FAUSTO BARREDO, petitioner, vs.SEVERINO GARCIA and TIMOTEA ALMARIO, respondents.

Celedonio P. Gloria and Antonio Barredo for petitioner.Jose G. Advincula for respondents.

BOCOBO, J.:

This case comes up from the Court of Appeals which held the petitioner herein, Fausto Barredo, liable in damages for the death of Faustino Garcia caused by the negligence of Pedro Fontanilla, a taxi driver employed by said Fausto Barredo.

At about half past one in the morning of May 3, 1936, on the road between Malabon and Navotas, Province of Rizal, there was a head-on collision between a taxi of the Malate Taxicab driven by Pedro Fontanilla and a carretela guided by Pedro Dimapalis. The carretela was overturned, and one of its passengers, 16-year-old boy Faustino Garcia, suffered injuries from which he died two days later. A criminal action was filed against Fontanilla in the Court of First Instance of Rizal, and he was convicted and sentenced to an indeterminate sentence of one year and one day to two years of prision correccional. The court in the criminal case granted the petition that the right to bring a separate civil action be reserved. The Court of Appeals affirmed the sentence of the lower court in the criminal case. Severino Garcia and Timotea Almario, parents of the deceased on March 7, 1939, brought an action in the Court of First Instance of Manila against Fausto Barredo as the sole proprietor of the Malate Taxicab and employer of Pedro Fontanilla. On July 8, 1939, the Court of First Instance of Manila awarded damages in favor of the plaintiffs for P2,000 plus legal interest from the date of the complaint. This decision was modified by the Court of Appeals by reducing the damages to P1,000 with legal interest from the time the action was instituted. It is undisputed that Fontanilla 's negligence was the cause of the mishap, as he was driving on the wrong side of

the road, and at high speed. As to Barredo's responsibility, the Court of Appeals found:

... It is admitted that defendant is Fontanilla's employer. There is proof that he exercised the diligence of a good father of a family to prevent damage. (See p. 22, appellant's brief.) In fact it is shown he was careless in employing Fontanilla who had been caught several times for violation of the Automobile Law and speeding (Exhibit A) — violation which appeared in the records of the Bureau of Public Works available to be public and to himself. Therefore, he must indemnify plaintiffs under the provisions of article 1903 of the Civil Code.

The main theory of the defense is that the liability of Fausto Barredo is governed by the Revised Penal Code; hence, his liability is only subsidiary, and as there has been no civil action against Pedro Fontanilla, the person criminally liable, Barredo cannot be held responsible in the case. The petitioner's brief states on page 10:

... The Court of Appeals holds that the petitioner is being sued for his failure to exercise all the diligence of a good father of a family in the selection and supervision of Pedro Fontanilla to prevent damages suffered by the respondents. In other words, The Court of Appeals insists on applying in the case article 1903 of the Civil Code. Article 1903 of the Civil Code is found in Chapter II, Title 16, Book IV of the Civil Code. This fact makes said article to a civil liability arising from a crime as in the case at bar simply because Chapter II of Title 16 of Book IV of the Civil Code, in the precise words of article 1903 of the Civil Code itself, is applicable only to "those (obligations) arising from wrongful or negligent acts or commission not punishable by law.

The gist of the decision of the Court of Appeals is expressed thus:

... We cannot agree to the defendant's contention. The liability sought to be imposed upon him in this action is not a civil obligation arising from a felony or a misdemeanor (the crime of Pedro Fontanilla,), but an obligation imposed in article 1903 of the Civil Code by reason of his negligence in the selection or supervision of his servant or employee.

The pivotal question in this case is whether the plaintiffs may bring this separate civil action against Fausto Barredo, thus making him primarily and directly, responsible under article 1903 of the Civil Code as an employer of Pedro Fontanilla. The defendant maintains that Fontanilla's negligence being punishable by the Penal Code, his (defendant's) liability as an employer is only subsidiary, according to said Penal code, but Fontanilla has not been sued in a civil action and his property has not been exhausted. To decide the main issue, we must cut through the tangle that has, in the minds of many confused and jumbled together delitos and cuasi delitos, or crimes under the Penal Code and fault or negligence under articles 1902-1910 of the Civil Code. This should be done, because justice may be lost in a labyrinth, unless principles and remedies are distinctly envisaged. Fortunately, we are aided in our inquiry by the luminous presentation of the perplexing subject by renown jurists and we are likewise guided by the decisions of this Court in previous cases as well as by the solemn clarity of the consideration in several sentences of the Supreme Tribunal of Spain.

Authorities support the proposition that a quasi-delict or "culpa aquiliana " is a separate legal institution under the Civil Code with a substantivity all its own, and individuality that is entirely apart and independent from delict or crime. Upon this principle and on the wording and spirit article 1903 of the Civil Code, the primary and direct responsibility of employers may be safely anchored.

The pertinent provisions of the Civil Code and Revised Penal Code are as follows:

CIVIL CODE

ART. 1089 Obligations arise from law, from contracts and quasi-contracts, and from acts and omissions which are unlawful or in which any kind of fault or negligence intervenes.

x x x           x x x           x x x

ART. 1092. Civil obligations arising from felonies or misdemeanors shall be governed by the provisions of the Penal Code.

ART. 1093. Those which are derived from acts or omissions in which fault or negligence, not punishable by law, intervenes shall be subject to the provisions of Chapter II, Title XVI of this book.

x x x           x x x           x x x

ART 1902. Any person who by an act or omission causes damage to another by his fault or negligence shall be liable for the damage so done.

ART. 1903. The obligation imposed by the next preceding article is enforcible, not only for personal acts and omissions, but also for those of persons for whom another is responsible.

The father and in, case of his death or incapacity, the mother, are liable for any damages caused by the minor children who live with them.

Guardians are liable for damages done by minors or incapacitated persons subject to their authority and living with them.

Owners or directors of an establishment or business are equally liable for any damages caused by their employees while engaged in the branch of the service in which employed, or on occasion of the performance of their duties.

The State is subject to the same liability when it acts through a special agent, but not if the damage shall have been caused by the official upon whom properly devolved the duty of doing the act performed, in which case the provisions of the next preceding article shall be applicable.

Finally, teachers or directors of arts trades are liable for any damages caused by their pupils or apprentices while they are under their custody.

The liability imposed by this article shall cease in case the persons mentioned therein prove that they are exercised all the diligence of a good father of a family to prevent the damage.

ART. 1904. Any person who pays for damage caused by his employees may recover from the latter what he may have paid.

REVISED PENAL CODE

ART. 100. Civil liability of a person guilty of felony. — Every person criminally liable for a felony is also civilly liable.

ART. 101. Rules regarding civil liability in certain cases. — The exemption from criminal liability established in subdivisions 1, 2, 3, 5, and 6 of article 12 and in subdivision 4 of article 11 of this Code does not include

exemption from civil liability, which shall be enforced to the following rules:

First. In cases of subdivision, 1, 2 and 3 of article 12 the civil liability for acts committed by any imbecile or insane person, and by a person under nine years of age, or by one over nine but under fifteen years of age, who has acted without discernment shall devolve upon those having such person under their legal authority or control, unless it appears that there was no fault or negligence on their part.

Should there be no person having such insane, imbecile or minor under his authority, legal guardianship, or control, or if such person be insolvent, said insane, imbecile, or minor shall respond with their own property, excepting property exempt from execution, in accordance with the civil law.

Second. In cases falling within subdivision 4 of article 11, the person for whose benefit the harm has been prevented shall be civilly liable in proportion to the benefit which they may have received.

The courts shall determine, in their sound discretion, the proportionate amount for which each one shall be liable.

When the respective shares can not be equitably determined, even approximately, or when the liability also attaches to the Government, or to the majority of the inhabitants of the town, and, in all events, whenever the damage has been caused with the consent of the authorities or their agents, indemnification shall be made in the manner prescribed by special laws or regulations.

Third. In cases falling within subdivisions 5 and 6 of article 12, the persons using violence or causing the fear shall be primarily liable and secondarily, or, if there be no such persons, those doing the

act shall be liable, saving always to the latter that part of their property exempt from execution.

ART. 102. Subsidiary civil liability of innkeepers, tavern keepers and proprietors of establishment. — In default of persons criminally liable, innkeepers, tavern keepers, and any other persons or corporation shall be civilly liable for crimes committed in their establishments, in all cases where a violation of municipal ordinances or some general or special police regulation shall have been committed by them or their employees.

Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or theft within their houses lodging therein, or the person, or for the payment of the value thereof, provided that such guests shall have notified in advance the innkeeper himself, or the person representing him, of the deposit of such goods within the inn; and shall furthermore have followed the directions which such innkeeper or his representative may have given them with respect to the care of and vigilance over such goods. No liability shall attach in case of robbery with violence against or intimidation against or intimidation of persons unless committed by the innkeeper's employees.

ART. 103. Subsidiary civil liability of other persons. — The subsidiary liability established in the next preceding article shall also apply to employers, teachers, persons, and corporations engaged in any kind of industry for felonies committed by their servants, pupils, workmen, apprentices, or employees in the discharge of their duties.

x x x           x x x           x x x

ART. 365. Imprudence and negligence. — Any person who, by reckless imprudence, shall commit any act which,

had it been intentional, would constitute a grave felony, shall suffer the penalty of arresto mayor in its maximum period to prision correccional in its minimum period; if it would have constituted a less grave felony, the penalty of arresto mayor in its minimum and medium periods shall be imposed.

Any person who, by simple imprudence or negligence, shall commit an act which would otherwise constitute a grave felony, shall suffer the penalty of arresto mayor in its medium and maximum periods; if it would have constituted a less serious felony, the penalty of arresto mayor in its minimum period shall be imposed."

It will thus be seen that while the terms of articles 1902 of the Civil Code seem to be broad enough to cover the driver's negligence in the instant case, nevertheless article 1093 limits cuasi-delitos to acts or omissions "not punishable by law." But inasmuch as article 365 of the Revised Penal Code punishes not only reckless but even simple imprudence or negligence, the fault or negligence under article 1902 of the Civil Code has apparently been crowded out. It is this overlapping that makes the "confusion worse confounded." However, a closer study shows that such a concurrence of scope in regard to negligent acts does not destroy the distinction between the civil liability arising from a crime and the responsibility for cuasi-delitos or culpa extra-contractual. The same negligent act causing damages may produce civil liability arising from a crime under article 100 of the Revised Penal Code, or create an action for cuasi-delito or culpa extra-contractual under articles 1902-1910 of the Civil Code.

The individuality of cuasi-delito or culpa extra-contractual looms clear and unmistakable. This legal institution is of ancient lineage, one of its early ancestors being the Lex Aquilia in the Roman Law. In fact, in Spanish legal terminology, this responsibility is often referred to as culpa aquiliana. The Partidas also contributed to the genealogy of the present fault or negligence under the Civil Code; for instance, Law 6, Title 15, of Partida 7, says: "Tenudo es

de fazer emienda, porque, como quier que el non fizo a sabiendas en daño al otro, pero acaescio por su culpa."

The distinctive nature of cuasi-delitos survives in the Civil Code. According to article 1089, one of the five sources of obligations is this legal institution of cuasi-delito or culpa extra-contractual: "los actos . . . en que intervenga cualquier genero de culpa o negligencia." Then article 1093 provides that this kind of obligation shall be governed by Chapter II of Title XVI of Book IV, meaning articles 1902-0910. This portion of the Civil Code is exclusively devoted to the legal institution of culpa aquiliana.

Some of the differences between crimes under the Penal Code and the culpa aquiliana or cuasi-delito under the Civil Code are:

1. That crimes affect the public interest, while cuasi-delitos are only of private concern.

2. That, consequently, the Penal Code punishes or corrects the criminal act, while the Civil Code, by means of indemnification, merely repairs the damage.

3. That delicts are not as broad as quasi-delicts, because the former are punished only if there is a penal law clearly covering them, while the latter, cuasi-delitos, include all acts in which "any king of fault or negligence intervenes." However, it should be noted that not all violations of the penal law produce civil responsibility, such as begging in contravention of ordinances, violation of the game laws, infraction of the rules of traffic when nobody is hurt. (See Colin and Capitant, "Curso Elemental de Derecho Civil," Vol. 3, p. 728.)

Let us now ascertain what some jurists say on the separate existence of quasi-delicts and the employer's primary and direct liability under article 1903 of the Civil Code.

Dorado Montero in his essay on "Responsibilidad" in the "Enciclopedia Juridica Española" (Vol. XXVII, p. 414) says:

El concepto juridico de la responsabilidad civil abarca diversos aspectos y comprende a diferentes personas. Asi, existe una responsabilidad civil propiamente dicha, que en ningun casl lleva aparejada responsabilidad criminal alguna, y otra que es consecuencia indeclinable de la penal que nace de todo delito o falta."

The juridical concept of civil responsibility has various aspects and comprises different persons. Thus, there is a civil responsibility, properly speaking, which in no case carries with it any criminal responsibility, and another which is a necessary consequence of the penal liability as a result of every felony or misdemeanor."

Maura, an outstanding authority, was consulted on the following case: There had been a collision between two trains belonging respectively to the Ferrocarril Cantabrico and the Ferrocarril del Norte. An employee of the latter had been prosecuted in a criminal case, in which the company had been made a party as subsidiarily responsible in civil damages. The employee had been acquitted in the criminal case, and the employer, the Ferrocarril del Norte, had also been exonerated. The question asked was whether the Ferrocarril Cantabrico could still bring a civil action for damages against the Ferrocarril del Norte. Maura's opinion was in the affirmative, stating in part (Maura, Dictamenes, Vol. 6, pp. 511-513):

Quedando las cosas asi, a proposito de la realidad pura y neta de los hechos, todavia menos parece sostenible que exista cosa juzgada acerca de la obligacion civil de indemnizar los quebrantos y menoscabos inferidos por el choque de los trenes. El titulo en que se funda la accion para demandar el resarcimiento, no puede confundirse con las responsabilidades civiles nacidas de delito, siquiera exista en este, sea el cual sea, una culpa

rodeada de notas agravatorias que motivan sanciones penales, mas o menos severas. La lesion causada por delito o falta en los derechos civiles, requiere restituciones, reparaciones o indemnizaciones, que cual la pena misma atañen al orden publico; por tal motivo vienen encomendadas, de ordinario, al Ministerio Fiscal; y claro es que si por esta via se enmiendan los quebrantos y menoscabos, el agraviado excusa procurar el ya conseguido desagravio; pero esta eventual coincidencia de los efectos, no borra la diversidad originaria de las acciones civiles para pedir indemnizacion.

Estas, para el caso actual (prescindiendo de culpas contractuales, que no vendrian a cuento y que tiene otro regimen), dimanan, segun el articulo 1902 del Codigo Civil, de toda accion u omision, causante de daños o perjuicios, en que intervenga culpa o negligencia. Es trivial que acciones semejantes son ejercitadas ante los Tribunales de lo civil cotidianamente, sin que la Justicia punitiva tenga que mezclarse en los asuntos. Los articulos 18 al 21 y 121 al 128 del Codigo Penal, atentos al espiritu y a los fines sociales y politicos del mismo, desenvuelven y ordenan la materia de responsabilidades civiles nacidas de delito, en terminos separados del regimen por ley comun de la culpa que se denomina aquiliana, por alusion a precedentes legislativos del Corpus Juris. Seria intempestivo un paralelo entre aquellas ordenaciones, y la de la obligacion de indemnizar a titulo de culpa civil; pero viene al caso y es necesaria una de las diferenciaciones que en el tal paralelo se notarian.

Los articulos 20 y 21 del Codigo Penal, despues de distribuir a su modo las responsabilidades civiles, entre los que sean por diversos conceptos culpables del delito o falta, las hacen extensivas a las empresas y los establecimientos al servicio de los cuales estan los

delincuentes; pero con caracter subsidiario, o sea, segun el texto literal, en defecto de los que sean responsables criminalmente. No coincide en ello el Codigo Civil, cuyo articulo 1903, dice; La obligacion que impone el articulo anterior es exigible, no solo por los actos y omisiones propios, sino por los de aquellas personas de quienes se debe responder; personas en la enumeracion de las cuales figuran los dependientes y empleados de los establecimientos o empresas, sea por actos del servicio, sea con ocasion de sus funciones. Por esto acontece, y se observa en la jurisprudencia, que las empresas, despues de intervenir en las causas criminales con el caracter subsidiario de su responsabilidad civil por razon del delito, son demandadas y condenadas directa y aisladamente, cuando se trata de la obligacion, ante los tribunales civiles.

Siendo como se ve, diverso el titulo de esta obligacion, y formando verdadero postulado de nuestro regimen judicial la separacion entre justicia punitiva y tribunales de lo civil, de suerte que tienen unos y otros normas de fondo en distintos cuerpos legales, y diferentes modos de proceder, habiendose, por añadidura, abstenido de asistir al juicio criminal la Compañia del Ferrocarril Cantabrico, que se reservo ejercitar sus acciones, parece innegable que la de indemnizacion por los daños y perjuicios que le irrogo el choque, no estuvo sub judice ante el Tribunal del Jurado, ni fue sentenciada, sino que permanecio intacta, al pronunciarse el fallo de 21 de marzo. Aun cuando el veredicto no hubiese sido de inculpabilidad, mostrose mas arriba, que tal accion quedaba legitimamente reservada para despues del proceso; pero al declararse que no existio delito, ni responsabilidad dimanada de delito, materia unica sobre que tenian jurisdiccion aquellos juzgadores, se redobla el motivo para la obligacion civil ex lege, y se patentiza mas y mas que la accion para pedir su cumplimiento permanece incolume, extraña a la cosa juzgada.

As things are, apropos of the reality pure and simple of the facts, it seems less tenable that there should beres judicata with regard to the civil obligation for damages on account of the losses caused by the collision of the trains. The title upon which the action for reparation is based cannot be confused with the civil responsibilities born of a crime, because there exists in the latter, whatever each nature, a culpasurrounded with aggravating aspects which give rise to penal measures that are more or less severe. The injury caused by a felony or misdemeanor upon civil rights requires restitutions, reparations, or indemnifications which, like the penalty itself, affect public order; for this reason, they are ordinarily entrusted to the office of the prosecuting attorney; and it is clear that if by this means the losses and damages are repaired, the injured party no longer desires to seek another relief; but this coincidence of effects does not eliminate the peculiar nature of civil actions to ask for indemnity.

Such civil actions in the present case (without referring to contractual faults which are not pertinent and belong to another scope) are derived, according to article 1902 of the Civil Code, from every act or omission causing losses and damages in which culpa or negligence intervenes. It is unimportant that such actions are every day filed before the civil courts without the criminal courts interfering therewith. Articles 18 to 21 and 121 to 128 of the Penal Code, bearing in mind the spirit and the social and political purposes of that Code, develop and regulate the matter of civil responsibilities arising from a crime, separately from the regime under common law, of culpa which is known as aquiliana, in accordance with legislative precedent of the Corpus Juris. It would be unwarranted to make a detailed comparison between the former provisions and that regarding the obligation to indemnify on account of civil culpa; but it is pertinent and necessary to point out to one of such differences.

Articles 20 and 21 of the Penal Code, after distriburing in their own way the civil responsibilities among those who, for different reasons, are guilty of felony or misdemeanor, make such civil responsibilities applicable to enterprises and establishments for which the guilty parties render service, but with subsidiary character, that is to say, according to the wording of the Penal Code, in default of those who are criminally responsible. In this regard, the Civil Code does not coincide because article 1903 says: "The obligation imposed by the next preceding article is demandable, not only for personal acts and omissions, but also for those of persons for whom another is responsible." Among the persons enumerated are the subordinates and employees of establishments or enterprises, either for acts during their service or on the occasion of their functions. It is for this reason that it happens, and it is so observed in judicial decisions, that the companies or enterprises, after taking part in the criminal cases because of their subsidiary civil responsibility by reason of the crime, are sued and sentenced directly and separately with regard to theobligation, before the civil courts.

Seeing that the title of this obligation is different, and the separation between punitive justice and the civil courts being a true postulate of our judicial system, so that they have different fundamental norms in different codes, as well as different modes of procedure, and inasmuch as the Compaña del Ferrocarril Cantabrico has abstained from taking part in the criminal case and has reserved the right to exercise its actions, it seems undeniable that the action for indemnification for the losses and damages caused to it by the collision was not sub judice before the Tribunal del Jurado, nor was it the subject of a sentence, but it remained intact when the decision of March 21 was rendered. Even if the verdict had not been that of acquittal, it has already been shown that such action had been legitimately reserved till after the criminal

prosecution; but because of the declaration of the non-existence of the felony and the non-existence of the responsibility arising from the crime, which was the sole subject matter upon which the Tribunal del Juradohad jurisdiction, there is greater reason for the civil obligation ex lege, and it becomes clearer that the action for its enforcement remain intact and is not res judicata.

Laurent, a jurist who has written a monumental work on the French Civil Code, on which the Spanish Civil Code is largely based and whose provisions on cuasi-delito or culpa extra-contractual are similar to those of the Spanish Civil Code, says, referring to article 1384 of the French Civil Code which corresponds to article 1903, Spanish Civil Code:

The action can be brought directly against the person responsible (for another), without including the author of the act. The action against the principal is accessory in the sense that it implies the existence of a prejudicial act committed by the employee, but it is not subsidiary in the sense that it can not be instituted till after the judgment against the author of the act or at least, that it is subsidiary to the principal action; the action for responsibility (of the employer) is in itself a principal action. (Laurent, Principles of French Civil Law, Spanish translation, Vol. 20, pp. 734-735.)

Amandi, in his "Cuestionario del Codigo Civil Reformado" (Vol. 4, pp. 429, 430), declares that the responsibility of the employer is principal and not subsidiary. He writes:

Cuestion 1. La responsabilidad declarada en el articulo 1903 por las acciones u omisiones de aquellas personas por las que se debe responder, es subsidiaria? es principal? Para contestar a esta pregunta es necesario saber, en primer lugar, en que se funda el precepto legal. Es que realmente se impone una responsabilidad por una falta ajena? Asi parece a primera vista; pero semejante

afirmacion seria contraria a la justicia y a la maxima universal, segun la que las faltas son personales, y cada uno responde de aquellas que le son imputables. La responsabilidad de que tratamos se impone con ocasion de un delito o culpa, pero no por causa de ellos, sino por causa del causi delito, esto es, de la imprudencia o de la negligencia del padre, del tutor, del dueño o director del establecimiento, del maestro, etc. Cuando cualquiera de las personas que enumera el articulo citado (menores de edad, incapacitados, dependientes, aprendices) causan un daño, la ley presume que el padre, el tutor, el maestro, etc., han cometido una falta de negligencia para prevenir o evitar el daño. Esta falta es la que la ley castiga. No hay, pues, responsabilidad por un hecho ajeno, sino en la apariencia; en realidad la responsabilidad se exige por un hecho propio. La idea de que esa responsabilidad sea subsidiaria es, por lo tanto, completamente inadmisible.

Question No. 1. Is the responsibility declared in article 1903 for the acts or omissions of those persons for who one is responsible, subsidiary or principal? In order to answer this question it is necessary to know, in the first place, on what the legal provision is based. Is it true that there is a responsibility for the fault of another person? It seems so at first sight; but such assertion would be contrary to justice and to the universal maxim that all faults are personal, and that everyone is liable for those faults that can be imputed to him. The responsibility in question is imposed on the occasion of a crime or fault, but not because of the same, but because of the cuasi-delito, that is to say, the imprudence or negligence of the father, guardian, proprietor or manager of the establishment, of the teacher, etc. Whenever anyone of the persons enumerated in the article referred to (minors, incapacitated persons, employees, apprentices) causes any damage, the law presumes that the father, guardian, teacher, etc. have committed an act of negligence in not preventing or avoiding the damage. It is this fault that is

condemned by the law. It is, therefore, only apparent that there is a responsibility for the act of another; in reality the responsibility exacted is for one's own act. The idea that such responsibility is subsidiary is, therefore, completely inadmissible.

Oyuelos, in his "Digesto: Principios, Doctrina y Jurisprudencia, Referentes al Codigo Civil Español," says in Vol. VII, p. 743:

Es decir, no responde de hechos ajenos, porque se responde solo de su propia culpa, doctrina del articulo 1902; mas por excepcion, se responde de la ajena respecto de aquellas personas con las que media algun nexo o vinculo, que motiva o razona la responsabilidad. Esta responsabilidad, es directa o es subsidiaria? En el orden penal, el Codigo de esta clase distingue entre menores e incapacitados y los demas, declarando directa la primera (articulo 19) y subsidiaria la segunda (articulos 20 y 21); pero en el orden civil, en el caso del articulo 1903, ha de entenderse directa, por el tenor del articulo que impone la responsabilidad precisamente "por los actos de aquellas personas de quienes se deba responder."

That is to say, one is not responsible for the acts of others, because one is liable only for his own faults, this being the doctrine of article 1902; but, by exception, one is liable for the acts of those persons with whom there is a bond or tie which gives rise to the responsibility. Is this responsibility direct or subsidiary? In the order of the penal law, the Penal Code distinguishes between minors and incapacitated persons on the one hand, and other persons on the other, declaring that the responsibility for the former is direct (article 19), and for the latter, subsidiary (articles 20 and 21); but in the scheme of the civil law, in the case of article 1903, the responsibility should be understood as direct, according to the tenor of that articles, for precisely it imposes responsibility "for the

acts of those persons for whom one should be responsible."

Coming now to the sentences of the Supreme Tribunal of Spain, that court has upheld the principles above set forth: that a quasi-delict or culpa extra-contractual is a separate and distinct legal institution, independent from the civil responsibility arising from criminal liability, and that an employer is, under article 1903 of the Civil Code, primarily and directly responsible for the negligent acts of his employee.

One of the most important of those Spanish decisions is that of October 21, 1910. In that case, Ramon Lafuente died as the result of having been run over by a street car owned by the "compañia Electric Madrileña de Traccion." The conductor was prosecuted in a criminal case but he was acquitted. Thereupon, the widow filed a civil action against the street car company, paying for damages in the amount of 15,000 pesetas. The lower court awarded damages; so the company appealed to the Supreme Tribunal, alleging violation of articles 1902 and 1903 of the Civil Code because by final judgment the non-existence of fault or negligence had been declared. The Supreme Court of Spain dismissed the appeal, saying:

Considerando que el primer motivo del recurso se funda en el equivocado supuesto de que el Tribunal a quo, al condonar a la compañia Electrica Madrileña al pago del daño causado con la muerte de Ramon La fuente Izquierdo, desconoce el valor y efectos juridicos de la sentencia absolutoria deictada en la causa criminal que se siguio por el mismo hecho, cuando es lo cierto que de este han conocido las dos jurisdicciones bajo diferentes as pectos, y como la de lo criminal declrao dentro de los limites de su competencia que el hecho de que se trata no era constitutivo de delito por no haber mediado descuido o negligencia graves, lo que no excluye, siendo este el unico fundamento del fallo absolutorio, el concurso de la culpa o negligencia no califacadas, fuente

de obligaciones civiles segun el articulo 1902 del Codigo, y que alcanzan, segun el 1903, netre otras perosnas, a los Directores de establecimientos o empresas por los daños causados por sus dependientes en determinadas condiciones, es manifesto que la de lo civil, al conocer del mismo hehco baho este ultimo aspecto y al condenar a la compañia recurrente a la indemnizacion del daño causado por uno de sus empleados, lejos de infringer los mencionados textos, en relacion con el articulo 116 de la Ley de Enjuciamiento Criminal, se ha atenido estrictamente a ellos, sin invadir atribuciones ajenas a su jurisdiccion propia, ni contrariar en lo mas minimo el fallo recaido en la causa.

Considering that the first ground of the appeal is based on the mistaken supposition that the trial court, in sentencing the Compañia Madrileña to the payment of the damage caused by the death of Ramon Lafuente Izquierdo, disregards the value and juridical effects of the sentence of acquittal rendered in the criminal case instituted on account of the same act, when it is a fact that the two jurisdictions had taken cognizance of the same act in its different aspects, and as the criminal jurisdiction declared within the limits of its authority that the act in question did not constitute a felony because there was no grave carelessness or negligence, and this being the only basis of acquittal, it does no exclude the co-existence of fault or negligence which is not qualified, and is a source of civil obligations according to article 1902 of the Civil Code, affecting, in accordance with article 1903, among other persons, the managers of establishments or enterprises by reason of the damages caused by employees under certain conditions, it is manifest that the civil jurisdiccion in taking cognizance of the same act in this latter aspect and in ordering the company, appellant herein, to pay an indemnity for the damage caused by one of its employees, far from violating said legal provisions, in relation with article 116 of the Law of Criminal

Procedure, strictly followed the same, without invading attributes which are beyond its own jurisdiction, and without in any way contradicting the decision in that cause. (Emphasis supplied.)

It will be noted, as to the case just cited:

First. That the conductor was not sued in a civil case, either separately or with the street car company. This is precisely what happens in the present case: the driver, Fontanilla, has not been sued in a civil action, either alone or with his employer.

Second. That the conductor had been acquitted of grave criminal negligence, but the Supreme Tribunal of Spain said that this did not exclude the co-existence of fault or negligence, which is not qualified, on the part of the conductor, under article 1902 of the Civil Code. In the present case, the taxi driver was found guilty of criminal negligence, so that if he had even sued for his civil responsibility arising from the crime, he would have been held primarily liable for civil damages, and Barredo would have been held subsidiarily liable for the same. But the plaintiffs are directly suing Barredo, on his primary responsibility because of his own presumed negligence — which he did not overcome — under article 1903. Thus, there were two liabilities of Barredo: first, the subsidiary one because of the civil liability of the taxi driver arising from the latter's criminal negligence; and, second, Barredo's primary liability as an employer under article 1903. The plaintiffs were free to choose which course to take, and they preferred the second remedy. In so doing, they were acting within their rights. It might be observed in passing, that the plaintiff choose the more expeditious and effective method of relief, because Fontanilla was either in prison, or had just been released, and besides, he was probably without property which might be seized in enforcing any judgment against him for damages.

Third. That inasmuch as in the above sentence of October 21, 1910, the employer was held liable civilly, notwithstanding the acquittal of the employee (the conductor) in a previous criminal

case, with greater reason should Barredo, the employer in the case at bar, be held liable for damages in a civil suit filed against him because his taxi driver had been convicted. The degree of negligence of the conductor in the Spanish case cited was less than that of the taxi driver, Fontanilla, because the former was acquitted in the previous criminal case while the latter was found guilty of criminal negligence and was sentenced to an indeterminate sentence of one year and one day to two years of prision correccional.

(See also Sentence of February 19, 1902, which is similar to the one above quoted.)

In the Sentence of the Supreme Court of Spain, dated February 14, 1919, an action was brought against a railroad company for damages because the station agent, employed by the company, had unjustly andfraudulently, refused to deliver certain articles consigned to the plaintiff. The Supreme Court of Spain held that this action was properly under article 1902 of the Civil Code, the court saying:

Considerando que la sentencia discutida reconoce, en virtud de los hechos que consigna con relacion a las pruebas del pleito: 1.º, que las expediciones facturadas por la compañia ferroviaria a la consignacion del actor de las vasijas vacias que en su demanda relacionan tenian como fin el que este las devolviera a sus remitentes con vinos y alcoholes; 2.º, que llegadas a su destino tales mercanias no se quisieron entregar a dicho consignatario por el jefe de la estacion sin motivo justificado y con intencion dolosa, y 3.º, que la falta de entrega de estas expediciones al tiempo de reclamarlas el demandante le originaron daños y perjuicios en cantidad de bastante importancia como expendedor al por mayor que era de vinos y alcoholes por las ganancias que dejo de obtener al verse privado de servir los pedidos que se le habian hecho por los remitentes en los envases:

Considerando que sobre esta base hay necesidad de estimar los cuatro motivos que integran este recurso, porque la demanda inicial del pleito a que se contrae no contiene accion que nazca del incumplimiento del contrato de transporte, toda vez que no se funda en el retraso de la llegada de las mercancias ni de ningun otro vinculo contractual entre las partes contendientes, careciendo, por tanto, de aplicacion el articulo 371 del Codigo de Comercio, en que principalmente descansa el fallo recurrido, sino que se limita a pedir la reparaction de los daños y perjuicios producidos en el patrimonio del actor por la injustificada y dolosa negativa del porteador a la entrega de las mercancias a su nombre consignadas, segun lo reconoce la sentencia, y cuya responsabilidad esta claramente sancionada en el articulo 1902 del Codigo Civil, que obliga por el siguiente a la Compañia demandada como ligada con el causante de aquellos por relaciones de caracter economico y de jurarquia administrativa.

Considering that the sentence, in question recognizes, in virtue of the facts which it declares, in relation to the evidence in the case: (1) that the invoice issued by the railroad company in favor of the plaintiff contemplated that the empty receptacles referred to in the complaint should be returned to the consignors with wines and liquors; (2) that when the said merchandise reached their destination, their delivery to the consignee was refused by the station agent without justification and with fraudulent intent, and (3) that the lack of delivery of these goods when they were demanded by the plaintiff caused him losses and damages of considerable importance, as he was a wholesale vendor of wines and liquors and he failed to realize the profits when he was unable to fill the orders sent to him by the consignors of the receptacles:

Considering that upon this basis there is need of upholding the four assignments of error, as the original

complaint did not contain any cause of action arising from non-fulfillment of a contract of transportation, because the action was not based on the delay of the goods nor on any contractual relation between the parties litigant and, therefore, article 371 of the Code of Commerce, on which the decision appealed from is based, is not applicable; but it limits to asking for reparation for losses and damages produced on the patrimony of the plaintiff on account of the unjustified and fraudulent refusal of the carrier to deliver the goods consigned to the plaintiff as stated by the sentence, and the carrier's responsibility is clearly laid down in article 1902 of the Civil Code which binds, in virtue of the next article, the defendant company, because the latter is connected with the person who caused the damage by relations of economic character and by administrative hierarchy. (Emphasis supplied.)

The above case is pertinent because it shows that the same act may come under both the Penal Code and the Civil Code. In that case, the action of the agent was unjustified and fraudulent and therefore could have been the subject of a criminal action. And yet, it was held to be also a proper subject of a civil action under article 1902 of the Civil Code. It is also to be noted that it was the employer and not the employee who was being sued.

Let us now examine the cases previously decided by this Court.

In the leading case of Rakes vs. Atlantic Gulf and Pacific Co. (7 Phil., 359, 362-365 [year 1907]), the trial court awarded damages to the plaintiff, a laborer of the defendant, because the latter had negligently failed to repair a tramway in consequence of which the rails slid off while iron was being transported, and caught the plaintiff whose leg was broken. This Court held:

It is contended by the defendant, as its first defense to the action that the necessary conclusion from these collated laws is that the remedy for injuries through negligence lies only in a criminal action in which the official criminally

responsible must be made primarily liable and his employer held only subsidiarily to him. According to this theory the plaintiff should have procured the arrest of the representative of the company accountable for not repairing the track, and on his prosecution a suitable fine should have been imposed, payable primarily by him and secondarily by his employer.

This reasoning misconceived the plan of the Spanish codes upon this subject. Article 1093 of the Civil Code makes obligations arising from faults or negligence not punished by the law, subject to the provisions of Chapter II of Title XVI. Section 1902 of that chapter reads:

"A person who by an act or omission causes damage to another when there is fault or negligence shall be obliged to repair the damage so done.

"SEC. 1903. The obligation imposed by the preceeding article is demandable, not only for personal acts and omissions, but also for those of the persons for whom they should be responsible.

"The father, and on his death or incapacity, the mother, is liable for the damages caused by the minors who live with them.

x x x           x x x           x x x

"Owners or directors of an establishment or enterprise are equally liable for the damages caused by their employees in the service of the branches in which the latter may be employed or in the performance of their duties.

x x x           x x x           x x x

"The liability referred to in this article shall cease when the persons mentioned therein prove that they employed all the diligence of a good father of a family to avoid the damage."

As an answer to the argument urged in this particular action it may be sufficient to point out that nowhere in our general statutes is the employer penalized for failure to provide or maintain safe appliances for his workmen. His obligation therefore is one 'not punished by the laws' and falls under civil rather than criminal jurisprudence. But the answer may be a broader one. We should be reluctant, under any conditions, to adopt a forced construction of these scientific codes, such as is proposed by the defendant, that would rob some of these articles of effect, would shut out litigants against their will from the civil courts, would make the assertion of their rights dependent upon the selection for prosecution of the proper criminal offender, and render recovery doubtful by reason of the strict rules of proof prevailing in criminal actions. Even if these articles had always stood alone, such a construction would be unnecessary, but clear light is thrown upon their meaning by the provisions of the Law of Criminal Procedure of Spain (Ley de Enjuiciamiento Criminal), which, though never in actual force in these Islands, was formerly given a suppletory or explanatory effect. Under article 111 of this law, both classes of action, civil and criminal, might be prosecuted jointly or separately, but while the penal action was pending the civil was suspended. According to article 112, the penal action once started, the civil remedy should be sought therewith, unless it had been waived by the party injured or been expressly reserved by him for civil proceedings for the future. If the civil action alone was prosecuted, arising out of a crime that could be enforced only on private complaint, the penal action thereunder should be extinguished. These provisions are in harmony with those

of articles 23 and 133 of our Penal Code on the same subject.

An examination of this topic might be carried much further, but the citation of these articles suffices to show that the civil liability was not intended to be merged in the criminal nor even to be suspended thereby, except as expressly provided in the law. Where an individual is civilly liable for a negligent act or omission, it is not required that the injured party should seek out a third person criminally liable whose prosecution must be a condition precedent to the enforcement of the civil right.

Under article 20 of the Penal Code the responsibility of an employer may be regarded as subsidiary in respect of criminal actions against his employees only while they are in process of prosecution, or in so far as they determine the existence of the criminal act from which liability arises, and his obligation under the civil law and its enforcement in the civil courts is not barred thereby unless by the election of the injured person. Inasmuch as no criminal proceeding had been instituted, growing our of the accident in question, the provisions of the Penal Code can not affect this action. This construction renders it unnecessary to finally determine here whether this subsidiary civil liability in penal actions has survived the laws that fully regulated it or has been abrogated by the American civil and criminal procedure now in force in the Philippines.

The difficulty in construing the articles of the code above cited in this case appears from the briefs before us to have arisen from the interpretation of the words of article 1093, "fault or negligence not punished by law," as applied to the comprehensive definition of offenses in articles 568 and 590 of the Penal Code. It has been shown that the liability of an employer arising out of his relation to his employee who is the offender is not to be

regarded as derived from negligence punished by the law, within the meaning of articles 1902 and 1093. More than this, however, it cannot be said to fall within the class of acts unpunished by the law, the consequence of which are regulated by articles 1902 and 1903 of the Civil Code. The acts to which these articles are applicable are understood to be those not growing out of pre-existing duties of the parties to one another. But where relations already formed give rise to duties, whether springing from contract or quasi contract, then breaches of those duties are subject to articles 1101, 1103, and 1104 of the same code. A typical application of this distinction may be found in the consequences of a railway accident due to defective machinery supplied by the employer. His liability to his employee would arise out of the contract of employment, that to the passengers out of the contract for passage, while that to the injured bystander would originate in the negligent act itself.

In Manzanares vs. Moreta, 38 Phil., 821 (year 1918), the mother of the 8 of 9-year-old child Salvador Bona brought a civil action against Moreta to recover damages resulting from the death of the child, who had been run over by an automobile driven and managed by the defendant. The trial court rendered judgment requiring the defendant to pay the plaintiff the sum of P1,000 as indemnity: This Court in affirming the judgment, said in part:

If it were true that the defendant, in coming from the southern part of Solana Street, had to stop his auto before crossing Real Street, because he had met vehicles which were going along the latter street or were coming from the opposite direction along Solana Street, it is to be believed that, when he again started to run his auto across said Real Street and to continue its way along Solana Street northward, he should have adjusted the speed of the auto which he was operating until he had fully crossed Real Street and had completely reached a clear way on Solana Street. But, as the child was run over

by the auto precisely at the entrance of Solana Street, this accident could not have occurred if the auto had been running at a slow speed, aside from the fact that the defendant, at the moment of crossing Real Street and entering Solana Street, in a northward direction, could have seen the child in the act of crossing the latter street from the sidewalk on the right to that on the left, and if the accident had occurred in such a way that after the automobile had run over the body of the child, and the child's body had already been stretched out on the ground, the automobile still moved along a distance of about 2 meters, this circumstance shows the fact that the automobile entered Solana Street from Real Street, at a high speed without the defendant having blown the horn. If these precautions had been taken by the defendant, the deplorable accident which caused the death of the child would not have occurred.

It will be noticed that the defendant in the above case could have been prosecuted in a criminal case because his negligence causing the death of the child was punishable by the Penal Code. Here is therefore a clear instance of the same act of negligence being a proper subject-matter either of a criminal action with its consequent civil liability arising from a crime or of an entirely separate and independent civil action for fault or negligence under article 1902 of the Civil Code. Thus, in this jurisdiction, the separate individually of a cuasi-delito or culpa aquilianaunder the Civil Code has been fully and clearly recognized, even with regard to a negligent act for which the wrongdoer could have been prosecuted and convicted in a criminal case and for which, after such a conviction, he could have been sued for this civil liability arising from his crime.

Years later (in 1930) this Court had another occasion to apply the same doctrine. In Bernal and Enverso vs. House and Tacloban Electric & Ice Plant, Ltd., 54 Phil., 327, the parents of the five-year-old child, Purificacion Bernal, brought a civil action to recover damages for the child's death as a result of burns caused

by the fault and negligence of the defendants. On the evening of April 10, 1925, the Good Friday procession was held in Tacloban, Leyte. Fortunata Enverso with her daughter Purificacion Bernal had come from another municipality to attend the same. After the procession the mother and the daughter with two others were passing along Gran Capitan Street in front of the offices of the Tacloban Electric & Ice Plant, Ltd., owned by defendants J. V. House, when an automobile appeared from the opposite direction. The little girl, who was slightly ahead of the rest, was so frightened by the automobile that she turned to run, but unfortunately she fell into the street gutter where hot water from the electric plant was flowing. The child died that same night from the burns. The trial courts dismissed the action because of the contributory negligence of the plaintiffs. But this Court held, on appeal, that there was no contributory negligence, and allowed the parents P1,000 in damages from J. V. House who at the time of the tragic occurrence was the holder of the franchise for the electric plant. This Court said in part:

Although the trial judge made the findings of fact hereinbefore outlined, he nevertheless was led to order the dismissal of the action because of the contributory negligence of the plaintiffs. It is from this point that a majority of the court depart from the stand taken by the trial judge. The mother and her child had a perfect right to be on the principal street of Tacloban, Leyte, on the evening when the religious procession was held. There was nothing abnormal in allowing the child to run along a few paces in advance of the mother. No one could foresee the coincidence of an automobile appearing and of a frightened child running and falling into a ditch filled with hot water. The doctrine announced in the much debated case of Rakes vs. Atlantic Gulf and Pacific Co. ([1907]), 7 Phil., 359), still rule. Article 1902 of the Civil Code must again be enforced. The contributory negligence of the child and her mother, if any, does not operate as a bar to recovery, but in its strictest sense could only result in reduction of the damages.

It is most significant that in the case just cited, this Court specifically applied article 1902 of the Civil Code. It is thus that although J. V. House could have been criminally prosecuted for reckless or simple negligence and not only punished but also made civilly liable because of his criminal negligence, nevertheless this Court awarded damages in an independent civil action for fault or negligence under article 1902 of the Civil Code.

In Bahia vs. Litonjua and Leynes (30 Phil., 624 [year 1915), the action was for damages for the death of the plaintiff's daughter alleged to have been caused by the negligence of the servant in driving an automobile over the child. It appeared that the cause of the mishap was a defect in the steering gear. The defendant Leynes had rented the automobile from the International Garage of Manila, to be used by him in carrying passengers during the fiesta of Tuy, Batangas. Leynes was ordered by the lower court to pay P1,000 as damages to the plaintiff. On appeal this Court reversed the judgment as to Leynes on the ground that he had shown that the exercised the care of a good father of a family, thus overcoming the presumption of negligence under article 1903. This Court said:

As to selection, the defendant has clearly shown that he exercised the care and diligence of a good father of a family. He obtained the machine from a reputable garage and it was, so far as appeared, in good condition. The workmen were likewise selected from a standard garage, were duly licensed by the Government in their particular calling, and apparently thoroughly competent. The machine had been used but a few hours when the accident occurred and it is clear from the evidence that the defendant had no notice, either actual or constructive, of the defective condition of the steering gear.

The legal aspect of the case was discussed by this Court thus:

Article 1903 of the Civil Code not only establishes liability in cases of negligence, but also provides when the liability shall cease. It says:

"The liability referred to in this article shall cease when the persons mentioned therein prove that they employed all the diligence of a good father of a family to avoid the damage."

From this article two things are apparent: (1) That when an injury is caused by the negligence of a servant or employee there instantly arises a presumption of law that there was negligence on the part of the matter or employer either in the selection of the servant or employee, or in supervision over him after the selection, or both; and (2) that presumption is juris tantum and not juris et de jure, and consequently, may be rebutted. It follows necessarily that if the employer shows to the satisfaction of the court that in selection and supervision he has exercised the care and diligence of a good father of a family, the presumption is overcome and he is relieve from liability.

This theory bases the responsibility of the master ultimately on his own negligence and not on that of his servant.

The doctrine of the case just cited was followed by this Court in Cerf vs. Medel (33 Phil., 37 [year 1915]). In the latter case, the complaint alleged that the defendant's servant had so negligently driven an automobile, which was operated by defendant as a public vehicle, that said automobile struck and damaged the plaintiff's motorcycle. This Court, applying article 1903 and following the rule in Bahia vs. Litonjua and Leynes, said in part (p. 41) that:

The master is liable for the negligent acts of his servant where he is the owner or director of a business or enterprise and the negligent acts are committed while the servant is engaged in his master's employment as such owner.

Another case which followed the decision in Bahia vs. Litonjua and Leynes was Cuison vs. Norton & Harrison Co., 55 Phil., 18 (year 1930). The latter case was an action for damages brought by Cuison for the death of his seven-year-old son Moises. The little boy was on his way to school with his sister Marciana. Some large pieces of lumber fell from a truck and pinned the boy underneath, instantly killing him. Two youths, Telesforo Binoya and Francisco Bautista, who were working for Ora, an employee of defendant Norton & Harrison Co., pleaded guilty to the crime of homicide through reckless negligence and were sentenced accordingly. This Court, applying articles 1902 and 1903, held:

The basis of civil law liability is not respondent superior but the relationship of pater familias. This theory bases the liability of the master ultimately on his own negligence and not on that of his servant. (Bahia vs.Litonjua and Leynes [1915], 30 Phil., 624; Cangco vs. Manila Railroad Co. [1918], 38 Phil., 768.)

In Walter A. Smith & Co. vs. Cadwallader Gibson Lumber Co., 55 Phil., 517 (year 1930) the plaintiff brought an action for damages for the demolition of its wharf, which had been struck by the steamer Helen C belonging to the defendant. This Court held (p. 526):

The evidence shows that Captain Lasa at the time the plaintiff's wharf collapsed was a duly licensed captain, authorized to navigate and direct a vessel of any tonnage, and that the appellee contracted his services because of his reputation as a captain, according to F. C. Cadwallader. This being so, we are of the opinion that the presumption of liability against the defendant has been

overcome by the exercise of the care and diligence of a good father of a family in selecting Captain Lasa, in accordance with the doctrines laid down by this court in the cases cited above, and the defendant is therefore absolved from all liability.

It is, therefore, seen that the defendant's theory about his secondary liability is negatived by the six cases above set forth. He is, on the authority of these cases, primarily and directly responsible in damages under article 1903, in relation to article 1902, of the Civil Code.

Let us now take up the Philippine decisions relied upon by the defendant. We study first, City of Manila vs. Manila Electric Co., 52 Phil., 586 (year 1928). A collision between a truck of the City of Manila and a street car of the Manila Electric Co. took place on June 8, 1925. The truck was damaged in the amount of P1,788.27. Sixto Eustaquio, the motorman, was prosecuted for the crime of damage to property and slight injuries through reckless imprudence. He was found guilty and sentenced to pay a fine of P900, to indemnify the City of Manila for P1,788.27, with subsidiary imprisonment in case of insolvency. Unable to collect the indemnity from Eustaquio, the City of Manila filed an action against the Manila Electric Company to obtain payment, claiming that the defendant was subsidiarily liable. The main defense was that the defendant had exercised the diligence of a good father of a family to prevent the damage. The lower court rendered judgment in favor of the plaintiff. This Court held, in part, that this case was governed by the Penal Code, saying:

With this preliminary point out of the way, there is no escaping the conclusion that the provisions of the Penal Code govern. The Penal Code in easily understandable language authorizes the determination of subsidiary liability. The Civil Code negatives its application by providing that civil obligations arising from crimes or misdemeanors shall be governed by the provisions of the Penal Code. The conviction of the motorman was a

misdemeanor falling under article 604 of the Penal Code. The act of the motorman was not a wrongful or negligent act or omission not punishable by law. Accordingly, the civil obligation connected up with the Penal Code and not with article 1903 of the Civil Code. In other words, the Penal Code affirms its jurisdiction while the Civil Code negatives its jurisdiction. This is a case of criminal negligence out of which civil liability arises and not a case of civil negligence.

x x x           x x x           x x x

Our deduction, therefore, is that the case relates to the Penal Code and not to the Civil Code. Indeed, as pointed out by the trial judge, any different ruling would permit the master to escape scot-free by simply alleging and proving that the master had exercised all diligence in the selection and training of its servants to prevent the damage. That would be a good defense to a strictly civil action, but might or might not be to a civil action either as a part of or predicated on conviction for a crime or misdemeanor. (By way of parenthesis, it may be said further that the statements here made are offered to meet the argument advanced during our deliberations to the effect that article 0902 of the Civil Code should be disregarded and codal articles 1093 and 1903 applied.)

It is not clear how the above case could support the defendant's proposition, because the Court of Appeals based its decision in the present case on the defendant's primary responsibility under article 1903 of the Civil Code and not on his subsidiary liability arising from Fontanilla's criminal negligence. In other words, the case of City of Manila vs. Manila Electric Co., supra, is predicated on an entirely different theory, which is the subsidiary liability of an employer arising from a criminal act of his employee, whereas the foundation of the decision of the Court of Appeals in the present case is the employer's primary liability under article 1903

of the Civil Code. We have already seen that this is a proper and independent remedy.

Arambulo vs. Manila Electric Co. (55 Phil., 75), is another case invoked by the defendant. A motorman in the employ of the Manila Electric Company had been convicted o homicide by simple negligence and sentenced, among other things, to pay the heirs of the deceased the sum of P1,000. An action was then brought to enforce the subsidiary liability of the defendant as employer under the Penal Code. The defendant attempted to show that it had exercised the diligence of a good father of a family in selecting the motorman, and therefore claimed exemption from civil liability. But this Court held:

In view of the foregoing considerations, we are of opinion and so hold, (1) that the exemption from civil liability established in article 1903 of the Civil Code for all who have acted with the diligence of a good father of a family, is not applicable to the subsidiary civil liability provided in article 20 of the Penal Code.

The above case is also extraneous to the theory of the defendant in the instant case, because the action there had for its purpose the enforcement of the defendant's subsidiary liability under the Penal Code, while in the case at bar, the plaintiff's cause of action is based on the defendant's primary and direct responsibility under article 1903 of the Civil Code. In fact, the above case destroys the defendant's contention because that decision illustrates the principle that the employer's primary responsibility under article 1903 of the Civil Code is different in character from his subsidiary liability under the Penal Code.

In trying to apply the two cases just referred to, counsel for the defendant has failed to recognize the distinction between civil liability arising from a crime, which is governed by the Penal Code, and the responsibility for cuasi-delito or culpa aquiliana under the Civil Code, and has likewise failed to give the importance to the latter type of civil action.

The defendant-petitioner also cites Francisco vs. Onrubia (46 Phil., 327). That case need not be set forth. Suffice it to say that the question involved was also civil liability arising from a crime. Hence, it is as inapplicable as the two cases above discussed.

The foregoing authorities clearly demonstrate the separate individuality of cuasi-delitos or culpa aquiliana under the Civil Code. Specifically they show that there is a distinction between civil liability arising from criminal negligence (governed by the Penal Code) and responsibility for fault or negligence under articles 1902 to 1910 of the Civil Code, and that the same negligent act may produce either a civil liability arising from a crime under the Penal Code, or a separate responsibility for fault or negligence under articles 1902 to 1910 of the Civil Code. Still more concretely, the authorities above cited render it inescapable to conclude that the employer — in this case the defendant-petitioner — is primarily and directly liable under article 1903 of the Civil Code.

The legal provisions, authors, and cases already invoked should ordinarily be sufficient to dispose of this case. But inasmuch as we are announcing doctrines that have been little understood in the past, it might not be inappropriate to indicate their foundations.

Firstly, the Revised Penal Code in article 365 punishes not only reckless but also simple negligence. If we were to hold that articles 1902 to 1910 of the Civil Code refer only to fault or negligence not punished by law, according to the literal import of article 1093 of the Civil Code, the legal institution of culpa aquiliana would have very little scope and application in actual life. Death or injury to persons and damage to property through any degree of negligence — even the slightest — would have to be indemnified only through the principle of civil liability arising from a crime. In such a state of affairs, what sphere would remain for cuasi-delito or culpa aquiliana? We are loath to impute to the lawmaker any intention to bring about a situation so absurd and anomalous. Nor are we, in the interpretation of the laws, disposed

to uphold the letter that killeth rather than the spirit that giveth life. We will not use the literal meaning of the law to smother and render almost lifeless a principle of such ancient origin and such full-grown development as culpa aquiliana or cuasi-delito, which is conserved and made enduring in articles 1902 to 1910 of the Spanish Civil Code.

Secondly, to find the accused guilty in a criminal case, proof of guilt beyond reasonable doubt is required, while in a civil case, preponderance of evidence is sufficient to make the defendant pay in damages. There are numerous cases of criminal negligence which can not be shown beyond reasonable doubt, but can be proved by a preponderance of evidence. In such cases, the defendant can and should be made responsible in a civil action under articles 1902 to 1910 of the Civil Code. Otherwise, there would be many instances of unvindicated civil wrongs. Ubi jus ibi remedium.

Thirdly, to hold that there is only one way to make defendant's liability effective, and that is, to sue the driver and exhaust his (the latter's) property first, would be tantamount to compelling the plaintiff to follow a devious and cumbersome method of obtaining relief. True, there is such a remedy under our laws, but there is also a more expeditious way, which is based on the primary and direct responsibility of the defendant under article 1903 of the Civil Code. Our view of the law is more likely to facilitate remedy for civil wrongs, because the procedure indicated by the defendant is wasteful and productive of delay, it being a matter of common knowledge that professional drivers of taxis and similar public conveyance usually do not have sufficient means with which to pay damages. Why, then, should the plaintiff be required in all cases to go through this roundabout, unnecessary, and probably useless procedure? In construing the laws, courts have endeavored to shorten and facilitate the pathways of right and justice.

At this juncture, it should be said that the primary and direct responsibility of employers and their presumed negligence are

principles calculated to protect society. Workmen and employees should be carefully chosen and supervised in order to avoid injury to the public. It is the masters or employers who principally reap the profits resulting from the services of these servants and employees. It is but right that they should guarantee the latter's careful conduct for the personnel and patrimonial safety of others. As Theilhard has said, "they should reproach themselves, at least, some for their weakness, others for their poor selection and all for their negligence." And according to Manresa, "It is much more equitable and just that such responsibility should fall upon the principal or director who could have chosen a careful and prudent employee, and not upon the injured person who could not exercise such selection and who used such employee because of his confidence in the principal or director." (Vol. 12, p. 622, 2nd Ed.) Many jurists also base this primary responsibility of the employer on the principle of representation of the principal by the agent. Thus, Oyuelos says in the work already cited (Vol. 7, p. 747) that before third persons the employer and employee "vienen a ser como una sola personalidad, por refundicion de la del dependiente en la de quien le emplea y utiliza." ("become as one personality by the merging of the person of the employee in that of him who employs and utilizes him.") All these observations acquire a peculiar force and significance when it comes to motor accidents, and there is need of stressing and accentuating the responsibility of owners of motor vehicles.

Fourthly, because of the broad sweep of the provisions of both the Penal Code and the Civil Code on this subject, which has given rise to the overlapping or concurrence of spheres already discussed, and for lack of understanding of the character and efficacy of the action for culpa aquiliana, there has grown up a common practice to seek damages only by virtue of the civil responsibility arising from a crime, forgetting that there is another remedy, which is by invoking articles 1902-1910 of the Civil Code. Although this habitual method is allowed by our laws, it has nevertheless rendered practically useless and nugatory the more expeditious and effective remedy based on culpa aquiliana or culpa extra-contractual. In the present case, we are

asked to help perpetuate this usual course. But we believe it is high time we pointed out to the harm done by such practice and to restore the principle of responsibility for fault or negligence under articles 1902 et seq. of the Civil Code to its full rigor. It is high time we caused the stream of quasi-delict or culpa aquiliana to flow on its own natural channel, so that its waters may no longer be diverted into that of a crime under the Penal Code. This will, it is believed, make for the better safeguarding of private rights because it re-establishes an ancient and additional remedy, and for the further reason that an independent civil action, not depending on the issues, limitations and results of a criminal prosecution, and entirely directed by the party wronged or his counsel, is more likely to secure adequate and efficacious redress.

In view of the foregoing, the judgment of the Court of Appeals should be and is hereby affirmed, with costs against the defendant-petitioner.

SONG FO & COMPANY, plaintiff-appellee, vs.HAWAIIAN PHILIPPINE CO., defendant-appellant.

Hilado and Hilado, Ross, Lawrence and Selph and Antonio T. Carrascoso, Jr., for appellant.Arroyo, Gurrea and Muller for appellee.

MALCOLM, J.:

In the court of First Instance of Iloilo, Song Fo & Company, plaintiff, presented a complaint with two causes of action for breach of contract against the Hawaiian-Philippine Co., defendant, in which judgment was asked for P70,369.50, with legal interest, and costs. In an amended answer and cross-complaint, the defendant set up the special defense that since the plaintiff had defaulted in the payment for the molasses delivered to it by the defendant under the contract between the parties, the latter was compelled to cancel and rescind the said contract. The case was submitted for decision on a stipulation of facts and the exhibits therein mentioned. The judgment of the trial court condemned the defendant to pay to the plaintiff a total of P35,317.93, with legal interest from the date of the presentation of the complaint, and with costs.

From the judgment of the Court of First Instance the defendant only has appealed. In this court it has made the following assignment of errors: "I. The lower court erred in finding that appellant had agreed to sell to the appellee 400,000, and not only 300,000, gallons of molasses. II. The lower court erred in finding that the appellant rescinded without sufficient cause the contract for the sale of molasses executed by it and the appellee. III. The lower court erred in rendering judgment in favor of the appellee and not in favor of the appellant in accordance with the prayer of its answer and cross-complaint. IV. The lower court erred in denying appellant's motion for a new trial." The specified errors raise three questions which we will consider in the order suggested by the appellant.

1. Did the defendant agree to sell to the plaintiff 400,000 gallons of molasses or 300,000 gallons of molasses? The trial court found the former amount to be correct. The appellant contends that the smaller amount was the basis of the agreement.

The contract of the parties is in writing. It is found principally in the documents, Exhibits F and G. The First mentioned exhibit is a letter addressed by the administrator of the Hawaiian-Philippine Co. to Song Fo & Company on December 13, 1922. It reads:

SILAY, OCC. NEGROS, P.I.            December 13, 1922

Messrs. SONG FO AND CO.Iloilo, Iloilo.

DEAR SIRS: Confirming our conversation we had today with your Mr. Song Fo, who visited this Central, we wish to state as follows:

He agreed to the delivery of 300,000 gallons of molasses at the same price as last year under the same condition, and the same to start after the completion of our grinding season. He requested if possible to let you have molasses during January, February and March or in other words, while we are grinding, and we agreed with him that we would to the best of our ability, altho we are somewhat handicapped. But we believe we can let you have 25,000 gallons during each of the milling months, altho it interfere with the shipping of our own and planters sugars to Iloilo. Mr. Song Fo also asked if we could supply him with another 100,000 gallons of molasses, and we stated we believe that this is possible and will do our best to let you have these extra 100,000 gallons during the next year the

same to be taken by you before November 1st, 1923, along with the 300,000, making 400,000 gallons in all.

Regarding the payment for our molasses, Mr. Song Fo gave us to understand that you would pay us at the end of each month for molasses delivered to you.

Hoping that this is satisfactory and awaiting your answer regarding this matter, we remain.

Yours very truly,

HAWAIIAN-PHILIPPINE COMPANY      BY R. C. PITCAIRN      Administrator.

Exhibit G is the answer of the manager of Song Fo & Company to the Hawaiian-Philippine Co. on December 16, 1922. This letter reads:

December 16th, 1922.

Messrs. HAWAIIAN-PHILIPPINE CO.,            Silay, Neg. Occ., P.I.

DEAR SIRS: We are in receipt of your favours dated the 9th and the 13th inst. and understood all their contents.

In connection to yours of the 13th inst. we regret to hear that you mentioned Mr. Song Fo the one who visited your Central, but it was not for he was Mr. Song Heng, the representative and the manager of Messrs. Song Fo & Co.

With reference to the contents of your letter dated the 13th inst. we confirm all the arrangements you have stated and in order to make the contract clear, we hereby quote below our old contract as amended, as per our new arrangements.

(a) Price, at 2 cents per gallon delivered at the central.

(b) All handling charges and expenses at the central and at the dock at Mambaguid for our account.

(c) For services of one locomotive and flat cars necessary for our six tanks at the rate of P48 for the round trip dock to central and central to dock. This service to be restricted to one trip for the six tanks.

Yours very truly,

      SONG FO & COMPANYBy __________________________                        Manager.

We agree with appellant that the above quoted correspondence is susceptible of but one interpretation. The Hawaiian-Philippine Co. agreed to deliver to Song Fo & Company 300,000 gallons of molasses. The Hawaiian-Philippine Co. also believed it possible to accommodate Song Fo & Company by supplying the latter company with an extra 100,000 gallons. But the language used with reference to the additional 100,000 gallons was not a definite promise. Still less did it constitute an obligation.

If Exhibit T relied upon by the trial court shows anything, it is simply that the defendant did not consider itself obliged to deliver to the plaintiff molasses in any amount. On the other hand, Exhibit A, a letter written by the manager of Song Fo & Company on October 17, 1922, expressly mentions an understanding

between the parties of a contract for P300,000 gallons of molasses.

We sustain appellant's point of view on the first question and rule that the contract between the parties provided for the delivery by the Hawaiian-Philippine Co. to song Fo & Company of 300,000 gallons of molasses.

2. Had the Hawaiian-Philippine Co. the right to rescind the contract of sale made with Song Fo & Company? The trial judge answers No, the appellant Yes.

Turning to Exhibit F, we note this sentence: "Regarding the payment for our molasses, Mr. Song Fo (Mr. Song Heng) gave us to understand that you would pay us at the end of each month for molasses delivered to you." In Exhibit G, we find Song Fo & Company stating that they understand the contents of Exhibit F, and that they confirm all the arrangements you have stated, and in order to make the contract clear, we hereby quote below our old contract as amended, as per our new arrangements. (a) Price, at 2 cents per gallon delivered at the central." In connection with the portion of the contract having reference to the payment for the molasses, the parties have agree on a table showing the date of delivery of the molasses, the amount and date thereof, the date of receipt of account by plaintiff, and date of payment. The table mentioned is as follows:

Date of delivery

Account and date thereof

Date of receipt of

account by plaintiff

1922 1923

Dec. 18 P206.16 Dec. 26/22 Jan. 5

Dec. 29 206.16 Jan. 3/23 do

1923

Jan. 5 206.16 Jan. 9/23 Mar. 7 or 8 Mar. 31

Feb. 12 206.16 Mar. 12/23 do Do

Feb. 27 206.16 do do Do

Mar. 5 206.16 do do Do

Mar. 16 206.16 Mar. 20/23 Apr. 2/23 Apr. 19

Mar. 24 206.16 Mar. 31/23 do Do

Mar. 29 206.16 do do Do

Some doubt has risen as to when Song Fo & Company was expected to make payments for the molasses delivered. Exhibit F speaks of payments "at the end of each month." Exhibit G is silent on the point. Exhibit M, a letter of March 28, 1923, from Warner, Barnes & Co., Ltd., the agent of the Hawaiian-Philippine Co. to Song Fo & Company, mentions "payment on presentation of bills for each delivery." Exhibit O, another letter from Warner, Barnes & Co., Ltd. to Song Fo & Company dated April 2, 1923, is of a similar tenor. Exhibit P, a communication sent direct by the Hawaiian-Philippine Co. to Song Fo & Company on April 2, 1923, by which the Hawaiian-Philippine Co. gave notice of the termination of the contract, gave as the reason for the rescission, the breach by Song Fo & Company of this condition: "You will recall that under the arrangements made for taking our molasses, you were to meet our accounts upon presentation and at each delivery." Not far removed from this statement, is the allegation of plaintiff in its complaint that "plaintiff agreed to pay defendant, at the end of each month upon presentation accounts."

Resolving such ambiguity as exists and having in mind ordinary business practice, a reasonable deduction is that Song Fo & Company was to pay the Hawaiian-Philippine Co. upon

presentation of accounts at the end of each month. Under this hypothesis, Song Fo & Company should have paid for the molasses delivered in December, 1922, and for which accounts were received by it on January 5, 1923, not later than January 31 of that year. Instead, payment was not made until February 20, 1923. All the rest of the molasses was paid for either on time or ahead of time.

The terms of payment fixed by the parties are controlling. The time of payment stipulated for in the contract should be treated as of the essence of the contract. Theoretically, agreeable to certain conditions which could easily be imagined, the Hawaiian-Philippine Co. would have had the right to rescind the contract because of the breach of Song Fo & Company. But actually, there is here present no outstanding fact which would legally sanction the rescission of the contract by the Hawaiian-Philippine Co.

The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only for such breaches as are so substantial and fundamental as to defeat the object of the parties in making the agreement. A delay in payment for a small quantity of molasses for some twenty days is not such a violation of an essential condition of the contract was warrants rescission for non-performance. Not only this, but the Hawaiian-Philippine Co. waived this condition when it arose by accepting payment of the overdue accounts and continuing with the contract. Thereafter, Song Fo & Company was not in default in payment so that the Hawaiian-Philippine co. had in reality no excuse for writing its letter of April 2, 1923, cancelling the contract. (Warner, Barnes & Co. vs. Inza [1922], 43 Phil., 505.)

We rule that the appellant had no legal right to rescind the contract of sale because of the failure of Song Fo & Company to pay for the molasses within the time agreed upon by the parties. We sustain the finding of the trial judge in this respect.

3. On the basis first, of a contract for 300,000 gallons of molasses, and second, of a contract imprudently breached by the

Hawaiian-Philippine Co., what is the measure of damages? We again turn to the facts as agreed upon by the parties.

The first cause of action of the plaintiff is based on the greater expense to which it was put in being compelled to secure molasses from other sources. Three hundred thousand gallons of molasses was the total of the agreement, as we have seen. As conceded by the plaintiff, 55,006 gallons of molasses were delivered by the defendant to the plaintiff before the breach. This leaves 244,994 gallons of molasses undelivered which the plaintiff had to purchase in the open market. As expressly conceded by the plaintiff at page 25 of its brief, 100,000 gallons of molasses were secured from the Central North Negros Sugar Co., Inc., at two centavos a gallon. As this is the same price specified in the contract between the plaintiff and the defendant, the plaintiff accordingly suffered no material loss in having to make this purchase. So 244,994 gallons minus the 100,000 gallons just mentioned leaves as a result 144,994 gallons. As to this amount, the plaintiff admits that it could have secured it and more from the Central Victorias Milling Company, at three and one-half centavos per gallon. In other words, the plaintiff had to pay the Central Victorias Milling company one and one-half centavos a gallon more for the molasses than it would have had to pay the Hawaiian-Philippine Co. Translated into pesos and centavos, this meant a loss to the plaintiff of approximately P2,174.91. As the conditions existing at the central of the Hawaiian-Philippine Co. may have been different than those found at the Central North Negros Sugar Co., Inc., and the Central Victorias Milling Company, and as not alone through the delay but through expenses of transportation and incidental expenses, the plaintiff may have been put to greater cost in making the purchase of the molasses in the open market, we would concede under the first cause of action in round figures P3,000.

The second cause of action relates to lost profits on account of the breach of the contract. The only evidence in the record on this question is the stipulation of counsel to the effect that had Mr.

Song Heng, the manager of Song Fo & Company, been called as a witness, he would have testified that the plaintiff would have realized a profit of P14,948.43, if the contract of December 13, 1922, had been fulfilled by the defendant. Indisputably, this statement falls far short of presenting proof on which to make a finding as to damages.

In the first place, the testimony which Mr. Song Heng would have given undoubtedly would follow the same line of thought as found in the decision of the trial court, which we have found to be unsustainable. In the second place, had Mr. Song Heng taken the witness-stand and made the statement attributed to him, it would have been insufficient proof of the allegations of the complaint, and the fact that it is a part of the stipulation by counsel does not change this result. And lastly, the testimony of the witness Song Heng, it we may dignify it as such, is a mere conclusion, not a proven fact. As to what items up the more than P14,000 of alleged lost profits, whether loss of sales or loss of customers, or what not, we have no means of knowing.

We rule that the plaintiff is entitled to recover damages from the defendant for breach of contract on the first cause of action in the amount of P3,000 and on the second cause of action in no amount. Appellant's assignments of error are accordingly found to be well taken in part and not well taken in part.

Agreeable to the foregoing, the judgment appealed from shall be modified and the plaintiff shall have and recover from the defendant the sum of P3,000, with legal interest form October 2, 1923, until payment. Without special finding as to costs in either instance, it is so ordered.

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners, vs. COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.

D E C I S I O N

PANGANIBAN, J.:

A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract, entitles the injured party to rescind the obligation. Rescission abrogates the contract from its inception and requires a mutual restitution of benefits received.

The Case

Before us is a Petition for Review on Certiorari[1] questioning the Decision[2] of the Court of Appeals (CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its Resolution[3] dated December 29, 1992 denying petitioners motion for reconsideration.[4]

The dispositive portion of the assailed Decision reads:

WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the Decision dated November 14, 1990 dismissing the [C]omplaint is REINSTATED. The bonds posted by plaintiffs-appellees and defendants-appellants are hereby RELEASED.[5]

The Facts

The factual antecedents of the case, as found by the CA, are as follows:

x x x. David Raymundo [herein private respondent] is the absolute and registered owner of a parcel of land, together with the house and other improvements thereon, located at 1918 Kamias St., Dasmarias Village, Makati and covered by TCT No. 142177. Defendant George Raymundo [herein private respondent] is Davids father who negotiated with plaintiffs Avelina and Mariano Velarde [herein petitioners] for the sale of said property, which was, however, under lease (Exh. 6, p. 232, Record of Civil Case No. 15952).

On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. A; Exh. 1, pp. 11-12, Record) was executed by defendant David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as vendee, with the following terms and conditions:

x x x x x x x x x

That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, receipt of which in full is hereby acknowledged by the VENDOR from the VENDEE, to his entire and complete satisfaction, by these presents the VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and voluntarily, with full warranty of a legal and valid title as provided by law, unto the VENDEE, her heirs, successors and assigns, the parcel of land mentioned and described above, together with the house and other improvements thereon.

That the aforesaid parcel of land, together with the house and other improvements thereon, were mortgaged by the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila, to secure the payment of a loan of ONE MILLION EIGHT HUNDRED

THOUSAND PESOS (P1,800,000.00), Philippine currency, as evidenced by a Real Estate Mortgage signed and executed by the VENDOR in favor of the said Bank of the Philippine Islands, on______ and which Real Estate Mortgage was ratified before Notary Public for Makati, _______, as Doc. No. ____, Page No. ___, Book No. ___, Series of 1986 of his Notarial Register.

That as part of the consideration of this sale, the VENDEE hereby assumes to pay the mortgage obligations on the property herein sold in the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in favor of Bank of the Philippine Islands, in the name of the VENDOR, and further agrees to strictly and faithfully comply with all the terms and conditions appearing in the Real Estate Mortgage signed and executed by the VENDOR in favor of BPI, including interests and other charges for late payment levied by the Bank, as if the same were originally signed and executed by the VENDEE.

It is further agreed and understood by the parties herein that the capital gains tax and documentary stamps on the sale shall be for the account of the VENDOR; whereas, the registration fees and transfer tax thereon shall be for the account of the VENDEE. (Exh. A, pp. 11-12, Record).

On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the consent of her husband, Mariano, executed an Undertaking (Exh. C, pp. 13-14, Record), the pertinent portions of which read, as follows:

x x x x x x x x x

Whereas, as per Deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo the sum of EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, and assume the mortgage

obligations on the property with the Bank of the Philippine Islands in the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in accordance with the terms and conditions of the Deed of Real Estate Mortgage dated _________, signed and executed by Mr. David A. Raymundo with the said Bank, acknowledged before Notary Public for Makati, _____, as Doc. No. ___, Page No. ___, Book No. __, Series of 1986 of his Notarial Register.

WHEREAS, while my application for the assumption of the mortgage obligations on the property is not yet approved by the mortgagee Bank, I have agreed to pay the mortgage obligations on the property with the Bank in the name of Mr. David A. Raymundo, in accordance with the terms and conditions of the said Deed of Real Estate Mortgage, including all interests and other charges for late payment.

WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for purposes of attesting and confirming our private understanding concerning the said mortgage obligations to be assumed.

NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption of the mortgage obligations of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, with the Bank of the Philippine islands, I, Mrs. Avelina D. Velarde, with the consent of my husband, Mariano Z. Velarde, do hereby bind and obligate myself, my heirs, successors and assigns, to strictly and faithfully comply with the following terms and conditions:

1. That until such time as my assumption of the mortgage obligations on the property purchased is approved by the mortgagee bank, the Bank of the Philippine Islands, I shall continue to pay the said loan in accordance

with the terms and conditions of the Deed of Real Estate Mortgage in the name of Mr. David A. Raymundo, the original Mortgagor.

2. That, in the event I violate any of the terms and conditions of the said Deed of Real Estate Mortgage, I hereby agree that my downpayment of P800,000.00, plus all payments made with the Bank of the Philippine Islands on the mortgage loan, shall be forfeited in favor of Mr. David A. Raymundo, as and by way of liquidated damages, without necessity of notice or any judicial declaration to that effect, and Mr. David A Raymundo shall resume total and complete ownership and possession of the property sold by way of Deed of Sale with Assumption of Mortgage, and the same shall be deemed automatically cancelled and be of no further force or effect, in the same manner as if (the) same had never been executed or entered into.

3. That I am executing this Undertaking for purposes of binding myself, my heirs, successors and assigns, to strictly and faithfully comply with the terms and conditions of the mortgage obligations with the Bank of the Philippine Islands, and the covenants, stipulations and provisions of this Undertaking.

That, David A. Raymundo, the vendor of the property mentioned and identified above, [does] hereby confirm and agree to the undertakings of the Vendee pertinent to the assumption of the mortgage obligations by the Vendee with the Bank of the Philippine Islands. (Exh. C, pp. 13-14, Record).

This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.

It appears that the negotiated terms for the payment of the balance of P1.8 million was from the proceeds of a loan that plaintiffs were to secure from a bank with defendants help. Defendants had a standing

approved credit line with the Bank of the Philippine Islands (BPI). The parties agreed to avail of this, subject to BPIs approval of an application for assumption of mortgage by plaintiffs. Pending BPIs approval o[f] the application, plaintiffs were to continue paying the monthly interests of the loan secured by a real estate mortgage.

Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by the aforementioned mortgage for three (3) months as follows: September 19, 1986 at P27,225.00; October 20, 1986 at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. E, H & J, pp. 15, 17 and 18, Record).

On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgage with BPI was not approved (Exh. J, p. 133, Record). This prompted plaintiffs not to make any further payment.

On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their non-payment to the mortgage bank constitute[d] non-performance of their obligation (Exh. 3, p. 220, Record).

In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:

This is to advise you, therefore, that our client is willing to pay the balance in cash not later than January 21, 1987 provided: (a) you deliver actual possession of the property to her not later than January 15, 1987 for her immediate occupancy; (b) you cause the release of title and mortgage from the Bank of P.I. and make the title available and free from any liens and encumbrances; and (c) you execute an absolute deed of sale in her favor free from any liens or encumbrances not later than January 21, 1987. (Exhs. K, 4, p. 223, Record).

On January 8, 1987, defendants sent plaintiffs a notarial notice of cancellation/rescission of the intended sale of the subject property allegedly due to the latters failure to comply with the terms and conditions of the Deed of Sale with Assumption of Mortgage and the Undertaking (Exh. 5, pp. 225-226, Record).[6]

Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for specific performance, nullity of cancellation, writ of possession and damages. This was docketed as Civil Case No. 15952 at the Regional Trial Court of Makati, Branch 149. The case was tried and heard by then Judge Consuelo Ynares-Santiago (now an associate justice of this Court), who dismissed the Complaint in a Decision dated November 14, 1990.[7] Thereafter, petitioners filed a Motion for Reconsideration.[8]

Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge Salvador S. A. Abad Santos was assigned to the sala she vacated. In an Order dated May 15, 1991,[9] Judge Abad Santos granted petitioners Motion for Reconsideration and directed the parties to proceed with the sale. He instructed petitioners to pay the balance of P1.8 million to private respondents who, in turn, were ordered to execute a deed of absolute sale and to surrender possession of the disputed property to petitioners.

Private respondents appealed to the CA.

Ruling of the Court of Appeals

The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiagos earlier Decision dismissing petitioners Complaint. Upholding the validity of the rescission made by private respondents, the CA explained its ruling in this wise:

In the Deed of Sale with Assumption of Mortgage, it was stipulated that as part of the consideration of this sale, the VENDEE (Velarde) would assume to pay the mortgage obligation on the subject property in the amount of P1.8 million in favor of BPI in the name of the Vendor (Raymundo). Since the price to be paid by the Vendee Velarde includes the downpayment of P800,000.00 and the balance of P1.8 million, and the balance of P1.8 million cannot be paid in cash, Vendee Velarde, as part of the consideration of the sale, had to assume the mortgage obligation on the subject property. In other words, the assumption of the mortgage obligation is part of the obligation of Velarde, as vendee, under the contract. Velarde further agreed to strictly and faithfully comply with all the terms and conditions appearing in the Real Estate Mortgage signed and executed by the VENDOR in favor of BPI x x x as if the same were originally signed and executed by the Vendee. (p.2, thereof, p.12, Record). This was reiterated by Velarde in the document entitled Undertaking wherein the latter agreed to continue paying said loan in accordance with the terms and conditions of the Deed of Real Estate Mortgage in the name of Raymundo. Moreover, it was stipulated that in the event of violation by Velarde of any terms and conditions of said deed of real estate mortgage, the downpayment of P800,000.00 plus all payments made with BPI or the mortgage loan would be forfeited and the [D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby be cancelled automatically and of no force and effect (pars. 2 & 3, thereof, pp. 13-14, Record).

From these 2 documents, it is therefore clear that part of the consideration of the sale was the assumption by Velarde of the mortgage obligation of Raymundo in the amount of P1.8 million. This would mean that Velarde had to make payments to BPI under the [D]eed of [R]eal [E]state [M]ortgage in the name of Raymundo. The application with BPI for the approval of the assumption of mortgage would mean that, in case of approval, payment of the mortgage obligation will now be in the name of Velarde. And in the event said application is

disapproved, Velarde had to pay in full. This is alleged and admitted in Paragraph 5 of the Complaint. Mariano Velarde likewise admitted this fact during the hearing on September 15, 1997 (p. 47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This being the case, the non-payment of the mortgage obligation would result in a violation of the contract. And, upon Velardes failure to pay the agreed price, the[n] Raymundo may choose either of two (2) actions - (1) demand fulfillment of the contract, or (2) demand its rescission (Article 1191, Civil Code).

The disapproval by BPI of the application for assumption of mortgage cannot be used as an excuse for Velardes non-payment of the balance of the purchase price. As borne out by the evidence, Velarde had to pay in full in case of BPIs disapproval of the application for assumption of mortgage. What Velarde should have done was to pay the balance of P1.8 million. Instead, Velarde sent Raymundo a letter dated January 7, 1987 (Exh. K, 4) which was strongly given weight by the lower court in reversing the decision rendered by then Judge Ynares-Santiago. In said letter, Velarde registered their willingness to pay the balance in cash but enumerated 3 new conditions which, to the mind of this Court, would constitute a new undertaking or new agreement which is subject to the consent or approval of Raymundo. These 3 conditions were not among those previously agreed upon by Velarde and Raymundo. These are mere offers or, at most, an attempt to novate.But then again, there can be no novation because there was no agreement of all the parties to the new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).

It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale with Assumption of Mortgage would be deemed automatically cancelled and of no further force and effect, as if the same had never been executed or entered into. While it is true that even if the contract expressly provided for automatic rescission upon failure to pay the price, the vendee may still pay, he may do so only for

as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act (Article 1592, Civil Code). In the case at bar, Raymundo sent Velarde a notarial notice dated January 8, 1987 of cancellation/rescission of the contract due to the latters failure to comply with their obligation. The rescission was justified in view of Velardes failure to pay the price (balance) which is substantial and fundamental as to defeat the object of the parties in making the agreement. As adverted to above, the agreement of the parties involved a reciprocal obligation wherein the obligation of one is a resolutory condition of the obligation of the other, the non-fulfillment of which entitles the other party to rescind the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage obligation by appellees Velarde would create a right to demand payment or to rescind the contract, or to criminal prosecution (Edca Publishing & Distribution Corporation vs. Santos, 184 SCRA 614). Upon appellees failure, therefore, to pay the balance, the contract was properly rescinded (Ruiz vs. IAC, 184 SCRA 720). Consequently, appellees Velarde having violated the contract, they have lost their right to its enforcement and hence, cannot avail of the action for specific performance (Voysaw vs. Interphil Promotions, Inc., 148 SCRA 635).[10]

Hence, this appeal.[11]

The Issues

Petitioners, in their Memorandum,[12] interpose the following assignment of errors:

I.

The Court of Appeals erred in holding that the non-payment of the mortgage obligation resulted in a breach of the contract.

II.

The Court of Appeals erred in holding that the rescission (resolution) of the contract by private respondents was justified.

III.

The Court of Appeals erred in holding that petitioners January 7, 1987 letter gave three new conditions constituting mere offers or an attempt to novate necessitating a new agreement between the parties.

The Courts Ruling

The Petition is partially meritorious.

First Issue:

Breach of Contract

Petitioners aver that their nonpayment of private respondents mortgage obligation did not constitute a breach of contract, considering that their request to assume the obligation had been disapproved by the mortgagee bank. Accordingly, payment of the monthly amortizations ceased to be their obligation and, instead, it devolved upon private respondents again.

However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay the balance of the purchase price. As admitted by both parties, their agreement mandated that petitioners should pay the purchase price balance of P1.8 million to private respondents in case the request to assume the mortgage would be

disapproved. Thus, on December 15, 1986, when petitioners received notice of the banks disapproval of their application to assume respondents mortgage, they should have paid the balance of the P1.8 million loan.

Instead of doing so, petitioners sent a letter to private respondents offering to make such payment only upon the fulfillment of certain conditions not originally agreed upon in the contract of sale. Such conditional offer to pay cannot take the place of actual payment as would discharge the obligation of a buyer under a contract of sale.

In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate thing, and the buyer to pay therefor a price certain in money or its equivalent.[13] Private respondents had already performed their obligation through the execution of the Deed of Sale, which effectively transferred ownership of the property to petitioner through constructive delivery. Prior physical delivery or possession is not legally required, and the execution of the Deed of Sale is deemed equivalent to delivery.[14]

Petitioners, on the other hand, did not perform their correlative obligation of paying the contract price in the manner agreed upon. Worse, they wanted private respondents to perform obligations beyond those stipulated in the contract before fulfilling their own obligation to pay the full purchase price.

Second Issue

Validity of the Rescission

Petitioners likewise claim that the rescission of the contract by private respondents was not justified, inasmuch as the former had signified their willingness to pay the balance of the purchase price only a little over a month from the time they were notified of the disapproval

of their application for assumption of mortgage. Petitioners also aver that the breach of the contract was not substantial as would warrant a rescission. They cite several cases[15] in which this Court declared that rescission of a contract would not be permitted for a slight or casual breach. Finally, they argue that they have substantially performed their obligation in good faith, considering that they have already made the initial payment of P800,000 and three (3) monthly mortgage payments.

As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of the mortgage obligations, as their nonperformance of their reciprocal obligation to pay the purchase price under the contract of sale. Private respondents right to rescind the contract finds basis in Article 1191 of the Civil Code, which explicitly provides as follows:

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

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

The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between them.[16] The breach contemplated in the said provision is the obligors failure to comply with an existing obligation.[17] When the obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the absence of any just cause for the court to determine the period of compliance, the court shall decree the rescission.[18]

In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of petitioners to comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of sale, a violation that consequently gave rise to private respondents right to rescind the same in accordance with law.

True, petitioners expressed their willingness to pay the balance of the purchase price one month after it became due; however, this was not equivalent to actual payment as would constitute a faithful compliance of their reciprocal obligation.Moreover, the offer to pay was conditioned on the performance by private respondents of additional burdens that had not been agreed upon in the original contract. Thus, it cannot be said that the breach committed by petitioners was merely slight or casual as would preclude the exercise of the right to rescind.

Misplaced is petitioners reliance on the cases[19] they cited because the factual circumstances in those cases are not analogous to those in the present one. In Song Fo there was, on the part of the buyer, only a delay of twenty (20) days to pay for the goods delivered. Moreover, the buyers offer to pay was unconditional and was accepted by the seller. In Zepeda, the breach involved a mere one-week delay in paying the balance of P1,000, which was actually paid. In Tan, the alleged breach was private respondents delay of only a few days, which was for the purpose of clearing the title to the property; there was no reference whatsoever to the nonpayment of the contract price.

In the instant case, the breach committed did not merely consist of a slight delay in payment or an irregularity; such breach would not normally defeat the intention of the parties to the contract. Here, petitioners not only failed to pay theP1.8 million balance, but they also imposed upon private respondents new obligations as preconditions to the performance of their own obligation. In effect, the qualified offer to pay was a repudiation of an existing obligation, which was legally due and demandable under the contract of sale. Hence, private respondents

were left with the legal option of seeking rescission to protect their own interest.

Mutual Restitution

Required in Rescission

As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a violation of the terms and conditions of the mortgage contract. Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the contract does not apply. Instead, Civil Code provisions shall govern and regulate the resolution of this controversy.

Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution is required to bring back the parties to their original situation prior to the inception of the contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners should be returned by private respondents, lest the latter unjustly enrich themselves at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore.[20] To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made.[21]

Third Issue

Attempt to Novate

In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third issue raised by petitioners. Suffice it to say that the three conditions appearing on the January 7, 1987 letter of petitioners to private respondents were not part of the original contract. By that time, it was already incumbent upon the former to pay the balance of the sale price. They had no right to demand preconditions to the fulfillment of their obligation, which had become due.

WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that private respondents are ordered to return to petitioners the amount of P874,150, which the latter paid as a consequence of the rescinded contract, with legal interest thereon from January 8, 1987, the date of rescission. No pronouncement as to costs.

SO ORDERED.

 

CHARLES F. WOODHOUSE, plaintiff-appellant, vs.FORTUNATO F. HALILI, defendant-appellant.

Tañada, Pelaez & Teehankee for defendant and appellant.Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.

LABRADOR, J.:

On November 29, 1947, the plaintiff entered on a written agreement, Exhibit A, with the defendant, the most important provisions of which are (1) that they shall organize a partnership for the bottling and distribution of Mision soft drinks, plaintiff to act as industrial partner or manager, and the defendant as a capitalist, furnishing the capital necessary therefor; (2) that the defendant was to decide matters of general policy regarding the business, while the plaintiff was to attend to the operation and development of the bottling plant; (3) that the plaintiff was to secure the Mission Soft Drinks franchise for and in behalf of the proposed partnership; and (4) that the plaintiff was to receive 30 per cent of the net profits of the business. The above agreement was arrived at after various conferences and consultations by and between them, with the assistance of their respective attorneys. Prior to entering into this agreement, plaintiff had informed the

Mission Dry Corporation of Los Angeles, California, U.S.A., manufacturers of the bases and ingridients of the beverages bearing its name, that he had interested a prominent financier (defendant herein) in the business, who was willing to invest half a million dollars in the bottling and distribution of the said beverages, and requested, in order that he may close the deal with him, that the right to bottle and distribute be granted him for a limited time under the condition that it will finally be transferred to the corporation (Exhibit H). Pursuant for this request, plaintiff was given "a thirty-days" option on exclusive bottling and distribution rights for the Philippines" (Exhibit J). Formal negotiations between plaintiff and defendant began at a meeting on November 27, 1947, at the Manila Hotel, with their lawyers attending. Before this meeting plaintiff's lawyer had prepared the draft of the agreement, Exhibit II or OO, but this was not satisfactory because a partnership, instead of a corporation, was desired. Defendant's lawyer prepared after the meeting his own draft, Exhibit HH. This last draft appears to be the main basis of the agreement, Exhibit A.

The contract was finally signed by plaintiff on December 3, 1947. Plaintiff did not like to go to the United States without the agreement being not first signed. On that day plaintiff and defendant went to the United States, and on December 10, 1947, a franchise agreement (Exhibit V) was entered into the Mission Dry Corporation and Fortunato F.

Halili and/or Charles F. Woodhouse, granted defendant the exclusive right, license, and authority to produce, bottle, distribute, and sell Mision beverages in the Philippines. The plaintiff and the defendant thereafter returned to the Philippines. Plaintiff reported for duty in January, 1948, but operations were not begun until the first week of February, 1948. In January plaintiff was given as advance, on account of profits, the sum of P2,000, besides the use of a car; in February, 1948, also P2,000, and in March only P1,000. The car was withdrawn from plaintiff on March 9, 1948.

When the bottling plant was already on operation, plaintiff demanded of defendant that the partnership papers be executed. At first defendant executed himself, saying there was no hurry. Then he promised to do so after the sales of the product had been increased to P50,000. As nothing definite was forthcoming, after this condition was attained, and as defendant refused to give further allowances to plaintiff, the latter caused his attorneys to take up the matter with the defendant with a view to a possible settlement. as none could be arrived at, the present action was instituted.

In his complaint plaintiff asks for the execution of the contract of partnership, an accounting of the profits, and a share thereof of 30 per cent, as well as damages in the amount of P200,000. In his answer defendant alleges by way of defense (1) that defendant's consent to the agreement,

Exhibit A, was secured by the representation of plaintiff that he was the owner, or was about to become owner of an exclusive bottling franchise, which representation was false, and plaintiff did not secure the franchise, but was given to defendant himself; (2) that defendant did not fail to carry out his undertakings, but that it was plaintiff who failed; (3) that plaintiff agreed to contribute the exclusive franchise to the partnership, but plaintiff failed to do so. He also presented a counter-claim for P200,000 as damages. On these issues the parties went to trial, and thereafter the Court of First Instance rendered judgment ordering defendant to render an accounting of the profits of the bottling and distribution business, subject of the action, and to pay plaintiff 15 percent thereof. it held that the execution of the contract of partnership could not be enforced upon the parties, but it also held that the defense of fraud was not proved. Against this judgment both parties have appealed.

The most important question of fact to be determined is whether defendant had falsely represented that he had an exclusive franchise to bottle Mission beverages, and whether this false representation or fraud, if it existed, annuls the agreement to form the partnership. The trial court found that it is improbable that defendant was never shown the letter, Exhibit J, granting plaintiff had; that the drafts of the contract prior to the final one can not be considered for the purpose of determining the issue, as they are presumed

to have been already integrated into the final agreement; that fraud is never presumed and must be proved; that the parties were represented by attorneys, and that if any party thereto got the worse part of the bargain, this fact alone would not invalidate the agreement. On this appeal the defendant, as appellant, insists that plaintiff did represent to the defendant that he had an exclusive franchise, when as a matter of fact, at the time of its execution, he no longer had it as the same had expired, and that, therefore, the consent of the defendant to the contract was vitiated by fraud and it is, consequently, null and void.

Our study of the record and a consideration of all the surrounding circumstances lead us to believe that defendant's contention is not without merit. Plaintiff's attorney, Mr. Laurea, testified that Woodhouse presented himself as being the exclusive grantee of a franchise, thus:

A. I don't recall any discussion about that matter. I took along with me the file of the office with regards to this matter. I notice from the first draft of the document which I prepared which calls for the organization of a corporation, that the manager, that is, Mr. Woodhouse, is represented as being the exclusive grantee of a franchise from the Mission Dry Corporation. . . . (t.s.n., p.518)

As a matter of fact, the first draft that Mr.

Laurea prepared, which was made before the Manila Hotel conference on November 27th, expressly states that plaintiff had the exclusive franchise. Thus, the first paragraph states:

Whereas, the manager is the exclusive grantee of a franchise from the Mission Dry Corporation San Francisco, California, for the bottling of Mission products and their sale to the public throughout the Philippines; . . . .

3. The manager, upon the organization of the said corporation, shall forthwith transfer to the said corporation his exclusive right to bottle Mission products and to sell them throughout the Philippines. . . . .

(Exhibit II; emphasis ours)

The trial court did not consider this draft on the principle of integration of jural acts. We find that the principle invoked is inapplicable, since the purpose of considering the prior draft is not to vary, alter, or modify the agreement, but to discover the intent of the parties thereto and the circumstances surrounding the execution of the contract. The issue of fact is: Did plaintiff represent to defendant that he had an exclusive franchise? Certainly, his acts or statements prior to the agreement are essential and relevant to the determination of said issue.

The act or statement of the plaintiff was not sought to be introduced to change or alter the terms of the agreement, but to prove how he induced the defendant to enter into it — to prove the representations or inducements, or fraud, with which or by which he secured the other party's consent thereto. These are expressly excluded from the parol evidence rule. (Bough and Bough vs. Cantiveros and Hanopol, 40 Phil., 209; port Banga Lumber Co. vs. Export & Import Lumber Co., 26 Phil., 602; III Moran 221,1952 rev. ed.) Fraud and false representation are an incident to the creation of a jural act, not to its integration, and are not governed by the rules on integration. Were parties prohibited from proving said representations or inducements, on the ground that the agreement had already been entered into, it would be impossible to prove misrepresentation or fraud. Furthermore, the parol evidence rule expressly allows the evidence to be introduced when the validity of an instrument is put in issue by the pleadings (section 22, par. (a), Rule 123, Rules of Court),as in this case.

That plaintiff did make the representation can also be easily gleaned from his own letters and his own testimony. In his letter to Mission Dry Corporation, Exhibit H, he said:.

. . . He told me to come back to him when I was able to speak with authority so that we could come to terms as far as he and I were concerned. That is the reason why

the cable was sent. Without this authority, I am in a poor bargaining position. . .

I would propose that you grant me the exclusive bottling and distributing rights for a limited period of time, during which I may consummate my plants. . . .

By virtue of this letter the option on exclusive bottling was given to the plaintiff on October 14, 1947. (See Exhibit J.) If this option for an exclusive franchise was intended by plaintiff as an instrument with which to bargain with defendant and close the deal with him, he must have used his said option for the above-indicated purpose, especially as it appears that he was able to secure, through its use, what he wanted.

Plaintiff's own version of the preliminary conversation he had with defendant is to the effect that when plaintiff called on the latter, the latter answered, "Well, come back to me when you have the authority to operate. I am definitely interested in the bottling business." (t. s. n., pp. 60-61.) When after the elections of 1949 plaintiff went to see the defendant (and at that time he had already the option), he must have exultantly told defendant that he had the authority already. It is improbable and incredible for him to have disclosed the fact that he had only an option to the exclusive franchise, which was to last thirty days only, and still more improbable for him to have disclosed that, at the time of the

signing of the formal agreement, his option had already expired. Had he done so, he would have destroyed all his bargaining power and authority, and in all probability lost the deal itself.

The trial court reasoned, and the plaintiff on this appeal argues, that plaintiff only undertook in the agreement "to secure the Mission Dry franchise for and in behalf of the proposed partnership." The existence of this provision in the final agreement does not militate against plaintiff having represented that he had the exclusive franchise; it rather strengthens belief that he did actually make the representation. How could plaintiff assure defendant that he would get the franchise for the latter if he had not actually obtained it for himself? Defendant would not have gone into the business unless the franchise was raised in his name, or at least in the name of the partnership. Plaintiff assured defendant he could get the franchise. Thus, in the draft prepared by defendant's attorney, Exhibit HH, the above provision is inserted, with the difference that instead of securing the franchise for the defendant, plaintiff was to secure it for the partnership. To show that the insertion of the above provision does not eliminate the probability of plaintiff representing himself as the exclusive grantee of the franchise, the final agreement contains in its third paragraph the following:

. . . and the manager is ready and willing to allow the capitalists to use

the exclusive franchise . . .

and in paragraph 11 it also expressly states:

1. In the event of the dissolution or termination of the partnership, . . . the franchise from Mission Dry Corporation shall be reassigned to the manager.

These statements confirm the conclusion that defendant believed, or was made to believe, that plaintiff was the grantee of an exclusive franchise. Thus it is that it was also agreed upon that the franchise was to be transferred to the name of the partnership, and that, upon its dissolution or termination, the same shall be reassigned to the plaintiff.

Again, the immediate reaction of defendant, when in California he learned that plaintiff did not have the exclusive franchise, was to reduce, as he himself testified, plaintiff's participation in the net profits to one half of that agreed upon. He could not have had such a feeling had not plaintiff actually made him believe that he (plaintiff) was the exclusive grantee of the franchise.

The learned trial judge reasons in his decision that the assistance of counsel in the making of the contract made fraud improbable. Not necessarily, because the alleged representation took place before the conferences were had, in other words, plaintiff had already represented to

defendant, and the latter had already believed in, the existence of plaintiff's exclusive franchise before the formal negotiations, and they were assisted by their lawyers only when said formal negotiations actually took place. Furthermore, plaintiff's attorney testified that plaintiff had said that he had the exclusive franchise; and defendant's lawyer testified that plaintiff explained to him, upon being asked for the franchise, that he had left the papers evidencing it.(t.s.n., p. 266.)

We conclude from all the foregoing that plaintiff did actually represent to defendant that he was the holder of the exclusive franchise. The defendant was made to believe, and he actually believed, that plaintiff had the exclusive franchise. Defendant would not perhaps have gone to California and incurred expenses for the trip, unless he believed that plaintiff did have that exclusive privilege, and that the latter would be able to get the same from the Mission Dry Corporation itself. Plaintiff knew what defendant believed about his (plaintiff's) exclusive franchise, as he induced him to that belief, and he may not be allowed to deny that defendant was induced by that belief. (IX Wigmore, sec. 2423; Sec. 65, Rule 123, Rules of Court.)

We now come to the legal aspect of the false representation. Does it amount to a fraud that would vitiate the contract? It must be noted that fraud is manifested in illimitable number of degrees or gradations, from the

innocent praises of a salesman about the excellence of his wares to those malicious machinations and representations that the law punishes as a crime. In consequence, article 1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the causal fraud, which may be a ground for the annulment of a contract, and the incidental deceit, which only renders the party who employs it liable for damages. This Court had held that in order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo causante), inducement to the making of the contract. (Article 1270, Spanish Civil Code; Hill vs. Veloso, 31 Phil. 160.) The record abounds with circumstances indicative that the fact that the principal consideration, the main cause that induced defendant to enter into the partnership agreement with plaintiff, was the ability of plaintiff to get the exclusive franchise to bottle and distribute for the defendant or for the partnership. The original draft prepared by defendant's counsel was to the effect that plaintiff obligated himself to secure a franchise for the defendant. Correction appears in this same original draft, but the change is made not as to the said obligation but as to the grantee. In the corrected draft the word "capitalist"(grantee) is changed to "partnership." The contract in its final form retains the substituted term "partnership." The defendant was, therefore, led to the belief that plaintiff had the exclusive franchise, but that the same was to be secured for or transferred to the partnership. The plaintiff no longer had the

exclusive franchise, or the option thereto, at the time the contract was perfected. But while he had already lost his option thereto (when the contract was entered into), the principal obligation that he assumed or undertook was to secure said franchise for the partnership, as the bottler and distributor for the Mission Dry Corporation. We declare, therefore, that if he was guilty of a false representation, this was not the causal consideration, or the principal inducement, that led plaintiff to enter into the partnership agreement.

But, on the other hand, this supposed ownership of an exclusive franchise was actually the consideration or price plaintiff gave in exchange for the share of 30 percent granted him in the net profits of the partnership business. Defendant agreed to give plaintiff 30 per cent share in the net profits because he was transferring his exclusive franchise to the partnership. Thus, in the draft prepared by plaintiff's lawyer, Exhibit II, the following provision exists:

3. That the MANAGER, upon the organization of the said corporation, shall forthwith transfer to the said corporation his exclusive right to bottle Mission products and to sell them throughout the Philippines. As a consideration for such transfer, the CAPITALIST shall transfer to the Manager fully paid non assessable shares of the said corporation . . . twenty-five per centum of the capital

stock of the said corporation. (Par. 3, Exhibit II; emphasis ours.)

Plaintiff had never been a bottler or a chemist; he never had experience in the production or distribution of beverages. As a matter of fact, when the bottling plant being built, all that he suggested was about the toilet facilities for the laborers.

We conclude from the above that while the representation that plaintiff had the exclusive franchise did not vitiate defendant's consent to the contract, it was used by plaintiff to get from defendant a share of 30 per cent of the net profits; in other words, by pretending that he had the exclusive franchise and promising to transfer it to defendant, he obtained the consent of the latter to give him (plaintiff) a big slice in the net profits. This is the dolo incidentedefined in article 1270 of the Spanish Civil Code, because it was used to get the other party's consent to a big share in the profits, an incidental matter in the agreement.

El dolo incidental no es el que puede producirse en el cumplimiento del contrato sino que significa aqui, el que concurriendoen el consentimiento, o precediendolo, no influyo para arrancar porsi solo el consentimiento ni en la totalidad de la obligacion, sinoen algun extremo o accidente de esta, dando lugar tan solo a una accion para reclamar indemnizacion de perjuicios. (8

Manresa 602.)

Having arrived at the conclusion that the agreement may not be declared null and void, the question that next comes before us is, May the agreement be carried out or executed? We find no merit in the claim of plaintiff that the partnership was already a fait accompli from the time of the operation of the plant, as it is evident from the very language of the agreement that the parties intended that the execution of the agreement to form a partnership was to be carried out at a later date. They expressly agreed that they shall form a partnership. (Par. No. 1, Exhibit A.) As a matter of fact, from the time that the franchise from the Mission Dry Corporation was obtained in California, plaintiff himself had been demanding that defendant comply with the agreement. And plaintiff's present action seeks the enforcement of this agreement. Plaintiff's claim, therefore, is both inconsistent with their intention and incompatible with his own conduct and suit.

As the trial court correctly concluded, the defendant may not be compelled against his will to carry out the agreement nor execute the partnership papers. Under the Spanish Civil Code, the defendant has an obligation to do, not to give. The law recognizes the individual's freedom or liberty to do an act he has promised to do, or not to do it, as he pleases. It falls within what Spanish commentators call a very personal act (acto personalismo), of which courts may not compel compliance, as it is

considered an act of violence to do so.

Efectos de las obligaciones consistentes en hechos personalismo.—Tratamos de la ejecucion de las obligaciones de hacer en el solocaso de su incumplimiento por parte del deudor, ya sean los hechos personalisimos, ya se hallen en la facultad de un tercero; porque el complimiento espontaneo de las mismas esta regido por los preceptos relativos al pago, y en nada les afectan las disposiciones del art. 1.098.

Esto supuesto, la primera dificultad del asunto consiste en resolver si el deudor puede ser precisado a realizar el hecho y porque medios.

Se tiene por corriente entre los autores, y se traslada generalmente sin observacion el principio romanonemo potest precise cogi ad factum. Nadie puede ser obligado violentamente a haceruna cosa. Los que perciben la posibilidad de la destruccion deeste principio, añaden que, aun cuando se pudiera obligar al deudor, no deberia hacerse, porque esto constituiria una violencia, y noes la violenciamodo propio de cumplir las obligaciones (Bigot, Rolland, etc.). El maestro Antonio Gomez opinaba lo mismo cuandodecia que obligar por la

violencia seria infrigir la libertad eimponer una especie de esclavitud.

x x x           x x x           x x x

En efecto; las obligaciones contractuales no se acomodan biencon el empleo de la fuerza fisica, no ya precisamente porque seconstituya de este modo una especie de esclavitud, segun el dichode Antonio Gomez, sino porque se supone que el acreedor tuvo encuenta el caracter personalisimo del hecho ofrecido, y calculo sobre laposibilidad de que por alguna razon no se realizase. Repugna,ademas, a la conciencia social el empleo de la fuerza publica, mediante coaccion sobre las personas, en las relaciones puramente particulares; porque la evolucion de las ideas ha ido poniendo masde relieve cada dia el respeto a la personalidad humana, y nose admite bien la violencia sobre el individuo la cual tiene caracter visiblemente penal, sino por motivos que interesen a la colectividad de ciudadanos. Es, pues, posible y licita esta violencia cuando setrata de las obligaciones que hemos llamado ex lege, que afectanal orden social y a la entidad de Estado, y aparecen impuestas sinconsideracion a las conveniencias particulares, y sin que por estemotivo puedan tampoco ser modificadas; pero no debe serlo

cuandola obligacion reviste un interes puramente particular, como sucedeen las contractuales, y cuando, por consecuencia, paraceria salirseel Estado de su esfera propia, entrado a dirimir, con apoyo dela fuerza colectiva, las diferencias producidas entre los ciudadanos. (19 Scaevola 428, 431-432.)

The last question for us to decide is that of damages,damages that plaintiff is entitled to receive because of defendant's refusal to form the partnership, and damages that defendant is also entitled to collect because of the falsity of plaintiff's representation. (Article 1101, Spanish Civil Code.) Under article 1106 of the Spanish Civil Code the measure of damages is the actual loss suffered and the profits reasonably expected to be received, embraced in the terms daño emergente and lucro cesante. Plaintiff is entitled under the terms of the agreement to 30 per cent of the net profits of the business. Against this amount of damages, we must set off the damage defendant suffered by plaintiff's misrepresentation that he had obtained a very high percentage of share in the profits. We can do no better than follow the appraisal that the parties themselves had adopted.

When defendant learned in Los Angeles that plaintiff did not have the exclusive franchise which he pretended he had and which he had agreed to transfer to the partnership, his spontaneous reaction was to reduce

plaintiff's share form 30 per cent to 15 per cent only, to which reduction defendant appears to have readily given his assent. It was under this understanding, which amounts to a virtual modification of the contract, that the bottling plant was established and plaintiff worked as Manager for the first three months. If the contract may not be considered modified as to plaintiff's share in the profits, by the decision of defendant to reduce the same to one-half and the assent thereto of plaintiff, then we may consider the said amount as a fair estimate of the damages plaintiff is entitled to under the principle enunciated in the case of Varadero de Manila vs. Insular Lumber Co., 46 Phil. 176. Defendant's decision to reduce plaintiff's share and plaintiff's consent thereto amount to an admission on the part of each of the reasonableness of this amount as plaintiff's share. This same amount was fixed by the trial court. The agreement contains the stipulation that upon the termination of the partnership, defendant was to convey the franchise back to plaintiff (Par. 11, Exhibit A). The judgment of the trial court does not fix the period within which these damages shall be paid to plaintiff. In view of paragraph 11 of Exhibit A, we declare that plaintiff's share of 15 per cent of the net profits shall continue to be paid while defendant uses the franchise from the Mission Dry Corporation.

MANILA ELECTRIC COMPANY,Petitioner,         - versus -        Present:ROGELIO BENAMIRA, ERNIE    DE SAGUN[1], DIOSDADO   PUNO, Chairman,YOGARE, FRANCISCO MORO[2],   AUSTRIA-MARTINEZ,OSCAR LAGONOY[3],ROLANDO   CALLEJO, SR.,BENI, ALEX BENI, RAUL[4] DE   TINGA, andGUIA, ARMED SECURITY &   CHICO-NAZARIO,DETECTIVE AGENCY, INC.,(ASDAI) and ADVANCE FORCESSECURITY & INVESTIGATIONSERVICES, INC., (AFSISI),

    Promulgated: 

Respondents.   July 14, 2005x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

x  

D E C I S I O N  

AUSTRIA-MARTINEZ, J.:  

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the Decision,[5] dated September 27, 2000, of the Court of Appeals (CA) in CA-G.R. SP No. 50520 which declared petitioner Manila Electric Company (MERALCO) as the direct employer of individual respondents Rogelio Benamira, Ernie De Sagun, Diosdado Yogare, Francisco Moro, Oscar Lagonoy, Rolando Beni, Alex Beni and Raul De Guia (individual respondents for brevity). 

The factual background of the case is as follows: 

The individual respondents are licensed security guards formerly employed by Peoples Security, Inc. (PSI) and deployed as such at MERALCOs head office in Ortigas Avenue, Pasig, Metro Manila. 

On November 30, 1990, the security service agreement between PSI and MERALCO was terminated. 

Immediately thereafter, fifty-six of PSIs security guards, including herein eight individual respondents, filed a complaint for unpaid monetary benefits against PSI and MERALCO, docketed as NLRC-NCR Case No. 05-02746-90. 

Meanwhile, the security service agreement between respondent Armed Security & Detective Agency, Inc., (ASDAI) and MERALCO took effect on December 1, 1990. In the agreement, ASDAI was designated as the AGENCY while MERALCO was designated as the COMPANY. The pertinent terms and conditions of the agreement are as follows:

 1. The AGENCY shall initially provide the

COMPANY with TWO HUNDRED TWENTY (220) licensed, uniformed, bonded and armed security guards to be assigned at the COMPANYs MERALCO CENTER, complete with nightsticks, flashlights, raincoats, and other paraphernalias to work on eight (8) hours duty. The COMPANY shall determine the number of security guards in accordance with its needs and the areas of responsibility assigned to each, and shall have the option to increase or decrease the number of guards at any time provided the AGENCY is notified within twenty four (24) hours of the contemplated reduction or increase of the guards in which case the cost or consideration shall be adjusted accordingly. 

2. The COMPANY shall furnish the AGENCY copies of written specific instruction to be followed or implemented by the latters personnel in the discharge of their duties and responsibilities and the AGENCY shall be responsible for the faithful compliance therewith by its personnel together with such general and specific orders which shall be issued from time to time. 

3. For and in consideration of the services to be rendered by the AGENCY to the COMPANY, the COMPANY during the term of this contract shall pay the AGENCY the amount of THREE THOUSAND EIGHT HUNDRED PESOS (P3,800.00) a month per guard, FOUR THOUSAND PESOS (P4,000.00) for the Shift Leader and FOUR THOUSAND TWO HUNDRED PESOS (P4,200.00) for the Detachment Commander for eight (8) hours work/day, Saturdays, Sundays and Holidays included, payable semi-monthly. 

xxx 

5. The AGENCY shall assume the responsibility for the proper and efficient performance of duties by the security guards employed by it and it shall be solely responsible for any act of said security guards during their watch hours, the COMPANY being specifically released from any and all liability to third parties arising from the acts or omission of the security guards of the AGENCY. 

6. The AGENCY also agrees to hold the COMPANY entirely free from any liability, cause or causes of action or claims which may be filed by said security guards by reason of their employment with the AGENCY pursuant to this Agreement or under the provisions of the Labor Code, the Social Security Act, and other laws, decrees or social legislations now enacted or which hereafter may be enacted. 

7. Discipline and Administration of the security guards shall conform with the rules and regulations of the AGENCY, and the COMPANY reserves the right to require without explanation the replacement of any guard whose behavior, conduct or appearance is not satisfactory to the COMPANY and that the AGENCY cannot pull-out any security guard from the COMPANY without the consent of the latter. 

8. The AGENCY shall conduct inspections through its duly authorized inspector at least two (2) times a week of guards assigned to all COMPANY installations secured by the AGENCY located in the Metropolitan Manila area and at least once a week of the COMPANYs installations located outside of the Metropolitan Manila area and to further submit its inspection reports to the COMPANY. Likewise, the COMPANY shall have the right at all times to inspect the guards of the AGENCY assigned to the COMPANY. 

9. The said security guards shall be hired by the AGENCY and this contract shall not be deemed in any way to constitute a contract of employment between the COMPANY and any of the security guards hired by the AGENCY but merely as a contract specifying the conditions and manner under which the AGENCY shall render services to the COMPANY. 

10. Nothing herein contained shall be understood to make the security guards under this Agreement, employees of the COMPANY, it being clearly understood that such security guards shall be

considered as they are, employees of the AGENCY alone, so that the AGENCY shall be responsible for compliance with all pertinent labor laws and regulations included but not limited to the Labor Code, Social Security Act, and all other applicable laws and regulations including that providing for a withholding tax on income. 

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13. This contract shall take effect on the 1st day of December, 1990 and shall continue from year to year unless sooner terminated by the COMPANY for cause or otherwise terminated by either party without cause upon thirty (30) days written notice by one party to the other.[6]

  

Subsequently, the individual respondents were absorbed by ASDAI and retained at MERALCOs head office. 

On June 29, 1992, Labor Arbiter Manuel P. Asuncion rendered a decision in NLRC-NCR Case No. 05-02746-90 in favor of the former PSI security guards, including the individual respondents. 

Less than a month later, or on July 21, 1992, the individual respondents filed another complaint for unpaid monetary benefits, this time against ASDAI and MERALCO, docketed as NLRC-NCR Case No. 00-07-03953-92. 

On July 25, 1992, the security service agreement between respondent Advance Forces Security & Investigation Services, Inc. (AFSISI) and MERALCO took effect, terminating the previous security

service agreement with ASDAI.[7] Except as to the number of security guards,[8] the amount to be paid the agency,[9] and the effectivity of the agreement,[10] the terms and conditions were substantially identical with the security service agreement with ASDAI. 

On July 29, 1992, the individual respondents amended their complaint to implead AFSISI as party respondent. On August 11, 1992 they again amended their complaint to allege that AFSISI terminated their services on August 6, 1992 without notice and just cause and therefore guilty of illegal dismissal. 

The individual respondents alleged that: MERALCO and ASDAI never paid their overtime pay, service incentive leave pay, premium pay for Sundays and Holidays, P50.00 monthly uniform allowance and underpaid their 13th month pay; on July 24, 1992, when the security service agreement of ASDAI was terminated and AFSISI took over the security functions of the former on July 25, 1992, respondent security guard Benamira was no longer given any work assignment when AFSISI learned that the former has a pending case against PSI, in effect, dismissing him from the service without just cause; and, the rest of the individual respondents were absorbed by AFSISI but were not given any assignments, thereby dismissing them from the service without just cause. 

ASDAI denied in general terms any liability for the claims of the individual respondents, claiming that there is nothing due them in connection with their services. 

On the other hand, MERALCO denied liability on the ground of lack of employer-employee relationship with individual respondents. It averred that the individual respondents are the employees of the security agencies it contracted for security services; and that it has no existing liability for the individual respondents claims since said

security agencies have been fully paid for their services per their respective security service agreement. 

For its part, AFSISI asserted that: it is not liable for illegal dismissal since it did not absorb or hire the individual respondents, the latter were merely hold-over guards from ASDAI; it is not obliged to employ or absorb the security guards of the agency it replaced since there is no provision in its security service agreement with MERALCO or in law requiring it to absorb and hire the guards of ASDAI as it has its own guards duly trained to service its various clients. 

On January 3, 1994, after the submission of their respective evidence and position papers, Labor Arbiter Pablo C. Espiritu, Jr. rendered a Decision holding ASDAI and MERALCO jointly and solidarily liable to the monetary claims of individual respondents and dismissing the complaint against AFSISI. The dispositive portion of the decision reads as follows: 

WHEREFORE, conformably with the above premises, judgment is hereby rendered: 

1. Declaring ASDAI as the employer of the complainants and as such complainants should be reinstated as regular security guards of ASDAI without loss of seniority rights, privileges and benefits and for ASDAI to immediately post the complainants as security guards with their clients. The complaint against AFSISI is Dismissed for lack of merit. 

2. Ordering both respondents, ASDAI and MERALCO to jointly and solidarily pay complainants monetary claims (underpayment of actual regular hours

and overtime hours rendered, and premium pay for holiday and rest day) in the following amounts: NAME OVERTIME DIFFERENTIALS AND PREMIUM PAY FOR HOLIDAY & REST DAY 

1. Rogelio Benamira P14,615.752. Ernie De Sagun 21,164.313. Diosdado Yogare 7,108.774. Francisco Maro 26,567.115. Oscar Lagonay 18,863.366. Rolando Beni 21,834.127. Alex Beni 21,648.808. Ruel De Guia 14,200.33

3. Ordering Respondents ASDAI and MERALCO to jointly and solidarily pay complainants 10% attorneys fees in the amount of P14,600.25 based on the total monetary award due to the complainants in the amount ofP146,002.55. 

All other claims of the complainants are hereby DISMISSED for lack of merit. 

The counter-claim of respondent AFSISI for damages is hereby dismissed for want of substantial evidence to justify the grant of damages. 

SO ORDERED.[11]

  All the parties, except AFSISI, appealed to the National Labor

Relations Commission (NLRC).

Individual respondents partial appeal assailed solely the Labor Arbiters declaration that ASDAI is their employer. They insisted that AFSISI is the party liable for their illegal dismissal and should be the party directed to reinstate them. 

For its part, MERALCO attributed grave abuse of discretion on the part of the Labor Arbiter in failing to consider the absence of employer-employee relationship between MERALCO and individual respondents. 

On the other hand, ASDAI took exception from the Labor Arbiters finding that it is the employer of the individual respondents and therefore liable for the latters unpaid monetary benefits. 

On April 10, 1995, the NLRC affirmed in toto the decision of the Labor Arbiter.[12] On April 19, 1995, the individual respondents filed a motion for partial reconsideration but it was denied by the NLRC in a Resolution dated May 23, 1995.[13]

 On August 11, 1995, the individual respondents filed a petition

for certiorari before us, docketed as G.R. No. 121232.[14] They insisted that they were absorbed by AFSISI and the latter effected their termination without notice and just cause. 

After the submission of the responsive pleadings and memoranda, we referred the petition, in accordance with St. Martin Funeral Homes vs. NLRC,[15] to the CA which, on September 27, 2000, modified the decision of the NLRC by declaring MERALCO as the direct employer of the individual respondents. 

The CA held that: MERALCO changed the security agency manning its premises three times while engaging the services of the same people, the individual respondents; MERALCO employed a

scheme of hiring guards through an agency and periodically entering into service contract with one agency after another in order to evade the security of tenure of individual respondents; individual respondents are regular employees of MERALCO since their services as security guards are usually necessary or desirable in the usual business or trade of MERALCO and they have been in the service of MERALCO for no less than six years; an employer-employee relationship exists between MERALCO and the individual respondents because: (a) MERALCO had the final say in the selection and hiring of the guards, as when its advice was proved to have carried weight in AFSISIs decision not to absorb the individual respondents into its workforce; (b) MERALCO paid the wages of individual respondents through ASDAI and AFSISI; (c) MERALCOs discretion on matters of dismissal of guards was given great weight and even finality since the record shows that the individual respondents were replaced upon the advice of MERALCO; and, (d) MERALCO has the right, at any time, to inspect the guards, to require without explanation the replacement of any guard whose behavior, conduct or appearance is not satisfactory and ASDAI and AFSISI cannot pull out any security guard from MERALCO without the latters consent; and, a labor-only contract existed between ASDAI and AFSISI and MERALCO, such that MERALCO is guilty of illegal dismissal without just cause and liable for reinstatement of individual respondents to its workforce. 

The dispositive portion of the CAs Decision reads as follows: WHEREFORE, in view of the foregoing

premises, the Resolution subject of this petition is hereby AFFIRMED with MODIFICATION in the sense that MERALCO is declared the employer of the petitioners. Accordingly, private respondent MERALCO is hereby ordered as follows: 

1. To reinstate petitioners into MERALCOs work force as regular security guards without loss of seniority rights and other privileges; and 

2. To pay the petitioners full backwages, inclusive of allowances, and other benefits or their monetary equivalent computed from the time their compensation was withheld from them up to the time of their actual reinstatement, for which the Labor Arbiter Pablo C. Espiritu, Jr. is hereby directed to undertake the necessary computation and enforcement thereof. 

With respect to the rest of the dispositive portion of the assailed Resolution which affirmed the decision of the Labor Arbiter Pablo C. Espiritu, Jr., particularly the joint and solidary liabilities of both ASDAI and MERALCO to the petitioners, the same are hereby AFFIRMED. 

SO ORDERED.[16]

 Hence, the present petition for review on certiorari, filed by

MERALCO, anchored on the following grounds: 

A. THE COURT OF APPEALS COMMITTED SERIOUS REVERSIBLE ERROR AND GRAVE ABUSE OF DISCRETION IN HOLDING THAT AN EMPLOYER-EMPLOYEE RELATIONSHIP EXISTS BETWEEN PETITIONER MERALCO AND INDIVIDUAL RESPONDENTS. 

B. THE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION IN HOLDING THAT INDIVIDUAL RESPONDENTS ARE REGULAR EMPLOYEES OF PETITIONER MERALCO. C. THE COURT OF APPEALS COMMITTED SERIOUS REVERSIBLE ERROR IN ALLOWING INDIVIDUAL RESPONDENTS TO RAISE FOR THE FIRST TIME ON APPEAL, THE ISSUE THAT PETITIONER WAS THEIR DIRECT EMPLOYER. D. THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN FINDING THAT PETITIONER MERALCO IS GUILTY OF ILLEGAL DISMISSAL. E. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT INDIVIDUAL RESPONDENTS ARE ENTITLED TO REINSTATEMENT INTO PETITIONERS WORKFORCE. F. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT FINDING THAT PETITIONER MERALCO IS ENTITLED TO REIMBURSEMENT FROM RESPONDENT ASDAI FOR THE MONETARY CLAIMS PETITIONER PAID TO INDIVIDUAL RESPONDENTS PURSUANT TO THE SECURITY SERVICE AGREEMENT.[17]

  Anent the first ground, MERALCO submits that the elements

of four-fold test to determine the existence of an employer-employee relation, namely: (1) the power to hire, (2) the payment of wages, (3) the

power to dismiss, and (4) the power to control, are not present in the instant case.

 Regarding the power to hire, MERALCO contends that the

records are bereft of any evidence that shows that it participated in or influenced the decision of PSI and ASDAI to hire or absorb the individual respondents.

 As to the payment of wages, MERALCO maintains that the

individual respondents received their wages from their agency. With regard to the power to dismiss, MERALCO argues that

the security service agreement clearly provided that the discipline and administration of the security guards shall conform to the rules and regulations of the agency.

 Concerning the power of control, MERALCO asserts that there

is no evidence that individual respondents were subjected to its control as to the manner or method by which they conduct or perform their work of guarding of MERALCOs premises.

 Furthermore, MERALCO insists that ASDAI and AFSISI are

not labor-only contractors since they have their own equipment, machineries and work premises which are necessary in the conduct of their business and the duties performed by the security guards are not necessary in the conduct of MERALCOs principal business.

 With respect to the second ground, MERALCO argues that the

individual respondents cannot be considered as regular employees as the duties performed by them as security guards are not necessary in the conduct of MERALCOs principal business which is the distribution of electricity.

 

As regards the third ground, MERALCO argues that it was denied due process when the individual respondents raised for the first time in the CA the issue that MERALCO is their direct employer since the individual respondents have always considered themselves as employees of AFSISI and nowhere in the Labor Arbiter or the NLRC did they raise the argument that MERALCO is their direct employer.

 Regarding the fourth ground, MERALCO asserts that it is not

guilty of illegal dismissal because it had no direct hand or participation in the termination of the employment of individual respondents, who even insisted in their petition for certiorari in the CA that it was AFSISI which terminated their employment.

 As to the fifth ground, MERALCO maintains that the

individual respondents are not entitled to reinstatement into its workforce because no employer-employee relationship exists between it and the individual respondents.

 With regard to the sixth ground, MERALCO asserts that since

it is not the direct employer of the individual respondents, it has a right of reimbursement from ASDAI for the full amount it may pay to the individual respondents under Articles 106 and 107 of the Labor Code.

 In contrast, the individual respondents maintain that the CA

aptly found that all the elements in employer-employee relationship exist between them and MERALCO and there is no cogent reason to deviate from such factual findings.

 For its part, ASDAI contends that the instant petition raises

factual matters beyond the jurisdiction of this Court to resolve since only questions of law may be raised in a petition for review on certiorari.It submits that while the rule admits of exceptions,

MERALCO failed to establish that the present case falls under any of the exceptions.

 On the other hand, AFSISI avers that there is no employer-

employee relationship between MERALCO and the security guards of any of the security agencies under contract with MERALCO.

 It is a settled rule that in the exercise of the Supreme Courts

power of review, the Court is not a trier of facts and does not normally undertake the re-examination of the evidence presented by the contending parties during the trial of the case considering that the findings of facts of the CA are conclusive and binding on the Court. However, jurisprudence has recognized several exceptions in which factual issues may be resolved by this Court, to wit:

 (1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in making its findings the Court of Appeals went beyond the issues of the case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings are contrary to the trial court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioners main and reply briefs are not disputed by the respondent; (10) when the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on record; and (11) when the Court of Appeals manifestly overlooked certain

relevant facts not disputed by the parties, which, if properly considered, would justify a different conclusion.[18]

  In the present case, the existence of an employer-

employee relationship is a question of fact which is well within the province of the CA. Nonetheless, given the reality that the CAs findings are at odds to those of the NLRC, the Court is constrained to look deeper into the attendant circumstances obtaining in the present case, as appearing on record. 

At the outset, we note that the individual respondents never alleged in their complaint in the Labor Arbiter, in their appeal in the NLRC and even in their petition for certiorari in the CA that MERALCO was their employer. They have always advanced the theory that AFSISI is their employer. A perusal of the records shows it was only in their Memorandum in the CA that this thesis was presented and discussed for the first time. We cannot ignore the fact that this position of individual respondents runs contrary to their earlier submission in their pleadings filed in the Labor Arbiter, NLRC and even in the petition for certiorari in the CA that AFSISI is their employer and liable for their termination. As the object of the pleadings is to draw the lines of battle, so to speak, between the litigants and to indicate fairly the nature of the claims or defenses of both parties, a party cannot subsequently take a position contrary to, or inconsistent, with his pleadings.[19]

 Moreover, it is a fundamental rule of procedure that higher

courts are precluded from entertaining matters neither alleged in the pleadings nor raised during the proceedings below, but ventilated for the first time only in a motion for reconsideration or on appeal.[20] The individual respondents are bound by their submissions that AFSISI is their employer and they should not be permitted to change their theory.

Such a change of theory cannot be tolerated on appeal, not due to the strict application of procedural rules but as a matter of fairness.  A change of theory on appeal is objectionable because it is contrary to the rules of fair play, justice and due process.[21]

 Thus, the CA should not have considered the new theory

offered by the individual respondents in their memorandum. The present petition for review on certiorari is far from novel

and, in fact, not without precedence. We have ruled in Social Security System vs. Court of Appeals[22] that:

 ...The guards or watchmen render their

services to private respondent by allowing themselves to be assigned by said respondent, which furnishes them arms and ammunition, to guard and protect the properties and interests of private respondent's clients, thus enabling that respondent to fulfill its contractual obligations. Who the clients will be, and under what terms and conditions the services will be rendered, are matters determined not by the guards or watchmen, but by private respondent. On the other hand, the client companies have no hand in selecting who among the guards or watchmen shall be assigned to them. It is private respondent that issues assignment orders and instructions and exercises control and supervision over the guards or watchmen, so much so that if, for one reason or another, the client is dissatisfied with the services of a particular guard, the client cannot himself terminate the services of such guard, but has to notify private respondent, which either substitutes him with another or metes out to him disciplinary measures. That in the course of a watchman's assignment the

client conceivably issues instructions to him, does not in the least detract from the fact that private respondent is the employer of said watchman, for in legal contemplation such instructions carry no more weight than mere requests, the privity of contract being between the client and private respondent, not between the client and the guard or watchman. Corollarily, such giving out of instructions inevitably spring from the client's right predicated on the contract for services entered into by it with private respondent.

 In the matter of compensation, there can be no

question at all that the guards or watchmen receive compensation from private respondent and not from the companies or establishments whose premises they are guarding. The fee contracted for to be paid by the client is admittedly not equal to the salary of a guard or watchman; such fee is arrived at independently of the salary to which the guard or watchman is entitled under his arrangements with private respondent.[23]

  

and reiterated in American President Lines vs. Clave,[24] thus: In the light of the foregoing standards, We fail

to see how the complaining watchmen of the Marine Security Agency can be considered as employees of the petitioner. It is the agency that recruits, hires, and assigns the work of its watchmen. Hence, a watchman can not perform any security service for the petitioner's vessels unless the agency first accepts him as its watchman. With respect to his wages, the amount to be paid to a security guard is beyond the power of the

petitioner to determine. Certainly, the lump sum amount paid by the petitioner to the agency in consideration of the latter's service is much more than the wages of any one watchman. In point of fact, it is the agency that quantifies and pays the wages to which a watchman is entitled.

 Neither does the petitioner have any power to

dismiss the security guards. In fact, We fail to see any evidence in the record that it wielded such a power. It is true that it may request the agency to change a particular guard. But this, precisely, is proof that the power lies in the hands of the agency.

Since the petitioner has to deal with the agency, and not the individual watchmen, on matters pertaining to the contracted task, it stands to reason that the petitioner does not exercise any power over the watchmen's conduct. Always, the agency stands between the petitioner and the watchmen; and it is the agency that is answerable to the petitioner for the conduct of its guards.[25]

  In this case, the terms and conditions embodied in the security

service agreement between MERALCO and ASDAI expressly recognized ASDAI as the employer of individual respondents.

 Under the security service agreement, it was ASDAI which (a)

selected, engaged or hired and discharged the security guards; (b) assigned them to MERALCO according to the number agreed upon; (c) provided the uniform, firearms and ammunition, nightsticks, flashlights, raincoats and other paraphernalia of the security guards; (d) paid them salaries or wages; and, (e) disciplined and supervised them or

principally controlled their conduct. The agreement even explicitly provided that [n]othing herein contained shall be understood to make the security guards under this Agreement, employees of the COMPANY, it being clearly understood that such security guards shall be considered as they are, employees of the AGENCY alone. Clearly, the individual respondents are the employees of ASDAI. 

As to the provision in the agreement that MERALCO reserved the right to seek replacement of any guard whose behavior, conduct or appearance is not satisfactory, such merely confirms that the power to discipline lies with the agency. It is a standard stipulation in security service agreements that the client may request the replacement of the guards to it. Service-oriented enterprises, such as the business of providing security services, generally adhere to the business adage that the customer or client is always right and, thus, must satisfy the interests, conform to the needs, and cater to the reasonable impositions of its clients. 

Neither is the stipulation that the agency cannot pull out any security guard from MERALCO without its consent an indication of control. It is simply a security clause designed to prevent the agency from unilaterally removing its security guards from their assigned posts at MERALCOs premises to the latters detriment. 

The clause that MERALCO has the right at all times to inspect the guards of the agency detailed in its premises is likewise not indicative of control as it is not a unilateral right. The agreement provides that the agency is principally mandated to conduct inspections, without prejudice to MERALCOs right to conduct its own inspections. 

Needless to stress, for the power of control to be present, the person for whom the services are rendered must reserve the right to direct not only the end to be achieved but also the means for reaching

such end.[26] Not all rules imposed by the hiring party on the hired party indicate that the latter is an employee of the former.[27] Rules which serve as general guidelines towards the achievement of the mutually desired result are not indicative of the power of control.[28]

 Verily, the security service agreements in the present case

provided that all specific instructions by MERALCO relating to the discharge by the security guards of their duties shall be directed to the agency and not directly to the individual respondents. The individual respondents failed to show that the rules of MERALCO controlled their performance. 

Moreover, ASDAI and AFSISI are not labor-only contractors. There is labor only contract when the person acting as contractor is considered merely as an agent or intermediary of the principal who is responsible to the workers in the same manner and to the same extent as if they had been directly employed by him. On the other hand, job (independent) contracting is present if the following conditions are met: (a) the contractor carries on an independent business and undertakes the contract work on his own account under his own responsibility according to his own manner and method, free from the control and direction of his employer or principal in all matters connected with the performance of the work except to the result thereof; and (b) the contractor has substantial capital or investments in the form of tools, equipment, machineries, work premises and other materials which are necessary in the conduct of his business.[29] Given the above distinction and the provisions of the security service agreements entered into by petitioner with ASDAI and AFSISI, we are convinced that ASDAI and AFSISI were engaged in job contracting.

 The individual respondents can not be considered as regular

employees of the MERALCO for, although security services are necessary and desirable to the business of MERALCO, it is not directly

related to its principal business and may even be considered unnecessary in the conduct of MERALCOs principal business, which is the distribution of electricity.

Furthermore, the fact that the individual respondents filed their claim for unpaid monetary benefits against ASDAI is a clear indication that the individual respondents acknowledge that ASDAI is their employer. 

We cannot give credence to individual respondents insistence that they were absorbed by AFSISI when MERALCOs security service agreement with ASDAI was terminated. The individual respondents failed to present any evidence to confirm that AFSISI absorbed them into its workforce. Thus, respondent Benamira was not retained in his post at MERALCO since July 25, 1992 due to the termination of the security service agreement of MERALCO with ASDAI. As for the rest of the individual respondents, they retained their post only as hold-over guards until the security guards of AFSISI took over their post onAugust 6, 1992.[30]

 In the present case, respondent Benamira has been off-detail for

seventeen days while the rest of the individual respondents have only been off- detail for five days when they amended their complaint onAugust 11, 1992 to include the charge of illegal dismissal. The inclusion of the charge of illegal dismissal then was premature. Nonetheless, bearing in mind that ASDAI simply stopped giving the individual respondents any assignment and their inactivity clearly persisted beyond the six-month period allowed by Article 286[31] of the Labor Code, the individual respondents were, in effect, constructively dismissed by ASDAI from employment, hence, they should be reinstated. 

The fact that there is no actual and direct employer-employee relationship between MERALCO and the individual respondents does

not exonerate MERALCO from liability as to the monetary claims of the individual respondents. When MERALCO contracted for security services with ASDAI as the security agency that hired individual respondents to work as guards for it, MERALCO became an indirect employer of individual respondents pursuant to Article 107 of the Labor Code, which reads:

ART. 107. Indirect employer - The provisions of the immediately preceding Article shall likewise apply to any person, partnership, association or corporation which, not being an employer, contracts with an independent contractor for the performance of any work, task, job or project. 

When ASDAI as contractor failed to pay the individual respondents, MERALCO as principal becomes jointly and severally liable for the individual respondents wages, under Articles 106 and 109 of the Labor Code, which provide:

 ART. 106. Contractor or subcontractor.

- Whenever an employer enters into a contract with another person for the performance of the former[s] work, the employees of the contractor and of the latter[s] subcontractor, if any, shall be paid in accordance with the provisions of this Code. 

In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance with this Code, the employer shall be jointly and severally liable with his contractor or subcontractor to such employees to the extent of the work performed under the contract, in the same manner and extent that he is liable to employees directly employed by him. xxx

 ART. 109. Solidary liability - The provisions

of existing laws to the contrary notwithstanding, every employer or indirect employer shall be held responsible with his contractor or subcontractor for any violation of any provision of this Code. For purpose of determining the extent of their civil liability under this Chapter, they shall be considered as direct employers.  ASDAI is held liable by virtue of its status as direct employer,

while MERALCO is deemed the indirect employer of the individual respondents for the purpose of paying their wages in the event of failure of ASDAI to pay them. This statutory scheme gives the workers the ample protection consonant with labor and social justice provisions of the 1987 Constitution.[32]

 However, as held in Mariveles Shipyard Corp. vs. Court of

Appeals,[33] the solidary liability of MERALCO with that of ASDAI does not preclude the application of Article 1217 of the Civil Code on theright of reimbursement from his co-debtor by the one who paid,[34] which provides:

 ART. 1217. Payment made by one of the

solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. 

He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the

payment is made before the debt is due, no interest for the intervening period may be demanded.

 When one of the solidary debtors cannot,

because of his insolvency, reimburse his share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each.  ASDAI may not seek exculpation by claiming that

MERALCOs payments to it were inadequate for the individual respondents lawful compensation. As an employer, ASDAI is charged with knowledge of labor laws and the adequacy of the compensation that it demands for contractual services is its principal concern and not any others.[35]

 WHEREFORE, the present petition is GRANTED. The assailed

Decision, dated September 27, 2000, of the CA is REVERSED and SET ASIDE. The Decision of the Labor Arbiter dated January 3, 1994 and the Resolution of the NLRC dated April 10, 1995 are AFFIRMED with the MODIFICATION that the joint and solidary liability of ASDAI and MERALCO to pay individual respondents monetary claims for underpayment of actual regular hours and overtime hours rendered, and premium pay for holiday and rest day, as well as attorneys fees, shall be without prejudice to MERALCOs right of reimbursement from ASDAI.

 SO ORDERED.

   

 

  

  

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D E C I S I O N  PUNO, C.J.: 

A. Precis 

In this jurisdiction, it is established that freedom of the press is crucial and so inextricably woven into the right to free speech and free expression, that any attempt to restrict it must be met with an examination so critical that only a danger that is clear and present would be allowed to curtail it.

Indeed, we have not wavered in the duty to uphold this cherished freedom. We have struck down laws and issuances meant to curtail this right, as in Adiong v. COMELEC,[1] Burgos v. Chief of Staff,[2] Social Weather Stations v. COMELEC,[3] and Bayan v. Executive Secretary Ermita.[4] When on its face, it is clear that a

FRANCISCO CHAVEZ,Petitioner,     - versus -       RAUL M. GONZALES,in his capacity as theSecretary of theDepartment of Justice;and NATIONAL TELECOMMUNICATIONS COMMISSION (NTC),Respondents.

G.R. No. 168338 Present: PUNO, C.J.,QUISUMBING,YNARES-SANTIAGO,SANDOVAL-GUTIERREZ,CARPIO,AUSTRIA-MARTINEZ,CORONA,CARPIO MORALES,AZCUNA,TINGA,CHICO-NAZARIO,VELASCO, JR.,NACHURA,REYES, andLEONARDO-DE CASTRO, JJ. Promulgated: February 15, 2008 

governmental act is nothing more than a naked means to prevent the free exercise of speech, it must be nullified. 

B. The Facts 

1.     The case originates from events that occurred a year after the 2004 national and local elections. On June 5, 2005, Press Secretary Ignacio Bunye told reporters that the opposition was planning to destabilize the administration by releasing an audiotape of a mobile phone conversation allegedly between the President of the Philippines, Gloria Macapagal Arroyo, and a high-ranking official of the Commission on Elections (COMELEC). The conversation was audiotaped allegedly through wire-tapping.[5] Later, in a Malacaang press briefing, Secretary Bunye produced two versions of the tape, one supposedly the complete version, and the other, a spliced, doctored or altered version, which would suggest that the President had instructed the COMELEC official to manipulate the election results in the Presidents favor. [6] It seems that Secretary Bunye admitted that the voice was that of President Arroyo, but subsequently made a retraction. [7]

 2.     On June 7, 2005, former counsel of deposed President Joseph

Estrada, Atty. Alan Paguia, subsequently released an alleged authentic tape recording of the wiretap. Included in the tapes were purported conversations of the President, the First Gentleman Jose Miguel Arroyo, COMELEC Commissioner Garcillano, and the late Senator Barbers.[8]

 3.     On June 8, 2005, respondent Department of Justice (DOJ)

Secretary Raul Gonzales warned reporters that those who had copies of the compact disc (CD) and those broadcasting or publishing its contents could be held liable under the Anti-

Wiretapping Act. These persons included Secretary Bunye and Atty. Paguia. He also stated that persons possessing or airing said tapes were committing a continuing offense, subject to arrest by anybody who had personal knowledge if the crime was committed or was being committed in their presence.[9]

 4.     On June 9, 2005, in another press briefing, Secretary Gonzales

ordered the National Bureau of Investigation (NBI) to go after media organizations found to have caused the spread, the playing and the printing of the contents of a tape of an alleged wiretapped conversation involving the President about fixing votes in the 2004 national elections. Gonzales said that he was going to start with Inq7.net, a joint venture between the Philippine Daily Inquirer and GMA7 television network, because by the very nature of the Internet medium, it was able to disseminate the contents of the tape more widely.He then expressed his intention of inviting the editors and managers of Inq7.net and GMA7 to a probe, and supposedly declared, I [have] asked the NBI to conduct a tactical interrogation of all concerned. [10]

5.     On June 11, 2005, the NTC issued this press release: [11]

NTC GIVES FAIR WARNING TO RADIO AND TELEVISION OWNERS/OPERATORS TO OBSERVE ANTI-WIRETAPPING LAW AND PERTINENT CIRCULARS ON PROGRAM STANDARDS 

xxx xxx xxx Taking into consideration the countrys unusual situation, and in order not to unnecessarily aggravate the same, the NTC warns all radio stations and television network

owners/operators that the conditions of the authorization and permits issued to them by Government like the Provisional Authority and/or Certificate of Authority explicitly provides that said companies shall not use [their] stations for the broadcasting or telecasting of false information or willful misrepresentation. Relative thereto, it has come to the attention of the [NTC] that certain personalities are in possession of alleged taped conversations which they claim involve the President of the Philippines and a Commissioner of the COMELEC regarding supposed violation of election laws. These personalities have admitted that the taped conversations are products of illegal wiretapping operations. Considering that these taped conversations have not been duly authenticated nor could it be said at this time that the tapes contain an accurate or truthful representation of what was recorded therein, it is the position of the [NTC] that the continuous airing or broadcast of the said taped conversations by radio and television stations is a continuing violation of the Anti-Wiretapping Law and the conditions of the Provisional Authority and/or Certificate of Authority issued to these radio and television stations. It has been subsequently established that the said tapes are false and/or fraudulent after a prosecution or appropriate investigation,

the concerned radio and television companies are hereby warned that their broadcast/airing of such false information and/or willful misrepresentation shall be just cause for the suspension, revocation and/or cancellation of the licenses or authorizations issued to the said companies. In addition to the above, the [NTC] reiterates the pertinent NTC circulars on program standards to be observed by radio and television stations. NTC Memorandum Circular 111-12-85 explicitly states, among others, that all radio broadcasting and television stations shall, during any broadcast or telecast, cut off from the air the speech, play, act or scene or other matters being broadcast or telecast the tendency thereof is to disseminate false information or such other willful misrepresentation, or to propose and/or incite treason, rebellion or sedition. The foregoing directive had been reiterated by NTC Memorandum Circular No. 22-89, which, in addition thereto, prohibited radio, broadcasting and television stations from using their stations to broadcast or telecast any speech, language or scene disseminating false information or willful misrepresentation, or inciting, encouraging or assisting in subversive or treasonable acts. The [NTC] will not hesitate, after observing the requirements of due process, to apply with full force the provisions of said

Circulars and their accompanying sanctions on erring radio and television stations and their owners/operators.

 6.     On June 14, 2005, NTC held a dialogue with the Board of

Directors of the Kapisanan ng mga Brodkaster sa Pilipinas (KBP). NTC allegedly assured the KBP that the press release did not violate the constitutional freedom of speech, of expression, and of the press, and the right to information. Accordingly, NTC and KBP issued a Joint Press Statement which states, among others, that: [12]

 NTC respects and will not hinder freedom of the

press and the right to information on matters of public concern. KBP & its members have always been committed to the exercise of press freedom with high sense of responsibility and discerning judgment of fairness and honesty.

 NTC did not issue any MC [Memorandum

Circular] or Order constituting a restraint of press freedom or censorship. The NTC further denies and does not intend to limit or restrict the interview of members of the opposition or free expression of views.

 What is being asked by NTC is that the exercise

of press freedom [be] done responsibly. KBP has program standards that KBP members

will observe in the treatment of news and public affairs programs. These include

verification of sources, non-airing of materials that would constitute inciting to sedition and/or rebellion.

 The KBP Codes also require that no false

statement or willful misrepresentation is made in the treatment of news or commentaries.

 The supposed wiretapped tapes should be treated

with sensitivity and handled responsibly giving due consideration to the process being undertaken to verify and validate the authenticity and actual content of the same.

  

C. The Petition 

Petitioner Chavez filed a petition under Rule 65 of the Rules of Court against respondents Secretary Gonzales and the NTC, praying for the issuance of the writs of certiorari and prohibition, as extraordinary legal remedies, to annul void proceedings, and to prevent the unlawful, unconstitutional and oppressive exercise of authority by the respondents.[13]

 Alleging that the acts of respondents are violations of the

freedom on expression and of the press, and the right of the people to information on matters of public concern,[14] petitioner specifically asked this Court:

 [F]or [the] nullification of acts, issuances, and orders of respondents committed or made since June 6, 2005 until the present that curtail the publics rights to

freedom of expression and of the press, and to information on matters of public concern specifically in relation to information regarding the controversial taped conversion of President Arroyo and for prohibition of the further commission of such acts, and making of such issuances, and orders by respondents. [15]

 Respondents[16] denied that the acts transgress the Constitution,

and questioned petitioners legal standing to file the petition. Among the arguments they raised as to the validity of the fair warning issued by respondent NTC, is that broadcast media enjoy lesser constitutional guarantees compared to print media, and the warning was issued pursuant to the NTCs mandate to regulate the telecommunications industry. [17] It was also stressed that most of the [television] and radio stations continue, even to this date, to air the tapes, but of late within the parameters agreed upon between the NTC and KBP. [18]

 D. THE PROCEDURAL THRESHOLD: LEGAL STANDING

 To be sure, the circumstances of this case make the

constitutional challenge peculiar. Petitioner, who is not a member of the broadcast media, prays that we strike down the acts and statements made by respondents as violations of the right to free speech, free expression and a free press. For another, the recipients of the press statements have not come forwardneither intervening nor joining petitioner in this action. Indeed, as a group, they issued a joint statement with respondent NTC that does not complain about restraints on freedom of the press.

 It would seem, then, that petitioner has not met the requisite

legal standing, having failed to allege such a personal stake in the outcome of the controversy as to assure that concrete adverseness which

sharpens the presentation of issues upon which the Court so largely depends for illumination of difficult constitutional questions. [19]

 But as early as half a century ago, we have already held that where serious constitutional questions are involved, the transcendental importance to the public of these cases demands that they be settled promptly and definitely, brushing aside if we must, technicalities of procedure. [20] Subsequently, this Court has repeatedly and consistently refused to wield procedural barriers as impediments to its addressing and resolving serious legal questions that greatly impact on public interest,[21] in keeping with the Court's duty under the 1987 Constitution to determine whether or not other branches of government have kept themselves within the limits of the Constitution and the laws and that they have not abused the discretion given to them.

 Thus, in line with the liberal policy of this Court on locus standi when a case involves an issue of overarching significance to our society,[22] we therefore brush aside technicalities of procedure and take cognizance of this petition,[23] seeing as it involves a challenge to the most exalted of all the civil rights, the freedom of expression. The petition raises other issues like the extent of the right to information of the public. It is fundamental, however, that we need not address all issues but only the most decisive one which in the case at bar is whether the acts of the respondents abridge freedom of speech and of the press.

 But aside from the primordial issue of determining whether

free speech and freedom of the press have been infringed, the case at bar also gives this Court the opportunity: (1) to distill the essence of freedom of speech and of the press now beclouded by the vagaries of motherhood statements; (2) to clarify the types of speeches and their differing restraints allowed by law; (3) to discuss the core concepts of prior restraint, content-neutral and content-based regulations and their constitutional standard of review; (4) to

examine the historical difference in the treatment of restraints between print and broadcast media and stress the standard of review governing both; and (5) to call attention to the ongoing blurring of the lines of distinction between print and broadcast media. 

E. RE-EXAMINING THE LAW ON FREEDOM OF SPEECH,OF EXPRESSION AND OF THE PRESS

 No law shall be passed abridging the freedom of speech, of expression, or of the press, or the right of the people peaceably to assemble and petition the government for redress of grievances.[24]

 Freedom of expression has gained recognition as a fundamental

principle of every democratic government, and given a preferred right that stands on a higher level than substantive economic freedom or other liberties. The cognate rights codified by Article III, Section 4 of the Constitution, copied almost verbatim from the First Amendment of the U.S. Bill of Rights,[25] were considered the necessary consequence of republican institutions and the complement of free speech.[26] This preferred status of free speech has also been codified at the international level, its recognition now enshrined in international law as a customary norm that binds all nations.[27]

 In the Philippines, the primacy and high esteem accorded

freedom of expression is a fundamental postulate of our constitutional system. [28] This right was elevated to constitutional status in the 1935, the 1973 and the 1987 Constitutions, reflecting our own lesson of history, both political and legal, that freedom of speech is an indispensable condition for nearly every other form of freedom.[29] Moreover, our history shows that the struggle to protect the freedom of speech, expression and the press was, at bottom, the struggle for the

indispensable preconditions for the exercise of other freedoms.[30] For it is only when the people have unbridled access to information and the press that they will be capable of rendering enlightened judgments. In the oft-quoted words of Thomas Jefferson, we cannot both be free and ignorant.

 E.1. ABSTRACTION OF FREE SPEECH

 Surrounding the freedom of speech clause are various concepts

that we have adopted as part and parcel of our own Bill of Rights provision on this basic freedom.[31] What is embraced under this provision was discussed exhaustively by the Court in Gonzales v. Commission on Elections, [32] in which it was held:

 At the very least, free speech and free press may be identified with the liberty to discuss publicly and truthfully any matter of public interest without censorship and punishment. There is to be no previous restraint on the communication of views or subsequent liability whether in libel suits, prosecution for sedition, or action for damages, or contempt proceedings unless there be a clear and present danger of substantive evil that Congress has a right to prevent. [33]

 Gonzales further explained that the vital need of a constitutional

democracy for freedom of expression is undeniable, whether as a means of assuring individual self-fulfillment; of attaining the truth; of assuring participation by the people in social, including political, decision-making; and of maintaining the balance between stability and change.[34] As early as the 1920s, the trend as reflected in Philippine and American decisions was to recognize the broadest scope and assure the widest latitude for this constitutional guarantee. The trend represents a

profound commitment to the principle that debate on public issue should be uninhibited, robust, and wide-open. [35]

 Freedom of speech and of the press means something more than

the right to approve existing political beliefs or economic arrangements, to lend support to official measures, and to take refuge in the existing climate of opinion on any matter of public consequence.[36] When atrophied, the right becomes meaningless.[37] The right belongs as well -- if not more to those who question, who do not conform, who differ.[38] The ideas that may be expressed under this freedom are confined not only to those that are conventional or acceptable to the majority. To be truly meaningful, freedom of speech and of the pressshould allow and even encourage the articulation of the unorthodox view, though it be hostile to or derided by others; or though such view induces a condition of unrest, creates dissatisfaction with conditions as they are, or even stirs people to anger.[39] To paraphrase Justice Holmes, it is freedom for the thought that we hate, no less than for the thought that agrees with us. [40]

 The scope of freedom of expression is so broad that it extends protection to nearly all forms of communication. It protects speech, print and assembly regarding secular as well as political causes, and is not confined to any particular field of human interest. The protection covers myriad matters of public interest or concern embracing all issues, about which information is needed or appropriate, so as to enable members of society to cope with the exigencies of their period. The constitutional protection assures the broadest possible exercise of free speech and free press for religious, political, economic, scientific, news, or informational ends, inasmuch as the Constitution's basic guarantee of freedom to advocate ideas is not confined to the expression of ideas that are conventional or shared by a majority.

 The constitutional protection is not limited to the exposition of

ideas. The protection afforded free speech extends to speech or

publications that are entertaining as well as instructive or informative.Specifically, in Eastern Broadcasting Corporation (DYRE) v. Dans,[41] this Court stated that all forms of media, whether print or broadcast, are entitled to the broad protection of the clause on freedom of speech and of expression.

 While all forms of communication are entitled to the broad

protection of freedom of expression clause, the freedom of film, television and radio broadcasting is somewhat lesser in scope than the freedom accorded to newspapers and other print media, as will be subsequently discussed.

 E.2. DIFFERENTIATION: THE LIMITS & RESTRAINTS OF

FREE SPEECHFrom the language of the specific constitutional provision, it would appear that the right to free speech and a free press is not susceptible of any limitation. But the realities of life in a complex society preclude a literal interpretation of the provision prohibiting the passage of a law that would abridge such freedom. For freedom of expression is not an absolute, [42] nor is it an unbridled license that gives immunity for every possible use of language and prevents the punishment of those who abuse this freedom. Thus, all speech are not treated the same. Some types of speech may be subjected to some regulation by the State under its pervasive police power, in order that it may not be injurious to the equal right of others or those of the community or society.[43] The difference in treatment is expected because the relevant interests of one type of speech, e.g., political speech, may vary from those of another, e.g., obscene speech. Distinctions have therefore been made in the treatment, analysis, and evaluation of the permissible scope of restrictions on various categories of speech. [44] We have ruled, for example, that in our jurisdiction slander or libel, lewd and obscene speech, as well as

fighting words are not entitled to constitutional protection and may be penalized.[45]

Moreover, the techniques of reviewing alleged restrictions on speech (overbreadth, vagueness, and so on) have been applied differently to each category, either consciously or unconsciously.  [46] A study of free speech jurisprudencewhether here or abroadwill reveal that courts have developed different tests as to specific types or categories of speech in concrete situations; i.e., subversive speech; obscene speech; the speech of the broadcast media and of the traditional print media; libelous speech; speech affecting associational rights; speech before hostile audiences; symbolic speech; speech that affects the right to a fair trial; and speech associated with rights of assembly and petition. [47]

 Generally, restraints on freedom of speech and expression are

evaluated by either or a combination of three tests, i.e., (a) the dangerous tendency doctrine which permits limitations on speech once a rational connection has been established between the speech restrained and the danger contemplated; [48] (b) the balancing of interests tests, used as a standard when courts need to balance conflicting social values and individual interests, and requires a conscious and detailed consideration of the interplay of interests observable in a given situation of type of situation;  [49] and (c) the clear and present danger rule which rests on the premise that speech may be restrained because there is substantial danger that the speech will likely lead to an evil the government has a right to prevent. This rule requires that the evil consequences sought to be prevented must be substantive, extremely serious and the degree of imminence extremely high. [50]

 As articulated in our jurisprudence, we have applied either

the dangerous tendency doctrine or clear and present danger test to resolve free speech challenges. More recently, we have concluded that we have generally adhered to the clear and present danger test. [51]

 

E.3. IN FOCUS: FREEDOM OF THE PRESS Much has been written on the philosophical basis of press

freedom as part of the larger right of free discussion and expression. Its practical importance, though, is more easily grasped. It is the chief source of information on current affairs. It is the most pervasive and perhaps most powerful vehicle of opinion on public questions. It is the instrument by which citizens keep their government informed of their needs, their aspirations and their grievances. It is the sharpest weapon in the fight to keep government responsible and efficient. Without a vigilant press, the mistakes of every administration would go uncorrected and its abuses unexposed. As Justice Malcolm wrote in United States v. Bustos:[52]

 The interest of society and the maintenance of good government demand a full discussion of public affairs. Complete liberty to comment on the conduct of public men is a scalpel in the case of free speech. The sharp incision of its probe relieves the abscesses of officialdom. Men in public life may suffer under a hostile and unjust accusation; the wound can be assuaged with the balm of clear conscience.

 Its contribution to the public weal makes freedom of the press deserving of extra protection. Indeed, the press benefits from certain ancillary rights. The productions of writers are classified as intellectual and proprietary. Persons who interfere or defeat the freedom to write for the press or to maintain a periodical publication are liable for damages, be they private individuals or public officials. 

E.4. ANATOMY OF RESTRICTIONS: PRIOR RESTRAINT, CONTENT-NEUTRAL AND CONTENT-BASED REGULATIONS

Philippine jurisprudence, even as early as the period under the 1935 Constitution, has recognized four aspects of freedom of the press. These are (1) freedom from prior restraint; (2) freedom from punishment subsequent to publication; [53] (3) freedom of access to information; [54] and (4) freedom of circulation.[55]

 Considering that petitioner has argued that respondents press statement constitutes a form of impermissible prior restraint, a closer scrutiny of this principle is in order, as well as its sub-specie of content-based (as distinguished from content-neutral) regulations. 

At this point, it should be noted that respondents in this case deny that their acts constitute prior restraints. This presents a unique tinge to the present challenge, considering that the cases in our jurisdiction involving prior restrictions on speech never had any issue of whether the governmental act or issuance actually constituted prior restraint. Rather, the determinations were always about whether the restraint was justified by the Constitution.

 Be that as it may, the determination in every case of whether there is an impermissible restraint on the freedom of speech has always been based on the circumstances of each case, including the nature of the restraint. And in its application in our jurisdiction, the parameters of this principle have been etched on a case-to-case basis, always tested by scrutinizing the governmental issuance or act against the circumstances in which they operate, and then determining the appropriate test with which to evaluate. Prior restraint refers to official governmental restrictions on the press or other forms of expression in advance of actual publication or dissemination.[56] Freedom from prior restraint is largely freedom from government censorship of publications, whatever the form of censorship, and regardless of whether it is wielded by the executive,

legislative or judicial branch of the government. Thus, it precludes governmental acts that required approval of a proposal to publish; licensing or permits as prerequisites to publication including the payment of license taxes for the privilege to publish; and even injunctions against publication. Even the closure of the business and printing offices of certain newspapers, resulting in the discontinuation of their printing and publication, are deemed as previous restraint or censorship.[57] Any law or official that requires some form of permission to be had before publication can be made, commits an infringement of the constitutional right, and remedy can be had at the courts. Given that deeply ensconced in our fundamental law is the hostility against all prior restraints on speech, and any act that restrains speech is presumed invalid,[58]  and any act that restrains speech is hobbled by the presumption of invalidity and should be greeted with furrowed brows, [59] it is important to stress not all prior restraints on speech are invalid. Certain previous restraints may be permitted by the Constitution, but determined only upon a careful evaluation of the challenged act as against the appropriate test by which it should be measured against. Hence, it is not enough to determine whether the challenged act constitutes some form of restraint on freedom of speech. A distinction has to be made whether the restraint is (1) a content-neutral regulation,i.e., merely concerned with the incidents of the speech, or one that merely controls the time, place or manner, and under well defined standards;[60] or (2) a content-based restraint or censorship, i.e., the restriction is based on the subject matter of the utterance or speech. [61] The cast of the restriction determines the test by which the challenged act is assayed with. When the speech restraints take the form of a content-neutral regulation, only a substantial governmental interest is required for its

validity.[62] Because regulations of this type are not designed to suppress any particular message, they are not subject to the strictest form of judicial scrutiny but an intermediate approachsomewhere between the mere rationality that is required of any other law and the compelling interest standard applied to content-based restrictions.[63] The test is called intermediate because the Court will not merely rubberstamp the validity of a law but also require that the restrictions be narrowly-tailored to promote an important or significant governmental interest that is unrelated to the suppression of expression. The intermediate approach has been formulated in this manner: 

A governmental regulation is sufficiently justified if it is within the constitutional power of the Government, if it furthers an important or substantial governmental interest; if the governmental interest is unrelated to the suppression of free expression; and if the incident restriction on alleged [freedom of speech & expression] is no greater than is essential to the furtherance of that interest. [64]

 On the other hand, a governmental action that restricts freedom of speech or of the press based on content is given the strictest scrutiny in light of its inherent and invasive impact. Only when the challenged act has overcome the clear and present danger rule will it pass constitutional muster,[65] with the government having the burden of overcoming the presumed unconstitutionality. Unless the government can overthrow this presumption, the content-based restraint will be struck down.[66]

With respect to content-based restrictions, the government must also show the type of harm the speech sought to be restrained would bring about especially the gravity and the imminence of the threatened harm otherwise the prior restraint will be invalid. Prior restraint on speech

based on its content cannot be justified by hypothetical fears, but only by showing a substantive and imminent evil that has taken the life of a reality already on ground.[67] As formulated, the question in every case is whether the words used are used in such circumstances and are of such a nature as to create a clear and present danger thatthey will bring about the substantive evils that Congress has a right to prevent. It is a question of proximity and degree.[68]

 The regulation which restricts the speech content must also serve an important or substantial government interest, which is unrelated to the suppression of free expression. [69]

 Also, the incidental restriction on speech must be no greater than what is essential to the furtherance of that interest.  [70] A restriction that is so broad that it encompasses more than what is required to satisfy the governmental interest will be invalidated. [71] The regulation, therefore, must be reasonable and narrowly drawn to fit the regulatory purpose, with the least restrictive means undertaken. [72]

 Thus, when the prior restraint partakes of a content-neutral regulation, it is subjected to an intermediate review. A content-based regulation,[73] however, bears a heavy presumption of invalidity and is measured against the clear and present danger rule. The latter will pass constitutional muster only if justified by a compelling reason, and the restrictions imposed are neither overbroad nor vague. [74]

 Applying the foregoing, it is clear that the challenged acts in the case at bar need to be subjected to the clear and present danger rule, as they are content-based restrictions. The acts of respondents focused solely on but one objecta specific content fixed as these were on the alleged taped conversations between the President and a COMELEC official.

Undoubtedly these did not merely provide regulations as to the time, place or manner of the dissemination of speech or expression.

E.5. Dichotomy of Free Press: Print v. Broadcast Media Finally, comes respondents argument that the challenged act is

valid on the ground that broadcast media enjoys free speech rights that are lesser in scope to that of print media. We next explore and test the validity of this argument, insofar as it has been invoked to validate a content-based restriction on broadcast media.

 The regimes presently in place for each type of media differ

from one other. Contrasted with the regime in respect of books, newspapers, magazines and traditional printed matter, broadcasting, film and video have been subjected to regulatory schemes.

 The dichotomy between print and broadcast media traces its

origins in the United States. There, broadcast radio and television have been held to have limited First Amendment protection,[75] and U.S. Courts have excluded broadcast media from the application of the strict scrutiny standard that they would otherwise apply to content-based restrictions.[76] According to U.S. Courts, the three major reasonswhy broadcast media stands apart from print media are: (a) the scarcity of the frequencies by which the medium operates [i.e., airwaves are physically limited while print medium may be limitless]; [77] (b) its pervasiveness as a medium; and (c) its unique accessibility to children.[78] Because cases involving broadcast media need not follow precisely the same approach that [U.S. courts] have applied to other media, nor go so far as to demand that such regulations serve compelling government interests,[79] they are decided on whether the governmental restriction is narrowly tailored to further a substantial governmental interest,[80] or the intermediate test.

 

As pointed out by respondents, Philippine jurisprudence has also echoed a differentiation in treatment between broadcast and print media. Nevertheless, a review of Philippine case law on broadcast media will show thatas we have deviated with the American conception of the Bill of Rights[81] we likewise did not adopt en masse the U.S. conception of free speech as it relates to broadcast media,particularly as to which test would govern content-based prior restraints.

 Our cases show two distinct features of this

dichotomy. First, the difference in treatment, in the main, is in the regulatory scheme applied to broadcast media that is not imposed on traditional print media, and narrowly confined to unprotected speech (e.g., obscenity, pornography, seditious and inciting speech), or is based on a compelling government interest that also has constitutional protection, such as national security or the electoral process.

 Second, regardless of the regulatory schemes that broadcast

media is subjected to, the Court has consistently held that the clear and present danger test applies to content-based restrictions on media, without making a distinction as to traditional print or broadcast media.

 The distinction between broadcast and traditional print media was first enunciated in Eastern Broadcasting Corporation (DYRE) v. Dans,[82] wherein it was held that [a]ll forms of media, whether print or broadcast, are entitled to the broad protection of the freedom of speech and expression clause. The test for limitations on freedom of expression continues to be the clear and present danger rule[83]

 Dans was a case filed to compel the reopening of a radio station

which had been summarily closed on grounds of national security. Although the issue had become moot and academic because the owners were no longer interested to reopen, the Court still proceeded to do an

analysis of the case and made formulations to serve as guidelines for all inferior courts and bodies exercising quasi-judicial functions. Particularly, the Court made a detailed exposition as to what needs be considered in cases involving broadcast media. Thus:[84]

 xxx xxx xxx

 

(3) All forms of media, whether print or broadcast, are entitled to the broad protection of the freedom of speech and expression clause. The test for limitations on freedom of expression continues to be the clear and present danger rule, that words are used in such circumstances and are of such a nature as to create a clear and present danger that they will bring about the substantive evils that the lawmaker has a right to prevent, In his Constitution of the Philippines (2nd Edition, pp. 569-570) Chief Justice Enrique M. Fernando cites at least nine of our decisions which apply the test. More recently, the clear and present danger test was applied in J.B.L. Reyes in behalf of the Anti-Bases Coalition v. Bagatsing. (4) The clear and present danger test, however, does not lend itself to a simplistic and all embracing interpretation applicable to all utterances in all forums.

Broadcasting has to be licensed. Airwave frequencies have to be allocated among qualified users. A broadcast corporation cannot simply appropriate a certain frequency

without regard for government regulation or for the rights of others.

All forms of communication are entitled to the broad protection of the freedom of expression clause. Necessarily, however, the freedom of television and radio broadcasting is somewhat lesser in scope than the freedom accorded to newspaper and print media.

The American Court in Federal Communications Commission v. Pacifica Foundation (438 U.S. 726), confronted with a patently offensive and indecent regular radio program, explained why radio broadcasting, more than other forms of communications, receives the most limited protection from the free expression clause. First, broadcast media have established a uniquely pervasive presence in the lives of all citizens, Material presented over the airwaves confronts the citizen, not only in public, but in the privacy of his home. Second, broadcasting is uniquely accessible to children. Bookstores and motion picture theaters may be prohibited from making certain material available to children, but the same selectivity cannot be done in radio or television, where the listener or viewer is constantly tuning in and out.

Similar considerations apply in the area of national security.

The broadcast media have also established a uniquely pervasive presence in the lives of all

Filipinos. Newspapers and current books are found only in metropolitan areas and in the poblaciones of municipalities accessible to fast and regular transportation. Even here, there are low income masses who find the cost of books, newspapers, and magazines beyond their humble means. Basic needs like food and shelter perforce enjoy high priorities.

On the other hand, the transistor radio is found everywhere. The television set is also becoming universal. Their message may be simultaneously received by a national or regional audience of listeners including the indifferent or unwilling who happen to be within reach of a blaring radio or television set. The materials broadcast over the airwaves reach every person of every age, persons of varying susceptibilities to persuasion, persons of different I.Q.s and mental capabilities, persons whose reactions to inflammatory or offensive speech would be difficult to monitor or predict. The impact of the vibrant speech is forceful and immediate. Unlike readers of the printed work, the radio audience has lesser opportunity to cogitate analyze, and reject the utterance.

(5) The clear and present danger test, therefore, must take the particular circumstances of broadcast media into account. The supervision of radio stations-whether by government or through self-regulation by the industry itself calls for

thoughtful, intelligent and sophisticated handling.

The government has a right to be protected against broadcasts which incite the listeners to violently overthrow it. Radio and television may not be used to organize a rebellion or to signal the start of widespread uprising. At the same time, the people have a right to be informed. Radio and television would have little reason for existence if broadcasts are limited to bland, obsequious, or pleasantly entertaining utterances. Since they are the most convenient and popular means of disseminating varying views on public issues, they also deserve special protection.

(6) The freedom to comment on public affairs is essential to the vitality of a representative democracy. In the 1918 case of United States v. Bustos (37 Phil. 731) this Court was already stressing that.

The interest of society and the maintenance of good government demand a full discussion of public affairs. Complete liberty to comment on the conduct of public men is a scalpel in the case of free speech. The sharp incision of its probe relieves the abscesses of officialdom. Men in public life may suffer under a hostile and an unjust accusation; the wound can be assuaged with the balm of a clear conscience. A public officer must not be too thin-skinned with reference to comment upon his official

acts. Only thus can the intelligence and dignity of the individual be exalted.

(7) Broadcast stations deserve the special protection given to all forms of media by the due process and freedom of expression clauses of the Constitution. [Citations omitted]

 It is interesting to note that the Court in Dans adopted the arguments found in U.S. jurisprudence to justify differentiation of treatment (i.e., the scarcity, pervasiveness and accessibility to children), but only after categorically declaring that the test for limitations on freedom of expression continues to be the clear and present danger rule, for all forms of media, whether print or broadcast. Indeed, a close reading of the above-quoted provisions would show that the differentiation that the Court in Dans referred to was narrowly restricted to what is otherwise deemed as unprotected speech (e.g., obscenity, national security, seditious and inciting speech), or to validate a licensing or regulatory scheme necessary to allocate the limited broadcast frequencies, which is absent in print media. Thus, when this Court declared in Dans that the freedom given to broadcast media was somewhat lesser in scope than the freedom accorded to newspaper and print media, it was not as to what test should be applied, but the context by which requirements of licensing, allocation of airwaves, and application of norms to unprotected speech. [85]

In the same year that the Dans case was decided, it was reiterated in Gonzales v. Katigbak,[86] that the test to determine free expression challenges was the clear and present danger, again without distinguishing the media.[87] Katigbak, strictly speaking, does not treat of broadcast media but motion pictures. Although the issue involved obscenity standards as applied to movies,[88] the Court concluded its decision with the following obiter dictum that a less liberal approach

would be used to resolve obscenity issues in television as opposed to motion pictures:

All that remains to be said is that the ruling is to be limited to the concept of obscenity applicable to motion pictures. It is the consensus of this Court that where television is concerned, a less liberal approach calls for observance. This is so because unlike motion pictures where the patrons have to pay their way, television reaches every home where there is a set. Children then will likely be among the avid viewers of the programs therein shown..It cannot be denied though that the State as parens patriae is called upon to manifest an attitude of caring for the welfare of the young.

 More recently, in resolving a case involving the conduct of exit polls and dissemination of the results by a broadcast company, we reiterated that the clear and present danger rule is the test we unquestionably adhere to issues that involve freedoms of speech and of the press.[89]

 This is not to suggest, however, that the clear and present danger rule has been applied to all cases that involve the broadcast media. The rule applies to all media, including broadcast, but only when the challenged act is a content-based regulation that infringes on free speech, expression and the press. Indeed, in Osmena v. COMELEC,[90] which also involved broadcast media, the Court refused to apply the clear and present danger rule to a COMELEC regulation of time and manner of advertising of political advertisements because the challenged restriction was content-neutral.[91] And in a case involving due process and equal protection issues, the Court in Telecommunications and Broadcast Attorneys of the Philippines v. COMELEC[92] treated a restriction imposed on a broadcast media as a reasonable condition for

the grant of the medias franchise, without going into which test would apply.That broadcast media is subject to a regulatory regime absent in print media is observed also in other jurisdictions, where the statutory regimes in place over broadcast media include elements of licensing, regulation by administrative bodies, and censorship. As explained by a British author:  

The reasons behind treating broadcast and films differently from the print media differ in a number of respects, but have a common historical basis. The stricter system of controls seems to have been adopted in answer to the view that owing to their particular impact on audiences, films, videos and broadcasting require a system of prior restraints, whereas it is now accepted that books and other printed media do not. These media are viewed as beneficial to the public in a number of respects, but are also seen as possible sources of harm.[93]

Parenthetically, these justifications are now the subject of debate. Historically, the scarcity of frequencies was thought to provide a rationale. However, cable and satellite television have enormously increased the number of actual and potential channels. Digital technology will further increase the number of channels available. But still, the argument persists that broadcasting is the most influential means of communication, since it comes into the home, and so much time is spent watching television. Since it has a unique impact on people and affects children in a way that the print media normally does not, that regulation is said to be necessary in order to preserve pluralism. It has been argued further that a significant main threat to free expressionin terms of diversitycomes not from government, but from private

corporate bodies. These developments show a need for a reexamination of the traditional notions of the scope and extent of broadcast media regulation. [94]

 The emergence of digital technology -- which has led to the convergence of broadcasting, telecommunications and the computer industry -- has likewise led to the question of whether the regulatory model for broadcasting will continue to be appropriate in the converged environment.[95] Internet, for example, remains largely unregulated, yet the Internet and the broadcast media share similarities, [96] and the rationales used to support broadcast regulation apply equally to the Internet.[97] Thus, it has been argued that courts, legislative bodies and the government agencies regulating media must agree to regulate both, regulate neither or develop a new regulatory framework and rationale to justify the differential treatment. [98]

 F. The Case At Bar

 Having settled the applicable standard to content-based restrictions on broadcast media, let us go to its application to the case at bar.  To recapitulate, a governmental action that restricts freedom of speech or ofthe press based on content is given the strictest scrutiny, with the government having the burden of overcoming the presumed unconstitutionality by the clear and present danger rule. This rule applies equally to all kinds of media, including broadcast media. This outlines the procedural map to follow in cases like the one at bar as it spells out the following: (a) the test; (b) the presumption; (c) the burden of proof; (d) the party to discharge the burden; and (e) the quantum of evidence necessary. On the basis of the records of the case at bar, respondents who have the burden to show that these acts do not abridge freedom of speech and of the press failed to hurdle the clear and

present danger test. It appears that the great evil which government wants to prevent is the airing of a tape recording in alleged violation of the anti-wiretapping law. The records of the case at bar, however, are confused and confusing, and respondents evidence falls short of satisfying the clear and present danger test. Firstly, the various statements of the Press Secretary obfuscate the identity of the voices in the tape recording. Secondly, the integrity of the taped conversation is also suspect. The Press Secretary showed to the public two versions, one supposed to be a complete version and the other, an altered version. Thirdly, the evidence of the respondents on the whos and the hows of the wiretapping act is ambivalent, especially considering the tapes different versions. The identity of the wire-tappers, the manner of its commission and other related and relevant proofs are some of the invisibles of this case. Fourthly, given all these unsettled facets of the tape, it is even arguable whether its airing would violate the anti-wiretapping law. We rule that not every violation of a law will justify straitjacketing the exercise of freedom of speech and of the press. Our laws are of different kinds and doubtless, some of them provide norms of conduct which even if violated have only an adverse effect on a persons private comfort but does not endanger national security. There are laws of great significance but their violation, by itself and without more, cannot support suppression of free speech and free press. In fine, violation of law is just a factor, a vital one to be sure, which should be weighed in adjudging whether to restrain freedom of speech and of the press. The totality of the injurious effects of the violation to private and public interest must be calibrated in light of the preferred status accorded by the Constitution and by related international covenants protecting freedom of speech and of the press. In calling for a careful and calibrated measurement of the circumference of all these factors to determine compliance with the clear and present danger test, the Court should not be misinterpreted as

devaluing violations of law. By all means, violations of law should be vigorously prosecuted by the State for they breed their own evil consequence. But to repeat, the need to prevent their violation cannot per se trump the exercise of free speech and free press, a preferred right whose breach can lead to greater evils. For this failure of the respondents alone to offer proof to satisfy the clear and present danger test, the Court has no option but to uphold the exercise of free speech and free press. There is no showing that the feared violation of the anti-wiretapping law clearly endangers the national security of the State. This is not all the faultline in the stance of the respondents. We slide to the issue of whether the mere press statements of the Secretary of Justice and of the NTC in question constitute a form of content-based prior restraint that has transgressed the Constitution. In resolving this issue, we hold that it is not decisive that the press statements made by respondents were not reduced in or followed up with formal orders or circulars. It is sufficient that the press statements were made by respondents while in the exercise of their official functions. Undoubtedly, respondent Gonzales made his statements as Secretary of Justice, while the NTC issued its statement as the regulatory body of media. Any act done, such as a speech uttered, for and on behalf of the government in an official capacity is covered by the rule on prior restraint. The concept of an act does not limit itself to acts already converted to a formal order or official circular. Otherwise, the non formalization of an act into an official order or circular will result in the easy circumvention of the prohibition on prior restraint. The press statements at bar are acts that should be struck down as they constitute impermissible forms of prior restraints on the right to free speech and press. 

There is enough evidence of chilling effect of the complained acts on record. The warnings given to media came from no less the

NTC, a regulatory agency that can cancel the Certificate of Authority of the radio and broadcast media. They also came from the Secretary of Justice, the alter ego of the Executive, who wields the awesome power to prosecute those perceived to be violating the laws of the land.After the warnings, the KBP inexplicably joined the NTC in issuing an ambivalent Joint Press Statement. After the warnings, petitioner Chavez was left alone to fight this battle for freedom of speech and of the press. This silence on the sidelines on the part of some media practitioners is too deafening to be the subject of misinterpretation.

 The constitutional imperative for us to strike down unconstitutional acts should always be exercised with care and in light of the distinct facts of each case. For there are no hard and fast rules when it comes to slippery constitutional questions, and the limits and construct of relative freedoms are never set in stone. Issues revolving on their construct must be decided on a case to case basis, always based on the peculiar shapes and shadows of each case. But in cases where the challenged acts are patent invasions of a constitutionally protected right, we should be swift in striking them down as nullities per se. A blow too soon struck for freedom is preferred than a blow too late. In VIEW WHEREOF, the petition is GRANTED. The writs of certiorari and prohibition are hereby issued, nullifying the official statements made by respondents on June 8, and 11, 2005 warning the media on airing the alleged wiretapped conversation between the President and other personalities, for constituting unconstitutional prior restraint on the exercise of freedom of speech and of the press

SO ORDERED.

PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees,vs.NATIONAL RICE AND CORN CORPORATION, defendant-appellant,MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee.

REGALA, J.:

This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated February 20, 1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages for breach of contract and dismissing the counterclaim and third party complaint of the defendant-appellant NARIC.

In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn Administration (NARIC) is hereby abolished and all its assets, liabilities, functions, powers which are not inconsistent with the provisions of this Act, and all personnel are transferred "to the Rice and Corn Administration (RCA).

All references, therefore, to the NARIC in this decision must accordingly be adjusted and read as RCA pursuant to the aforementioned law.

On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the supply of 20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the lowest, she was awarded the contract for the same. Accordingly, on July 1, 1952,

plaintiff-appellee Paz P. Arrieta and the appellant corporation entered into a Contract of Sale of Rice, under the terms of which the former obligated herself to deliver to the latter 20,000 metric tons of Burmess Rice at $203.00 per metric ton, CIF Manila. In turn, the defendant corporation committed itself to pay for the imported rice "by means of an irrevocable, confirmed and assignable letter of credit in U.S. currency in favor of the plaintiff-appellee and/or supplier in Burma, immediately." Despite the commitment to pay immediately "by means of an irrevocable, confirmed and assignable Letter of Credit," however, it was only on July 30, 1952, or a full month from the execution of the contract, that the defendant corporation, thru its general manager, took the first to open a letter of credit by forwarding to the Philippine National Bank its Application for Commercial Letter Credit. The application was accompanied by a transmittal letter, the relevant paragraphs of which read:

In view of the fact that we do not have sufficient deposit with your institution with which to cover the amount required to be deposited as a condition for the opening of letters of credit, we will appreciate it if this application could be considered special case.

We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August 4, 1952, and in order to comply therewith, it is imperative that the L/C be opened prior to that date. We would therefore request your full cooperation on this matter.

On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the appellant corporation of the extreme necessity for the immediate opening of the letter credit since she had by then made a tender to her supplier in Rangoon, Burma, "equivalent to 5% of the F.O.B. price of 20,000 tons at $180.70 and in compliance with the

regulations in Rangoon this 5% will be confiscated if the required letter of credit is not received by them before August 4, 1952."

On August 4, 1952, the Philippine National Bank informed the appellant corporation that its application, "for a letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by the Board of Directors with the condition that marginal cash deposit be paid and that drafts are to be paid upon presentment." (Exh. J-pl.; Exh. 10-def., p. 19, Folder of Exhibits). Furthermore, the Bank represented that it "will hold your application in abeyance pending compliance with the above stated requirement."

As it turned out, however, the appellant corporation not in any financial position to meet the condition. As matter of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the appellee its dilemma: "In this connection, please be advised that our application for opening of the letter of credit has been presented to the bank since July 30th but the latter requires that we first deposit 50% of the value of the letter amounting to aproximately $3,614,000.00 which we are not in a position to meet." (Emphasis supplied. Exh. 9-Def.; Exh. 1-Pe., p. 18, Folder of Exhibits)

Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor of Thiri Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than two months from the execution of the contract) the party named by the appellee as beneficiary of the letter of credit.1äwphï1.ñët

As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the 5% deposit, amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this connection, it must be made of record that although the Burmese authorities had set August

4, 1952, as the deadline for the remittance of the required letter of credit, the cancellation of the allocation and the confiscation of the 5% deposit were not effected until August 20, 1952, or, a full half month after the expiration of the deadline. And yet, even with the 15-day grace, appellant corporation was unable to make good its commitment to open the disputed letter of credit.

The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the futility of reinstating the same became apparent, she offered to substitute Thailand rice instead to the defendant NARIC, communicating at the same time that the offer was "a solution which should be beneficial to the NARIC and to us at the same time." (Exh. X-Pe., Exh. 25—Def., p. 38, Folder of Exhibits). This offer for substitution, however, was rejected by the appellant in a resolution dated November 15, 1952.

On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the damages caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit. The demand having been rejected she instituted this case now on appeal.

At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance Company was brought to the suit as a third party defendant to hold it liable on the performance bond it executed in favor of the plaintiff-appellee.

We find for the appellee.

It is clear upon the records that the sole and principal reason for the cancellation of the allocation contracted by the appellee herein in Rangoon, Burma, was the failure of the letter of credit to be opened with the contemplated period. This failure must, therefore, be taken as

the immediate cause for the consequent damage which resulted. As it is then, the disposition of this case depends on a determination of who was responsible for such failure. Stated differently, the issue is whether appellant's failure to open immediately the letter of credit in dispute amounted to a breach of the contract of July 1, 1952 for which it may be held liable in damages.

Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit. On the contrary, it insists that the fault lies with the appellee. Appellant contends that the disputed negotiable instrument was not promptly secured because the appellee , failed to seasonably furnish data necessary and required for opening the same, namely, "(1) the amount of the letter of credit, (2) the person, company or corporation in whose favor it is to be opened, and (3) the place and bank where it may be negotiated." Appellant would have this Court believe, therefore, that had these informations been forthwith furnished it, there would have been no delay in securing the instrument.

Appellant's explanation has neither force nor merit. In the first place, the explanation reaches into an area of the proceedings into which We are not at liberty to encroach. The explanation refers to a question of fact. Nothing in the record suggests any arbitrary or abusive conduct on the part of the trial judge in the formulation of the ruling. His conclusion on the matter is sufficiently borne out by the evidence presented. We are denied, therefore, the prerogative to disturb that finding, consonant to the time-honored tradition of this Tribunal to hold trial judges better situated to make conclusions on questions of fact. For the record, We quote hereunder the lower court's ruling on the point:

The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff to name the supplier, the amount and the bank is not tenable. Plaintiff stated in Court that these facts were known to defendant even before the contract was executed because these facts were necessarily revealed to the defendant before she could qualify as a bidder. She stated too that she had given the necessary data immediately after the execution of Exh. "A" (the contract of July 1, 1952) to Mr. GABRIEL BELMONTE, General Manager of the NARIC, both orally and in writing and that she also pressed for the opening of the letter of credit on these occasions. These statements have not been controverted and defendant NARIC, notwithstanding its previous intention to do so, failed to present Mr. Belmonte to testify or refute this. ...

Secondly, from the correspondence and communications which form part of the record of this case, it is clear that what singularly delayed the opening of the stipulated letter of credit and which, in turn, caused the cancellation of the allocation in Burma, was the inability of the appellant corporation to meet the condition importation by the Bank for granting the same. We do not think the appellant corporation can refute the fact that had it been able to put up the 50% marginal cash deposit demanded by the bank, then the letter of credit would have been approved, opened and released as early as August 4, 1952. The letter of the Philippine National Bank to the NARIC was plain and explicit that as of the said date, appellant's "application for a letter of credit ... has been approved by the Board of Directors with the condition that 50% marginal cash deposit be paid and that drafts are to be paid upon presentment." (Emphasis supplied)

The liability of the appellant, however, stems not alone from this failure or inability to satisfy the requirements of the bank. Its culpability arises from its willful and deliberate assumption of contractual

obligations even as it was well aware of its financial incapacity to undertake the prestation. We base this judgment upon the letter which accompanied the application filed by the appellant with the bank, a part of which letter was quoted earlier in this decision. In the said accompanying correspondence, appellant admitted and owned that it did "not have sufficient deposit with your institution (the PNB) with which to cover the amount required to be deposited as a condition for the opening of letters of credit. ... .

A number of logical inferences may be drawn from the aforementioned admission. First, that the appellant knew the bank requirements for opening letters of credit; second, that appellant also knew it could not meet those requirement. When, therefore, despite this awareness that was financially incompetent to open a letter of credit immediately, appellant agreed in paragraph 8 of the contract to pay immediately "by means of an irrevocable, confirm and assignable letter of credit," it must be similarly held to have bound itself to answer for all and every consequences that would result from the representation. aptly observed by the trial court:

... Having called for bids for the importation of rice involving millions, $4,260,000.00 to be exact, it should have a certained its ability and capacity to comply with the inevitably requirements in cash to pay for such importation. Having announced the bid, it must be deemed to have impliedly assured suppliers of its capacity and facility to finance the importation within the required period, especially since it had imposed the supplier the 90-day period within which the shipment of the rice must be brought into the Philippines. Having entered in the contract, it should have taken steps immediately to arrange for the letter of credit for the large amount involved and inquired into the possibility of its issuance.

In relation to the aforequoted observation of the trial court, We would like to make reference also to Article 11 of the Civil Code which provides:

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

Under this provision, not only debtors guilty of fraud, negligence or default in the performance of obligations a decreed liable; in general, every debtor who fails in performance of his obligations is bound to indemnify for the losses and damages caused thereby (De la Cruz Seminary of Manila, 18 Phil. 330; Municipality of Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz, 37 Phil. 982; Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando v. Gimenez, 54 Phil. 459; Acme Films v. Theaters Supply, 63 Phil. 657). The phrase "any manner contravene the tenor" of the obligation includes any illicit act which impairs the strict and faithful fulfillment of the obligation or every kind or defective performance. (IV Tolentino, Civil Code of the Philippines, citing authorities, p. 103.)

The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for the originally contracted Burmese rice amounted to a waiver by the appellee of whatever rights she might have derived from the breach of the contract. We disagree. Waivers are not presumed, but must be clearly and convincingly shown, either by express stipulation or acts admitting no other reasonable explanation. (Ramirez v. Court of Appeals, 52 O.G. 779.) In the case at bar, no such intent to waive has been established.

We have carefully examined and studied the oral and documentary evidence presented in this case and upon which the lower court based

its award. Under the contract, the NARIC bound itself to buy 20,000 metric tons of Burmese rice at "$203.00 U.S. Dollars per metric ton, all net shipped weight, and all in U.S. currency, C.I.F. Manila ..." On the other hand, documentary and other evidence establish with equal certainty that the plaintiff-appellee was able to secure the contracted commodity at the cost price of $180.70 per metric ton from her supplier in Burma. Considering freights, insurance and charges incident to its shipment here and the forfeiture of the 5% deposit, the award granted by the lower court is fair and equitable. For a clearer view of the equity of the damages awarded, We reproduce below the testimony of the appellee, adequately supported by the evidence and record:

Q. Will you please tell the court, how much is the damage you suffered?

A. Because the selling price of my rice is $203.00 per metric ton, and the cost price of my rice is $180.00 We had to pay also $6.25 for shipping and about $164 for insurance. So adding the cost of the rice, the freight, the insurance, the total would be about $187.99 that would be $15.01 gross profit per metric ton, multiply by 20,000 equals $300,200, that is my supposed profit if I went through the contract.

The above testimony of the plaintiff was a general approximation of the actual figures involved in the transaction. A precise and more exact demonstration of the equity of the award herein is provided by Exhibit HH of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far as germane.

It is equally of record now that as shown in her request dated July 29, 1959, and other communications subsequent thereto for the opening by your corporation of the required letter of credit, Mrs. Arrieta was

supposed to pay her supplier in Burma at the rate of One Hundred Eighty Dollars and Seventy Cents ($180.70) in U.S. Currency, per ton plus Eight Dollars ($8.00) in the same currency per ton for shipping and other handling expenses, so that she is already assured of a net profit of Fourteen Dollars and Thirty Cents ($14.30), U.S., Currency, per ton or a total of Two Hundred and Eighty Six Thousand Dollars ($286,000.00), U.S. Currency, in the aforesaid transaction. ...

Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of unrealized profit damages in the total sum of $406,000.00 from the failure of the projected contract to materialize. This counterclaim was supported by a cost study made and submitted by the appellant itself and wherein it was illustrated how indeed had the importation pushed thru, NARIC would have realized in profit the amount asserted in the counterclaim. And yet, the said amount of P406,000.00 was realizable by appellant despite a number of expenses which the appellee under the contract, did not have to incur. Thus, under the cost study submitted by the appellant, banking and unloading charges were to be shouldered by it, including an Import License Fee of 2% and superintendence fee of $0.25 per metric ton. If the NARIC stood to profit over P400 000.00 from the disputed transaction inspite of the extra expenditures from which the herein appellee was exempt, we are convicted of the fairness of the judgment presently under appeal.

In the premises, however, a minor modification must be effected in the dispositive portion of the decision appeal from insofar as it expresses the amount of damages in U.S. currency and not in Philippine Peso. Republic Act 529 specifically requires the discharge of obligations only "in any coin or currency which at the time of payment is legal tender for public and private debts." In view of that law, therefore, the award should be converted into and expressed in Philippine Peso.

This brings us to a consideration of what rate of exchange should apply in the conversion here decreed. Should it be at the time of the breach, at the time the obligation was incurred or at the rate of exchange prevailing on the promulgation of this decision.

In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of damages for breach of contract, even if the obligation assumed by the defendant was to pay the plaintiff a sum of money expressed in American currency, the indemnity to be allowed should be expressed in Philippine currency at the rate of exchange at the time of the judgment rather than at the rate of exchange prevailing on the date of defendant's breach. This ruling, however, can neither be applied nor extended to the case at bar for the same was laid down when there was no law against stipulating foreign currencies in Philippine contracts. But now we have Republic Act No. 529 which expressly declares such stipulations as contrary to public policy, void and of no effect. And, as We already pronounced in the case of Eastboard Navigation, Ltd. v. Juan Ysmael & Co., Inc., G.R. No. L-9090, September 10, 1957, if there is any agreement to pay an obligation in a currency other than Philippine legal tender, the same is null and void as contrary to public policy (Republic Act 529), and the most that could be demanded is to pay said obligation in Philippine currency "to be measured in the prevailing rate of exchange at the time the obligation was incurred (Sec. 1, idem)."

UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole modification that the award should be converted into the Philippine peso at the rate of exchange prevailing at the time the obligation was incurred or on July 1, 1952 when the contract was executed. The appellee insurance company, in the light of

this judgment, is relieved of any liability under this suit. No pronouncement as to costs.

JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners, vs.THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and the PHILIPPINE BAR ASSOCIATION, respondents.

G.R. No. L-47863 October 3, 1986

THE UNITED CONSTRUCTION CO., INC., petitioner, vs.COURT OF APPEALS, ET AL., respondents.

G.R. No. L-47896 October 3, 1986

PHILIPPINE BAR ASSOCIATION, ET AL., petitioners, vs.COURT OF APPEALS, ET AL., respondents.

 

PARAS, J.:

These are petitions for review on certiorari of the November 28, 1977 decision of the Court of Appeals in CA-G.R. No. 51771-R modifying the decision of the Court of First Instance of Manila, Branch V, in Civil Case No. 74958 dated September 21, 1971 as modified by the Order of the lower court dated December 8, 1971. The Court of Appeals in modifying the decision of the lower court included an award of an additional amount of P200,000.00 to the Philippine Bar Association to be paid jointly and severally by the defendant United Construction Co. and by the third-party defendants Juan F. Nakpil and Sons and Juan F. Nakpil.

The dispositive portion of the modified decision of the lower court reads:

WHEREFORE, judgment is hereby rendered:

(a) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman Ozaeta) to pay the plaintiff, jointly and severally, the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date of the filing of the complaint until full payment;

(b) Dismissing the complaint with respect to defendant Juan J. Carlos;

(c) Dismissing the third-party complaint;

(d) Dismissing the defendant's and third-party defendants' counterclaims for lack of merit;

(e) Ordering defendant United Construction Co., Inc. and third-party defendants (except Roman Ozaeta) to pay the costs in equal shares.

SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the judgment appealed from is modified to include an award of P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with interest at the legal rate from November 29, 1968 until full payment to be paid jointly and severally by defendant United Construction Co., Inc. and third party defendants (except Roman Ozaeta). In all other respects, the judgment dated September 21, 1971 as modified in the December 8, 1971 Order of the lower court is hereby affirmed with COSTS to be paid by the defendant and third party defendant (except Roman Ozaeta) in equal shares.

SO ORDERED.

Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J. Carlos in L-47863 seek the reversal of the decision of the Court of Appeals, among other

things, for exoneration from liability while petitioner Philippine Bar Association in L-47896 seeks the modification of aforesaid decision to obtain an award of P1,830,000.00 for the loss of the PBA building plus four (4) times such amount as damages resulting in increased cost of the building, P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees.

These petitions arising from the same case filed in the Court of First Instance of Manila were consolidated by this Court in the resolution of May 10, 1978 requiring the respective respondents to comment. (Rollo, L-47851, p. 172).

The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269-348; pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are as follows:

The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under the Corporation Law, decided to construct an office building on its 840 square meters lot located at the comer of Aduana and Arzobispo Streets, Intramuros, Manila. The construction was undertaken by the United Construction, Inc. on an "administration" basis, on the suggestion of Juan J. Carlos, the president and general manager of said corporation. The proposal was approved by plaintiff's board of directors and signed by its president Roman Ozaeta, a third-party defendant in this case. The plans and specifications for the building were prepared by the other third-party defendants Juan F. Nakpil & Sons. The building was completed in June, 1966.

In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its environs and the building in question sustained major damage. The front columns of the building buckled, causing the building to tilt forward dangerously. The tenants vacated the building in view of its precarious condition. As a temporary remedial measure, the building was shored up by United Construction, Inc. at the cost of P13,661.28.

On November 29, 1968, the plaintiff commenced this action for the recovery of damages arising from the partial collapse of the building against United Construction, Inc. and its President and General Manager Juan J. Carlos as defendants. Plaintiff alleges that the collapse of the building was accused by defects in the construction, the failure of the contractors to follow plans and specifications and violations by the defendants of the terms of the contract.

Defendants in turn filed a third-party complaint against the architects who prepared the plans and specifications, alleging in essence that the collapse of the building was due to the defects in the said plans and specifications. Roman Ozaeta, the then president of the plaintiff Bar Association was included as a third-party defendant for damages for having included Juan J. Carlos, President of the United Construction Co., Inc. as party defendant.

On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F. Nakpil presented a written stipulation which reads:

1. That in relation to defendants' answer with counterclaims and third- party complaints and the third-party defendants Nakpil & Sons' answer thereto, the plaintiff need not amend its complaint by including the said Juan F. Nakpil & Sons and Juan F. Nakpil personally as parties defendant.

2. That in the event (unexpected by the undersigned) that the Court should find after the trial that the above-named defendants Juan J. Carlos and United Construction Co., Inc. are free from any blame and liability for the collapse of the PBA Building, and should further find that the collapse of said building was due to defects and/or inadequacy of the plans, designs, and specifications p by the third-party defendants, or in the event that the Court may find Juan F. Nakpil

and Sons and/or Juan F. Nakpil contributorily negligent or in any way jointly and solidarily liable with the defendants, judgment may be rendered in whole or in part. as the case may be, against Juan F. Nakpil & Sons and/or Juan F. Nakpil in favor of the plaintiff to all intents and purposes as if plaintiff's complaint has been duly amended by including the said Juan F. Nakpil & Sons and Juan F. Nakpil as parties defendant and by alleging causes of action against them including, among others, the defects or inadequacy of the plans, designs, and specifications prepared by them and/or failure in the performance of their contract with plaintiff.

3. Both parties hereby jointly petition this Honorable Court to approve this stipulation. (Record on Appeal, pp. 274-275; Rollo, L-47851,p.169).

Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which among others, the parties agreed to refer the technical issues involved in the case to a Commissioner. Mr. Andres O. Hizon, who was ultimately appointed by the trial court, assumed his office as Commissioner, charged with the duty to try the following issues:

1. Whether the damage sustained by the PBA building during the August 2, 1968 earthquake had been caused, directly or indirectly, by:

(a) The inadequacies or defects in the plans and specifications prepared by third-party defendants;

(b) The deviations, if any, made by the defendants from said plans and specifications and how said deviations contributed to the damage sustained;

(c) The alleged failure of defendants to observe the requisite quality of materials and workmanship in the construction of the building;

(d) The alleged failure to exercise the requisite degree of supervision expected of the architect, the contractor and/or the owner of the building;

(e) An act of God or a fortuitous event; and

(f) Any other cause not herein above specified.

2. If the cause of the damage suffered by the building arose from a combination of the above-enumerated factors, the degree or proportion in which each individual factor contributed to the damage sustained;

3. Whether the building is now a total loss and should be completely demolished or whether it may still be repaired and restored to a tenantable condition. In the latter case, the determination of the cost of such restoration or repair, and the value of any remaining construction, such as the foundation, which may still be utilized or availed of (Record on Appeal, pp. 275-276; Rollo, L-47851, p. 169).

Thus, the issues of this case were divided into technical issues and non-technical issues. As aforestated the technical issues were referred to the Commissioner. The non-technical issues were tried by the Court.

Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may topple down in case of a strong earthquake. The motions were opposed by the defendants and the matter was referred to the Commissioner. Finally, on April 30,

1979 the building was authorized to be demolished at the expense of the plaintiff, but not another earthquake of high intensity on April 7, 1970 followed by other strong earthquakes on April 9, and 12, 1970, caused further damage to the property. The actual demolition was undertaken by the buyer of the damaged building. (Record on Appeal, pp. 278-280; Ibid.)

After the protracted hearings, the Commissioner eventually submitted his report on September 25, 1970 with the findings that while the damage sustained by the PBA building was caused directly by the August 2, 1968 earthquake whose magnitude was estimated at 7.3 they were also caused by the defects in the plans and specifications prepared by the third-party defendants' architects, deviations from said plans and specifications by the defendant contractors and failure of the latter to observe the requisite workmanship in the construction of the building and of the contractors, architects and even the owners to exercise the requisite degree of supervision in the construction of subject building.

All the parties registered their objections to aforesaid findings which in turn were answered by the Commissioner.

The trial court agreed with the findings of the Commissioner except as to the holding that the owner is charged with full nine supervision of the construction. The Court sees no legal or contractual basis for such conclusion. (Record on Appeal, pp. 309-328; Ibid).

Thus, on September 21, 1971, the lower court rendered the assailed decision which was modified by the Intermediate Appellate Court on November 28, 1977.

All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence, these petitions.

On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers, and the Philippine Institute of Architects filed with the Court a motion to intervene as amicus curiae. They proposed to present a position paper on the liability of architects when a building collapses and to submit likewise a critical analysis with computations on the divergent views on the design and plans as submitted by the experts procured by the parties. The motion having been granted, the amicus curiaewere granted a period of 60 days within which to submit their position.

After the parties had all filed their comments, We gave due course to the petitions in Our Resolution of July 21, 1978.

The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted.

The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not defective. But the Commissioner, when asked by Us to comment, reiterated his conclusion that the defects in the plans and specifications indeed existed.

Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No. 4131) and the 1966 Asep Code, the Commissioner added that even if it can be proved that the defects in theconstruction alone (and not in the plans and design) caused the damage to the building, still the deficiency in the original design and jack of specific provisions against torsion in the original plans and the overload on the ground floor columns (found by an the experts including the original designer) certainly contributed to the damage which occurred. (Ibid, p. 174).

In their respective briefs petitioners, among others, raised the following assignments of errors: Philippine Bar Association claimed that the measure of damages should not be limited to P1,100,000.00 as estimated cost of repairs or to the period of six (6) months for loss of rentals while United Construction Co., Inc.

and the Nakpils claimed that it was an act of God that caused the failure of the building which should exempt them from responsibility and not the defective construction, poor workmanship, deviations from plans and specifications and other imperfections in the case of United Construction Co., Inc. or the deficiencies in the design, plans and specifications prepared by petitioners in the case of the Nakpils. Both UCCI and the Nakpils object to the payment of the additional amount of P200,000.00 imposed by the Court of Appeals. UCCI also claimed that it should be reimbursed the expenses of shoring the building in the amount of P13,661.28 while the Nakpils opposed the payment of damages jointly and solidarity with UCCI.

The pivotal issue in this case is whether or not an act of God-an unusually strong earthquake-which caused the failure of the building, exempts from liability, parties who are otherwise liable because of their negligence.

The applicable law governing the rights and liabilities of the parties herein is Article 1723 of the New Civil Code, which provides:

Art. 1723. The engineer or architect who drew up the plans and specifications for a building is liable for damages if within fifteen years from the completion of the structure the same should collapse by reason of a defect in those plans and specifications, or due to the defects in the ground. The contractor is likewise responsible for the damage if the edifice fags within the same period on account of defects in the construction or the use of materials of inferior quality furnished by him, or due to any violation of the terms of the contract. If the engineer or architect supervises the construction, he shall be solidarily liable with the contractor.

Acceptance of the building, after completion, does not imply waiver of any of the causes of action by reason of any defect mentioned in the preceding paragraph.

The action must be brought within ten years following the collapse of the building.

On the other hand, the general rule is that no person shall be responsible for events which could not be foreseen or which though foreseen, were inevitable (Article 1174, New Civil Code).

An act of God has been defined as an accident, due directly and exclusively to natural causes without human intervention, which by no amount of foresight, pains or care, reasonably to have been expected, could have been prevented. (1 Corpus Juris 1174).

There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of God.

To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation due to an "act of God," the following must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any participation in, or aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).

Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay or violation or contravention in any manner of the tenor of the

obligation as provided for in Article 1170 of the Civil Code, which results in loss or damage, the obligor cannot escape liability.

The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned exclusively by the violence of nature and all human agencies are to be excluded from creating or entering into the cause of the mischief. When the effect, the cause of which is to be considered, is found to be in part the result of the participation of man, whether it be from active intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were, and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).

Thus it has been held that when the negligence of a person concurs with an act of God in producing a loss, such person is not exempt from liability by showing that the immediate cause of the damage was the act of God. To be exempt from liability for loss because of an act of God, he must be free from any previous negligence or misconduct by which that loss or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657).

The negligence of the defendant and the third-party defendants petitioners was established beyond dispute both in the lower court and in the Intermediate Appellate Court. Defendant United Construction Co., Inc. was found to have made substantial deviations from the plans and specifications. and to have failed to observe the requisite workmanship in the construction as well as to exercise the requisite degree of supervision; while the third-party defendants were found to have inadequacies or defects in the plans and specifications prepared by them. As correctly assessed by both courts, the defects in the construction and in the plans and specifications were the proximate causes that rendered the PBA building unable to withstand the earthquake of August 2, 1968. For this reason the defendant and third-party

defendants cannot claim exemption from liability. (Decision, Court of Appeals, pp. 30-31).

It is well settled that the findings of facts of the Court of Appeals are conclusive on the parties and on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs. Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is a finding grounded entirely on speculation, surmise and conjectures; (2) the inference made is manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is based on misapprehension of facts; (5) the findings of fact are conflicting , (6) the Court of Appeals went beyond the issues of the case and its findings are contrary to the admissions of both appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co., February 8, 1967, 19 SCRA 289, 291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings of facts of the Court of Appeals are contrary to those of the trial court; (8) said findings of facts are conclusions without citation of specific evidence on which they are based; (9) the facts set forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals, July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is premised on the supposed absence of evidence and is contradicted by evidence on record (Salazar vs. Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v. Sandiganbayan, July 10, 1986).

It is evident that the case at bar does not fall under any of the exceptions above-mentioned. On the contrary, the records show that the lower court spared no effort in arriving at the correct appreciation of facts by the referral of technical issues to a Commissioner chosen by the parties whose findings and conclusions remained convincingly unrebutted by the intervenors/amicus curiae who were allowed to intervene in the Supreme Court.

In any event, the relevant and logical observations of the trial court as affirmed by the Court of Appeals that "while it is not possible to state with certainty that the building would not have collapsed were those defects not present, the fact remains that several buildings in the same area withstood the earthquake to which the building of the plaintiff was similarly subjected," cannot be ignored.

The next issue to be resolved is the amount of damages to be awarded to the PBA for the partial collapse (and eventual complete collapse) of its building.

The Court of Appeals affirmed the finding of the trial court based on the report of the Commissioner that the total amount required to repair the PBA building and to restore it to tenantable condition was P900,000.00 inasmuch as it was not initially a total loss. However, while the trial court awarded the PBA said amount as damages, plus unrealized rental income for one-half year, the Court of Appeals modified the amount by awarding in favor of PBA an additional sum of P200,000.00 representing the damage suffered by the PBA building as a result of another earthquake that occurred on April 7, 1970 (L-47896, Vol. I, p. 92).

The PBA in its brief insists that the proper award should be P1,830,000.00 representing the total value of the building (L-47896, PBA's No. 1 Assignment of Error, p. 19), while both the NAKPILS and UNITED question the additional award of P200,000.00 in favor of the PBA (L- 47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The PBA further urges that the unrealized rental income awarded to it should not be limited to a period of one-half year but should be computed on a continuing basis at the rate of P178,671.76 a year until the judgment for the principal amount shall have been satisfied L- 47896, PBA's No. 11 Assignment of Errors, p. 19).

The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial and it is undisputed that the building could then still be repaired and restored to its tenantable

condition. The PBA, however, in view of its lack of needed funding, was unable, thru no fault of its own, to have the building repaired. UNITED, on the other hand, spent P13,661.28 to shore up the building after the August 2, 1968 earthquake (L-47896, CA Decision, p. 46). Because of the earthquake on April 7, 1970, the trial court after the needed consultations, authorized the total demolition of the building (L-47896, Vol. 1, pp. 53-54).

There should be no question that the NAKPILS and UNITED are liable for the damage resulting from the partial and eventual collapse of the PBA building as a result of the earthquakes.

We quote with approval the following from the erudite decision penned by Justice Hugo E. Gutierrez (now an Associate Justice of the Supreme Court) while still an Associate Justice of the Court of Appeals:

There is no question that an earthquake and other forces of nature such as cyclones, drought, floods, lightning, and perils of the sea are acts of God. It does not necessarily follow, however, that specific losses and suffering resulting from the occurrence of these natural force are also acts of God. We are not convinced on the basis of the evidence on record that from the thousands of structures in Manila, God singled out the blameless PBA building in Intramuros and around six or seven other buildings in various parts of the city for collapse or severe damage and that God alone was responsible for the damages and losses thus suffered.

The record is replete with evidence of defects and deficiencies in the designs and plans, defective construction, poor workmanship, deviation from plans and specifications and other imperfections. These deficiencies are attributable to negligent men and not to a perfect God.

The act-of-God arguments of the defendants- appellants and third party defendants-appellants presented in their briefs are premised on legal generalizations or speculations and on theological fatalism both of which ignore the plain facts. The lengthy discussion of United on ordinary earthquakes and unusually strong earthquakes and on ordinary fortuitous events and extraordinary fortuitous events leads to its argument that the August 2, 1968 earthquake was of such an overwhelming and destructive character that by its own force and independent of the particular negligence alleged, the injury would have been produced. If we follow this line of speculative reasoning, we will be forced to conclude that under such a situation scores of buildings in the vicinity and in other parts of Manila would have toppled down. Following the same line of reasoning, Nakpil and Sons alleges that the designs were adequate in accordance with pre-August 2, 1968 knowledge and appear inadequate only in the light of engineering information acquired after the earthquake. If this were so, hundreds of ancient buildings which survived the earthquake better than the two-year old PBA building must have been designed and constructed by architects and contractors whose knowledge and foresight were unexplainably auspicious and prophetic. Fortunately, the facts on record allow a more down to earth explanation of the collapse. The failure of the PBA building, as a unique and distinct construction with no reference or comparison to other buildings, to weather the severe earthquake forces was traced to design deficiencies and defective construction, factors which are neither mysterious nor esoteric. The theological allusion of appellant United that God acts in mysterious ways His wonders to

perform impresses us to be inappropriate. The evidence reveals defects and deficiencies in design and construction. There is no mystery about these acts of negligence. The collapse of the PBA building was no wonder performed by God. It was a result of the imperfections in the work of the architects and the people in the construction company. More relevant to our mind is the lesson from the parable of the wise man in the Sermon on the Mount "which built his house upon a rock; and the rain descended and the floods came and the winds blew and beat upon that house; and it fen not; for it was founded upon a rock" and of the "foolish upon the sand. And the rain descended and man which built his house the floods came, and the winds blew, and beat upon that house; and it fell and great was the fall of it. (St. Matthew 7: 24-27)." The requirement that a building should withstand rains, floods, winds, earthquakes, and natural forces is precisely the reason why we have professional experts like architects, and engineers. Designs and constructions vary under varying circumstances and conditions but the requirement to design and build well does not change.

The findings of the lower Court on the cause of the collapse are more rational and accurate. Instead of laying the blame solely on the motions and forces generated by the earthquake, it also examined the ability of the PBA building, as designed and constructed, to withstand and successfully weather those forces.

The evidence sufficiently supports a conclusion that the negligence and fault of both United and Nakpil and Sons, not a mysterious act of an inscrutable God, were responsible for the

damages. The Report of the Commissioner, Plaintiff's Objections to the Report, Third Party Defendants' Objections to the Report, Defendants' Objections to the Report, Commissioner's Answer to the various Objections, Plaintiffs' Reply to the Commissioner's Answer, Defendants' Reply to the Commissioner's Answer, Counter-Reply to Defendants' Reply, and Third-Party Defendants' Reply to the Commissioner's Report not to mention the exhibits and the testimonies show that the main arguments raised on appeal were already raised during the trial and fully considered by the lower Court. A reiteration of these same arguments on appeal fails to convince us that we should reverse or disturb the lower Court's factual findings and its conclusions drawn from the facts, among them:

The Commissioner also found merit in the allegations of the defendants as to the physical evidence before and after the earthquake showing the inadequacy of design, to wit:

Physical evidence before the earthquake providing (sic) inadequacy of design;

1. inadequate design was the cause of the failure of the building.

2. Sun-baffles on the two sides and in front of the building;

a. Increase the inertia forces that move the building laterally toward the Manila Fire Department.

b. Create another stiffness imbalance.

3. The embedded 4" diameter cast iron down spout on all exterior columns reduces the cross-sectional area of each of the columns and the strength thereof.

4. Two front corners, A7 and D7 columns were very much less reinforced.

Physical Evidence After the Earthquake, Proving Inadequacy of design;

1. Column A7 suffered the severest fracture and maximum sagging. Also D7.

2. There are more damages in the front part of the building than towards the rear, not only in columns but also in slabs.

3. Building leaned and sagged more on the front part of the building.

4. Floors showed maximum sagging on the sides and toward the front corner parts of the building.

5. There was a lateral displacement of the building of about 8", Maximum sagging occurs at the column A7 where the floor is lower by 80 cm. than the highest slab level.

6. Slab at the corner column D7 sagged by 38 cm.

The Commissioner concluded that there were deficiencies or defects in the design, plans and specifications of the PBA building which involved appreciable risks with respect to the accidental forces which may result from earthquake shocks. He conceded, however, that the fact that those

deficiencies or defects may have arisen from an obsolete or not too conservative code or even a code that does not require a design for earthquake forces mitigates in a large measure the responsibility or liability of the architect and engineer designer.

The Third-party defendants, who are the most concerned with this portion of the Commissioner's report, voiced opposition to the same on the grounds that (a) the finding is based on a basic erroneous conception as to the design concept of the building, to wit, that the design is essentially that of a heavy rectangular box on stilts with shear wan at one end; (b) the finding that there were defects and a deficiency in the design of the building would at best be based on an approximation and, therefore, rightly belonged to the realm of speculation, rather than of certainty and could very possibly be outright error; (c) the Commissioner has failed to back up or support his finding with extensive, complex and highly specialized computations and analyzes which he himself emphasizes are necessary in the determination of such a highly technical question; and (d) the Commissioner has analyzed the design of the PBA building not in the light of existing and available earthquake engineering knowledge at the time of the preparation of the design, but in the light of recent and current standards.

The Commissioner answered the said objections alleging that third-party defendants' objections were based on estimates or exhibits not presented during the hearing that the resort to engineering references posterior to the date of the preparation of the plans was induced by the third-

party defendants themselves who submitted computations of the third-party defendants are erroneous.

The issue presently considered is admittedly a technical one of the highest degree. It involves questions not within the ordinary competence of the bench and the bar to resolve by themselves. Counsel for the third-party defendants has aptly remarked that "engineering, although dealing in mathematics, is not an exact science and that the present knowledge as to the nature of earthquakes and the behaviour of forces generated by them still leaves much to be desired; so much so "that the experts of the different parties, who are all engineers, cannot agree on what equation to use, as to what earthquake co-efficients are, on the codes to be used and even as to the type of structure that the PBA building (is) was (p. 29, Memo, of third- party defendants before the Commissioner).

The difficulty expected by the Court if tills technical matter were to be tried and inquired into by the Court itself, coupled with the intrinsic nature of the questions involved therein, constituted the reason for the reference of the said issues to a Commissioner whose qualifications and experience have eminently qualified him for the task, and whose competence had not been questioned by the parties until he submitted his report. Within the pardonable limit of the Court's ability to comprehend the meaning of the Commissioner's report on this issue, and the objections voiced to the same, the Court sees no compelling reasons to disturb the findings of the Commissioner that there were defects and deficiencies in the design, plans and

specifications prepared by third-party defendants, and that said defects and deficiencies involved appreciable risks with respect to the accidental forces which may result from earthquake shocks.

(2) (a) The deviations, if any, made by the defendants from the plans and specifications, and how said deviations contributed to the damage sustained by the building.

(b) The alleged failure of defendants to observe the requisite quality of materials and workmanship in the construction of the building.

These two issues, being interrelated with each other, will be discussed together.

The findings of the Commissioner on these issues were as follows:

We now turn to the construction of the PBA Building and the alleged deficiencies or defects in the construction and violations or deviations from the plans and specifications. All these may be summarized as follows:

a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.

(1) Wrongful and defective placing of reinforcing bars.

(2) Absence of effective and desirable integration of the 3 bars in the cluster.

(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no larger than 1 inch.

(4) Reinforcement assembly is not concentric with the column, eccentricity being 3" off when on one face the main bars are only 1 1/2' from the surface.

(5) Prevalence of honeycombs,

(6) Contraband construction joints,

(7) Absence, or omission, or over spacing of spiral hoops,

(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5, ground floor,

(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground floor,

(10) Undergraduate concrete is evident,

(11) Big cavity in core of Column 2A-4, second floor,

(12) Columns buckled at different planes. Columns buckled worst where there are no spirals or where spirals are cut. Columns suffered worst displacement where the eccentricity of the columnar reinforcement assembly is more acute.

b. Summary of alleged defects as reported by Engr. Antonio Avecilla.

Columns are first (or ground) floor, unless otherwise stated.

(1) Column D4 — Spacing of spiral is changed from 2" to 5" on centers,

(2) Column D5 — No spiral up to a height of 22" from the ground floor,

(3) Column D6 — Spacing of spiral over 4 l/2,

(4) Column D7 — Lack of lateral ties,

(5) Column C7 — Absence of spiral to a height of 20" from the ground level, Spirals are at 2" from the exterior column face and 6" from the inner column face,

(6) Column B6 — Lack of spiral on 2 feet below the floor beams,

(7) Column B5 — Lack of spirals at a distance of 26' below the beam,

(8) Column B7 — Spirals not tied to vertical reinforcing bars, Spirals are uneven 2" to 4",

(9) Column A3 — Lack of lateral ties,

(10) Column A4 — Spirals cut off and welded to two separate clustered vertical bars,

(11) Column A4 — (second floor Column is completely hollow to a height of 30"

(12) Column A5 — Spirals were cut from the floor level to the bottom of the spandrel beam to a height of 6 feet,

(13) Column A6 — No spirals up to a height of 30' above the ground floor level,

(14) Column A7— Lack of lateralties or spirals,

c. Summary of alleged defects as reported by the experts of the Third-Party defendants.

Ground floor columns.

(1) Column A4 — Spirals are cut,

(2) Column A5 — Spirals are cut,

(3) Column A6 — At lower 18" spirals are absent,

(4) Column A7 — Ties are too far apart,

(5) Column B5 — At upper fourth of column spirals are either absent or improperly spliced,

(6) Column B6 — At upper 2 feet spirals are absent,

(7) Column B7 — At upper fourth of column spirals missing or improperly spliced.

(8) Column C7— Spirals are absent at lowest 18"

(9) Column D5 — At lowest 2 feet spirals are absent,

(10) Column D6 — Spirals are too far apart and apparently improperly spliced,

(11) Column D7 — Lateral ties are too far apart, spaced 16" on centers.

There is merit in many of these allegations. The explanations given by the engineering experts for the defendants are either contrary to general principles of engineering design for reinforced concrete or not applicable to the requirements for ductility and strength of reinforced concrete in earthquake-resistant design and construction.

We shall first classify and consider defects which may have appreciable bearing or relation to' the earthquake-resistant property of the building.

As heretofore mentioned, details which insure ductility at or near the connections between columns and girders are desirable in earthquake resistant design and construction. The omission of spirals and ties or hoops at the bottom and/or tops of columns contributed greatly to the loss of earthquake-resistant strength. The plans and specifications required that these spirals and ties be carried from the floor level to the bottom reinforcement of the deeper beam (p. 1, Specifications, p. 970, Reference 11). There were several clear evidences where this was not done especially in some of the ground floor columns which failed.

There were also unmistakable evidences that the spacings of the spirals and ties in the columns were in many cases greater than those called for in the plans and specifications resulting again in loss of earthquake-resistant strength. The assertion of the engineering experts for the defendants that the improper spacings and the cutting of the spirals did not result in loss of

strength in the column cannot be maintained and is certainly contrary to the general principles of column design and construction. And even granting that there be no loss in strength at the yield point (an assumption which is very doubtful) the cutting or improper spacings of spirals will certainly result in the loss of the plastic range or ductility in the column and it is precisely this plastic range or ductility which is desirable and needed for earthquake-resistant strength.

There is no excuse for the cavity or hollow portion in the column A4, second floor, and although this column did not fail, this is certainly an evidence on the part of the contractor of poor construction.

The effect of eccentricities in the columns which were measured at about 2 1/2 inches maximum may be approximated in relation to column loads and column and beam moments. The main effect of eccentricity is to change the beam or girder span. The effect on the measured eccentricity of 2 inches, therefore, is to increase or diminish the column load by a maximum of about 1% and to increase or diminish the column or beam movements by about a maximum of 2%. While these can certainly be absorbed within the factor of safety, they nevertheless diminish said factor of safety.

The cutting of the spirals in column A5, ground floor is the subject of great contention between the parties and deserves special consideration.

The proper placing of the main reinforcements and spirals in column A5, ground floor, is the responsibility of the general contractor which is the UCCI. The burden of proof, therefore, that this

cutting was done by others is upon the defendants. Other than a strong allegation and assertion that it is the plumber or his men who may have done the cutting (and this was flatly denied by the plumber) no conclusive proof was presented. The engineering experts for the defendants asserted that they could have no motivation for cutting the bar because they can simply replace the spirals by wrapping around a new set of spirals. This is not quite correct. There is evidence to show that the pouring of concrete for columns was sometimes done through the beam and girder reinforcements which were already in place as in the case of column A4 second floor. If the reinforcement for the girder and column is to subsequently wrap around the spirals, this would not do for the elasticity of steel would prevent the making of tight column spirals and loose or improper spirals would result. The proper way is to produce correct spirals down from the top of the main column bars, a procedure which can not be done if either the beam or girder reinforcement is already in place. The engineering experts for the defendants strongly assert and apparently believe that the cutting of the spirals did not materially diminish the strength of the column. This belief together with the difficulty of slipping the spirals on the top of the column once the beam reinforcement is in place may be a sufficient motivation for the cutting of the spirals themselves. The defendants, therefore, should be held responsible for the consequences arising from the loss of strength or ductility in column A5 which may have contributed to the damages sustained by the building.

The lack of proper length of splicing of spirals was also proven in the visible spirals of the columns

where spalling of the concrete cover had taken place. This lack of proper splicing contributed in a small measure to the loss of strength.

The effects of all the other proven and visible defects although nor can certainly be accumulated so that they can contribute to an appreciable loss in earthquake-resistant strength. The engineering experts for the defendants submitted an estimate on some of these defects in the amount of a few percent. If accumulated, therefore, including the effect of eccentricity in the column the loss in strength due to these minor defects may run to as much as ten percent.

To recapitulate: the omission or lack of spirals and ties at the bottom and/or at the top of some of the ground floor columns contributed greatly to the collapse of the PBA building since it is at these points where the greater part of the failure occurred. The liability for the cutting of the spirals in column A5, ground floor, in the considered opinion of the Commissioner rests on the shoulders of the defendants and the loss of strength in this column contributed to the damage which occurred.

It is reasonable to conclude, therefore, that the proven defects, deficiencies and violations of the plans and specifications of the PBA building contributed to the damages which resulted during the earthquake of August 2, 1968 and the vice of these defects and deficiencies is that they not only increase but also aggravate the weakness mentioned in the design of the structure. In other words, these defects and deficiencies not only tend to add but also to multiply the effects of the shortcomings in the design of the building. We

may say, therefore, that the defects and deficiencies in the construction contributed greatly to the damage which occurred.

Since the execution and supervision of the construction work in the hands of the contractor is direct and positive, the presence of existence of all the major defects and deficiencies noted and proven manifests an element of negligence which may amount to imprudence in the construction work. (pp. 42-49, Commissioners Report).

As the parties most directly concerned with this portion of the Commissioner's report, the defendants voiced their objections to the same on the grounds that the Commissioner should have specified the defects found by him to be "meritorious"; that the Commissioner failed to indicate the number of cases where the spirals and ties were not carried from the floor level to the bottom reinforcement of the deeper beam, or where the spacing of the spirals and ties in the columns were greater than that called for in the specifications; that the hollow in column A4, second floor, the eccentricities in the columns, the lack of proper length of splicing of spirals, and the cut in the spirals in column A5, ground floor, did not aggravate or contribute to the damage suffered by the building; that the defects in the construction were within the tolerable margin of safety; and that the cutting of the spirals in column A5, ground floor, was done by the plumber or his men, and not by the defendants.

Answering the said objections, the Commissioner stated that, since many of the defects were minor only the totality of the defects was considered. As regards the objection as to failure to state the number of cases where the spirals and ties were not carried from the floor level to the bottom reinforcement, the Commissioner specified groundfloor columns B-6 and C-5 the first one without spirals for 03 inches at the top, and in the latter, there were no spirals for 10 inches at the bottom. The Commissioner likewise specified the first storey columns where

the spacings were greater than that called for in the specifications to be columns B-5, B-6, C-7, C-6, C-5, D-5 and B-7. The objection to the failure of the Commissioner to specify the number of columns where there was lack of proper length of splicing of spirals, the Commissioner mentioned groundfloor columns B-6 and B-5 where all the splices were less than 1-1/2 turns and were not welded, resulting in some loss of strength which could be critical near the ends of the columns. He answered the supposition of the defendants that the spirals and the ties must have been looted, by calling attention to the fact that the missing spirals and ties were only in two out of the 25 columns, which rendered said supposition to be improbable.

The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate or contribute to the damage, but averred that it is "evidence of poor construction." On the claim that the eccentricity could be absorbed within the factor of safety, the Commissioner answered that, while the same may be true, it also contributed to or aggravated the damage suffered by the building.

The objection regarding the cutting of the spirals in Column A-5, groundfloor, was answered by the Commissioner by reiterating the observation in his report that irrespective of who did the cutting of the spirals, the defendants should be held liable for the same as the general contractor of the building. The Commissioner further stated that the loss of strength of the cut spirals and inelastic deflections of the supposed lattice work defeated the purpose of the spiral containment in the column and resulted in the loss of strength, as evidenced by the actual failure of this column.

Again, the Court concurs in the findings of the Commissioner on these issues and fails to find any sufficient cause to disregard or modify the same. As found by the Commissioner, the "deviations made by the defendants from the plans and specifications caused indirectly the damage sustained and that those deviations not only added but also aggravated the damage caused by the

defects in the plans and specifications prepared by third-party defendants. (Rollo, Vol. I, pp. 128-142)

The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and the third-party defendants in effecting the plans, designs, specifications, and construction of the PBA building and We hold such negligence as equivalent to bad faith in the performance of their respective tasks.

Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380) which may be in point in this case reads:

One who negligently creates a dangerous condition cannot escape liability for the natural and probable consequences thereof, although the act of a third person, or an act of God for which he is not responsible, intervenes to precipitate the loss.

As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of ancient buildings in the vicinity were hardly affected by the earthquake. Only one thing spells out the fatal difference; gross negligence and evident bad faith, without which the damage would not have occurred.

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental circumstances of this case, We deem it reasonable to render a decision imposing, as We do hereby impose, upon the defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception of attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum

shall be imposed upon afore-mentioned amounts from finality until paid. Solidary costs against the defendant and third-party defendants (except Roman Ozaeta).

SO ORDERED.

G.R. No. L-21749             September 29, 1967

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs.LUZON STEVEDORING CORPORATION, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.H. San Luis and L.V. Simbulan for defendant-appellant.

 

 

REYES, J.B.L., J.:

The present case comes by direct appeal from a decision of the Court of First Instance of Manila (Case No. 44572) adjudging the defendant-appellant, Luzon Stevedoring Corporation, liable in damages to the plaintiff-appellee Republic of the Philippines.

In the early afternoon of August 17, 1960, barge L-1892, owned by the Luzon Stevedoring Corporation was being towed down the Pasig river by tugboats "Bangus" and "Barbero"1 also belonging to the same corporation, when the barge rammed against one of the wooden piles of the Nagtahan bailey bridge, smashing the posts and causing the bridge to list. The river, at the time, was swollen and the current swift, on account of the heavy downpour of Manila and the surrounding provinces on August 15 and 16, 1960.

Sued by the Republic of the Philippines for actual and consequential damage caused by its employees, amounting to P200,000 (Civil Case No. 44562, CFI of Manila), defendant Luzon Stevedoring Corporation disclaimed liability therefor, on the grounds that it had exercised due diligence in the selection and supervision of its employees; that the damages to the bridge were caused by force majeure; that plaintiff has no capacity to sue; and that the Nagtahan bailey bridge is an obstruction to navigation.

After due trial, the court rendered judgment on June 11, 1963, holding the defendant liable for the damage caused by its employees and ordering it to pay to plaintiff the actual cost of the repair of the Nagtahan bailey bridge which amounted to P192,561.72, with legal interest thereon from the date of the filing of the complaint.

Defendant appealed directly to this Court assigning the following errors allegedly committed by the court a quo, to wit:

I — The lower court erred in not holding that the herein defendant-appellant had exercised the diligence required of it in the selection and supervision of its personnel to prevent damage or injury to others.1awphîl.nèt

II — The lower court erred in not holding that the ramming of the Nagtahan bailey bridge by barge L-1892 was caused by force majeure.

III — The lower court erred in not holding that the Nagtahan bailey bridge is an obstruction, if not a menace, to navigation in the Pasig river.

IV — The lower court erred in not blaming the damage sustained by the Nagtahan bailey bridge to the improper placement of the dolphins.

V — The lower court erred in granting plaintiff's motion to adduce further evidence in chief after it has rested its case.

VI — The lower court erred in finding the plaintiff entitled to the amount of P192,561.72 for damages which is clearly exorbitant and without any factual basis.

However, it must be recalled that the established rule in this jurisdiction is that when a party appeals directly to the Supreme Court, and submits his case there for decision, he is deemed to have waived the right to dispute any finding of fact made by the trial Court. The only questions that may be raised are those of law (Savellano vs. Diaz, L-17441, July 31, 1963; Aballe vs. Santiago, L-16307, April 30, 1963; G.S.I.S. vs. Cloribel, L-22236, June 22, 1965). A converso, a party who resorts to the Court of Appeals, and submits his case for decision there, is barred from contending later that his claim was beyond the jurisdiction of the aforesaid Court. The reason is that a contrary rule would encourage the undesirable practice of appellants' submitting their cases for decision to either court in expectation of favorable judgment, but with intent of attacking its jurisdiction should the decision be unfavorable (Tyson Tan, et al. vs. Filipinas Compañia de Seguros) et al., L-10096, Res. on Motion to Reconsider, March 23, 1966). Consequently, we are limited in this appeal to the issues of law raised in the appellant's brief.

Taking the aforesaid rules into account, it can be seen that the only reviewable issues in this appeal are reduced to two:

1) Whether or not the collision of appellant's barge with the supports or piers of the Nagtahan bridge was in law caused by fortuitous event or force majeure, and

2) Whether or not it was error for the Court to have permitted the plaintiff-appellee to introduce additional evidence of damages after said party had rested its case.

As to the first question, considering that the Nagtahan bridge was an immovable and stationary object and uncontrovertedly provided with adequate openings for the passage of water craft, including barges like of appellant's, it is undeniable that the unusual event that the barge, exclusively controlled by appellant, rammed the bridge supports raises a presumption of negligence on the part of appellant or its employees manning the barge or the tugs that towed it. For in the ordinary course of events, such a thing does not happen if proper care is used. In Anglo American Jurisprudence, the inference arises by what is known as the "res ipsa loquitur" rule (Scott vs. London Docks Co., 2 H & C 596; San Juan Light & Transit Co. vs. Requena, 224 U.S. 89, 56 L. Ed., 680; Whitwell vs. Wolf, 127 Minn. 529, 149 N.W. 299; Bryne vs. Great Atlantic & Pacific Tea Co., 269 Mass. 130; 168 N.E. 540; Gribsby vs. Smith, 146 S.W. 2d 719).

The appellant strongly stresses the precautions taken by it on the day in question: that it assigned two of its most powerful tugboats to tow down river its barge L-1892; that it assigned to the task the more competent and experienced among its patrons, had the towlines, engines and equipment double-checked and inspected; that it instructed its patrons to take extra precautions; and concludes that it had done all it was called to do, and that the accident, therefore, should be held due to force majeure or fortuitous event.

These very precautions, however, completely destroy the appellant's defense. For caso fortuito or force majeure(which in law are identical in so far as they exempt an obligor from liability)2 by definition, are extraordinary events not foreseeable or avoidable, "events that could not be foreseen, or which, though foreseen, were inevitable" (Art. 1174, Civ. Code of the Philippines). It is, therefore, not enough that the event should not

have been foreseen or anticipated, as is commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility to foresee the same: "un hecho no constituye caso fortuito por la sola circunstancia de que su existencia haga mas dificil o mas onerosa la accion diligente del presento ofensor" (Peirano Facio, Responsibilidad Extra-contractual, p. 465; Mazeaud Trait de la Responsibilite Civil, Vol. 2, sec. 1569). The very measures adopted by appellant prove that the possibility of danger was not only foreseeable, but actually foreseen, and was not caso fortuito.

Otherwise stated, the appellant, Luzon Stevedoring Corporation, knowing and appreciating the perils posed by the swollen stream and its swift current, voluntarily entered into a situation involving obvious danger; it therefore assured the risk, and can not shed responsibility merely because the precautions it adopted turned out to be insufficient. Hence, the lower Court committed no error in holding it negligent in not suspending operations and in holding it liable for the damages caused.

It avails the appellant naught to argue that the dolphins, like the bridge, were improperly located. Even if true, these circumstances would merely emphasize the need of even higher degree of care on appellant's part in the situation involved in the present case. The appellant, whose barges and tugs travel up and down the river everyday, could not safely ignore the danger posed by these allegedly improper constructions that had been erected, and in place, for years.

On the second point: appellant charges the lower court with having abused its discretion in the admission of plaintiff's additional evidence after the latter had rested its case. There is

an insinuation that the delay was deliberate to enable the manipulation of evidence to prejudice defendant-appellant.

We find no merit in the contention. Whether or not further evidence will be allowed after a party offering the evidence has rested his case, lies within the sound discretion of the trial Judge, and this discretion will not be reviewed except in clear case of abuse.3

In the present case, no abuse of that discretion is shown. What was allowed to be introduced, after plaintiff had rested its evidence in chief, were vouchers and papers to support an item of P1,558.00 allegedly spent for the reinforcement of the panel of the bailey bridge, and which item already appeared in Exhibit GG. Appellant, in fact, has no reason to charge the trial court of being unfair, because it was also able to secure, upon written motion, a similar order dated November 24, 1962, allowing reception of additional evidence for the said defendant-appellant.4

WHEREFORE, finding no error in the decision of the lower Court appealed from, the same is hereby affirmed. Costs against the defendant-appellant.

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner, vs.HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents. 

VITUG, J.:

The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker; (b) whether the payment of legal interest on an award for loss or damage is to be computed from the time the complaint is filed or from the date the decision appealed from is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent (12%) or six percent (6%).

The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts that have led to the controversy are hereunder reproduced:

This is an action against defendants shipping company, arrastre operator and broker-forwarder for damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who paid the consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of Lading 

No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No. 81/01177 for P36,382,466.38.

Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which damage was unknown to plaintiff.

On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey." Exh. D).

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).

Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).

As a consequence of the losses sustained, plaintiff was compelled to pay the consignee

P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee against defendants (per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O). (pp. 85-86, Rollo.)

There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:

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

From the evidence the court found the following:

The issues are:

1. Whether or not the shipment sustained losses/damages;

2. Whether or not these losses/damages were sustained while in the custody of defendants (in whose respective custody, if determinable);

3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's pre-Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).

As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two drums were shipped in good order and condition, as clearly shown by the Bill of Lading and Commercial Invoice which do not indicate any damages drum that was shipped (Exhs. B and C). But when on December 12, 1981 the shipment was delivered to defendant Metro Port Service, Inc., it excepted to one drum in bad order.

Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in the respective and/or successive custody and possession of defendants carrier (Eastern), arrastre operator (Metro Port) and broker (Allied Brokerage). This becomes evident when the Marine Cargo Survey Report (Exh. G), with its "Additional Survey Notes", are considered. In the latter notes, it is stated that when the shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila on December 12, 1981, it was observed that "one (1) fiber drum (was) in damaged condition, covered by the vessel's Agent's Bad Order Tally Sheet No. 86427." The report further states that when defendant Allied Brokerage withdrew the shipment from defendant arrastre operator's custody on January 7, 1982, one drum was found opened without seal, cello bag partly torn but contents intact. Net unrecovered spillages was 15 kgs. The report went on to state that when the drums reached the consignee, one drum was

found with adulterated/faked contents. It is obvious, therefore, that these losses/damages occurred before the shipment reached the consignee while under the successive custodies of defendants. Under Art. 1737 of the New Civil Code, the common carrier's duty to observe extraordinary diligence in the vigilance of goods remains in full force and effect even if the goods are temporarily unloaded and stored in transit in the warehouse of the carrier at the place of destination, until the consignee has been advised and has had reasonable opportunity to remove or dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad Order Cargoes" (Exhs. 3-Eastern) states that on December 12, 1981 one drum was found "open".

and thus held:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

A. Ordering defendants to pay plaintiff, jointly and severally:

1. The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982, the date of filing of this complaints, until fully paid (the liability of defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss, whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall be to the extent of the actual invoice value of each package, crate box or container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract);

2. P3,000.00 as attorney's fees, and

3. Costs.

B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage Corporation.

SO ORDERED. (p. 207, Record).

Dissatisfied, defendant's recourse to US.

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is correct. As there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 87-89, Rollo.)

The Court of Appeals thus affirmed in toto the judgment of the court a quo.

In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of discretion on the part of the appellate court when —

I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;

II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD COMMENCE FROM THE DATE OF

THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.

The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack to.

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articles are surrendered to or unconditionally placed in the possession of, and received by, the carrier for transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when such presumption of fault is not observed but these cases, enumerated in Article 1734 1 of the Civil Code, are exclusive, not one of which can be applied to this case.

The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and the arrastre operator liable in solidum,thus:

The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between the consignee and the common carrier is similar to that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and to deliver them in good condition to the consignee, such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in good condition to the consignee.

We do not, of course, imply by the above pronouncement that the arrastre operator and the customs broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that attendant facts in a given case may not vary the rule. The instant petition has been brought solely by Eastern Shipping Lines, which, being the carrier and not having been able to rebut the presumption of fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a quo and the appellate court, we take note, is that "there is sufficient evidence that the shipment sustained damage while in the successive

possession of appellants" (the herein petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is inevitable regardless of whether there are others solidarily liable with it.

It is over the issue of legal interest adjudged by the appellate court that deserves more than just a passing remark.

Let us first see a chronological recitation of the major rulings of this Court:

The early case of Malayan Insurance Co., Inc., vs. Manila Port Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint that the total amount of its claim for the value of the undelivered goods amounted to P3,947.20. This demand, however, was neither established in its totality nor definitely ascertained. In the stipulation of facts later entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the complaint was filed on 28 December 1962 until full payment thereof. The appellants then assailed,inter alia, the award of legal interest. In sustaining the appellants, this Court ruled:

Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial.

The trial court opted for judicial demand as the starting point.

But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty." And as was held by this Court in Rivera vs. Perez, 4 L-6998, February 29, 1956, if the suit were for damages, "unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman, 38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)

The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of Damages for Injury to Person and Loss of Property." After trial, the lower court decreed:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants and against the defendants and third party plaintiffs as follows:

Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and severally the following persons:

xxx xxx xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the value of the boat F B Pacita III together with its accessories, fishing gear and equipment minus P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a month as the estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time they are actually paid or already the total sum of P370,000.00 as of June 4, 1972 with legal interest from the filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs against defendants and third party plaintiffs. (Emphasis supplied.)

On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained the trial court in adjudging legal interest from the filing of the complaint until fully paid. When the appellate court's decision became final, the case was remanded to the lower court for execution, and this was when the trial court issued its assailed resolution which applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their petition for review on certiorari, the petitioners contended that Central Bank Circular No. 416, providing thus —

By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in judgments, in the

absence of express contract as to such rate of interest, shall be twelve (12%) percent per annum. This Circular shall take effect immediately. (Emphasis found in the text) —

should have, instead, been applied. This Court 6 ruled:

The judgments spoken of and referred to are judgments in litigations involving loans or forbearance of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with, nor involving loans or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not within the ambit of the authority granted to the Central Bank.

xxx xxx xxx

Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for Damages for injury to persons and loss of property and does not involve any loan, much less forbearances of any money, goods or credits. As correctly argued by the private respondents, the law applicable to the said case is Article 2209 of the New Civil Code which reads —

Art. 2209. — If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the

contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which is six percent per annum.

The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July 1986. The case was for damages occasioned by an injury to person and loss of property. The trial court awarded private respondent Pedro Manabat actual and compensatory damages in the amount of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on the Reformina v. Tomol case, this Court 8 modified the interest award from 12% to 6% interest per annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully paid.

In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages arising from the collapse of a building, ordered, inter alia, the "defendant United Construction Co., Inc. (one of the petitioners) . . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date of the filing of the complaint until full payment . . . ." Save from the modification of the amount granted by the lower court, the Court of Appeals sustained the trial court's decision. When taken to this Court for review, the case, on 03 October 1986, was decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental circumstances of this case, we deem it reasonable to render a decision imposing,

as We do hereby impose, upon the defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra. p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception to attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum shall be imposed upon aforementioned amounts from finality until paid. Solidary costs against the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis supplied)

A motion for reconsideration was filed by United Construction, contending that "the interest of twelve (12%) per cent per annum imposed on the total amount of the monetary award was in contravention of law." The Court 10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained:

There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit; and (3) rate allowed in judgments (judgments spoken

of refer to judgments involving loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is neither a loan or a forbearance, but then no interest is actually imposed provided the sums referred to in the judgment are paid upon the finality of the judgment. It is delay in the payment of such final judgment, that will cause the imposition of the interest.

It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum, from the filing of the complaint until paid; in other words, as part of the judgment for damages. Clearly, they are not applicable to the instant case. (Emphasis supplied.)

The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court 11 was a petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the right of the private respondent to recover damages, held the award, however, for moral damages by the trial court, later sustained by the IAC, to be inconceivably large. The Court 12 thus

set aside the decision of the appellate court and rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied)

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from a breach of employment contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral and exemplary damages without, however, providing any legal interest thereon. When the decision was appealed to the Court of Appeals, the latter held:

WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except defendant-appellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in the dispositive portion of the decision, including the sum of P1,400.00 in concept of compensatory damages, with interest at the legal rate from the date of the filing of the complaint until fully paid(Emphasis supplied.)

The petition for review to this Court was denied. The records were thereupon transmitted to the trial court, and an entry of judgment was made. The writ of execution issued by the trial court directed that only compensatory damages should earn interest at 6% per annum from the date of the filing of the complaint. Ascribing grave abuse

of discretion on the part of the trial judge, a petition for certiorari assailed the said order. This Court said:

. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate"from the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416] does not apply to actions based on a breach of employment contract like the case at bar. (Emphasis supplied)

The Court reiterated that the 6% interest per annum on the damages should be computed from the time the complaint was filed until the amount is fully paid.

Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs. Angas, 14decided on 08 May 1992, involved the expropriation of certain parcels of land. After conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to pay the private respondents certain sums of money as just compensation for their lands so expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest per annum under the Civil Code, the Court 15 declared:

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but expropriation of certain parcels of land for a public purpose, the payment of which is without stipulation regarding interest, and the interest adjudged by the trial court is in the nature of indemnity for damages. The legal interest required to be paid on the amount of just

compensation for the properties expropriated is manifestly in the form of indemnity for damages for the delay in the payment thereof. Therefore, since the kind of interest involved in the joint judgment of the lower court sought to be enforced in this case is interest by way of damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil Code shall apply.

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

In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases that there has been a consistent holding that the Central Bank Circular imposing the 12% interest per annum applies only to loans or forbearance 16 of money, goods or credits, as well as to judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general. Observe, too, that in these

cases, a common time frame in the computation of the 6% interest per annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.

The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per annum, 17depending on whether or not the amount involved is a loan or forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group" which remained consistent in holding that the running of the legal interest should be from the time of the filing of the complaint until fully paid, the "second group" varied on the commencement of the running of the legal interest.

Malayan held that the amount awarded should bear legal interest from the date of the decision of the court a quo,explaining that "if the suit were for damages, 'unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the date of the decision.'" American Express International v. IAC, introduced a different time frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision until paid." The Nakpil and Sons case ruled that 12% interest per annum should be imposed from the finality of the decision until the judgment amount is paid.

The ostensible discord is not difficult to explain. The factual circumstances may have called for different applications, guided by the rule that the courts are vested with discretion, depending on the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest the following rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 20

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. 22 In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 23 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court 24 at the rate of 6% per annum. 25 No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. 26 Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to

have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment thereof.

SO ORDERED.

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner, vs.

THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

 

KAPUNAN, J.:p

On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses Ponciano L. Almeda and Eufemia P. Almeda several loan/credit accommodations totaling P18.0 Million pesos payable in a period of six years at an interest rate of 21% per annum. To secure the loan, the spouses Almeda executed a Real Estate Mortgage Contract covering a 3,500 square meter parcel of land, together with the building erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati, Metro Manila. A credit agreement embodying the terms and conditions of the loan was executed between the parties. Pertinent portions of the said agreement are quoted below:

SPECIAL CONDITIONS

xxx xxx xxx

The loan shall be subject to interest at the rate of twenty one per cent (21%) per annum, payable semi-annually in arrears, the first interest payment to become due and payable six (6) months from date of initial release of the loan. The loan shall likewise be subject to the appropriate service charge and a penalty charge of three per cent (30%) per annum to be imposed on any amount remaining unpaid or not rendered when due.

xxx xxx xxx

III. OTHER CONDITIONS

(c) Interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate. 1

Between 1981 and 1984, petitioners made several partial payments on the loan totaling. P7,735,004.66, 2 a substantial portion of which was applied to accrued interest. 3 On March 31, 1984, respondent bank, over petitioners' protestations, raised the interest rate to 28%, allegedly pursuant to Section III-c (1) of its credit agreement. Said interest rate thereupon increased from an initial 21% to a high of 68% between March of 1984 to September, 1986. 4

Petitioner protested the increase in interest rates, to no avail. Before the loan was to mature in March, 1988, the spouses filed on February 6, 1988 a petition for declaratory relief with prayer for a writ of preliminary injunction and temporary restraining order with the Regional Trial Court of Makati, docketed as Civil Case No. 18872. In said petition, which was raffled to Branch 134 presided by Judge Ignacio Capulong, the spouses sought clarification as to whether or not the PNB could unilaterally raise interest rates on the loan, pursuant to the credit agreement's escalation clause, and in relation to Central Bank Circular No.

905. As a preliminary measure, the lower court, on March 3, 1988, issued a writ of preliminary injunction enjoining the Philippine National Bank from enforcing an interest rate above the 21% stipulated in the credit agreement. By this time the spouses were already in default of their loan obligations.

Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB countered by ordering the extrajudicial foreclosure of petitioner's mortgaged properties and scheduled an auction sale for March 14, 1989. Upon motion by petitioners, however, the lower court, on April 5, 1989, granted a supplemental writ of preliminary injunction, staying the public auction of the mortgaged property.

On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court dissolved the supplemental writ of preliminary injunction. Petitioners filed a motion for reconsideration. In the interim, respondent bank once more set a new date for the foreclosure sale of Marvin Plaza which was March 12, 1990. Prior to the scheduled date, however, petitioners tendered to respondent bank the amount of P40,142,518.00, consisting of the principal (P18,000,000.00) and accrued interest calculated at the originally stipulated rate of 21%. The PNB refused to accept the payment. 5

As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990, formally consigned the amount of P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-663. They prayed therein for a writ of preliminary injunction with a temporary restraining order. The case was raffled to Branch 147, presided by Judge Teofilo Guadiz. On March 15, 1990, respondent bank sought the dismissal of the case.

On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the writ of preliminary injunction enjoining the foreclosure sale of "Marvin Plaza" scheduled on March 12, 1990. On April 17, 1990 respondent bank filed a motion for reconsideration of the said order.

On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by Judge Eriberto Rosario who issued an order consolidating said case with Civil Case 18871 presided by Judge Ignacio Capulong.

For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30, 1990, respondent bank filed a petition for Certiorari, Prohibition and Mandamus with respondent Court of Appeals, assailing the following orders of the Regional Trial Court:

1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary injunction restraining the foreclosure sale of Mavin Plaza set on March 12, 1990;

2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent bank's motion to lift the writ of injunction issued by Judge Guadiz as well as its motion to dismiss Civil Case No. 90-663;

3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's subsequent motion to lift the writ of preliminary injunction; and

4. Order of Judge Capulong dated October 20, 1992 denying respondent bank's motion for reconsideration.

On August 27, 1993, respondent court rendered its decision setting aside the assailed orders and upholding respondent bank's right to foreclose the mortgaged property pursuant to Act 3135, as amended and P.D. 385. Petitioners' Motion for Reconsideration and Supplemental Motion for Reconsideration, dated September 15, 1993 and October 28, 1993, respectively,

were denied by respondent court in its resolution dated January 10, 1994.

Hence the instant petition.

This appeal by certiorari from the respondent court's decision dated August 27, 1993 raises two principal issues namely: 1) Whether or not respondent bank was authorized to raise its interest rates from 21% to as high as 68% under the credit agreement; and 2) Whether or not respondent bank is granted the authority to foreclose the Marvin Plaza under the mandatory foreclosure provisions of P.D. 385.

In its comment dated April 19, 1994, respondent bank vigorously denied that the increases in the interest rates were illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of interest it imposed was based on the agreement of the parties. Respondent bank further contends that it had a right to foreclose the mortgaged property pursuant to P.D. 385, after petitioners were unable to pay their loan obligations to the bank based on the increased rates upon maturity in 1984.

The instant petition is impressed with merit.

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. 6 Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the

loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall be due unless it has been expressly stipulated in writing." What has been "stipulated in writing" from a perusal of interest rate provision of the credit agreement signed between the parties is that petitioners were bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily resolved by a careful reading of the credit agreement because the same plainly uses the phrase "interest rate agreed upon," in reference to the original 21% interest rate. The interest provision states:

(c) interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate.

In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent bank from unilaterally raising the interest rate in the borrower's loan from 18% to 32%, 41% and 48% partly because the aforestated increases violated the

principle of mutuality of contracts expressed in Article 1308 of the Civil Code. The Court held:

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates —

. . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law.

but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116 which limits such changes to once every twelve months.

Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private respondent's loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

Art. 308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan

agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or lease it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.

PNB's successive increases of the interest rate on the private respondent's loan, over the latter's protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may be amended only by an instrument in writing signed by the party to be bound as burdened by such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that "no interest shall be due unless it has been expressly stipulated in writing."

The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24%per annum, hence, he is not bound to pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as found by the Court of Appeals, is indisputable.

Clearly, the galloping increases in interest rate imposed by respondent bank on petitioners' loan, over the latter's vehement protests, were arbitrary.

Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not authorize the bank, or any lending institution for that matter, to progressively increase interest rates on borrowings to an extent which would have made it virtually impossible for debtors to comply with their own obligations. True, escalation clauses in credit agreements are perfectly valid and do not contravene public policy. Such clauses, however, (as are stipulations in other contracts) are nonetheless still subject to laws and provisions governing agreements between parties, which agreements — while they may be the law between the contracting parties — implicitly incorporate provisions of existing law. Consequently, while the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could possibly be read as granting respondent bank carte blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets. Borrowing represents a transfusion of capital from lending institutions to industries and businesses in order to stimulate growth. This would not, obviously, be the effect of PNB's unilateral and lopsided policy regarding the interest rates of petitioners' borrowings in the instant case.

Apart from violating the principle of mutuality of contracts, there is authority for disallowing the interest rates imposed by respondent bank, for the credit agreement specifically requires that the increase be "within the limits allowed by law". In the case of PNB v. Court of Appeals, cited above, this Court clearly emphasized that C.B. Circular No. 905 could not be properly invoked to justify the escalation clauses of such contracts, not being a grant of specific authority.

Furthermore, the escalation clause of the credit agreement requires that the same be made "within the limits allowed by law," obviously referring specifically to legislative enactments not

administrative circulars. Note that the phrase "limits imposed by law," refers only to the escalation clause. However, the same agreement allows reduction on the basis of law or the Monetary Board. Had the parties intended the word "law" to refer to both legislative enactments and administrative circulars and issuances, the agreement would not have gone as far as making a distinction between "law or the Monetary Board Circulars" in referring to mutually agreed upon reductions in interest rates. This distinction was the subject of the Court's disquisition in the case of Banco Filipino Savings and Mortgage Bank v. Navarro 8 where the Court held that:

What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion that it may not.

The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase.

the interest rate stipulated in this contract without advance notice to me/us in the event.

a law

increasing

the lawful rates of interest that may be charged

on this particular

kind of loan. (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." The Escalation Clause was dependent on an increase of rate made by "law" alone.

CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law." (Emphasis supplied). "An administrative regulation adopted pursuant to law has the force and effect of law." "That administrative rules and regulations have the force of law can no longer be questioned."

The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the latter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law."

The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable

maximum rate of interest is increased "by law or by the Monetary Board." To quote:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest

is increased by law or by the Monetary Board:

Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board;

Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.' (Paragraphing and emphasis supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of

the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board."

Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in contravention to the tenor of their credit agreement. That an increase in interest rates from 18% to as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to virtually half of the entire principal (P7,735,004.66) which was applied to interest alone. By the time the spouses tendered the amount of P40,142,518.00 in settlement of their obligations; respondent bank was demanding P58,377,487.00 over and above those amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid grounds. 9 Here, as clearly demonstrated above, not only the increases of the interest rates on the basis of the escalation clause patently unreasonable and unconscionable, but also there are no valid and reasonable standards upon which the increases are anchored.

We go now to respondent bank's claim that the principal issue in the case at bench involves its right to foreclose petitioners' properties under P.D. 385. We find respondent's pretense untenable.

Presidential Decree No. 385 was issued principally to guarantee that government financial institutions would not be denied substantial cash inflows necessary to finance the government's development projects all over the country by large borrowers who resort to litigation to prevent or delay the government's collection of their debts or loans. 10 In facilitating collection of debts through its automatic foreclosure provisions, the government is however, not exempted from observing basic principles of law, and ordinary

fairness and decency under the due process clause of the Constitution. 11

In the first place, because of the dispute regarding the interest rate increases, an issue which was never settled on merit in the courts below, the exact amount of petitioner's obligations could not be determined. Thus, the foreclosure provisions of P.D. 385 could be validly invoked by respondent only after settlement of the question involving the interest rate on the loan, and only after the spouses refused to meet their obligations following such determination. In Filipinas Marble Corporation v. Intermediate Appellate Court, 12 involving P.D. 385's provisions on mandatory foreclosure, we held that:

We cannot, at this point, conclude that respondent DBP together with the Bancom people actually misappropriated and misspent the $5 million loan in whole or in part although the trial court found that there is "persuasive" evidence that such acts were committed by the respondent. This matter should rightfully be litigated below in the main action. Pending the outcome of such litigation, P.D. 385 cannot automatically be applied for if it is really proven that respondent DBP is responsible for the misappropriation of the loan, even if only in part, then the foreclosure of the petitioner's properties under the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It would unduly prejudice the petitioner, its employees and their families.

Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or not, for the benefit of the petitioner be determined. Consequently, the extent of the loan where there was no failure of consideration and which may be properly satisfied by foreclosure

proceedings under P.D. 385 will have to await the presentation of evidence in a trial on the merits.

In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in Filipinas Marble Corporation, held:

The enforcement of P.D. 385 will sweep under the rug' this iceberg of a scandal in the sugar industry during the Marcos Martial Law years. This we can not allow to happen. For the benefit of future generations, all the dirty linen in the PHILSUCUCOM/NASUTRA/RPB closets have to be exposed in public so that the same may NEVER be repeated.

It is of paramount national interest, that we allow the trial court to proceed with dispatch to allow the parties below to present their evidence.

Furthermore, petitioners made a valid consignation of what they, in good faith and in compliance with the letter of the Credit Agreement, honestly believed to be the real amount of their remaining obligations with the respondent bank. The latter could not therefore claim that there was no honest-to-goodness attempt on the part of the spouse to settle their obligations. Respondent's rush to inequitably invoke the foreclosure provisions of P.D. 385 through its legal machinations in the courts below, in spite of the unsettled differences in interpretation of the credit agreement was obviously made in bad faith, to gain the upper hand over petitioners.

In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the parties to agree to changes in the interest rate in writing, we hold that the unilateral and progressive increases imposed by respondent PNB were null and void. Their effect was to increase the total obligation on an eighteen million peso loan to an amount way over three times that

which was originally granted to the borrowers. That these increases, occasioned by crafty manipulations in the interest rates is unconscionable and neutralizes the salutary policies of extending loans to spur business cannot be disputed.

WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August 27, 1993, as well as the resolution dated February 10, 1994 is hereby REVERSED AND SET ASIDE. The case is remanded to the Regional Trial Court of Makati for further proceedings.

SO ORDERED.

FERNANDO A. GAITE, plaintiff-appellee, vs.ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING CO., INC., SEGUNDINA VIVAS, FRNACISCO DANTE, PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.

Alejo Mabanag for plaintiff-appellee.Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-appellants.

REYES, J.B.L., J.:

This appeal comes to us directly from the Court of First Instance because the claims involved aggregate more than P200,000.00.

Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a representative capacity, of 11 iron lode mineral claims, known as the Dawahan Group, situated in the municipality of Jose Panganiban, province of Camarines Norte.

By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier constituted and appointed plaintiff-appellee Fernando A. Gaite as his true and lawful attorney-in-fact to enter into a contract with any individual or juridical person for the exploration and development of the mining claims aforementioned on a royalty basis of not less than P0.50 per ton of ore that might be extracted therefrom. On March 19, 1954, Gaite in turn executed a general assignment (Record on Appeal, pp. 17-19) conveying the development and exploitation of said mining claims into the Larap Iron Mines, a single proprietorship owned solely by and belonging to him, on the same royalty basis

provided for in Exhibit "3". Thereafter, Gaite embarked upon the development and exploitation of the mining claims in question, opening and paving roads within and outside their boundaries, making other improvements and installing facilities therein for use in the development of the mines, and in time extracted therefrom what he claim and estimated to be approximately 24,000 metric tons of iron ore.

For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to Gaite to exploit and develop the mining claims in question, and Gaite assented thereto subject to certain conditions. As a result, a document entitled "Revocation of Power of Attorney and Contract" was executed on December 8, 1954 (Exhibit "A"),wherein Gaite transferred to Fonacier, for the consideration of P20,000.00, plus 10% of the royalties that Fonacier would receive from the mining claims, all his rights and interests on all the roads, improvements, and facilities in or outside said claims, the right to use the business name "Larap Iron Mines" and its goodwill, and all the records and documents relative to the mines. In the same document, Gaite transferred to Fonacier all his rights and interests over the "24,000 tons of iron ore, more or less" that the former had already extracted from the mineral claims, in consideration of the sum of P75,000.00, P10,000.00 of which was paid upon the signing of the agreement, and

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from and out of the first letter of credit covering the first shipment of iron ores and of the first amount derived from the local sale of iron ore made by the Larap Mines & Smelting Co. Inc., its assigns, administrators, or successors in interests.

To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor of Gaite a surety bond, and pursuant to the promise, Fonacier delivered to Gaite a surety bond dated December 8, 1954 with himself (Fonacier) as principal and the Larap Mines and Smelting Co. and its stockholders George Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, however, that when this bond was presented to him by Fonacier together with the "Revocation of Power of Attorney and Contract", Exhibit "A", on December 8, 1954, he refused to sign said Exhibit "A" unless another bond under written by a bonding company was put up by defendants to secure the payment of the P65,000.00 balance of their price of the iron ore in the stockpiles in the mining claims. Hence, a second bond, also dated December 8, 1954 (Exhibit "B"),was executed by the same parties to the first bond Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as additional surety, but it provided that the liability of the surety company would attach only when there had been an actual sale of iron ore by the Larap Mines & Smelting Co. for an amount of not less then P65,000.00, and that, furthermore, the liability of said surety company would automatically expire on December 8, 1955. Both bonds were attached to the "Revocation of Power of Attorney and Contract", Exhibit "A", and made integral parts thereof.

On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two executed and signed the "Revocation of Power of Attorney and Contract", Exhibit "A", Fonacier entered into a "Contract of Mining Operation", ceding, transferring, and conveying unto the Larap Mines and Smelting Co., Inc. the right to develop, exploit, and explore the mining claims in question, together with the improvements therein and the use of the name "Larap Iron Mines" and its good will, in consideration of certain

royalties. Fonacier likewise transferred, in the same document, the complete title to the approximately 24,000 tons of iron ore which he acquired from Gaite, to the Larap & Smelting Co., in consideration for the signing by the company and its stockholders of the surety bonds delivered by Fonacier to Gaite (Record on Appeal, pp. 82-94).

Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far Eastern Surety and Insurance Company, no sale of the approximately 24,000 tons of iron ore had been made by the Larap Mines & Smelting Co., Inc., nor had the P65,000.00 balance of the price of said ore been paid to Gaite by Fonacier and his sureties payment of said amount, on the theory that they had lost right to make use of the period given them when their bond, Exhibit "B" automatically expired (Exhibits "C" to "C-24"). And when Fonacier and his sureties failed to pay as demanded by Gaite, the latter filed the present complaint against them in the Court of First Instance of Manila (Civil Case No. 29310) for the payment of the P65,000.00 balance of the price of the ore, consequential damages, and attorney's fees.

All the defendants except Francisco Dante set up the uniform defense that the obligation sued upon by Gaite was subject to a condition that the amount of P65,000.00 would be payable out of the first letter of credit covering the first shipment of iron ore and/or the first amount derived from the local sale of the iron ore by the Larap Mines & Smelting Co., Inc.; that up to the time of the filing of the complaint, no sale of the iron ore had been made, hence the condition had not yet been fulfilled; and that consequently, the obligation was not yet due and demandable. Defendant Fonacier also contended that only 7,573 tons of the estimated 24,000 tons of iron ore sold to him by Gaite was

actually delivered, and counterclaimed for more than P200,000.00 damages.

At the trial of the case, the parties agreed to limit the presentation of evidence to two issues:

(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000.00 become due and demandable when the defendants failed to renew the surety bond underwritten by the Far Eastern Surety and Insurance Co., Inc. (Exhibit "B"), which expired on December 8, 1955; and

(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant Fonacier were actually in existence in the mining claims when these parties executed the "Revocation of Power of Attorney and Contract", Exhibit "A."

On the first question, the lower court held that the obligation of the defendants to pay plaintiff the P65,000.00 balance of the price of the approximately 24,000 tons of iron ore was one with a term: i.e., that it would be paid upon the sale of sufficient iron ore by defendants, such sale to be effected within one year or before December 8, 1955; that the giving of security was a condition precedent to Gait's giving of credit to defendants; and that as the latter failed to put up a good and sufficient security in lieu of the Far Eastern Surety bond (Exhibit "B") which expired on December 8, 1955, the obligation became due and demandable under Article 1198 of the New Civil Code.

As to the second question, the lower court found that plaintiff Gaite did have approximately 24,000 tons of iron ore at the mining claims in question at the time of the execution of the contract Exhibit "A."

Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay him, jointly and severally, P65,000.00 with interest at 6% per annum from December 9, 1955 until payment, plus costs. From this judgment, defendants jointly appealed to this Court.

During the pendency of this appeal, several incidental motions were presented for resolution: a motion to declare the appellants Larap Mines & Smelting Co., Inc. and George Krakower in contempt, filed by appellant Fonacier, and two motions to dismiss the appeal as having become academic and a motion for new trial and/or to take judicial notice of certain documents, filed by appellee Gaite. The motion for contempt is unmeritorious because the main allegation therein that the appellants Larap Mines & Smelting Co., Inc. and Krakower had sold the iron ore here in question, which allegedly is "property in litigation", has not been substantiated; and even if true, does not make these appellants guilty of contempt, because what is under litigation in this appeal is appellee Gaite's right to the payment of the balance of the price of the ore, and not the iron ore itself. As for the several motions presented by appellee Gaite, it is unnecessary to resolve these motions in view of the results that we have reached in this case, which we shall hereafter discuss.

The main issues presented by appellants in this appeal are:

(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay appellee Gaite the P65,000.00 (balance of the price of the iron ore in question)is one with a period or term and not one with a suspensive condition, and that the term expired on December 8, 1955; and

(2) that the lower court erred in not holding that there were only 10,954.5 tons in the stockpiles of iron ore sold by appellee Gaite to appellant Fonacier.

The first issue involves an interpretation of the following provision in the contract Exhibit "A":

7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier all his rights and interests over the 24,000 tons of iron ore, more or less, above-referred to together with all his rights and interests to operate the mine in consideration of the sum of SEVENTY-FIVE THOUSAND PESOS (P75,000.00) which the latter binds to pay as follows:

a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of this agreement.

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be paid from and out of the first letter of credit covering the first shipment of iron ore made by the Larap Mines & Smelting Co., Inc., its assigns, administrators, or successors in interest.

We find the court below to be legally correct in holding that the shipment or local sale of the iron ore is not a condition precedent (or suspensive) to the payment of the balance of P65,000.00, but was only a suspensive period or term. What characterizes a conditional obligation is the fact that its efficacy or obligatory force (as distinguished from its demandability) is subordinated to the happening of a future and uncertain event; so that if the suspensive condition does not take place, the parties would stand as if the conditional obligation had never existed. That the parties

to the contract Exhibit "A" did not intend any such state of things to prevail is supported by several circumstances:

1) The words of the contract express no contingency in the buyer's obligation to pay: "The balance of Sixty-Five Thousand Pesos (P65,000.00) will be paid out of the first letter of credit covering the first shipment of iron ores . . ." etc. There is no uncertainty that the payment will have to be made sooner or later; what is undetermined is merely the exact date at which it will be made. By the very terms of the contract, therefore, the existence of the obligation to pay is recognized; only its maturity or demandability is deferred.

2) A contract of sale is normally commutative and onerous: not only does each one of the parties assume a correlative obligation (the seller to deliver and transfer ownership of the thing sold and the buyer to pay the price),but each party anticipates performance by the other from the very start. While in a sale the obligation of one party can be lawfully subordinated to an uncertain event, so that the other understands that he assumes the risk of receiving nothing for what he gives (as in the case of a sale of hopes or expectations, emptio spei), it is not in the usual course of business to do so; hence, the contingent character of the obligation must clearly appear. Nothing is found in the record to evidence that Gaite desired or assumed to run the risk of losing his right over the ore without getting paid for it, or that Fonacier understood that Gaite assumed any such risk. This is proved by the fact that Gaite insisted on a bond a to guarantee payment of the P65,000.00, an not only upon a bond by Fonacier, the Larap Mines & Smelting Co., and the company's stockholders, but also on one by a surety company; and the fact that appellants did put up such bonds indicates that they admitted the definite existence of their obligation to pay the balance of P65,000.00.

3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or shipment of the ore as a condition precedent, would be tantamount to leaving the payment at the discretion of the debtor, for the sale or shipment could not be made unless the appellants took steps to sell the ore. Appellants would thus be able to postpone payment indefinitely. The desireability of avoiding such a construction of the contract Exhibit "A" needs no stressing.

4) Assuming that there could be doubt whether by the wording of the contract the parties indented a suspensive condition or a suspensive period (dies ad quem) for the payment of the P65,000.00, the rules of interpretation would incline the scales in favor of "the greater reciprocity of interests", since sale is essentially onerous. The Civil Code of the Philippines, Article 1378, paragraph 1, in fine, provides:

If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.

and there can be no question that greater reciprocity obtains if the buyer' obligation is deemed to be actually existing, with only its maturity (due date) postponed or deferred, that if such obligation were viewed as non-existent or not binding until the ore was sold.

The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit, and not an aleatory contract where the transferor, Gaite, would assume the risk of not being paid at all; and that the previous sale or shipment of the ore was not a suspensive condition for the payment of the balance of the agreed price, but was intended merely to fix the future date of the payment.

This issue settled, the next point of inquiry is whether appellants, Fonacier and his sureties, still have the right to insist that Gaite should wait for the sale or shipment of the ore before receiving payment; or, in other words, whether or not they are entitled to take full advantage of the period granted them for making the payment.

We agree with the court below that the appellant have forfeited the right court below that the appellants have forfeited the right to compel Gaite to wait for the sale of the ore before receiving payment of the balance of P65,000.00, because of their failure to renew the bond of the Far Eastern Surety Company or else replace it with an equivalent guarantee. The expiration of the bonding company's undertaking on December 8, 1955 substantially reduced the security of the vendor's rights as creditor for the unpaid P65,000.00, a security that Gaite considered essential and upon which he had insisted when he executed the deed of sale of the ore to Fonacier (Exhibit "A"). The case squarely comes under paragraphs 2 and 3 of Article 1198 of the Civil Code of the Philippines:

"ART. 1198. The debtor shall lose every right to make use of the period:

(1) . . .

(2) When he does not furnish to the creditor the guaranties or securities which he has promised.

(3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through fortuitous event they disappear, unless he immediately gives new ones equally satisfactory.

Appellants' failure to renew or extend the surety company's bond upon its expiration plainly impaired the securities given to the creditor (appellee Gaite), unless immediately renewed or replaced.

There is no merit in appellants' argument that Gaite's acceptance of the surety company's bond with full knowledge that on its face it would automatically expire within one year was a waiver of its renewal after the expiration date. No such waiver could have been intended, for Gaite stood to lose and had nothing to gain barely; and if there was any, it could be rationally explained only if the appellants had agreed to sell the ore and pay Gaite before the surety company's bond expired on December 8, 1955. But in the latter case the defendants-appellants' obligation to pay became absolute after one year from the transfer of the ore to Fonacier by virtue of the deed Exhibit "A.".

All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in demanding payment and instituting this action one year from and after the contract (Exhibit "A") was executed, either because the appellant debtors had impaired the securities originally given and thereby forfeited any further time within which to pay; or because the term of payment was originally of no more than one year, and the balance of P65,000.00 became due and payable thereafter.

Coming now to the second issue in this appeal, which is whether there were really 24,000 tons of iron ore in the stockpiles sold by appellee Gaite to appellant Fonacier, and whether, if there had been a short-delivery as claimed by appellants, they are entitled to the payment of damages, we must, at the outset, stress two things:first, that this is a case of a sale of a specific mass of fungible goods for a single price or a lump sum, the quantity of

"24,000 tons of iron ore, more or less," stated in the contract Exhibit "A," being a mere estimate by the parties of the total tonnage weight of the mass; and second, that the evidence shows that neither of the parties had actually measured of weighed the mass, so that they both tried to arrive at the total quantity by making an estimate of the volume thereof in cubic meters and then multiplying it by the estimated weight per ton of each cubic meter.

The sale between the parties is a sale of a specific mass or iron ore because no provision was made in their contract for the measuring or weighing of the ore sold in order to complete or perfect the sale, nor was the price of P75,000,00 agreed upon by the parties based upon any such measurement.(see Art. 1480, second par., New Civil Code). The subject matter of the sale is, therefore, a determinate object, the mass, and not the actual number of units or tons contained therein, so that all that was required of the seller Gaite was to deliver in good faith to his buyer all of the ore found in the mass, notwithstanding that the quantity delivered is less than the amount estimated by them (Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171 So. 872, applying art. 2459 of the Louisiana Civil Code). There is no charge in this case that Gaite did not deliver to appellants all the ore found in the stockpiles in the mining claims in questions; Gaite had, therefore, complied with his promise to deliver, and appellants in turn are bound to pay the lump price.

But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not a definite mass, but approximately 24,000 tons of ore, so that any substantial difference in this quantity delivered would entitle the buyers to recover damages for the short-delivery, was there really a short-delivery in this case?

We think not. As already stated, neither of the parties had actually measured or weighed the whole mass of ore cubic meter by cubic meter, or ton by ton. Both parties predicate their respective claims only upon an estimated number of cubic meters of ore multiplied by the average tonnage factor per cubic meter.

Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles of ore that he sold to Fonacier, while appellants contend that by actual measurement, their witness Cirpriano Manlañgit found the total volume of ore in the stockpiles to be only 6.609 cubic meters. As to the average weight in tons per cubic meter, the parties are again in disagreement, with appellants claiming the correct tonnage factor to be 2.18 tons to a cubic meter, while appellee Gaite claims that the correct tonnage factor is about 3.7.

In the face of the conflict of evidence, we take as the most reliable estimate of the tonnage factor of iron ore in this case to be that made by Leopoldo F. Abad, chief of the Mines and Metallurgical Division of the Bureau of Mines, a government pensionado to the States and a mining engineering graduate of the Universities of Nevada and California, with almost 22 years of experience in the Bureau of Mines. This witness placed the tonnage factor of every cubic meter of iron ore at between 3 metric tons as minimum to 5 metric tons as maximum. This estimate, in turn, closely corresponds to the average tonnage factor of 3.3 adopted in his corrected report (Exhibits "FF" and FF-1") by engineer Nemesio Gamatero, who was sent by the Bureau of Mines to the mining claims involved at the request of appellant Krakower, precisely to make an official estimate of the amount of iron ore in Gaite's stockpiles after the dispute arose.

Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made by appellant's witness Cipriano Manlañgit is correct, if we multiply it by the average tonnage factor of 3.3 tons to a cubic meter, the product is 21,809.7 tons, which is not very far from the estimate of 24,000 tons made by appellee Gaite, considering that actual weighing of each unit of the mass was practically impossible, so that a reasonable percentage of error should be allowed anyone making an estimate of the exact quantity in tons found in the mass. It must not be forgotten that the contract Exhibit "A" expressly stated the amount to be 24,000 tons, more or less. (ch. Pine River Logging & Improvement Co. vs U.S., 279, 46 L. Ed. 1164).

There was, consequently, no short-delivery in this case as would entitle appellants to the payment of damages, nor could Gaite have been guilty of any fraud in making any misrepresentation to appellants as to the total quantity of ore in the stockpiles of the mining claims in question, as charged by appellants, since Gaite's estimate appears to be substantially correct.

WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same, with costs against appellants.

GEORGE L. PARKS, plaintiff-appellant, vs.PROVINCE OF TARLAC, MUNICIPALITY OF TARLAC, CONCEPCION CIRER, and JAMES HILL, her husband, defendants-appellees.

Jos. N. Wolfson for appellant.Provincial Fiscal Lopez de Jesus for the Province and Municipality of Tarlac.No appearance for the other appellees.

AVANCEÑA, C. J.:

On October 18, 1910, Concepcion Cirer and James Hill, the owners of parcel of land No. 2 referred to in the complaint, donated it perpetually to the municipality of Tarlac, Province of Tarlac, under certain conditions specified in the public document in which they made this donation. The donation was accepted by Mr. Santiago de Jesus in the same document on behalf of the municipal council of Tarlac of which he was the municipal president. The parcel thus donated was later registered in the name of the donee, the municipality of Tarlac. On January 15, 1921, Concepcion Cirer and James Hill sold this parcel to the herein plaintiff George L. Parks. On August 24, 1923, the municipality of Tarlac transferred the parcel to the Province of Tarlac which, by reason of this transfer, applied for and obtained the registration thereof in its name, the corresponding certificate of title having been issued to it.

The plaintiff, George L. Parks, alleging that the conditions of the donation had not been complied with and invoking the sale of this parcel of land made by Concepcion Cirer and James Hill in his favor, brought this action against the Province of Tarlac, the municipality of Tarlac, Concepcion Cirer and James Hill and prayed that he be declared the absolute owner entitled to the possession of this parcel, that the transfer of the same by the municipality of Tarlac to the Province of Tarlac be annulled, and the transfer certificate issued to the Province of Tarlac cancelled.

The lower court dismissed the complaint.

The plaintiff has no right of action. If he has any, it is only by virtue of the sale of this parcel made by Concepcion Cirer and James Hill in his favor on January 15, 1921, but that sale cannot

have any effect. This parcel having been donated by Concepcion Cirer and James Hill to the municipality of Tarlac, which donation was accepted by the latter, the title to the property was transferred to the municipality of Tarlac. It is true that the donation might have been revoked for the causes, if any, provided by the law, but the fact is that it was not revoked when Concepcion Cirer and James Hill made the sale of this parcel to the plaintiff. Even supposing that causes existed for the revocation of this donation, still, it was necessary, in order to consider it revoked, either that the revocation had been consented to by the donee, the municipality of Tarlac, or that it had been judicially decreed. None of these circumstances existed when Concepcion Cirer and James Hill sold this parcel to the plaintiff. Consequently, when the sale was made Concepcion Cirer and James Hill were no longer the owners of this parcel and could not have sold it to the plaintiff, nor could the latter have acquired it from them.

But the appellant contends that a condition precedent having been imposed in the donation and the same not having been complied with, the donation never became effective. We find no merit in this contention. The appellant refers to the condition imposed that one of the parcels donated was to be used absolutely and exclusively for the erection of a central school and the other for a public park, the work to commence in both cases within the period of six months from the date of the ratification by the partes of the document evidencing the donation. It is true that this condition has not been complied with. The allegation, however, that it is a condition precedent is erroneous. The characteristic of a condition precedent is that the acquisition of the right is not effected while said condition is not complied with or is not deemed complied with. Meanwhile nothing is acquired and there is only an expectancy of right. Consequently, when a condition is imposed, the compliance of which cannot be effected

except when the right is deemed acquired, such condition cannot be a condition precedent. In the present case the condition that a public school be erected and a public park made of the donated land, work on the same to commence within six months from the date of the ratification of the donation by the parties, could not be complied with except after giving effect to the donation. The donee could not do any work on the donated land if the donation had not really been effected, because it would be an invasion of another's title, for the land would have continued to belong to the donor so long as the condition imposed was not complied with.

The appellant also contends that, in any event, the condition not having been complied with, even supposing that it was not a condition precedent but subsequent, the non-compliance thereof is sufficient cause for the revocation of the donation. This is correct. But the period for bringing an action for the revocation of the donation has prescribed. That this action is prescriptible, there is no doubt. There is no legal provision which excludes this class of action from the statute of limitations. And not only this, — the law itself recognizes the prescriptibility of the action for the revocation of a donation, providing a special period of five years for the revocation by the subsequent birth of children (art. 646, Civil Code), and one year for the revocation by reason of ingratitude. If no special period is provided for the prescription of the action for revocation for noncompliance of the conditions of the donation (art. 647, Civil Code), it is because in this respect the donation is considered onerous and is governed by the law of contracts and the general rules of prescription. Under the law in force (sec. 43, Code of Civ. Proc.) the period of prescription of this class of action is ten years. The action for the revocation of the donation for this cause arose on April 19, 1911, that is six months after the ratification of the instrument of donation of

October 18, 1910. The complaint in this action was presented July 5, 1924, more than ten years after this cause accrued.

By virtue of the foregoing, the judgment appealed from is affirmed, with the costs against the appellant. So ordered.

CENTRAL PHILIPPINE UNIVERSITY, petitioner, vs.COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N. LOPEZ, CECILIA P. VDA. DE LOPEZ, REDAN LOPEZ AND REMARENE LOPEZ, respondents.

 

BELLOSILLO, J.:

CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of the decision of the Court of Appeals which reversed that of the Regional Trial Court of Iloilo City directing petitioner to reconvey to private respondents the property donated to it by their predecessor-in-interest.

Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of Trustees of the Central Philippine College (now Central Philippine University [CPU]), executed a deed of donation in favor of the latter of a parcel of land identified as Lot No. 3174-B-1 of the subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which Transfer Certificate of Title No. T-3910-A was issued in the name of the donee CPU with the following annotations copied from the deed of donation —

1. The land described shall be utilized by the CPU exclusively for the establishment and use of a medical college with all its buildings as part of the curriculum;

2. The said college shall not sell, transfer or convey to any third party nor in any way encumber said land;

3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said college shall be under obligation to erect a cornerstone bearing that name. Any net income from the land or any of its parks shall be put in a fund to be known as the "RAMON LOPEZ CAMPUS FUND" to be used for improvements of said campus and erection of a building thereon. 1

On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez, Sr., filed an action for annulment of donation, reconveyance and damages against CPU alleging that since 1939 up to the time the action was filed the latter had not complied with the conditions of the donation. Private respondents also argued that petitioner had in fact negotiated with the National Housing Authority (NHA) to exchange the donated property with another land owned by the latter.

In its answer petitioner alleged that the right of private respondents to file the action had prescribed; that it did not violate any of the conditions in the deed of donation because it never used the donated property for any other purpose than that for which it was intended; and, that it did not sell, transfer or convey it to any third party.

On 31 May 1991, the trial court held that petitioner failed to comply with the conditions of the donation and declared it null and void. The court a quo further directed petitioner to execute a deed of the reconveyance of the property in favor of the heirs of the donor, namely, private respondents herein.

Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that the annotations at the back of petitioner's

certificate of title were resolutory conditions breach of which should terminate the rights of the donee thus making the donation revocable.

The appellate court also found that while the first condition mandated petitioner to utilize the donated property for the establishment of a medical school, the donor did not fix a period within which the condition must be fulfilled, hence, until a period was fixed for the fulfillment of the condition, petitioner could not be considered as having failed to comply with its part of the bargain. Thus, the appellate court rendered its decision reversing the appealed decision and remanding the case to the court of origin for the determination of the time within which petitioner should comply with the first condition annotated in the certificate of title.

Petitioner now alleges that the Court of Appeals erred: (a) in holding that the quoted annotations in the certificate of title of petitioner are onerous obligations and resolutory conditions of the donation which must be fulfilled non-compliance of which would render the donation revocable; (b) in holding that the issue of prescription does not deserve "disquisition;" and, (c) in remanding the case to the trial court for the fixing of the period within which petitioner would establish a medical college. 2

We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the deed of donation executed by Don Ramon Lopez, Sr., gives us no alternative but to conclude that his donation was onerous, one executed for a valuable consideration which is considered the equivalent of the donation itself, e.g., when a donation imposes a burden equivalent to the value of the donation. A gift of land to the City of Manila requiring the latter to erect schools, construct a children's playground and open streets

on the land was considered an onerous donation. 3 Similarly, where Don Ramon Lopez donated the subject parcel of land to petitioner but imposed an obligation upon the latter to establish a medical college thereon, the donation must be for an onerous consideration.

Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. Thus, when a person donates land to another on the condition that the latter would build upon the land a school, the condition imposed was not a condition precedent or a suspensive condition but a resolutory one. 4 It is not correct to say that the schoolhouse had to be constructed before the donation became effective, that is, before the donee could become the owner of the land, otherwise, it would be invading the property rights of the donor. The donation had to be valid before the fulfillment of the condition. 5 If there was no fulfillment or compliance with the condition, such as what obtains in the instant case, the donation may now be revoked and all rights which the donee may have acquired under it shall be deemed lost and extinguished.

The claim of petitioner that prescription bars the instant action of private respondents is unavailing.

The condition imposed by the donor, i.e., the building of a medical school upon the land donated, depended upon the exclusive will of the donee as to when this condition shall be fulfilled. When petitioner accepted the donation, it bound itself to comply with the condition thereof. Since the time within which the condition should be fulfilled depended upon the exclusive will of the petitioner, it has

been held that its absolute acceptance and the acknowledgment of its obligation provided in the deed of donation were sufficient to prevent the statute of limitations from barring the action of private respondents upon the original contract which was the deed of donation. 6

Moreover, the time from which the cause of action accrued for the revocation of the donation and recovery of the property donated cannot be specifically determined in the instant case. A cause of action arises when that which should have been done is not done, or that which should not have been done is done. 7 In cases where there is no special provision for such computation, recourse must be had to the rule that the period must be counted from the day on which the corresponding action could have been instituted. It is the legal possibility of bringing the action which determines the starting point for the computation of the period. In this case, the starting point begins with the expiration of a reasonable period and opportunity for petitioner to fulfill what has been charged upon it by the donor.

The period of time for the establishment of a medical college and the necessary buildings and improvements on the property cannot be quantified in a specific number of years because of the presence of several factors and circumstances involved in the erection of an educational institution, such as government laws and regulations pertaining to education, building requirements and property restrictions which are beyond the control of the donee.

Thus, when the obligation does not fix a period but from its nature and circumstances it can be inferred that a period was intended, the general rule provided in Art. 1197 of the Civil Code applies,

which provides that the courts may fix the duration thereof because the fulfillment of the obligation itself cannot be demanded until after the court has fixed the period for compliance therewith and such period has arrived. 8

This general rule however cannot be applied considering the different set of circumstances existing in the instant case. More than a reasonable period of fifty (50) years has already been allowed petitioner to avail of the opportunity to comply with the condition even if it be burdensome, to make the donation in its favor forever valid. But, unfortunately, it failed to do so. Hence, there is no more need to fix the duration of a term of the obligation when such procedure would be a mere technicality and formality and would serve no purpose than to delay or lead to an unnecessary and expensive multiplication of suits. 9 Moreover, under Art. 1191 of the Civil Code, when one of the obligors cannot comply with what is incumbent upon him, the obligee may seek rescission and the court shall decree the same unless there is just cause authorizing the fixing of a period. In the absence of any just cause for the court to determine the period of the compliance, there is no more obstacle for the court to decree the rescission claimed.

Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts referring to incidental circumstances of a gratuitous contract should be resolved in favor of the least transmission of rights and interests.10 Records are clear and facts are undisputed that since the execution of the deed of donation up to the time of filing of the instant action, petitioner has failed to comply with its obligation as donee. Petitioner has slept on its obligation for an unreasonable length of time. Hence, it is only just and equitable now to declare the subject donation already ineffective and, for all purposes, revoked so that petitioner as

donee should now return the donated property to the heirs of the donor, private respondents herein, by means of reconveyance.

WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31 May 1991 is REINSTATED and AFFIRMED, and the decision of the Court of Appeals of 18 June 1993 is accordingly MODIFIED. Consequently, petitioner is directed to reconvey to private respondents Lot No. 3174-B-1 of the subdivision plan Psd-1144 covered by Transfer Certificate of Title No. T-3910-A within thirty (30) days from the finality of this judgment.

Costs against petitioner.

SO ORDERED.

TOMAS OSMEÑA, plaintiff-appellee, vs.CENONA RAMA, defendant-appellant.

Filemon Sotto for appellant. J. H. Junquera for appellee.

JOHNSON, J.:

It appears from the record that upon the 15th day of November, 1890, the defendant herein executed and delivered to Victoriano Osmeña the following contract:

EXHIBIT A.

P200.00.

CEBU, November 15, 1890.               

I, Doña Cenona Rama, a resident of this city, and of legal age, have received from Don Victoriano Osmeña the sum of two hundred pesos in cash which I will pay in sugar in the month of January or February of the coming year, at the price ruling on the day of delivering the sugar into his warehouse, and I will pay him interest at the rate of half a cuartillo per month on each peso, beginning on this date until the day of the settlement; and if I can not pay in full, a balance shall be struck, showing the amount outstanding at the end of each June, including interest, and such as may be outstanding against me shall be considered as capital which I will always pay in sugar, together with the interest mentioned above. I further promise that I will sell to the said Señor Osmeña all the

sugar that I may harvest, and as a guarantee, pledge as security all of my present and future property, and as special security the house with tile roof and ground floor of stone in which I live in Pagina; in proof whereof, I sign this document, and he shall be entitled to make claim against me at the expiration of the term stated in this document.

(Signed) CENON RAMA.

Witnesses:

FAUSTO PEÑALOSA. FRANCISCO MEDALLE.

On the 27th day of October, 1891, the defendant executed and delivered to the said Victoriano Osmeña the following contract:

EXHIBIT B.

CEBU, October 27, 1891.               

On this date I have asked for further loan and have received from Don Victoriano Osmeña the sum of seventy pesos in cash, fifty pesos of which I have loaned to Don Evaristo Peñares, which we will pay in sugar in the month of January of the coming year according to the former conditions.

(Signed) CENONA RAMA.

From Don Evaristo Peñares P50

Doña Cenona Rama 20

P70

Received — Evaristo Peñares.

Some time after the execution and delivery of the above contracts, the said Victoriano Osmeña died. In the settlement and division of the property of his estate the above contracts became the property of one of his estate the above contracts became the property of one of his heirs, Agustina Rafols. Later, the date does not appear, the said Agustina Rafols ceded to the present plaintiff all of her right and interest in said contracts.

On the 15th day of March, 1902 the plaintiff presented the contracts to the defendant for payment and she acknowledged her responsibility upon said contracts by an indorsement upon them in the following language:

EXHIBIT C.

CEBU, March 15, 1902.               

On this date I hereby promise, in the presence of two witness, that if the house of strong materials in which I live in Pagina is sold, I will pay my indebtedness to Don Tomas Osmeña as set forth in this document.

(Signed) CENONA RAMA.             

The defendant not having paid the amount due on said contracts; the plaintiff, upon the 26th day of June, 1906, commenced the present action in the Court of First Instance of the Province of

Cebu. The complaint filed in said cause alleged the execution and delivery of the above contracts, the demand for payment, and the failure to pay on the part of the defendant, and the prayer for a judgment for the amount due on the said contracts. The defendant answered by filing a general denial and setting up the special defense of prescription.

The case was finally brought on to trial in the Court of First Instance, and the only witness produced during the trial was the plaintiff himself. The defendant did not offer any proof whatever in the lower court.

After hearing the evidence adduced during the trial, the lower court rendered a judgment in favor of the plaintiff and against the defendant for the sum of P200 with interest at the rate of 18 3/4 per cent per annum, from the 15th day of November, 1890, and for the sum of P20 with interest at the rate of 18 3/4 per cent per annum, from the 27th day of October, 1891, until the said sums were paid. From this judgment the defendant appealed.

The lower court found that P50 of the P70 mentioned in Exhibit B had been borrowed by the defendant, but by one Evaristo Peñares; therefore the defendant had no responsibility for the payment of the said P50.

The only questions raised by the appellant were questions of fact. The appellant alleges that the proof adduced during the trial of the cause was not sufficient to support the findings of the lower court. It was suggested during the discussion of the case in this court that, in the acknowledgment above quoted of the indebtedness made by the defendant, she imposed the condition that she would pay the obligation if she sold her house. If that statement found in her acknowledgment of the indebtedness

should be regarded as a condition, it was a condition which depended upon her exclusive will, and is therefore, void. (Art. 1115, Civil Code.) The acknowledgment, therefore, was an absolute acknowledgment of the obligation and was sufficient to prevent the statute of limitation from barring the action upon the original contract.

We are satisfied, from all of the evidence adduced during the trial, that the judgment of the lower court should be affirmed. So ordered.

RUSTAN PULP & PAPER MILLS, INC., BIENVENIDO R. TANTOCO, SR., and ROMEO S. VERGARA, petitioners, vs.THE INTERMEDIATE APPELLATE COURT and ILIGAN DIVERSIFIED PROJECTS, INC., ROMEO A. LLUCH and ROBERTO G. BORROMEO, respondents.

 

MELO, J.:

When petitioners informed herein private respondents to stop the delivery of pulp wood supplied by the latter pursuant to a contract of sale between them, private respondents sued for breach of their covenant. The court of origin dismissed the complaint but at the same time enjoined petitioners to respect the contract of sale if circumstances warrant the full operation in a commercial scale of petitioners' Baloi plant and to continue accepting and paying for deliveries of pulp wood products from Romeo Lluch (page 14, Petition; page 20, Rollo). On appeal to the then Intermediate Appellate Court, Presiding Justice Ramon G. Gaviola, Jr., who spoke for the First Civil Cases Division, with Justices Caguioa, Quetulio-Losa, and Luciano, concurring, modified the judgment by directing herein petitioners to pay private respondents, jointly and severally, the sum of P30,000.00 as moral damages and P15,000.00 as attorney's fees (pages 48-58, Rollo).

In the petition at bar, it is argued that the Appellate Court erred;

A. . . . IN HOLDING PERSONALLY LIABLE UNDER THE CONTRACT OF SALE PETITIONER TANTOCO WHO SIGNED MERELY AS REPRESENTATIVE OF

PETITIONER RUSTAN, AND PETITIONER VERGARA WHO DID NOT SIGN AT ALL;

B. . . . IN HOLDING THAT PETITIONER RUSTAN'S DECISION TO SUSPEND TAKING DELIVERY OF PULP WOOD FROM RESPONDENT LLUCH, WHICH WAS PROMPTED BY SERIOUS AND UNFORESEEN DEFECTS IN THE MILL, WAS NOT IN THE LAWFUL EXERCISE OF ITS RIGHTS UNDER THE CONTRACT OF SALE; and

C. . . . IN AWARDING MORAL DAMAGES AND ATTORNEY'S FEES IN THE ABSENCE OF FRAUD OR BAD FAITH.

(page 18, Petition; page 24, Rollo)

The generative facts of the controversy, as gathered from the pleadings, are fairly simple.

Sometime in 1966, petitioner Rustan established a pulp and paper mill in Baloi, Lano del Norte. On March 20, 1967, respondent Lluch, who is a holder of a forest products license, transmitted a letter to petitioner Rustan for the supply of raw materials by the former to the latter. In response thereto, petitioner Rustan proposed, among other things, in the letter-reply:

2. That the contract to supply is not exclusive because Rustan shall have the option to buy from other suppliers who are qualified and holder of

appropriate government authority or license to sell and dispose pulp wood.

These prefatory business proposals culminated in the execution, during the month of April, 1968, of a contract of sale whereby Romeo A. Lluch agreed to sell, and Rustan Pulp and Paper Mill, Inc. undertook to pay the price of P30.00 per cubic meter of pulp wood raw materials to be delivered at the buyer's plant in Baloi, Lanao del Norte. Of pertinent significance to the issue at hand are the following stipulations in the bilateral undertaking:

3. That BUYER shall have the option to buy from other SELLERS who are equally qualified and holders of appropriate government authority or license to sell or dispose, that BUYER shall not buy from any other seller whose pulp woods being sold shall have been established to have emanated from the SELLER'S lumber and/or firewood concession. . . .

And that SELLER has the priority to supply the pulp wood materials requirement of the BUYER;

xxx xxx xxx

7. That the BUYER shall have the right to stop delivery of the said raw materials by the seller covered by this contract when supply of the same shall become sufficient until such time when need for said raw materials shall have become necessarily provided, however, that the SELLER is given sufficient notice.

(pages 8-9, Petition; pages 14-15, Rollo)

In the installation of the plant facilities, the technical staff of Rustan Pulp and Paper Mills, Inc. recommended the acceptance of deliveries from other suppliers of the pulp wood materials for which the corresponding deliveries were made. But during the test run of the pulp mill, the machinery line thereat had major defects while deliveries of the raw materials piled up, which prompted the Japanese supplier of the machinery to recommend the stoppage of the deliveries. The suppliers were informed to stop deliveries and the letter of similar advice sent by petitioners to private respondents reads:

Iligan Diversified Projects, Inc.Iligan City

Attention: Mr. Romeo A. Lluch

Dear Mr. Lluch:

This is to inform you that the supply of raw materials to us has become sufficient and we will not be needing further delivery from you. As per the terms of our contract, please stop delivery thirty (30) days from today.

Private respondent Romeo Lluch sought to clarify the tenor of the letter as to whether stoppage of delivery or termination of the contract of sale was intended, but the query was not answered by petitioners. This alleged ambiguity notwithstanding, Lluch and the

other suppliers resumed deliveries after the series of talks between Romeo S. Vergara and Romeo Lluch.

On January 23, 1969, the complaint for contractual breach was filed which, as earlier noted, was dismissed. In the process of discussing the merits of the appeal interposed therefrom, respondent Court clarified the eleven errors assigned below by herein petitioners and it seems that petitioners were quite satisfied with the Appellate Court's in seriatim response since petitioners trimmed down their discourse before this Court to three basic matters, relative to the nature of liability, the propriety of the stoppage, and the feasibility of awarding moral damages including attorney's fees.

Respondent Court found it ironic that petitioners had to exercise the prerogative regarding the stoppage of deliveries via the letter addressed to Iligan Diversified Project, Inc. on September 30, 1968 because petitioners never really stopped accepting deliveries from private respondents until December 23, 1968. Petitioner's paradoxial stance portrayed in this manner:

. . . We cannot accept the reasons given by appellees as to why they were stopping deliveries of pulp wood materials. First, We find it preposterous for a business company like the appellee to accumulate stockpiles of cut wood even after its letter to appellants dated September 30, 1968 stopping the deliveries because the supply of raw materials has become sufficient. The fact that appellees were buying and accepting pulp wood materials from other sources other than the appellants even after September 30, 1968 belies that they have more than

sufficient supply of pulp wood materials, or that they are unable to go into full commercial operation or that their machineries are defective or even that the pulp wood materials coming from appellants are sub-standard. Second, We likewise find the courta quo's finding that "even with one predicament in which defendant Rustan found itself wherein commercial operation was delayed, it accommodated all its suppliers of raw materials, including plaintiff, Romeo Lluch, by allowing them to deliver all its stockpiles of cut wood" (Decision, page 202, Record on Appeal) to be both illogical and inconsistent. Illogical, because as appellee Rustan itself claimed "if the plant could not be operated on a commercial scale, it would then be illogical for defendant Rustan to continue accepting deliveries of raw materials." Inconsistent because this kind of "concern" or "accommodation" is not usual or consistent with ordinary business practice considering that this would mean adequate losses to the company. More so, if We consider that appellee is a new company and could not therefore afford to absorb more losses than it already allegedly incurred by the consequent defects in the machineries.

Clearly therefore, this is a breach of the contract entered into by and between appellees and appellants which warrants the intervention of this Court.

xxx xxx xxx

. . . The letter of September 30, 1968, Exh. "D" shows that defendants were terminating the contract of sale (Exh. "A"), and refusing any future or further delivery — whether on the ground that they had sufficient supply of pulp wood materials or that appellants cannot meet the standard of quality of pulp wood materials that Rustan needs or that there were defects in appellees' machineries resulting in an inability to continue full commercial operations.

Furthermore, there is evidence on record that appellees have been accepting deliveries of pulp wood materials from other sources, i.e. Salem Usman, Fermin Villanueva and Pacasum even after September 30, 1968.

Lastly, it would be unjust for the court a quo to rule that the contract of sale be temporarily suspended until Rustan, et al., are ready to accept deliveries from appellants. This would make the resumption of the contract purely dependent on the will of one party — the appellees, and they could always claim, as they did in the instant case, that they have more than sufficient supply of pulp wood when in fact they have been accepting the same from other sources. Added to this, the court a quo was imposing a new condition in the contract, one that was not agreed upon by the parties.

(Pages B-10, Decision; Pages 55-57, Rollo)

The matter of Tantoco's and Vergara's joint and several liability as a result of the alleged breach of the contract is dependent, first of all, on whether Rustan Pulp and Paper Mills may legally exercise the right of stoppage should there be a glut of raw materials at its plant.

And insofar as the express discretion on the part of petitioners is concerned regarding the right of stoppage, We feel that there is cogent basis for private respondent's apprehension on the illusory resumption of deliveries inasmuch as the prerogative suggests a condition solely dependent upon the will of petitioners. Petitioners can stop delivery of pulp wood from private respondents if the supply at the plant is sufficient as ascertained by petitioners, subject to re-delivery when the need arises as determined likewise by petitioners. This is Our simple understanding of the literal import of paragraph 7 of the obligation in question. A purely potestative imposition of this character must be obliterated from the face of the contract without affecting the rest of the stipulations considering that the condition relates to the fulfillment of an already existing obligation and not to its inception (Civil Code Annotated, by Padilla, 1987 Edition, Volume 4, Page 160). It is, of course, a truism in legal jurisprudence that a condition which is both potestative (or facultative) and resolutory may be valid, even though the saving clause is left to the will of the obligor like what this Court, through Justice Street, said in Taylor vs. Uy Tieng Piao and Tan Liuan (43 Phil. 873; 879; cited in Commentaries and Jurisprudence on the Civil Code, by Tolentino, Volume 4, 1991 edition, page 152). But the conclusion drawn from the Taylor case, which allowed a condition for unilateral cancellation of the contract when the machinery to be installed on the factory did not arrive in Manila, is certainly inappropriate for application to the case at hand because the factual milieu in the legal tussle dissected by Justice Street

conveys that the proviso relates to the birth of the undertaking and not to the fulfillment of an existing obligation.

In support of the second ground for allowance of the petition, petitioners are of the impression that the letter dated September 30, 1968 sent to private respondents is well within the right of stoppage guaranteed to them by paragraph 7 of the contract of sale which was construed by petitioners to be a temporary suspension of deliveries. There is no doubt that the contract speaks loudly about petitioners' prerogative but what diminishes the legal efficacy of such right is the condition attached to it which, as aforesaid, is dependent exclusively on their will for which reason, We have no alternative but to treat the controversial stipulation as inoperative (Article 1306, New Civil Code). It is for this same reason that We are not inclined to follow the interpretation of petitioners that the suspension of delivery was merely temporary since the nature of the suspension itself is again conditioned upon petitioner's determination of the sufficiency of supplies at the plant.

Neither are We prepared to accept petitioners' exculpation grounded on frustration of the commercial object under Article 1267 of the New Civil Code, because petitioners continued accepting deliveries from the suppliers. This conduct will estop petitioners from claiming that the breakdown of the machinery line was an extraordinary obstacle to their compliance to the prestation. It was indeed incongruous for petitioners to have sent the letters calling for suspension and yet, they in effect disregarded their own advice by accepting the deliveries from the suppliers. The demeanor of petitioners along this line was sought to be justified as an act of generous accommodation, which entailed greater loss to them and "was not motivated by the usual businessman's obsession with profit" (Page 34, Petition; Page 40,

Rollo). Altruism may be a noble gesture but petitioners' stance in this respect hardly inspires belief for such an excuse is inconsistent with a normal business enterprise which takes ordinary care of its concern in cutting down on expenses (Section 3, (d), Rule 131, Revised Rules of Court). Knowing fully well that they will encounter difficulty in producing output because of the defective machinery line, petitioners opted to open the plant to greater loss, thus compounding the costs by accepting additional supply to the stockpile. Verily, the petitioner's action when they acknowledged that "if the plant could not be operated on a commercial scale, it would then be illogical for defendant Rustan to continue accepting deliveries of raw materials." (Page 202, Record on Appeal; Page 8, Decision; Page 55, Rollo).

Petitioners argue next that Tantoco and Vergara should not have been adjudged to pay moral damages and attorney's fees because Tantoco merely represented the interest of Rustan Pulp and Paper Mills, Inc. while Romeo S. Vergara was not privy to the contract of sale. On this score, We have to agree with petitioners' citation of authority to the effect that the President and Manager of a corporation who entered into and signed a contract in his official capacity, cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect due to the personality of the corporation being separate and distinct from the person composing it (Bangued Generale Belge vs. Walter Bull and Co., Inc., 84 Phil. 164). And because of this precept, Vergara's supposed non-participation in the contract of sale although he signed the letter dated September 30, 1968 is completely immaterial. The two exceptions contemplated by Article 1897 of the New Civil Code where agents are directly responsible are absent and wanting.

WHEREFORE, the decision appealed from is hereby MODIFIED in the sense that only petitioner Rustan Pulp and Paper Mills is ordered to pay moral damages and attorney's fees as awarded by respondent Court.

SO ORDERED.

THE ROMAN CATHOLIC ARCHBISHOP OF MANILA, THE ROMAN CATHOLIC BISHOP OF IMUS, and the SPOUSES FLORENCIO IGNAO and SOLEDAD C. IGNAO, petitioners, vs.HON. COURT OF APPEALS, THE ESTATE OF DECEASED SPOUSES EUSEBIO DE CASTRO and MARTINA RIETA, represented by MARINA RIETA GRANADOS and THERESA RIETA TOLENTINO, respondents.

G.R. No. 77450             June 19, 1991

THE ROMAN CATHOLIC ARCHBISHOP OF MANILA, THE ROMAN CATHOLIC BISHOP OF IMUS, and the SPOUSES FLORENCIO IGNAO and SOLEDAD C. IGNAO, petitioners, vs.HON. COURT OF APPEALS, THE ESTATE OF DECEASED SPOUSES EUSEBIO DE CASTRO and MARTINA RIETA, represented by MARINA RIETA GRANADOS and THERESA RIETA TOLENTINO, respondents.

Severino C. Dominguez for petitioner Roman Catholic Bishop of Imus, Cavite.Dolorfino and Dominguez Law Offices for Sps. Ignao.Joselito R. Enriquez for private respondents.

REGALADO, J.:

These two petitions for review on certiorari1 seek to overturn the decision of the Court of Appeals in CA-G.R. CV No. 054562 which reversed and set aside the order of the Regional Trial Court of

Imus, Cavite dismissing Civil Case No. 095-84, as well as the order of said respondent court denying petitioner's motions for the reconsideration of its aforesaid decision.

On November 29, 1984, private respondents as plaintiffs, filed a complaint for nullification of deed of donation, rescission of contract and reconveyance of real property with damages against petitioners Florencio and Soledad C. Ignao and the Roman Catholic Bishop of Imus, Cavite, together with the Roman Catholic Archbishop of Manila, before the Regional Trial Court, Branch XX, Imus, Cavite and which was docketed as Civil Case No. 095-84 therein.3

In their complaint, private respondents alleged that on August 23, 1930, the spouses Eusebio de Castro and Martina Rieta, now both deceased, executed a deed of donation in favor of therein defendant Roman Catholic Archbishop of Manila covering a parcel of land (Lot No. 626, Cadastral Survey of Kawit), located at Kawit, Cavite, containing an area of 964 square meters, more or less. The deed of donation allegedly provides that the donee shall not dispose or sell the property within a period of one hundred (100) years from the execution of the deed of donation, otherwise a violation of such condition would render ipso facto null and void the deed of donation and the property would revert to the estate of the donors.

It is further alleged that on or about June 30, 1980, and while still within the prohibitive period to dispose of the property, petitioner Roman Catholic Bishop of Imus, in whose administration all properties within the province of Cavite owned by the Archdiocese of Manila was allegedly transferred on April 26, 1962, executed a deed of absolute sale of the property subject of the donation in favor of petitioners Florencio and Soledad C.

Ignao in consideration of the sum of P114,000. 00. As a consequence of the sale, Transfer Certificate of Title No. 115990 was issued by the Register of Deeds of Cavite on November 15, 1980 in the name of said petitioner spouses.

What transpired thereafter is narrated by respondent court in its assailed decision.4

On December 17, 1984, petitioners Florencio Ignao and Soledad C. Ignao filed a motion to dismiss based on the grounds that (1) herein private respondents, as plaintiffs therein, have no legal capacity to sue; and (2) the complaint states no cause of action.

On December 19, 1984, petitioner Roman Catholic Bishop of Imus also filed a motion to dismiss on three (3) grounds, the first two (2) grounds of which were identical to that of the motion to dismiss filed by the Ignao spouses, and the third ground being that the cause of action has prescribed.

On January 9, 1985, the Roman Catholic Archbishop of Manila likewise filed a motion to dismiss on the ground that he is not a real party in interest and, therefore, the complaint does not state a cause of action against him.

After private respondents had filed their oppositions to the said motions to dismiss and the petitioners had countered with their respective replies, with rejoinders thereto by private respondents, the trial court issued an order dated January 31, 1985, dismissing the complaint on the ground that the cause of action has prescribed.5

Private respondents thereafter appealed to the Court of Appeals raising the issues on (a) whether or not the action for rescission

of contracts (deed of donation and deed of sale) has prescribed; and (b) whether or not the dismissal of the action for rescission of contracts (deed of donation and deed of sale) on the ground of prescription carries with it the dismissal of the main action for reconveyance of real property.6

On December 23, 1986, respondent Court of Appeals, holding that the action has not yet prescibed, rendered a decision in favor of private respondents, with the following dispositive portion:

WHEREFORE, the Order of January 31, 1985 dismissing appellants' complaint is SET ASIDE and Civil Case No. 095-84 is hereby ordered REINSTATED and REMANDED to the lower court for further proceedings. No Costs.7

Petitioners Ignao and the Roman Catholic Bishop of Imus then filed their separate motions for reconsideration which were denied by respondent Court of Appeals in its resolution dated February 6, 1987,8 hence, the filing of these appeals by certiorari.

It is the contention of petitioners that the cause of action of herein private respondents has already prescribed, invoking Article 764 of the Civil Code which provides that "(t)he donation shall be revoked at the instance of the donor, when the donee fails to comply with any of the conditions which the former imposed upon the latter," and that "(t)his action shall prescribe after four years from the non-compliance with the condition, may be transmitted to the heirs of the donor, and may be exercised against the donee's heirs.

We do not agree.

Although it is true that under Article 764 of the Civil Code an action for the revocation of a donation must be brought within four (4) years from the non-compliance of the conditions of the donation, the same is not applicable in the case at bar. The deed of donation involved herein expressly provides for automatic reversion of the property donated in case of violation of the condition therein, hence a judicial declaration revoking the same is not necessary, As aptly stated by the Court of Appeals:

By the very express provision in the deed of donation itself that the violation of the condition thereof would render ipso facto null and void the deed of donation, WE are of the opinion that there would be no legal necessity anymore to have the donation judicially declared null and void for the reason that the very deed of donation itself declares it so. For where (sic) it otherwise and that the donors and the donee contemplated a court action during the execution of the deed of donation to have the donation judicially rescinded or declared null and void should the condition be violated, then the phrase reading "would render ipso facto null and void" would not appear in the deed of donation.9

In support of its aforesaid position, respondent court relied on the rule that a judicial action for rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions.10 It called attention to the holding that there is nothing in the law that prohibits the parties from entering into an agreement that a violation of the terms of the contract would cause its cancellation even without court intervention, and that it is not always necessary for the injured party to resort to court for rescission of the contract.11 It reiterated the doctrine that a judicial action is

proper only when there is absence of a special provision granting the power of cancellation.12

It is true that the aforesaid rules were applied to the contracts involved therein, but we see no reason why the same should not apply to the donation in the present case. Article 732 of the Civil Code provides that donationsinter vivos shall be governed by the general provisions on contracts and obligations in all that is not determined in Title III, Book III on donations. Now, said Title III does not have an explicit provision on the matter of a donation with a resolutory condition and which is subject to an express provision that the same shall be considered ipso facto revoked upon the breach of said resolutory condition imposed in the deed therefor, as is the case of the deed presently in question. The suppletory application of the foregoing doctrinal rulings to the present controversy is consequently justified.

The validity of such a stipulation in the deed of donation providing for the automatic reversion of the donated property to the donor upon non-compliance of the condition was upheld in the recent case of De Luna, et al. vs. Abrigo, et al.13 It was held therein that said stipulation is in the nature of an agreement granting a party the right to rescind a contract unilaterally in case of breach, without need of going to court, and that, upon the happening of the resolutory condition or non-compliance with the conditions of the contract, the donation is automatically revoked without need of a judicial declaration to that effect. While what was the subject of that case was an onerous donation which, under Article 733 of the Civil Code is governed by the rules on contracts, since the donation in the case at bar is also subject to the same rules because of its provision on automatic revocation upon the violation of a resolutory condition, from parity of reasons said pronouncements in De Luna pertinently apply.

The rationale for the foregoing is that in contracts providing for automatic revocation, judicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a contract already deemed rescinded by virtue of an agreement providing for rescission even without judicial intervention, but in order to determine whether or not the rescission was proper.14

When a deed of donation, as in this case, expressly provides for automatic revocation and reversion of the property donated, the rules on contract and the general rules on prescription should apply, and not Article 764 of the Civil Code. Since Article 1306 of said Code authorizes the parties to a contract to establish such stipulations, clauses, terms and conditions not contrary to law, morals, good customs, public order or public policy, we are of the opinion that, at the very least, that stipulation of the parties providing for automatic revocation of the deed of donation, without prior judicial action for that purpose, is valid subject to the determination of the propriety of the rescission sought. Where such propriety is sustained, the decision of the court will be merely declaratory of the revocation, but it is not in itself the revocatory act.

On the foregoing ratiocinations, the Court of Appeals committed no error in holding that the cause of action of herein private respondents has not yet prescribed since an action to enforce a written contract prescribes in ten (10) years.15 It is our view that Article 764 was intended to provide a judicial remedy in case of non-fulfillment or contravention of conditions specified in the deed of donation if and when the parties have not agreed on the automatic revocation of such donation upon the occurrence of the contingency contemplated therein. That is not the situation in the case at bar.

Nonetheless, we find that although the action filed by private respondents may not be dismissed by reason of prescription, the same should be dismissed on the ground that private respondents have no cause of action against petitioners.

The cause of action of private respondents is based on the alleged breach by petitioners of the resolutory condition in the deed of donation that the property donated should not be sold within a period of one hundred (100) years from the date of execution of the deed of donation. Said condition, in our opinion, constitutes an undue restriction on the rights arising from ownership of petitioners and is, therefore, contrary to public policy.

Donation, as a mode of acquiring ownership, results in an effective transfer of title over the property from the donor to the donee. Once a donation is accepted, the donee becomes the absolute owner of the property donated. Although the donor may impose certain conditions in the deed of donation, the same must not be contrary to law, morals, good customs, public order and public policy. The condition imposed in the deed of donation in the case before us constitutes a patently unreasonable and undue restriction on the right of the donee to dispose of the property donated, which right is an indispensable attribute of ownership. Such a prohibition against alienation, in order to be valid, must not be perpetual or for an unreasonable period of time.

Certain provisions of the Civil Code illustrative of the aforesaid policy may be considered applicable by analogy.1âwphi1Under the third paragraph of Article 494, a donor or testator may prohibit partition for a period which shall not exceed twenty (20) years. Article 870, on its part, declares that the dispositions of the

testator declaring all or part of the estate inalienable for more than twenty (20) years are void.

It is significant that the provisions therein regarding a testator also necessarily involve, in the main, the devolution of property by gratuitous title hence, as is generally the case of donations, being an act of liberality, the imposition of an unreasonable period of prohibition to alienate the property should be deemed anathema to the basic and actual intent of either the donor or testator. For that reason, the regulatory arm of the law is or must be interposed to prevent an unreasonable departure from the normative policy expressed in the aforesaid Articles 494 and 870 of the Code.

In the case at bar, we hold that the prohibition in the deed of donation against the alienation of the property for an entire century, being an unreasonable emasculation and denial of an integral attribute of ownership, should be declared as an illegal or impossible condition within the contemplation of Article 727 of the Civil Code. Consequently, as specifically stated in said statutory provision, such condition shall be considered as not imposed. No reliance may accordingly be placed on said prohibitory paragraph in the deed of donation. The net result is that, absent said proscription, the deed of sale supposedly constitutive of the cause of action for the nullification of the deed of donation is not in truth violative of the latter hence, for lack of cause of action, the case for private respondents must fail.

It may be argued that the validity of such prohibitory provision in the deed of donation was not specifically put in issue in the pleadings of the parties. That may be true, but such oversight or inaction does not prevent this Court from passing upon and resolving the same.

It will readily be noted that the provision in the deed of donation against alienation of the land for one hundred (100) years was the very basis for the action to nullify the deed of d donation. At the same time, it was likewise the controverted fundament of the motion to dismiss the case a quo, which motion was sustained by the trial court and set aside by respondent court, both on the issue of prescription. That ruling of respondent court interpreting said provision was assigned as an error in the present petition. While the issue of the validity of the same provision was not squarely raised, it is ineluctably related to petitioner's aforesaid assignment of error since both issues are grounded on and refer to the very same provision.

This Court is clothed with ample authority to review matters, even if they are not assigned as errors on appeal, if it finds that their consideration is necessary in arriving at a just decision of the case:16 Thus, we have held that an unassigned error closely related to an error properly assigned,17 or upon which the determination of the question properly assigned is dependent, will be considered by the appellate court notwithstanding the failure to assign it as error.18

Additionally, we have laid down the rule that the remand of the case to the lower court for further reception of evidence is not necessary where the Court is in a position to resolve the dispute based on the records before it. On many occasions, the Court, in the public interest and for the expeditious administration of justice, has resolved actions on the merits instead of remanding them to the trial court for further proceedings, such as where the ends of justice, would not be subserved by the remand of the case.19 The aforestated considerations obtain in and apply to the present case with respect to the matter of the validity of the resolutory condition in question.

WHEREFORE, the judgment of respondent court is SET ASIDE and another judgment is hereby rendered DISMISSING Civil Case No. 095-84 of the Regional Trial Court, Branch XX, Imus, Cavite.

SO ORDERED.

SOLOMON BOYSAW and ALFREDO M. YULO, JR., plaintiffs-appellants, vs.INTERPHIL PROMOTIONS, INC., LOPE SARREAL, SR., and MANUEL NIETO, JR., defendants-appellees.

Felipe Torres and Associates for plaintiffs-appellants.

V.E. Del Rosario & Associates for defendant-appellee M. Nieto, Jr.

A.R. Naravasa & Pol Tiglao, Jr. for defendant-appellee Interphil Promotions, Inc.

R E S O L U T I O N

 

FERNAN, J.:

This is an appeal interposed by Solomon Boysaw and Alfredo Yulo, Jr., from the decision dated July 25, 1963 and other rulings and orders of the then Court of First Instance [CFI] of Rizal, Quezon City, Branch V in Civil Case No. Q-5063, entitled "Solomon Boysaw and Alfredo M. Yulo, Jr., Plaintiffs versus Interphil Promotions, Inc., Lope Sarreal, Sr. and Manuel Nieto, Jr., Defendants," which, among others, ordered them to jointly and severally pay defendant-appellee Manuel Nieto, Jr., the total sum of P25,000.00, broken down into P20,000.00 as moral damages and P5,000.00 as attorney's fees; the defendants-appellees Interphil Promotions, Inc. and Lope Sarreal, Sr., P250,000.00 as unrealized profits, P33,369.72 as actual damages and P5,000.00 as attorney's fees; and defendant-

appellee Lope Sarreal, Sr., the additional amount of P20,000.00 as moral damages aside from costs.

The antecedent facts of the case are as follows:

On May 1, 1961, Solomon Boysaw and his then Manager, Willie Ketchum, signed with Interphil Promotions, Inc. represented by Lope Sarreal, Sr., a contract to engage Gabriel "Flash" Elorde in a boxing contest for the junior lightweight championship of the world.

It was stipulated that the bout would be held at the Rizal Memorial Stadium in Manila on September 30, 1961 or not later than thirty [30] days thereafter should a postponement be mutually agreed upon, and that Boysaw would not, prior to the date of the boxing contest, engage in any other such contest without the written consent of Interphil Promotions, Inc.

On May 3, 1961, a supplemental agreement on certain details not covered by the principal contract was entered into by Ketchum and Interphil. Thereafter, Interphil signed Gabriel "Flash" Elorde to a similar agreement, that is, to engage Boysaw in a title fight at the Rizal Memorial Stadium on September 30, 1961.

On June 19, 1961, Boysaw fought and defeated Louis Avila in a ten-round non-title bout held in Las Vegas, Nevada, U.S.A. [pp. 26-27, t.s.n., session of March 14, 1963].

On July 2, 1961, Ketchum on his own behalf and on behalf of his associate Frank Ruskay, assigned to J. Amado Araneta the managerial rights over Solomon Boysaw.

Presumably in preparation for his engagement with Interphil, Solomon Boysaw arrived in the Philippines on July 31, 1961.

On September 1, 1961, J. Amado Araneta assigned to Alfredo J. Yulo, Jr. the managerial rights over Boysaw that he earlier acquired from Ketchum and Ruskay. The next day, September 2, 1961, Boysaw wrote Lope Sarreal, Sr. informing him of his arrival and presence in the Philippines.

On September 5, 1961, Alfredo Yulo, Jr. wrote to Sarreal informing him of his acquisition of the managerial rights over Boysaw and indicating his and Boysaw's readiness to comply with the boxing contract of May 1, 1961. On the same date, on behalf of Interphil Sarreal wrote a letter to the Games and Amusement Board [GAB] expressing concern over reports that there had been a switch of managers in the case of Boysaw, of which he had not been formally notified, and requesting that Boysaw be called to an inquiry to clarify the situation.

The GAB called a series of conferences of the parties concerned culminating in the issuance of its decision to schedule the Elorde-Boysaw fight for November 4, 1961. The USA National Boxing Association which has supervisory control of all world title fights approved the date set by the GAB

Yulo, Jr. refused to accept the change in the fight date, maintaining his refusal even after Sarreal on September 26, 1961, offered to advance the fight date to October 28, 1961 which was within the 30-day period of allowable postponements provided in the principal boxing contract of May 1, 1961.

Early in October 1961, Yulo, Jr. exchanged communications with one Mamerto Besa, a local boxing promoter, for a possible

promotion of the projected Elorde-Boysaw title bout. In one of such communications dated October 6, 1961, Yulo informed Besa that he was willing to approve the fight date of November 4,1961 provided the same was promoted by Besa.

While an Elorde-Boysaw fight was eventually staged, the fight contemplated in the May 1, 1961 boxing contract never materialized.

As a result of the foregoing occurrences, on October 12, 1961, Boysaw and Yulo, Jr. sued Interphil, Sarreal, Sr. and Manuel Nieto, Jr. in the CFI of Rizal [Quezon City Branch] for damages allegedly occasioned by the refusal of Interphil and Sarreal, aided and abetted by Nieto, Jr., then GAB Chairman, to honor their commitments under the boxing contract of May 1,1961.

On the first scheduled date of trial, plaintiff moved to disqualify Solicitor Jorge Coquia of the Solicitor General's Office and Atty. Romeo Edu of the GAB Legal Department from appearing for defendant Nieto, Jr. on the ground that the latter had been sued in his personal capacity and, therefore, was not entitled to be represented by government counsel. The motion was denied insofar as Solicitor General Coquia was concerned, but was granted as regards the disqualification of Atty. Edu.

The case dragged into 1963 when sometime in the early part of said year, plaintiff Boysaw left the country without informing the court and, as alleged, his counsel. He was still abroad when, on May 13, 1963, he was scheduled to take the witness stand. Thus, the lower court reset the trial for June 20, 1963. Since Boysaw was still abroad on the later date, another postponement was granted by the lower court for July 23, 1963 upon assurance of Boysaw's counsel that should Boysaw fail to appear on said date,

plaintiff's case would be deemed submitted on the evidence thus far presented.

On or about July 16, 1963, plaintiffs represented by a new counsel, filed an urgent motion for postponement of the July 23, 1963 trial, pleading anew Boysaw's inability to return to the country on time. The motion was denied; so was the motion for reconsideration filed by plaintiffs on July 22, 1963.

The trial proceeded as scheduled on July 23, 1963 with plaintiff's case being deemed submitted after the plaintiffs declined to submit documentary evidence when they had no other witnesses to present. When defendant's counsel was about to present their case, plaintiff's counsel after asking the court's permission, took no further part in the proceedings.

After the lower court rendered its judgment dismissing the plaintiffs' complaint, the plaintiffs moved for a new trial. The motion was denied, hence, this appeal taken directly to this Court by reason of the amount involved.

From the errors assigned by the plaintiffs, as having been committed by the lower court, the following principal issues can be deduced:

1. Whether or not there was a violation of the fight contract of May 1, 1961; and if there was, who was guilty of such violation.

2. Whether or not there was legal ground for the postponement of the fight date from September 1, 1961, as stipulated in the May 1, 1961 boxing contract, to November 4,1961,

3. Whether or not the lower court erred in the refusing a postponement of the July 23, 1963 trial.

4. Whether or not the lower court erred in denying the appellant's motion for a new trial.

5. Whether or not the lower court, on the basis of the evidence adduced, erred in awarding the appellees damages of the character and amount stated in the decision.

On the issue pertaining to the violation of the May 1, 1961 fight contract, the evidence established that the contract was violated by appellant Boysaw himself when, without the approval or consent of Interphil, he fought Louis Avila on June 19, 1961 in Las Vegas Nevada. Appellant Yulo admitted this fact during the trial. [pp. 26-27, t.s.n., March 14, 1963].

While the contract imposed no penalty for such violation, this does not grant any of the parties the unbridled liberty to breach it with impunity. Our law on contracts recognizes the principle that actionable injury inheres in every contractual breach. Thus:

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

Also:

The power to rescind obligations is implied, in reciprocal ones, in case one of the obligors should

not comply with what is incumbent upon him. [Part 1, Art. 1191, Civil Code].

There is no doubt that the contract in question gave rise to reciprocal obligations. "Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously, so that the performance of one is conditioned upon the simultaneous fulfillment of the other" [Tolentino, Civil Code of the Philippines, Vol. IV, p. 175.1

The power to rescind is given to the injured party. "Where the plaintiff is the party who did not perform the undertaking which he was bound by the terms of the agreement to perform 4 he is not entitled to insist upon the performance of the contract by the defendant, or recover damages by reason of his own breach " [Seva vs. Alfredo Berwin 48 Phil. 581, Emphasis supplied].

Another violation of the contract in question was the assignment and transfer, first to J. Amado Araneta, and subsequently, to appellant Yulo, Jr., of the managerial rights over Boysaw without the knowledge or consent of Interphil.

The assignments, from Ketchum to Araneta, and from Araneta to Yulo, were in fact novations of the original contract which, to be valid, should have been consented to by Interphil.

Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the

creditor. [Art. 1293, Civil Code, emphasis supplied].

That appellant Yulo, Jr., through a letter, advised Interphil on September 5, 1961 of his acquisition of the managerial rights over Boysaw cannot change the fact that such acquisition, and the prior acquisition of such rights by Araneta were done without the consent of Interphil. There is no showing that Interphil, upon receipt of Yulo's letter, acceded to the "substitution" by Yulo of the original principal obligor, who is Ketchum. The logical presumption can only be that, with Interphil's letter to the GAB expressing concern over reported managerial changes and requesting for clarification on the matter, the appellees were not reliably informed of the changes of managers. Not being reliably informed, appellees cannot be deemed to have consented to such changes.

Under the law when a contract is unlawfully novated by an applicable and unilateral substitution of the obligor by another, the aggrieved creditor is not bound to deal with the substitute.

The consent of the creditor to the change of debtors, whether in expromision or delegacion is an, indispensable requirement . . . Substitution of one debtor for another may delay or prevent the fulfillment of the obligation by reason of the inability or insolvency of the new debtor, hence, the creditor should agree to accept the substitution in order that it may be binding on him.

Thus, in a contract where x is the creditor and y is the debtor, if y enters into a contract with z, under which he transfers to z all his rights under the first

contract, together with the obligations thereunder, but such transfer is not consented to or approved by x, there is no novation. X can still bring his action against y for performance of their contract or damages in case of breach. [Tolentino, Civil Code of the Philippines, Vol. IV, p. 3611.

From the evidence, it is clear that the appellees, instead of availing themselves of the options given to them by law of rescission or refusal to recognize the substitute obligor Yulo, really wanted to postpone the fight date owing to an injury that Elorde sustained in a recent bout. That the appellees had the justification to renegotiate the original contract, particularly the fight date is undeniable from the facts aforestated. Under the circumstances, the appellees' desire to postpone the fight date could neither be unlawful nor unreasonable.

We uphold the appellees' contention that since all the rights on the matter rested with the appellees, and appellants' claims, if any, to the enforcement of the contract hung entirely upon the former's pleasure and sufferance, the GAB did not act arbitrarily in acceding to the appellee's request to reset the fight date to November 4, 1961. It must be noted that appellant Yulo had earlier agreed to abide by the GAB ruling.

In a show of accommodation, the appellees offered to advance the November 4, 1961 fight to October 28, 1961 just to place it within the 30- day limit of allowable postponements stipulated in the original boxing contract.

The refusal of appellants to accept a postponement without any other reason but the implementation of the terms of the original boxing contract entirely overlooks the fact that by virtue of the

violations they have committed of the terms thereof, they have forfeited any right to its enforcement.

On the validity of the fight postponement, the violations of the terms of the original contract by appellants vested the appellees with the right to rescind and repudiate such contract altogether. That they sought to seek an adjustment of one particular covenant of the contract, is under the circumstances, within the appellee's rights.

While the appellants concede to the GAB's authority to regulate boxing contests, including the setting of dates thereof, [pp. 44-49, t.s.n., Jan. 17, 1963], it is their contention that only Manuel Nieto, Jr. made the decision for postponement, thereby arrogating to himself the prerogatives of the whole GAB Board.

The records do not support appellants' contention. Appellant Yulo himself admitted that it was the GAB Board that set the questioned fight date. [pp. 32-42, t.s.n., Jan. 17, 1963]. Also, it must be stated that one of the strongest presumptions of law is that official duty has been regularly performed. In this case, the absence of evidence to the contrary, warrants the full application of said presumption that the decision to set the Elorde-Boysaw fight on November 4, 1961 was a GAB Board decision and not of Manuel Nieto, Jr. alone.

Anent the lower court's refusal to postpone the July 23, 1963 trial, suffice it to say that the same issue had been raised before Us by appellants in a petition for certiorari and prohibition docketed as G.R. No. L-21506. The dismissal by the Court of said petition had laid this issue to rest, and appellants cannot now hope to resurrect the said issue in this appeal.

On the denial of appellant's motion for a new trial, we find that the lower court did not commit any reversible error.

The alleged newly discovered evidence, upon which the motion for new trial was made to rest, consists merely of clearances which Boysaw secured from the clerk of court prior to his departure for abroad. Such evidence cannot alter the result of the case even if admitted for they can only prove that Boysaw did not leave the country without notice to the court or his counsel.

The argument of appellants is that if the clearances were admitted to support the motion for a new trial, the lower court would have allowed the postponement of the trial, it being convinced that Boysaw did not leave without notice to the court or to his counsel. Boysaw's testimony upon his return would, then, have altered the results of the case.

We find the argument without merit because it confuses the evidence of the clearances and the testimony of Boysaw. We uphold the lower court's ruling that:

The said documents [clearances] are not evidence to offset the evidence adduced during the hearing of the defendants. In fact, the clearances are not even material to the issues raised. It is the opinion of the Court that the 'newly discovered evidence' contemplated in Rule 37 of the Rules of Court, is such kind of evidence which has reference to the merits of the case, of such a nature and kind, that if it were presented, it would alter the result of the judgment. As admitted by the counsel in their pleadings, such clearances might have impelled the Court to grant the

postponement prayed for by them had they been presented on time. The question of the denial of the postponement sought for by counsel for plaintiffs is a moot issue . . . The denial of the petition for certiorari and prohibition filed by them, had he effect of sustaining such ruling of the court . . . [pp. 296-297, Record on Appeal].

The testimony of Boysaw cannot be considered newly discovered evidence for as appellees rightly contend, such evidence has been in existence waiting only to be elicited from him by questioning.

We cite with approval appellee's contention that "the two qualities that ought to concur or dwell on each and every of evidence that is invoked as a ground for new trial in order to warrant the reopening . . . inhered separately on two unrelated species of proof" which "creates a legal monstrosity that deserves no recognition."

On the issue pertaining to the award of excessive damages, it must be noted that because the appellants wilfully refused to participate in the final hearing and refused to present documentary evidence after they no longer had witnesses to present, they, by their own acts prevented themselves from objecting to or presenting proof contrary to those adduced for the appellees.

On the actual damages awarded to appellees, the appellants contend that a conclusion or finding based upon the uncorroborated testimony of a lone witness cannot be sufficient. We hold that in civil cases, there is no rule requiring more than one witness or declaring that the testimony of a single witness will

not suffice to establish facts, especially where such testimony has not been contradicted or rebutted. Thus, we find no reason to disturb the award of P250,000.00 as and for unrealized profits to the appellees.

On the award of actual damages to Interphil and Sarreal, the records bear sufficient evidence presented by appellees of actual damages which were neither objected to nor rebutted by appellants, again because they adamantly refused to participate in the court proceedings.

The award of attorney's fees in the amount of P5,000.00 in favor of defendant-appellee Manuel Nieto, Jr. and another P5,000.00 in favor of defendants-appellees Interphil Promotions, Inc. and Lope Sarreal, Sr., jointly, cannot also be regarded as excessive considering the extent and nature of defensecounsels' services which involved legal work for sixteen [16] months.

However, in the matter of moral damages, we are inclined to uphold the appellant's contention that the award is not sanctioned by law and well- settled authorities. Art. 2219 of the Civil Code provides:

Art. 2219. Moral damages may be recovered in the following analogous cases:

1) A criminal offense resulting in physical injuries;

2) Quasi-delict causing physical injuries;

3) Seduction, abduction, rape or other lascivious acts;

4) Adultery or concubinage;

5) Illegal or arbitrary detention or arrest;

6) Illegal search;

7) Libel, slander or any other form of defamation;

8) Malicious prosecution;

9) Acts mentioned in Art. 309.

10) Acts and actions referred to in Arts., 21, 26, 27, 28, 29, 30, 32, 34 and 35.

The award of moral damages in the instant case is not based on any of the cases enumerated in Art. 2219 of the Civil Code. The action herein brought by plaintiffs-appellants is based on a perceived breach committed by the defendants-appellees of the contract of May 1, 1961, and cannot, as such, be arbitrarily considered as a case of malicious prosecution.

Moral damages cannot be imposed on a party litigant although such litigant exercises it erroneously because if the action has been erroneously filed, such litigant may be penalized for costs.

The grant of moral damages is not subject to the whims and caprices of judges or courts. The court's discretion in granting or refusing it is governed by reason and justice. In order that a person may be made liable to the payment of moral damages, the law requires that his act be wrongful. The adverse result of an action does not

per se make the act wrongful and subject the actor to the payment of moral damages. The law could not have meant to impose a penalty on the right to litigate; such right is so precious that moral damages may not be charged on those who may exercise it erroneously. For these the law taxes costs. [Barreto vs. Arevalo, et. al. No. L-7748, Aug. 27, 1956, 52 O.G., No. 13, p. 5818.]

WHEREFORE, except for the award of moral damages which is herein deleted, the decision of the lower court is hereby affirmed.

SO ORDERED.

UNIVERSITY OF THE PHILIPPINES, petitioner, vs.WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the COURT OF FIRST INSTANCE IN QUEZON CITY, et al., respondents.

Office of the Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores and Special Counsel Perfecto V. Fernandez for petitioner.

Norberto J. Quisumbing for private respondents.

 

REYES, J.B.L., J.:

Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No. 9435, are sought to be annulled in this petition for certiorari and prohibition, filed by herein petitioner University of the Philippines (or UP) against the above-named respondent judge and the Associated Lumber Manufacturing Company, Inc. (or ALUMCO). The first order, dated 25 February 1966, enjoined UP from awarding logging rights over its timber concession (or Land Grant), situated at the Lubayat areas in the provinces of Laguna and Quezon; the second order, dated 14 January 1967, adjudged UP in contempt of court, and directed Sta. Clara Lumber Company, Inc. to refrain from exercising logging rights or conducting logging operations on the concession; and the third order, dated 12 December 1967, denied reconsideration of the order of contempt.

As prayed for in the petition, a writ of preliminary injunction against the enforcement or implementation of the three (3) questioned orders was issued by this Court, per its resolution on 9 February 1968.

The petition alleged the following:

That the above-mentioned Land Grant was segregated from the public domain and given as an endowment to UP, an institution of higher learning, to be operated and developed for the purpose of raising additional income for its support, pursuant to Act 3608;

That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under which the latter was granted exclusive authority, for a period starting from the date of the agreement to 31 December 1965, extendible for a further period of five (5) years by mutual agreement, to cut, collect and remove timber from the Land Grant, in consideration of payment to UP of royalties, forest fees, etc.; that ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it had incurred an unpaid account of P219,362.94, which, despite repeated demands, it had failed to pay; that after it had received notice that UP would rescind or terminate the logging agreement, ALUMCO executed an instrument, entitled "Acknowledgment of Debt and Proposed Manner of Payments," dated 9 December 1964, which was approved by the president of UP, and which stipulated the following:

3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are not sufficient to liquidate the foregoing indebtedness of the DEBTOR in favor of the CREDITOR, the balance outstanding after the said payments have been applied shall be paid by the DEBTOR in full no later than June 30, 1965;

xxx xxx xxx

5. In the event that the DEBTOR fails to comply with any of its promises or undertakings in this document, the DEBTOR agrees without reservation that the CREDITOR shall have the right and the power to consider the Logging Agreement dated December 2, 1960 as rescinded without the necessity of any judicial suit, and the

CREDITOR shall be entitled as a matter of right to Fifty Thousand Pesos (P50,000.00) by way of and for liquidated damages;

ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from 9 December 1964 to 15 July 1965, in the amount of P61,133.74, in addition to the indebtedness that it had previously acknowledged.

That on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date, considered as rescinded and of no further legal effect the logging agreement that they had entered in 1960; and on 7 September 1965, UP filed a complaint against ALUMCO, which was docketed as Civil Case No. 9435 of the Court of First Instance of Rizal (Quezon City), for the collection or payment of the herein before stated sums of money and alleging the facts hereinbefore specified, together with other allegations; it prayed for and obtained an order, dated 30 September 1965, for preliminary attachment and preliminary injunction restraining ALUMCO from continuing its logging operations in the Land Grant.

That before the issuance of the aforesaid preliminary injunction UP had taken steps to have another concessionaire take over the logging operation, by advertising an invitation to bid; that bidding was conducted, and the concession was awarded to Sta. Clara Lumber Company, Inc.; the logging contract was signed on 16 February 1966.

That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and preliminary injunction but were denied by the court;

That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from conducting the bidding; on 27 November 1965, it filed a second petition for preliminary injunction; and, on 25 February 1966, respondent judge issued

the first of the questioned orders, enjoining UP from awarding logging rights over the concession to any other party.

That UP received the order of 25 February 1966 after it had concluded its contract with Sta. Clara Lumber Company, Inc., and said company had started logging operations.

That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order dated 14 January 1967, declared petitioner UP in contempt of court and, in the same order, directed Sta. Clara Lumber Company, Inc., to refrain from exercising logging rights or conducting logging operations in the concession.

The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12 December 1967.

Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is embodied in Act 3608 and, therefore, conclusively known, respondent ALUMCO did not deny the foregoing allegations in the petition. In its answer, respondent corrected itself by stating that the period of the logging agreement is five (5) years - not seven (7) years, as it had alleged in its second amended answer to the complaint in Civil Case No. 9435. It reiterated, however, its defenses in the court below, which maybe boiled down to: blaming its former general manager, Cesar Guy, in not turning over management of ALUMCO, thereby rendering it unable to pay the sum of P219,382.94; that it failed to pursue the manner of payments, as stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments" because the logs that it had cut turned out to be rotten and could not be sold to Sta. Clara Lumber Company, Inc., under its contract "to buy and sell" with said firm, and which contract was referred and annexed to the "Acknowledgment of Debt and Proposed Manner of Payments"; that UP's unilateral rescission of the logging contract, without a court order, was invalid; that petitioner's supervisor refused to allow respondent to cut new logs unless the logs previously cut during the management of

Cesar Guy be first sold; that respondent was permitted to cut logs in the middle of June 1965 but petitioner's supervisor stopped all logging operations on 15 July 1965; that it had made several offers to petitioner for respondent to resume logging operations but respondent received no reply.

The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO rescinded, and may disregard the same before any judicial pronouncement to that effect. Respondent ALUMCO contended, and the lower court, in issuing the injunction order of 25 February 1966, apparently sustained it (although the order expresses no specific findings in this regard), that it is only after a final court decree declaring the contract rescinded for violation of its terms that U.P. could disregard ALUMCO's rights under the contract and treat the agreement as breached and of no force or effect.

We find that position untenable.

In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments" that, upon default by the debtor ALUMCO, the creditor (UP) has "the right and the power to consider, the Logging Agreement dated 2 December 1960 as rescinded without the necessity of any judicial suit." As to such special stipulation, and in connection with Article 1191 of the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al., L-11897, 31 October 1964, 12 SCRA 276:

there is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured party to resort to court for rescission of the contract.

Of course, it must be understood that the act of party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203).

We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation, 1 since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription.

Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or error by the rescinder the other party is not barred from questioning in court such abuse or error, the practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting suit, instead of the rescinder.

In fact, even without express provision conferring the power of cancellation upon one contracting party, the Supreme Court of Spain, in construing the effect of Article 1124 of the Spanish Civil Code (of which Article 1191 of our own Civil; Code is practically a reproduction), has repeatedly held that, a resolution of reciprocal or synallagmatic contracts may be made extrajudicially unless successfully impugned in court.

El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones reciprocas para el caso de que uno de los obligados no cumpliese lo que le incumbe, facultad que, segun jurisprudencia de este Tribunal, surge immediatamente despuesque la otra parte incumplio su deber, sin necesidad de una declaracion previa de los Tribunales. (Sent. of the Tr. Sup. of Spain, of 10 April 1929; 106 Jur. Civ. 897).

Segun reiterada doctrina de esta Sala, el Art. 1124 regula la resolucioncomo una "facultad" atribuida a la parte perjudicada por el incumplimiento del contrato, la cual tiene derecho do opcion entre exigir el cumplimientoo la resolucion de lo convenido, que puede ejercitarse, ya en la via judicial, ya fuera de ella, por declaracion del acreedor, a reserva, claro es, que si la declaracion de resolucion hecha por una

de las partes se impugna por la otra, queda aquella sometida el examen y sancion de los Tribunale, que habran de declarar, en definitiva, bien hecha la resolucion o por el contrario, no ajustada a Derecho. (Sent. TS of Spain, 16 November 1956; Jurisp. Aranzadi, 3, 447).

La resolucion de los contratos sinalagmaticos, fundada en el incumplimiento por una de las partes de su respectiva prestacion, puedetener lugar con eficacia" 1. o Por la declaracion de voluntad de la otra hecha extraprocesalmente, si no es impugnada en juicio luego con exito. y 2. 0 Por la demanda de la perjudicada, cuando no opta por el cumplimientocon la indemnizacion de danos y perjuicios realmente causados, siempre quese acredite, ademas, una actitud o conducta persistente y rebelde de laadversa o la satisfaccion de lo pactado, a un hecho obstativo que de un modoabsoluto, definitivo o irreformable lo impida, segun el art. 1.124, interpretado por la jurisprudencia de esta Sala, contenida en las Ss. de 12 mayo 1955 y 16 Nov. 1956, entre otras, inspiradas por el principio del Derecho intermedio, recogido del Canonico, por el cual fragenti fidem, fides non est servanda. (Ss. de 4 Nov. 1958 y 22 Jun. 1959.) (Emphasis supplied).

In the light of the foregoing principles, and considering that the complaint of petitioner University made out aprima facie case of breach of contract and defaults in payment by respondent ALUMCO, to the extent that the court below issued a writ of preliminary injunction stopping ALUMCO's logging operations, and repeatedly denied its motions to lift the injunction; that it is not denied that the respondent company had profited from its operations previous to the agreement of 5 December 1964 ("Acknowledgment of Debt and Proposed Manner of Payment"); that the excuses offered in the second amended answer, such as

the misconduct of its former manager Cesar Guy, and the rotten condition of the logs in private respondent's pond, which said respondent was in a better position to know when it executed the acknowledgment of indebtedness, do not constitute on their face sufficient excuse for non-payment; and considering that whatever prejudice may be suffered by respondent ALUMCO is susceptibility of compensation in damages, it becomes plain that the acts of the court a quo in enjoining petitioner's measures to protect its interest without first receiving evidence on the issues tendered by the parties, and in subsequently refusing to dissolve the injunction, were in grave abuse of discretion, correctible by certiorari, since appeal was not available or adequate. Such injunction, therefore, must be set aside.

For the reason that the order finding the petitioner UP in contempt of court has open appealed to the Court of Appeals, and the case is pending therein, this Court abstains from making any pronouncement thereon.

WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent court of 25 February 1966, granting the Associated Lumber Company's petition for injunction, is hereby set aside. Let the records be remanded for further proceedings conformably to this opinion.

JOSE PONCE DE LEON, plaintiff-appellant, vs.SANTIAGO SYJUCO, INC., defendant-appellant, PHILIPPINE NATIONAL BANK, defendant-appellee.

Jose D. Cortes and Claro M. Recto for plaintiff and appellant.Ramon Diokno and Jose Diokno for defendant and appellant.Hilarion U. Jarencio for defendant and appellee.

BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Manila absolving defendant Santiago Syjuco, Inc. of the complaint and condemning the plaintiff to pay to said defendant the sum of P18,000 as principal and the further sum of P5,130 as interest thereon from August 6, 1944, to May 5, 1949, or a total of P23,130, Philippine currency, with interest thereon at the rate of 6% per annum from May 6, 1949, until said amount is paid in full, with costs against the plaintiff.

The facts of this case as reflected in the pleadings and the evidence, stripped of unnecessary details, are well narrated in the brief submitted by counsel for the Philippine National Bank, and which for purposes of this decision are hereunder reproduced:

The appellee, Philippine National Bank, hereinafter to be referred to as the Bank, was the owner of two (2) parcels of land known as Lots 871 and 872 of the Murcia Cadastre, Negros Occidental, more particularly described in Transfer Certificates of Titles Nos. 17176 and 17175, respectively. On March 9, 1936 the Bank executed a contract to sell the said properties to the plaintiff, Jose Ponce de Leon, hereinafter to be referred to as Ponce de Leon, the total price of P26,300, payable as follows: (a) P2,630 upon the execution of the said deed; and (b) the balance P23,670 in ten (10) annual amortizations, the first amortization to fall due one year after the execution of the

said contract (See annex "A" Syjuco's Segunda Contestacion Enmendada).

On May 5, 1944, Ponce de Leon obtained a loan from Santiago Syjuco, Inc., hereinafter to be referred to a s Syjuco, in the amount of P200,000 in Japanese Military Notes, payable within one (1) year from May 5, 1948. It was also provided in said promissory note that the promisor (Ponce de Leon) could not pay, and the payee (Syjuco) could not demand, the payment of said note except within the aforementioned period. To secure the payment of said obligation, Ponce de Leon mortgaged in favor of Syjuco the parcels of land which he agreed to purchase from the Bank (See Annex "B", Syjuco's Segunda Contestacion Enmendada).

On May 6, 1944, Ponce de Leon paid the Bank of the balance of the purchase price amounting to P23,670 in Japanese Military notes and, on the same date, the Bank executed in favor of Ponce de Leon, a deed of absolute sale of the aforementioned parcels of land (See Annex "F", Syjuco's Segunda Contectacion Enmendada).

The deed of sale executed by the Bank in favor of Ponce de Leon and the deed of mortgage executed by Ponce de Leon in favor of Syjuco were registered in the Office of the Register of Deeds of Negros Occidental and, as a consequence of such registration, Transfer Certificate of Title Nos. 17175 and 17176 in the name of the Bank were cancelled and Transfer Certificate of Title No. 398 (P.R.) and No. 399 (P.R.), respectively, were issued in the name of Ponce de Leon. The mortgage in favor of Syjuco was annotated on the back of said certificates.

On July 31, 1944, Ponce de Leon obtained an additional loan from Syjuco in the amount of P16,000 in Japanese Military notes and executed in the latter's favor of

promissory note of the same tenor as the one had previously executed (R. on Appeal, pp. 23-24)

On several occasions in October, 1944, Ponce de Leon tendered to Syjuco the amount of P254,880 in Japanese military notes in full payment of his indebtedness to Syjuco. The amount tendered included not only the interest up to the time of the tender, but also all the interest up to May 5, 1948. Ponce de Leon also wrote to Syjuco a letter tendering the payment of his indebtedness, including interests up to May 5, 1948, Syjuco, however, refused to accept such repeated tenders. During the trial, Ponce de Leon explained that he wanted to settle his obligations because as a member of the guerilla forces he was being hunted by the Japanese and he was afraid of getting caught and killed (t.s.n. pp. 14-15).

In view of Syjuco's refusal to accept the payment tendered by Ponce de Leon, the latter deposited with the Clerk of Court, of First Instance of Manila the amount of P254,880 and, on November 4, 1944, he filed a complaint consigning the amount so deposited to Syjuco. To this complaint Syjuco filed his answer. The records of this case were destroyed as a result of the war and after the liberation the same were reconstituted (R. on A., pp. 1-17)

On May 15, 1946, Ponce de Leon filed a petition in the Court of First Instance of Negros Occidental for the reconstitution of transfer Certificates of Titles Nos. 17175 and 17176 in the name of the Bank and, in an order dated June 4, 1946, the Court ordered the reconstitution of said titles. In compliance with said order, the Register of Deeds of Negros Occidental issued Certificates of Title Nos. 1297-R and 1298-R in the names of the Bank. Ponce de Leon then filed with the Register of Deeds a copy of the deed of sale of the properties covered by the said certificates of title issued by the Bank in his (Ponce

de Leon's) favor and the Register of Deeds cancelled the said Certificates of Title Nos. 1297-R and 1298-R and issued in favor of Ponce de Leon Transfer Certificates of Title Nos. 526-N and 527-N (R. on A., pp. 48-50).

On August 16, 1946, Ponce de Leon obtained an overdraft account from the Bank in an amount not exceeding P135,000 and, on the same date, he executed a mortgage of the two parcels of land covered by the reconstituted Transfer Certificates of Title Nos. 526-N and 527-N in favor of the said Bank to secure the payment of any amount which he may obtain from the Bank under aforementioned overdraft account. The overdraft account was granted by the Bank to Ponce de Leon in good faith, said Bank not being aware of the mortgage which Ponce de Leon had executed in favor of Syjuco during the Japanese occupation, and said Bank believing that the said properties had no lien or encumbrance appeared annotated on the reconstituted certificates of Title Nos. 526-N and 527-N in the name of Ponce de Leon (See Testimony of Atty. Endriga).

On September 28, 1946, Syjuco filed a second amended answer to Ponce de Leon's complaint and, in its "Tercera Reconvention", it claimed that Ponce de Leon, by reconstituting the titles in the name of the Bank, by causing the Register of Deeds to have the said titles transferred in his (Ponce de Leon's name, and by subsequently mortgaging the said properties to the Bank as a guaranty for his overdraft account, had violated the conditions of the morgage which Ponce de Leon has executed in its favor during the Japanese occupation. Syjuco then prayed that the mortgage executed by Ponce de Leon in favor of the Bank be declared null and void. (R. on A., pp. 32-53).

Ponce de Leon objected to the inclusion of the Bank as a cross-defendant. (R on A. pp. 55-58). Notwithstanding

said objection, however, the lower court ordered the inclusion of the Bank as a cross-defendant (R. on A., pp. 59-60).

On June 28, 1947, the Bank filed a motion to drop on the ground that it had been misjoined and to dismiss on the ground that the venue was improperly laid and there is another action pending between the same parties for the same cause (R. on A., pp. 65-75). The said motion was denied by the lower court in its order dated October 7, 1947 (R. on A., pp. 95-100). In view of such denial, the Bank filed its answer on October 29, 1947 (R. on A., pp. 101-106).

On June 24, 1949, the lower court rendered a decision absolving Syjuco from Ponce de Leon's complaint and condemning Ponce de Leon to pay Syjuco the total amount of P23,130 with interest at the legal rate from May 6, 1949, until fully paid (R. on A., pp. 107-135). Both Ponce de Leon and Syjuco file their appeal from this decision.

The principal questions to be determined in this appeal are: (1) Did the lower court err in not giving validity to the consignation made by the plaintiff of the principal and interest of his two promissory notes with the clerk of court?; (2) did the lower court err in reducing the principal and interest of said promissory notes to their just proportions using as a pattern the Ballantyne schedule in effecting the reduction?; (3) did the lower court err in disregarding the defense of moratorium set up by the plaintiff against the counterclaim of defendant Syjuco?; and (4) did the lower court err in not passing on the question of priority between the mortgage claim of defendant Syjuco and that of the Philippine National Bank on the same set of properties on the ground that they are situated in a province different from that in which this action was brought? We will discuss these issues in the order in which they are propounded.

1. It appears that plaintiff obtained from defendant Syjuco two loans in 944. One is for P200,000 obtained on May 5, 1944, and another for P16,000 obtained on July 31, 1944. These two loans appear in two promissory notes signed by the plaintiff which were couched in practically the same terms and conditions and were secured by two deeds of mortgage covering the same parcels of land. In said promissory notes it was expressly agreed upon that plaintiff shall pay the loans "within one year from May 5, 1948, . . . peso for peso in the coin or currency of the Government of the Philippines that, at the time of payment above fixed it is the legal tender for public and private debts, with interests at the rate of 6% per annum, payable in advance for the first year, and semi-annually in advance during the succeeding years", and that, the period above set forth having been established for the mutual benefit of the debtor and creditor, the former binds himself to pay, and the latter not to demand the payment of, the loans except within the period above mentioned. And as corollary to have the above stipulations, it was likewise agreed upon in the two deeds of mortgage that "if either party should attempt to annul or alter any of the stipulations of this deed or of the note which it secures, or do anything which has for its purpose or effect an alteration or annulment of any of said stipulations, he binds himself to indemnify the other for the losses and damages, which the parties hereby liquidate and fix at the amount of P200,000".

The facts show that, on November 15, 1944, or thereabouts, contrary to the stipulation above mentioned, plaintiff offered to pay to the defendant not only the principal sum due on the two promissory notes but also all the interests which said principal sum may earn up to the dates of maturity of the two notes, and as the defendant refused to accept the payment so tendered, plaintiff deposited the money with the clerk of court and brought this action to compel the defendant to accept it to relieve himself of further liability.

The question now to be determined is, is the consignation made by the plaintiff valid in the light of the law and the stipulations

agreed upon in the two promissory notes signed by the plaintiff? Our answer is in the negative.

In order that cogsignation may be effective, the debtor must first comply with certain requirements prescribed by law. The debtor must show (1) that there was a debt due; (2) that the consignation of the obligation had been made bacause the creditor to whom tender of payment was made refused to accept it, or because he was absent for incapacitated, or because several persons claimed to be entitled to receive the amount due (Art. 1176, Civil Code); (3) that previous notice of the consignation have been given to the person interested in the performance of the obligation (Art. 1177, Civil Code); (4) that the amount due was placed at the disposal of the court (Art 1178, Civil Code); and (5) that after the consignation had been made the person interested was notified thereof (Art. 1178, Civil Code). In the instant case, while it is admitted a debt existed, that the consignation was made because of the refusal of the creditor to accept it, and the filing of the complaint to compel its acceptance on the part of the creditor can be considered sufficient notice of the consignation to the creditor, nevertheless, it appears that at least two of the above requirements have not been complied with. Thus, it appears that plaintiff, before making the consignation with the clerk of the court, failed to give previous notice thereof to the person interested in the performance of the obligation. It also appears that the obligation was not yet due and demandable when the money was consigned, because, as already stated, by the very express provisions of the document evidencing the same, the obligation was to be paid within one year after May 5, 1948, and the consignation was made before this period matured. The failure of these two requirements is enough ground to render the consignation ineffective. And it cannot be contended that plaintiff is justified in accelerating the payment of the obligation because he was willing to pay the interests due up to the date of its maturity, because, under the law, in a monetary obligation contracted with a period, the presumption is that the same is deemed constituted in favor of both the creditor and the debtor unless from its tenor or from other circumstances it appears that

the period has been established for the benefit of either one of them (Art. 1127, Civil Code). Here no such exception or circumstance exists.

It may be argued that the creditor has nothing to lose but everything to gain by the acceleration of payment of the obligation because the debtor has offered to pay all the interests up to the date it would become due, but this argument loses force if we consider that the payment of interests is not the only reason why a creditor cannot be forced to accept payment contrary to the stipulation. There are other reasons why this cannot be done. One of them is that the creditor may want to keep his money invested safely instead of having it in his hands (Moore vs. Cord 14 Wis. 231). Another reason is that the creditor by fixing a period protects himself against sudden decline in the purchasing power of the currency loaned specially at a time when there are many factors that influence the fluctuation of the currency (Kemmerer on Money, pp. 9-10). And all available authorities on the matter are agreed that, unless the creditor consents, the debtor has no right to accelerate the time of payment even if the premature tender "included an offer to pay principal and interest in full" (17 A.L.R. 866-867; 23 L.R.A. (N.S.) 403; see ruling of this Court in the recent case of Ilusorio vs. Busuego, 84 Phil., 630).

Tested by the law and authorities we have cited above, the conclusion is inescapable that the consignation made by the plaintiff is invalid and, therefore, did not have the effect of relieving him of his obligation.

2. The next question to be determined is whether the lower court erred in reducing the amount of the loans by applying the Ballantyne schedule.

This is not the first time that this question has been raised. On two previous occasions this Court had been called upon to rule on a similar question and has decided that when the creditor and the debtor have agreed on a term within which payment of the obligation should be paid and on the currency in which payment

should be made, that stipulation should be given force and effect unless it appears contrary to law, moral or public order. Thus, in one case this Court said: "One who borrowed P4,000 in Japanese military notes on October 5, 1944, to be paid one year after, in currency then prevailing, was ordered by the Supreme Court to pay said sum after October 5, 1945, that is, after liberation, in Philippine currency (Roño vs. Gomez et al., 83 Phil., 890). In another case, wherein the parties executed a deed of sale with pacto de retro of a parcel of land for the sum of P5,000 in Japanese military notes agreeing that within 30 days after the expiration of one year from June 24, 1944, the aforementioned land may be redeemed sa ganito ding halaga (at the same price), the Court held that the "phrase sa ganito ding halaga meant the same price of P5,000 in Japanese war notes". The Court further said, "The parties herein gambled and speculated on the date of the termination of the war and the liberation of the Philippines by America. This can be gleaned from the stipulation about redemption, particularly that portion to the effect that redemption could be effected not before the expiration of one year from June 24, 1844. This kind of agreement is permitted by law. We find nothing immoral or unlawful in it" (Gomez vs. Tabia Off. Gaz., 641; 84 Phil., 269).

In this particular case, the terms agreed upon are clearer and more conclusive than the ones cited because the plaintiff agreed not only to pay the obligation within one year from May 5, 1948, but also to pay peso for peso in the coin or currency of the Government that at the time of payment it is the legal tender for public and private debts. This stipulation is permitted by law because there is nothing immoral or improper in it. And it is not oppressive because it appears that plaintiff used a great portion of that money to pay his obligations during the Japanese occupation as shown by the fact that he settled his account with the Philippine National Bank and other accounts to the tune of P100,000. It would seem therefore clear that plaintiff has no other alternative than to pay the defendant his obligation peso for peso in the present currency as expressly agreed upon in the two

promissory notes in question. The decision of the lower court on this point should, therefore, be modified.

As regards the penal clause contained in the two deeds of mortgage herein involved, we agree to the following finding of the court a quo: "The attempt made by the plaintiff to pay the obligation before the arrival of the term fixed for the purpose may be wrong; but it may be attributed to an honest belief that the term was not binding and not to a desire to modify the contract". This penal clause should be strictly construed.

3. As regards the third question, we find that the lower court erred in disregarding the defense of moratorium set up by the plaintiff against the counterclaim of the defendant on the sole ground that this defense was not raised by the plaintiff in his pleadings. An examination of the record shows that the plaintiff raised this question in his pleadings. This must have been overlooked by the court.

The lower court, therefore, should have passed upon this defense in the light of Executive Order No. 32, which suspended payment of all obligations contracted before March 10, 1945. We note, however, that said moratorium orders have already been modified by Republic Act No. 342 in the sense of limiting the ban on obligations contracted before the outbreak of the war to creditors who have filed claims for reparations with the Philippine War Damage Commission, leaving them open to obligations contracted during the Japanese occupation (Uy vs. Kalaw Katigbak, G.R. No. L-1830, December 1, 1949). As the obligation in question has been contracted during enemy occupation the same is still covered by the moratorium orders. The claim of counsel for the defendant that the moratorium orders cannot be invoked because they are unconstitutional cannot now be determined it appearing that it has been raised for the first time in this instance. This defense of moratorium was raised by plaintiff in his reply to the amended answer of the defendant dated August 1, 1946, and in his motion to dismiss the counterclaim dated October 29, 1946, but the defendant did not traverse that

allegation nor raise the constitutionality of the moratorium orders in any of its pleadings filed in the lower court. It is a well known rule that this Court can only considera question of constitutionality when it has been raised by any of the parties in the lower court (Laperal vs. City of Manila, 62 Phil., 352; Macondray and Co. vs. Benito and Ocampo, 62 Phil., 137).

4. The facts relative to the execution of the deed of mortgage in favor of the Philippine National Bank on the two lots in question are as follows: On March 9, 1936, the Philippine National Bank was the owner of the lots Nos. 872 and 871 of the Murcia Cadastre, Negros Occidental, covered by Certificates of Titles Nos. 17175 and 17176 respectively. On the same date, the Bank sold the two lots to the plaintiff and as a result Transfer Certificates of Titles Nos. 398 and 399 were issued in the name of the plaintiff. On May 5, 1944, plaintiff mortgaged these two lots to defendant Syjuco to guarantee the payment of two loans, one for P200,000 and another for P16,000. The mortgage was registered in accordance with the law. Then liberation came. Plaintiff taking advantage of the destruction of the records of the office of the Register of Deeds of Negros Occidental, obtained from the Court of First Instance of said province the 3‚3 reconstitution of Transfer Certificate of Titles Nos. 17175 and 17176 and by virtue thereof, the register of deeds issued transfer certificates of titles Nos. 1297-R and 1298-R in the name of the Philippine National Bank. Then he secured the cancellation of the titles last named and the issuance of Transfer Certificates of Titles Nos. 526-N and 527-N in his name without informing the court of the encumbrance existing in favor of defendant Syjuco. After securing the new titles in his name, plaintiff obtained a loan from the Philippine National Bank for the sum of P135,000 on the security of the property covered by said reconstituted titles. On said titles no encumbrance appears annotated, but it was noted thereon that they would be subject to whatever claim may be filed by virtue of documents or instruments previously registered but which, for some reason, do not appear annotated thereon, as required by a circular of the Department of Justice.

From the foregoing facts, it clearly appears that the mortgage executed in favor of the defendant Syjuco is prior in point of time and in point of registration to that executed in favor of the Philippine National Bank, let alone the fact that when the later mortgage was executed, the Bank must have known, as it was its duty to find out, that there was a warning appearing in reconstituted titles that the same were subject to whatever encumbrance may exist which for one reason or another does not appear in said titles. With such warning, the Bank should have taken the necessary precaution to inquire into the existence of any hidden transaction or encumbrance that might affect the property that was being offered in security such as the one existing in favor of the defendant, and when the Bank accepted as security the titles offered by the plaintiff without any further inquiry, it assumed the risk and the consequences resulting therefrom. Moreover, it also appears that this same question of priority has already been threshed out and determined by the Court of First Instance of Negros Occidental in the cadastral proceedings covered the two lots in question wherein the court ordered the cancellation of the reconstituted titles issued in the name of the plaintiff and the reconstitution of the former titles copies of which were in the possession of defendant Syjuco, subject only to the requirement that the mortgage in favor of the Philippine National Bank be annotated on said new titles. In other words, the court declared valid the titles originally issued in the name of the plaintiff wherein the encumbrance in favor of the defendant Syjuco appears and declared invalid the reconstituted titles secured by plaintiff through fraud and misinterpretation. This order is now final because no appeal has been taken therefrom by any interested party.

We have, therefore, no other alternative than to declare that the mortgage claim of the defendant Syjuco is entitled to priority over that of the Philippine National Bank. This question can be threshed out here regardless of venue because the counterclaim is but ancillary to the main case (1 Moran, Comments on the Rules of Court, 2nd ed., 201).

In view of the foregoing, the decision appealed from should be modified in the sense of ordering the plaintiff to pay the defendant Syjuco the sum of P216,000, Philippine currency, value of two promissory notes, with interest thereon at the rate of 6% per annum from May 6, 1949, until said amount is paid in full. It is further ordered that should said amount, together with the corresponding interests, be not paid within 90 days from the date this judgment in accordance with law, with costs against the plaintiff.

However, this judgment shall be held in abeyance, or no order for the execution thereof shall be issued, until after the moratorium orders shall have been lifted.

Feria, Bengzon, Tuason, Reyes, and Jugo, JJ., concur.

Separate Opinions

PARAS, C.J., dissenting:

The plaintiff obtained from defendant Syjuco on May 5, 1944, a loan of P200,000 and on July 31, 1944, another loan of P16,000, payable within one year from May 5, 1948." On November 15, 1944, the plaintiff offered to pay the entire indebtedness plus all the interest up to the date of maturity. Upon Syjuco's refusal to accept the tendered payment, the plaintiff deposited the amount with the clerk of the Court of First Instance of Manila and instituted the present action to compel Syjuco to accept payment. The records of the case were destroyed during the war, but they were duly reconstituted after the liberation. The trial court sentenced the plaintiff to pay Syjuco the total sum of P23,130, representing the whole indebtedness plus all the interest from August 6, 1944, to May 5, 1949, computed according to the Ballantyne scale of values. From this judgment Syjuco has

appealed, claiming his right to be paid the sum of P216,000, actual Philippine currency, plus P200,000, as penalty agreed upon in the contract. The majority of this Court sustains Syjuco's claim for P216,000.

As the same question has been resolved in Ilusorio vs. Busuego, G.R. No. L-822, September 30, 19491, Roño vs. Gomez, May 31, 19492, 46 Off. Gaz., Supp. to No. 11, p. 339, and Gomez vs. Tabia, August 5, 19493, 47 Off. Gaz., 644, in which I dissented, I have to disagree with the majority in the case at bar.

On the question whether a debtor can pay an indebtedness before the date of maturity provided corresponding interest is paid, I said the following in Ilusorio vs. Busuego:

In other words, I hold that the mortgagor has the right to pay the indebtedness at any time within three years provided that, as in this case, he pays the interest for the whole term of the mortgage. In the ordinary course of things, a loan is granted in consideration of interest, and if by the early payment of the obligation, the creditor would not lose any part of the stipulated interest, both paragraphs 3 and 4 would practically be enforced. It cannot be alleged that the creditor herein, in addition to interest, wanted to have his money in the safekeeping of the debtor because the contract is one of the loan and not of deposit. It is to be remembered, moreover, that the debt was being paid in the same currency loaned (Japanese money). The effect of inflation is one of the risks naturally incident to the money-lending business, and the lender should protect himself against it by plain covenants.

On the matter of requiring a loan obtained in Japanese war notes to be paid after the liberation in equivalent Philippine currency, I am hereinbelow reproducing at length what I stated in Roño vs, Gomez which should have greater application and force, because while in the Roño case the amount of the loan is only P4,000, in

the case at bar the debtor is being ordered to pay the large sum of P216,000:

The principal defense set up by Roño in that the note is contrary to law, morals or public order. This defense was flatly overruled in the court of origin, seconded by the Court of Appeals. The judgment of the latter court is now before us upon appeal by certiorari of Cristobal Roño.

The situation in which a borrower of P4,000 in Japanese war notes is made to pay the same amount in currency of the present Philippine Republic. In other words, the borrower of P4,000 during the latter part of the Japanese Military occupation which, in ordinary practical terms, could hardly purchase a cavan of rice, is now compelled to pay P4,000 in actual Philippine currency which, in the same ordinary practical terms, may be held equivalent to at least 100 cavanes of rice. Said borrower is compelled to do so, merely because in his promissory note he agreed to pay after one year in pesos of the Philippine Currency, and expressly waived any postwar arraignment devaluating the amount borrowed in October, 1944.

The Court of Appeals held that the commitment of Cristobal Roño settle his indebtedness in the legal tender at the time of payment is not against the law, morals or public order. We readily acquiesce in the proposition that the contract is not contrary to law or public order, for we are aware of no statute or public policy which prohibits a person from bringing about or causing his own financial reverses. But we are of the opinion that, if enforced to the letter, it is against morals. If the contract was entered into in times of peace, its obligations should have the force of law between the parties and must be performed in accordance with their stipulations (Art. 1091, Civil Code). But when as in the case at bar, the borrower had to obtain a loan during war time, when living conditions were abnormal and oppressive, everything was uncertain, and

everybody was fighting for his survival, our conscience and common sense demand that his acts be judged by compatible standards.

The Court of Appeals found that everybody was aware of the developments of the war outside of official propaganda and that, in so far as knowledge of war events is concerned, Roño was on more or less on an equal footing with Gomez. This means that all knew the bombings by the american air forces of various parts of the islands in September, 1944, and of the decisive defeats of the Axis powers in Europe, and that the mighty forces of the Allies would soon, as in fact they did, concentrate on and crush Japan, with the result that the Japanese war notes would accordingly become worthless. It may of course be opposed that Roño knowingly bound himself to his pact. But this is true merely in theory. Although, as found also by the Court of Appeals, Roño was not entirely an ignorant man because he is a mechanic and knows English, the fact nevertheless remains that the lender, Jose L. Gomez, was a lawyer, and the exaggerated way the promissory word is worded plainly shows that the latter must have thoroughly studied the transaction with Roño imposed the conditions evidenced therein to his one-sided advantage. It is needless to say that borrowers are always at the mercy of unscrupulous money lenders. "Neccesitous men are not, truly speaking, free men; but, to answer a present emergency, will submit to any terms that the crafty may impose upon them." (Marquez et al. vs. Valencia, 44 Off. Gaz., pp. 895, 897*, quoting Villa vs. Santiago, 38 Phil., 157, 164). We cannot believe, as intimated in the testimony of Sinforosa A. de Gomez (wife of Jose L. Gomez), that Roño informed them that he would use the money to purchase a jitney, for the simple reason that, in view of the inflated value of the Japanese war notes on October, 1944, the amount of P4,000 could not possibly purchase a jitney. At any rate, even accepting the

conjecture that said amount was invested by Roño in his business, the circumstance still makes him a necessitous man that had to submit to the terms of his lender. That a contract like the one in question is shocking to the conscience and therefore immoral becomes patent when we resort to the example of a borrower of P2,000 just before the liberation, when a kilo of sugar already cost P2,000, being compelled to pay the same in Philippine currency now when a kilo of sugar hardly costs P0.50. Where is the conscience of anyone who will collect P2,000 for a loan of virtually fifty centavos?

The Court of Appeals argued that the parties took equal risks, since it was impossible to predict the exact time at which the Philippines would be liberated and that, supposing that the liberation had been delayed for more than one year, Gomez might have been the loser and Roño the winner, for the Japanese currency might have further diminished in value. To this we would answer that Gomez would then be paid in the same currency that was borrowed and during the same war time when the loan was extended. This would not be unusual, as the parties are still under the very environments that surrounded the execution of the contract.

I may add the following observations contained in my dissenting opinion in Gomez vs, Tabia:

The majority also hold that the contract here in question is aleatory. This is open to doubt. Aleatory contracts, or those depending on chance, are covered by Title XII, Book IV, of the Civil Code. It is to be noted that, under article 1790, an aleatory contract involves the occurrence of an event which is uncertain or will happen at an indeterminate time. Moreover, the contracts contemplated by the Code as being aleatory, are grouped under insurance, contracts, gambling and betting, and life annuities. It follows that the contract now under

consideration, which is one of loan does not fall under any of those groups of aleatory contracts. At any rate, the contract of loan herein involved is clearly not dependent upon any uncertain event. The loan was granted on a definite date and has to be paid on a definite date. Both dates are certain. The payment of the loan has to be effected regardless of the result of the war.

As the contract in question contemplated that the payment is to be made in the same currency that was loaned, and the parties are presumed never to have intended that said payment would be made in what has become valueless money, justice demands that the indebtedness be paid in actual Philippine currency at an equivalent amount determined in the Ballantyne schedule, in the absence of evidence as to such value. The exceptions mentioned in the Ballantyne schedule refers to contracts in which the obligation is payable by something other than legal tender. Indeed, the majority in Hilado vs. De la Costa et al.,** G.R. No. L-150, decided on April 30, 1949, held that "what the debtor should pay is the value of the Japanese war notes in relation the peso of Philippine currency obtaining on the date when at the place where the obligation was incurred, unless the parties had agreed otherwise." This underscored clause undoubtedly contemplates an agreement to pay in a consideration other than legal tender of the Philippines, such as gold dollars, pounds sterling, Spanish pesetas, or the like. It cannot be otherwise, since if the intention is merely to pay in legal tenders, no express stipulation is necessary, because under section 1612 of the Revised Administrative Code, the Philippine currency is the legal tender for all debts.

In reiteration of my stand in the case of Roño vs. Gomez, supra, I wish to emphasize that to require the herein respondent to pay the sum of P5,000 actual Philippine currency, in return for an indebtedness

obtained in Japanese military notes equivalent in actual Philippine currency according to the Ballantyne schedule, to only P790.26 as found by the Court of Appeals, is unconscionable.

In my considered opinion, the appealed judgment should at most be affirmed.

Pablo, J., concurs:

PADILLA, J., dissenting:

I dissent. A loan of a sum of money is usually made for the purpose of earning interest. The creditor should not be allowed to exact and impose unfair terms and conditions, such as that of barring the debtor from paying the principal of the loan before the time agreed upon. By the payment of the principal of the loan together with the stipulated interests accrued and to accrue up to the time agreed upon for the payment of the principal, the purpose or aim of the loan is attained — all to the advantage and benefit of the creditor. The stipulated sum to be paid by the debtor as penalty or liquidated damages equal to the principal of the loan if payment thereof be made before the time agreed upon, even if the debtor pays at the same time the stipulated interests accrued and to accrue up to the time agreed upon for the payment of the principal, is contra bonos mores, against public policy, and should be disregarded and deemed as not written in the contract.

A loan of P200,000 in Japanese war notes was made on 5 May 1944, payable within one year from 5 May 1948. An additional loan of P16,000 in Japanese war notes was made on 31 July 1944, payable within the same period of time as the previous one. On different occasions in October 1944, the debtor tendered the

sum of P254,880 in full payment of the principal of the loan and the stipulated interests up to 5 May 1948, a tender refused by the creditor. In view of this refusal, the debtor deposited the sum and filed a complaint in the competent court to compel the creditor to accept the sum thus tendered and deposited.

To compel the debtor after the moratorium shall have been removed to pay in the present currency the principal of the loan made in Japanese war notes which at the time of the loan had very little value or purchasing power, and the stipulated interests up to the date of payment thereof, is so shocking to the conscience of a fair-minded person that it will constitute a blot on the administration of justice in this Republic. To that I cannot give my assent.

The requirement that previous notice of consignation be made to the creditor was practically complied with by the deposit in court of the sum of money tendered and the filing of the complaint by the debtor against the creditor to compel the latter to accept the payment of the sum of money thus tendered and deposited. The notice of consignation is superflous where a complaint is filed and the sum of money tendered for the payment of the principal of the loan and stipulated interests is deposited in court, because to avoid litigation the creditor or any party interested in the fulfillment of the obligation may still accept the payment of the sum of money deposited after he receives the summons. It does not appear in the case that any party other than the creditor was interested in the fulfillment of the obligation at the time the consignation was made.

The cross-claim of the creditor should have been dismissed. The consignation made by the debtor should have been upheld, or if the provisions as to consignation were not adhered to or complied with, then the creditor should be entitled at most to the sum awarded by the trial court.

EXCERPTS FROM THE MINUTES OF MARCH 27, 1952

xxx           xxx           xxx

This concerns the motions for reconsideration filed both by plaintiff and defendant in G.R. No. L-3316, Jose Ponce de Leon vs. Santiago Syjuco, Inc.

Plaintiff predicates his motion for reconsideration on the following grounds: (1) the difference of P192,870 between the value of the promissory notes in litigation calculated on the basis of the Ballantyne schedule and their value on the basis of one Japanese military peso constitutes an unjust enrichment (enriquecimiento torticero) unsupported by any true consideration, and cannot be sanctioned by this Court; (2) the limitation on the right to pay the loans as stipulated in the promissory notes was contrary to law and public order at the time the notes were executed; and (3) the aforesaid difference of P192,870 constitutes defendant's winnings in gambling, and cannot be recovered.

Defendant seeks the reconsideration of the decision on the following grounds: (1) the moratorium law has been erroneously applied in this case; (2) the decision has erroneously condoned the interest stipulated from August 6, 1944, to May 5, 1949; and (3) the Court has erroneously absolved the plaintiff from his obligation under the penal clause.

We will first take up the grounds of the motion for reconsideration of the plaintiff.

Claiming that the real value of the loan made by defendant to plaintiff in 1944, measured in terms of genuine currency, is P34,130, including interests, and if plaintiff is made to pay to defendant P216,000, with interests, in genuine currency, the difference between the actual value of the loan received by plaintiff and the value

set in the decision is P192,870, which represents the value actually transferred from plaintiff to defendant. It is claimed that this is an unjust enrichment which cannot be sanctioned in equity.

The fundamental doctrine of unjust enrichment is the transfer of value without just cause or consideration. The transfer is usually made in accordance with law, but the determining factor is the lack of cause or consideration. The elements of this doctrine are: enrichment on the part of the defendant; impoverishment on the part of the plaintiff; and lack of cause. The main objective is to prevent that one may enrich himself at the expense of another. If this situation is obtained, equity steps in to protect the one prejudiced.

This doctrine is sound. It is based upon equity, and though not expressly recognized on our old Civil Code, it is reflected in some of its provisions. Example: payments received though not owing, indebiti solutio, wherein an obligation to restore the thing received arises (Art. 1895). This relation is considered by treatisers as a kind of quasi-contract. (Castan, Derecho Civil Español, tomo 3, pag. 424).

But we doubt the application of this doctrine to the present case, if we view it in the light of its fundamental purpose, which is lack of cause or consideration. Here we find that the money given to the plaintiff in May and July, 1944, was invested by him not only to pay his pre-war obligations but also those contracted by him during the Japanese occupation. According to his own admission, these accounts reached a total of P105,000. The rest he used to promote his guerilla activities. He, therefore, made use of the money in the light of his most pressing needs and made use of it for his personal enrichment. This being so, it is fallacious now to claim that to make plaintiff return the money he made use of to advantage in

the manner he stipulated constitutes an unjust enrichment on the part of the giver. Nor is it fair and logical to conclude, after plaintiff had made use of the money to suit his purpose, that the transaction should be voided simply because the advantage has gone the other way. This is a venture in which both have speculated. It may work one way of the other and as such both must abide by it.

The claim that the speculation which limits the right to pay the loans within a certain period of time was contrary to the law and public order at the time the notes were executed is untenable. We find nothing in the law or in the orders issued by the military authorities in force at the time the notes in controversy were executed that could prevent anyone from stipulating as to the time within which certain obligation is to be paid. The military orders regarding the use and circulation of military notes do not contain any prohibition of this nature. They merely contain an injunction that those notes should be accepted as legal tender in making payments of all kinds, under pain of severe punishment for those who may infringe it. The stipulation in question does run counter to this injunction for it merely limits the time of payment of the obligation. We find nothing in this stipulation which may be said to be contrary to the law or public order prevailing at the time.

Whether the stipulation in question involves a gambling transaction or not, and as a consequence, the winnings resulting therefrom should be prescribed, as the law requires, is a closed matter. In Roño vs. Gomez, May 31, 1949, 46 Off. Gaz., Supp. (Nov. 1950), 333 this Court said: "Our legislation has a word for these contracts: aleatory. The civil code recognizes their validity (See article 1790 and Manresa's comment thereon) on a par with insurance policies and annuities". And in Gomez vs, Tabia, Aug. 5, 1949, 47 Off. Gaz., (Feb. 1951) 641, this Court also said: "This kind of agreement is permitted by law. We find nothing immoral or unlawful in it. It may be

viewed in the same light as insurance contracts, or sales of grain, sugar or other commodities to be delivered at some future date, whose price is subject to fluctuation, and may, at the time of delivery, be way above or below the sales price." It should be stated here with a sense of finality that contracts of this nature are valid and are not contrary to law, moral, or public order.

Let us come to the motion for reconsideration of defendant.

It is claimed that the Court has erroneously applied the moratorium law because of the pretense that the plaintiff has failed to invoke it in his favor in the lower court, and that while it is true that plaintiff has invoked the moratorium law he did so only in connection with his obligation to pay the interests and damages, and not in connection with the principal.

It should be noted that one of the errors assigned by plaintiff in his brief that the lower court erred in finding that he did not invoke the benefits of said moratorium law in his pleadings, and the defendant, in meeting this imputation, never claimed that plaintiff did not invoke the moratorium law, but merely limited his argument to the contention that plaintiff cannot invoke it because he failed to prove that he is a war victim, and that said law is unconstitutional. It is only now that the defendant makes the claim that plaintiff limited his objection to interests and damages. Surprisingly, defendants makes this claim for the first time in its motion for reconsideration.

We are of the opinion that the defense of moratorium set up by the plaintiff in the lower court applies both to the principal obligation as well as to the interests and damages, as it was so understood by the defendant. And this being so, defendant is now estopped from claiming otherwise, especially if it is considered that, to apply

moratorium to interests without at the same time applying it to the principal is incongrous. This claim, therefore, has no merit.

There is merit in the claim that the interests the plaintiff should pay on the obligation should be counted from the date plaintiff has ceased to pay said interests, or from August 6, 1944. This should be corrected.

We find no reason to disturb the finding of this Court in so far as the penal clause is concerned. All things considered, this finding should be maintained.

Wherefore, the motion for reconsideration filed by the plaintiff is denied.

The motion for reconsideration filed by the defendant is also denied. However, the dispositive part of the decision rendered in this case should be modified as follows:

In view of the foregoing, the decision appealed from should be modified in the sense of ordering the plaintiff to pay the defendant Syjuco the sum of P216,000, Philippine currency, value of two promissory notes, with interest thereon at the rate of 6 per cent per annum from August 6, 1944, up to May 5, 1949, and with similar interest from May 6, 1949 until said amount is paid in full. It is further ordered that should the amount of this judgment — principal and interests, — be not paid within ninety (90) days from the date this judgment becomes final, the properties mortgaged should be sold at public auction, and the proceeds applied to the payment of this judgment in accordance with law, with costs against the plaintiff.

However, this judgment shall be held in abeyance, or no order for the execution thereof shall be issued, until after the moratorium orders shall have been lifted.

The Chief Justice and Justices Pablo and Padilla dissented and voted also to let the case be set for hearing.