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Oblicon Contracts 2

This document is the decision from the Supreme Court of the Philippines in the case of Maria A. Garcia, et al., vs. Rita Legarda, Inc. regarding the cancellation of residential land sale contracts. The Court ruled that a contract clause allowing the vendor to cancel the contract if the buyer defaults and does not pay within an additional 90 day grace period is valid and does not violate the Civil Code. The Court also found that accepting late installment payments previously did not waive the vendor's right to cancel upon future defaults, and that cancellation was not arbitrary given the buyers' repeated failure to pay on time.
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0% found this document useful (0 votes)
549 views153 pages

Oblicon Contracts 2

This document is the decision from the Supreme Court of the Philippines in the case of Maria A. Garcia, et al., vs. Rita Legarda, Inc. regarding the cancellation of residential land sale contracts. The Court ruled that a contract clause allowing the vendor to cancel the contract if the buyer defaults and does not pay within an additional 90 day grace period is valid and does not violate the Civil Code. The Court also found that accepting late installment payments previously did not waive the vendor's right to cancel upon future defaults, and that cancellation was not arbitrary given the buyers' repeated failure to pay on time.
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EN BANC

[G.R. No. L-20175. October 30, 1967.]


MARIA A. GARCIA, et al., petitioners, vs. RITA LEGARDA,
INC., respondent.

Lazaro A. Marquez and Ricardo E. Reyes for petitioners.


M. S. Meneses for respondent.
SYLLABUS
1.CIVIL LAW; OBLIGATIONS AND CONTRACT; ART. 1308 NEW CIVIL CODE
CONSTRUED. Art. 1308 is a virtual reproduction of Art. 1256 of the old Civil
Code, so phrased as to emphasize that the contract must bind both parties,
based on the principles (1) that obligations arising from contracts have the force
of law between the contracting parties; and (2) that there must be mutuality
between the parties based on their essential equality, to which is repugnant to
have one party bound by the contract leaving the other free therefrom. Its
ultimate purpose is to render void a contract containing a condition which makes
its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties.
2.ID.; ID.; VALID CONTRACTS TO SELL OF RESIDENTIAL LOTS WITH
RESOLUTORY CONDITION. Where in a contract to sell subdivided lots in
monthly installments there has been a stipulation that in case of vendee's default
in the payment of installments he should have a month of grace and an additional
period of ninety days to pay all the amounts due otherwise the vendor should
have the right to declare the contract cancelled and of no effect, such stipulation
is valid and not violative of Art. 1308 of the new Civil Code, considering that the
validity or compliance thereof is not entirely left to the will of one of the
contracting parties, but it merely gives the vendor the right to declare such
contract cancelled and of no effect. Indeed, the power thus granted cannot be
said to be immoral, much less unlawful, for it could not be arbitrarily exercised
without the other party committing the breach of contract for nonpayment of the
installments agreed upon. Obviously, all that said party had to do to prevent the
other from exercising the power to cancel was for him to comply with his part of
the contract.
3.ID.; ID.; PAYMENT; ACCEPTANCE OF PAYMENT IN ARREARS CREATES
NO PRESUMPTION. Where prior to the cancellation of the contract to sell the
vendor had accepted payment of installments in arrears as an act of forbearance
so as to give the vendee an additional opportunity to keep the contract alive,
such acceptance did not give rise to the presumption that by such act of

humanity the vendor had waived his right to cancel the contract; on the contrary,
it strengthened his right to do so, considering that even after such beneficial act
of accommodation still the vendee subsequently defaulted again and again in the
payment of the installments.
DECISION

DIZON, J p:
Appeal taken by the spouses Maria A. Garcia and Marcelino A. Timbang
hereinafter referred to as petitioners from the decision of the Court of Appeals in
CA-G.R. No. 27194-R reversing the one rendered on January 9, 1960 by the
Court of First Instance of Manila in Civil Case No. 19642 entitled "Maria A.
Garcia, et al., vs. Rita Legarda, Inc. The latter is a corporation organized under
Philippine laws, and is engaged in the sale and resale of residential lots and
suburbs. We shall refer to it hereinafter as the respondent.
On May 20, 1953 the petitioners instituted the Civil case mentioned above
against the respondent to have certain contracts numbered 322, 324, and 965
declared as existing and subsisting; to compel the respondent to accept payment
tendered by them; and to recover moral and exemplary damages and attorney's
fees in the amounts of P6,000.00 and P1,500.00 respectively.
The three causes of action alleged in their complaint involved the three parcels of
land subject matter of the contracts aforesaid. Each had an area of about 150
square meters, and formed part of the Rita Legarda Estate situated in Manila,
and subdivided into lots sold on installment basis.
(1)Contract to Sell No. 322 (Exhs. A and A-1) covering Lot 40, Block 5-CC, was
executed by the respondent in favor of Emiliano Orellana on March 1, 1947. On
June 26, 1947, the latter transferred all his rights and interest thereunder to
Encarnacion Vito who, in turn, on November 3 of the same year, made a similar
transfer of rights in favor of Delfin Bacho. Finally, on May 29, 1948, Bacho also
transferred all his rights and interest to the petitioners.
(2)On March 1, 1947, Contract to Sell No. 324(Exh. 2) covering Lot No. 20, Block
5-CC was executed by respondent in favor of Jesusa Felix. Two months later,
Felix, with the written consent of the respondent, sold her rights and interest to
petitioners.
(3)Contract to Sell No. 965 (Exh. 3) covering Lot No. 27, Block 5-CC was
executed by the respondent in favor of Angela Alvarez Solomon on January 8,
1948. With the written consent of the former, Solomon also sold her rights and
interest to the petitioners on May 11, 1948.
In its answer to the complaint, the respondent averred that in relation to the

Contracts to Sell Nos. 322, 965 and 324, petitioners paid on November 7, 1951
the 53rd, 43rd and 53rd installments, respectively, corresponding to the
installments for the month of July, 1951; that the petitioners, as of June 11, 1952,
had failed to pay the stipulated monthly installments for Contracts Nos. 322 and
324 corresponding to the period from August, 1951 through June, 1952, and in
the case of Contract No. 965, from August, 1951 through May, 1952; that despite
several demands for payment of arrears made between December, 1951 and
June, 1952 by the respondent, the petitioners had failed to pay the amounts due;
and that upon the expiration of the 90- day grace period on June 11, 1952
stipulated in the sixth paragraph of the contracts, the respondent had cancelled
them. The answer also prayed for an award of damages and attorney's fees in
the sum of P2,000.00.
On April 20, 1954 the petitioners filed a reply denying that they were in arrears as
to their obligations under the three contracts and, farther averred as affirmative
defense that the cancellation thereof was unlawful and arbitrary.
After trial the Court rendered judgment declaring Contracts Nos. 322, 324 and
965 as existing and subsisting: ordering the respondent to accept the payments
tendered by the petitioners and to pay attorney's fees in the sum of P1,500.00,
but denied the award of moral and exemplary damages. From this decision the
respondent appealed to the Court of Appeals from whose decision - reversing
that of the lower court - the instant appeal was taken.
Petitioners now urge Us, in turn, to reverse the decision of the Court of Appeals,
claiming that the latter had committed the following errors:
"I.The Honorable Court of Appeals erred in declaring that the
respondent Rita Legarda, Inc. had not waived its rights to
cancel its contracts with the petitioners on the ground that it
had previously accepted late payments of the installments
due on such contracts.
"II.The Honorable Court of Appeals erred in declaring that
par. 9 of the contract in question is not in violation of Art.
1308 of the New Civil Code.
"III.The Honorable Court of Appeals erred in not declaring
that the respondent Rita Legarda, Inc., after having tolerated
and accepted previously late payments on the installments
due on the contracts, suddenly and without suitable warning
and giving of further opportunity to pay the same could not
and should not have precipitously decided to forfeit, as it
actually forfeited, all the payments which have already been
made to it by petitioners.
"IV.The Honorable Court of Appeals erred in reversing and in
not affirming the decision of the Court of First Instance of

Manila in its entirety."


The second assignment of error is based on petitioners' contention that the
questioned stipulations of the contracts are in violation of the provisions of Article
1308 of the New Civil Code, while the first and third are based on the claim that
the respondent having previously accepted late payments of installments due on
the contracts aforesaid, must be deemed to have waived its right to cancel said
contracts on the ground of late payment of installments, and that, at any rate,
after having tolerated and accepted said late payments, it was arbitrary on its
part to cancel the contracts suddenly and without suitable warning. The fifth and
last assignment of error is merely a consequence of the others.
Article 1308 of the New Civil Code reads as follows:
"The contract must bind both contracting parties; its validity
or compliance cannot be left to the will of one of them"
The above legal provision is a virtual reproduction of Article 1256 of the old Civil
Code but it was so phrased as to emphasize the principle that the contract must
bind both parties. This, of course, is based firstly, on the principle that obligations
arising from contracts have the force of the law between the contracting parties
and secondly, that there must be mutuality between the parties based on their
essential equality to which is repugnant to have one party bound by the contract
leaving the other free therefrom (8 Manresa 556). Its ultimate purpose is to
render void a contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the contracting parties.
Paragraph 6 of the contracts in question - which is the one claimed to be violative
of the legal provision above quoted - reads as follows:
"SIXTH. In case the party of the SECOND PART fails to
satisfy any monthly installments, or any other payments
herein agreed upon, he is granted a month of grace within
which to make the retarded payment, together with the one
corresponding to the said month of grace; it is understood,
however, that should the month of grace herein granted to
the party of the SECOND PART expire, without the
payments corresponding to both months having been
satisfied, an interest of 10% per annum will be charged on
the amounts he should have paid; it is understood further,
that should a period of 90 days elapse, to begin from the
expiration of the month of grace herein mentioned, and the
party of the SECOND PART has not paid all the amounts he
should have paid with the corresponding interest up to that
date, the party of the FIRST PART has the right to declare
this contract cancelled and of no effect, and as consequence
thereof, the party of the FIRST PART may dispose of the
parcel or parcels of land covered by this contract in favor of

other persons, as if this contract had never been entered


into. In case of such cancellation of this contract, all the
amounts paid in accordance with this agreement together
with all the improvements made on the premises, shall be
considered as rents paid for the use and occupation of the
above mentioned premises, and as payment for the
damages suffered by failure of the party of the SECOND
PART to fulfill as part of this agreement; and the party of the
SECOND PART hereby renounces all his right to demand or
reclaim the return of the same and obliges himself to
peacefully vacate the premises and deliver the same to the
party of the FIRST PART."

The above stipulation, to our mind, merely gives the vendor "the right to declare
this contract cancelled and of no effect" upon fulfillment of the conditions therein
setforth. It does not leave the validity or compliance of the contract entirely "to the
will of one of the contracting parties"; the stipulation or agreement simply says
that in case of default in the payment of installments by the vendee, he shall
have (1) "a month of grace," and that (2) should said month of grace expire
without the vendee paying his arrears, he shall have another "period of 90 days"
to pay "all the amounts he should have paid" etc., then the vendor "has the right
to declare this contract cancelled and of no effect." We have heretofore upheld
the validity of similar stipulations. In Taylor vs. Ky Tieng Piao etc. 43 Phil. 873,
876-878 the ruling was that a contract expressly giving to one part, the right to
cancel the same if a resolutory condition therein agreed upon similar to the
one under consideration is not fulfilled, is valid, the reason being that when the
contract is thus cancelled, the agreement of the parties is in reality being fulfilled.
Indeed, the power thus granted can not be said to be immoral, much less
unlawful, for it could be exercised - not arbitrarily - but only upon the other
contracting party committing the breach of contract of non-payment of the
installments agreed upon. Obviously, all that said party had to do to prevent the
other from exercising the power to cancel the contract was for him to comply with
his part of the contract. And in this case, after the maturity of any particular
installment and its non-payment, the contract gave him not only a month grace
but an additional period of 90 days.
Having arrived at the above conclusions, We now come to the question of
whether or not by having previously accepted payments of overdue installments
the respondent had waived its right to declare the contracts cancelled and of no
effect.
In this connection the record shows that on June 11, 1952 when the Contracts to
Sell Nos. 234 and 965 were cancelled, the vendees were ten months in arrears,
and that in the case of Contract to Sell No. 322 the vendees had never resumed
payment of a single installment from the date when, upon their petition, said
contract was reinstated on September 28, 1952. The contracts under

consideration are not of absolute sale but mere contracts to sell on


installment. They give the respondent (vendor) the right to declare the contracts
cancelled and of no effect as in fact it did upon fulfillment of certain
conditions. All said conditions so the record shows have been fulfilled.
Consequently, respondent's (vendor) right to cancel the contracts can not be
doubted.
That prior to the cancellation it had in fact accepted payment of installments in
arrears was but another act of forbearance on its part to give the petitioners an
additional opportunity to keep the contracts alive. Rather than give rise to the
presumption that by such act of humanity it waived its right to do so, considering
that even after such act of accommodation beneficial to the petitioners, the latter
subsequently defaulted again and again in the fulfillment of their obligation.
It is, of course, painful for the petitioners to lose not only the right they had
acquired under the contracts but also whatever amounts they had already paid
thereunder, but such consequences had been foreseen by the contracting
parties. To avoid them, all that petitioners had to do as already said heretofore was to comply with their part of the bargain. Having failed to do so, they really
have no valid reason to complain. That one contracting party appears to have
made a poor bargain is no reason for setting aside the agreement. (Fernandez
vs. Manila Railroad, 14 Phil. 274, 287).
Wherefore, the appealed judgment being in accordance with law and the facts of
the case, the same is hereby affirmed.
Concepcion, C.J., Reyes, J.B.L., Makalintal, Bengzon, J,P., Zaldivar, Sanchez,
Castro, Angeles and Fernando, JJ., concur.
FIRST DIVISION
[G.R. No. 124290. January 16, 1998.]
ALLIED BANKING CORPORATION, petitioner, vs. COURT
OF APPEALS, HON. JOSE C. DE GUZMAN, OSCAR D.
TANQUECO, LUCIA D. TANQUECO-MATIAS, RUBEN D.
TANQUECO and NESTOR D. TANQUECO, respondents.

Ocampo, Quiroz, Pesayco & Associates for petitioner.


H. D. Tumaneng & Associates for private respondents.
SYNOPSIS
The petitioner Allied Banking Corporation (Allied) leased a parcel of land located

at No. 2 Sarmiento Street corner Quirino Highway, Novaliches, Quezon City


owned by spouses Filemon Tanqueco and Lucia Domingo-Tanqueco. The No. 1
provision of the contract of lease specifically states that "the term of this lease
shall be fourteen (14) years commencing from April 1, 1978 and may be renewed
for a like term at the option of the lessee." Subsequently, the lessor donated the
said parcel of land to their children, the herein private respondents Tanquecos.
When the lease contract expired in 1992, private respondents demanded that
Allied vacate the premises. But the latter asserted its sole option to renew the
lease. Hence, the Tanquecos filed a case for ejectment against the petitioner.
After trial, the lower court declared Provision No. 1 of the lease contract as void
being violative to Article 1308 of the Civil Code. On appeal to the Regional Trial
Court, and later to the Court of Appeals, the said decision was affirmed.
Hence, in this petition Allied insists that Provision No. 1 of the lease contract was
mutually agreed upon hence valid and binding on both parties, and the exercise
by petitioner of its option to renew the contract was part of their agreement and in
pursuance thereof. Another issue involved in this case is whether a lessee has
the legal personality to assail the validity of a deed of donation executed by the
lessor over the leased premises.
The Court ruled that an express agreement which gives the lessee the sole
option to renew the lease is subsequent and subject to statutory restrictions, valid
and binding on the parties. This option, which is provided in the same lease
agreement, is fundamentally part of the consideration in the contract and is no
different from any other provision of the lease carrying an undertaking on the part
of the lessor to act conditioned on the performance by the lessee. It is a purely
executory contract and at most confers a right to obtain a renewal if there is
compliance with the conditions on which the right is made to depend. The right of
renewal constitutes a part of the lessee's interest in the land and form a
substantial and integral part of the agreement.
Allied cannot assail the validity of the deed of donation, not being a party thereto.
A person who is not principally or subsidiarily bound has no legal capacity to
challenge the validity of the contract. He must first have an interest in it.
The decision of the Court of Appeals is reversed and set aside.
SYLLABUS
1.CIVIL LAW; OBLIGATIONS AND CONTRACTS; PRINCIPLE OF MUTUALITY
OF CONTRACTS, CONSTRUED. Article 1308 of the Civil Code expresses
what is known in law as the principle of mutuality of contracts. It provides that
"contract must bind both the contracting parties; its validity or compliance cannot
be left to the will of one of them." This binding effect of a contract on both parties
is based on the principle that the obligations arising from contract have the force
of law between contracting parties, and there must be mutuality between them
based essentially on their equality under which it is repugnant to have one party

bound by the contract while leaving the other free therefrom.


2.ID.; ID.; LEASE; STIPULATION GRANTING LESSEE SOLE OPTION TO
RENEW LEASE CONTRACT, VALID AND BINDING. An express agreement
which gives the lessee the sole option to renew the lease is frequent and subject
to statutory restrictions, valid and binding on the parties. This option, which is
provided in the same lease agreement, is fundamentally part of the consideration
in the contract and is no different from any other provision of the lease carrying
an undertaking on the part of the lessor to act conditioned on the performance by
the lessee. It is a purely executory contract and at most confers a right to obtain
a renewal if there is compliance with the conditions on which the right is made to
depend. The right of renewal constitutes a part of the lessee's interest in the land
and forms a substantial and integral part of the agreement. The fact that such
option is binding only on the lessor and can be exercised only by the lessee does
not render it void for lack of mutuality. After all, the lessor is free to give or not to
give the option to the lessee.
3.ID.; ID.; ID.; ID.; ONCE HE EXERCISES HIS OPTION TO CONTINUE AND
LESSOR ACCEPTS, BOTH PARTIES ARE BOUND BY NEW LEASE
AGREEMENT. And while the lessee has a right to elect whether to continue
with the lease or not, once he exercises his option to continue and the lessor
accepts, both parties are thereafter bound by the new lease agreement. Their
rights and obligations become mutually fixed, and the lessee is entitled to retain
possession of the property for the duration of the new lease, and the lessor may
hold him liable for the rent therefor. The lessee cannot thereafter escape liability
even if he should subsequently decide to abandon the premises. Mutuality
obtains in such a contract and equality exists between the lessor and the lessee
since they remain with the same faculties in respect to fulfillment. HcDATC
4.ID.; ID.; ID.; CLAUSE "MAY BE RENEWED FOR A LIKE TERM AT THE
OPTION OF THE LESSEE," CONSTRUED. With respect to the meaning of
the clause "may be renewed for a like term at the option of the lessee," we
sustain petitioner's contention that its exercise of the option resulted in the
automatic extension of the contract of lease under the same terms and
conditions. The subject contract simply provides that "the term of this lease shall
be fourteen (14) years and may be renewed for a like term at the option of the
lessee." As we see it, the only term on which there has been a clear agreement
is the period of the new contract, i.e., fourteen (14) years, which is evident from
the clause "may be renewed for a like term at the option of the lessee," the
phrase "for a like term" referring to the period. It is silent as to what the specific
terms and conditions of the renewed lease shall be. Shall it be the same terms
and conditions as in the original contract, or shall it be under the terms and
conditions as may be mutually agreed upon by the parties after the expiration of
the existing lease? In Ledesma v. Javellana this Court was confronted with a
similar problem. In that case the lessee was given the sole option to renew the
lease, but the contract failed to specify the terms and conditions that would
govern the new contract. In sustaining the lessee, this Court made the following

pronouncement: . . . in the case of Hicks v. Manila Hotel Company, a similar


issue was resolved by the Court. It was held that 'such a clause relates to the
very contract in which it is placed, and does not permit the defendant upon the
renewal of the contract in which the clause is found, to insist upon different terms
than those embraced in the contract to be renewed'; and that 'a stipulation to
renew always relates to the contract in which it is found and the rights granted
thereunder, unless it expressly provides for variations in the terms of the contract
to be renewed.' The same principle is upheld in American Law regarding the
renewal of lease contracts. In 50 Am. Jur. 2d, Sec. 1159, at p. 45, we find the
following citations: 'The rule is well-established that a general covenant to renew
or extend a lease which makes no provision as to the terms of a renewal or
extension implies a renewal or extension upon the same terms as provided in the
original lease.'
5.ID.; ID.; ID.; IN CONSTRUCTING PROVISIONS RELATING TO RENEWALS
OR EXTENSIONS, TENANT IS FAVORED. The settled rule is that in case of
uncertainty as to the meaning of a provision granting extension to a contract of
lease, the tenant is the one favored and not the landlord. 'As a general rule, in
construing provisions relating to renewals or extensions, where there is any
uncertainty, the tenant is favored, and not the landlord, because the latter, having
the power of stipulation in his own favor, has neglected to do so; and also upon
the principle that every man's grant is to be taken most strongly against himself
(50 Am. Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599).'
6.ID.; ID.; NO WORD, SENTENCE OR PROVISION OF CONTRACT SHALL BE
CONSIDERED MEANINGLESS, VOID OR NUGATORY, IF IT CAN BE
REASONABLY AVOIDED. As in a statute no word, clause, sentence,
provision or part of a contract shall be considered surplusage or superfluous,
meaningless, void, insignificant or nugatory, if that can be reasonably avoided.
To this end, a construction which will render every word operative is to be
preferred over that which would make some words idle and nugatory.
7.ID.; ID., ACT OF VACATING PREMISES CONSTITUTES ABANDONMENT
UNDER RENEWAL CLAUSE. Fortunately for respondent-lessors, ALLIED
vacated the premises on 20 February 1993 indicating its abandonment of
whatever rights it had under the renewal clause. Consequently, what remains to
be done is for ALLIED to pay rentals for the continued use of the premises until it
vacated the same, computed from the expiration of the original term of the
contract on 31 March 1992 to the time it actually left the premises on 20 February
1993, deducting therefrom the amount of P68,400.00 consigned in court by
ALLIED and any other amount which it may have deposited or advanced in
connection with the lease. Since the old lease contract was deemed renewed
under the same terms and conditions upon the exercise by ALLIED of its option,
the basis of the computation of rentals should be the rental rate provided for in
the existing contract.
8.REMEDIAL LAW; ACTIONS; PARTIES; NO PERSON CAN ASSAIL VALIDITY
OF CONTRACT, NOT BEING A PARTY THERETO. Finally, ALLIED cannot

assail the validity of the deed of donation, not being a party thereto. A person
who is not principally or subsidiarily bound has no legal capacity to challenge the
validity of the contract. He must first have an interest in it. "Interest" within the
meaning of the term means material interest, an interest to be affected by the
deed, as distinguished from a mere incidental interest. Hence, a person who is
not a party to a contract and for whose benefit it was not expressly made cannot
maintain an action on it, even if the contract, if performed by the parties thereto
would incidentally affect him, except when he is prejudiced in his rights with
respect to one of the contracting parties and can show the detriment which could
positively result to him from the contract in which he had no intervention. We find
none in the instant case. CSHDTE

DECISION

BELLOSILLO, J p:
There are two (2) main issues in this petition for review: namely, (a) whether a
stipulation in a contract of lease to the effect that the contract "may be renewed
for a like term at the option of the lessee" is void for being potestative or violative
of the principle of mutuality of contracts under Art. 1308 of the Civil Code and
corollarily, what is the meaning of the clause "may be renewed for a like term at
the option of the lessee;" and, (b) whether a lessee has the legal personality to
assail the validity of a deed of donation executed by the lessor over the leased
premises.
Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square
meter lot located at No. 2 Sarmiento Street corner Quirino High-way, Novaliches,
Quezon City, covered by TCT No. 136779 in their name. On 30 June 1978 they
leased the property to petitioner Allied Banking Corporation (ALLIED) for a
monthly rental of P1,000.00 for the first three (3) years, adjustable by 25% every
three (3) years thereafter. 1 The lease contract specifically states in its Provision
No. 1 that "the term of this lease shall be fourteen (14) years commencing from
April 1, 1978 and may be renewed for a like term at the option of the lessee."
Pursuant to their lease agreement, ALLIED introduced an improvement on the
property consisting of a concrete building with a floor area of 340-square meters
which it used as a branch office. As stipulated, the ownership of the building
would be transferred to the lessors upon the expiration of the original term of the
lease.
Sometime in February 1988 the Tanqueco spouses executed a deed of donation
over the subject property in favor of their four (4) children, namely, private
respondents herein Oscar D. Tanqueco, Lucia Tanqueco-Matias, Ruben D.
Tanqueco and Nestor D. Tanqueco, who accepted the donation in the same

public instrument.
On 13 February 1991, a year before the expiration of the contract of lease, the
Tanquecos notified petitioner ALLIED that they were no longer interested in
renewing the lease. 2 ALLIED replied that it was exercising its option to renew
their lease under the same terms with additional proposals. 3 Respondent Ruben
D. Tanqueco, acting in behalf of all the donee-lessors, made a counter-proposal.
4 ALLIED however rejected the counter-proposal and insisted on Provision No. 1
of their lease contract.
When the lease contract expired in 1992 private respondents demanded that
ALLIED vacate the premises. But the latter asserted its sole option to renew the
lease and enclosed in its reply letter a cashier's check in the amount of
P68,400.00 representing the advance rental payments for six (6) months taking
into account the escalation clause. Private respondents however returned the
check to ALLIED, prompting the latter to consign the amount in court.
An action for ejectment was commenced before the Metropolitan Trial Court of
Quezon City. After trial, the MeTC-Br. 33 declared Provision No. 1 of the lease
contract void for being violative of Art. 1308 of the Civil Code thus
. . . but such provision [in the lease contract], to the mind of
the Court, does not add luster to defendant's cause nor
constitutes as an unbridled or unlimited license or sanctuary
of the defendant to perpetuate its occupancy on the subject
property. The basic intention of the law in any contract is
mutuality and equality. In other words, the validity of a
contract cannot be left at (sic) the will of one of the
contracting parties. Otherwise, it infringes (upon) Article
1308 of the New Civil Code, which provides: The contract
must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them . . . Using the
principle laid down in the case of Garcia v. Legarda as
cornerstone, it is evident that the renewal of the lease in this
case cannot be left at the sole option or will of the defendant
notwithstanding provision no. 1 of their expired contract. For
that would amount to a situation where the continuance and
effectivity of a contract will depend only upon the sole will or
power of the lessee, which is repugnant to the very spirit
envisioned under Article 1308 of the New Civil Code . . . the
theory adopted by this Court in the case at bar finds ample
affirmation from the principle echoed by the Supreme Court
in the case of Lao Lim v. CA, 191 SCRA 150, 154, 155.
On appeal to the Regional Trial Court, and later to the Court of Appeals, the
assailed decision was affirmed. 5
On 20 February 1993, while the case was pending in the Court of Appeals,

ALLIED vacated the leased premises by reason of the controversy. 6


ALLIED insists before us that Provision No. 1 of the lease contract was mutually
agreed upon hence valid and binding on both parties, and exercise by petitioner
of its option to renew the contract was part of their agreement and in pursuance
thereof.
We agree with petitioner. Article 1308 of the Civil Code expresses what is known
in law as the principle of mutuality of contracts. It provides that "the contract must
bind both the contracting parties; its validity or compliance cannot be left to the
will of one of them." This binding effect of a contract on both parties is based on
the principle that the obligations arising from contracts have the force of law
between the contracting parties, and there must be mutuality between them
based essentially on their equality under which it is repugnant to have one party
bound by the contract while leaving the other free therefrom. The ultimate
purpose is to render void a contract containing a condition which makes its
fulfillment dependent solely upon the uncontrolled will of one of the contracting
parties.
An express agreement which gives the lessee the sole option to renew the lease
is frequent and subject to statutory restrictions, valid and binding on the parties.
This option, which is provided in the same lease agreement, is fundamentally
part of the consideration in the contract and is no different from any other
provision of the lease carrying an undertaking on the part of the lessor to act
conditioned on the performance by the lessee. It is a purely executory contract
and at most confers a right to obtain a renewal if there is compliance with the
conditions on which the right is made to depend. The right of renewal constitutes
a part of the lessee's interest in the land and forms a substantial and integral part
of the agreement.
The fact that such option is binding only on the lessor and can be exercised only
by the lessee does not render it void for lack of mutuality. After all, the lessor is
free to give or not to give the option to the lessee. And while the lessee has a
right to elect whether to continue with the lease or not, once he exercises his
option to continue and the lessor accepts, both parties are thereafter bound by
the new lease agreement. Their rights and obligations become mutually fixed,
and the lessee is entitled to retain possession of the property for the duration of
the new lease, and the lessor may hold him liable for the rent therefor. The
lessee cannot thereafter escape liability even if he should subsequently decide to
abandon the premises. Mutuality obtains in such a contract and equality exists
between the lessor and the lessee since they remain with the same faculties in
respect to fulfillment. 7
The case of Lao Lim v. Court of Appeals 8 relied upon by the trial court is not
applicable here. In that case, the stipulation in the disputed compromise
agreement was to the effect that the lessee would be allowed to stay in the
premises "as long as he needs it and can pay the rents." In the present case, the
questioned provision states that the lease "may be renewed for a like term at the

option of the lessee." The lessor is bound by the option he has conceded to the
lessee. The lessee likewise becomes bound only when he exercises his option
and the lessor cannot thereafter be excused from performing his part of the
agreement.
Likewise, reliance by the trial court on the 1967 case of Garcia v. Rita Legarda,
Inc., 9 is misplaced. In that case, what was involved was a contract to sell
involving residential lots, which gave the vendor the right to declare the contract
cancelled and of no effect upon the failure of the vendee to fulfill any of the
conditions therein set forth. In the instant case, we are dealing with a contract of
lease which gives the lessee the right to renew the same.
With respect to the meaning of the clause "may be renewed for a like term at the
option of the lessee," we sustain petitioner's contention that its exercise of the
option resulted in the automatic extension of the contract of lease under the
same terms and conditions. The subject contract simply provides that "the term
of this lease shall be fourteen (14) years and may be renewed for a like term at
the option of the lessee." As we see it, the only term on which there has been a
clear agreement is the period of the new contract, i.e., fourteen (14) years, which
is evident from the clause "may be renewed for a like term at the option of the
lessee," the phrase "for a like term" referring to the period. It is silent as to what
the specific terms and conditions of the renewed lease shall be. Shall it be the
same terms and conditions as in the original contract, or shall it be under the
terms and conditions as may be mutually agreed upon by the parties after the
expiration of the existing lease?
In Ledesma v. Javellana 10 this Court was confronted with a similar problem. In
that case the lessee, was given the sole option to renew the lease, but the
contract failed to specify the terms and conditions that would govern the new
contract. When the lease expired, the lessee demanded an extension under the
same terms and conditions. The lessor expressed conformity to the renewal of
the contract but refused to accede to the claim of the lessee that the renewal
should be under the same terms and conditions as the original contract. In
sustaining the lessee, this Court made the following pronouncement:

. . . in the case of Hicks v. Manila Hotel Company, a similar


issue was resolved by this Court. It was held that 'such a
clause relates to the very contract in which it is placed, and
does not permit the defendant upon the renewal of the
contract in which the clause is found, to insist upon different
terms than those embraced in the contract to be renewed;
and that 'a stipulation to renew always relates to the contract
in which it is found and the rights granted thereunder, unless
it expressly provides for variations in the terms of the
contract to be renewed.'

The same principle is upheld in American Law regarding the


renewal of lease contracts. In 50 Am. Jur. 2d, Sec. 1159, at
p. 45, we find the following citations:
"The rule is well-established that a general
covenant to renew or extend a lease which makes
no provision as to the terms of a renewal or
extension implies a renewal or extension upon the
same terms as provided in the original lease.'
In the lease contract under consideration, there is no
provision to indicate that the renewal will be subject to new
terms and conditions that the parties may yet agree upon. It
is to renewal provisions of lease contracts of the kind
presently considered that the principles stated above
squarely apply. We do not agree with the contention of the
appellants that if it was intended by the parties to renew the
contract under the same terms and conditions stipulated in
the contract of lease, such should have expressly so stated
in the contract itself. The same argument could easily be
interposed by the appellee who could likewise contend that if
the intention was to renew the contract of lease under such
new terms and conditions that the parties may agree upon,
the contract should have so specified. Between the two
assertions, there is more logic in the latter.
The settled rule is that in case of uncertainty as to the
meaning of a provision granting extension to a contract of
lease, the tenant is the one favored and not the landlord. 'As
a general rule, in construing provisions relating to renewals
or extensions, where there is any uncertainty, the tenant is
favored, and not the landlord, because the latter, having the
power of stipulating in his own favor, has neglected to do so;
and also upon the principle that every man's grant is to be
taken most strongly against himself (50 Am Jur 2d, Sec.
1162, p. 48; see also 51 C.J.S. 599).'
Besides, if we were to adopt the contrary theory that the terms and conditions to
be embodied in the renewed contract were still subject to mutual agreement by
and between the parties, then the option which is an integral part of the
consideration for the contract would be rendered worthless. For then, the
lessor could easily defeat the lessee's right of renewal by simply imposing
unreasonable and onerous conditions to prevent the parties from reaching an
agreement, as in the case at bar. As in a statute no word, clause, sentence,
provision or part of a contract shall be considered surplusage or superfluous,
meaningless, void, insignificant or nugatory, if that can be reasonably avoided.
To this end, a construction which will render every word operative is to be
preferred over that which would make some words idle and nugatory. 11

Fortunately for respondent lessors, ALLIED vacated the premises on 20


February 1993 indicating its abandonment of whatever rights it had under the
renewal clause. Consequently, what remains to be done is for ALLIED to pay
rentals for the continued use of the premises until it vacated the same, computed
from the expiration of the original term of the contract on 31 March 1992 to the
time it actually left the premises on 20 February 1993, deducting therefrom the
amount of P68,400.00 consigned in court by ALLIED and any other amount
which it may have deposited or advanced in connection with the lease. Since the
old lease contract was deemed renewed under the same terms and conditions
upon the exercise by ALLIED of its option, the basis of the computation of rentals
should be the rental rate provided for in the existing contract.
Finally, ALLIED cannot assail the validity of the deed of donation, not being a
party thereto. A person who is not principally or subsidiarily bound has no legal
capacity to challenge the validity of the contract. 12 He must first have an interest
in it. "Interest" within the meaning of the term means material interest, an interest
to be affected by the deed, as distinguished from a mere incidental interest.
Hence, a person who is not a party to a contract and for whose benefit it was not
expressly made cannot maintain an action on it, even if the contract, if performed
by the parties thereto would incidentally affect him, 13 except when he is
prejudiced in his rights with respect to one of the contracting parties and can
show the detriment which could positively result to him from the contract in which
he had no intervention. 14 We find none in the instant case.
WHEREFORE, the Decision of the Court of Appeals is REVERSED and SET
ASIDE. Considering that petitioner ALLIED BANKING CORPORATION already
vacated the leased premises as of 20 February 1993, the renewed lease contract
is deemed terminated as of that date. However, petitioner is required to pay
rentals to respondent lessors at the rate provided in their existing contract,
subject to computation in view of the consignment in court of P68,400.00 by
petitioner, and of such other amounts it may have deposited or advanced in
connection with the lease.
SO ORDERED.
Davide, Jr., Vitug and Kapunan, JJ ., concur.

Footnotes
1.Records, p. 45.
2.Records, p. 11; Exh. "C".
3.ALLIED proposed the following terms for the extension of the lease: (1) Term
of Lease: ten (10) years; (2) Escalation Rate: 10% per annum starting
on the second year; (3) Monthly Rental: P8,000/month on the first

year; and (4) Advance Rental: Six (6) months to be applied to the first
six (6) months of the lease.
4.The counter-proposal: (1) Term: Two (2) years subject to renewal at the sole
option of the lessor; (2) Rent: a) at P80,000 a month payable within
the first five (5) days of each month commencing from the date the
lease contract is executed: b) Twelve (12) months rental payable in
advance upon signing of the lease contract; (3) Deposit: P80,000 to
answer for any unpaid obligations of the lessee, payable upon signing
of the lease contract and refundable upon the termination of the lease
(net of any amount applied to the payment of any such unpaid
obligations).
5.Decision penned by Judge Jose C. de Guzman, RTC Br. 93, Quezon City;
Decision of the Court of Appeals penned by Justice Jesus M.
Elbinias, concurred in by Justices Ramon U. Mabutas. Jr., and
Salvador J. Valdez, Jr., CA-G.R. SP. Case No. 30162.
6.Rollo, p. 12.
7.8 Manresa 627.
8.G.R. No. 87047, 31 October 1990, 191 SCRA 156.
9.No. L-20175, 30 October 1976, 21 SCRA 555.
10.G.R. No. 55187, 28 April 1983, 121 SCRA 794.
11.Shimonek v. Tillanan, 1 P. 2d., 154.
12.Astudillo v. The Board or Directors of PHHC, No. L-28066, 22 September
1976, 73 SCRA 15. See also Article 1397, civil Code.
13.House International Building Tenants Association Inc. v. Intermediate
Appellate Court, G.R. No. 75287, 30 June 1987, 151 SCRA 703.
14.Teves v. The People's Homesite and Housing Corporation, et al., No. L21498, 27 June 1968, 23 SCRA 1141.

EN BANC
[G.R. No. L-264. October 4, 1946.]
VICENTE SINGSON ENCARNACION, plaintiff-appellee, vs.
JACINTA BALDOMAR, ET AL., defendants-appellants.

Bausa & Ampil, for appellants.


Tolentino & Aguas, for appellee.
SYLLABUS
1.OBLIGATIONS AND CONTRACTS; LEASE; VALIDITY AND
FULFILLMENT CANNOT BE LEFT TO EXCLUSIVE WILL OF LESSEE.
The continuance and fulfillment of the contract of lease cannot be made to
depend solely and exclusively upon the free and uncontrolled choice of the
lessees between continuing paying the rentals or not, completely depriving
the owner of all say in the matter. For if this were allowed, so long as
defendants elected to continue the lease by continuing the payment of the
rentals, the owner would never be able to discontinue it; conversely,
although the owner should desire the lease to continue, the lessees could
effectively thwart his purpose if they should prefer to terminate the contract
by the simple expedient of stopping payment of the rentals. This, of course,
is prohibited by article 1256 of the Civil Code.
DECISION

HILADO, J p:
Vicente Singson Encarnacion, owner of the house numbered 589
Legarda Street, Manila, some six years ago leased said house to Jacinta
Baldomar and her son, Lefrado Fernando, upon a month-to-month basis for
the monthly rental of P35. After Manila was liberated in the last war,
specifically on March 16, 1945, and on April 7, of the same year, plaintiff
Singson Encarnacion notified defendants, the said mother and son, to
vacate the house above-mentioned on or before April 15, 1945, because
plaintiff needed it for his offices as a result of the destruction of the building
where said plaintiff had said offices before. Despite this demand, defendants
insisted on continuing their occupancy. When the original action was lodged
with the Municipal Court of Manila on April 20, 1945, defendants were in
arrears in the payment of the rental corresponding to said month, the agreed
rental being payable within the first five days of each month. That rental was
paid prior to the hearing of the case in the municipal court, as a
consequence of which said court entered judgment for restitution and
payment of rentals at the rate of P35 a month from May 1, 1945, until
defendants completely vacate the premises. Although plaintiff included in
said original complaint a claim for P500 damages per month, that claim was
waived by him before the hearing in the municipal court, on account of which
nothing was said regarding said damages in the municipal court's decision.
When the case reached the Court of First Instance of Manila upon

appeal, defendants filed therein a motion to dismiss (which was similar to a


motion to dismiss filed by them in the municipal court) based upon the
ground that the municipal court had no Jurisdiction over the subject matter
due to the aforesaid claim for that, therefore, the Court of First Instance had
no appellate Jurisdiction over the subject matter of the action. That motion to
dismiss was denied by His Honor, Judge Mamerto Roxas, by order dated
July 21, 1945 on the ground that in the municipal court plaintiff had waived
said claim for damages and that, therefore, the same waiver was understood
also to have been made in the Court of First Instance.
In the Court of First Instance the gravamen of the defense
interposed by defendants, as it was expressed by defendant Lefrado
Fernando during the trial, was that the contract which they had celebrated
with plaintiff since the beginning authorized them to continue occupying the
house indefinitely and while they should faithfully fulfill their obligation as
respects the payment of the rentals, and that this agreement had been
ratified when another ejectment case between the parties filed during the
Japanese regime concerning the same house was allegedly compounded in
the municipal court. The Court of First Instance gave more credit to plaintiff's
witness, Vicente Singson Encarnacion, jr., who testified that the lease had
always and since the beginning been upon a month-to-month basis. The
court added in its decision that this defense which was put up by defendant
Lefrado Fernando during the trial had not been alleged in defendant's
answer, for which reason the Court considered it as indicative of an
eleventh-hour theory. We think that the Court of First Instance was right in
so declaring. Furthermore, carried to its logical conclusion, the defense thus
set up by defendant Lefrado Fernando would leave to the sole and exclusive
will of one of the contracting parties (defendants in this case) the validity and
fulfillment of the contract of lease, within the meaning of article 1256 of the
Civil Code, since the continuance and fulfillment of the contract would then
depend solely and exclusively upon their free and uncontrolled choice
between continuing paying the rentals or not, completely depriving the owner
of all say in the matter. if this defense were to be allowed, so long as
defendants elected to continue the lease by continuing the payment of the
rentals, the owner would never be able to discontinue it; conversely,
although the owner should desire the lease to continue, the lessees could
effectively thwart his purpose if they should prefer to terminate the contract
by the simple expedient of stopping payment of the rentals. This, of course,
is prohibited buy the aforesaid article of the Civil Code. (8 Manresa, 3d ed.,
pp. 626, 627; Cuyugan vs. Santos, 34 Phil., 100.)
During the pendency of the appeal in the Court of First Instance
and before the judgment appealed from was rendered on October 31, 1945,
the rentals in arrears were those pertaining to the month of August, 1945, to
the date of said judgment at the rate of P35 a month. During the pendency of
the appeal in that court, certain deposits were made by defendants on
account of rentals with the clerk of said court, and in said judgment it is

disposed that the amounts thus deposited should be delivered to plaintiff.


Upon the whole, we are clearly of opinion that the judgment
appealed from should be, as it is hereby, affirmed, with the costs of the three
instances to appellantes. So ordered.
Paras, Pablo, Perfecto and Padilla, JJ., concur.

EN BANC
[G.R. No. 13463. November 9, 1918.]
H. C. LIEBENOW, plaintiff-appellant, vs. THE PHILIPPINE
VEGETABLE OIL COMPANY, defendant-appellee.

Kincaid & Perkins for appellant.


Nartigan & Welch for appellee.
SYLLABUS
1.CONTRACTS; STIPULATION FOR BONUS IN ADDITION TO
SALARY. A stipulation contained in a contract of employment to the effect
that the employee, in addition to his salary, shall receive a bonus in such
amount as the employer may see fit to grant creates a legal obligation on the
part of the employer to pay something by way of bonus; but the other party is
bound by the provision which leaves the determination of the amount of the
bonus to the employer.
2.WITNESSES; SUBPOENA "DUCES TECUM;" MOTION TO
VACATE. Where a subpoena duces tecum is improperly issued to
enforce the production of books, documents, or things which the witness is
not bound to produce, a proper remedy on the part of the person against
whom such subpoena is directed is to move that it be vacated or set aside.
3.ID.; ID.; OBSERVATIONS ON USE THEREOF. Inasmuch as
the subpoena duces tecum is a process which easily lends itself to abuse, it
should be controlled by the courts with a view to making it conformable to
law and justice. The court should never require the production of books and
documents which are irrelevant to the issue or which, if produced, could not
be properly utilized at the trial. A party desiring access to voluminous books
and documents which cannot be properly utilized at the hearing, without
expert assistance, should by timely motion before the trial ask the court to
require the adversary party to submit such books and documents for
examination under such reasonable conditions as the court may specify.

DECISION

STREET, J p:
This action was instituted by the plaintiff, H. C. Liebenow, on May
11, 1917, in the Court of First Instance of the city of Manila against the
defendant, the Philippine Vegetable Oil Company, a corporation engaged in
the manufacture of coconut oil in the city of Manila. The purpose of the
proceeding is to recover a sum of money to which the plaintiff considers
himself entitled by way of a bonus in addition to the salary earned by him
while in the employment of the defendant company as superintendent of its
factory in the district of Nagtahan, city of Manila. At the hearing in the Court
of First Instance judgment was entered against the plaintiff, absolving the
defendant from the complaint, and the plaintiff has appealed.
The contract under which the plaintiff rendered the service to which
reference has been made is expressed in a letter of March 17, 1914, written
by the president of the Philippine Vegetable Oil Company to Liebenow as
follows:
"We hereby confirm conversation had on yesterday
by our Mr. Vorster and yourself to the effect that this
company engages your services as superintendent of its
factory at Nagtahan for the period of one year from April 1st,
1914, at a monthly compensation of P500 (five hundred
pesos) and living quarters and such further amount in the
way of bonus as the board of directors may see fit to grant
you."
In conformity with this agreement, the plaintiff entered upon the
discharge of his duties as superintendent of the factory aforesaid on April 1,
1914, and continued to render service in this capacity not only for the period
of one year specified in the contract, but for an additional period of four
months, or until August 1, 1916, when his services terminated. At some time
during the course of this employment, the exact date of which does not
appear, the monthly salary of P500 was raised to P750, but the contract was
not otherwise changed. After the employment ceased the defendant
company continued to deliver to the plaintiff each month a check for P750,
the equivalent of the salary he had been receiving. These payments were
continued until the total sum of P4,500 had been thus paid.
The plaintiff alleges in his complaint that by reason of his skill and
ability the defendant's plant was made much more productive and its profits
thereby enormously increased. It is not denied that the service rendered was
satisfactory to the company, and the court found that during the time the
plaintiff was employed as superintendent the output of the plant had

increased and the cost of operation had diminished, with consequent profit
to the defendant company.
It is the plaintiff's contention that the stipulation contained in the
letter of March 17, 1914, to the effect that the plaintiff should receive such
further amount in the way of bonus, over and above salary, as the board of
directors might see fit to grant has not been satisfied. The P4,500, which he
received in the form of a monthly check of P750 for six successive months
after the termination of his services, seems to be considered by the plaintiff
purely in the light of a free gift, and it is insisted that this money was not paid
to him in satisfaction, in whole or in part, of the stipulated bonus. We cannot
concur in this suggestion. It is true that the directors did not by anticipation
declare that these payments should be considered in the light of a "bonus;"
and a resolution to this effect was not adopted by them until after the trial in
the Court of First Instance had commenced. This circumstance we consider
unimportant. The money thus paid was in addition to salary; and it came
from the same source and was paid by the same authority as any bonus that
might have been awarded to him. The fact that the money was not so
labeled is immaterial.
The plaintiff, however, contends that he is entitled to a bonus to be
fixed by the court as a reasonable participation in the increased profits of the
factory under his care, taking into consideration his technical skill and the
greater output resulting therefrom. He believes that the increased profits of
the enterprise due directly to his efficiency amounted to at least P100,000;
and he suggests, as the lowest proper minimum that he should be awarded
an amount sufficient to raise his salary for the whole period to the sum of
P12,000 per annum, the amount supposedly paid to his predecessor. This
last suggestion is based on the circumstance that, upon a certain occasion,
he talked to the company's manager about the amount of the bonus which
he would expect to receive and informed the manager that he would not be
satisfied with less than his predecessor had been accustomed to receive.
The manager, so the plaintiff says, expressed his conformity with this idea.
The solution of the case makes it necessary to consider the legal
effect of the stipulation inserted in the contract in question to the effect that
the plaintiff should be entitled to such further amount in the way of bonus as
the board of directors might see fit to grant.
We see no reason to doubt that a promise of this character creates
a legal obligation binding upon the promisor, although in its actual results it
may not infrequently prove to be illusory. Such a promise is not, in our
opinion, nugatory, under Article 1115 of the Civil Code, as embodying a
condition dependent exclusively upon the will of the obligor. Nor can it be
held invalid under Article 1256 of the same Code, which declares that the
validity and performance of a contract cannot be left to the will of one of the
contracting parties. The uncertainty of the amount to be paid by way of
bonus is also no obstacle to the validity of the contract (Article 1273, Civil
Code); since the contract itself specifies the manner in which the amount

payable is to be determined, namely, by the exercise of the judgment and


discretion of the employer.
The validity of the promise being conceded, the question which
arises next is: What is necessary to satisfy it? Upon this point it must be
obvious that the obligation can only be satisfied when something has been
paid as a bonus by or with the approval of the board of directors. In the case
before us the promise to pay a bonus is absolute and unconditional. The
payment is not conditioned upon satisfactory service, nor upon the duration
of the service, nor upon the profits which may accrue to the employer from
the efficiency of the employee. All these elements might and naturally would
operate upon the minds and discretion of the directors in fixing the amount of
the bonus, but they are wholly unconnected with the legal right of the plaintiff
to receive something as a bonus.
The amount of the bonus, it will be observed, is left by the contract
to the discretion of the board of directors. Now, when that discretion has
once been exercised and a bonus has been paid by the directors or by the
officers of the company, with the approval, express or implied, of the
directors, can that discretion be judicially reviewed? We are of the opinion
that it cannot. The parties stipulated that the discretion to be exercised was
the discretion of the directors; and there would be a very manifest
infringement of the contract, if we were to substitute in place of the discretion
of the directors the discretion of any other person or body whomsoever.
Practical considerations point to the same conclusion. An employer,
in determining what amount to award as a bonus, naturally and properly
considers many things a court could not well take into account, as for
instance, the personal peculiarities which make one man more acceptable or
more serviceable in the employment than another. In the complex
enterprises of modern industry, especially, would it be difficult for a court to
undertake to say just what any particular employee might be entitled to. The
best course, we think, in such a case as this, is to recognize that the
contracting parties have placed the discretion to determine the amount of the
bonus in the hands of the employer, and to hold them bound by that.
But it is suggested that where a contract of service provides for a
salary in a fixed sum and an additional sum to be paid by way of bonus, the
whole contract is to be taken together, and it is to be considered as having
about the same effect as if the parties, recognizing the inadequacy of the
amount fixed as salary, had agreed that a further bonus should be paid
sufficient to raise the amount to what should be considered adequate upon
the basis of a quantum meruit. A more reasonable construction and in our
opinion one which approximates more closely to the evident intention of the
parties is to hold that the fixed salary was adjusted with a view to
compensate the employee so far as those elements are concerned which
could properly be taken into consideration in fixing a quantum meruit and
that the bonus was intended to be a mere gratuity the amount of which
should be determined exclusively in the discretion of the employer.

If, as supposed, the contracting parties are really bound by the


stipulation which leaves the determination of the amount of the bonus to the
employer, two consequences necessarily follow. The first is that where
something or other is paid by way of a bonus upon such a contract, even
though only a nominal amount, the obligation is satisfied. The other is that, if
nothing at all is paid, the employee can recover in a legal action only
nominal damages. Such a contract contains nothing which could serve as
the basis of a title to special damages and affords no measure by which the
amount of such damages could be ascertained.
It therefore becomes a matter of little or no practical importance
whether the sum of P4,500, which was paid to the plaintiff after he quit work
for the defendant, was paid as a bonus or not; for even if it were not so paid,
the plaintiff could in this action recover no more than mere nominal
damages.
A question which we consider of much importance is presented in
an assignment of error directed to the action of the trial court with reference
to a subpoena duces tecum which the plaintiff caused to be issued a few
days prior to the hearing in the Court of First Instance. Said subpoena was
directed to the managing director of the Philippine Vegetable Oil Company
and commanded him to produce in court upon the day set for the hearing of
the cause the following documents, records, and papers relative to the
company's business, to wit:
"(1)All Daily Mill reports showing daily output of oil
and cake and consumption of copra of the P. V. O. Co., from
April 1, 1913, to March 31, 1915, both inclusive.
"(2)All shipping reports of oil of said company for
the same period. "(3) All records showing cost of all
shipments of oil made by said company, both in bulk and
barrels for the same period.
"(4)All records of all demurrage charges on said
shipments for the same period.
"(5)All records of receipts, expenses and profits
from operation of the company's mill and all operating
charges and costs of said mill for the same period.
"(6)All records and vouchers showing the salary
and all other sums paid to Mr. Thompson, the company's mill
superintendent, or mill manager, during the entire period of
his employment as well as all sums paid to him thereafter."
When the case was called for hearing the attorney for the
defendant moved the court to vacate this subpoena on the ground that the
plaintiff was not entitled to require the production of the documents called

for. The court reserved the matter for later determination and in the end
ruled that the evidence which the plaintiff sought to elicit was irrelevant. The
witness was therefore excused from producing the papers mentioned in the
subpoena duces tecum and the plaintiff duly excepted.
According to the plaintiff's theory of the case, he was entitled to a
bonus the amount of which should be determined by the court with a view to
the usefulness and efficiency which he had exhibited in the course of his
employment; and he insists that the profits earned by the defendant during
the time he was employed as superintendent of the Nagtahan factory are
relevant in determining the amount to be thus awarded. For reasons already
stated, this contention is untenable; and we are of the opinion that the court
committed no error in refusing to compel the production of the documents
and records in question. The right to the bonus was wholly independent of
the profits, and the amount of the profits could not properly be taken into
consideration by the court at all.
The subpoena duces tecum is, in all respects, like the ordinary
subpoena ad testificandum, with the exception that it concludes with an
injunction that the witness shall bring with him and produce at the
examination the books, documents, or things described in the subpoena. It is
issued in the same manner as the ordinary subpoena, and is procurable
from the clerk as of course without application to the court. Section 402 of
the Code of Civil Procedure says that the subpoena duces tecum may be
used to compel the witness to bring any book, document, or other thing
under his control, which he is bound by law to produce in evidence. The
words "which he is bound by law to produce in evidence" indicate a limitation
upon the exigency of the writ; and it is evident that there is this difference
between the ordinary subpoena to testify and the subpoena duces tecum,
namely, that while the person to whom the subpoena to testify is directed is
bound absolutely and without qualification to appear in response to the
subpoena, the person to whom the subpoena duces tecum is directed is
bound only in so far as he is required by law to produce the documents in
evidence.
It results therefore that, if the case is such as to make it doubtful
whether the documents to be produced are such that the witness is bound
by law to produce them, the witness is entitled to have the court pass upon
this question; and where a subpoena duces tecum is improperly issued to
enforce the production of documents which the witness is not bound to
produce, a proper remedy is by motion to vacate or set aside the subpoena.
Such was the procedure adopted in this case.
The power to require the production of books, documents, and
papers by means of the subpoena duces tecum is one which is undoubtedly
capable of abuse and one which, if improperly used, causes great
annoyance, not to say, expense to the person against whom it is directed. If
the use of the subpoena duces tecum were in practice confined to the office
of compelling the production of documents and papers which are directly

related to the issues in a case, occasions for complaint would be infrequent.


However, in modern business it is sometimes necessary for litigants to have
access to voluminous materials. Journals, ledgers, cashbooks, invoice
books, and account books pertaining to the business of large enter arises
may have to be examined. L To enforce the production of these great piles
of material unconditionally in court would in many cases operate with
unreasonable hardship on the party against whom the subpoena is issued
and not infrequently the step would be barren of results to the person
seeking to examine them. Such procedure is not to be encouraged; and it is
the duty of the court, in such a situation, to control the process so as to
make it conformable to law and justice. (Subsection 7, Section 11, Code of
Civil Procedure.) The motion to vacate or set aside the subpoena gives the
court the requisite opportunity to examine the issues raised by the pleadings
in the cause and to consider not only the relevancy of the evidence which is
to be elicited but also to consider whether an order for the production of the
document would constitute an unlawful invasion of privacy.
In determining whether the production of the documents described
in a subpoena duces tecum should be enforced by the court, it is proper to
consider, first, whether the subpoena calls for the production of specific
documents, or rather for specific proof, and secondly, whether that proof is
prima facie sufficiently relevant to justify enforcing its production. A general
inquisitorial examination of all the books, papers, and documents of an
adversary, conducted with a view to ascertain whether something of value
may not show up, will not be enforced. (Street, Federal Equity Practice, vol.
2, Sec. 1844.) No court, it is needless to say, would punish a witness for
contempt in refusing to obey a subpoena duces tecum the issuance of which
has been procured with such end in view.
We observe in conclusion that where a party has any legitimate
reason for inspecting the voluminous documents of an adversary, it is
usually more to the purpose to ask the court, before the hearing, for an order
requiring such adversary to submit his books and records for examination
under such reasonable condition as the court may specify. If necessary, an
expert can then be set to work; and the result ,of his examination can he
submitted to the court in a form at once intelligible and helpful. In the case
before us if the documents called for had been produced in the court room,
both the court and the attorneys alike would have been helpless to discover
from the unsystematized mass the particular facts intended to be proved by
them; and in the end it would have been necessary to adjourn the hearing
and call in an accountant to make the needed examination. While we do not
wish to be understood as attempting to lay down any hard and fast rule upon
such a matter, we merely suggest that it is an abuse of legal process to use
the subpoena duces tecum to produce in court material which cannot be
properly utilized by the court in determining the issues of the case; and in
cases of this kind the litigant should be required to resort to some other
procedure in order properly to place before the court the evidence upon

which the case should be decided.


The judgment is affirmed, with costs. So ordered.
Torres, Johnson, Malcolm, Avancea and Fisher, JJ., concur.
SECOND DIVISION
[G.R. No. 107569. November 8, 1994.]
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF
APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO
FERNANDEZ, respondents.

DECISION

PUNO, J p:
Petitioner bank seeks the review of the decision, dated October 15,
1992, of the Court of Appeals 1 in CA G.R. CV No. 27195, the dispositive
portion of which reads as follows:
"WHEREFORE, the judgment appealed from is hereby SET
ASIDE and a new one is entered ordering defendantappellee PNB of re-apply the interest rate of 12% per annum
to plaintiffs-appellants (referring to herein private
respondents) indebtedness and to accordingly take the
appropriate charges from plaintiffs-appellants' (private
respondents') payment of P81,000.00 made on December
26, 1985. Any balance on the indebtedness should, likewise,
be charged interest at the rate of 12% per annum.
"SO ORDERED."
The parties do not dispute the facts as laid down by respondent
court in its impugned decision, viz.:
"On April 7, 1982, (private respondents) as owners of a
NACIDA-registered enterprise, obtained a loan under the
Cottage Industry Guaranty Loan Fund (CIGLF) from the
Philippine National Bank (PNB) in the amount of Fifty
Thousand (P50,000.00) Pesos, as evidenced by a Credit
Agreement. Under the Promissory Note covering the loan,
the loan was to be amortized over a period of three (3) years
to end on March 29, 1985, at twelve (12%) percent interest

annually.
"To secure the loan, (private respondents) executed a Real
Estate Mortgage over a 1.5542 hectare parcel of
unregistered agricultural land located at Cambang-ug,
Toledo City, which was appraised by the PNB at P1,062.52
and given a loan value of P531.26 by the Bank. In addition,
(private respondents) executed a Chattel Mortgage over a
thermo plastic-forming machine, which had an appraisal
value of P8,800 and a loan value of P4,400.00.
"The Credit Agreement provided inter alia, that
'(a)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
accommodation shall be correspondingly
decreased in the event that the applicable
maximum interest 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 in
the maximum interest rate.'
"The Promissory Note, in turn, authorized the PNB to raise
the rate of interest, at any time without notice, beyond the
stipulated rate of 12% but only "within the limits allowed by
law."
The Real Estate Mortgage contract likewise
provided that
'(k)INCREASE OF INTEREST RATE: The rate of
interest charged on the obligation secured by this
mortgage as well as the interest on the amount
which may have been advanced by the
MORTGAGE, in accordance with the provision
thereof, shall be subject during the life of this
contract to such an increase within the rate allowed
by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.'
"On February 17, 1983, (private respondents) were granted
an additional NACIDA loan of Fifty Thousand (P50,000.00)
Pesos by the PNB, for which (private respondents) executed
another Promissory Note, which was to mature on April 1,
1985. Other than the date of maturity, the second promissory

note contained the same terms and stipulations as the


previous note. The parties likewise executed a new Credit
Agreement, changing the amount of the loan from
P50,000.00 to P100,000.00, but otherwise preserving the
stipulations contained in the original agreement.
"As additional security for the loan, (private respondents)
constituted another real estate mortgage over 2 parcels of
registered land, with a combined area of 311 square meters,
located at Guadalupe, Cebu City. The land, upon which
several buildings are standing, was appraised by the PNB to
have a value of P40,000.00 and a loan value of P28,000.00.
"In a letter dated August 1, 1984, the PNB informed (private
respondents) 'that the interest rate of your CIGLF loan
account wit us is now 25% per annum plus a penalty of 6%
per annum on past dues.' The PNB further increased this
interest rate to 30% on October 15, 1984; and to 42% on
October 25, 1984.
"The records show tat as of December 1985, (private
respondents) had an outstanding principal account of
P81,000.00 of which P18,523.14 was credited to the
principal, P57,488.89 to the interest, and the rest to penalty
and other charges. Thus, as of said date, the unpaid
principal obligation of (private respondent) amounted to
P62,830.32.
"Thereafter, (private respondents) exerted efforts to get the
PNB to re-adopt the 12% interest and to condone the
present interest and penalties due; but to no avail. 2
(Citations omitted.)
On December 15, 1987, private respondents filed a suit for specific
performance against petitioner PNB and the NACIDA. It was docketed as
Civil Case No. CEB-5610, and raffled to the Regional Trial Court, 7th
Judicial Region, Cebu City, Br. 7. 3 Private respondents prayed the trial court
to order:
"1.The PNB and NACIDA to issue in (private respondents')
favor, a release of mortgage;
"2.The PNB to pay pecuniary consequential damages for the
destruction of (private respondents') enterprise;
"3.The PNB to pay moral and exemplary damages as well as
the costs of suit; and
"4.Granting (private respondents') such other relief as may

be found just and equitable in the premises.4


On February 26, 1990, the trial court dismissed private
respondents' complaint in Civil Case No. CEB-5610. On October 15,
1992, the Court of Appeals reversed the dismissal with respect to
petitioner bank, and disallowed the increases in interest rates.
Petitioner bank now contends that "respondent Court of
Appeals committed grave error when it ruled (1) that the increase in
interest rates are unauthorized; (2) that the Credit Agreement and the
Promissory Notes are not the law between the parties; (3) that CB
Circular No. 773 and CB Circular No. 905 are not applicable; and (4)
that private respondents are not estopped from questioning the
increase of rate interest made by petitioner." 5
The petition is bereft of merit.
In making the unilateral increases in interest rates, petitioner
bank relied on the escalation clause contained in their credit
agreement which provides, as follows:
"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 and
provided, that, the interest rate on this accommodation
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 in maximum
interest rate."
This clause is authorized by Section 2 of Presidential Decree
(P.D.) No. 1684 which further amended Act No. 2655 ("The Usury Law"),
as amended, thus:
"Sec. 2.The same Act is hereby amended by adding a
new section after Section 7, to read as follows:
'Sec. 7-a.Practice to an agreement pertaining to
a loan or forbearance of money, goods or
credits may stipulate that the rate of interest
greed 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."
Section 1 of P.D. No. 1684 also empowered the Central Bank's
Monetary Board to prescribe the maximum rates of interest for loans
and certain forbearances. Pursuant to such authority, the Monetary
Board issued Central Bank (C.B.) Circular No. 905, series of 1982,
Section 5 of which provides:
"Sec. 5.Section 1303 of the Manual of Regulations (for
Banks and Other Financial Intermediaries) is hereby
amended to read as follows:
'Sec. 1303.Interest and Other Charges. The rate
of interest, including commissions, premiums,
fees and other charges, on any loan, or
forbearance of any money, goods or credits,
regardless of maturity and whether secured or
unsecured, shall not be subject to any ceiling
prescribed under or pursuant to the prescribed
under or pursuant to the Usury Law, as
amended.'"
P.D. No. 1684 and C.B. Circular No. 905 no more than allow
contracting parties to stipulate freely regarding any subsequent
adjustment in the interest rate that shall accrue on a loan or
forbearance of money, goods or credits. In fine, they can agree to
adjust, upward or downward, the interest previously stipulated.
However, contrary to the stubborn insistence of petitioner bank, the
said law and circular did not authorize either party to unilaterally raise
the interest rate without the other's consent. cdphil
It is basic that there can be no contract in the true sense in the
absence of the element of agreement, or of mutual assent of the
parties. If this assent is wanting on the part of the one who contracts,
his act has no more efficiency than if it had been done under duress or
by a person of unsound mind. 6
Similarly, contract charges must be made with the consent of
the contracting parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect
of the agreement. In the case of loan contracts, it cannot be gainsaid
that the rate of interest is always a vital component, for it can make or
break a capital venture. Thus, any change must be mutually agreed
upon, otherwise, it is bereft of any binding effect.

We cannot countenance petitioner bank's posturing that the


escalation clause at bench gives it unbridled right to unilaterally
upwardly adjust the interest on private respondents' loan. That would
completely take away from private respondents the right to assent to
an important modification in their agreement, and would negate the
element of mutuality in contracts. In Philippine National Bank v. Court
of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held
". . . 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. 1308.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 or 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 . . . Hence, even assuming that the . . . 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 leave it' . . . Such a contract is a
veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.
(Citation omitted.)
Private respondents are not also estopped from assailing the
unilateral increases in interest rate made by petitioner bank. No one
receiving a proposal to change a contract to which he is a party, is
obliged to answer the proposal, and his silence per se cannot be
construed as an acceptance. 7 In the case at bench, the circumstances
do not show that private respondents implicitly agreed to the proposed
increases in interest rate which by any standard were to sudden and
too stiff. llcd

IN VIEW THEREOF, the instant petition is DENIED for lack of


merit, and the decision of the Court of Appeals in CA-G.R. CV No.
27195, dated October 15, 1992, is AFFIRMED. Costs against petitioner.
SO ORDERED.
Narvasa, C.J., Regalado and Mendoza, JJ., concur.

Footnotes
1.Through its Second Division, composed of Associate Justices Santiago
M. Kapunan (chairman and ponente), Oscar M. Herrera, and
Serafin V.C. Guingona.
2.Rollo, pp. 32-34.
3.Presided by Judge Generoso A. Juaban.
4.Rollo, p. 35.
5.Petition, p. 9; Rollo, p. 16.
6.See Mutual Life Ins. Co. of New York v. Young's Adm'rs, 23 L.Ed. 152;
Noland Co. v. Graver Tank & Mfg. Co., 301 F. 2d 43; Miller v.
Miller, 134 F. 2d 583, 588; See also Linne v. Ronkienen, 37 N.W.
2d 237, 239.
7.See Suitter v. Thompson, 358 P. 2d 267; Levy v. Baetjer, 81 A. 2d 644.
FIRST DIVISION
[G.R. No. L-27696. September 30, 1977.]
MIGUEL FLORENTINO, ROSARIO ENCARNACION de
FLORENTINO, MANUEL ARCE, JOSE FLORENTINO,
VICTORINO FLORENTINO, ANTONIO FLORENTINO,
REMEDION ENCARNACION and SEVERINA
ENCARNACION, petitioners-appellants, vs. SALVADOR
ENCARNACION, SR., SALVADOR ENCARNACION, JR.,
and ANGEL ENCARNACION, oppositors to encumbrancepetitioners-appellees.

Jose F. Singson and Miguel Florentino for appellants.


Pedro Singson for appellees.

DECISION

GUERRERO, J p:
Appeal from the decision of the Court of First Instance of Ilocos Sur, acting as a
land registration court, in Land Registration Case No. N-310.
On May 22, 1964, the petitioners-appellants Miguel Florentino, Rosario
Encarnacion de Florentino, Manuel Arce, Jose Florentino, Victorino Florentino,
Antonio Florentino, Remedios Encarnacion and Severina Encarnacion, and the
petitioners-appellees Salvador Encarnacion, Sr., Salvador Encarnacion, Jr. and
Angel Encarnacion filed with the Court of First Instance of Ilocos Sur an
application for the registration under Act 496 of a parcel of agricultural land
located at Barrio Lubong, Dacquel, Cabugao, Ilocos Sur. prLL
The application alleged among other things that the applicants are the common
and pro-indiviso owners in fee simple of the said land with the improvements
existing thereon; that to the best of their knowledge and belief, there is no
mortgage, lien or encumbrance of any kind whatsoever affecting said land, nor
any other person having any estate or interest thereon, legal or equitable,
remainder, reservation or in expectancy; that said applicants had acquired the
aforesaid land thru and by inheritance from their predecessors in interest, lately
from their aunt, Doa Encarnacion Florentino who died in Vigan, Ilocos Sur in
1941, and for which the said land was adjudicated to them by virtue of the deed
of extrajudicial partition dated August 24, 1947; that applicants Salvador
Encarnacion, Jr. and Angel Encarnacion acquired their respective shares of the
land thru purchase from the original heirs, Jesus, Caridad, Lourdes and Dolores,
all surnamed Singson, on one hand and from Asuncion Florentino on the other.
After due notice and publication, the Court set the application for hearing. No
opposition whatsoever was filed except that of the Director of Lands which was
later withdrawn, thereby leaving the application unopposed. Thereupon, an order
of general default was issued against the whole world. Upon application of the
applicants, the Clerk of Court was commissioned and authorized to receive the
evidence of the applicants and ordered to submit the same for the Court's proper
resolution.
The crucial point in controversy in this registration case is centered in the
stipulation marked Exhibit O-1 embodied in the deed of extrajudicial partition
(Exhibit O) dated August 24, 1947 which states:
"Los productos de esta parcela de terreno situada en el
Barrio Lubong, Dacquel, Cabugao, Ilocos Sur, se destinan
para costear los gastos de procesion de la Tercera Caida,
celebracion y sermon de Siete Palabras, Seis Estaciones de
Cuaresma, procesion del Nio Jesus, reparacion y

conservacion de los mismos, construccion de un camarin en


donde se depositan los carros, mesas y otras cosas que
sirven para la celebracion de Siete Palabras y otras cosas
mas. Lo que sobra de dichos productos despues de
descontados todos los gastos, se repartira entre nosotros
los herederos."
In his testimony during the trial, applicant Miguel Florentino asked the court to
include the said stipulation (Exhibit O-1) as an encumbrance on the land sought
to be registered, and cause the entry of the same on the face of the title that will
finally be issued. Opposing its entry on the title as an encumbrance, petitionersappellees Salvador Encarnacion, Sr., Salvador Encarnacion, Jr. and Angel
Encarnacion filed on October 3, 1966 a manifestation seeking to withdraw their
application on their respective shares of the land sought to be registered. The
withdrawal was opposed by the petitioners-appellants.
The Court after hearing the motion for withdrawal and the opposition thereto
issued on November 17, 1966 an order and for the purpose of ascertaining and
implifying the issues therein stated that all the applicants admit the truth of the
following:
(1)That just after the death of Doa Encarnacion Florentino
in 1941 up to last year, and as had always been the case
since time immemorial, the products of the land made
subject matter of this land registration case had been used in
answering for the payment of expenses for the religious
functions specified in the Deed of Extrajudicial Partition,
dated August 24, 1947;
(2)That this arrangement about the products answering for
the payment of expenses for religious functions as
mentioned above was not registered in the office of the
Register of Deeds under Act No. 3344, Act 496 or any other
system of registration;
(3)That all the herein applicants know of the existence of this
arrangement as specified in the Deed of Extrajudicial
Partition of August 24, 1947;
(4)That the Deed of Extrajudicial Partition of August 24, 1947
was not signed by Angel Encarnacion or Salvador
Encarnacion, Jr.
The court denied the petitioners-appellees' motion to withdraw for lack of merit,
and rendered a decision under date of November 29, 1966 confirming the title of
the property in favor of the following applicants with their respective shares as
follows:
Spouses Miguel Florentino and Rosario Encarnacion de

Florentino, both of legal age, Filipinos, and residents of


Vigan, Ilocos Sur, consisting of an undivided 31/297 and
8.25/297 portions, respectively;
Manuel Arce, of legal age, Filipino, married to Remedios
Pichay and resident of Vigan, Ilocos Sur, consisting of an
undivided 66/297 portion;.
Salvador Encarnacion, Jr., of legal age, Filipino, married to
Angelita Nagar, and resident of Vigan, Ilocos Sur, consisting
of an undivided 66/297;.
Jose Florentino, of legal age, Filipino, married to Salvacion
Florendo and resident of 16 South Ninth Diliman, Quezon
City, consisting of an undivided 33/297 portion;.
Angel Encarnacion, of legal age, Filipino, single and resident
of 1514 Milagros St., Sta. Cruz, Manila, consisting of an
undivided 33/297 portion;
Victorino Florentino, of legal age, Filipino, married to
Mercedes L. Encarnacion and resident of Vigan, Ilocos Sur,
consisting of an undivided 17.5/297 portion;
Antonio Florentino, of legal age, Filipino, single and resident
of Vigan, Ilocos Sur, consisting of an undivided 17.5/297;
Salvador Encarnacion, Sr., of legal age, Filipino, married to
Dolores Singson, consisting of an undivided 8.25/297;
Remedios Encarnacion, of legal age, Filipino, single and
resident of Vigan, Ilocos Sur, consisting of an undivided
8.25/297 portion; and.
Severina Encarnacion, of legal age, Filipino, single and
resident of Vigan, Ilocos Sur, consisting of 8.25/297
undivided portion.
The court, after ruling "that the contention of the proponents of the encumbrance
is without merit because, taking the self-imposed arrangement in favor of the
Church as a pure and simple donation, the same is void for the reason that the
done here has not accepted the donation (Art. 745, Civil Code) and for the further
reason that, in the case of Salvador Encarnacion, Jr. and Angel Encarnacion,
they had made no oral or written grant at all (Art. 748) as in fact they are even
opposed to it," 1 held in the dispositive portion, as follows:
"In view of all these, therefore, and insofar as the question of
encumbrance is concerned, let the religious expenses as
herein specified be made and entered on the undivided

shares, interests and participations of all the applicants in


this case, except that of Salvador Encarnacion, Sr., Salvador
Encarnacion, Jr. and Angel Encarnacion."
On January 3, 1967, petitioners-appellants filed their Reply to the Opposition
reiterating their previous arguments, and also attacking the jurisdiction of the
registration court to pass upon the validity or invalidity of the agreement Exhibit
O-1, alleging that such is litigable only in an ordinary action and not proper in a
land registration proceeding.
The Motion for Reconsideration and of New Trial was denied on January 14,
1967 for lack of merit, but the court modified its earlier decision of November 29,
1966, to wit:
"This Court believes, and so holds, that the contention of the
movants (proponents of the encumbrance) is without merit
because the arrangement, stipulation or grant as embodied
in Exhibit O (Escritura de Particion Extrajudicial), by
whatever name it may be called, whether donation, usufruct
or ellemosynary gift, can be revoked, as in fact the
oppositors Salvador Encarnacion, Sr., who is the only one of
the three oppositors who is a party to said Exhibit O (the two
others, Salvador Encarnacion, Jr. and Angel Encarnacion
were no parties to it) did revoke it as shown by acts
accompanying his refusal to have the same appear as an
encumbrance on the title to be issued. In fact, legally, the
same can also be ignored or disregarded by all the three
oppositors. The reasons are: First, if the said stipulation as
embodied in Exhibit O-1 is to be viewed as a stipulation pour
autrui the same cannot now be enforced because the
Church in whose favor it was made has not communicated
its acceptance to the oppositors before the latter revoked it.
Says the 2nd par. of Art. 1311 of the New Civil Code:
"If a contract should contain some stipulation in favor of a
third person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest of a person
is not sufficient. The contracting parties must have clearly
and deliberately conferred a favor upon a third person." No
evidence has ever been submitted by the Church to show its
clear acceptance of the grant before its revocation by the
oppositor Salvador Encarnacion, Sr. (or of the two other
oppositors, Salvador Encarnacion, Jr. and Angel
Encarnacion, who didn't even make any grant, in the first
place), and so not even the movants who have officiously
taken into themselves the right to enforce the grant cannot
now maintain any action to compel compliance with it. (Bank

of the P.I. v. Concepcion y Hijos, Inc., 53 Phil. 806). Second,


the Church in whose favor the stipulation or grant had
apparently been made ought to be the proper party to
compel the herein three oppositors to abide with the
stipulation. But it has not made any appearance nor
registered its opposition to the application even before Oct.
18, 1966 when an order of general default was issued. Third,
the movants are not, in the contemplation of Section 2, Rule
3 of the Rules of Court, the real party in interest to raise the
present issue; and Fourth, the movants having once alleged
in their application for registration that the land is without
encumbrance (par. 3 thereof), cannot now be allowed by the
rules of pleading to contradict said allegation of theirs.
(McDaniel v. Apacible, 44 Phil. 248)"

SO ORDERED." 2
After Motions for Reconsideration were denied by the court, the petitionersappellants appealed directly to this Court pursuant to Rule 41, Rules of Court,
raising the following assignment of errors:
I.The lower court erred in concluding that the stipulation embodied in Exhibit O
on religious expenses is just an arrangement, stipulation, or grant revocable at
the unilateral option of the co-owners.
II.The lower court erred in finding and concluding that the encumbrance or
religious expenses embodied in Exhibit O, the extrajudicial partition between the
co-heirs, is binding only on the applicants Miguel Florentino, Rosario
Encarnacion de Florentino, Manuel Arce, Jose Florentino, Antonio Florentino,
Victorino Florentino, Remedios Encarnacion and Severina Encarnacion.
III.The lower court as a registration court erred in passing upon the merits of the
encumbrance (Exhibit O-1) as the same was never put to issue and as the
question involved is an adjudication of rights of the parties.
We find the first and second assignments of error impressed with merit and,
therefore, tenable. The stipulation embodied in Exhibit O-1 on religious expenses
is not revocable at the unilateral option of the co-owners and neither is it binding
only on the petitioners-appellants Miguel Florentino, Rosario Encarnacion de
Florentino, Manuel Arce, Jose Florentino, Victorino Florentino, Antonio
Florentino, Remedios Encarnacion and Severina Encarnacion. It is also binding
on the oppositors-appellees Angel Encarnacion, Salvador Encarnacion, Sr. and
Salvador Encarnacion, Jr.
The stipulation (Exhibit O-1) is part of an extrajudicial partition (Exh. O) duly
agreed and signed by the parties, hence the same must bind the contracting
parties thereto and its validity or compliance cannot be left to the will of one of

them (Art. 1308, N.C.C.). Under Art. 1311 of the New Civil Code, this stipulation
takes effect between the parties, their assigns and heirs. This article provides:.
"Art. 1311. Contracts take effect only between the parties,
their assigns and heirs, except in cases where the rights and
obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. The heir
is not liable beyond the value of the property he received
from the decedent.
If a contract should contain a stipulation in favor of a third
person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest of a person
is not sufficient. The contracting parties must have clearly
and deliberately conferred a favor upon a third person."
The second paragraph of Article 1311 above-quoted states the law on
stipulations pour autrui. Considering the nature and purpose of the stipulation
(Exh. O-1), We hold that said stipulation is a stipulation pour autrui. A stipulation
pour autrui is a stipulation in favor of a third person conferring a clear and
deliberate favor upon him, and which stipulation is merely a part of a contract
entered into by the parties, neither of whom acted as agent of the third person,
and such third person may demand its fulfillment provided that he communicates
his acceptance to the obligor before it is revoked. 3 The requisites are: (1) that
the stipulation in favor of a third person should be a part, not the whole, of the
contract; (2) that the favorable stipulation should not be conditioned or
compensated by any kind of obligation whatever; and (3) neither of the
contracting parties bears the legal representation or authorization of third party.
To constitute a valid stipulation pour autrui, it must be the purpose and intent of
the stipulating parties to benefit the third person, and it is not sufficient that the
third person may be incidentally benefited by the stipulation. The fairest test to
determine whether the interest of third person in a contract is a stipulation pour
autrui or merely an incidental interest, is to rely upon the intention of the parties
as disclosed by their contract. In applying this test, it matters not whether the
stipulation is in the nature of a gift or whether there is an obligation owing from
the promises to the third person. That no such obligation exists may in some
degree assist in determining whether the parties intended to benefit a third
person. 4
In the case at bar, the determining point is whether the co-owners intended to
benefit the Church when in their extrajudicial partition of several parcels of land
inherited by them from Doa Encarnacion Florentino they agreed that with
respect to the land situated in Barrio Lubong, Dacquel, Cabugao, Ilocos Sur, the
fruits thereof shall serve to defray the religious expenses specified in Exhibit O-1.
The evidence on record shows that the true intent of the parties is to confer a
direct and material benefit upon the Church. The fruits of the aforesaid land were

used thenceforth to defray the expenses of the Church in the preparation and
celebration of the Holy Week, an annual Church function. Suffice it to say that
were it not for Exhibit O-1, the Church would have necessarily expended for this
religious occasion, the annual religious procession during the Holy Week and
also for the repair and preservation of all the statutes, tables, carriages and all
other things necessary for the celebration of the Seven Last Words.
We find that the trial court erred in holding that the stipulation, arrangement or
grant (Exhibit O-1) is revocable at the option of the co-owners. While a stipulation
in favor of a third person has no binding effect in itself before its acceptance by
the party favored, the law does not provide when the third person must make his
acceptance. As a rule, there is no time limit; such third Person has all the time
until the stipulation is revoked. Here, We find that the Church accepted the
stipulation in its favor before it is sought to be revoked by some of the co-owners,
namely the petitioners-appellees herein. It is not disputed that from the time of
the death of Doa Encarnacion Florentino in 1941, as had always been the case
since time immemorial, up to a year before the filing of their application in May
1964, the Church had been enjoying the benefits of the stipulation. The
enjoyment of benefits flowing therefrom for almost seventeen years without
question from any quarters can only be construed as an implied acceptance by
the Church of the stipulation pour autrui before its revocation.
"The acceptance does not have to be in any particular form,
even when the stipulation is for the third person an act of
liberality or generosity on the part of the promisor or
promisee." 5
"It need not be made expressly and formally. Notification of
acceptance, other than such as is involved in the making of
demand, is unnecessary." 6
"A trust constituted between two contracting parties for the
benefit of a third person is not subject to the rules governing
donation of real property. The beneficiary of a trust may
demand performance of the obligation without having
formally accepted the benefit of the trust in a public
document, upon mere acquiescence in the formation of the
trust and acceptance under the second paragraph of Art.
1257 of the Civil Code." 7
Hence, the stipulation (Exhibit O-1) cannot now be revoked by any of the
stipulators at their own option. This must be so because of Article 1257, Civil
Code and the cardinal rule of contracts that it has the force of law between the
parties. 8 Thus, this Court ruled in Garcia v. Rita Legarda, Inc., 9 "Article 1309 is
a virtual reproduction of Article 1256 of the Civil Code, so phrased to emphasize
that the contract must bind both parties, based on the principles (1) that
obligation arising from contracts have the force of law between the contracting
parties; and (2) that there must be mutuality between the parties based on their

essential equality, to which is repugnant to have one party bound by the contract
leaving the other free therefrom."
Consequently, Salvador Encarnacion, Sr. must bear with Exhibit O-1, being a
signatory to the Deed of Extrajudicial Partition embodying such beneficial
stipulation. Likewise, with regards to Salvador, Jr. and Angel Encarnacion, they
too are bound to the agreement. Being subsequent purchasers, they are privies
or successors in interest; it is axiomatic that contracts are enforceable against
the parties and their privies. 10 Furthermore, they are shown to have given their
conformity to such agreement when they kept their peace in 1962 and 1963,
having already bought their respective shares of the subject land but did not
question the enforcement of the agreement as against them. They are also
shown to have knowledge of Exhibit O-1 as they had admitted in a Deed of Real
Mortgage executed by them on March 8, 1962 involving their shares of the
subject land, that, "This parcel of land is encumbered as evidenced by the
document No. 420, page 94, Book I, series 1947, executed by the heirs of the
late Encarnacion Florentino, on August 26, 1947, before M. Francisco Ante,
Notary Public of Vigan, Ilocos Sur, in its page 10 of the said document of
partition, and also by other documents."
The annotation of Exhibit O-1 on the face of the title to be issued in this case is
merely a guarantee of the continued enforcement and fulfillment of the beneficial
stipulation. It is error for the lower court to rule that the petitioners-appellants are
not the real parties in interest, but the Church. That one of the parties to a
contract pour autrui is entitled to bring an action for its enforcement or to prevent
its breach is too clear to need any extensive discussion. Upon the other hand,
that the contract involved contained a stipulation pour autrui amplifies this settled
rule only in the sense that the third person for whose benefit the contract was
entered into may also demand its fulfillment provided he had communicated his
acceptance thereof to the obligor before the stipulation in his favor is revoked. 11

Petitioners-appellants' third assignment of error is not well-taken. Firstly, the


otherwise rigid rule that the jurisdiction of the Land Registration Court, being
special and limited in character and proceedings thereon summary in nature,
does not extend to cases involving issues properly litigable in other independent
suits or ordinary civil actions, has time and again been relaxed in special and
exceptional circumstances. (See Government of the Phil. Islands v. Serafica, 61
Phil. 93 (1934); Caoibes v. Sison, 102 Phil. 19 (1957); Luna v. Santos, 102 Phil.
588 (1957); Cruz v. Tan, 93 Phil. 348 (1953); Gurbax Singh Pabla & Co. v.
Reyes, 92 Phil. 177 (1952). From these cases, it may be gleaned and gathered
that the peculiarity of the exceptions is based not alone on the fact that Land
Registration Courts are likewise the same Courts of First Instance, but also the
following premises: (1) Mutual consent of the parties or their acquiescence in
submitting the aforesaid issues for determination by the court in the registration
proceedings; (2) Full opportunity given to the parties in the presentation of their
respective sides of the issues and of the evidence in support thereto; (3)

Consideration by the court that the evidence already of record is sufficient and
adequate for rendering a decision upon these issues. 12 In the case at bar, the
records clearly show that the second and third premises enumerated above are
fully met. With regards to the first premise, the petitioners-appellants cannot
claim that the issues anent Exhibit O-1 were not put in issue because this is
contradictory to their stand before the lower court where they took the initial step
in praying for the court's determination of the merits of Exhibit O-1 as an
encumbrance to be annotated on the title to be issued by such court. On the
other hand, the petitioners-appellees who had the right to invoke the limited
jurisdiction of the registration court failed to do so but met the issues head on.
cdrep
Secondly, for this very special reason, We will uphold the actuation of the lower
court in determining the conflicting interests of the parties in the registration
proceedings before it. This case has been languishing in our courts for thirteen
long years. To require that it be remanded to the lower court for another
proceeding under its general jurisdiction is not in consonance with our avowed
policy of speedy justice. It would not be amiss to note that if this case be
remanded to the lower court, and should appeal again be made, the same issues
will once more be raised before Us; hence, Our decision to resolve at once the
issues in the instant petition.
IN VIEW OF THE FOREGOING, the decision of the Court of First Instance of
Ilocos Sur in Land Registration Case No. N-310 is affirmed but modified to allow
the annotation of Exhibit O-1 as an encumbrance on the face of the title to be
finally issued in favor of all the applicants (herein appellants and herein
appellees) in the registration proceedings below.
No pronouncement as to costs.
SO ORDERED.
Teehankee (Chairman), Makasiar, Muoz Palma, Martin and Fernandez, JJ.,
concur.

Footnotes
SECOND DIVISION
[G.R. No. 79518. January 13, 1989.]
REBECCA C. YOUNG, assisted by her husband
ANTONIO GO, petitioner, vs. COURT OF APPEALS, PH
CREDIT CORP., PHIL. HOLDING, INC. FRANCISCO
VILLAROMAN, FONG YOOK LU, ELLEN YEE FONG and
THE REGISTER OF DEEDS OF MANILA, respondents.

Diego O. Untalan for petitioner.


Esteban B. Bautista for respondents Fong Yook Lu and Ellen Yee Fong.
Jonette Borres for respondents.
SYLLABUS
1.REMEDIAL LAW; JUDGMENT; COMPROMISE AGREEMENT; MAY NOT BE
ENFORCED BY ONE WHO IS NOT PARTY. Appellant is not entitled to
enforce a compromise agreement to which he was not a party and that as to its
effect and scope, it has been determined in the sense that its effectivity if at all, is
limited to the parties thereto and those mentioned in the exhibits (J.M. Tuason &
Co., Inc. v. Aguirre, 7 SCRA 112 [1963]). The rule was reiterated later that a
compromise agreement cannot bind persons who are not parties thereto
(Guerrero v. C.A., 29 SCRA 791 [1969]).
2.CIVIL LAW; OBLIGATIONS AND CONTRACT; STIPULATION POUR AUTRUI;
REQUISITES. The requisites of a stipulation pour autrui or a stipulation in
favor of a third person are the following: (1) there must be a stipulation in favor of
a third person. (2) the stipulation must be a part, not the whole of the contract. (3)
the contracting parties must have clearly and deliberately conferred a favor upon
a third person, not a mere incidental benefit or interest. (4) the third person must
have communicated his acceptance to the obligor before its revocation. (5)
neither of the contracting parties bears the legal representation or authorization
of the third party. (Florentino v. Encarnacion, Sr., 79 SCRA 193 [1977]).
DECISION

PARAS, J p:
This is a petition for review on certiorari seeking to set aside the decision of the
Court of Appeals 1 in CA-G.R. No. 1002, entitled Spouses Chui Wan and Felisa
Tan Yu and Rebecca Young vs. PH Credit Corporation et al., which affirmed the
decision of the Regional Trial Court of Manila, Branch XXXII, earlier dismissing
the complaint of petitioners for Annulment of Sale, Specific Performance and
Damages, against respondents.
The facts of the case are as follows:
Defendant Philippine Holding, Inc. is the former owner of a piece of land located
at Soler St., Sta. Cruz, Manila, and a two storey building erected thereon,
consisting of six units; Unit 1350 which is vacant, Unit 1352 occupied by Antonio
Young, Unit 1354 by Rebecca C. Young, Unit 1356 by Chui Wan and Felisa Tan
Yu, Unit 1358 by Fong Yook Lu and Ellen Yee Fong and Unit 1360 by the Guan

Heng Hardware (Rollo, pp. 14-15).


The owner Philippine Holding, Inc. secured an order from the City Engineer of
Manila to demolish the building. Antonio Young, then a tenant of said Unit 1352,
filed an action to annul the City Engineer's demolition Order (Civil Case No.
123883) entitled Antonio S. Young vs. Philippine Holding, Inc. before the then
Court of First Instance of Manila, Branch XXX. As an incident in said case, the
parties submitted a Compromise Agreement to the Court on September 24,
1981. Paragraph 3 of said agreement provides that plaintiff (Antonio S. Young)
and Rebecca Young and all persons claiming rights under them bind themselves
to voluntarily and peacefully vacate the premises which they were occupying as
lessees (Units 1352 and 1354, respectively) which are the subject of the
condemnation and demolition order and to surrender possession thereof to the
defendant Philippine Holding, Inc. within sixty (60) days from written notice,
subject to the proviso that should defendant decided to sell the subject property
or portion thereof, "plaintiff and Rebecca C. Young have the right of first refusal
thereof." (Rollo, p. 49).
On September 17, 1981, Philippine Holding, Inc. had previously sold the above
said property described in the compromise agreement by way of dacion in
payment to PH Credit Corporation (Rollo, p. 49). cdll
On November 9, 1982, the property was subdivided into two parcels, one 244.09
sq.m. in area covering Units 1350, 1352 and 1354 (TCT No. 152439) and the
other 241.71 sq.m. in area covering Units 1356, 1358 and 1360 (TCT No.
152440) and both titles were placed in the name of PH Credit Corporation.
On December 8, 1982, PH Credit Corporation sold the property covered by TCT
152439 to the Blessed Land Development Corporation represented by its
President Antonio T.S. Young; and on September 16, 1983, PH Credit
Corporation sold the property covered by TCT 152440 embracing Units 1356,
1358 and 1360 to spouses Fong Yook Lu and Ellen Yee Fong (Rollo, p. 15).
Thereafter, petitioner Rebecca C. Young and her co-plaintiffs, the spouses Chui
Wan and Felisa Tan Yu filed in the Regional Trial Court of Manila, Civil Case No.
84-22676 for the annulment of the sale in favor of herein respondent spouses,
Fong Yook Lu and Ellen Yee Fong and for specific performance and damages
against the PH Credit Corporation and Philippine Holding, Incorporated.
Plaintiff spouses Chui Wan and Felisa Tan Yu alleged that defendant corporation
and Francisco Villaroman, sold the property without affording them (the plaintiffsspouses) the right of first refusal to purchase that portion of the property which
they are renting.
Plaintiff Rebecca C. Young, now petitioner, also claimed the right of first refusal
purportedly granted to her under the aforestated proviso of the abovesaid
compromise agreement and prayed that the sale be annulled and that they be
allowed to exercise her right of first refusal to purchase subject property (Rollo, p.

50).
The lower court decided in favor of the defendants and against the plaintiffs, thus
dismissing the complaint together with defendants' counterclaims (Rollo, p. 15)
On the other hand, the claim of Rebecca C. Young was similarly rejected by the
trial court on the following grounds: (1) that she was not a party in the Civil Case
No. 123883, wherein subject compromise agreement was submitted and
approved by the trial court apart from the fact that she did not even affix her
signature to the said compromise agreement; (2) that Rebecca Young had failed
to present any evidence to show that she had demanded from the defendantsowners, observance of her right of first refusal before the said owners sold units
1356, 1358 and 1360; (3) that even assuming that her supposed right of first
refusal is a stipulation for the benefit of a third person, she did not inform the
obligor of her acceptance as required by the second paragraph of Article 1311 of
the Civil Code.
Chui Wan and Felisa Tan Yu and Rebecca C. Young, assisted by her husband,
appealed to the Court of Appeals which dismissed the same on August 7, 1987,
for lack of merit. LexLib
Hence this petition, which was brought to this Court only by Rebecca Young,
assisted by her husband Antonio Go.
On October 2, 1987, respondents Fong Yook Lu, moved to strike out or dismiss
outright the instant petition (Rollo, p. 35). In the resolution of November 4, 1987,
the Second Division of this Court required the petitioner to comment on said
motion (Rollo, p. 37), which comment was filed on December 17, 1987 (Rollo, p.
38). Thereafter, in the resolution of January 20, 1988, respondents were required
to file a reply thereto (Rollo, p. 42) which was filed on January 11, 1988 (Rollo, p.
43). On March 24, 1988, petitioner filed a rejoinder to reply (Rollo, p. 46) in
compliance with the resolution of February 29, 1988 (Rollo, p. 45).
In the resolution of May 11, 1988, the petition was given due course and the
parties were required to submit simultaneously their respective memoranda
(Rollo, p. 47). Respondents filed their memorandum on June 29, 1988 (Rollo, p.
48), while petitioner's memorandum was filed on July 14, 1988 (Rollo, p. 64).
Petitioner raised the following assignments of error:
1.The lower court erred in holding that Rebecca C. Young
cannot enforce the stipulation in her favor in the compromise
agreement as she is not party therein.
2.The lower court erred in holding that even if par. 3 of the
compromise agreement is construed as a stipulation pour
autrui Rebecca Young cannot enforce it because she did not
communicate her acceptance thereof to the obligor. (Rollo,
p. 7)

The petition is devoid of merit.


The main issue in this case is whether or not petitioner can enforce a
compromise agreement to which she was not a party.
This issue has already been squarely settled by this Court in the negative in J.M.
Tuason & Co., Inc. v. Cadampog (7 SCRA 808 [1963] where it was ruled that
appellant is not entitled to enforce a compromise agreement to which he was not
a party and that as to its effect and scope, it has been determined in the sense
that its effectivity if at all, is limited to the parties thereto and those mentioned in
the exhibits (J.M. Tuason & Co., Inc. v. Aguirre, 7 SCRA 112 [1963]). It was
reiterated later that a compromise agreement cannot bind persons who are not
parties thereto (Guerrero v. C.A., 29 SCRA 791 [1969]).
The pertinent portion of the Compromise Agreement reads:
"Plaintiff Antonio T.S. Young and the Defendant HOLDING
hereby agree to implead in this action as necessary partyplaintiff, plaintiff's daughter Rebecca C. Young who is the
recognized lawful lessee of the premises known and
identified as 1354 Soller St., Sta. Cruz, Manila and whose
written conformity appears hereunder." (Rollo, p. 18)
From the terms of this agreement, the conditions are very clear, such as: (1) that
Rebecca C. Young shall be impleaded in the action and (2) that she shall signify
her written conformity thereto.
For unknown reasons, the above conditions were not complied with. The parties
did not make any move to implead Rebecca as necessary party in the case.
Neither did her written conformity appear in said agreement. While there is the
printed name of Rebecca C. Young appearing at the end of the joint motion for
approval of the Compromise Agreement, she did not affix her signature above
her printed name, nor on the left margin of each and every page thereof. cdphil

In fact, on cross-examination, she admitted that she was not a party to the case
and that she did not sign the aforesaid joint motion because it was not presented
to her (Rollo, p. 18).
More than that, by the aforesaid actuations of the parties and petitioner's
apparent lack of interest, the intention is evident, not to include the latter either in
the onerous, or in the beneficient provisions of said agreement.
Petitioner further argued that the stipulation giving her the right of first refusal is a
stipulation pour autrui or a stipulation in favor of a third person under Article 1311
of the Civil Code.
The requisites of a stipulation pour autrui or a stipulation in favor of a third person

are the following:


(1)there must be a stipulation in favor of a third person.
(2)the stipulation must be a part, not the whole of the
contract.
(3)the contracting parties must have clearly and deliberately
conferred a favor upon a third person, not a mere incidental
benefit or interest.
(4)the third person must have communicated his acceptance
to the obligor before its revocation.
(5)neither of the contracting parties bears the legal
representation or authorization of the third party. (Florentino
v. Encarnacion, Sr., 79 SCRA 193 [1977]).
Assuming that petitioner is correct in claiming that this is a stipulation pour autrui,
it is unrebutted that she did not communicate her acceptance whether expressly
or impliedly. She insists however, that the stipulation has not yet been revoked,
so that her present claim or demand is still timely.
As correctly observed by the Court of Appeals, the above argument is pointless,
considering that the sale of subject property to some other person or entity
constitutes in effect a revocation of the grant of the right of first refusal to
Rebecca C. Young.
PREMISES CONSIDERED, the petition is DENIED for lack of merit, and the
decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
Melencio-Herrera (Chairperson), Padilla, Sarmiento and Regalado, JJ., concur.

Footnotes
1.Penned by CA Justices Lorna S. Lombos-De la Fuente (ponente), Ricardo J.
Francisco and Alfredo L. Benipayo.
FIRST DIVISION
[G.R. No. 27014. October 5, 1927.]
PAULINA CRISTOBAL ET AL., plaintiffs-appellees, vs.
MARCELINO GOMEZ, defendant-appellant.

M. H. de Joya and Jose Batungbacal for appellant.


Ambrosio Santos for appellees.
SYLLABUS
1.TRUSTS; REDEMPTION OF PROPERTY FOB BENEFIT OF
ANOTHER; SURRENDER OF PROPERTY TO OWNER. A person who
redeems property belonging to another which has been sold under contract
with pacto de retro, with the understanding that the income of the property
shall be applied to the reimbursement of the capital, with interest, and other
expenses incidental to the administration of the property, until the whole
shall be liquidated, whereupon the property shall be restored to the owner,
occupies the position of trustee; and when the purpose of such a trust has
been accomplished, the trustee is bound to surrender the property to the
owner or his successors.
2.ID.; ID.; TRANSFER OF INTEREST BY ONE TRUSTEE TO
ANOTHER. The fact that one of two individuals who have constituted
themselves trustees for the purpose above indicated conveys his interest in
the trust property to his cotrustee does not relieve the latter from the
obligation to comply with the trust.
3.ID.; DONATION; DISTINCTION BETWEEN TRUST AND
DONATION. A trust constituted between two contracting parties for the
benefit of a third person is not subject to the rules governing donations of
real property. The beneficiary of a trust may demand performance of the
obligation without having formally accepted the benefit of the trust in a public
document, upon mere acquiescence in the formation of the trust and under
the second paragraph of article 1257 of the Civil Code.
4.ID.; PRESCRIPTION. As against the beneficiary prescription is
not effective in favor of a person who is acting as trustee of a continuing and
subsisting trust.
5.ESTOPPEL; EQUITABLE ESTOPPEL. An equitable estoppel
can only be involved by one who is in a position to be misled by the
misrepresentation with respect to which the estoppel is invoked; and under
circumstances where damage would result to him from the adoption by the
person estopped of a position different from that which has been held out to
be true.
6.ID.; ID.; CASE AT BAR. The owner of a piece of property
executed a notarial act tending to show falsely that his brother claimed to be
the owner of the property mentioned in the document. Held: That the brother
to whom ownership was thus imputed could not claim title against the
declarant by virtue of said document, since he had not been misled by the
false statement.

DECISION

STREET, J p:
This action was instituted in the Court of First Instance of the
Province of Cavite by Paulina Cristobal, Luis Gomez, Josefa Gomez,
Paciencia Gomez and Jose Gomez, for the purpose of recovering from
Marcelino Gomez two parcels of land located in the sitio of Jabay,
municipality of Bacoor, Province of Cavite, and a lot located in the town of
Bacoor, Cavite, all more particularly described in the second paragraph of
the complaint, and for the purpose of compelling the defendant to pay to the
plaintiffs the income received by him from said property since 1918. To the
complaint the defendant answered with a general denial and two special
defenses not necessary to be here recounted other than to indicate that he
claimed to be owner in his own right of all of the property which is the subject
of the action. Upon hearing the cause the trial court found that the property
in question belongs to the plaintiffs, as coowners, and he therefore ordered
the defendant to surrender the property to them and execute an appropriate
deed of transfer as well as to pay the costs of the proceeding. From this
judgment the defendant appealed.
The property with which this action is concerned formerly belonged
to Epifanio Gomez, deceased husband of the plaintiff Paulina Cristobal and
father of the four Gomez children who are joined with their mother Paulina in
the complaint. On December 13, 1891, Epifanio Gomez sold this property
under contract of sale with pacto de retro to Luis R. Yangco, redeemable in
five years, for the sum of P2,500, the vendor remaining in possession in the
character of lessee. The period expressed in this agreement passed without
redemption, with the result that the property consolidated in Yangco, who,
nevertheless, many years later conceded to the vendor the privilege of
repurchasing. Gomez was without means to effect the repurchase of the
property himself, and he therefore found it necessary to apply to a kinsman,
Bibiano Baas, for assistance. Baas hesitated to lend Gomez the money
upon his own sole credit; but told him that he would let him have the money
if his brother Marcelino Gomez and his sister Telesfora Gomez would make
themselves responsible for the loan. Epifanio therefore consulted with his
brother and sister and they agreed to assist him in getting back his property.
Accordingly, in the latter part of July, 1907, Bibiano Baas was called in
consultation, at the home of Telesfora Gomez in Manila, with Epifanio
Gomez and Marcelino Gomez. These four being present upon that occasion,
an agreement was reached, which was, in substance, that Bibiano Baas
should advance the sum of P7,000, upon the personal credit of Marcelino
and Telesfora Gomez, and that this money should be used to repurchase
the property in the names of Marcelino Gomez and Telesfora Gomez, who
should hold and administer the property until the capital advanced by Baas

should be paid off, after which the property would be returned to Epifanio
Gomez. This agreement was carried into effect by the execution of the
Exhibits A and D of the plaintiffs, and though executed two days apart, these
documents, as the trial court found, really constitute parts of one transaction.
By the Exhibit A, executed on August 12, 1907, Marcelino Gomez and
Telesfora Gomez created a "private partnership in participation" for the
purpose of redeeming the property which their brother Epifanio had sold to
Yangco. It was therein agreed that the capital of this partnership should
consist of P7,000, of which Marcelino Gomez was to supply the amount of
P1,500, and Telesfora Gomez the sum of P5,500. It was further agreed that
all the property to be redeemed should be placed in the name of the two,
namely, Marcelino Gomez and Telesfora Gomez, and that Marcelino Gomez
should be its manager. Among the provisions in this agreement of major
importance to the present decision, we find the following:
"(h)That all the income, rent, and produce of the
aforesaid property of Epifanio Gomez shall be applied
exclusively to the amortization of the capital employed by the
two parties, that is to say, Don Marcelino Gomez and Dona
Telesfora Gomez, with its corresponding interest and other
incidental expenses.
"(i)As soon as the capital employed, with its interest
and other incidental expenses, shall have been covered,
said properties shall be returned to our brother Epifanio
Gomez or to his legitimate children, with the direct
intervention, however, of both parties, namely, Don
Marcelino Gomez and Dona Telesfora Gomez, or one of
them.
"(j)In order that the property of Epifanio Gomez may
be returned, it is made essential that he shall manifest good
behavior in the opinion of Don Marcelino Gomez and Doa
Telesfora Gomez jointly."
By the Exhibit D, executed on July 10, 1907, Luis R. Yangco
conveyed to Marcelino Gomez and Telesfora Gomez the three pieces of
property which he had obtained from Epifanio Gomez. Though this
conveyance recites a consideration of P5,000, the amount really paid to
Yangco upon this occasion was P6,700, consisting of the sum of P5,000,
which was needed to redeem the property from Yangco, the further sum of
P1,500 necessary to pay a loan which Epifanio Gomez had obtained from
Gregoria Yangco, sister of Luis R. Yangco, and finally the sum of P200
which Yangco exacted as a present for his manager. The payment of these
sums left P300 of the capital which Baas had advanced, and this balance
was left with Marcelino Gomez to pay the expenses of documentation and to
make certain needed repairs upon the property.
A little more than a year after the transaction above-mentioned had

been consummated, Epifanio Gomez died, leaving a widow, Paulina


Cristobal, and the four children who are coplaintiffs with their mother in this
action. Marcelino Gomez meanwhile entered into possession of the property,
a possession which he subsequently maintained until his death, which
occurred after this action had been tried in the court below. During this
period of about twenty years Marcelino Gomez improved the larger parcel by
extending the salt beds constructed upon it and by converting them from the
Filipino form to the Chinese style. During the same period the three parcels
of property quintupled in value, being now worth about P50,000, according
to the estimate made by Marcelino Gomez him-self.
Less than a year after the death of Epifanio Gomez, his sister
Telesfora became desirous of freeing herself from the responsibility which
she had assumed to Bibiano Baas. Accordingly, on September 10, 1909,
with the consent of Baas, the document Exhibit E was prepared and
executed by Telesfora and Marcelino Gomez. By this instrument Telesfora
conveyed to Marcelino her interest and share in the three properties
previously redeemed from Yangco. The conveyance recites a consideration
of the sum of P6,096, paid in the act. Nevertheless, no money passed, and
the real consideration of the conveyance, as admitted by Marcelino Gomez
himself, was that Marcelino should assume the obligation which Telesfora
had contracted with Baas by reason of the loan of P7,000 made by the
latter upon the occasion of the redemption of the property from Yangco. The
amount of this obligation was estimated at P6,096, and the consideration
mentioned in the Exhibit E was therefore fixed in this amount. At the time
that Exhibit E was executed the same parties, Marcelino Gomez and
Telesfora Gomez, executed the document Exhibit 13 of the defendant,
whereby they declared dissolved the partnership that had been created by
the Exhibit A; and Telesfora Gomez again declared that she conveyed to
Marcelino Gomez the three parcels in question for the same consideration
recited in the Exhibit E.
As long as both Telesfora and Marcelino Gomez had been
personally answerable to Baas for the loan of P7,000, he had been content
to look to their personal responsibility for reimbursement; but now that the
loan was being novated, with Marcelino as the sole debtor, Baas required
him to execute a contract of sale of the three parcels, with pacto de retro, for
the purpose of securing the indebtedness (Exhibit 14 of the defendant). This
instrument was executed on September 10, 1909, contemporaneously with
the execution of the documents by which Telesfora conveyed her interest in
the property to Marcelino and by which the partnership was declared
dissolved. In the instrument Exhibit 14 it is declared that Marcelino Gomez
sells the property to Baas for the sum of P8,500, with pacto de retro,
redeemable within the period of five years, extendible for whatever time
Baas may consider convenient. At the same time, and by the same
instrument, Baas leased the property to the vendor Gomez for the period

fixed for repurchase at a semiannual rental of P510, taxes to be paid by the


lessee. The period of repurchase fixed in this contract passed without
redemption having been effected, but by an instrument dated June 26, 1915,
Baas conceded to Gomez the right to repurchase, without any definite limit
of time, conditioned upon the payment of the rent. Finally, on April 1, 1918,
Marcelino Gomez paid to Baas the sum of P7,575.92 in full satisfaction of
the entire claim and received from Baas a reconveyance of the three
parcels, thus closing the documentary history of the property so far as
concerns this litigation. Reflection upon the foregoing transactions leaves no
room for doubt as to the fact that Baas held the property under the contract
of sale with pacto de retro (Exhibit 14) as a mere security for his loan. This
inference is borne out by the fact that partial payments on the capital had
been accepted by him and that he voluntarily extended the period of
redemption indefinitely after the property had nominally consolidated.
The defendant Gomez says that the money used by him to redeem
the property in the end was money of his own which he had obtained from
the sale of a lithographic plant. Assuming that this is true, it must
nevertheless be remembered that the properties in question, especially the
salt beds, were productive of considerable income; and Gomez admitted at
the trial that he had obtained enough from the property to reimburse him for
all outlays. It is therefore evident that the Baas loan has been fully
liquidated from the income of the property, or the equivalent, and that the
purpose of the original trust had been fully accomplished before this action
was brought.
The proof shows that Epifanio Gomez was in financial straits from
the time of the Philippine revolution until his death; and in the early years of
the present century he had from time to time informally hypothecated several
of these salt beds to different creditors to secure petty loans, and this
notwithstanding the fact that the property had previously been sold under
contract of sale with pacto de retro to Luis R. Yangco. The fact that these
loans had been made was known to Marcelino and Telesfora Gomez when
they entered into the partnership arrangement to get back the property from
Yangco. Marcelino Gomez, as manager, was therefore confronted with the
necessity of paying off these small debts, with the result that he finally paid
out upon the property a total of around P10,000, including of course the debt
to Baas of P7,000. For these and all other expenses incident to the
property he has, upon his own statement, been fully reimbursed.
The facts sketched above exhibit the dominant features of the case,
and reflection upon their import conducts us to the conclusion that the trial
court committed no error in holding that the defendant Marcelino Gomez
must surrender the property involved in this lawsuit; and he being now dead,
the same obligation devolves on his heirs. The so-called partnership
agreement (Exhibit A) between Marcelino Gomez and his sister created a
trust for the express purpose of rescuing the property of Epifanio Gomez;
and now that that purpose has been accomplished, the property should be

returned to his legitimate children, as provided in paragraph (i) of the


agreement. This bilateral contract was fully binding on both the contracting
parties; and the trial court did not err in declaring that, under the second
paragraph of article 1257 of the Civil Code, the successors of Epifanio
Gomez are entitled to demand fulfillment of the trust. In Martinez vs. Grao
(42 Phil., 35), we held that a person who, before consolidation of property in
the purchaser under a contract of sale with pacto de retro, agrees with the
vendors to buy the property and administer it till all debts constituting an
incumbrance thereon shall be paid, after which the property shall be turned
back to the original owner, is bound by such agreement; and upon buying in
the property under these circumstances such person becomes in effect a
trustee and is bound to administer the property in this character. The same
rule is applicable in the case before us.
But it is claimed for the appellant that the trust agreement (Exhibit
A) was kept secret from Epifanio Gomez and that, having no knowledge of it,
he could not have accepted it before the stipulation was revoked. This
contention is contradicted in fact by the testimony of Bibiano Baas, who
says that Epifanio Gomez was present when the arrangement for the
repurchase of the property from Yangco was discussed and that he
assented thereto. Moreover, Baas states that after the agreement had been
executed, he told Epifanio Gomez in the presence of his brother and sister
that he should be well pleased as the object he had in view had been
accomplished, meaning that the property was recovered. But even
supposing that Epifanio Gomez may never have seen the Exhibit A, we have
no doubt that he understood the nature of the arrangement and his assent
thereto was a sufficient acceptance. This being true, it was not competent for
the parties to the trust agreement thereafter to dissolve the partnership and
destroy the beneficial right of Epifanio Gomez in the property. The effect of
Exhibits E and 13 was merely to eliminate Telesfora Gomez from
responsibility in the performance of the trust and to clothe Marcelino Gomez
alone with the obligations that had been created by Exhibit A.
Much energy has been expended by the attorneys for the appellant
in attempting to demonstrate that, if Epifanio Gomez at any time had any
right in the property by virtue of the Exhibit A, such right could only be
derived from the aspect of Exhibit A as a donation, and that, inasmuch as
the donation was never accepted by Epifanio Gomez in a public document,
his supposed interest therein is unenforceable. But this, in our opinion, is not
a tenable hypothesis. The partnership agreement should not be viewed in
the light of an intended donation, but as an express trust.
Much stress is placed in the appellant's brief upon paragraph (j) of
the partnership agreement which, it is claimed, makes it a condition
precedent to the return of the property to Epifanio Gomez that he should
exhibit good behavior in the opinion of Marcelino and Telesfora Gomez; and
it is claimed that Epifanio Gomez violated this condition by two kinds of
misbehavior before his death, namely, first, by selling different salt lots to

various per- sons, and secondly, by attending cockfights, an activity


distasteful to his brother and sister. This feature of the case is fully
discussed and the contention of the appellant refuted in the appealed
decision. But a few words may be here added upon this aspect of the case.
The trust agreement provides that after the capital employed and other
expenses shall have been covered, the property shall be returned to
Epifanio Gomez or his legitimate children. This contemplated the action to
be taken when the debt should be fully liquidated, something that did not
occur in this case until 1918. But Epifanio Gomez died in 1908. It is evident
that misbehavior on the part of Epifanio Gomez during the year or more that
he lived after the trust agreement was made could not be attributed as a
ground of forfeiture to his legitimate children ten years later, especially as no
step had ever been taken in the life of Epifanio Gomez to defeat his rights
under the trust on account of his alleged misbehavior.
Again, it is contended for the appellant that inasmuch as the
property consolidated in Baas in the year 1915 under the contract of sale
with pacto de retro to him, the subsequent repurchase of the property by
Marcelino Gomez in 1918 vested an indefeasible title in the latter free from
the original trust. But it is obvious that the purchase effected in 1918 was
really a repurchase, consequent upon the extension of the time of
redemption by Baas, and Gomez must be considered to be holding in the
same right as before, that is, subject to the trust in favor of Epifanio Gomez.
Lastly, it is urged that Gomez has the benefit of prescription in his
favor, having been in possession more than ten years under the deed by
which he acquired the sole right from his sister in 1909. This contention
would be valid if the defendant had really been holding adversely under a
claim of title exclusive of any other right and adverse to all other claimants;
but, as we have already demonstrated, he was merely a trustee in
possession under a continuing and subsisting trust. Prescription is not
effective in favor of such a holder (Code of Civil Procedure, sec. 38).
Moreover, even supposing that the statute of limitations might have begun to
run in the defendant's favor when he recovered the property from Baas in
1918, the ten years allowed by law had not been completed when this action
was instituted; and in this connection the minority of one or more of the
plaintiffs during this period may be disregarded.
A point unconnected with the other issues in the case is raised by
the fourth assignment of error in the appellant's brief. This has reference to
the title to parcel C, the lot located in Bacoor. There can be no doubt that the
ownership of this piece of property was originally vested in Epifanio Gomez
by virtue of a composition title from the Government; and said title has never
passed from him except by virtue of the contract of sale of 1891 in favor of
Luis R. Yangco. Nevertheless, the defendant has submitted in evidence a
notarial document emitted on December 31, 1904, by Epifanio Gomez, in the
character of notary public, wherein he certifies that Marcelino Gomez had

requested him to draw up a notarial act showing the properties of which


Marcelino Gomez was known to be the true owner: upon which follows an
enumeration of properties possessed by Marcelino Gomez. Among these we
find the lot in Bacoor, being the parcel C described in the complaint. The
appellant relies upon this instrument as proving title in Marcelino Gomez,
and it is contended that Epifanio Gomez and his successors are estopped
from claiming said lot. This contention is untenable. It is true that we have
here the written admission of Epifanio Gomez that this lot belonged to his
brother Marcelino; and if this admission had ever been acted upon by any
third person purchasing from Marcelino Gomez, Epifanio Gomez would have
been estopped from asserting ownership in himself. Nevertheless, it is clear
enough that the real title at the time that declaration was made was in
Epifanio Gomez; and it is obvious that in creating this document Epifanio
Gomez, in collusion with his brother Marcelino, was merely laying the basis
of a scheme to defeat Yangco's rights under his contract of purchase of
1891, or perhaps to defeat other creditors of Epifanio Gomez, a plot
which, in view of subsequent occurrences, they did not attempt to carry into
effect. No estoppel can be invoked by Marcelino Gomez or his successors,
based upon this document, for the reason that he was not misled by the
false statement contained therein.
In conclusion we note that the trial court did not determine the
extent of the proportional interest in the property pertaining to the different
plaintiffs, and no issue has been made with respect to the extent of their
several rights. The solution of this point, if any contention should arise
among them in the future, depends upon the character of the property in
relation to the spouses Epifanio Gomez and Paulina Cristobal, that is,
whether it was conjugal property or the individual property of Epifanio
Gomez. In the dispositive paragraph of the appealed decision the court
ordered Marcelino Gomez to execute a deed conveying the three parcels in
question to the plaintiffs; but, the defendant being now dead, and the exact
extent of the several interests pertaining to the plaintiffs not being
determined, it will be sufficient for us to declare, as we now do, that the
plaintiffs are the owners of the property in question, and to require the
successors in interest of the defendant to deliver the property to the
plaintiffs.
The appealed judgment will therefore be modified by incorporating
therein a declaration of ownership in favor of the plaintiffs and by eliminating
the requirement for the specific execution of a conveyance. In other respects
the judgment is affirmed. So ordered, with costs against the appellant.
Avancea, C. J., Johnson, Malcolm, Villamor, Ostrand, and
Romualdez, JJ., concur.
Separate Opinions
JOHNS, J., with whom concurs VILLA-REAL, J., dissenting:

Paulina Cristobal is the widow, and the other plaintiffs are her
children and those of Epifanio Gomez, her deceased husband, and the
defendant is the brother of Epifanio Gomez. As stated in the majority opinion
on December 31, 1891, the deceased brother sold the property in question
under pacto de retro to Luis R. Yangco with the right to redeem in five years.
The deceased brother, not having the money with which to redeem the
property, applied to Bibiano Baas for assistance, who agreed to do so on
condition that the defendant and his sister would become personally
responsible for the loan, and on July, 1907, the property was thus redeemed
upon the terms and conditions stated in the majority opinion, and pursuant to
that agreement, the P7,000 thus advanced by Bibiano Baas was used to
repurchase the property in the name of the defendant and his sister
Telesfora Gomez.
The record is conclusive that Epifanio Gomez was a man of
dissolute habits and more or less a spendthrift. That he was squandering his
property, and was very unreliable in money matters, and that on several
occasions the defendant and his sister had been forced to come to his relief
to protect the good name of the family, and that it was for such reason that
the conditions specified were imposed in the agreement of July, 1907. It also
appears that the sister, desiring to be released of her financial responsibility,
conveyed any interest which she may have had to the defendant. That later
the title to the property consolidated in Yangco's with whom the contract of
pacto de retro was made, and that thereafter it was conveyed to the
defendant. The record is also conclusive that the defendant was a thrifty,
prudent, business man, and that under his management and by close
personal attention to the business, he eventually paid for the property, and
that a portion of the purchase price was paid out of his own money, and that
it was through his personal attention and the investment of his own money,
that he was enabled to acquire title and pay for the property.
The legal effect of the majority opinion is to penalize the defendant
for his thrift and prudent business methods, and to take the property away
from him without any compensation for his twenty years of long and faithful
service upon the theory that he acquired the title in trust, and at all times
held it in trust for the use and benefit of his deceased brother and his heirs.
There is no evidence that the defendant acted as trustee or that he ever
recognized a trust, or that during the whole period of twenty years he ever
rendered any accounting or that any one ever requested him to make an
accounting. The evidence is conclusive that at all times he acted, dealt with
and treated the property as his own, upon which he spent his own time, his
own money, and improved the property, so as to give it a commercial value.
Because he did that and the property now has increased in value, it is taken
away from him without any compensation for his services, and he is denied
the fruits of twenty years of his labor in giving t a commercial value.
This is one of many cases which come before this court growing
out of the increase in the value of property, and which would never appear in

court, if there was not an increase in value. The very fact that during the
whole period of twenty years, the defendant was never called upon or
required to make an accounting, and that at all times he considered, dealt
with, and treated the property as his own, is conclusive evidence that he
never held the title in trust for any one.
The judgment of the lower court should be reversed.
EN BANC
[G.R. No. L-23276. November 29, 1968.]
MELECIO COQUIA, MARIA ESPANUEVA and MANILA
YELLOW TAXICAB CO., INC., plaintiffs-appellees, vs.
FIELDMEN'S INSURANCE CO., INC., defendant-appellant.

Antonio de Venecia for plaintiffs-appellees.


Rufino Javier for defendant-appellant.
SYLLABUS
1.CIVIL LAW; CONTRACTS; CONTRACTS POUR AUTRUI; MAY BE
ENFORCED BY A THIRD PARTY FOR WHOSE BENEFIT IT WAS MADE.
Although, in general, only parties to a contract may bring an action based
thereon, this rule is subject to exceptions, one of which is found in the second
paragraph of Article 1311 of the Civil Code of the Philippines, reading: "If a
contract should contain some stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person." This is but the restatement of a well-known principle
concerning contracts pour autrui, the enforcement of which may be demanded by
a third party for whose benefit it was made, although not a party to the contract,
before the stipulation in his favor has been revoked by the contracting parties.
2.ID.; ID.; ID.; INSURANCE CONTRACT CONTAINING A STIPULATION IN
FAVOR OF THE AUTHORIZED DRIVER OF INSURED'S MOTOR VEHICLE, A
CONTRACT POUR AUTRUI; HEIRS OF THE DECEASED DRIVER MAY BRING
AN ACTION AGAINST THE INSURANCE COMPANY. In the case at bar, the
insurance policy contains stipulations pursuant to which the insurance company
"will indemnify any authorized Driver who is driving the Motor Vehicle" of the
Insured and, in the event of death of said driver, the Company shall, likewise,
"indemnify his personal representatives," and the Company "may, at its option,
make indemnity payable directly to the claimants or heirs of claimants . . . it being

the true intention of this Policy to protect . . . the liabilities of the Insured towards
the passengers of the Motor Vehicle and the Public" in other words, third parties.
Thus, the policy under consideration is typical of contracts pour autrui this
character being made more manifest by the fact that the deceased driver paid
fifty percent (50%) of the corresponding premiums, which were deducted from his
weekly commissions. Under these conditions, it is clear that the Coquias who,
admittedly, are the sole heirs of the deceased have a direct cause of action
against the Company (Uy Tam v. Leonard, 30 Phil. 471, 485-486; Kauffman v.
Philippine National Bank, 42 Phil. 182, 187, 189), and, since they could have
maintained this action by themselves, without the assistance of the insured it
goes without saying that they could and did properly join the latter in filing the
complaint herein (Guingon v. Capital Insurance & Surety Co., Inc., L-22042, Aug.
17, 1967).
3.ID.; ID.; ID.; ID.; REFERENCE OF DISPUTE TO ARBITRATORS AS
PROVIDED IN THE POLICY, DEEMED WAIVED BY THE ACTS OR
OMISSIONS OF THE PARTIES. Section 17 of the policy under consideration
reads: "If any difference or dispute shall arise with respect to the amount of the
Company's liability under this Policy, the same shall be referred to the decision of
a single arbitrator to be agreed upon by both parties or failing such agreement of
a single arbitrator, to the decision of two arbitrators, one to be appointed in
writing by each of the parties within one calendar month after having been
required in writing so to do by either of the parties and in case of disagreement
between the arbitrator to the decision of an umpire who shall have been
appointed in writing by the arbitrators before entering on the reference and the
costs of and incidental to the reference shall be dealt with in the Award. And it is
hereby expressly stipulated and declared that it shall be a condition precedent to
any right of action or suit upon this Policy that the award by such arbitrator,
arbitrators or umpire of the amount of the Company's liability hereunder if
disputed shall be first obtained." The record shows, however, that none of the
parties to the contract invoked this section, or made any reference to arbitration,
during the negotiations preceding the institution of the present case. In fact,
counsel for both parties stipulated, in the trial court, that none of them had, at any
time during said negotiations, even suggested the settlement of the issue
between them by arbitration, as provided in said section. Their aforementioned
acts or omissions had the effect of a waiver of their respective right to demand an
arbitration (Kahnweiler v. Phenix Insurance Co. of Brooklyn, 67 Fed. 483;
Independent School District No. 35, St. Louis County v. A. Hedenberg & Co.,
Inc., 7 NW 2nd, 511).
DECISION

CONCEPCION, C.J p:
This is an appeal from a decision of the Court of First Instance of Manila, certified

to us by the Court of Appeals, only questions of law being involved therein.


Indeed, the pertinent facts have been stipulated and/or, admitted by the parties at
the hearing of the case in the trial court, to dispense with the presentation of
evidence therein.
It appears that on December 1, 1961, appellant Fieldmen's Insurance Company,
Inc. herein after referred to as the Company issued, in favor of the Manila
Yellow Taxicab Co., Inc. herein after referred to as the Insured a common
carrier accident insurance policy, covering the period from December 1, 1961 to
December ,1962. It was stipulated in said policy that:
"The Company will, subject to the Limits of Liability and
under the Terms of this Policy, indemnify the Insured in the
event of accident caused by or arising out of the use of
Motor Vehicle against all sums which the Insured will
become legally liable to pay in respect of: Death or bodily
injury to any fare-paying passenger including the Driver,
Conductor and/or Inspector who is riding in the Motor
Vehicle insured at the time of accident or injury." 1
While the policy was in force, or on February 10, 1962, a taxicab of the Insured,
driven by Carlito Coquia, met a vehicular accident at Maagaldan, Pangasinan,
in consequence of which Carlito died. The Insured filed therefor a claim for
P5,000.00 to which the Company replied with an offer to pay P2,000.00, by way
of compromise. The Insured rejected the same and made a counter-offer for
P4,000.00, but the Company did not accept it. Hence, on September 18, 1962,
the Insured and Carlito's parents, namely, Melecio Coquia and Maria Espanueva
hereinafter referred to as the Coquias filed a complaint against the
Company to collect the proceeds of the aforementioned policy. In its answer, the
Company admitted the existence thereof, but pleaded lack of cause of action on
the part of the plaintiffs.
After appropriate proceedings, the trial court rendered a decision sentencing the
Company to pay to the plaintiffs the sum of P4,000.00 and the costs. Hence, this
appeal by the Company, which contends that plaintiffs have no cause of action
because: 1) the Coquias have no contractual relation with the Company; and 2)
the Insured has not complied with the provisions of the policy concerning
arbitration.
As regards the first defense, it should be noted that, although, in general, only
parties to a contract may bring an action based thereon, this rule is subject to
exceptions, one of which is found in the second paragraph of Article 1311 of the
Civil Code of the Philippines, reading:
"If a contract should contain some stipulation in favor of a
third person, he may demand its fulfillment provided he
communicated his acceptance of the obligor before its
revocation. A mere incidental benefit or interest of a person

is not sufficient. The contracting parties must have clearly


and deliberately conferred a favor upon a third person." 2
This is but the restatement of a well-known principle concerning contracts pour
autrui, the enforcement of which may be demanded by a third party for whose
benefit it was made, although not a party to the contract, before the stipulation in
his favor has been revoked by the contracting parties. Does the policy in question
belong to such class of contracts pour autrui?
In this connection, said policy provides, inter alia:
"Section I Liability to Passengers. 1.The Company will,
subject to the Limits of Liability and under the Terms of this
Policy, indemnify the Insured in the event of accident caused
by or arising out of the use of Motor Vehicle against all sums
which the Insured will become legally liable to pay in respect
of: Death or bodily injury to any fare-paying passenger
including the Driver. . . who is riding in the Motor Vehicle
insured at the time of accident or injury.
"Section II. Liability to the Public
xxx xxx xxx
"3.In terms of and subject to the limitations of and for the
purposes of this Section, the Company will indemnify any
authorized Driver who is driving the Motor Vehicle . . . "
"Conditions
xxx xxx xxx
"7.In the event of death of any person entitled to indemnify
under this Policy, the Company will, in respect of the liability
incurred by such person, indemnify his personal
representatives in terms of and subject to the limitations of
this Policy, provided, that such representatives shall, as
though they were the Insured, observe, fulfill and be subject
to the Terms of this Policy insofar as they can apply.
"8.The Company may, at its option, make indemnity payable
directly to the claimants or heirs of claimants, with or without
securing the consent of or prior notification to the Insured, it
being the true intention of this Policy to protect, to the extent
herein specified and subject always to the Terms of this
Policy, the liabilities of the Insured towards the passengers
of the Motor Vehicle and the Public."
Pursuant to these stipulations, the Company "will indemnify any authorized Driver
who is driving the Motor Vehicle" of the Insured and, in the event of death of said

driver, the Company shall, likewise, "indemnify his personal representatives." In


fact the Company "may, at its option, make indemnity payable directly to the
claimants . . . or heirs of claimants .. it being the true intention of this Policy to
protect . . . the liabilities of the Insured towards the passengers of the Motor
Vehicle and the Public" in other words, third parties.

Thus, the policy under consideration is typical of contracts pour autrui, this
character being made more manifest by the fact that the deceased driver paid
fifty percent (50%) of the corresponding premiums, which were deducted from his
weekly commissions. Under these conditions, it is clear that the Coquias who,
admittedly, are the sole heirs of the deceased have a direct cause of action
against the Company, 3 and, since they could have maintained this action by
themselves, without the assistance of the Insured, it goes without saying that
they could and did properly join the latter in filing the complaint herein. 4
The second defense set up by the Company is based upon Section 17 of the
policy reading:
"If any difference or dispute shall arise with respect to the
amount of the Company's liability under this Policy, the same
shall be referred to the decision of a single arbitrator to be
agreed upon by both parties or failing such agreement of a
single arbitrator, to the decision of two arbitrators, one to be
appointed in writing by each of the parties within one
calendar month after having been required in writing so to do
by either of the parties and in case of disagreement between
the arbitrators, to the decision of an umpire who shall have
been appointed in writing by the arbitrators before entering
on the reference and the costs of and incidental to the
reference shall be dealt with in the Award. And it is hereby
expressly stipulated and declared that it shall be a condition
precedent to any right of action or suit upon this Policy that
the award by such arbitrator, arbitrators or umpire of the
amount of the Company's liability hereunder if disputed shall
be first obtained."
The record shows, however, that none of the parties to the contract invoked this
section, or made any reference to arbitration, during the negotiations preceding
the institution of the present case. In fact, counsel for both parties stipulated, in
the trial court, that none of them had, at any time during said negotiations, even
suggested the settlement of the issue between them by arbitration, as provided in
said section. Their aforementioned acts or omissions had the effect of a waiver of
their respective right to demand an arbitration. Thus, in Kahnweiler vs. Phenix
Ins. Co. of Brooklyn, 5 it was held:
"Another well-settled rule for interpretation of all contracts is

that the court will lean to that interpretation of a contract


which will make it reasonable and just. Bish. Cont. Sec. 400.
Applying these rules to the tenth clause of this policy, its
proper interpretation seems quite clear. When there is a
difference between the company and the insured as to the
amount of the loss the policy declares: `The same shall then
be submitted to competent and impartial arbitrators, one to
be selected by each party . . .' It will be observed that the
obligation to procure or demand an arbitration is not, by this
clause, in terms imposed on either party. It is not said that
either the company or the insured shall take the initiative in
setting the arbitration on foot. The company had no more
right to say the insured must do it than the insured has to
say the company must do it. The contract in this respect is
neither unilateral nor self-executing. To procure a reference
to arbitrators, the joint and concurrent action of both parties
to the contract is indispensable. The right it gives and the
obligation it creates to refer the differences between the
parties to arbitrators are mutual. One party to the contract
cannot bring about an arbitration. Each party is entitled to
demand a reference, but neither can compel it, and neither
has the right to insist that the other shall first demand it, and
shall forfeit any right by not doing so. If the company
demands it, and the insured refuses to arbitrate, his right of
action is suspended until he consents to an arbitration; and if
the insured demands an arbitration, and the company
refuses to accede to the demand, the insured may maintain
a suit on the policy, notwithstanding the language of the
twelfth section of the policy, and, where neither party
demands an arbitration, both parties thereby waive it." 6
To the same effect was the decision of the Supreme Court of Minnesota in
Independent School Dist. No. 35, St. Louis County vs. A. Hedenberg & Co., Inc.
7 from which we quote:
"This rule is not new in our state. In Meyer v. Berlandi, 53
Minn. 59, 54 N.W. 937, decided in 1893, this court held that
the parties to a construction contract, having proceeded
throughout the entire course of their dealings with each other
in entire disregard of the provision of the contract regarding
the mode of determining by arbitration the value of the
extras, thereby waived such provision."
xxx xxx xxx
"The test for determining whether there has been a waiver in
a particular case is stated by the author of an exhaustive
annotation in 117 A.L.R. p. 304, as follows: `Any conduct of

the parties inconsistent with the notion that they treated the
arbitration provision as in effect, or any conduct which might
be reasonably construed as showing that they did not intend
to avail themselves of such provision, may amount to a
waiver thereof and estop the party charged with such
conduct from claiming its benefits'."
xxx xxx xxx
"The decisive facts here are that both parties from the
inception of their dispute proceeded in entire disregard of the
provisions of their contract relating arbitration and that
neither at any stage of such dispute, either before or after
commencement of the action, demanded arbitration, either
by oral or written demand, pleading, or otherwise. Their
conduct was as effective a rejection of the right to arbitrate
as if, in the best Coolidge tradition, they had said, `We do
not choose to arbitrate'. As arbitration under the express
provisions of article 40 was `at the choice of either party,'
and was chosen by neither, a waiver by both of the right to
arbitration followed as a matter of law."
WHEREFORE, the decision appealed from should be as it is hereby affirmed in
toto, with costs against the herein defendant-appellant, Fieldmen's Insurance
Co., Inc.
IT IS SO ORDERED
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Ruiz Castro, Fernando and
Capistrano, JJ., concur.
EN BANC
[G.R. No. L-22404. May 31, 1971.]
PASTOR B. CONSTANTINO, plaintiff-appellant, vs.
HERMINIA ESPIRITU, defendant-appellee.

David Guevara for plaintiff-appellant.


SYLLABUS
1.CIVIL LAW; OBLIGATIONS AND CONTRACTS; STIPULATION POUR
AUTRUI; DEMAND FOR FULFILLMENT BY THIRD PERSON BENEFITED BY
CONTRACT. That one of the parties to a contract is entitled to bring an action
for its enforcement or to prevent its breach is too clear to need any extensive

discussion. Upon the other hand, that the contract involved contained a
stipulation pour atrui amplifies this settled rule only in the sense that the third
person for whose benefit the contract was entered into may also demand its
fulfillment provided he had communicated his acceptance thereof to the obligor
before the stipulation in his favor is revoked
2.ID.; ID.; STATUTE OF FRAUDS; PARTIALLY PERFORMED CONTRACTS
EXCLUDED FROM APPLICATION THEREOF. The contention that the
contract in question is not enforceable by action by reason of the provisions of
the Statute of Frauds does not appear to be indubitable, it being clear upon the
facts alleged in the amended complaint that the contract between the parties had
already been partially performed by the execution of the deed of sale, the action
brought below being only for the enforcement of another phase thereof, namely,
the execution by appellee of a deed of conveyance in favor of the beneficiary
thereunder.
BARREDO, J., concurring:
1.REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; NOT APPLICABLE
WHEN REAL AGREEMENT OR ADDITIONAL TERMS INTENDED TO BE
PROVED ARE SPECIFICALLY ALLEGED IN THE PLEADING; RULE MAY NOT
BE UTILIZED AS INSTRUMENT TO CONCEAL OR SHIELD FRAUD. The
general rule of admissibility which excludes evidence aliunde tending to vary the
terms of a written agreement is subject to the exception, among others, that the
same does not apply when the party wishing to prove the real agreement or the
additional terms specifically alleges such agreement or terms in his pleading.
Otherwise stated, the matter of whether or not there is really an obligation on the
part of the appellee to convey the land in question to her child with appellee is
only one of proof, there being no technical bar to the evidence, much less to
appellant's action. Withal, like the Statute of Frauds, the parol evidence rule may
not be used as a shield to commit fraud with impunity, particularly, when, as in
this case, it is alleged that an implied trust is involved. I would even go further. I
venture to add that even if this case were considered as one involving an
express trust under Article 1443 of the Civil Code which provides that an express
trust affecting realty may not be proved by parol evidence. I would still hold that
appellant's case is subject to this exception. It is a fundamental principle
underlying all rules of proof that never may the same be utilized as instruments to
conceal or shield fraud.
DECISION

DIZON, J p:
This is a direct appeal on a question of law taken by Pastor B. Constantino from
an order of the Court of First Instance of Rizal denying his motion for the

admission of his amended complaint in Civil Case No. 5924, entitled "Pastor B.
Constantino vs. Herminia Espiritu."
Appellant's complaint alleged, inter alia, that he had, by a fictitious deed of
absolute sale annexed thereto, conveyed to appellee on October 30, 1953, for a
consideration of P8,000.00, the two-storey house and four (4) subdivision lots
covered by Transfer Certificate of Title No. 20174 issued by the Register of
Deeds of Rizal on October 25, 1950 in the name of Pastor B. Constantino,
married to Honorata Geukeko, with ,the understanding that appellee would hold
the properties in trust for their illegitimate son, Pastor Constantino, Jr., still
unborn at the time of the conveyance; that thereafter appellee mortgaged said
properties to the Republic Savings Bank of Manila twice to secure payment of
two loans, one of P3.000.00 and the other of P2,000.00, and that thereafter she
offered them for sale. The complaint then prayed for the issuance of a writ of
preliminary injunction restraining appellee and her agents or representatives from
further alienating or disposing of the properties, and for judgment ordering her to
execute a deed of absolute sale of said properties in favor of Pastor B.
Constantino, Jr., the beneficiary (who, at the filing of said complaint, was about
five years of age), and to pay attorney's fees in the sum of P2,000.00.
As a result of the conveyance mentioned heretofore, TCT No. 20714 in the name
of plaintiff was partially cancelled and in lieu thereof, TCT No. 32744 was issued
by the Register of Deeds of Rizal in the name of appellee Herminia Espiritu.
On December 16, 1959, appellee moved to dismiss the complaint on the ground
that it stated no cause of action because Pastor Constantino, Jr., the beneficiary
of the alleged trust, was not included as party-plaintiff, and on the further ground
that appellant's cause of action was unenforceable under the Statute of Frauds.
In his opposition to said motion to dismiss, appellant argued that the Statute of
Frauds does not apply to trustee and cestui que trust as in the case of appellee
and her illegitimate child, and that for this reason appellant would not be barred
from proving by parol evidence an implied trust existing under Article 1453 of the
Civil Code. On the other hand, in her rejoinder to appellant's opposition,, appellee
argued that what the former was invoking in his complaint (Paragraph V,
Complaint) was an implied trust under Article 1453 of the Civil Code and not an
express trust under Section 3, Rule 3 of the Revised Rules of Court. Finding the
grounds alleged in the motion to dismiss to be meritorious, the trial court
dismissed the complaint, with costs.
Immediately after receiving notice of said order of dismissal, appellant filed a
motion for the admission of an amended complaint, attaching thereto a copy
hereof, the amendment consisting mainly of the inclusion of the minor, Pastor
Constantino, Jr. as co-plaintiff. The amended complaint further prayed for the
appointment of appellant as said minor's guardian ad litem. An opposition thereto
was filed on the ground that the amendment aforesaid was not an inclusion but a
substitution of the party plaintiff. As the latter had no interest whatsoever in the
subject matter of the case, it was argued that the substitution was not allowed in

this jurisdiction. Appellant's answer to appellee's opposition alleged that, as the


ground relied upon in the said opposition was purely technical, even the
substitution of the party plaintiff should be allowed under Section 2, Rule 17 of
the Rules of Court. Thereafter the lower court issued the appealed order denying
appellant's motion for the admission of his amended complaint. Hence, the
instant direct appeal.
The original as well as the amended complaint mentioned above allege that the
sale made by appellant Constantino in favor of appellee of the properties
described in said pleadings was subject to the agreement that the vendee would
hold them in trust for their at that time already conceived but unborn illegitimate
child; that the vendee violated this agreement, firstly, by subjecting them to two
different contracts of mortgage, and later by trying to sell them, this being not
only in violation of the aforesaid agreement but prejudicial to the cestui que trust;
that the action was commenced to compel the vendee to comply with their
agreement by executing the corresponding deed of conveyance in favor of their
minor son, and to desist from further doing any act prejudicial to the interests of
the latter.
It appears then that, upon the facts alleged by appellant, the contract between
him and appellee was a contract pour autrui, although couched in the form of a
deed of absolute sale, and that appellant's action was, in effect, one for specific
performance. That one of the parties to a contract is entitled to bring an action for
its enforcement or to prevent its breach is too clear to need any extensive
discussion. Upon the other hand, that the contract involved contained a
stipulation pour autrui amplifies this settled rule only in the sense that the third
person for whose benefit the contract was entered into may also demand its
fulfillment provided he had communicated his acceptance thereof to the obligor
before the stipulation in his favor is revoked.
It appearing that the amended complaint submitted by appellant to the lower
court impleaded the beneficiary under the contract as a party co-plaintiff, it
seems clear that the three parties concerned therewith would, as a result, be
before the court and the latter's adjudication would be complete and binding upon
them.
The ruling in the case of Echaus vs. Gan, 55 Phil. 527 involving facts similar to
the ones before Us is of obvious application to the latter. We quote the following
pertinent portions of our decision in said case:
"This action was instituted in the Court of First Instance of
Occidental Negros by Adoracion Rosales de Echaus,
assisted by her husband Enrique Echaus, for the purpose of
obtaining a judicial order requiring the defendant Maria Gan,
as administratrix of the estate of her deceased husband,
Manuel Gay Yulingco, as well as the heirs of said decedent,
to execute in due form a contract, with appropriate
description of the real property involved, in conformity with

the terms of an agreement dated September 3, 1927,


executed by the deceased Manuel Gay Yulingco, in life, and
Enrique Echaus, one of the plaintiffs in the case (Exhibit A).
To this action the defendants interposed a general answer
and cross-complaint, in the latter of which they sought a
decree annulling the contract Exhibit A as excessively
onerous and illegal. Upon hearing the cause the trial court
absolved the plaintiffs from the cross-complaint and gave
judgment in favor of the plaintiffs upon the complaint,
requiring the defendants, within thirty days from the date of
the finality of the decision, to execute before a notary public
and deliver to the plaintiffs a contract similar in terms to that
indicated in the Exhibit A but containing, in addition, a
description of the real property involved, in such form as
would enable the plaintiffs to procure said contract to be
inscribed on the certificate of title corresponding to said
property, with costs against the defendants. From this
judgment the defendants appealed.

xxx xxx xxx


The contract in question, Exhibit A, on which this action is
based, was executed by Manuel Gay Yulingco and Enrique
Echaus, and although the contract binds Yulingco to pay to
Adoracion Rosales de Echaus, the wife of Enrique Echaus,
the sum of fifty centavos for each picul of sugar that may be
produced upon the two haciendas covered by the contract
during the fourteen years beginning with the crop for 19271928, nevertheless this action is not instituted by the nominal
beneficiary, Adoracion Rosales de Echaus, directly for the
purpose of obtaining the benefit which said contract purports
to confer upon her. The purpose of the action is to compel
the defendants to execute a contract pursuant to the tenor of
the contract Exhibit A, but containing an adequate
description of the property contained in the two haciendas,
for the purpose of enabling Echaus to procure the annotation
of said contract on the Torrens certificates of title. It is
therefore evident that, technically speaking, the proper
person to bring this action is Enrique Echaus, the person
with whom the contract was made by Yulingco. It is,
nevertheless, equally obvious that the wife of Enrique
Echaus is a party in interest, and she is certainly a proper, if
not an entirely necessary party to the action. It results that
there is really no improper joinder of parties plaintiff."
Whether the contract of sale entered into between appellant and appellee was

as claimed in the amended complaint subject to the agreement that appellee


would hold the properties in trust for their unborn child is a question of fact that
appellee may raise in her answer for the lower court to determine after trial. On
the other hand, the contention that the contract in question is not enforceable by
action by reason of the provisions of the Statute of Frauds does not appear to be
indubitable, it being clear upon the facts alleged in the amended complaint that
the contract between the parties had already been partially performed by the
execution of the deed of sale, the action brought below being only for the
enforcement of another phase thereof, namely, the execution by appellee of a
deed of conveyance in favor of the beneficiary thereunder.
WHEREFORE, the appealed order is hereby set aside and the case is remanded
to the lower court for further proceedings in accordance with law.
Concepcion, C.J., Reyes, J.B.L., Zaldivar, Castro, Fernando, Teehankee,
Villamor and Makasiar, JJ., concur.
Makalintal, J., concurs in the result.
Separate Opinions
BARREDO, J., concurring:
I concur, but it may not be amiss for me to state briefly my humble view as
regards appellee's claim that appellant's action is barred by the Statute of
Frauds.
As I understand the nature of appellant's action, it is not to enforce an entirely
unwritten contract, which is what is generally barred by the Statute of Frauds;
rather, it is for the enforcement of a condition not appearing in the written
agreement herein involved but which condition, according to appellant, was in
fact part thereof but which the parties had agreed not to include in the deed,
probably because of doubt that such a stipulation in favor of an already
conceived but still unborn illegitimate child may not be judicially permissible. On
the other hand, under the theory of appellee, even assuming, alternatively, that
there w as such an understanding to benefit their unborn child, the conveyance
to her of the land in question is an entirely separate contract from the obligation
assumed by her of turning over the property in question to said child with the
appellant, hence this separate agreement not being in writing is unenforceable by
action under the Statute of Frauds. I consider such posture of appellee
untenable.
To my mind, the obligation of the appellee to execute the conveyance in favor of
their child was part and parcel of one single verbal agreement, in partial
implementation of which the said property was conveyed to her. In other words,
appellant's action is simply one for the enforcement of an implied trust under
Article 1453 of the Civil Code which provides thus:

"ART. 1453.When property is conveyed to a person in


reliance upon his declared intention to hold it for, or transfer
it to another or the grantor, there is an implied trust in favor
of the person whose benefit is contemplated."
Accordingly, the only rule, that can possibly have any relevance to appellee's
situation, instead of the Statute of Frauds, would be the parol evidence rule
which, in any event, is not one of the grounds for dismissal of a complaint,
since it is a rule exclusively of admissibility of evidence and not of any other
branch of procedure. As a matter of fact, under the known circumstances of
this case, I even doubt very much if the appellee will be able to successfully
invoke the parol evidence rule when the trial is eventually held, for the
simple reason that appellant has in effect specifically alleged in his complaint
that the deed of sale in favor of appellee was subject to the condition already
mentioned that their illegitimate child would be the real beneficiary thereof.
The general rule of admissibility which excludes evidence aliunde 1 tending
to vary the terms of a written agreement is subject to the exception, among
others, that the same does not apply when the party wishing to prove the
real agreement or the additional terms specifically alleges such agreement
or terms in his pleading. Otherwise stated, the matter of whether or not there
is really an obligation on the part of the appellee to convey the land in
question to her child with appellee is only the one of proof, there being no
technical bar to the evidence, much less to appellant's action. Withal, like the
Statute of Frauds, the parol evidence rule may not be used as a shield to
commit fraud with impunity, particularly, when, as in this case, it is alleged
that an implied trust is involved. I would even go further. I venture to add that
even if this case were considered as one involving an express trust under
Article 1443 of the Civil Code which provides that an express trust affecting
realty may not be proved by parol evidence, I would still hold that appellant's
case is subject to this exception It is a fundamental principle underlying all
rules of proof that never may the same be utilized as instruments to conceal
or shield fraud.
The main opinion holds that the execution of the deed of conveyance in favor of
the appellant was a partial execution or consummation of the agreement
between appellant and appellee which puts the enforcement of the obligation in
question beyond the pale of the Statute of Frauds. Evidently, the predicate of
said proposition is that the conveyance of the property in question to appellee
and her obligation to hold the same only in trust for their illegitimate child still
unborn at that time constitute one single contract, albeit verbal, as I have already
explained above. Consequently, one part of the contract having been complied
with already by appellant by executing the formal deed in favor of appellee, the
latter cannot now excuse herself from complying with her part of the bargain by
invoking the Statute of Frauds.
Indeed, from whatever angle one views this case, most of all from the standpoint
of the innocent child begotten by the parties out of wedlock and whose future
seems uncertain, the conclusion is inescapable that the trial court erred in

sustaining appellee's motion to dismiss. With the procedural technicalities now


set aside, whether the property in question was indeed intended by appellant and
appellee to remain with appellee for her own benefit or to be in her name only
temporarily for the benefit of their child is the main question of fact which by this
decision the court a quo may now try and decide.
I concur in this opinion of Mr. Justice Barredo. Makasiar, J.

Footnotes
1.This rule of evidence is commonly known as the parol evidence rule. In its
operation, however, it excludes all kinds of evidence, whether oral, in
writing or otherwise, which tends to prove a term or condition not
appearing in the written agreement, if such terms or condition had
been agreed upon before or simultaneously with the agreement. For
this reason, I prefer to call the evidence barred by the general rule
evidence aliunde rather than parol evidence, which is often mistaken
to refer only to evidence by word of mouth, which, as already
explained, is not the sense in which it is supposed to be understood in
the parol evidence rule.

FIRST DIVISION
[G.R. No. 128690. January 21, 1999.]
ABS-CBN BROADCASTING CORPORATION, petitioner,
vs. HONORABLE COURT OF APPEALS, REPUBLIC
BROADCASTING CORP., VIVA PRODUCTIONS, INC.,
and VICENTE DEL ROSARIO, respondents.

Gancayco Law Offices for petitioner.


Penaflor & Perez Law Offices for Republic Broadcasting System, Inc.
Bengzon Narciso Cudala Jimenez Gonzales & Liwanag for VIVA Productions
and V. del Rosario.
Belo Gozon Elma Parel Asuncion & Lucila for Republic Broadcasting System,
Inc.
SYNOPSIS

In 1990, ABS-CBN and VIVA executed a Film Exhibition Agreement whereby the
latter gave the former an exclusive right to exhibit 24 VIVA Films for TV telecast.
Later, VIVA, through respondent Vincent del Rosario, offered ABS-CBN a list of 3
film packages (36 titles) from which the latter may exercise its right of first refusal
under their agreement. ABS-CBN ticked off 10 titles therefrom. Thereafter, in
February 1992, Del Rosario offered ABS-CBN airing rights over a package of
104 movies for P60 million. In April, 1992, Del Rosario, and Eugenio Lopez of
ABS-CBN, met at a restaurant to discuss the package proposal. According to
Lopez, however, what they agreed upon was ABS-CBN's exclusive film rights to
14 films for P36 million. Del Rosario denied the same. He insisted that the
discussion was on VIVA's offer of 104 films for P60 million, to which ABS-CBN
later made a counter proposal but rejected by VIVA's Board of Directors. Hence,
VIVA later granted RBS the exclusive right to air the 104 VIVA films, including the
14 films supposedly granted to ABS-CBN. ABS-CBN then filed a complaint for
specific performance with prayer for injunction. The RTC granted the prayer and
required ABS-CBN post a P35 million bond, But while ABS-CBN was moving for
reduction of the bond, RBS offered to put up a counterbond and was allowed to
post P30 million. Later, the RTC rendered a decision in favor of RBS and VIVA,
ordering ABS-CBN to pay RBS the amount it paid for the print advertisement and
premium on the counterbond, moral damages, exemplary damages and
attorney's fee. ABS-CBN appealed to the Court of Appeals. Viva and Del Rosario
also appealed seeking moral and exemplary damages and additional attorney's
fees. The Court of Appeals affirmed the RTC decision and sustained the
monetary awards, VIVA's and Del Rosario's appeals were denied.
The key issues are: 1. Whether there was a perfected contract between VIVA
and ABS-CBN; and 2. Whether RBS is entitled to damages and attorney's fees.
The first issue is resolved against ABS-CBN, in the absence of the requisites to
make a valid contract. The alleged agreement on the 14 films, if there is one, is
not binding to VIVA as it is not manifested that Del Rosario has an authority to
bind VIVA. Thus, when ABS-CBN made a counter-proposal to VIVA, the same
was submitted to its Board of Directors, who rejected the same. Further, the
Court agreed that the alleged agreement is not a continuation of the 1990
Contract as the right of first refusal under the said contract had already been
exercised by ABS-CBN. However, on the issue of damages, the Court found
ABS-CBN. RBS is not entitled to actual damages as the claim thereof did not
arise from that which allows the same to be recovered. Neither is RBS entitled to
attorney's fees as there is no showing of bad faith in the other party's persistence
in his case. Also, being a corporation, RBS is not entitled to moral damages as
the same is awarded to compensate actual injuries suffered. Lastly, exemplary
damages cannot be awarded in the absence of proof that ABS-CBN was inspired
by malice or bad faith.
SYLLABUS
1.CIVIL LAW; CONTRACT; ELUCIDATED. A contract is a meeting of minds

between two persons whereby one binds himself to give something or to render
some service to another for a consideration. There is no contract unless the
following requisites concur: (1) consent of the contracting parties; (2) object
certain which is the subject of the contract; and (3) cause of the obligation, which
is established. A contract undergoes three stages: (a) preparation, conception, or
generation, which is the period of negotiation and bargaining, ending at the
moment of agreement of the parties; (b) perfection or birth of the contract, which
is the moment when the parties come to agree on the terms of the contract; and
(c) consummation or death, which is the fulfillment or performance of the terms
agreed upon in the contract. Contracts that are consensual in nature are
perfected upon mere meeting of the minds. Once there is concurrence between
the offer and the acceptance upon the subject matter, consideration, and terms
of payment, a contract is produced. The offer must be certain. To convert the
offer into a contract, the acceptance must be absolute and must not qualify the
terms of the offer; it must be plain, unequivocal, unconditional, and without
variance of any sort from the proposal. A qualified acceptance, or one that
involves a new proposal, constitutes a counter-offer and is a rejection of the
original offer. Consequently, when something is desired which is not exactly what
is proposed in the offer, such acceptance is not sufficient to generate consent
because any modification or variation from the terms of the offer annuls the offer.
2.CORPORATION LAW; BOARD OF DIRECTORS; POWER TO ENTER INTO
CONTRACTS; DELEGATION; VALIDITY THEREOF. Under the Corporation
Code, unless otherwise provided by said Code, corporate powers, such as the
power to enter into contracts, are exercised by the Board of Directors. However,
the Board may delegate such powers to either an executive committee or officials
or contracted managers. The delegation, except for the executive committee,
must be for specific purposes. Delegation to officers makes the latter agents of
the corporation; accordingly, the general rules of agency as to the binding effects
of their acts would apply. For such officers to be deemed fully clothed by the
corporation to exercise a power of the Board, the latter must specially authorize
them to do so. That Del Rosario did not have the authority to accept ABS-CBN's
counter-offer was best evidenced by his submission of the draft contract to
VIVA'S Board of Directors for the latter's approval. In any event, there was
between Del Rosario and Lopez III no meeting of minds.
3.CIVIL LAW; OBLIGATIONS AND CONTRACTS; DAMAGES; ACTUAL
DAMAGES; ELABORATED. Chapter 2, Title XVIII, Book IV of the Civil Code
is the specific law on actual or compensatory damages. Except as provided by
law or by stipulation, one is entitled to compensation for actual damages only for
such pecuniary loss suffered by him as he has duly proved. The indemnification
shall comprehend not only the value of the loss suffered, but also that of the
profits that the obligee failed to obtain. In contracts and quasi-contracts the
damages which may be awarded are dependent on whether the obligor acted
with good faith or otherwise. In case of good faith, the damages recoverable are
those which are the natural and probable consequences of the breach of the
obligation and which the parties have foreseen or could have reasonably

foreseen at the time of the constitution of the obligation. If the obligor acted with
fraud, bad faith, malice, or wanton attitude, he shall be responsible for all
damages which may be reasonably attributed to the non-performance of the
obligation. In crimes and quasi-delicts, the defendant shall be liable for all
damages which are the natural and probable consequences of the act or
omission complained of, whether or not such damages have been foreseen or
could have reasonably been foreseen by the defendant. Actual damages may
likewise be recovered for loss or impairment of earning capacity in cases of
temporary or permanent personal injury, or for injury to the plaintiff's business
standing or commercial credit. DIETcC
4.ID.; ID.; ID.; ID.; CASE AT BAR. The claim of RBS for actual damages did
not arise from contract, quasi-contract, delict, or quasi-delict. It arose from the
fact of filing of the complaint despite ABS-CBN's alleged knowledge of lack of
cause of action. Needless to state, the award of actual damages cannot be
comprehended under the law on actual damages. RBS could only probably take
refuge under Articles 19, 20, and 21 of the Civil Code. It may further be observed
that in cases where a writ of preliminary injunction is issued, the damages which
the defendant may suffer by reason of the writ are recoverable from the injunctive
bond. In this case, ABS-CBN had not yet filed the required bond; as a matter of
fact, it asked for reduction of the bond and even went to the Court of Appeals to
challenge the order on the matter. Clearly then, it was not necessary for RBS to
file a counterbond. Hence, ABS-CBN cannot be held responsible for the premium
RBS paid for the counterbond. Neither could ABS-CBN be liable for the print
advertisements for "Maging Sino Ka Man" for lack of sufficient legal basis. The
RTC issued a temporary restraining order and later, a writ of preliminary
injunction on the basis of its determination that there existed sufficient grounds
for the issuance thereof. Notably, the RTC did not dissolve the injunction on the
ground of lack of legal and factual basis, but because of the plea of RBS that it
be allowed to put up a counterbond.
5.ID.; ID.; ID.; ID.; ATTORNEY'S FEES; ELABORATED. As regards attorney's
fees, the law is clear that in the absence of stipulation, attorney's fees may be
recovered as actual or compensatory damages under any of the circumstances
provided for in Article 2208 of the Civil Code. The general rule is that attorney's
fees cannot be recovered as part of damages because of the policy that no
premium should be placed on the right of litigate. They are not to be awarded
every time a party wins a suit. The power of the court to award attorney's fees
under Article 2208 demands factual, legal, and equitable justification. Even when
a claimant is compelled to litigate with third persons or to incur expenses to
protect his rights, still attorney's fees may not be awarded where no sufficient
showing of bad faith could be reflected in a party's persistence in a case other
than an erroneous conviction of the righteousness of his cause.

6.ID.; ID.; ID.; MORAL DAMAGES; ELABORATED. As to moral damages the


law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code. Article 2217

thereof defines what are included in moral damages, while Article 2219
enumerates the cases where they may be recovered. Article 2220 provides that
moral damages may be recovered in breaches of contract where the defendant
acted fraudulently or in bad faith. Moral damages are in the category of an award
designed to compensate the claimant for actual injury suffered and not to impose
a penalty on the wrongdoer. The award is not meant to enrich the complainant at
the expense of the defendant, but to enable the injured party to obtain means,
diversion, or amusements that will serve to obviate the moral suffering he has
undergone. It is aimed at the restoration, within the limits of the possible, of the
spiritual status quo ante, and should be proportionate to the suffering inflicted.
Trial courts must then guard against the award of exorbitant damages; they
should exercise balanced restrained and measured objectivity to avoid suspicion
that it was due to passion, prejudice, or corruption on the part of the trial court.
7.ID.; ID.; ID.; ID.; CASE AT BAR. RBS's claim for moral damages could
possibly fall only under item (10) of Article 2219, thereof which reads: (10) Acts
and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
However, the award of moral damages cannot be granted in favor of a
corporation because, being an artificial person and having existence only in legal
contemplation, it has no feelings, no emotions, no senses. It cannot, therefore,
experience physical suffering and mental anguish, which can be experienced
only by one having a nervous system. The statement in People v. Manero and
Mambulao Lumber Co. v. PNB that a corporation may recover moral damages if
it "has a good reputation that is debased, resulting in social humiliation" is an
obiter dictum. On this score alone the award for damages must be set aside,
since RBS is a corporation.
8.ID.; ID.; ID.; EXEMPLARY DAMAGES; ELUCIDATED. The basic law on
exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the Civil
Code. These are imposed by way of example or correction for the public good, in
addition to moral, temperate, liquidated, or compensatory damages. They are
recoverable in criminal cases as part of the civil liability when the crime was
committed with one or more aggravating circumstances; in quasi-delicts, if the
defendant acted with gross negligence; and in contracts and quasi-contracts, if
the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent
manner.
9.ID.; ID.; ID.; ID.; CASE AT BAR. The claim of RBS against ABS-CBN is not
based on contract, quasi-contract, delict, or quasi-delict. Hence, the claims for
moral and exemplary damages can only be based on Articles 19, 20, and 21 of
the Civil Code. The elements of abuse of right under Article 19 are the following:
(1) the existence of a legal right or duty, (2) which is exercised in bad faith, and
(3) for the sole intent of prejudicing or injuring another. Article 20 speaks of the
general sanction for all other provisions of law which do not especially provide for
their own sanction; while Article 21 deals with acts contra bonus mores, and has
the following elements: (1) there is an act which is legal, (2) but which is contrary
to morals, good custom, public order, or public policy, and (3) and it is done with

intent to injure. Verily then, malice or bad faith is at the core of Articles 19, 20,
and 21. Malice or bad faith implies a conscious and intentional design to do a
wrongful act for a dishonest purpose or moral obliquity. Such must be
substantiated by evidence. There is no adequate proof that ABS-CBN was
inspired by malice or bad faith. It was honestly convinced of the merits of its
cause after it had undergone serious negotiations culminating in its formal
submission of a draft contract. Settled is the rule that the adverse result of an
action does not per se make the action wrongful and subject the actor to
damages, for the law could not have meant to impose a penalty on the right to
litigate. If damages result from a person's exercise of a right, it is damnum
absque injuria. TIADCc
DECISION

DAVIDE, JR., C.J p:


In this petition for review on certiorari, petitioner ABS-CBN
Broadcasting Corp. (hereafter ABS-CBN) seeks to reverse and set aside the
decision 1 of 31 October 1996 and the resolution 2 of 10 March 1997 of the
Court of Appeals in CA-G.R. CV No. 44125. The former affirmed with
modification the decision 3 of 28 April 1993 of the Regional Trial Court
(RTC) of Quezon City, Branch 80, in Civil Case No. Q-92-12309. The latter
denied the motion to reconsider the decision of 31 October 1996. llcd
The antecedents, as found by the RTC and adopted by the Court of
Appeals, are as follows:
In 1990, ABS-CBN and Viva executed a Film
Exhibition Agreement (Exh. "A") whereby Viva gave ABSCBN an exclusive right to exhibit some Viva films. Sometime
in December 1991, in accordance with paragraph 2.4 [sic] of
said agreement stating that
1.4ABS-CBN shall have the right of first refusal to
the next twenty-four (24) Viva films for TV telecast
under such terms as may be agreed upon by the
parties hereto, provided, however, that such right
shall be exercised by ABS-CBN from the actual
offer in writing.
Viva, through defendant Del Rosario, offered ABSCBN, through its vice-president Charo Santos-Concio, a list
of three (3) film packages (36 title) from which ABS-CBN
may exercise its right of first refusal under the afore-said
agreement (Exhs. "1" par. 2, "2," "2-A" and "2-B" - Viva).
ABS-CBN, however through Mrs. Concio, "can tick off only

ten (10) titles" (from the list) "we can purchase" (Exh. "3" Viva) and therefore did not accept said list (TSN, June 8,
1992, pp. 9-10). The titles ticked off by Mrs. Concio are not
the subject of the case at bar except the film "Maging Sino
Ka Man."
For further enlightenment, this rejection letter dated
January 06, 1992 (Exh "3" - Viva) is hereby quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing
to you as I would like to express my difficulty in
recommending the purchase of the three film
packages you are offering ABS-CBN.
From among the three packages I can only tick off
10 titles we can purchase. Please see attached. I
hope you will understand my position. Most of the
action pictures in the list do not have big action
stars in the cast. They are not for primetime. In line
with this I wish to mention that I have not scheduled
for telecast several action pictures in our very first
contract because of the cheap production value of
these movies as well as the lack of big action stars.
As a film producer, I am sure you understand what I
am trying to say as Viva produces only big action
pictures.
In fact, I would like to request two (2) additional
runs for these movies as I can only schedule them
in our non-primetime slots. We have to cover the
amount that was paid for these movies because as
you very well know that non-primetime advertising
rates are very low. These are the unaired titles in
the first contract.
1.Kontra Persa [sic]
2.Raider Platoon
3.Underground guerillas
4.Tiger Command
5.Boy de Sabog
6.Lady Commando

7.Batang Matadero
8.Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us
before and have been rejected because of the
ruling of MTRCB to have them aired at 9:00 p.m.
due to their very adult themes.
As for the 10 titles I have choosen [sic] from the 3
packages please consider including all the other
Viva movies produced last year. I have quite an
attractive offer to make.
Thanking you and with my warmest regards.
(Signed)
Charo
SantosConcio
On February 27, 1992, defendant Del Rosario approached
ABS-CBN's Ms. Concio, with a list consisting of 52 original
movie titles (i.e. not yet aired on television) including the 14
titles subject of the present case, as well as 104 re-runs
(previously aired on television) from which ABS-CBN may
choose another 52 titles, as a total of 156 titles, proposing to
sell to ABS-CBN airing rights over this package of 52
originals and 52 re-runs for P60,000,000.00 of which
P30,000,000.00 will be in cash and P30,000,000.00 worth of
television spots (Exh. "4" to "4-C" - Viva; "9" - Viva).
On April 2, 1992, defendant Del Rosario and ABSCBN's general manager, Eugenio Lopez III, met at the
Tamarind Grill Restaurant in Quezon City to discuss the
package proposal of Viva. What transpired in that lunch
meeting is the subject of conflicting versions. Mr. Lopez
testified that he and Mr. Del Rosario allegedly agreed that
ABS-CBN was granted exclusive film rights to fourteen (14)
films for a total consideration of P36 million; that he allegedly
put this agreement as to the price and number of films in a
"napkin" and signed it and gave it to Mr. Del Rosario (Exh.
D; TSN, pp. 24-26, 77-78, June 8, 1992). On the other hand,
Del Rosario denied having made any agreement with Lopez
regarding the 14 Viva films; denied the existence of a napkin
in which Lopez wrote something; and insisted that what he

and Lopez discussed at the lunch meeting was Viva's film


package offer of 104 films (52 originals and 52 re-runs) for a
total price of P60 million. Mr. Lopez promising [sic] to make a
counter proposal which came in the form of a proposal
contract Annex "C" of the complaint (Exh. "1" - Viva; Exh. "C"
- ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano
Gozon of RBS Senior vice-president for Finance discussed
the terms and conditions of Viva's offer to sell the 104 films,
after the rejection of the same package by ABS-CBN.
On April 07, 1992, defendant Del Rosario received
through his secretary, a handwritten note from Ms. Concio,
(Exh. "5" - Viva), which reads: "Here's the draft of the
contract. I hope you find everything in order," to which was
attached a draft exhibition agreement (Exh. "C" - ABS-CBN;
Exh. "9" - Viva, p. 3) a counter-proposal covering 53 films,
52 of which came from the list sent by defendant Del Rosario
and one film was added by Ms. Concio, for a consideration
of P35 million. Exhibit "C" provides that ABS-CBN is granted
film rights to 53 films and contains a right of first refusal to
"1992 Viva Films." The said counter proposal was however
rejected by Viva's Board of Directors [in the] evening of the
same day, April 7, 1992, as Viva would not sell anything less
than the package of 104 films for P60 million pesos (Exh. "9"
- Viva), and such rejection was relayed to Ms. Concio.

On April 29, 1992, after the rejection of ABS-CBN


and following several negotiations and meetings defendant
Del Rosario and Viva's President Teresita Cruz, in
consideration of P60 million, signed a letter of agreement
dated April 24, 1992, granting RBS the exclusive right to air
104 Viva-produced and/or acquired films (Exh. "7-A" - RBS;
Exh. "4" - RBS) including the fourteen (14) films subject of
the present case. 4
On 27 May 1992, ABS-CBN filed before the RTC a complaint for
specific performance with a prayer for a writ of preliminary injunction and/or
temporary restraining order against private respondents Republic
Broadcasting Corporation 5 (hereafter RBS), Viva Productions (hereafter
VIVA), and Vicente del Rosario. The complaint was docketed as Civil Case
No. Q-92-12309.
On 28 May 1992, the RTC issued a temporary restraining order 6
enjoining private respondents from proceeding with the airing, broadcasting,

and televising of the fourteen VIVA films subject of the controversy, starting
with the film Maging Sino Ka Man, which was scheduled to be shown on
private respondent RBS' channel 7 at seven o'clock in the evening of said
date.
On 17 June 1992, after appropriate proceedings, the RTC issued
an order 7 directing the issuance of a writ of preliminary injunction upon
ABS-CBN's posting of a P35 million bond. ABS-CBN moved for the
reduction of the bond, 8 while private respondents moved for reconsideration
of the order and offered to put up a counterbond. 9
In the meantime, private respondents filed separate answers with
counterclaim. 10 RBS also set up a cross-claim against VIVA.
On 3 August 1992, the RTC issued an order 11 dissolving the writ
of preliminary injunction upon the posting by RBS of a P30 million
counterbond to answer for whatever damages ABS-CBN might suffer by
virtue of such dissolution. However, it reduced petitioner's injunction bond to
P15 million as a condition precedent for the reinstatement of the writ of
preliminary injunction should private respondents be unable to post a
counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion
of the court, agreed to explore the possibility of an amicable settlement. In
the meantime, RBS prayed for and was granted reasonable time within
which to put up a P30 million counterbond in the event that no settlement
would be reached.
As the parties failed to enter into an amicable settlement, RBS
posted on 1 October 1992 a counterbond, which the RTC approved in its
Order of 15 October 1992. 13
On 19 October 1992, ABS-CBN filed a motion for reconsideration
14 of the 3 August and 15 October 1992 Orders, which RBS opposed. 15
On 29 October 1992, the RTC conducted a pre-trial. 16
Pending resolution of its motion for reconsideration, ABS-CBN filed
with the Court of Appeals a petition 17 challenging the RTC's Orders of 3
August and 15 October 1992 and praying for the issuance of a writ of
preliminary injunction to enjoin the RTC from enforcing said orders. The
case was docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary
restraining order 18 to enjoin the airing, broadcasting, and televising of any
or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a
decision 19 dismissing the petition in CA-G.R. SP No. 29300 for being
premature. ABS-CBN challenged the dismissal in a petition for review filed
with this Court on 19 January 1993, which was docketed as G.R. No.
108363.

In the meantime the RTC received the evidence for the parties in
Civil Case No. Q-92-12309. Thereafter, on 28 April 1993, it rendered a
decision 20 in favor of RBS and VIVA and against ABS-CBN disposing as
follows:
WHEREFORE, under cool reflection and
prescinding from the foregoing, judgment is rendered in
favor of defendants and against the plaintiff.
(1)The complaint is hereby dismissed;
(2)Plaintiff ABS-CBN is ordered to pay defendant RBS the
following:
a)P107,727.00, the amount of premium paid by
RBS to the surety which issued defendant
RBS's bond to lift the injunction;
b)P191,843.00 for the amount of print
advertisement for "Maging Sino Ka Man"
in various newspapers;
c)Attorney's fees in the amount of P1 million;
d)P5 million as and by way of moral damages;
e)P5 million as and by way of exemplary damages;
(3)For defendant VIVA, plaintiff ABS-CBN is ordered to pay
P212,000.00 by way of reasonable attorney's fees.
(4)The cross-claim of defendant RBS against defendant
VIVA is dismissed.
(5)Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price
and terms of the offer. The alleged agreement between Lopez III and Del
Rosario was subject to the approval of the VIVA Board of Directors, and said
agreement was disapproved during the meeting of the Board on 7 April
1992. Hence, there was no basis for ABS-CBN's demand that VIVA signed
the 1992 Film Exhibition Agreement. Furthermore, the right of first refusal
under the 1990 Film Exhibition Agreement had previously been exercised
per Ms. Concio's letter to Del Rosario ticking off ten titles acceptable to
them, which would have made the 1992 agreement an entirely new contract.
On 21 June 1993, this Court denied 21 ABS-CBN's petition for
review in G.R. No. 108363, as no reversible error was committed by the
Court of Appeals in its challenged decision and the case had "become moot
and academic in view of the dismissal of the main action by the court a quo
in its decision" of 28 April 1993.

Aggrieved by the RTC's decision, ABS-CBN appealed to the Court


of Appeals claiming that there was a perfected contract between ABS-CBN
and VIVA granting ABS-CBN the exclusive right to exhibit the subject films.
Private respondents VIVA and Del Rosario also appealed seeking moral and
exemplary damages and additional attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed
with the RTC that the contract between ABS-CBN and VIVA had not been
perfected, absent the approval by the VIVA Board of Directors of whatever
Del Rosario, it's agent, might have agreed with Lopez III. The appellate court
did not even believe ABS-CBN's evidence that Lopez III actually wrote down
such an agreement on a "napkin," as the same was never produced in court.
It likewise rejected ABS-CBN's insistence on its right of first refusal and
ratiocinated as follows:
As regards the matter of right of first refusal, it may
be true that a Film Exhibition Agreement was entered into
between Appellant ABS-CBN and appellant VIVA under
Exhibit "A" in 1990, and that parag. 1.4 thereof provides:
1.4ABS-CBN shall have the right of first refusal to
the next twenty-four (24) VIVA films for TV telecast
under such terms as may be agreed upon by the
parties hereto, provided, however, that such right
shall be exercised by ABS-CBN within a period of
fifteen (15) days from the actual offer in writing
(Records, p. 14).
[H]owever, it is very clear that said right of first refusal in
favor of ABS-CBN shall still be subject to such terms as may
be agreed upon by the parties thereto, and that the said right
shall be exercised by ABS-CBN within fifteen (15) days from
the actual offer in writing. cdll
Said parag. 1.4 of the agreement Exhibit "A" on the
right of first refusal did not fix the price of the film right to the
twenty-four (24) films, nor did it specify the terms thereof.
The same are still left to be agreed upon by the parties.
In the instant case, ABS-CBN's letter of rejection
Exhibit 3 (Records, p. 89) stated that it can only tick off ten
(10) films, and the draft contract Exhibit "C" accepted only
fourteen (14) films, while parag. 1.4 of Exhibit "A" speaks of
the next twenty-four (24) films.
The offer of VIVA was sometime in December 1991
(Exhibits 2, 2-A, 2-B; Records, pp. 86-88; Decision, p. 11,
Records, p. 1150), when the first list of VIVA films was sent
by Mr. Del Rosario to ABS-CBN. The Vice President of ABS-

CBN, Mrs. Charo Santos-Concio, sent a letter dated January


6, 1992 (Exhibit 3, Records, p. 89) where ABS-CBN
exercised its right of refusal by rejecting the offer of VIVA. As
aptly observed by the trial court, with the said letter of Mrs.
Concio of January 6, 1992, ABS-CBN had lost its right of first
refusal. And even if We reckon the fifteen (15) day period
from February 27, 1992 (Exhibit 4 to 4-C) when another list
was sent to ABS-CBN after the letter of Mrs. Concio, still the
fifteen (15) day period within which ABS-CBN shall exercise
its right of first refusal has already expired. 22
Accordingly, respondent court sustained the award of actual
damages consisting in the cost of print advertisements and the premium
payments for the counterbond, there being adequate proof of the pecuniary
loss which RBS had suffered as a result of the filing of the complaint by
ABS-CBN. As to the award of moral damages, the Court of Appeals found
reasonable basis therefor, holding that RBS's reputation was debased by the
filing of the complaint in Civil Case No. Q-92-12309 and by the non-showing
of the film "Maging Sino Ka Man." Respondent court also held that
exemplary damages were correctly imposed by way of example or correction
for the public good in view of the filing of the complaint despite petitioner's
knowledge that the contract with VIVA had not been perfected. It also upheld
the award of attorney's fees, reasoning that with ABS-CBN's act of instituting
Civil Case No. Q-92-12309, RBS was "unnecessarily forced to litigate." The
appellate court, however, reduced the awards of moral damages to P2
million, exemplary damages to P2 million, and attorney's fees to
P500,000.00.
On the other hand, respondent Court of Appeals denied VIVA and
Del Rosario's appeal because it was "RBS and not VIVA which was actually
prejudiced when the complaint was filed by ABS-CBN."
Its motion for reconsideration having been denied, ABS-CBN filed
the petition in this case, contending that the Court of Appeals gravely erred
in
I
. . . RULING THAT THERE WAS NO PERFECTED
CONTRACT BETWEEN PETITIONER AND PRIVATE
RESPONDENT VIVA NOTWITHSTANDING
PREPONDERANCE OF EVIDENCE ADDUCED BY
PETITIONER TO THE CONTRARY.
II
. . . IN AWARDING ACTUAL AND COMPENSATORY
DAMAGES IN FAVOR OF PRIVATE RESPONDENT RBS.

III
. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES
IN FAVOR OF PRIVATE RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF
RBS.
ABS-CBN claims that it had yet to fully exercise its right of first
refusal over twenty-four titles under the 1990 Film Exhibition Agreement, as
it had chosen only ten titles from the first list. It insists that we give credence
to Lopez's testimony that he and Del Rosario met at the Tamarind Grill
Restaurant, discussed the terms and conditions of the second list (the 1992
Film Exhibition Agreement) and upon agreement thereon, wrote the same on
a paper napkin. It also asserts that the contract has already been effective,
as the elements thereof, namely, consent, object, and consideration were
established. It then concludes that the Court of Appeals' pronouncements
were not supported by law and jurisprudence, as per our decision of 1
December 1995 in Limketkai Sons Milling, Inc. v. Court of Appeals, 23 which
cited Toyota Shaw, Inc. v. Court of Appeals, 24 Ang Yu Asuncion v. Court of
Appeals; 25 and Villonco Realty Company v. Bormaheco, Inc. 26
Anent the actual damages awarded to RBS, ABS-CBN disavows
liability therefor. RBS spent for the premium on the counterbond of its own
volition in order to negate the injunction issued by the trial court after the
parties had ventilated their respective positions during the hearings for the
purpose. The filing of the counterbond was an option available to RBS, but it
can hardly be argued that ABS-CBN compelled RBS to incur such expense.
Besides, RBS had another available option, i.e., move for the dissolution of
the injunction; or if it was determined to put up a counterbond, it could have
presented a cash bond. Furthermore under Article 2203 of the Civil Code,
the party suffering loss or injury is also required to exercise the diligence of a
good father of a family to minimize the damages resulting from the act or
omission. As regards the cost of print advertisements, RBS had not
convincingly established that this was a loss attributable to the non-showing
of "Maging Sino Ka Man"; on the contrary, it was brought out during trial that
with or without the case or the injunction, RBS would have spent such an
amount to generate interest in the film.
ABS-CBN further contends that there was no clear basis for the
awards of moral and exemplary damages. The controversy involving ABSCBN and RBS did not in any way originate from business transaction
between them. The claims for such damages did not arise from any
contractual dealings or from specific acts committed by ABS-CBN against
RBS that may be characterized as wanton, fraudulent, or reckless; they
arose by virtue only of the filing of the complaint. An award of moral and
exemplary damages is not warranted where the record is bereft of any proof

that a party acted maliciously or in bad faith in filing an action. 27 In any


case, free resort to courts for redress of wrongs is a matter of public policy.
The law recognizes the right of every one to sue for that which he honestly
believes to be his right without fear of standing trial for damages where by
lack of sufficient evidence, legal technicalities, or a different interpretation of
the laws on the matter, the case would lose ground. 28 One who makes use
of his own legal right does no injury. 29 If damage results from the filing of
the complaint, it is damnum absque injuria. 30 Besides, moral damages are
generally not awarded in favor of a juridical person, unless it enjoys a good
reputation that was debased by the offending party resulting in social
humiliation. 31
As regards the award of attorney's fees, ABS-CBN maintains that
the same had no factual, legal, or equitable justification. In sustaining the
trial court's award, the Court of Appeals acted in clear disregard of the
doctrine laid down in Buan v. Camaganacan 32 that the text of the decision
should state the reason why attorney's fees are being awarded; otherwise,
the award should be disallowed. Besides, no bad faith has been imputed on,
much less proved as having been committed by, ABS-CBN. It has been held
that "where no sufficient showing of bad faith would be reflected in a party's
persistence in a case other than an erroneous conviction of the
righteousness of his cause, attorney's fees shall not be recovered as cost."
33
On the other hand, RBS asserts that there was no perfected
contract between ABS-CBN and VIVA absent any meeting of minds between
them regarding the object and consideration of the alleged contract. It
affirms that ABS-CBN's claim of a right of first refusal was correctly rejected
by the trial court. RBS insists the premium it had paid for the counterbond
constituted a pecuniary loss upon which it may recover. It was obliged to put
up the counterbond due to the injunction procured by ABS-CBN. Since the
trial court found that ABS-CBN had no cause of action or valid claim against
RBS and, therefore not entitled to the writ of injunction, RBS could recover
from ABS-CBN the premium paid on the counterbond. Contrary to the claim
of ABS-CBN, the cash bond would prove to be more expensive, as the loss
would be equivalent to the cost of money RBS would forego in case the P30
million came from its funds or was borrowed from banks.
RBS likewise asserts that it was entitled to the cost of
advertisements for the cancelled showing of the film "Maging Sino Ka Man"
because the print advertisements were put out to announce the showing on
a particular day and hour on Channel 7, i.e., in its entirety at one time, not as
series to be shown on a periodic basis. Hence, the print advertisements
were good and relevant for the particular date of showing, and since the film
could not be shown on that particular date and hour because of the
injunction, the expenses for the advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that ABSCBN filed the case and secured injunctions purely for the purpose of

harassing and prejudicing RBS. Pursuant then to Articles 19 and 21 of the


Civil Code, ABS-CBN must be held liable for such damages. Citing
Tolentino, 34 damages may be awarded in cases of abuse of rights even if
the act done is not illicit, and there is abuse of rights where a plaintiff
institutes an action purely for the purpose of harassing or prejudicing the
defendant.
In support of its stand that a juridical entity can recover moral and
exemplary damages, private respondent RBS cited People v. Manero, 35
where it was stated that such entity may recover moral and exemplary
damages if it has a good reputation that is debased resulting in social
humiliation. It then ratiocinates; thus:
There can be no doubt that RBS' reputation has
been debased by ABS-CBN's acts in this case. When RBS
was not able to fulfill its commitment to the viewing public to
show the film "Maging Sino Ka Man" on the scheduled dates
and times (and on two occasions that RBS advertised), it
suffered serious embarrassment and social humiliation.
When the showing was canceled, irate viewers called up
RBS' offices and subjected RBS to verbal abuse ("Announce
kayo ng announce, hindi ninyo naman ilalabas", "nanloloko
yata kayo") (Exh. 3-RBS, par. 3). This alone was not
something RBS brought upon itself. It was exactly what
ABS-CBN had planned to happen.
The amount of moral and exemplary damages
cannot be said to be excessive. Two reasons justify the
amount of the award.
The first is that the humiliation suffered by RBS is
national in extent. RBS' operations as a broadcasting
company is [sic] nationwide. Its clientele, like that of ABSCBN, consists of those who own and watch television. It is
not an exaggeration to state, and it is a matter of judicial
notice that almost every other person in the country watches
television. The humiliation suffered by RBS is multiplied by
the number of televiewers who had anticipated the showing
of the film "Maging Sino Ka Man" on May 28 and November
3, 1992 but did not see it owing to the cancellation. Added to
this are the advertisers who had placed commercial spots for
the telecast and to whom RBS had a commitment in
consideration of the placement to show the film in the dates
and times specified.
The second is that it is a competitor that caused
RBS to suffer the humiliation. The humiliation and injury are
far greater in degree when caused by an entity whose

ultimate business objective is to lure customers (viewers in


this case) away from the competition. 36
For their part, VIVA and Vicente del Rosario contend that the
findings of fact of the trial court and the Court of Appeals do not support
ABS-CBN's claim that there was a perfected contract. Such factual findings
can no longer be disturbed in this petition for review under Rule 45, as only
questions of law can be raised, not questions of fact. On the issue of
damages and attorneys fees, they adopted the arguments of RBS.
The key issues for our consideration are (1) whether there was a
perfected contract between VIVA and ABS-CBN, and (2) whether RBS is
entitled to damages and attorney's fees. It may be noted that the award of
attorney's fees of P212,000 in favor of VIVA is not assigned as another error.
I
The first issue should be resolved against ABS-CBN. A contract is
a meeting of minds between two persons whereby one binds himself to give
something or to render some service to another 37 for a consideration.
There is no contract unless the following requisites concur: (1) consent of
the contracting parties; (2) object certain which is the subject of the contract;
and (3) cause of the obligation, which is established. 38 A contract
undergoes three stages:
(a)preparation, conception, or generation, which is the period
of negotiation and bargaining, ending at the
moment of agreement of the parties;
(b)perfection or birth of the contract, which is the moment
when the parties come to agree on the terms of the
contract; and
(c)consummation or death, which is the fulfillment or
performance of the terms agreed upon in the
contract. 39
Contracts that are consensual in nature are perfected upon mere
meeting of the minds. Once there is concurrence between the offer and the
acceptance upon the subject matter, consideration, and terms of payment a
contract is produced. The offer must be certain. To convert the offer into a
contract, the acceptance must be absolute and must not qualify the terms of
the offer; it must be plain, unequivocal, unconditional, and without variance
of any sort from the proposal. A qualified acceptance, or one that involves a
new proposal, constitutes a counter-offer and is a rejection of the original
offer. Consequently, when something is desired which is not exactly what is
proposed in the offer, such acceptance is not sufficient to generate consent
because any modification or variation from the terms of the offer annuls the

offer. 40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at
the Tamarind Grill on 2 April 1992 to discuss the package of films, said
package of 104 VIVA films was VIVA's offer to ABS-CBN to enter into a new
Film Exhibition Agreement. But ABS-CBN, sent, through Ms. Concio, a
counter-proposal in the form of a draft contract proposing exhibition of 53
films for a consideration of P35 million. This counter-proposal could be
nothing less than the counter-offer of Mr. Lopez during his conference with
Del Rosario at Tamarind Grill Restaurant. Clearly, there was no acceptance
of VIVA's offer, for it was met by a counter-offer which substantially varied
the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is
misplaced. In these cases, it was held that an acceptance may contain a
request for certain changes in the terms of the offer and yet be a binding
acceptance as long as "it is clear that the meaning of the acceptance is
positively and unequivocally to accept the offer, whether such request is
granted or not." This ruling was, however, reversed in the resolution of 29
March 1996, 43 which ruled that the acceptance of an offer must be
unqualified and absolute, i.e., it "must be identical in all respects with that of
the offer so as to produce consent or meeting of the minds."
On the other hand, in Villonco, cited in Limketkai, the alleged
changes in the revised counter-offer were not material but merely
clarificatory of what had previously been agreed upon. It cited the statement
in Stuart v. Franklin Life Insurance Co. 44 that "a vendor's change in a
phrase of the offer to purchase, which change does not essentially change
the terms of the offer, does not amount to a rejection of the offer and the
tender of a counter-offer." 45 However, when any of the elements of the
contract is modified upon acceptance, such alteration amounts to a counteroffer.
In the case at bar, ABS-CBN made no unqualified acceptance of
VIVA's offer. Hence, they underwent a period of bargaining. ABS-CBN then
formalized its counter-proposals or counter-offer in a draft contract. VIVA
through its Board of Directors, rejected such counter-offer. Even if it be
conceded arguendo that Del Rosario had accepted the counter-offer, the
acceptance did not bind VIVA, as there was no proof whatsoever that Del
Rosario had the specific authority to do so.
Under the Corporation Code, 46 unless otherwise provided by said
Code, corporate powers, such as the power to enter into contracts, are
exercised by the Board of Directors. However, the Board may delegate such
powers to either an executive committee or officials or contracted managers.
The delegation, except for the executive committee, must be for specific
purposes. 47 Delegation to officers makes the latter agents of the
corporation; accordingly, the general rules of agency as to the binding

effects of their acts would apply. 48 For such officers to be deemed fully
clothed by the corporation to exercise a power of the Board, the latter must
specially authorize them to do so. That Del Rosario did not have the
authority to accept ABS-CBN's counter-offer was best evidenced by his
submission of the draft contract to VIVA's Board of Directors for the latter's
approval. In any event, there was between Del Rosario and Lopez III no
meeting of minds. The following findings of the trial court are instructive:
A number of considerations militate against ABSCBN's claim that a contract was perfected at that lunch
meeting on April 02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed
upon at the Tamarind Grill referred to the price and the
number of films, which he wrote on a napkin. However,
Exhibit "C" contains numerous provisions which were not
discussed at the Tamarind Grill, if Lopez testimony was to be
believed nor could they have been physically written on a
napkin. There was even doubt as to whether it was a paper
napkin or a cloth napkin. In short what were written in Exhibit
"C" were not discussed, and therefore could not have been
agreed upon, by the parties. How then could this court
compel the parties to sign Exhibit "C" when the provisions
thereof were not previously agreed upon?
SECOND, Mr. Lopez claimed that what was agreed
upon as the subject matter of the contract was 14 films. The
complaint in fact prays for delivery of 14 films. But Exhibit
"C" mentions 53 films as its subject matter. Which is which?
If Exhibit "C" reflected the true intent of the parties, then
ABS-CBN's claim for 14 films in its complaint is false or if
what it alleged in the complaint is true, then Exhibit "C" did
not reflect what was agreed upon by the parties. This
underscores the fact that there was no meeting of the minds
as to the subject matter of the contract, so as to preclude
perfection thereof. For settled is the rule that there can be no
contract where there is no object certain which is its subject
matter (Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his
affidavit testimony (Exh. "D") states:
"We were able to reach an agreement. VIVA gave
us the exclusive license to show these fourteen (14)
films, and we agreed to pay Viva the amount of
P16,050,000.00 as well as grant Viva commercial
slots worth P19,950,000.00. We had already
earmarked this P16,050,000.00."

which gives a total consideration of P36 million


(P19,950,000.00 plus P16,050,000.00 equals
P36,000,000.00).
On cross-examination Mr. Lopez testified:
QWhat was written in this napkin?
AThe total price, the breakdown the known Viva movies, the
7 blockbuster movies and the other 7 Viva movies
because the price was broken down accordingly.
The none [sic] Viva and the seven other Viva
movies and the sharing between the cash portion
and the concerned spot portion in the total amount
of P35 million pesos.
Now, which is which? P36 million or P35 million? This
weakens ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN
stated that she transmitted Exhibit "C" to Mr. Del Rosario
with a handwritten note, describing said Exhibit "C" as a
"draft." (Exh. "5" - Viva; tsn pp. 23-24, June 08, 1992). The
said draft has a well defined meaning.
xxx xxx xxx
Since Exhibit "C" is only a draft, or a tentative,
provisional or preparatory writing prepared for discussion,
the terms and conditions thereof could not have been
previously agreed upon by ABS-CBN and Viva. Exhibit "C"
could not therefore legally bind Viva, not having agreed
thereto. In fact, Ms. Concio admitted that the terms and
conditions embodied in Exhibit "C" were prepared by ABSCBN's lawyers and there was no discussion on said terms
and conditions . . .
As the parties had not yet discussed the proposed
terms and conditions in Exhibit "C," and there was no
evidence whatsoever that Viva agreed to the terms and
conditions thereof, said document cannot be a binding
contract. The fact that Viva refused to sign Exhibit "C"
reveals only two [sic] well that it did not agree on its terms
and conditions, and this court has no authority to compel
Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and
Mr. Del Rosario agreed upon at the Tamarind Grill was only
provisional, in the sense that it was subject to approval by

the Board of Directors of Viva. He testified: LLpr


QNow, Mr. Witness, and after that Tamarind meeting . . . the
second meeting wherein you claimed that you have
the meeting of the minds between you and Mr. Vic
del Rosario, what happened?
AVic Del Rosario was supposed to call us up and tell us
specifically the result of the discussion with the
Board of Directors.
QAnd you are referring to the so-called agreement which
you wrote in [sic] a piece of paper?
AYes, sir.
QSo, he was going to forward that to the board of Directors
for approval?
AYes, sir. (Tsn, pp. 42-43, June 8, 1992)
xxx xxx xxx
QDid Mr. Del Rosario tell you that he will submit it to his
Board for approval?
AYes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond
doubt that he knew Mr. Del Rosario had no authority to bind
Viva to a contract with ABS-CBN until and unless its Board
of Directors approved it. The complaint, in fact, alleges that
Mr. Del Rosario "is the Executive Producer of defendant
Viva" which "is a corporation." (par. 2, complaint). As a mere
agent of Viva, Del Rosario could not bind Viva unless what
he did is ratified by its Board of Directors. (Vicente vs.
Geraldez, 52 SCRA 210; Arnold vs. Willets and Paterson, 44
Phil. 634). As a mere agent, recognized as such by plaintiff,
Del Rosario could not be held liable jointly and severally with
Viva and his inclusion as party defendant has no legal basis.
(Salonga vs. Warner Barner [sic], COLTA, 88 Phil. 125;
Salmon vs. Tan, 36 Phil. 556).

The testimony of Mr. Lopez and the allegations in


the complaint are clear admissions that what was supposed
to have been agreed upon at the Tamarind Grill between Mr.
Lopez and Del Rosario was not a binding agreement. It is as
it should be because corporate power to enter into a contract
is lodged in the Board of Directors. (Sec. 23, Corporation
Code). Without such board approval by the Viva board,

whatever agreement Lopez and Del Rosario arrived at could


not ripen into a valid contract binding upon Viva (Yao Ka Sin
Trading vs. Court of Appeals, 209 SCRA 763). The evidence
adduced shows that the Board of Directors of Viva rejected
Exhibit "C" and insisted that the film package for 104 films be
maintained (Exh. "7-1" - Viva). 49
The contention that ABS-CBN had yet to fully exercise its right of
first refusal over twenty-four films under the 1990 Film Exhibition Agreement
and that the meeting between Lopez and Del Rosario was a continuation of
said previous contract is untenable. As observed by the trial court, ABSCBN's right of first refusal had already been exercised when Ms. Concio
wrote to VIVA ticking off ten films. Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months
after this letter was sent, was for an entirely different
package. Ms. Concio herself admitted on cross-examination
to having used or exercised the right of first refusal. She
stated that the list was not acceptable and was indeed not
accepted by ABS-CBN (TSN, June 8, 1992, pp. 8-10). Even
Mr. Lopez himself admitted that the right of first refusal may
have been already exercised by Ms. Concio (as she had).
(TSN, June 8, 1992, pp. 71-75). Del Rosario himself knew
and understand [sic] that ABS-CBN has lost its right of first
refusal when his list of 36 titles were rejected (Tsn, June 9,
1992, pp. 10-11). 50
II
However, we find for ABS-CBN on the issue of damages. We shall
first take up actual damages. Chapter 2, Title XVIII, Book IV of the Civil
Code is the specific law on actual or compensatory damages. Except as
provided by law or by stipulation, one is entitled to compensation for actual
damages only for such pecuniary loss suffered by him as he has duly
proved. 51 The indemnification shall comprehend not only the value of the
loss suffered, but also that of the profits that the obligee failed to obtain. 52
In contracts and quasi-contracts the damages which may be awarded are
dependent on whether the obligor acted with good faith or otherwise. In case
of good faith, the damages recoverable are those which are the natural and
probable consequences of the breach of the obligation and which the parties
have foreseen or could have reasonably foreseen at the time of the
constitution of the obligation. If the obligor acted with fraud, bad faith, malice,
or wanton attitude, he shall be responsible for all damages which may be
reasonably attributed to the non-performance of the obligation. 53 In crimes
and quasi-delicts, the defendant shall be liable for all damages which are the
natural and probable consequences of the act or omission complained of,
whether or not such damages have been foreseen or could have reasonably
been foreseen by the defendant. 54

Actual damages may likewise be recovered for loss or impairment


of earning capacity in cases of temporary or permanent personal injury, or
for injury to the plaintiff's business standing or commercial credit. 55
The claim of RBS for actual damages did not arise from contract,
quasi-contract, delict, or quasi-delict. It arose from the fact of filing of the
complaint despite ABS-CBN's alleged knowledge of lack of cause of action.
Thus paragraph 12 of RBS's Answer with Counterclaim and Cross-claim
under the heading COUNTERCLAIM specifically alleges:
12.ABS-CBN filed the complaint knowing fully well that it has
no cause of action against RBS. As a result thereof,
RBS suffered actual damages in the amount of
P6,621,195.32. 56
Needless to state the award of actual damages cannot be comprehended
under the above law on actual damages. RBS could only probably take
refuge under Articles 19, 20, and 21 of the Civil Code, which read as follows.
ART. 19.Every person must, in the exercise of his
rights and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good faith.
ART. 20.Every person who, contrary to law, wilfully
or negligently causes damage to another, shall indemnify the
latter for the same.
ART. 21.Any person who wilfully causes loss or
injury to another in a manner that is contrary to morals, good
customs or public policy shall compensate the latter for the
damage.
It may further be observed that in cases where a writ of preliminary
injunction is issued, the damages which the defendant may suffer by reason
of the writ are recoverable from the injunctive bond. 57 In this case, ABSCBN had not yet filed the required bond; as a matter of fact, it asked for
reduction of the bond and even went to the Court of Appeals to challenge
the order on the matter. Clearly then, it was not necessary for RBS to file a
counterbond. Hence, ABS-CBN cannot be held responsible for the premium
RBS paid for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for
"Maging Sino Ka Man" for lack of sufficient legal basis. The RTC issued a
temporary restraining order and later, a writ of preliminary injunction on the
basis of its determination that there existed sufficient ground for the issuance
thereof. Notably, the RTC did not dissolve the injunction on the ground of
lack of legal and factual basis, but because of the plea of RBS that it be
allowed to put up a counterbond.
As regards attorney's fees, the law is clear that in the absence of

stipulation, attorney's fees may be recovered as actual or compensatory


damages under any of the circumstances provided for in Article 2208 of the
Civil Code. 58
The general rule is that attorney's fees cannot be recovered as part
of damages because of the policy that no premium should be placed on the
right to litigate. 59 They are not to be awarded every time a party wins a suit.
The power of the court to award attorney's fees under Article 2208 demands
factual, legal, and equitable justification. 60 Even when a claimant is
compelled to litigate with third persons or to incur expenses to protect his
rights, still attorney's fees may not be awarded where no sufficient showing
of bad faith could be reflected in a party's persistence in a case other than
an erroneous conviction of the righteousness of his cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII,
Book IV of the Civil Code. Article 2217 thereof defines what are included in
moral damages, while Article 2219 enumerates the cases where they may
be recovered. Article 2220 provides that moral damages may be recovered
in breaches of contract where the defendant acted fraudulently or in bad
faith. RBS's claim for moral damages could possibly fall only under item (10)
of Article 2219, thereof which reads:
(10)Acts and actions referred to in Articles 21, 26, 27, 28, 29,
30, 32, 34 and 35.
Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered and not to impose a
penalty on the wrongdoer. 62 The award is not meant to enrich the
complainant at the expense of the defendant, but to enable the injured party
to obtain means, diversion, or amusements that will serve to obviate the
moral suffering he has undergone. It is aimed at the restoration, within the
limits of the possible, of the spiritual status quo ante, and should be
proportionate to the suffering inflicted. 63 Trial courts must then guard
against the award of exorbitant damages; they should exercise balanced
restrained and measured objectivity to avoid suspicion that it was due to
passion, prejudice, or corruption on the part of the trial court. 64
The award of moral damages cannot be granted in favor of a
corporation because, being an artificial person and having existence only in
legal contemplation, it has no feelings, no emotions, no senses. It cannot,
therefore, experience physical suffering and mental anguish which can be
experienced only by one having a nervous system. 65 The statement in
People v. Manero 66 and Mambulao Lumber Co. v. PNB 67 that a
corporation may recover moral damages if it "has a good reputation that is
debased, resulting in social humiliation" is an obiter dictum. On this score
alone the award for damages must be set aside, since RBS is a corporation.
The basic law on exemplary damages is Section 5, Chapter 3, Title
XVIII, Book IV of the Civil Code. These are imposed by way of example or

correction for the public good, in addition to moral, temperate, liquidated, or


compensatory damages. 68 They are recoverable in criminal cases as part
of the civil liability when the crime was committed with one or more
aggravating circumstances; 69 in quasi-delicts, if the defendant acted with
gross negligence; 70 and in contracts and quasi-contracts, if the defendant
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
71
It may be reiterated that the claim of RBS against ABS-CBN is not
based on contract, quasi-contract, delict, or quasi-delict. Hence, the claims
for moral and exemplary damages can only be based on Articles 19, 20, and
21 of the Civil Code.
The elements of abuse of right under Article 19 are the following:
(1) the existence of a legal right or duty, (2) which is exercised in bad faith,
and (3) for the sole intent of prejudicing or injuring another. Article 20 speaks
of the general sanction for all other provisions of law which do not especially
provide for their own sanction; while Article 21 deals with acts contra bonus
mores, and has the following elements: (1) there is an act which is legal, (2)
but which is contrary to morals, good custom, public order, or public policy,
and (3) and it is done with intent to injure. 72
Verily then, malice or bad faith is at the core of Articles 19, 20, and
21. Malice or bad faith implies a conscious and intentional design to do a
wrongful act for a dishonest purpose or moral obliquity. 73 Such must be
substantiated by evidence. 74
There is no adequate proof that ABS-CBN was inspired by malice
or bad faith. It was honestly convinced of the merits of its cause after it had
undergone serious negotiations culminating in its formal submission of a
draft contract. Settled is the rule that the adverse result of an action does not
per se make the action wrongful and subject the actor to damages, for the
law could not have meant to impose a penalty on the right to litigate. If
damages result from a person's exercise of a right, it is damnum absque
injuria. 75
WHEREFORE, the instant petition is GRANTED. The challenged
decision of the Court of Appeals in CA-G.R. CV No. 44125 is hereby
REVERSED except as to unappealed award of attorney's fees in favor of
VIVA Productions, Inc.
No pronouncement as to costs. prLL
SO ORDERED.
Melo, Kapunan, Martinez and Pardo, JJ., concur.
FIRST DIVISION

[G.R. No. 131726. May 7, 2002.]


YOLANDA PALATTAO, petitioner, vs. THE COURT OF
APPEALS, HON. ANTONIO J. FINEZA, as Presiding
Judge of the Regional Trial Court of Caloocan City,
Branch 131 and MARCELO CO, respondents.

Gordon S. Uy Law Office for petitioner.


Seludo & Tolentino Law Office for private respondent M.
SYNOPSIS
When respondent's lease contract expired, he filed an action for specific
performance to enforce his alleged right to purchase the property. Pending
negotiations for an amicable settlement, the trial court issued a status quo order.
Unable to reach an amicable settlement, petitioner-lessor subsequently filed an
ejectment case against the respondent on the ground of expiration of the period
of the lease contract. Respondent refused to vacate the leased premises
claiming that there was a perfected contract of sale of the leased property. He
also contended that the filing of the ejectment case violated their agreement to
maintain the status quo. The MTC rendered a decision in favor of petitioner and
ordered respondent to vacate the property. The RTC and CA, however, reversed
the decision. AaIDHS
On appeal, the Supreme Court held that the status quo applied only during the
period of negotiations for an amicable settlement, not for the duration of the
pendency of the specific performance case; that an injunction suit and/or specific
performance case cannot preclude the filing of, or abate, an ejectment case; that
there are no "strong reason of equity" to sustain the suspension or dismissal of
the ejectment case; that no contract of sale was perfected because the parties
failed to agree on the extent of the lot subject of the proposed sale; and that even
assuming, that they did agree, there was subsequently a mutual withdrawal from
the contract because respondent failed to pay the downpayment and did not
insist on the sale of the subject lot.
SYLLABUS
1.REMEDIAL LAW; CIVIL PROCEDURE; EJECTMENT; RULE AGAINST
SUSPENSION OF AN EJECTMENT PROCEEDING DUE TO THE PENDENCY
OF INJUNCTION AND/OR SPECIFIC PERFORMANCE CASES; CASE AT BAR.
It is beyond cavil therefore that the preservation of the status quo agreed upon
by the parties applied only during the period of negotiations for an amicable
settlement and cannot be construed to be effective for the duration of the
pendency of the specific performance case. It is a settled rule that injunction suits

and specific performance cases, inter alia, will not preclude the filing of, or abate,
an ejectment case. Unlawful detainer and forcible entry suits under Rule 70 are
designed to summarily restore physical possession of a piece of land or building
to one who has been illegally or forcibly deprived thereof, without prejudice to the
settlement of the parties' opposing claims of juridical possession in appropriate
proceedings. It has been held that these actions "are intended to avoid disruption
of public order by those who would take the law in their hands purportedly to
enforce their claimed right of possession." In these cases, the issue is pure
physical or de facto possession, and pronouncements made on questions of
ownership are provisional in nature.
2.ID.; ID.; ID.; ID.; SHOWING OF "STRONG REASONS OF EQUITY," AS AN
EXCEPTION THERETO; CASE AT BAR. In Wilmon Auto Supply Corporation,
et al., v. Court of Appeals, et al., the issue of whether or not an ejectment case
based on expiration of lease contract should be abated by an action to enforce
the right of preemption or prior purchase of the leased premises was resolved in
the negative. Only in rare instances is suspension allowed to await the outcome
of the pending civil action. In Wilmon, the Court recognized that Vda. De Legaspi
v. Avendao [based on strong reasons of equity] was an exception to the general
rule against suspension of an ejectment proceeding. In the case at bar, the
continued occupation by private respondent of the leased premises is
conditioned upon his right to acquire ownership over said property. The factual
milieu obtaining here, however, hardly falls within the aforecited exception as the
resolution of the ejectment suit will not result in the demolition of the leased
premises, as in the case of Vda. De Legaspi v. Avendao. Verily, private
respondent failed to show "strong reasons of equity" to sustain the suspension or
dismissal of the ejectment case.
3.CIVIL LAW; SALES; CONTRACT OF SALE, WHEN PERFECTED; NO
ABSOLUTE ACCEPTANCE OF SELLER'S OFFER IN CASE AT BAR.
Contracts that are consensual in nature, like a contract of sale, are perfected
upon mere meeting of the minds. Once there is concurrence between the offer
and the acceptance upon the subject matter, consideration, and terms of
payment, a contract is produced. The offer must be certain. To convert the offer
into a contract, the acceptance must be absolute and must not qualify the terms
of the offer; it must be plain, unequivocal, unconditional, and without variance of
any sort from the proposal. A qualified acceptance, or one that involves a new
proposal, constitutes a counter-offer and is a rejection of the original offer.
Consequently, when something is desired which is not exactly what is proposed
in the offer, such acceptance is not sufficient to generate consent because any
modification or variation from the terms of the offer annuls the offer. ASTDCH
4.ID.; ID.; ID.; CASE AT BAR. In the case at bar, while it is true that private
respondent informed petitioner that he is accepting the latter's offer to sell the
leased property, it appears that they did not reach an agreement as to the extent
of the lot subject of the proposed sale. This is evident from the April 15, 1993
[and November 7, 1993 reply-letter[s] of private respondent to petitioner . . . The

foregoing letters reveal that private respondent did not give his consent to buy
only 413.28 square meters of the leased lot, as he desired to purchase the whole
490 square-meter-leased premises which, however, was not what was exactly
proposed in petitioner's offer. Clearly, therefore, private respondent's acceptance
of petitioner's offer was not absolute, and will consequently not generate consent
that would perfect a contract.
DECISION

YNARES-SANTIAGO, J p:
This is a petition for review under Rule 45 of the Rules of Court seeking to set
aside the August 29, 1997 decision 1 and the November 28, 1997 resolution 2 of
the Court of Appeals 3 in CA-G.R. SP No. 40031, affirming the decision 4 of the
Regional Trial Court of Caloocan City, Branch 131, in Civil Case No. C-17033
which reversed the Decision 5 of the Metropolitan Trial Court of Caloocan,
Branch 53, in an ejectment suit docketed as Civil Case No. 21755.
The antecedent facts are as follows: Petitioner Yolanda Palattao entered into a
lease contract whereby she leased to private respondent a house and a 490square-meter lot located in 101 Caimito Road, Caloocan City, covered by
Transfer Certificate of Title No. 247536 and registered in the name of petitioner.
The duration of the lease contract was for three years, commencing from
January 1, 1991, to December 31, 1993, renewable at the option of the parties.
The agreed monthly rental was P7,500.00 for the first year; P8,000.00 for the
second year; and P8,500.00 for the third year. The contract gave respondent
lessee the first option to purchase the leased property. 6
During the last year of the contract, the parties began negotiations for the sale of
the leased premises to private respondent. In a letter dated April 2, 1993,
petitioner offered to sell to private respondent 413.28 square meters of the
leased lot at P7,800.00 per square meter, or for the total amount of
P3,223,548.00. 7 Private respondent replied on April 15, 1993 wherein he
informed petitioner that he "shall definitely exercise [his] option [to buy]" the
leased property. 8 Private respondent, however, manifested his desire to buy the
whole 490-square-meter leased premises and inquired from petitioner the reason
why only 413.28 square meters of the leased lot were being offered for sale. In a
letter dated November 6, 1993, petitioner made a final offer to sell the lot at
P7,500.00 per square meter with a downpayment of 50% upon the signing of the
contract of conditional sale, the balance payable in one year with a monthly
lease/interest payment of P14,000.00 which must be paid on or before the fifth
day of every month that the balance is still outstanding. 9 On November 7, 1993,
private respondent accepted petitioner's offer and reiterated his request for
clarification as to the size of the lot for sale. 10 Petitioner acknowledged private
respondent's acceptance of the offer in his letter dated November 10, 1993.

Petitioner gave private respondent on or before November 24, 1993, within which
to pay the 50% downpayment in cash or manager's check. Petitioner stressed
that failure to pay the downpayment on the stipulated period will enable petitioner
to freely sell her property to others. Petitioner likewise notified private respondent
that she is no longer renewing the lease agreement upon its expiration on
December 31, 1993. 11
Private respondent did not accept the terms proposed by petitioner. Neither was
there any documents of sale nor payment by private respondent of the required
downpayment. Private respondent wrote a letter to petitioner on November 29,
1993 manifesting his intention to exercise his option to renew their lease contract
for another three years, starting January 1, 1994 to December 31, 1996. 12 This
was rejected by petitioner, reiterating that she was no longer renewing the lease.
Petitioner demanded that private respondent vacate the premises, but the latter
refused.
Hence, private respondent filed with the Regional Trial Court of Caloocan,
Branch 127, a case for specific performance, docketed as Civil Case No. 16287,
13 seeking to compel petitioner to sell to him the leased property. Private
respondent further prayed for the issuance of a writ of preliminary injunction to
prevent petitioner from filing an ejectment case upon the expiration of the lease
contract on December 31, 1993.

During the proceedings in the specific performance case, the parties agreed to
maintain the status quo. After they failed to reach an amicable settlement,
petitioner filed the instant ejectment case before the Metropolitan Trial Court of
Caloocan City, Branch 53. 14 In his answer, 15 private respondent alleged that
he refused to vacate the leased premises because there was a perfected
contract of sale of the leased property between him and petitioner. Private
respondent argued that he did not abandon his option to buy the leased property
and that his proposal to renew the lease was but an alternative proposal to the
sale. He further contended that the filing of the ejectment case violated their
agreement to maintain the status quo.
On July 28, 1995, the Metropolitan Trial Court rendered a decision in favor of
petitioner. The dispositive portion thereof states:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff and against the defendant, ordering the defendant
and all persons claiming right under him to pay the plaintiff
as follows:
1.P12,000.00 per month representing reasonable monthly
rental from January 1, 1994 and months thereafter until
defendants shall vacate the subject premises;
2.P10,000.00 representing attorney's fee;

3.To pay the cost of suit.


SO ORDERED. 16
On appeal, the Regional Trial Court reversed the assailed decision, disposing as
follows:
WHEREFORE, in view of all the foregoing, the assailed
decision of the Metropolitan Trial Court, Branch 53, this City,
rendered on July 28, 1995, is hereby REVERSED and SET
ASIDE, with costs de officio.
SO ORDERED. 17
Aggrieved, petitioner filed a petition for review with the Court of Appeals, which
dismissed the petition. Likewise, the motion for reconsideration was denied on
August 29, 1997. Hence, the instant petition anchored upon the following
grounds:
I
THE COURT OF APPEALS AND RTC, CALOOCAN CITY,
BRANCH 131, ERRED IN DECLARING THAT PETITIONER
IS GUILTY OF ESTOPPEL IN FILING AN EJECTMENT
CASE AGAINST RESPONDENT CO.
II
THE COURT OF APPEALS AND RTC, CALOOCAN CITY,
BRANCH 131, ERRED IN FINDING THAT AN INJUNCTIVE
SUIT WILL BAR THE FILING OF EJECTMENT CASE
AGAINST RESPONDENT CO.
III
THE RTC, CALOOCAN CITY, BRANCH 131, ERRED IN
DECLARING THAT THERE WAS A PERFECTED
CONTRACT OF SALE BETWEEN THE PARTIES OVER
THE LEASED PROPERTY. 18
The petition is impressed with merit.
The Court of Appeals ruled that petitioner was estopped from filing the instant
ejectment suit against private respondent by the alleged status quo agreement
reached in the specific performance case filed by private respondent against
petitioner. A reading, however, of the transcript of stenographic notes taken
during the January 21, 1994 hearing discloses that the agreement to maintain the
status quo pertained only to the duration of the negotiation for an amicable
settlement and was not intended to be operative until the final disposition of the
specific performance case. Thus:

xxx xxx xxx


Court
Before we go into the prayer for preliminary injunction and of
the merit of the case I want to see if I can make the
parties settle their differences.
Atty. Siapan
We will in the meantime maintain the status quo on the
matter pending further negotiation.
Court
As a matter of injunction, are you willing to maintain a status
quo muna [?]
Atty. Mendez
Yes, your Honor.
Court
How about Atty. Uy are you willing?
Atty. Uy
Yes, your Honor.
Court
I will not issue any injunction but there will be a status quo
and we will concentrate our efforts on letting the
parties to (sic) negotiate and enter into an
agreement. 19
xxx xxx xxx
I will give you the same facts of the case. I want to settle this
and not go into trial because in due time I will not
finish the case, my stay here is only Acting
Presiding Judge and there are other judges
nominated for this sala and once the judge will be
(sic) appointed then I go, let us get advantage of
settling the matter. I will have your gentleman's
agreement that there will be no adversarial attitude
among you will (sic) never arrive at any agreement.
Atty. Siapan
In the meantime, we will move for a resetting of this case

your Honor.
Court
Anyway, this is a gentleman's agreement that there will be
no new movement but the status quo will be
maintained.
Atty. Siapan, Atty. Mendez & Atty. Uy.
Yes, your Honor. (simultaneously (sic) in saying) 20
The foregoing agreement to maintain the status quo pending negotiations was
noted by the trial court in its January 21, 1994 Order postponing the hearing to
enable the parties to arrive at an amicable settlement, to wit:
Upon agreement of the parties herein for postponement of
today's schedule as there might be some possibility of
settling the claims herein, let the hearing today be cancelled.
In the meantime this case is set for hearing on February 28,
1994 at 8:30 a.m., should the parties not arrive at any
amicable settlement. 21
It is beyond cavil therefore that the preservation of the status quo agreed upon by
the parties applied only during the period of negotiations for an amicable
settlement and cannot be construed to be effective for the duration of the
pendency of the specific performance case. It is a settled rule that injunction suits
and specific performance cases, inter alia, will not preclude the filing of, or abate,
an ejectment case. Unlawful detainer and forcible entry suits under Rule 70 are
designed to summarily restore physical possession of a piece of land or building
to one who has been illegally or forcibly deprived thereof, without prejudice to the
settlement of the parties' opposing claims of juridical possession in appropriate
proceedings. It has been held that these actions "are intended to avoid disruption
of public order by those who would take the law in their hands purportedly to
enforce their claimed right of possession." In these cases, the issue is pure
physical or de facto possession, and pronouncements made on questions of
ownership are provisional in nature. 22
In Wilmon Auto Supply Corporation, et al. v. Court of Appeals, et al. 23 the issue
of whether or not an ejectment case based on expiration of lease contract should
be abated by an action to enforce the right of preemption or prior purchase of the
leased premises was resolved in the negative. The Court outlined the following
precedents:
1.Injunction suits instituted in the RTC by defendants in
ejectment actions in the municipal trial courts or
other courts of the first level (Nacorda v. Yatco, 17
SCRA 920 [1966]) do not abate the latter; and

neither do proceedings on consignation of rentals


(Lim Si v. Lim, 98 Phil. 868 [1956], citing Pue, et al.
v. Gonzales, 87 Phil. 81 [1950]).
2.An "accion publiciana" does not suspend an ejectment suit
against the plaintiff in the former (Ramirez v. Bleza,
106 SCRA 187 [1981]).
3.A "writ of possession case" where ownership is
concededly the principal issue before the Regional
Trial Court does not preclude nor bar the execution
of the judgment in an unlawful detainer suit where
the only issue involved is the material possession
or possession de facto of the premises (Heirs of F.
Guballa, Sr. v. C.A., et al.; etc., 168 SCRA 518
[1988]).
4.An action for quieting of title to property is not a bar to an
ejectment suit involving the same property (Quimpo
v. de la Victoria, 46 SCRA 139 [1972]).
5.Suits for specific performance with damages do not affect
ejectment actions (e.g., to compel renewal of a
lease contract) (Desamito v. Cuyegkeng, 18 SCRA
1184 [1966]; Rosales v. CFI, 154 SCRA 153 [1987];
Commander Realty, Inc. v. C.A., 161 SCRA 264
[1988]).
6.An action for reformation of instrument (e.g., from deed of
absolute sale to one of sale with pacto de retro)
does not suspend an ejectment suit between the
same parties (Judith v. Abragan, 66 SCRA 600
[1975]).
7.An action for reconveyance of property or "accion
reivindicatoria" also has no effect on ejectment suits
regarding the same property (Del Rosario v.
Jimenez, 8 SCRA 549 [1963]; Salinas v. Navarro,
126 SCRA 167; De la Cruz v. C.A., 133 SCRA 520
[1984]); Drilon v. Gaurana, 149 SCRA 352 [1987];
Ching v. Malaya, 153 SCRA 412 [1987]; Philippine
Feeds Milling Co., Inc. v. C.A., 174 SCRA 108;
Dante v. Sison, 174 SCRA 517 [1989]; Guzman v.
C.A. [annulment of sale and reconveyance], 177
SCRA 604 [1989]; Demamay v. C.A., 186 SCRA
608 [1990]; Leopoldo Sy v. C.A., et al., [annulment
of sale and reconveyance], G.R. No. 95818, Aug. 2,
1991).

8.Neither do suits for annulment of sale, or title, or document


affecting property operate to abate ejectment
actions respecting the same property (Salinas v.
Navarro [annulment of deed of sale with
assumption of mortgage and/or to declare the same
an equitable mortgage], 126 SCRA 167 [1983]; Ang
Ping v. RTC [annulment of sale and title], 154
SCRA 153 [1987]; Caparros v. C.A. [annulment of
title], 170 SCRA 758 [1989]; Dante v. Sison
[annulment of sale with damages], 174 SCRA 517;
Galgala v. Benguet Consolidated, Inc. [annulment
of document], 177 SCRA 288 [1989]).
The underlying reasons for the above ruling were that the
actions in the Regional Trial Court did not involve physical or
de facto possession, and, on not a few occasions, that the
case in the Regional Trial Court was merely a ploy to delay
disposition of the ejectment proceeding, or that the issues
presented in the former could quite as easily be set up as
defenses in the ejectment action and there resolved.
Only in rare instances is suspension allowed to await the outcome of the pending
civil action. In Wilmon, the Court recognized that Vda. De Legaspi v. Avendao
24 was an exception to the general rule against suspension of an ejectment
proceeding. 25 Thus:
. . . [A]s regards the seemingly contrary ruling in Vda. de
Legaspi v. Avendano, 89 SCRA 135 (1977), this Court
observed in Salinas v. Navarro, 126 SCRA 167, 172-173
(1983), that 'the exception to the rule in this case of Vda. de
Legaspi is based on strong reasons of equity not found in
the present petition. The right of the petitioner is not so
seriously placed in issue in the annulment case as to warrant
a deviation, on equitable grounds, from the imperative nature
of the rule. In the Vda. de Legaspi case, execution of the
decision in the ejectment case would also have meant
demolition of the premises, a factor not present in this
petition.

In the case at bar, the continued occupation by private respondent of the leased
premises is conditioned upon his right to acquire ownership over said property.
The factual milieu obtaining here, however, hardly falls within the aforecited
exception as the resolution of the ejectment suit will not result in the demolition of
the leased premises, as in the case of Vda. De Legaspi v. Avendao. Verily,
private respondent failed to show "strong reasons of equity" to sustain the
suspension or dismissal of the ejectment case. Argumentum a simili valet in lege.

Precedents are helpful in deciding cases when they are on all fours or at least
substantially identical with previous litigations. 26 Faced with the same scenario
on which the general rule is founded, and finding no reason to deviate therefrom,
the Court adheres to the settled jurisprudence that suits involving ownership may
not be successfully pleaded in abatement of an action for ejectment.
Contracts that are consensual in nature, like a contract of sale, are perfected
upon mere meeting of the minds. Once there is concurrence between the offer
and the acceptance upon the subject matter, consideration, and terms of
payment, a contract is produced. The offer must be certain. To convert the offer
into a contract, the acceptance must be absolute and must not qualify the terms
of the offer; it must be plain, unequivocal, unconditional, and without variance of
any sort from the proposal. A qualified acceptance, or one that involves a new
proposal, constitutes a counter-offer and is a rejection of the original offer.
Consequently, when something is desired which is not exactly what is proposed
in the offer, such acceptance is not sufficient to generate consent because any
modification or variation from the terms of the offer annuls the offer. 27
In the case at bar, while it is true that private respondent informed petitioner that
he is accepting the latter's offer to sell the leased property, it appears that they
did not reach an agreement as to the extent of the lot subject of the proposed
sale. This is evident from the April 15, 1993 reply-letter of private respondent to
petitioner, to wit:
I would like to inform you that I shall definitely,exercise my
option as embodied in Provision "F" (First Option) of our
Contract of Lease dated December 21, 1990. As per
agreement, my first option covers the 490 square meters site
which I am currently leasing from you at 101 Caimito Road,
Caloocan City. Specifically, your Transfer Certificate of Title
#247536 delineates the property sizes as 492 square
meters.
Your offer, however, states only 413.28 square meters are
for sale to me. I trust that this is merely an oversight on your
part. Notwithstanding the rumors to the effect that part of the
property have already been sold to other parties, I would like
to believe that you still retain absolute ownership over the
entire property covered by my Contract of Lease. Kindly
enlighten me on this matter so that we can proceed with the
negotiations for the sale of your property to me. 28
Likewise, in his November 7, 1993 reply-letter, private respondent stated that:
While it is true that you first offered your property for sale to
me last April 14, 1993, it is also equally true that you only
correspond with me on this matter again on October 27,
1993. I answered your April 14 offer with a registered mail on

April 15, 1993. In it, I stated that I am definitely exercising my


first option to purchase your property in accordance with
Provisions "F" of our Contract of Lease dated December 21,
1990. Likewise, I requested you to explain the discrepancy
between the size of the property being offered for sale
(413.28 square meters) as against the size stated in my
option which is 492 square meters. However, I did not get
any reply from you on this matter. Hence the negotiations
got stalled. If anybody should be blamed for the prolonged
negotiation, then surely it is not all mine alone. 29
The foregoing letters reveal that private respondent did not give his consent to
buy only 413.28 square meters of the leased lot, as he desired to purchase the
whole 490 square-meter-leased premises which, however, was not what was
exactly proposed in petitioner's offer. Clearly, therefore, private respondent's
acceptance of petitioner's offer was not absolute, and will consequently not
generate consent that would perfect a contract.
Even assuming that the parties reached an agreement as to the size of the lot
subject of the sale, the records show that there was subsequently a mutual
withdrawal from the contract. 30 This is so because in the November 10, 1993
letter of petitioner, she gave private respondent until November 24, 1993 to pay
50% of the purchase price, with the caveat that failure to do so would authorize
her to sell to others the leased premises. The period within which to pay the
downpayment is a new term or a counter-offer in the contract which needs
acceptance by private respondent. The latter, however, failed to pay said
downpayment, or to at least manifest his conformity to the period given by
petitioner. Neither did private respondent ask for an extension nor insist on the
sale of the subject lot. What appears in the record is private respondent's
November 29, 1993 letter informing petitioner that he shall exercise or avail of
the option to renew their lease contract for another three years, starting January
1, 1994 to December 31, 1996. Evidently, there was a subsequent mutual
backing out from the contract of sale. Hence, private respondent cannot compel
petitioner to sell the leased property to him.
Considering that the lease contract was not renewed after its expiration on
December 31, 1991, private respondent has no more right to continue occupying
the leased premises. Consequently, his ejectment therefrom must be sustained.
As to the monthly rental to be paid by private respondent from the expiration of
their contract of lease until the premises is vacated, we find that the P12,000.00
awarded by the Metropolitan Trial Court must be reduced to P8,500.00, it being
the highest amount of monthly rental stated in the lease contract.
WHEREFORE, the petition is GRANTED. The August 29, 1997 decision and the
November 28, 1997 resolution of the Court of Appeals in CA-G.R. SP No. 40031
are SET ASIDE. The Decision of the Metropolitan Trial Court of Caloocan,
Branch 53, in Civil Case No. 21755 is REINSTATED subject to the modification

that the monthly rental to be paid by private respondent from the date of the
termination of the lease contract until the leased premises is vacated is reduced
to P8,500.00. SHCaDA
SO ORDERED.
Davide, Jr., C.J., Puno, Kapunan and Austria-Martinez, JJ., concur.

Footnotes
SECOND DIVISION
[G.R. No. 148541. November 11, 2004.]
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs. BONITA O. PEREZ and ALFREDO PEREZ,
respondents.

DECISION

CALLEJO, SR., J p:
This is a petition for review on certiorari seeking to reverse and set aside the
Decision 1 of the Court of Appeals (CA) dated February 28, 2001, and to
reinstate the Decision of the Regional Trial Court (RTC), Makati City, Branch
145, in Civil Case No. 12057, as modified by trial court's Order dated June 11,
1993.
The Antecedents
On April 28, 1978, petitioner Development Bank of the Philippines (DBP) sent a
letter to respondent Bonita Perez, informing the latter of the approval of an
industrial loan amounting to P214,000.00 for the acquisition of machinery and
equipment and for working capital, and an additional industrial loan amounting to
P21,000.00 to cover unforeseen price escalation. 2
On May 18, 1978, the respondents were made to sign four promissory notes
covering the total amount of the loan, P235,000.00. Three promissory notes for
P24,000.00, P48,000.00, and P142,000.00, respectively, were executed, totaling
P214,000.00. These promissory notes were all due on August 31, 1988. 3 A
fourth promissory note due on September 19, 1988 was, likewise, executed to
cover the additional loan of P21,000.00. 4 The promissory notes were to be paid
in equal quarterly amortizations and were secured by a mortgage contract

covering real and personal properties. 5


On September 6, 1978, the petitioner sent a letter 6 to the respondents informing
them of the terms for the payment of the P214,000.00 industrial loan. On
November 8, 1978, the petitioner sent another letter 7 to the respondents
informing them about the terms and conditions of their additional P21,000.00
industrial loan.
Due to the respondents' failure to comply with their amortization payments, the
petitioner decided to foreclose the mortgages that secured the obligation.
However, in a Letter 8 dated October 7, 1981, Mrs. Perez requested for a
restructuring of their account due to difficulties they were encountering in
collecting receivables.
On April 1, 1982, the petitioner informed the respondents that it had approved the
restructuring of their accounts. 9 The loan was restructured, and on May 6, 1982,
the respondents signed another promissory note in the amount of P231,000.00 at
eighteen percent (18%) interest per annum, payable quarterly at P12,553.27,
over a period of ten years. The promissory note stated in part:
PROMISSORY NOTE
P231,000.00Makati, Metro Manila, May 6, 1982
On or before May 7, 1992, for value received, I/we, jointly
and severally, promise to pay the DEVELOPMENT BANK
OF THE PHILIPPINES, or order at its office at Makati, Metro
Manila, Philippines, the sum of TWO HUNDRED THIRTYONE THOUSAND PESOS (P231,000.00), Philippine
Currency, with interest at the rate of EIGHTEEN per centum
(18%) per annum. Before the date of maturity, we hereby
bind ourselves to make partial payments, the first payment to
be made on August 7, 1982 and the subsequent payments
on the 7th day of every three (3) months thereafter, and
each of all such payments shall be TWELVE THOUSAND
FIVE HUNDRED FIFTY-THREE and 27/100 PESOS
(P12,553.27) which shall cover amortizations on the principal
and interest at the above-mentioned rate.
This loan shall be subject to penalty charges and additional
interest as follows:
On loan with amortizationsor portions thereof inarrears
irrespective of age.
Additional
interest at
the basic
loan interest

rate per
annum
computed on
total
amortizations
past due
irrespective
of age.
PLUS
Penalty
charge of 8%
per annum
computed on
total
amortizations
in arrears
irrespective
of age.
The DBP further reserves the right to increase, with notice to
the mortgagor, the rate of interest on the loan as well as all
other fees and charges on loans and advances pursuant to
such policy as it may adopt from time to time during the
period of the loan; Provided that the rate of interest on the
loan 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 shall take effect on or after the effectivity of
the increase or decrease in the maximum rate of interest.
In case of non-payment of the amount of this note or any
portion of it on demand, when due, or any other amount or
amounts due on account of this note, the entire obligation
shall become due and demandable, and if, for the
enforcement of the payment thereof, the DEVELOPMENT
BANK OF THE PHILIPPINES, is constrained to entrust the
case to its attorneys, I/we, jointly and severally, bind
myself/ourselves to pay for attorney's fees, as provided for in
the mortgage contract, in addition to the legal fees and other
incidental expenses. In the event of foreclosure of the
mortgage securing this note, I/we further bind
myself/ourselves, jointly and severally, to pay the deficiency,
if any. AacDHE
SIGNED IN THE PRESENCE OF:

illegibleSGD.SGD.
illegibleBONITA ANG ORDIALESALFREDO PEREZ
(Bonita O. Perez)
This Promissory Note supersedes the Promissory Note
dated May 18, 1978 and stands secured by a mortgage
contract executed by the above parties on the same date,
subject to the following terms and conditions. 10
As stated in the promissory note, the first amortization was due on August 7,
1982, and the succeeding amortizations, every quarter thereafter. However, the
respondents made their first payment amounting to P15,000.00 11 only on April
20, 1983 or after the lapse of three quarters. 12 Their second payment, which
should have been paid on November 7, 1982, was made on December 2, 1983
and only in the amount of P5,000.00. The third payment was then made at the
time when the ninth quarterly amortization should have been paid. After this, the
respondents completely stopped paying. 13 The total payments they made after
the restructure of the loan amounted to P35,000.00 only. 14
This failure to meet the quarterly amortization of the loan prompted the petitioner
to institute foreclosure proceedings on the mortgages. The sale of the properties
covered by the mortgage contract was scheduled on October 30, 1985. 15
On October 24, 1985, the respondents filed a Complaint 16 for the nullification of
the new promissory note with damages and preliminary prohibitory injunction.
The complaint alleged that the petitioner restructured the respondents' obligation
in bad faith by requiring them to sign another promissory note for P231,000.00
without considering the total payments made on the loan amounting to
P224,383.43. The respondents claimed that the petitioner failed to explain to
them how it had arrived at the amount of the restructured loan. The respondents
also alleged that the petitioner failed to furnish them with a disclosure statement
as required by Rep. Act No. 3765, also known as the Truth in Lending Act, prior
to the consummation of the transaction. They averred that the interest imposed
on the said transaction was usurious. They, likewise, alleged that the new
promissory note constituted a novation of the previous obligations.
In its answer, the petitioner denied the allegations and averred that the claim for
violation of the disclosure requirement under Rep. Act No. 3765 was not within
the jurisdiction of the RTC and was barred by prescription. By way of compulsory
counterclaim, the petitioner prayed that the respondents be ordered to pay their
obligation, plus exemplary damages and costs. 17 During trial, the petitioner
presented a Statement of Account dated September 14, 1990, showing that the
total amount of the obligation as of September 15, 1990 was P1,384,465.71. 18
On October 25, 1985, the trial court ordered the petitioner to desist from holding
the public auction of the respondents' properties. The trial court issued an Order
on April 25, 1986 to maintain the status quo.

In its Decision dated May 10, 1993, the court a quo upheld the validity of the new
promissory note and ordered the respondents to pay their obligation. The
dispositive portion reads:
WHEREFORE, judgment is rendered dismissing the
complaint for failure of plaintiffs to prove their causes of
action by clear preponderance of evidence, with costs
against them.
The order issued on April 25, 1986, ordering the defendant
Bank to maintain the status quo and suspending the auction
sale, is hereby set aside.
Defendant Bank's counterclaim is hereby granted, and
plaintiffs are hereby ordered to pay the former the sum of
One Million Three Hundred Eighty-four Thousand Four
Hundred Sixty-five Pesos and Seventy-one Centavos
(P1,384,465.71), representing the latter's obligation as of
September 15, 1990, with interest thereon at the legal rate of
twelve (12%) percent per annum pursuant to Sec. 2 of CB
Circular No. 905; (Sagrador vs. Valderrama, supra), from
September 15, 1990 up to full payment of said sum. The
other counterclaim for exemplary damages is hereby
dismissed.
SO ORDERED. 19
Upon the petitioner's motion for reconsideration, the trial court issued an order 20
amending the dispositive portion of its decision by changing the rate of interest to
eighteen percent (18%) per annum.
Dissatisfied, the respondents appealed to the CA. On February 28, 2001, the CA
rendered a decision, the dispositive portion of which reads:
WHEREFORE, premises considered, the Decision dated
May 10, 1993, docketed as Civil Case No. 12057 by the
Regional Trial Court of Makati, Branch 145, is hereby
MODIFIED in the sense that the amount of P1,384,465.71
as of September 1990 is SET ASIDE and the formula
mandated by Central Bank Circular No. 158 should be
applied by the trial court in computing the total obligation and
liability of appellants. All the other parts of the assailed
decision are AFFIRMED in toto.

SO ORDERED. 21
The CA found that the respondents did not voluntarily sign the restructured

promissory note as they were only forced to sign it for fear of having their
mortgaged property foreclosed by the bank. It ruled that the restructured
promissory note which was prepared by the petitioner alone was a contract of
adhesion which violates the rule on mutuality of contracts.
Nonetheless, the CA held that the trial court should have used the formula
prescribed by paragraph 3, 22 Sec. 2(i), Central Bank (CB) Circular No. 158,
Rules and Regulations Implementing Rep. Act No. 3765, in computing the total
obligation of the respondents considering that Sec. 3(a) thereof provides that it
applies to any loans, mortgages, deeds of trust, advances and discounts. 23 The
CA also held that since the loan is secured by a mortgage contract, the eighteen
percent (18%) interest rate was excessive and usurious under CB Circular No.
817. According to the appellate court, CB Circular No. 905, series of 1982, simply
suspended the effectivity of the Usury Law; it did not authorize either party to
unilaterally raise the interest without the other party's consent. 24 Finally, the CA
concluded that there was neither basis nor explanation as to how the measly
amount of P214,000.00 in 1972, restructured to P231,000.00 in 1982, ballooned
to P1,384,465.71 as of September 15, 1990. 25
Both parties moved to reconsider the said decision. The CA denied the said
motions in a Resolution dated May 31, 2001.
The Present Petition
The petitioner raises the following grounds in the instant petition:
1.Whether or not the Honorable Court of Appeals had
decided this instant case in a way not in accord with
the spirit and intent of Republic Act No. 3765,
otherwise known as the Truth in Lending Act, when
it declared that "the trial court should have applied
the formula provided by Central Bank Circular No.
158, series of 1963, as provided above to arrive at
the total obligations of appellants less the amounts
paid by appellants as evidenced by the vouchers
and receipts attached to the records;"
2.Whether or not the conclusion of the Honorable Court of
Appeals stating that the private respondents did not
voluntarily sign the restructured promissory note is
entirely grounded on speculations and/or surmises
or conjectures;
3.Whether or not the Honorable Court of Appeals failed to
notice certain relevant facts which if it had been
considered would change its finding that the
restructured promissory note was prepared by the
appellee Bank alone;

4.Whether or not the Honorable Court of Appeals failed to


notice certain relevant facts which if it had been
considered would change its finding that the
amount of P1,384,465.71 as of September 15,
1990 has neither basis at all nor any explanation
how this amount came to existence;
5.Whether or not the conclusion of the Honorable Court of
Appeals stating that petitioner DBP failed to follow
Central Bank Circular No. 158 is grounded entirely
on speculation and surmises or conjecture. And
whether or not this finding is contradicted by
another finding of the same court; and
6.Whether or not this Honorable Court of Appeals committed
grave abuse of discretion when it ruled that
pursuant to Central Bank Circular No. 817 the 18%
interest per annum agreed upon by the parties in
the restructured promissory note is usurious, and
that the same should be reduced to 12% being the
legal rate of interest. 26
In a nutshell, the issues in this case are as follows: (1) whether the new
promissory note is voidable for not having been voluntarily signed by the
respondents and for being a contract of adhesion; (2) whether the interest rate
agreed upon by the parties in the new promissory note is usurious; (3) whether
Central Bank Circular No. 158 should be applied in computing the total
obligations of the respondents; and (4) the amount of the total obligation of the
respondents.
The petition is partly meritorious. ADETca
Anent the first issue, the petitioner points out that the respondents admitted to
having signed the new promissory note. It avers that there was no evidence on
record showing that the signing of the new promissory note was attended by
mistake, violence, intimidation, undue influence, or fraud. The petitioner posits
that the respondents' claim of having been forced to sign the restructured note for
fear of having their mortgaged property foreclosed cannot serve as legal basis to
conclude that the respondents did not voluntarily sign the new promissory note.
27 The petitioner maintains that a perusal of the evidence would reveal that the
new promissory note was the result of the mutual agreement of the parties and,
as such, is not a contract of adhesion. 28
On the other hand, the respondents argue that this is a question of fact which is
not subject to review by this Court. According to the respondents, the fact that
the restructured loan proved disadvantageous to them belies the petitioner's
claim that they voluntarily signed the new promissory note.

We agree with the petitioner.


In petitions for review on certiorari as a mode of appeal under Rule 45 of the
Rules of Court, the petitioner can raise only questions of law the Supreme
Court is not the proper venue to consider a factual issue as it is not a trier of
facts. 29 A departure from the general rule may be warranted where the findings
of fact of the Court of Appeals are contrary to the findings and conclusions of the
trial court, or when the same is unsupported by the evidence on record. 30
In the instant case, there was no evidence showing that the respondents signed
the new promissory note through mistake, violence, intimidation, undue
influence, or fraud. The respondents merely alleged that they were forced to
restructure their loan for fear of having their mortgaged properties foreclosed.
However, it is axiomatic that this would not amount to vitiated consent. The last
paragraph of Article 1335 of the New Civil Code specifically states that a threat to
enforce one's claim through competent authority, if the claim is just or legal, does
not vitiate consent. Foreclosure of mortgaged properties in case of default in
payment of a debtor is a legal remedy afforded by law to a creditor. Hence, a
threat to foreclose the mortgage would not, per se, vitiate consent.
The CA noted that the petitioner prepared the new promissory note on its own
and that the only participation of the respondents was to sign the same. The CA
concluded, therefore, that the new promissory note was a contract of adhesion.
A contract of adhesion is so-called because its terms are prepared by only one
party while the other party merely affixes his signature signifying his adhesion
thereto. 31 While we accede to the appellate court's conclusion that the new
promissory note was in the nature of a contract of adhesion, we cannot fathom
how this can further the respondents' case. In discussing the consequences of a
contract of adhesion, we held in Rizal Commercial Banking Corporation v. Court
of Appeals: 32
It bears stressing that a contract of adhesion is just as
binding as ordinary contracts. It is true that we have, on
occasion, struck down such contracts as void when the
weaker party is imposed upon in dealing with the dominant
bargaining party and is reduced to the alternative of taking it
or leaving it, completely deprived of the opportunity to
bargain on equal footing. Nevertheless, contracts of
adhesion are not invalid per se; they are not entirely
prohibited. The one who adheres to the contract is in reality
free to reject it entirely; if he adheres, he gives his consent.
33
On the second issue, the CA held that under CB Circular No. 817, if the loan is
secured by a registered real estate, the interest of eighteen percent (18%) is
usurious. The petitioner, however, argues that usury has become legally
inexistent with the promulgation of CB Circular No. 905. 34 It contends that the

interest rate should be eighteen percent (18%), the interest rate they agreed
upon. 35 For their part, the respondents argue that the Central Bank engaged in
self-legislation in enacting CB Circular No. 905.
We agree with the ruling of the CA. It is elementary that the laws in force at the
time the contract was made generally govern the effectivity of its provision. 36
We note that the new promissory note was executed on May 6, 1982, prior to the
effectivity of CB Circular No. 905 on January 1, 1983. At that time, The Usury
Law, Act No. 2655, as amended by Presidential Decree No. 116, was still in force
and effect.
Under the Usury Law, no person shall receive a rate of interest, including
commissions, premiums, fines and penalties, higher than twelve percent (12%)
per annum or the maximum rate prescribed by the Monetary Board for a loan
secured by a mortgage upon real estate the title to which is duly registered. 37
In this case, by specific provision in the new promissory note, the restructured
loan continued to be secured by the same mortgage contract executed on May
18, 1978 which covered real and personal properties of the respondents. We,
therefore, find the eighteen percent (18%) interest rate plus the additional interest
and penalty charges of eighteen percent (18%) and eight percent (8%),
respectively, to be highly usurious.
In usurious loans, the entire obligation does not become void because of an
agreement for usurious interest; the unpaid principal debt still stands and
remains valid, but the stipulation as to the usurious interest is void.
Consequently, the debt is to be considered without stipulation as to the interest.
38 In the absence of an express stipulation as to the rate of interest, the legal
rate at twelve percent (12%) per annum shall be imposed. 39
Neither is the contention of the respondents that the Central Bank engaged in
self-legislation correct. As we held in First Metro Investment Corporation v. Este
Del Sol Mountain Reserve, Inc.: 40

. . . Central Bank Circular No. 905 did not repeal nor in any
way amend the Usury Law but simply suspended the latter's
effectivity. The illegality of usury is wholly the creature of
legislation. A Central Bank Circular cannot repeal a law.
Only a law can repeal another law. Thus, retroactive
application of a Central Bank Circular cannot, and should
not, be presumed. 41
On the third issue, the petitioner argues that CB Circular No. 158 does not
prescribe a formula in computing a debtor's monetary obligation, but merely
provides for the formula in computing the simple annual rate. It contends that the
amount of the debtor's obligation must be computed in accordance with the
interest rate, charges, and manner of computation agreed upon by the parties. 42

We agree. The total obligation of the respondents must be computed according


to the terms and conditions agreed upon. The formula provided under paragraph
3, Sec. 2(i), CB Circular No. 158 cannot be used in computing the total obligation
of the respondents because it merely applies to the computation of the simple
annual rate. Simple annual rate is the uniform percentage which represents the
ratio, on an annual basis, between the finance charges and the amount to be
financed. 43 It is one of the items required to be disclosed under the Truth in
Lending Act pursuant to the State's policy to protect its citizens from lack of
awareness of the true cost of credit. 44
Finally, we find that the records are insufficient to enable us to determine the total
amount of the respondents' obligation. It is not even clear how much the
respondents have already paid on the restructured loans and when such
payments were made. The receipts presented in evidence by the respondents
only showed that they paid P15,000.00 on April 20, 1983 and P5,000.00 on
December 2, 1983. 45 On the other hand, Mr. Roberto Balarao, who is assigned
to the Traffic and Processing Department of the petitioner, testified that a third
payment was made, but failed to state the amount. 46 Another witness, Carmen
Chamen, an account officer of the petitioner, testified that after the restructuring
of the account, the total payment made was P35,000.00. 47
Moreover, considering our previous conclusion that the interest rates prescribed
under the new promissory note are usurious, the statement of account presented
by the petitioner is no longer pertinent. It must be stressed that such statement of
account was arrived at based on the usurious interest rates. Hence, the total
amount of the obligation must necessarily be recomputed. AacCIT
IN LIGHT OF ALL THE FOREGOING, the assailed Decision dated February 28,
2001 of the Court of Appeals and Order dated June 11, 1993 of the Regional
Trial Court, Makati City, Branch 145, are AFFIRMED WITH MODIFICATION. The
case is hereby REMANDED to the trial court for determination of the total amount
of the respondents' obligation according to the reduced interest rate of twelve
percent (12%) per annum.
SO ORDERED.
Austria-Martinez and Chico-Nazario, JJ ., concur.
Puno, J ., is on official leave.
Tinga, J ., is on leave.
N BANC
[G.R. No. 201112. October 23, 2012.]
ARCHBISHOP FERNANDO R. CAPALLA, OMAR
SOLITARIO ALI and MARY ANNE L. SUSANO, petitioners,

vs. THE HONORABLE COMMISSION ON ELECTIONS,


respondent.

[G.R. No. 201121. October 23, 2012.]


SOLIDARITY FOR SOVEREIGNITY (S4S) represented by
Ma. Linda Olaguer; RAMON PEDROSA, BENJAMIN
PAULINO SR., EVELYN CORONEL, MA. LINDA
OLAGUER MONTAYRE, and NELSON T. MONTAYRE,
petitioners, vs. COMMISSION ON ELECTIONS
represented by its Chairman, Commissioner SIXTO S.
BRILLANTES, JR., respondent.

[G.R. No. 201127. October 23, 2012.]


TEOFISTO T. GUINGONA, BISHOP BRODERICK S.
PABILLO, SOLITA COLLAS MONSOD, MARIA CORAZON
MENDOZA ACOL, FR. JOSE DIZON, NELSON JAVA
CELIS, PABLO R. MANALASTAS, GEORGINA R.
ENCANTO and ANNA LEAH E. COLINA, petitioners, vs.
COMMISSION ON ELECTIONS and SMARTMATIC-TIM
CORPORATION, respondents.

[G.R. No. 201413. October 23, 2012.]


TANGGULANG DEMOKRASYA (TAN DEM), INC.,
EVELYN L. KILAYKO, TERESITA D. BALTAZAR, PILAR
L. CALDERON and ELITA T. MONTILLA, petitioners, vs.
COMMISSION ON ELECTIONS and SMARTMATIC-TIM
CORPORATION, respondents.

RESOLUTION

PERALTA, J p:
Before the Court are the Motions for Reconsideration separately filed by movants
Teofisto T. Guingona, Bishop Broderick S. Pabillo, Solita Collas Monsod, Maria
Corazon Mendoza Acol, Fr. Jose Dizon, Nelson Java Celis, Pablo R.
Manalastas, Georgina R. Encanto and Anna Leah E. Colina (herein referred to
as Guingona, et al.) in G.R. No. 201127; 1 Solidarity for Sovereignty (S4S)

represented by Ma. Linda Olaguer, Ramon Pedrosa, Benjamin Paulino Sr.,


Evelyn Coronel, Ma. Linda Olaguer Montayre, and Nelson T. Montayre (referred
to as S4S, et al.) in G.R. No. 201121; 2 and Tanggulang Demokrasya (Tan
Dem), Inc., Evelyn L. Kilayko, Teresita D. Baltazar, Pilar L. Calderon and Elita T.
Montilla (Tan Dem, et al. for brevity) in G.R. No. 201413. 3 Movants implore the
Court to take a second look at the June 13, 2012 Decision 4 dismissing their
petitions filed against respondents Commission on Elections (Comelec),
represented by its Chairman Commissioner Sixto S. Brillantes, Jr. (Chairman
Brillantes), and Smartmatic-TIM Corporation (Smartmatic-TIM).
For a proper perspective, the facts as found by the Court in the assailed decision
are briefly stated below:
On July 10, 2009, the Comelec and Smartmatic-TIM entered into a Contract for
the Provision of an Automated Election System for the May 10, 2010
Synchronized National and Local Elections (AES Contract) which is a Contract of
Lease with Option to Purchase (OTP) the goods listed therein consisting of the
Precinct Count Optical Scan (PCOS), both software and hardware. 5 The
Comelec was given until December 31, 2010 within which to exercise the option
but opted not to exercise the same except for 920 units of PCOS machines with
the corresponding canvassing/consolidation system (CCS) for the special
elections in certain areas in Basilan, Lanao del Sur and Bulacan. 6
On March 6, 2012, the Comelec issued Resolution No. 9373 resolving to
seriously consider exercising the OTP subject to certain conditions. 7 It issued
another Resolution numbered 9376 resolving to exercise the OTP in accordance
with the AES Contract. 8 On March 29, 2012, it issued Resolution No. 9377
resolving to accept Smartmatic-TIM's offer to extend the period to exercise the
OTP until March 31, 2012. 9 The Agreement on the Extension of the OTP under
the AES Contract (Extension Agreement) was eventually signed on March 30,
2012. 10 Finally, it issued Resolution No. 9378 resolving to approve the Deed of
Sale between the Comelec and Smartmatic-TIM to purchase the latter's PCOS
machines to be used in the upcoming 2013 elections. 11 The Deed of Sale was
forthwith executed. 12
Claiming that the foregoing Comelec issuances and transactions entered
pursuant thereto are illegal and unconstitutional, movants filed separate petitions
for certiorari, prohibition and mandamus before the Court.
Movants failed to obtain a favorable decision when the Court rendered a
Decision 13 on June 13, 2012 dismissing their petitions. Hence, the motions for
reconsideration based on the following grounds: EDcIAC
G.R. No. 201127
I.THE HONORABLE COURT, WITH ALL DUE RESPECT,
ERRED IN HOLDING THAT THE PERIOD OF THE OPTION
TO PURCHASE HAS NOT EXPIRED;

II.THE HONORABLE COURT, WITH ALL DUE RESPECT,


ERRED IN HOLDING THAT THERE WAS NO
SUBSTANTIAL AMENDMENT TO THE AES CONTRACT;
[AND]
III.THE HONORABLE COURT, WITH ALL DUE RESPECT,
ERRED IN HOLDING THAT THE SUBJECT AMENDMENT
IS ADVANTAGEOUS TO THE PUBLIC. 14
Movants Guingona, et al. disagree with the Court's interpretation of Article 2.2 of
the AES Contract and insist that the use of the words "without prejudice" and
"surviving" explicitly distinguished the "period of the option to purchase" from the
"Term of this Contract." They thus conclude that the warranty provision and the
OTP are covered by a totally different period and not by the term of the AES
Contract. 15 They also argue that the bid bulletins relative to the AES Contract
expressly stated the deadline for Comelec to exercise the OTP 16 and that the
parties intended that the stated period be definite and non-extendible. 17
Movants likewise aver that the Court erred in holding that there was no
substantial amendment to the AES Contract. 18 Citing San Diego v. The
Municipality of Naujan, Province of Mindoro, 19 as discussed in Justice Arturo D.
Brion's Dissenting Opinion, 20 and as allegedly reiterated in San Buenaventura
v. Municipality of San Jose, Camarines Sur, et al., 21 Guingona, et al. points out
that an extension, however short, of the period of a publicly bidded out contract is
a substantial amendment that requires public bidding because the period in an
OTP is a vital and essential particular to the contract. 22 Movants add that the
Court erred in holding that the subject amendment is advantageous to the public
as the extended option contract is void and thus can never be said to inure to the
benefit of the public. 23 Lastly, movants claim that the Comelec still has the time
to conduct public bidding to procure the items necessary for the 2013 elections
and that the needed budget could be provided by Congress. 24
G.R. No. 201121
Petitioners humbly submit that the Order of this Honorable
Court dismissing the petition by upholding the validity of the
extended option to purchase and the constitutionality of the
AES Contract implementation is contrary to law and the
Constitution. 25
Movants S4S, et al. implore the Court to take a second look at the relevance of
the release of the performance security to the subject expired option contract
since it did not alter the fact of such expiration. 26 They explain that the Court's
conclusion is a dangerous precedent, because it would encourage circumvention
of the laws and rules on government contracts since the parties could enter into
collusion to defer the release of the performance security for the sole purpose of
prolonging the effectivity of the contract. 27 They reiterate their argument that
any extension of the option period amounts to a new procurement which must
comply with the requirements of bidding under Republic Act (RA) No. 9184 28

and stress that the March 31, 2012 Deed of Sale is not a special transaction
which warrants any exemption from the mandatory requirements of a public
bidding. 29 It is likewise their view that time constraints, budgetary consideration
and other advantages in extending the option period are not plausible
justifications for non-compliance with the requirements of public bidding. 30
Finally, movants assail the constitutionality of the entire AES Contract and
consequently of the option contract because of its failure to provide that the
mandatory minimum system capabilities be complied with; and because of the
provision on shared responsibility between the Comelec and Smartmatic. 31
G.R. No. 201413
I.THE NON-RELEASE OF THE SECURITY DEPOSIT BY
COMELEC INDICATES THE EXISTENCE OF
UNFULFILLED OBLIGATIONS BY THE
CONTRACTOR, AND THEREFORE, IT IS
ABSURD TO CITE THIS UNCURED BREACH BY
THE CONTRACTOR TO JUSTIFY THE GRANT
OF MORE RIGHTS TO THE SAID CONTRACTOR
BY EXTENDING THE EXPIRED OPTION TO
PURCHASE WHICH EFFECTIVELY
CIRCUMVENTS THE GOVERNMENT
PROCUREMENT LAW. TSDHCc
II.THERE IS NO JUSTIFIABLE BASIS TO ACCEPT MERE
ARGUMENTS THAT THE PCOS IS CAPABLE OF
RUNNING WITH DIGITAL SIGNATURES,
SECURE[D] FROM HACKING AND COMPLIANT
WITH THE MINIMUM ACCURACY RATE OF
99.995%, WHEN IN ACTUAL PERFORMANCE
DURING MAY 2010 [ELECTIONS,] THE PCOS
OPERATED WITHOUT DIGITAL SIGNATURES,
FOUND VULNERABLE TO HACKING AND
FAILED BY THE ACCURACY REQUIREMENT, AS
SHOWN BY THE APPLICABLE COMELEC
RESOLUTIONS, TWG-RMA REPORT, AUDIT
LOGS AND PRINT LOGS. 32
Movants Tan Dem, et al. convey their view on the absurdity of the Court's
decision in justifying the resurrection of the dead OTP with the continuing
effectivity of the stipulation on performance security notwithstanding the
presumed existence of uncured contractual breach by the contractor. 33 They
also express doubt that the PCOS machines are capable of running with digital
signatures compliant with the minimum accuracy rate. 34
For their part, respondents offer the following comments:
COMELEC

The Comelec, on the other hand, argues that it validly exercised the OTP
because the period for its exercise was amended and accordingly extended to
March 31, 2012. It highlights the provision in the AES Contract on the right to
amend the contract which the parties did during its effectivity. 35 It does not
agree with movants' claim that the parties to the contract intended that the option
period be definite. 36 Rather, it maintains that the parties are free to extend the
option period in the same way that they can amend the other provisions of the
contract. 37 Moreover, the Comelec insists that the extension of the option period
is neither a material nor substantial amendment considering that after the
extension, the AES Contract taken as a whole still contains substantially the
same terms and conditions as the original contract and does not translate to
concrete financial advantages to Smartmatic-TIM. 38 It also argues that the
extension of the option period could not have affected the bid prices or financial
proposals of the bidders since they understood from the RFP that it had no
separate price allocation. 39 It emphasizes that a longer period was not a benefit
but a burden to the bidders such that they would not have submitted a lower but
in fact a higher bid because they would have to give up the opportunity to lease
or sell the PCOS machines to third parties and it would also result in higher costs
in warehousing and security. 40 The Comelec also opines that San Diego and
San Buenaventura, cited by movants, are not applicable because they involve
alterations of the essential terms and conditions of the main contract to the
disadvantage of the government unlike this case where there is an alteration only
with respect to the ancillary provision of the AES Contract and for the benefit of
the Comelec. 41 The Comelec reiterates that the extension of the option period is
advantageous to it and burdensome for Smartmatic-TIM. 42 Lastly, it posits that
the exercise of the OTP was the more prudent choice for the Comelec taking into
consideration the budget and time constraints. 43
SMARTMATIC-TIM
Smartmatic-TIM contends that the OTP is only an ancillary provision in the
subsisting AES Contract which has already satisfied the public bidding
requirements. 44 It disagrees with petitioners that the extension of the option
period was unilateral and claims instead that it was mutual as the parties in fact
executed an agreement on the extension. 45 Assuming that the option period
had already expired, the extension is not a substantial or material amendment
since it only pertains to a residual component of the AES Contract. 46 It also
echoes the Comelec's argument that the San Diego and San Buenaventura
cases are not applicable to the present case because of the difference in factual
circumstances. 47 Moreover, it reiterates its claim that the extension is favorable
to the Comelec and does not prejudice the other bidders. 48 Smartmatic-TIM
explains that the retention of the performance security is due to its residual
continuing obligations to maintain the PCOS machines and update the software
in anticipation of their possible use for elections after 2010, and not due to the
existence of unfulfilled obligations as provided in the AES Contract. 49 It likewise
points out that the alleged flaws and deficiencies of the PCOS machines do not
affect its compliance with the requirements of RA 9369. 50 It emphasizes that the

use of digital signatures and their availability for use in future elections have been
adequately established. 51 It also defends PCOS machines' compliance with the
minimum requirements under RA 9369 as found by the Court in Roque v.
Comelec. 52 As to the alleged glitches, Smartmatic-TIM claims that they are not
attributable to any inherent defect in the PCOS machines and, in any case,
enhancements have already been made. 53 Lastly, Smartmatic-TIM stresses
that the arguments challenging the validity and constitutionality of the AES
Contract and the performance by the Comelec of its mandate have already been
rejected with finality by the Court in Roque v. Comelec. 54
We find no reason to disturb our June 13, 2012 Decision.
Clearly, under the AES Contract, the Comelec was given until December 31,
2010 within which to exercise the OTP the subject goods listed therein including
the PCOS machines. The option was, however, not exercised within said period.
But the parties later entered into an extension agreement giving the Comelec
until March 31, 2012 within which to exercise it. With the extension of the period,
the Comelec validly exercised the option and eventually entered into a contract of
sale of the subject goods. The extension of the option period, the subsequent
exercise thereof, and the eventual execution of the Deed of Sale became the
subjects of the petitions challenging their validity in light of the contractual
stipulations of respondents and the provisions of RA 9184. IcDHaT
In our June 13, 2012 Decision, we decided in favor of respondents and placed a
stamp of validity on the assailed resolutions and transactions entered into. Based
on the AES Contract, we sustained the parties' right to amend the same by
extending the option period. Considering that the performance security had not
been released to Smartmatic-TIM, the contract was still effective which can still
be amended by the mutual agreement of the parties, such amendment being
reduced in writing. To be sure, the option contract is embodied in the AES
Contract whereby the Comelec was given the right to decide whether or not to
buy the subject goods listed therein under the terms and conditions also agreed
upon by the parties. As we simply held in the assailed decision:
While the contract indeed specifically required the Comelec
to notify Smartmatic-TIM of its OTP the subject goods until
December 31, 2010, a reading of the other provisions of the
AES contract would show that the parties are given the right
to amend the contract which may include the period within
which to exercise the option. There is, likewise, no
prohibition on the extension of the period, provided that the
contract is still effective. 55
In interpreting Article 2.2 of the AES Contract, movants claim that the use of
the word "surviving" and the phrase "without prejudice" suggests that the
warranty provision and the OTP are covered by a different period and not by
the term of the AES Contract. 56

We cannot subscribe to said postulation. Article 2.2 of the AES Contract reads:
Article 2
EFFECTIVITY
xxx xxx xxx
2.2.The Term of this Contract begins from the date of
effectivity until the release of the Performance Security,
without prejudice to the surviving provisions of this
Contract including the warranty provision as prescribed
in Article 8.3 and the period of the option to purchase
(Emphasis supplied).
The provision means that the contract takes effect from the date of effectivity until
the release of the performance security. Article 8 thereof, on the other hand,
states when the performance security is released, to wit:
Article 8
Performance Security and Warranty
xxx xxx xxx
Within seven (7) days from delivery by the PROVIDER to
COMELEC of the Over-all Project Management Report after
successful conduct of the May 10, 2010 elections,
COMELEC shall release to the PROVIDER the abovementioned Performance Security without need of demand.
The performance security may, therefore, be released before December 31,
2010, the deadline set in the AES Contract within which the Comelec could
exercise the option. The moment the performance security is released, the
contract would have ceased to exist. However, since it is without prejudice to the
surviving provisions of the contract, the warranty provision and the period of the
option to purchase survive even after the release of the performance security.
While these surviving provisions may have different terms, in no way can we then
consider the provision on the OTP separate from the main contract of lease such
that it cannot be amended under Article 19.
In this case, the contract is still effective because the performance security has
not been released. Thus, not only the option and warranty provisions survive but
the entire contract as well. In light of the contractual provisions, we, therefore,
sustain the amendment of the option period.
The amendment of a previously bidded contract is not per se invalid. For it to be
nullified, the amendment must be substantial such that the other bidders were
deprived of the terms and opportunities granted to the winning bidder after it won
the same and that it is prejudicial to public interest. In our assailed decision, we

found the amendment not substantial because no additional right was made
available to Smartmatic-TIM that was not previously available to the other
bidders; except for the extension of the option period, the exercise of the option
was still subject to same terms and conditions such as the purchase price and
the warranty provisions; and the amendment is more advantageous to the
Comelec and the public. AHCaED
Movants seek the application of San Diego 57 where we nullified the extension of
the lease agreement and considered said amendment substantial. We, however,
find the case inapplicable. The extension made in San Diego pertained to the
period of the main contract of lease while in this case, the extension referred not
to the main contract of lease of goods and services but to the period within which
to exercise the OTP. In extending the original period of lease of five years to
another five years without public bidding, the Municipality of Naujan, Province of
Mindoro acted in violation of existing law. The period of lease undoubtedly was a
vital and essential particular to the contract of lease. In San Diego, the
Municipality of Naujan was the lessor of its municipal waters and the petitioner,
the lessee. An extension of the lease contract would mean that the lessee would
be given undue advantage because it would enjoy the lease of the property
under the same terms and conditions for a longer period. Moreover, prior to the
extension of the lease period, the rentals were reduced upon the request of the
lessee. The end result was that the municipality was deprived of income by way
of rentals because of the reduced rates and longer period of lease.
In this case, the extension of the option period means that the Comelec had
more time to determine the propriety of exercising the option. With the extension,
the Comelec could acquire the subject PCOS machines under the same terms
and conditions as earlier agreed upon. The end result is that the Comelec
acquired the subject PCOS machines with its meager budget and was able to
utilize the rentals paid for the 2010 elections as part of the purchase price.
We maintain the view that the extension of the option period is an amendment to
the AES Contract authorized by Article 19 thereof. As held in Agan, Jr. v.
Philippine International Air Terminals Co., Inc.: 58
While we concede that a winning bidder is not precluded
from modifying or amending certain provisions of the
contract bidded upon, such changes must not constitute
substantial or material amendments that would alter the
basic parameters of the contract and would constitute a
denial to the other bidders of the opportunity to bid on
the same terms. Hence, the determination of whether or not
a modification or amendment of a contract bidded out
constitutes a substantial amendment rests on whether the
contract, when taken as a whole, would contain substantially
different terms and conditions that would have the effect of
altering the technical and/or financial proposals previously
submitted by other bidders. The alterations and

modifications in the contract executed between the


government and the winning bidder must be such as to
render such executed contract to be an entirely different
contract from the one that was bidded upon. 59
It must be pointed out that public biddings are held for the best protection of the
public and to give the public the best possible advantages by means of open
competition between the bidders, and to change them without complying with the
bidding requirement would be against public policy. 60 What are prohibited are
modifications or amendments which give the winning bidder an edge or
advantage over the other bidders who took part in the bidding, or which make the
signed contract unfavorable to the government. 61 In this case, as thoroughly
discussed in our June 13, 2012 Decision, the extension of the option period and
the eventual purchase of the subject goods resulted in more benefits and
advantages to the government and to the public in general.
While movants may have apprehensions on the effect to government contracts of
allowing "advantage to the government" as justification for the absence of
competitive public bidding, it must be stressed that the same reasoning could
only be used under similar circumstances. The "advantage to the government,"
time and budget constraints, the application of the rules on valid amendment of
government contracts, and the successful conduct of the May 2010 elections are
among the factors looked into in arriving at the conclusion that the assailed
Resolutions issued by the Comelec and the agreement and deed entered into
between the Comelec and Smartmatic-TIM, are valid.
Lastly, we need not further discuss the issues raised by movants on the alleged
glitches of the subject PCOS machines, their compliance with the minimum
system capabilities required by law, and the supposed abdication of the
Comelec's exclusive power in the conduct of elections as these issues have been
either thoroughly discussed in the assailed decision or in the earlier case of
Roque, Jr. v. Commission on Elections. 62
WHEREFORE, premises considered, the motions for reconsideration are
DENIED for lack of merit. ICDcEA
SO ORDERED.
Sereno, C.J., Leonardo-de Castro, Bersamin, Abad, Mendoza and Reyes, JJ.,
concur.
Carpio and Perez, JJ., are on official leave.
Velasco, Jr., J., please see concurring opinion.
Brion, J., see dissenting opinion.
Del Castillo, J., is on leave.

Villarama, Jr. and Perlas-Bernabe, JJ., maintain the dissent in the June 13, 2012
Decision.
Separate Opinions
VELASCO, JR., J., concurring:
I agree with the ponencia that the Motions for Reconsideration dated October 3,
2012 should be dismissed, but for a different reason, i.e., the disputed Deed of
Sale for the acquisition of the PCOS machines and CCS hardware and software
can be considered as a purchase through direct contracting, a mode of
acquisition not subject to the usual bidding requirements under Republic Act No.
(RA) 9184 or the Government Procurement Reform Act. I am, however, of a
different disposition with respect to the majority's holding that the extension of the
Option to Purchase (OTP) is valid, and consequently, the assailed deed of sale is
also valid.
The OTP Has Expired
The majority's position is that the OTP was still subsisting when the Deed of Sale
was executed in view of the non-receipt by Smartmatic-TIM Corporation of the
Performance Security, which receipt will terminate the AES Contract pursuant to
Article 2 thereof. I beg to disagree. As I have discussed in my June 13, 2012
separate concurring opinion, I am of the view that a different period is given by
the parties with respect to the OTP, as articulated in Article 2.2 of the AES
Contract, which reads:
Article 2
EFFECTIVITY
2.2.The Term of this Contract begins from the date of
effectivity until the release of the Performance Security,
without prejudice to the surviving provisions of this
Contract, including the warranty provision as prescribed in
Article 8.3 and the period of the option to purchase.
(Emphasis ours.)
Shorn of the non-essentials, the provision would read "The Term of this Contract
[is] . . . until the release of the Performance Security, without prejudice to . . . the
period of the option to purchase." With, this, the only interpretation that can be
given to the provision is that the life of the AES Contract GENERALLY ends upon
the release of the Performance Security, EXCEPT with respect to the period of
the OTP, hence the use of the qualifying phrase "without prejudice to." As such,
whether or not Smartmatic-TIM has already received the Performance Security is
immaterial with respect to the proper determination of the date when the OTP
was terminated, the OTP having its own period of existence, independent from
that of the AES Contract.

The period of the OTP is specified in Par. 28.1 of Part V of the RFP, which states
that "[a]n offer for an option to purchase by component shall be decided by the
COMELEC before December 31, 2010." Admittedly, the COMELEC failed to
exercise the OTP within the prescribed period and this failure resulted in the
expiration of the OTP. This is not to say, however, that the purchase of the
PCOS machines and allied components via a new contract, separate and distinct
from the AES Contract, by the COMELEC is invalid for lack of a public bidding.
The purchase can be justified under the Direct Contracting mode,an
Alternative Mode of Procurement under RA 9184
Concededly, the subsequent contract in question is not an extension of the
previous AES Contract, but a new one. And not being an ordinary contract but a
procurement by the government, RA 9184 or the Government Procurement
Reform Act applies. Section 10 of said law requires for the validity of every
government procurement that competitive bidding be conducted. As the law
provides: cCHITA
ARTICLE IV
COMPETITIVE BIDDING
Sec. 10.Competitive Bidding. All Procurement shall be
done through Competitive Bidding, except as provided for in
Article XVI of this Act.
This rule, however, is not absolute. There are recognized exceptions to the
bidding requirement, as can be gleaned in the above-quoted provision. The
exceptions are laid out on the provisions of "Alternative Modes of Procurement"
under Section 48, Article XVI of RA 9184, which reads:
Sec. 48.Alternative Methods. Subject to the prior approval
of the Head of the Procuring Entity or his duly authorized
representative, and whenever justified by the conditions
provided in this Act, the Procuring Entity may, in order to
promote economy and efficiency, resort to any of the
following alternative methods of Procurement:
a.Limited Source Bidding, otherwise known as Selective
Bidding a method of Procurement that involves
direct invitation to bid by the Procuring Entity from a
set of pre-selected suppliers or consultants with
known experience and proven capability relative to
the requirements of a particular contract;
b.Direct Contracting, otherwise known as Single Source
Procurement a method of Procurement that does
not require elaborate Bidding Documents because
the supplier is simply asked to submit a price

quotation or a pro-forma voice together with the


conditions of sale, which offer may be accepted
immediately or after some negotiations;
c.Repeat Order a method of Procurement that involves a
direct Procurement of Goods from the previous
winning bidder, whenever there is a need to
replenish Goods procured under a contract
previously awarded through Competitive Bidding;
d.Shopping a method of Procurement whereby the
Procuring Entity simply requests for the submission
of price quotations for readily available off-the-shelf
Goods or ordinary/regular equipment to be
procured directly from suppliers of known
qualification; or
e.Negotiated Procurement a method of Procurement that
may be resorted under the extraordinary
circumstances provided for in Section 53 of this Act
and other instances that shall be specified in the
IRR, whereby the Procuring Entity directly
negotiates a contract with a technically, legally and
financially capable supplier, contractor or
consultant.
In all instances, the Procuring Entity shall ensure that the
most advantageous price for the government is obtained.
At first glance, it is easily deduced that, being a new contract, the purchase of
PCOS machines for the upcoming 2013 elections should undergo public bidding.
However, in view of the uniqueness of the circumstances obtaining, I am of the
view that the validity of the purchase agreement finds footing in the application of
the alternative mode Direct Contracting. As such, competitive bidding is not
required.
To justify resort to any of the alternative methods of procurement, the following
conditions must exist:
1.There is prior approval of the Head of the Procuring Entity
on the use of alternative methods of procurement, as
recommended by the BAC; and
2.The conditions required by law for the use of alternative
methods are present; and AHacIS
3.The method chosen promotes economy and efficiency,
and that the most advantageous price for the government is
obtained. 1

In this regard, I reiterate my position that all the foregoing conditions exist in the
present case, thus allowing COMELEC to use an alternative method of
procurement permitted under said statute. Allow me to discuss the existence of
said conditions in seriatim.
Prior approval of the procuring entity
The prior approval of the procuring entity, respondent COMELEC in this case,
was made through COMELEC Resolution Nos. 9376 and 9377. In said
Resolutions, COMELEC manifested its resolve to purchase the AES hardware
and software covered by the OTP in the AES Contract between it and
Smartmatic-TIM. In its Resolution No. 9376, the COMELEC stated:
NOW, THEREFORE, the Commission on Elections, by virtue
of the powers vested in it by the Constitution, the Omnibus
Election Code, Republic Act No. 9369 and other election
laws, and after finding the exercise of the Option to
Purchase most advantageous to the government,
RESOLVED, as it hereby RESOLVES, to exercise its Option
to Purchase the PCOS and CCS hardware and software in
accordance with Section 4.3, Article 4 of the AES contract
between the Commission and SMARTMATIC-TIM in
connection with the May 10, 2010 National and Local
Elections . . . .
Conditions justifying a Direct Contracting
As for the second condition, I submit that the Deed of Sale executed by
respondents is analogous to the "Direct Contracting" mode defined in the
above-quoted Sec. 48 (b), Art. XVI of RA 9184 that is exempt from the more
protracted process of competitive bidding. Sec. 50, RA 9184, provides the
alternative conditions before a resort to direct contracting is permitted:
Section 50.Direct Contracting. Direct Contracting may be
resorted to only in any of the following conditions:
a.Procurement of Goods of proprietary nature, which
can be obtained only from the proprietary
source, i.e., when patents, trade secrets and
copyrights prohibit others from manufacturing
the same items;
b.When the Procurement of critical components from a
specific manufacturer, supplier, or distributor is a
condition precedent to hold a contractor to
guarantee its project performance, in accordance
with the provisions of his contract; or
c.Those sold by an exclusive dealer or manufacturer,

which does not have sub-dealers selling at


lower prices and for which no suitable
substitute can be obtained at more
advantageous terms to the government.
(Emphasis supplied.)
Note that while only one condition is needed to justify direct contracting, two (2)
of the stated conditions actually exist in the present controversy thereby
exempting the Deed of Sale from the requirement of a prior competitive
bidding, namely: Sec. 50 (a) on the procurement of goods of proprietary nature
and Sec. 50 (c) on the procurement of goods sold by an exclusive dealer that
does not have sub-dealers selling at a lower price and for which a suitable
substitute can be obtained at terms more advantageous to the government.
The Deed of Sale involves the procurement of proprietary goods
Under Sec. 50 (a), the Deed of Sale is exempt from competitive bidding as it
involves goods of "proprietary nature." Goods are considered of "proprietary
nature" when they are owned by a person who has a protectable interest in them
2 or an interest protected by the intellectual property laws.
Our Intellectual Property Code protects, among others, original works, as
provided for under Section 172, which reads in part: DcCEHI
Chapter II
ORIGINAL WORKS
Sec. 172.Literary and Artistic Works.
172.1 Literary and artistic works, hereinafter referred to as
"works", are original intellectual creations in the literary and
artistic domain protected from the moment of their creation
and shall include in particular:
xxx xxx xxx
(n)Computer programs; and
xxx xxx xxx
172.2 Works are protected by the sole fact of their creation,
irrespective of their mode or form of expression, as well as of
their content, quality and purpose. (Emphasis supplied.)
In the case at bar, petitioners have raised the argument that Sec. 50 (a) of RA
9184 cannot apply because the EMS and the PCOS firmware are "mere
component(s) of the entire Automated Election System" that also includes the
PCOS hardware, canvassing system and servers listed in Annexes "E" and "E-1"
of the Deed of Sale. This argument, however, fails to consider the fact that this

proprietary software is a bundled software "that is sold together with hardware,


other software, or services at a single price." 3
In Philippine contract law, one species of an indivisible object is a divisible thing
which the parties treated as indivisible. 4 Article 1225 of the Civil Code provides:
Art. 1225.For the purpose of the preceding articles,
obligations to give definite things . . . shall be deemed to be
indivisible.
xxx xxx xxx
However, even though the object or service may be
physically divisible, an obligation is indivisible if so provided
by law or intended by the parties.
In the present case, not only was the object of the contract a determinate thing,
the parties likewise agreed that the subject Deed of Sale is for the purchase of
the entire first component. 5 While the hardware and software are, by their
nature, separable, the parties, however, intended to treat them as indivisible.
Such being the case, the software cannot then be procured without the
accompanying hardware on which they are embedded. In other words, what was
purchased by the COMELEC was the whole system, that is, the entire first
component of the original AES Contract, which includes the software needed for
the PCOS machines consisting of the Election Management System (EMS) and
the PCOS firmware 6 applications, protected by our copyright laws, together with
the hardware. 7 Being inseparable by contractual stipulation, the COMELEC is
thus required to procure the hardware and the proprietary software and firmware
provided by Smartmatic-TIM.
To further show the importance of treating the software and hardware as
indivisible, without Smartmatic-TIM's EMS which dictates the functioning of the
entire system, by directing the processes by which the PCOS and the CCS
hardware and software interpret the data scanned from the cast ballots and later
accumulate, tally and consolidate all the votes cast, the PCOS hardware are
lifeless. The EMS is the fundamental software on which all other applications and
machines in the entire Smartmatic-TIM AES depend. It serves as the brain that
commands all other components in the entire AES.
The goods subjects of the assailed procurement are soldexclusively by
Smartmatic-TIM which has no sub-dealer and forwhich no suitable
substitute can be obtained at terms moreadvantageous to the
government
In addition to the foregoing, it is important to underscore that the EMS application
which has been manufactured, configured and customized by Smartmatic-TIM 8
to fit the needs of Philippine elections cannot be obtained from any source other
than Smartmatic-TIM. This satisfies the requirement under Sec. 50 (c) of RA
9184, viz.: DaHcAS

Section 50.Direct Contracting. Direct Contracting may be


resorted to only in any of the following conditions:
xxx xxx xxx
(c)Those sold by an exclusive dealer or manufacturer,
which does not have sub-dealers selling at lower prices
and for which no suitable substitute can be obtained at
more advantageous terms to the government.
For the condition provided under Sec. 50 (c) of RA 9184 to exist, three elements
must be established:
1.The goods subject of the procurement are sold by an
exclusive dealer or manufacturer;
2.The exclusive dealer or manufacturer does not have subdealers selling the same goods at lower prices;
3.There are no suitable substitutes for the goods offered by
another supplier at terms more advantageous to the
government.
In this regard, I submit that all these elements are present in the case at bar.
As discussed, the specific goods subject of the assailed Deed of Sale are goods
of proprietary nature as they include the Smartmatic EMS, which is a proprietary
software that cannot be used, redistributed, or modified without the permission of
Smartmatic. 9 This software, together with the PCOS firmware 10 and hardware,
is owned and distributed exclusively by respondent Smartmatic-TIM. Hence, the
first element of the condition set forth in Sec. 50 (c) is clearly present.
On the existence of the second element, it is an uncontested fact that
Smartmatic-TIM has no sub-dealers 11 and that there are no other persons
selling the said software and hardware, 12 much less selling them at prices lower
than that offered by Smartmatic-TIM under the questioned Deed of Sale.
As to the third element, that there is no suitable substitute for the hardware and
software offered by Smartmatic-TIM, it is material to recall that for the automation
of the 2010 elections, only two bidders qualified, Smartmatic-TIM and the Indra
Consortium (Indra), and that the terms offered by Smartmatic-TIM are far better
than that of Indra on several material points, the most important of which is that
Indra pegged the lease price of just 57,231 PCOS machines at PhP11.22 billion,
PhP4 billion more than the price offered by Smartmatic-TIM for the lease of
82,000 PCOS machines.
It is, thus, reasonable to conclude that, as of the moment, no other supplier can
match Smartmatic-TIM's offer, which even included the contested OTP over
more than 81,000 PCOS units at only PhP1.8 billion, or 50% of the lease price of

the original 2009 AES Contract and almost PhP7 billion less than that estimated
by the COMELEC to purchase the same number of PCOS machines (without the
software and accompanying hardware) based on the lowest calculated
responsive bid for the 2010 elections.
With the above considerations, I respectfully submit that the terms of the
procurement contract are undeniably more advantageous to the government.
The assailed Deed of Sale promotes economy and efficiency,and
obtains for the most advantageous price
Anent the last requisite, I am of the opinion that it is likewise present in the
instant case.
In addition to the considerations discussed above which show that the
COMELEC is no longer in a position to seek other suppliers, as petitioners would
have it, recall that the automation of the 2013 elections is bombarded with
numerous complications, including time and budget constraints. Note that based
on the bids submitted for the 2010 automated elections, the COMELEC
determined that the funds needed for the procurement of 125,000 PCOS
machines to ensure a 600:1 voter-to-precinct ratio is around PhP12.85 billion.
However, it was only given a PhP7.96 billion budget for the entire automation of
the 2013 elections, which will involve not only the procurement of the equipment
but also the price of the allied services. This budget is obviously insufficient for
the Commission to be able to perform its mandate of automating the upcoming
2013 elections.
To further add to the government's advantage, Smartmatic-TIM also shouldered
the storage price of the PCOS units and offered them for sale without considering
inflation or putting a price on the enhancements and modifications demanded by
COMELEC. Too, obtaining more funds from Congress and going through with
competitive bidding, as insisted by petitioners, will eat up the precious time
necessary to test and modify a new AES, if any, and prepare and educate the
electorate and poll officers on its operation to prevent any human blunders that
might lead to an erroneous declaration of the results of an election, when here is
a system with which the electorate and the concerned poll officials are already
familiar with. This not only reduces the attending time constraint for it abbreviates
the learning curve of all the parties concerned, it also minimizes the errors
attributable to the variations and differences offered by a new AES, as seen in
the 2010 elections where the system was used for the first time on a national
scale. Besides, to require the COMELEC to procure a new and, as demanded by
petitioners, flawless AES for the 2013 elections with a budget of Php2.2 billion, at
least PhP5 billion short of the original amount requested, is requiring the
Commission to execute a financial miracle with only a few months to pull it off.
TacADE
Given the prevailing conditions and the constraints imposed on COMELEC, the
course of action taken by the poll body proves to be the most efficient and

economical avenue that guarantees the conduct of an automated election in


2013. Procuring the same, tested AES from the supplier who helped the conduct
of a successful and peaceful election in 2010 dispenses the need for additional
funding and so reserves the remaining time before the elections for the conduct
of essential modifications and enhancements on the Smartmatic-TIM AES that
could remove the problems complained of by petitioners. Hence, I submit that
direct contracting with Smartmatic-TIM for the hardware and software subject of
the Deed of Sale is justified under Sec. 50 (c) of RA 9184.
ACCORDINGLY, I vote to DENY the Motions for Reconsideration.
BRION, J., dissenting:
With due respect, I register my dissent to the ponencia's conclusion that the: (i)
COMELEC-SMARTMATIC-TIM's Agreement on the Extension of the Option to
Purchase (OTP) Under the Contract for the Provision of an Automated Election
System (AES) for the May 10, 2010 synchronized National and Local Elections;
(ii) the Deed of Sale of March 30, 2012; and (iii) COMELEC Resolution No. 9378
(approving the Deed of Sale) are valid and constitutional. In my June 13, 2012
Dissent, I held the view that the aforementioned contracts and COMELEC
issuance are null and void, as viewed from the prism of contract law, the law on
government procurement, and the constitutional set-up of the COMELEC's
independence.
For a complete treatment and presentation of the issues raised, the arguments in
the Resolution and the refutation are discussed below.
First, the ponencia emphasizes that although the option was not exercised within
the period (i.e., December 31, 2010), the same was validly extended when the
parties entered into an extension agreement giving the COMELEC until March
31, 2012 within which to exercise the option. Considering that the performance
security has not been released to SMARTMATIC-TIM, the contract remained
effective and could still be amended by mutual agreement of the parties. ICcDaA
Second, the ponencia maintains that pursuant to Section 2.2, Article 2 of the AES
Contract, the entire contract, as well as the option and warranty provisions,
remains effective since the performance security has not been released. It also
notes that while the surviving provisions (the option and warranty) have different
terms, Section 2.2 cannot be interpreted to mean that the provision on the OTP is
separate from the main contract of lease such that it cannot be amended under
Article 19 of the AES Contract.
Third, the ponencia asserts that the amendment, if any, to the AES Contract was
not substantial because no additional right was given to SMARTMATIC-TIM that
was not available to the other bidders. It emphasizes that except for the
extension of the option period, the exercise of the option remained subject to the
same terms and conditions; in fact, the amendment is more advantageous to the
COMELEC and the public.

Fourth, the ponencia argues that the Court's ruling in San Diego v. The
Municipality of Naujan, Province of Mindoro 1 is inapplicable for the reason that
the extension made in that case pertained to the period of the main contract of
lease and not to the period of an ancillary contract such as the OTP, as in the
present case. It notes that in San Diego, the extension of the lease contract
meant that the lessee would be given undue advantage because it would enjoy
the lease of the property under the same terms and conditions for a longer
period; here, the extension of the option period gave the COMELEC more time to
determine the propriety of exercising the option. Thus, with the extension, the
COMELEC could acquire the PCOS machines under the same terms and
conditions as previously agreed upon.
Fifth, the ponencia submits that it is unnecessary to discuss the issues raised by
the movants pertaining to the glitches of the PCOS machines, their compliance
with the minimum system capabilities and the COMELEC's abdication of its
exclusive power in the conduct of the elections since these issues have been
discussed and passed upon in the case of Roque, Jr. v. Commission on
Elections. 2
These arguments are addressed in the same order they are posed under the
topical headings below.
a.The OTP clearly lapsed
Contrary to the majority's conclusion, I submit that the OTP simply lapsed when
the COMELEC failed to exercise the option on or before December 31, 2010. By
virtue of the OTP an option contract preparatory to a contract of sale and
distinct from the main contract of lease SMARTMATIC-TIM, as owner, agreed
with the COMELEC that it shall have the right to buy the leased goods at a fixed
price, to be exercised within a specific period. Failing to exercise this right within
the option period, the COMELEC allowed the option to expire and thus,
SMARTMATIC-TIM was released from its obligation to respect the COMELEC's
right or privilege to buy. As I emphasized in my June 13, 2012 Dissent:
As authorized by the AES contract, COMELEC exercised the
OTP for the 2010 special elections in the ARMM by
purchasing 920 units of Precinct-Count Optical Scan System
(PCOS) machines and 36 units of Consolidated Canvassing
System (CCS). No further action was taken by COMELEC
on the OTP for the remainder of the goods under the option
(81,280 PCOS machines and 1,684 CCS) on or before 31
December 2010. Under these developments, the option
clearly lapsed. [italics and emphasis supplied]
Significantly, SMARTMATIC-TIM even acted under the assumption that the
option has been terminated, viz.:
The COMELEC inaction is highlighted by SMARTMATICTIM's unilateral offers to extend the period for the

COMELEC's exercise of its OTP (through its letters of


December 18, 2010, March 23, 2011, April 1, 2011 and
September 23, 2011), which the COMELEC clearly ignored
before the lapse of the option period. With the expiration of
the period, the option itself ceased to exist. There was
thus no option that could be extended. Interestingly, even
SMARTMATIC-TIM itself admitted that the period for the
OTP already lapsed after December 31, 2010. In its
several letters to the COMELEC, SMARTMATIC-TIM
disowned any legal obligation to sell to the COMELEC the
goods covered by the COMELEC's OTP simply because the
option already expired after December 31, 2010. 3 (italics
and emphases supplied)
b.The terms of Section 2.2, Article 2 of the AES Contract plainly
evince theparties' intention to treat theancillary OTP
contract and theperiod for its exercise differentlyfrom the
main contract of lease
I take exception to the ponencia's conclusion that Section 2.2, Article 2 of the
AES Contract cannot be interpreted to mean that the provision on the OTP is
separate from the main contract of lease such that it cannot be amended under
Article 19 of the AES Contract. ACTaDH
A basic disagreement with the ponencia relates to the interpretation of the
provision on effectivity of the AES Contract, which reads:
ARTICLE 2
EFFECTIVITY
2.1This Contract shall take effect upon the fulfillment of all of
the following conditions:
a)Submission by the Provider of the Performance
Security;
b)Signing of this Contract in seven (7) copies by the
parties; and
c)Receipt by the provider of the Notice to Proceed.
2.2.The term of this Contract begins from the date of
effectivity until the release of the performance security,
without prejudice to the surviving provisions of this
Contract including the warranty provision as prescribed in
Article 8.3 and the period of the option to purchase.
[italics and emphases supplied]
As explained in my Dissent, while I concede that the AES Contract still

technically subsists because of the COMELEC's retention of SMARTMATICTIM's performance security, Section 2.2, Article 2 of the AES Contract clearly
mandates that its continued effectivity is without prejudice to "the period of the
option to purchase." Thus, I conclude that under these terms, the COMELEC and
SMARTMATIC-TIM clearly recognized that the OTP and the period for its
exercise stand differently from the main contract of lease of goods and service. In
other words, the effectivity of the warranty provision and of the OTP are
covered by an entirely different period and not by the term of the main
contract of lease of goods. Properly viewed from this perspective, this
interpretation thus demolishes the ponencia's position that the OTP in this case
still subsists. As emphasized in my Dissent:
In the present case, COMELEC and SMARTMATIC-TIM's
intention to extend an already expired option period could
not have validly gone past the negotiation stage. Specifically,
SMARTMATIC-TIM formally made an offer to the COMELEC
to extend the original period and, upon its lapse, to provide
for a new period to exercise the same option; these,
COMELEC simply ignored. Thus, this offer is merely an
imperfect promise (politacion) that, by reason of lack of
acceptance before the expiration of the period, did not
give rise to any binding commitment. [italics and
emphasis supplied]
c.The unilateral extension of the OTP amounts to a substantial
amendment of the AES Contract
I cannot subscribe to the majority's view that the extension of the OTP cannot be
characterized as a substantial amendment because no additional right was given
to SMARTMATIC-TIM and that the option was still subject to the same terms and
conditions previously agreed upon. To my mind, this view seriously ignores the
fact that the period for the exercise of the option is a substantial particular
in the option contract. I reached this conclusion bearing in mind that the subject
of the OTP is a novel technological system in the conduct of an election and the
transitory nature of the information technology employed by the AES, viz.:
It should be considered in this regard that the subject of the
OTP is, collectively and broadly speaking, a technological
system in the conduct of an election. To my mind, a change
in technology over a short period of time through the advent
of a more advanced technology is a vital reason for limiting
the period within which the option must be exercised.
Therefore, the fact that the original price in the AES
contract is maintained is no argument, in favor of the
modification of the period of the OTP. If indeed the
original expiration date of the OTP is legally insignificant in
view of the deemed-sold provision under Article 5.11 of the
AES contract, I see no reason why SMARTMATIC-TIM

would make several unilateral offers to the COMELEC


before and after the expiration of the period of the OTP.
Contrary to the respondents' claim, the period is actually
for the benefit of both parties and not just of the
COMELEC alone. A seven-month period (reckoned from the
conduct of the elections) within which the OTP may be
exercised is a reasonable period to evaluate the pros and
cons of the technology used in the previous 2010 elections,
which may affect the COMELEC's decision to exercise the
option or not. Should the COMELEC refuse to exercise the
option, the parties obviously anticipated that, at least, the
COMELEC would still have the remaining more than two
years (prior to the conduct of the next national and local
elections) to look for another technological system and make
the necessary administrative, technical and legal
preparations. SMARTMATIC-TIM, on the other hand, could
still competitively market its PCOS machines, etc. to other
countries or users. Thus, the extension or renewal of the
option period on the pretext that it is beneficial to the
COMELEC seriously ignores these considerations. 4
(emphases ours, italics supplied) EADCHS
d.By analogy, the Court's ruling inSan Diego supports the view
that theextension of the OTP amounts to asubstantial
amendment since theperiod to exercise the OTP is a
substantial particular in the optioncontract
While it is true that the case of San Diego v. The Municipality of Naujan, Province
of Mindoro 5 involved the extension of the period of the lease contract prior to its
expiration, without the benefit of a public bidding, and not an option contract as in
the present case, I submit that San Diego is relevant to the present case for the
simple reason that the period of the option is a vital and essential particular to the
contract. Thus, in San Diego, the Court held:
Furthermore, it has been ruled that statutes requiring
public bidding apply to amendments of any contract
already executed in compliance with the law where such
amendments alter the original contract in some vital and
essential particular. Inasmuch as the period in a lease is a
vital and essential particular to the contract, we believe
that the extension of the lease period in this case, which was
granted without the essential requisite of public bidding, is
not in accordance with law. And it follows that Resolution
222, series of 1951, and the contract authorized thereby,
extending the original five-year lease to another five years
are null and void as contrary to law and public policy. 6
[citations omitted, emphases and underscores ours]

Thus, I cited the case for the reason that:


The above rationale for prohibiting the extension of the
period of the main contract of lease should equally apply to
the period of the OTP; this period of the option is a vital and
essential particular to the contract. With the short interval of
three years before the next elections, the extension of the
period beyond what was originally intended tends to give the
winning bidder (SMARTMATIC-TIM) undue advantage in
securing the contract of sale, not on the basis of having the
best possible advantages for the public, but on the
convenient excuse that the next election is "already a matter
of urgency" and its equipment, having been previously used,
needs only to be improved to replicate the 2010 election
results.
If the legality of the extension of the period of the OTP prior
to its expiration is already legally problematic, then a fortiori
the revival of a lapsed period by mutual agreement of the
parties must suffer the same fate and even worse. It must
at least be subjected to competitive bidding, or invalidated
for fatal infirmity based on other grounds. I note that in
Roque, Jr. v. Commission on Elections, filed before the 2010
elections, even the majority conceded that "the real worth of
the PCOS system and the machines will of course come
after they shall have been subjected to the gamut of
acceptance tests." The real test came during the actual
elections where, unfortunately, serious deficiencies and
issues affecting the integrity of the PCOS system surfaced,
compromising some of the minimum system capabilities
mandated by law.
If the present case simply involves an ordinary contract
where, ordinarily, only the pertinent provisions of the Civil
Code would apply, I would not perhaps have qualms with the
suggestion that since the option period was a limitation
imposed by SMARTMATIC-TIM on the COMELEC's right to
exercise its OTP, then nothing prevents SMARTMATIC-TIM
from waiving the period it imposed. The present case,
however, involves not just any government contract but
one involving a constitutional office tasked with the
independent enforcement and administration of all laws
and regulations relating to the conduct of elections to
public office to ensure a free, orderly and honest
electoral exercise; it involves an ambitious step to replicate
the first ever automated election held in 2010 by purchasing,
out of the national coffers, the same PCOS machines and

the CCS hardware and software worth billions of pesos. The


respondents sorely miss this point of distinction between a
government contract, on one hand, and an ordinary contract,
on the other hand, by approaching the issue from the
perspective of a purely private contract. 7 (emphases and
italics supplied) DAETHc
e.A continuing violation of theconstitutional set-up of the
Comelec's independence in thepresent case can never be
laid to rest by the majority's rulingin Roque, Jr. v.
Commissionon Elections
I submit anew my continuing objection as I did in my dissents in Roque, Jr. v.
Commission on Elections 8 and the present case to the COMELEC's failure to
observe Section 26 of Republic Act No. 8436 the very law which mandated
the COMELEC to undertake an automated election system. I reiterate the view
that:
[Had] only the COMELEC faithfully complied with Section 26
of Republic Act No. 8436 and undertook the automation of
election system in line with the law's intent for the
COMELEC itself to keep pace along with the new
system, the government would not be a "captive market" of
SMARTMATIC-TIM for the subsequent elections.
COMELEC, unfortunately, cannot do so without
SMARTMATIC-TIM by its side as it is not, up to now,
technologically up to date and self-sufficient as its
independence requires.
In any case, should the COMELEC choose to purchase
election related hardware and software, and the
accompanying system from a new provider, the same
advantage that SMARTMATIC-TIM now enjoys would be
enjoyed as well by this provider in a subsequent bidding, for
the rendition of technical services to make the system fully
functional. However, since the COMELEC does not, at any
time, appear to consider Section 26 of Republic Act No.
8436, the subsequent bidding for services (for technical
support involving the operation of the items purchased from
SMARTMATIC-TIM) would result in the same scheme of a
shared responsibility that would put the COMELEC in
continuous violation of the law and the Constitution. To my
mind, this is constitutionally objectionable. 9 (emphasis and
italics supplied)
I also take the view that this violation by the COMELEC of the law and the
Constitution can never be laid to rest and remains to be a continuing violation
unless and until the COMELEC complies with the terms of Section 26 of

Republic Act No. 8436 and the independence that the Constitution guarantees to
it.
For the foregoing reasons, I vote to grant the motions for reconsideration.
FIRST DIVISION
[G.R. No. L-23546. August 29, 1974.]
LAGUNA TAYABAS BUS COMPANY and BATANGAS
TRANSPORTATION COMPANY, petitioners, vs.
FRANCISCO C. MANABAT, as assignee of Bian
Transportation Company, Insolvent, respondent.

Domingo E. de Lara for petitioners.


M. A. Concordia & V.A. Guevarra for respondent.
DECISION

MAKASIAR, J p:
This is an appeal by certiorari from a judgment of the Court of Appeals dated
August 31, 1964, which WE AFFIRM.
The undisputed facts are recounted by the Court of Appeals through then
Associate Justice Salvador Esguerra thus:
"On January 20, 1956, a contract was executed whereby the
Bian Transportation Company leased to the LagunaTayabas Bus Company at a monthly rental of P2,500.00 its
certificates of public convenience over the lines known as
Manila-Bian, Manila-Canlubang and Sta. Rosa-Manila, and
to the Batangas Transportation Company its certificate of
public convenience over the line known as Manila-Batangas
Wharf, together with one 'International' truck, for a period of
five years, renewable for another similar period, to
commence from the approval of the lease contract by the
Public Service Commission. On the same date the Public
Service Commission provisionally approved the lease
contract on condition that the lessees should operate on the
leased lines in accordance with the prescribed time schedule
and that such approval was subject to modification or
cancellation and to whatever decision that in due time might

be rendered in the case.


"Sometime after the execution of the lease contract, the
plaintiff Bian Transportation Company was declared
insolvent in Special Proceedings No. B-30 of the Court of
First Instance of Laguna, and Francisco C. Manabat was
appointed as its assignee. From time to time, the defendants
paid the lease rentals up to December, 1957, with the
exception of the rental for August 1957, from which there
was deducted the sum of P1,836.92 without the consent of
the plaintiff. This deduction was based on the ground that
the employees of the defendants on the leased lines went on
strike for 6 days in June and another 6 days in July, 1957,
and caused a loss of P500 for each strike, or a total of
P1,000.00; and that in Civil Case No. 696 of the Court of
First Instance of Batangas, Branch II, judgment was
rendered in favor of defendant Batangas Transportation
Company against the Bian Transportation Company for the
sum of P836.92. The assignee of the plaintiff-objected to
such deduction, claiming that the contract of lease would be
suspended only if the defendants could not operate the
leased lines due to the action of the officers, employees or
laborers of the lessor but not of the lessees, and that the
deduction of P836.92 amounted to a fraudulent preference in
the insolvency proceedings as whatever judgment might
have been rendered in favor of any of the lessees should
have been filed as a claim in said proceedings. The
defendants neither refunded the deductions nor paid the
rentals beginning January, 1958, notwithstanding demands
therefor made from time to time. At first, the defendants
assured the plaintiff that the lease rentals would be paid,
although it might be delayed, but in the end they failed to
comply with their promise.
"On February 18, 1958, the Batangas Transportation
Company and Laguna-Tayabas Bus Company separately
filed with the Public Service Commission a petition for
authority to suspend the operation on the lines covered by
the certificates of public convenience leased to each of them
by the Bian Transportation Company. The defendants
alleged as reasons the reduction in the amount of dollars
allowed by the Monetary Board of the Central Bank of the
Philippines for the purchase of spare parts needed in the
operation of their trucks, the alleged difficulty encountered in
securing said parts, and their procurement at exorbitant
costs, thus rendering the operation of the leased lines
prohibitive. The defendants further alleged that the high cost

of operation, coupled with the lack of passenger traffic on the


leased lines resulted in financial losses. For these reasons
they asked permission to suspend the operation of the
leased lines until such time as the operating expenses were
restored to normal levels so as to allow the lessees to realize
a reasonable margin of profit from their operation.
"Plaintiff's assignee opposed the petition on the ground that
the Public Service Commission had no jurisdiction to grant
the relief prayed for as it would involve the interpretation of
the lease contract, which act falls exclusively within the
jurisdiction of the ordinary courts; that the petitioners had not
asked for the suspension of the operation of the lines
covered by their own certificates of public convenience; that
to grant the petition would amount to an impairment of the
obligation of contract; and that the defendants have no legal
personality to ask for suspension of the operation of the
leased lines since they belonged exclusively to the plaintiff
who is the grantee of the corresponding certificate of public
convenience. Aside from the assignee, the Commissioner of
the Internal Revenue and other creditors of the Bian
Transportation Company, like the Standard Vacuum Oil Co.
and Parsons Hardware Company, filed oppositions to the
petitions for suspension of operation.
"On October 15, 1958, the Public Service Commission
overruled all oppositions filed by the assignee and other
creditors of the insolvent, holding that upon its approval of
the lease contract, the lessees acquired the operating rights
of the lessor and assumed full responsibility for compliance
with all the terms and conditions of the certificate of public
convenience. The Public Service Commission further stated
that the petition to suspend operation did not pertain to any
act of dominion or ownership but only to the use of the
certificate of public convenience which had been transferred
by the plaintiff to the defendants, and that the suspension
prayed for was but an incident of the operation of the lines
leased to the defendants. The Public Service Commission
further ruled that being a quasi-judicial body of limited
jurisdiction, it bad no authority to interpret contracts, which
function belongs to the exclusive domain of the ordinary
courts, but the petition did not call for interpretation of any
provision of the lease contract as the authority of the Public
Service Commission to grant or deny the prayer therein was
derived from its regulatory power over the leased certificates
of public convenience.".

While proceedings before the Public Service Commission were thus going on, as
a consequence of the continuing failure of the lessees to fulfill their earlier
promise to pay the accruing rentals on the leased certificates,
"On May 19, 1959, plaintiff Bian Transportation Company,
represented by Francisco C. Manabat, assignee, filed this
action against defendants Laguna Tayabas Bus Company
and Batangas Transportation Company for the recovery of
the sum of P42,500 representing the accrued rentals for the
lease of the certificates of public convenience of the former
to the latter, corresponding to the period from January, 1958,
to May, 1959, inclusive, plus the sum of P1,836.92 which
was deducted by the defendants from the rentals due for
August, 1957, together with all subsequent rentals from
June, 1959, that became due and payable; P5,000.00 for
attorney's fees and such corrective and exemplary damages
as the court may find reasonable.
"The defendants moved to dismiss the complaint for lack of
jurisdiction over the subject matter of the action, there being
another case pending in the Public Service Commission
between the same parties for the same cause. . ." (pp. 2021, rec.; pp. 54-55, ROA)
The motion to dismiss was, however, denied.
Meanwhile
"The Public Service Commission delegated its Chief
Attorney to receive evidence of the parties on the petition of
the herein defendants for authority to suspend operation on
the lines leased to them by the plaintiff. The defendants, the
assignee of the plaintiff and other creditors of the insolvent
presented evidence before the Chief Attorney and the
hearing was concluded on June 29, 1959. On October 20,
1959, the Public Service Commission issued an order the
dispositive part of which reads as follows:
'In view of the foregoing, the petitioners
herein are authorized to suspend their operation of
the trips of the Bian Transportation Company
between Batangas Piers-Manila, Bian-Manila, Sta.
Rosa-Manila and Canlubang-Manila authorized in
the aforementioned cases from the date of the filing
of their petition on February 18, 1958, until
December 31, 1959.'" (p. 25, rec.; pp. 60-61, ROA).
Going back to the Court of First Instance of Laguna
". . . The motion (to dismiss) having been denied, the

defendants answered the complaint, alleging among others,


that the Public Service Commission authorized the
suspension of operation over the leased lines from February
18, 1950, up to December 31, 1959, and hence the lease
contract should be deemed suspended during that period;
that plaintiff failed to place defendants in peaceful and
adequate enjoyment and possession of the things leased;
that as a result of the plaintiff being declared insolvent the
lease contract lost further force and effect and payment of
rentals thereafter was made under a mistake and should be
refunded to the defendants." (p. 21; rec.; p. 55, ROA)
The Court of Appeals proceeded to state that
"After hearing in the court a quo and presentation by the
parties herein of their respective memoranda, the trial court
on March 18, 1960, rendered judgment in favor of plaintiff,
ordering the defendants jointly and severally to pay to the
former the sum of P65,000.00 for the rentals of the
certificates of public convenience corresponding to the
period from January, 1958, to February, 1960, inclusive,
including the withheld amount of P836.92 from the rentals for
August, 1957, plus the rentals that might become due and
payable beginning March, 1960, at the rate of P2,500.00 a
month, with interest on the sums of P42,500 and P836.92 at
the rate of 6% per annum from the date of the filing of the
complaint, with interest on the subsequent rentals at the
same rate beginning the first of the following month, plus the
sum of P3,000.00 as attorney's fees, and the cost of the
suit." (pp. 25-26, rec.)

From the decision of the Court of First Instance, defendants appealed to the
Court of Appeals, which affirmed the same in toto in its decision dated August 31,
1964. Said decision was received by the appellants on September 7, 1964.
On September 21, 1964, appellants filed the present appeal, raising the following
questions of law:
"1.Considering that the Court of Appeals found that the
Public Service Commission provisionally approved the lease
contract of January 20, 1956 between petitioners and Bian
Transportation Company upon the condition, among others,
that such approval was subject to modification and
cancellation and to whatever decision that in due time might
be rendered in the case, the Court of Appeals erred in giving
no legal effect and significance whatever to the suspension

of operations later granted by the Public Service


Commission after due hearing covering the lines leased to
petitioners thereby nullifying, contrary to law and decisions of
this Honorable Court, the authority and powers conferred on
the Public Service Commission.
"2.The Court of Appeals misapplied the statutory rules on
interpreting contracts and erred in its construction of the
clauses in the lease agreement authorizing petitioners to
suspend operation without the corresponding liability for
rentals during the period of suspension.
"3.Contrary to various decisions of this Honorable Court
relieving the lessee from the obligation to pay rent where
there is failure to use or enjoy the thing leased, the Court of
Appeals erroneously required petitioners to pay rentals, with
interest, during the period of suspension of the lease from
January, 1958 up to the expiration of the agreement on
January 20, 1961." (p. 7, rec.)
On October 12, 1964, the Supreme Court issued a resolution dismissing said
petition "for lack of merit." (p. 43, rec.). Said resolution was received by
petitioners on October 16, 1964.
On October 31, 1964, the day the Court's resolution was to become final,
petitioners filed a "Motion to Admit Amended Petition and to Give Due Course
Thereto." In said motion, petitioners explained
". . . The amendment includes an alternative ground relating
to petitioners' prayer for the reduction of the rentals payable
by them. This alternative petition was not included in the
original one as petitioners were genuinely convinced that
they should have been absolved from all liability whatever.
However, in view of the apparent position taken by this
Honorable Court, as implied in its resolution on October 12,
1964, notice of which was received on October 16, 1964,
petitioners now squarely submit their alternative position for
consideration. There is decisional authority for the reduction
of rentals payable (see Reyes v. Caltex, 47 O.G. 1193,
1203-1204)" (p. 41, rec.)
The new question raised is presented thus:
"xxx xxx xxx
IV
"This Honorable Court is authorized to equitably reduce the
rentals payable by the petitioners, should this Honorable

Court adopt the position of the Court of Appeals and the


lower court that petitioners have not been relieved from the
payment of rentals on the leased lines." (p. 7, Amended
Petition for Certiorari, pp. 46, 52, rec.)
On November 5, 1964, the Supreme Court required respondents herein to file an
answer to the amended petition. On the same date, respondents filed, quite
belatedly, an opposition to the motion of the petitioners. Said opposition was later
"noted" by the Court in its resolution dated December 1, 1964.
I
First, it must be pointed out that the first three questions of law raised by
petitioners were already disposed of in Our resolution dated October 12, 1964
dismissing the original petition for lack of merit, which in effect affirmed the
appealed decision of the Court of Appeals. Although, in their motion to admit
amended petition dated October 31, 1964, petitioners sought a reconsideration of
the said resolution not only in the light of the fourth legal issue raised but also on
the said first three legal questions, the petitioners advanced no additional
arguments nor cited new authorities in support of their stand on the first three
questions of law. They merely reproduced verbatim from their original petition
their discussion on said questions.
To the extent therefore that the motion filed by the petitioner seeks a
reconsideration of our order of dismissal by submitting anew, through the
amended petition, the very same arguments already dismissed by this Court, the
motion shall be considered pro forma, (See Estrada v. Sto. Domingo, 28 SCRA
890, 905-906, 911) and hence is without merit.
Consequently, we limit the resolution of this case solely on the discussions on
the last (fourth) question of law raised, taking into consideration the discussion
on the first three questions only insofar as they place the petitioners' discussion
on the fourth question in its proper context and perspective.
II
The undisguised object of petitioners' discussion on the fourth question of law
raised is to justify their plea for a reduction of the rentals on the ground that the
subject matter of the lease was allegedly not used by them as a result of the
suspension of operations on the lines authorized by the Public Service
Commission.
In support of said plea, petitioners invoke article 1680 of the Civil Code which
grants lessees of rural lands a right to a reduction of rentals whenever the
harvest on the land leased is considerably damaged by an extraordinary
fortuitous event. Reliance was also placed by the petitioners on Our decision in
Reyes v. Caltex (Phil.) Inc., 84 Phil. 654, which supposedly applied said article by
analogy to a lease other than that covered by said legal provision.

The authorities from which the petitioners draw support, however, are not
applicable to the case at bar.
Article 1680 of the Civil Code reads thus:
"Art. 1680.The lessee shall have no right to a reduction of
the rent on account of the sterility of the land leased, or by
reason of the loss of fruits due to ordinary fortuitous events;
but he shall have such right in case of the loss of more than
one-half of the fruits through extraordinary and unforeseen
fortuitous events, save always when there is a specific
stipulation to the contrary.
"Extraordinary fortuitous events are understood to be: fire,
war, pestilence, unusual flood, locusts, earthquake, or others
which are uncommon, and which the contracting parties
could not have reasonably foreseen."
Article 1680, it will be observed is a special provision for leases of rural lands. No
other legal provision makes it applicable to ordinary leases. Had the intention of
the lawmakers been so, they would have placed the article among the general
provisions on lease. Nor can the article be applied analogously to ordinary
leases, for precisely because of its special character, it was meant to apply only
to a special specie of lease. It is a provision of social justice designed to relieve
poor farmers from the harsh consequences of their contracts with rich
landowners. And taken in that light, the article provides no refuge to lessees
whose financial standing or social position is equal to, or even better than, the
lessor as in the case at bar.
Even if the cited article were a general rule on lease, its provisions nevertheless
do not extend to petitioners. One of its requisites is that the cause of loss of the
fruits of the leased property must be an "extraordinary and unforeseen fortuitous
event." The circumstances of the instant case fail to satisfy such requisite. As
correctly ruled by the Court of Appeals, the alleged causes for the suspension of
operations on the lines leased, namely, the high prices of spare parts and
gasoline and the reduction of the dollar allocations, "already existed when the
contract of lease was executed" (p. 11, Decision; p. 30, rec.; Cuyugan v. Dizon,
89 Phil. 80). The cause of petitioners' inability to operate on the lines cannot,
therefore, be ascribed to fortuitous events or circumstances beyond their control,
but to their own voluntary desistance (p. 13, Decision; p. 32, rec.).
If the petitioners would predicate their plea on the basis solely of their inability to
use the certificates of public convenience, absent the requisite of fortuitous
event, the cited article would speak strongly against their plea. Article 1680
opens with the statement: "The lessee shall have no right to reduction of the rent
on account of the sterility of the land leased . . ." Obviously, no reduction can be
sustained on the ground that the operation of the leased lines was suspended
upon the mere speculation that it would yield no substantial profit for the lessee

bus company. Petitioners' profits may be reduced due to increase operating


costs; but the volume of passenger traffic along the leased lines not only remains
the same but may even increase as the tempo of the movement of population is
intensified by the industrial development of the areas covered or connected by
the leased routes. Moreover, upon proper showing, the Public Service
Commission might have granted petitioners an increase in rates, as it has done
so in several instances, so that public interest will always he promoted by a
continuous flow of transportation facilities to service the population and the
economy. The citizenry and the economy will suffer by reason of any disruption
in the transportation facilities.
Furthermore, we are not at all convinced that the lease contract brought no
material advantage to the lessor for the period of suspension. It must be recalled
that the lease contract not only stipulated for the transfer of the lessor's right to
operate the lines covered by the contract, but also for a forbearance on the part
of the lessor to operate transportation business along the same lines and to
hold a certificate for that purpose. Thus, even if the lessee would not actually
make use of the lessor's certificates over the leased lines, the contractual
commitment of the lessor not to operate on the lines would sufficiently insure
added profit to the lessees on account of the lease contract. In other words, the
commitment alone of the lessor under the contract would enable the lessees to
reap full benefits therefrom since the commuting public would, after all, be forced
at their inconvenience and prejudice to patronize petitioner's remaining
buses.

Contrary to what petitioners want to suggest, WE refused in the Reyes case,


supra, to apply by analogy Article 1680 and consequently, WE denied the plea of
lessee therein for an equitable reduction of the stipulated rentals, holding that:
"The general rule on performance of contracts is graphically
set forth in American treatises, which is also the rule, in our
opinion, obtaining under the Civil Code.
"Where a person by his contract charges himself with an
obligation possible to be performed, he must perform it,
unless the performance is rendered impossible by the act of
God, by the law, or by the other party, it being the rule that in
case the party desires to be excused from the performance
in the event of contingencies arising, it is his duty to provide
therefor in his contract. Hence, performance is not excused
by subsequent inability to perform, by unforeseen difficulties,
by unusual or unexpected expenses, by danger, by
inevitable accident, by the breaking of machinery, by strikes,
by sickness, by failure of a party to avail himself of the
benefits to be had under the contract by weather conditions
by financial stringency or by stagnation of business. Neither

is performance excused by the fact that the contract turns


out to be hard and improvident unprofitable or impracticable
ill-advised, or even foolish, or less profitable or unexpectedly
burdensome. (17 CJS 946-948) (Reyes vs. Caltex, supra,
664. Underscoring supplied)
Also expressed in said case is a ruling in American jurisprudence, which found
relevance again in the case at bar, to wit: "(S)ince, by the lease, the lessee was
to have the advantage of casual profits of the leased premises, he should run the
hazard of casual losses during the term and not lay the whole burden upon the
lessor." (Reyes vs. Caltex, supra, 664)
Militating further against a grant of reduction of the rentals to the petitioners is the
petitioners' conduct which is not in accord with the rules of fair play and justice.
Petitioners, it must be recalled, promised to pay the accrued rentals in due time.
Later, however, when they believed they found a convenient excuse for escaping
their obligation, they reneged on their earlier promise. Moreover, petitioners'
option to suspend operation on the leased lines appears malicious. Thus, Justice
Esguerra, speaking for the Court of Appeals, propounded the following
questions: "If it were true that the cause of the suspension was the high prices of
spare parts, gasoline and needed materials and the reduction of the dollar
allocation, why was it that only plaintiff-appellee's certificate of public
convenience was sought to be suspended? Why did not the defendantsappellants ask for a corresponding reduction or suspension under their own
certificate along the same route? Suppose the prices of the spare parts and
needed materials were cheap, would the defendants-appellants have paid more
than what is stipulated in the lease contract? We believe not. Hence, the
suspension of operation on the leased lines was conceived as a scheme to
lessen operation costs with the expectation of greater profit." (p. 14, Decision)
Indeed, petitioners came to court with unclean hands, which fact militates against
their plea for equity.
WHEREFORE, THE ORIGINAL AND AMENDED PETITIONS ARE HEREBY
DISMISSED, AND THE DECISION OF THE COURT OF APPEALS DATED
AUGUST 31, 1964 IS HEREBY AFFIRMED, WITH COSTS AGAINST
PETITIONERS.
Makalintal, C.J., Castro, Teehankee and Muoz Palma, JJ., concur.
Esguerra, J., no part.
EN BANC
[G.R. No. L-21979. September 29, 1967.]
NATIONAL MARKETING CORPORATION, plaintiffappellant, vs. ATLAS TRADING DEVELOPMENT

CORPORATION and the ALTO SURETY & INSURANCE


CO., INC., defendants-appellees.

Tomas P. Matic, Jr. for plaintiff-appellant.


Domingo T. Zavalla for defendants-appellees.
SYLLABUS
1.CIVIL LAW; OBLIGATIONS AND CONTRACTS; LETTER OF CREDIT;
EFFECT OF VARIANCE BETWEEN LETTER OF CREDIT AND SALES
AGREEMENT. A discrepancy between what was agreed upon the contract
and the letter of credit, the effectivity of which requires that it be strictly complied
with would excuse non-performance by the seller.
2.ID.; ID.; ID.; NATURE OF LEGAL RELATIONS ARISING FROM LETTER OF
CREDIT. A letter of credit contains the entire contract of the party and
constitutes the complete agreement between them. It is independent of the
contract of sale between the buyer and the seller.
DECISION

FERNANDO, J p:
What is to be determined in this appeal is the correctness of a lower court
decision absolving from liability defendants Atlas Trading Development
Corporation (hereinafter referred to as Atlas) and Alto Surety & Insurance
Company (hereinafter referred to as Alto), the former under a contract for the
sale of galvanized steel sheets and the latter under a performance bond.
While the plaintiff-appellant is the National Marketing Corporation, the action was
originally started by its predecessor Philippine Relief and Trade Rehabilitation
Administration (hereinafter referred to as the Pratra). In its complaint dated June
14, 1950, it alleged: On July 21, 1948, defendant Atlas offered to sell to the
plaintiff 8,000 metric tons of galvanized sheets at the price of U.S. $247 per ton
of 1,000 kilos, CIF Manila, to be shipped beginning August, 1948; 1 on July 24,
1948, the plaintiff made an order and agreed to purchase the galvanized sheets
offered by defendant Atlas with the condition that the seller should furnish a
performance bond in favor of the plaintiff in the amount of P100,000.00; 2 on
August 5, 1948, the plaintiff and defendant Atlas as sales brokers for West India
Commercial Corp. of New York City, N.Y., U.S.A., executed a contract of
purchase and sale wherein the said defendant obligated itself to sell 8,000 metric
tons of galvanized steel sheets, at the price of U.S. $247 per ton of 1,000 kilos
CIF Manila; 3 under the aforementioned contract, defendant Atlas obligated itself

to furnish in favor of Pratra a performance bond in the sum of P100,000.00 to


guarantee the faithful compliance of all the terms and conditions of the said
contract, with defendant Alto as surety; 4 in compliance with its undertakings in
the contract, the plaintiff on August 26, 1948, opened a letter of credit with the
Philippine National Bank for the amount of U.S. $1,976,000.00 in favor of the
West India Commercial Corp. of New York, United States. 5
Neither defendant Atlas nor its supposed principal the West India Commercial
Corp. of New York delivered the 8,000 metric tons of galvanized steel sheets
involved in the contract. 6 The aforementioned contract having provided that in
case of violation of any of its terms and conditions, the buyer will be entitled to
recover liquidated damages in the amount of 20% of the total contractual value of
the merchandise therein described, U.S. $1,976,000.00, 20% of which is U.S.
$395,200.00 or P790,400.00, 7 plaintiff sought to recover the same from Atlas. It
likewise prayed that defendant Alto be condemned to pay the plaintiff the amount
of P100,000.00, the amount of the performance bond.
In the answer of defendant Atlas, filed on July 15, 1950, it admitted making the
offer, adding however that plaintiff was duly informed that it was acting in its
representative capacity; 8 that an order to purchase the galvanized steel sheets
was in fact made by plaintiff; 9 10 It further set up five special defenses and a
counterclaim for P100,000.00.
Defendant Alto denied the allegations of the complaint on the ground that it had
no knowledge or information sufficient to form a belief as to what was therein
contained except the execution of the bond for and on behalf of the West India
Commercial Corporation of New York to guarantee the latter's performance of its
obligation, if any, under the contract which, having been executed and
acknowledged on August 21, 1948 and not on August 5, 1948 as alleged, could
not be the basis of any obligation. On the assumption however that the latter
contract could be the one referred to in the bond, it alleged that it did so for and
on behalf of the West India Commercial Corporation of New York to guarantee
the performance of its obligation, if any, and that it never incurred any obligation
at all under the contract which was the basis of the complaint "as it was never a
party to it, nor did it authorize any one to obligate it in any manner whatsoever,"
and that plaintiff "having discharged the West India Commercial Corporation of
New York from liability on said contract, [defendant Alto] is and must likewise be
discharged, the obligation of the surety being merely accessory to that of the
principal."
After trial, the lower court promulgated a decision on July 29, 1962 dismissing the
complaint. In absolving defendant Atlas, it held that it "was duly authorized to act
as agent or broker of the West India Commercial Company in entering into the
contract of purchase and sale." 11 Even if its liability could be held to be direct,
the Pratra. having demanded payment of damages from West India Commercial
Corporation and not from it, waived whatever claim it might have against Atlas.
The above circumstances taken in connection with what the lower court found to
be a discrepancy in the letter of credit in favor of the West India Commercial

Corporation, which it held to be a condition precedent for the obligation of the


latter under such contract to arise, such discrepancy consisting of no period of
grace of 60 days for delivery having been provided for, although subsequently
corrected but only after the first delivery was "already impossible physically for
the West India Commercial Company to make on time" led it to conclude that for
all legal intents and purposes, such contract of purchase and sale "had not been
operative up to the time it was rescinded by the Pratra on September 23, 1948,
due to the failure of the latter to perform the condition precedent of establishing a
sufficient letter of credit." 12 No liability could therefore attach to defendant Atlas.
The same conclusion was reached as far as defendant Alto was concerned.
Thus: "As to the defendant Alto Surety, we hold that judgment cannot be
rendered against it. Alto Surety posted its bond for the West India Commercial
Corporation and not for the defendant Atlas. And as the West India Commercial
Corporation is not a party in this suit, there is nothing for the Alto Surety to
answer. The case against the Alto Surety and Insurance Co., Inc., is also
dismissed." 13
The facts as found by the lower court are in accordance with the evidence. The
law as applied cannot be characterized as erroneous. The judgment must be
affirmed.
It being undisputed that no such delivery of the 8,000 metric tons of galvanized
steel sheets contracted for was ever made, the decisive question is whether
liability could be deemed to have arisen. If the answer were in the affirmative, the
next question would be, who is to be held accountable? Defendant Atlas was
absolved from any responsibility by the lower court. It justified the non-delivery
because of the discrepancy between what was provided for in the contract of the
purchase and sale 14 and the letter of credit, 15 which under the contract had to
be opened. As noted in the Brief submitted by Atty. Domingo Zavalla for
defendant Atlas, distinguished for its clarity and lucidity, the failure of the letter of
credit to comply with what was agreed upon is "very apparent and noticeable."
Under the contract, the shipment of the galvanized steel sheets could be made
during a period from August, 1948 to February, 1949 with a grace of 60 days,
i.e., "all shipments within 60 days of the above schedule would be accepted as
good delivery." 16 The letter of credit on the other hand did not provide for such a
period of grace of 60 days for late shipment. The corrected letter of credit was
received by the West India Commercial Corporation only on September 7, 1948.
As the first shipment was supposed to have been made in August, it was
impossible for the West India Commercial Corporation to make it on time. Under
the above circumstances the correctness of the assertion in a radiogram of West
India Commercial Corporation sent to defendant Atlas stating that serious
discrepancy "from contract" would prevent it from "using letter of credit in present
form" cannot be denied.

In a decision of this Court, 17 it was held that the failure to open a letter of credit

within a period agreed upon suffices to prevent a binding juridical tie from being
created. That case, dealing with offer and acceptance, reiterated the principle
that to bind the offeror, "the offeree must comply with the conditions of the offer."
the situation before us deals with a perfected contract. Here the time element
does not enter into the failure of one party to live up to the terms of the contract.
What was manifest was the discrepancy between what was agreed upon in the
contract and the letter of credit, the effectivity of which requires that "all
conditions contained [in it] be strictly complied with, however onerous they may
be." 18 The above principle is deemed "absolutely necessary for the protection of
the banking and mercantile community." There is a New York Supreme Court
decision to the effect that a "material variance between the letter of credit and the
sales agreement would excuse non-performance by the seller." 19
Plaintiff-appellant must have been mindful of the force and applicability of the
above controlling principle. In its Brief, it sought to avoid its application by
alleging that by its very nature "a letter of credit cannot contain all the particulars
nor can it embody all the agreements previously entered into by the parties for
the terms and conditions of their agreement are already contained in separate
documents." 20 Plaintiff-appellant would then allege that no such period of
allowance or grace for the late shipment was provided for because the same was
already embodied in the contract of purchase and sale, Exhibit C. 21 Such an
argument is far from persuasive. An authoritative excerpt from Zollman on Banks
and Banking argues to the contrary. Thus: "Where, therefore, legal relations arise
from a letter of credit, such letter contains the entire contract of the parties, and
their resulting obligations should be measured by its provisions. It constitutes the
complete agreement, and is independent of the contract of sale between the
buyer and the seller, and is unaffected by any breach of contract on the part of
the seller or the buyer or by any controversy which may arise between the buyer
and seller or by any other transaction between the buyer and seller." 22
It follows then that the lower court was correct in holding that no liability was
incurred under the contract of purchase and sale because of such failure to make
the delivery. Such being the case, the question of whether or not defendant
Atlas, which acted as a sales broker, could be held liable for the alleged breach
need not be passed upon.
As for the surety, defendant Alto, the judgment must likewise be affirmed for the
obvious reason that as no accountability of the principal arose from the failure to
make the delivery of the galvanized steel sheets, it was equally exempt from
liability.
WHEREFORE, the judgment appealed from is affirmed. Without pronouncement
as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro
and Angeles, JJ., concur.
Bengzon, J.P., J., is on leave.

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