Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 3019            February 9, 1907

LA COMPAÑIA GENERAL DE TABACOS DE FILIPINA, plaintiff-appellee, vs.VICENTE ARAZA, defendant-appellant.

T. L. McGirr for appellant. Domingo Franco for appellee.

WILLARD, J.:

The plaintiff brought this action in the court below to foreclose a mortgage for 8,000 pesos upon certain land in the Province of Leyte. A demurrer to the complaint was overruled, but to the order overruling it the defendant did not except. The defendant answered, alleging that the document, the basis of the plaintiff's claim, was executed through error on his part and through fraud on the part of the plaintiff. A trial was had and judgment was entered for the plaintiff as prayed for in its complaint. The defendant moved for a new trial on the ground that the decision was not justified by the evidence, this motion was denied, to its denial the defendant excepted, and he has brought the case here for review.

Upon the questions of fact raised by the answer, the findings of the court below are sustained by the evidence, in no event they can be said to be plainly and manifestly against the weight of the evidence. Those findings include a finding that there was no fraud on the part of the plaintiff, no mistake on the part of the defendant, and that there was a sufficient consideration for the contract, As has been said, there was in the case to support all of these conclusions.

Upon one point, however, we think that the judgment was erroneous. The contract send upon was executed on the 11th day of June, 1901. By terms thereof the defendant promised to pay the plaintiff 8,000 pesos as follows: 500 pesos on the 30th of June, 1901, and the remainder at the rate of 100 pesos a month, payable on the 30th day of each month, until the entire 8,000 pesos was paid. The defendant paid 400 pesos and no more.

This suit was commenced on the 12th day of June, 1903. There was no provision in the contract by which, upon failure to pay one installment of the debt, the whole debt should thereupon become at once payable. We are of the opinion that the obligation can be enforced in this action for only the amount due and payable on the 12th day of June, 1903.

The court below gave no credit for the payment of 400 pesos admitted by the complaint to have been received by the plaintiff. It is allowed interest upon the entire debt from the 1st day of July, 1901. The contract does not provide for the payment of any interest. There is no provision in it declaring expressly that the failure to pay when due should put the debtor in default. There was therefore no default which would make him liable for interest until a demand was made. (Civil Code, art. 1100; Manresa, Com. on Civil Code, vol 8, p. 56.) The transaction did not constitute a mercantile loan and article 316 of the Code of Commerce is not applicable. There was no evidence any demand prior to the presentation of the complaint. The plaintiff is therefore entitled to interest only from the commencement of the action.

The judgment is set aside and the case is remanded to the court below with directions to determine the amount due in accordance with the views hereinbefore expressed and to enter judgment for such amount. No costs will be allowed to either party in this court. So ordered.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-22359             November 28, 1924

JULIO DE LA ROSA, plaintiff-appellant, vs.THE BANK OF THE PHILIPPINE ISLANDS, defendant-appellant.

Ramon Sotelo for plaintiff-appellant.Araneta and Zaragoza for defendant-appellant.

ROMUALDEZ, J.:

This action was instituted on June 11, 1923, by means of a complaint on the ground that the defendant bank started a contest of designs and plans for the construction of a building, announcing that the prizes would be awarded not later that on November 30, 1921; that the plaintiff took part in said contest, having performed work and incurred expenses for that purpose; that said bank refrained from naming judges and awarding the prizes in accordance with the conditions stipulated. The plaintiff prays that judgment be rendered in his favor for the sum of P30,000 as damages, with interest and the costs.

The defendant bank answered denying the facts contained in the second and following paragraphs of the complaint.

After the trial, the court rendered judgment ordering the defendant bank to pay the plaintiff an indemnity of P4,000 and the costs.

Both parties appealed from this judgment, the plaintiff assigning the following errors as committed by the trial court:

1. In holding that the sum of P4,000 was a just and reasonable indemnity to the plaintiff.2. In not ordering the defendant bank to pay the P30,000 prayed for in the complaint.

The defendant bank, in turn, assigned the following errors as committed by the trial court:

1. In holding that the date set for the award of prizes is essential in the contract.

2. In ordering that the sum of P4,000 be paid to the plaintiff.

The fundamental question on which the plaintiff's action depends is raised in the first assignment of error made by the defendant bank, or, whether or not the date set for the award of the prizes was essential in the contract and, therefore, whether or not the failure to award the prizes on said date was breach of contract on the part of the defendant.

First of all, we find that due to the fact that the bank started and advertised the said contest, offering prizes under certain conditions, and the plaintiff prepared, by labor and expense, and took part in said contest, the bank is bound to comply with the promise made in the rules and conditions prepared and advertised by it.

A binding obligation may even originate in advertisements addressed to the general public. (6 R. C. L., 600.)

It is an elementary principle that where a party publishes an offer to the world, and before it is withdrawn another acts upon it, the party making the offer is bound to perform his promise. This principle is frequently applied in cases of the offer of rewards, . . . (6 R. C. L., 607.)

What is to be determined is whether or not the defendant bank was in default in not awarding the prizes on November, 30, 1921.

The plaintiff contends that it was, according to paragraph 2 of article 1100 of the Civil Code, the complete text of which is as follows:

Persons obliged to deliver or to do something are in default from the moment the creditor demands of them judicially or extrajudicially the fulfillment of their obligation.

Nevertheless, the demand of the creditor shall not be necessary in order that the default may arise —

1. When the obligator or the law expressly so provides;

2. When by reason of the nature and circumstances of the obligation it shall appear that the designation of

the time at which the thing was to be delivered or the service rendered was the principal inducement to the creation of the obligation.

In reciprocal obligations neither of the obligators shall be in default if the other does not fulfill or does not submit to the fulfillment of that which is incumbent upon him. From the time on the obliges performs his obligation the default begins for the other party.

And the party plaintiff contends that the said date was the principal inducement because the current cost of concrete buildings at the time was fixed. The fixation of said price cannot be considered as the principal inducement of the contract, but undoubtedly only for the uniformity of the designs to be presented and to secure greater justice in the appreciation of the relative merits of each work submitted.

Such fixation of price, naturally, was not the principal inducement for the contestants. Neither was it for the bank which could not certain that said price would continue to be current price when it desired to construct the building designed.

We do not find sufficient reason for considering that the date set for the reward of the prizes was the principal inducement to the creation of the obligation. And, taking into consideration the criterion that must be followed in order to judge whether or not the time for the performance of the obligation is the principal inducement in a given case, we hold that it was not in the instant case.

The distinguished Manresa explains the matter in the following terms: 1awphi1.net

These words ("principal inducement" in paragraph 2 of article 1100 of the Civil Code) whose special meaning in connection with this article and the circumstances of each obligation does not permit of their being confused with the permanent general idea, and the distinct clearness of consideration of contracts, may give rise to serious doubts by reason of the breadth of expression, and must be judged in each particular case, it being impossible to give a general rule to explain them. It will for instance, be unquestionable that the hypothesis implied in this exception is affected when the matter, for instance, is

the delivery of things of the rendition of services to be employed in agricultural work, and the time of said work has been designated as the date for the fulfillment of the obligation; it will also exist when, for instance, fruits or any objects are to be delivered which might be used by the creditor in industrial operations having a determinate period for carrying them out and designated for their delivery; and, finally, it will also assist whenever, as in these cases, it appears that the obligation would not have been created for a date other than that fixed.

The defendant bank cannot be held to have been in default through the mere lapse of time. For this judicial or extrajudicial demand was necessary for the performance of the obligation, and it was not alleged here, nor does it appear that before bringing this action the plaintiff had ever demanded it from the defendant bank in any manner whatsoever. The defendant bank, therefore, was not in default.

The plaintiff's allegation that the defendant bank abstained from continuing the contest was not proven. On the contrary, it was proved, and so stated in the decision appealed from, that during the trial of this case in the Court of First Instance the designs were on the way to New York where they were sent to a technical committee.

This committee, according to the new evidence before us presented by the defendant bank and which we now hold admissibe and admit, was appointed by the defendant bank for the study and determination of the designs presented and entitled to the prizes advertised, and which rendered its report and awarded the prizes in accordance with the rules and conditions of the contract, except in regard to the date of such award of prizes which, as we have found, is not essential to the contract in question.

It appearing that the defendant bank was not in default it is needles to discuss the other questions raised, all depending upon the existence of said default.

We find the plaintiff has no cause of action in this case,

The judgment appealed from is reversed and the defendant is entirely absolved from the complaint, without any express finding as to costs. So ordered.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-10801             February 28, 1961

MARIANO RODRIGUEZ and MARINA RODRIGUEZ, plaintiffs-appellees, vs.PORFIRIO BELGICA and EMMA BELGICA, defendants-appellants.

Ignacio M. Orendain for plaintiffs-appellees.Arsenio M. Cabrera and Jose S. Fineza for defendants-appellants.

PAREDES, J.:

This was originally a partition case, instituted in the Court of First Instance of Rizal, Quezon City Branch. After a series of pleadings filed by the parties, and on one of the hearings held, the defendants made a verbal offer to compromise. Pursuant to the said offer, the plaintiffs, on August 27, 1955, filed a "Motion re Offer to Compromise." What transpired afterwards is best depicted in the following judgment of the lower court: .

"The above-entitled case was scheduled in the calendar of this Court today to consider the "Motion re Offer of Compromise" as a result of the pre-trial held by the parties and their respective Attorneys in this case.

The parties have discussed and considered the terms and conditions set forth in said Offer of Compromise submitted by the attorney for the plaintiffs and as a result thereof they have arrived at an amicable settlement, the terms of which were dictated in open court by the attorneys of both parties in the presence of their clients, with the exception of plaintiffs Mariano Rodriguez and his wife Marina Rodriguez who were represented by their son, Atty. Jose Rodriguez. The terms and conditions of said Compromise Agreement are as follows: .

Atty. Fineza:

If your Honor please, as regards the Motion Re Offer of Compromise presented by the

plaintiffs dated August 26, 1955, we wish to inform this Honorable Court that with regards to paragraph 1-A wherein the length of time given to the defendants to pay the plaintiffs of P35,000.00 is thirty (30) days, we request that said period be seventy (70) days counted from today, August 30, 1955. With regard to Paragraphs 1-B and 1-C, we are agreeable to the terms and conditions therein stated: Court: .

Any objection to the said counter proposal of the defendants? .

Atty. Orendain: .

We have no objection, Your Honor.

Court: - (To defendant Mr. Porfirio Belgica).

Mr. Porfirio Belgica, have you heard what Atty. Fineza, your lawyer, have proposed to the Court and are you agreeable to the same? .

Defendant Porfirio Belgica: .

Yes, Your Honor.

Atty. Fineza: .

Inasmuch as defendant Porfirio Belgica will have to negotiate a portion of the part pertaining to him to raise the amount of P35,000.00 with which he will pay the plaintiffs, we request that the plaintiffs make new selection of the portion they desire as per plan Exhibit E.

Atty. Orendain:.

According to my clients, Your Honor, I was instructed to choose the portion which is nearest to Quezon City, in other words, the portion in the bigger lot which is the Southern portion as appears in Exhibit E and which is encircled in red pencil, subject to relocation or readjustment after a survey is made.

That the plaintiffs will sign the necessary transfer of the 36% in favor of the defendants upon payment of the P35,000.00.

That the plaintiffs agree to grant authority to defendant Porfirio Belgica to negotiate the sale or mortgage of the 36% which is proposed to be conveyed to him, for the purpose of raising the P35,000.00 to be paid to the plaintiffs.

That the Motion re Offer of Compromise is hereby made a part and parcel of the Compromise Agreement, as modified.

Parties agree that in the event the defendants fail to pay to the plaintiffs said amount of P35,000.00 within the period above fixed or stipulated, the plaintiffs will automatically be the owners of the 36% of the two parcels of land, and that the 14% pertaining to the defendants will be taken from the portion towards Caloocan, or more particularly in the portion encircled in blue pencil, subject to the survey and relocation of a surveyor. Court: .

Make of record that this Compromise Agreement was made in open court in the presence of Atty. Jose Rodriguez, who is the son of the plaintiff Mariano Rodriguez, their attorney Mr. Ignacio M. Orendain, the defendant Mr. Porfirio Belgica and his counsel Atty. Jose S. Fineza.

Parties respectfully pray this Honorable Court to render judgment in accordance therewith without costs.

The transcript of the notes taken by the Stenographer of the proceedings taken by the parties before they arrived at an amicable settlement was signed by the parties and their respective attorneys and submitted to this Court for corresponding decision.

IN VIEW OF THE FOREGOING, judgment is hereby rendered approving en toto  the foregoing Compromise Agreement and the parties are hereby ordered to abide by and comply with the terms and conditions contained in said Compromise Agreement, without pronouncement as to costs.

On September 3, 1955, the defendants filed a Motion for Withdrawal of Exhibits, particularly the Certificates of Titles covering the lands, subject matter of the present controversy. Among the reasons given in the motion was "the defendants

have already taken steps to effect that partition of the property for the purpose of delimiting the respectively portion which would appertain to each, which delimitation has to be effected in order that defendants may have the opportunity of negotiating their half or any portion thereof to raise the P35,000.00 which he undertook to pay to plaintiffs. The above motion bore the conformity of counsel for the plaintiffs.

On November 19, 1955, after the lapse of the seventy (70) day period stipulated in the compromise agreement, and upon the failure of the defendants to pay, the plaintiffs presented a motion praying that the defendants be ordered to deliver to the plaintiffs the Certificates of the Titles so that 14% of the property pertaining to the defendant could be segregated. An opposition was registered by the defendants, contending that the inability to meet the obligation to pay the P35,000.00 was due to the deliberate refusal of the plaintiffs to grant the authority to defendant Porfirio Belgica to negotiate the sale or mortgage of the 36%; and that since the decision had created reciprocal obligations, the refusal or failure on the part of one to comply did not make the other in default. In the opposition, the defendants prayed that the plaintiffs be ordered to grant defendant Porfirio Belgica the authority to negotiate the sale or mortgage of the 36%. the lower court, On November 26, 1955, ordered the defendants to surrender to the Court the TCT's they withdrew, not latter than December 1, 1955. On this date the defendants filed a "Motion to Compel Plaintiffs to Comply with the Conditions of the Judgment", reiterating in substance, the reason they invoked in their previous oppositions. On December 15, 1955, the trial court acting on the motion of the defendants, handed down the following order, to wit:

"defendant Belgica's contention is that the plaintiffs Mariano Rodriguez has refused to grant the authority adverted to. Said defendant, however, has not done anything, nor has filed any petition with the Court regarding the alleged refusal of the plaintiff Rodriguez to grant such authority before the expiration of the 70-day period fixed by the parties within which to pay the said amount of P35,000.00. The petition to compel the plaintiffs to comply with the conditions of the judgment, namely to command said plaintiffs to grant the authority above referred to was only filed on December 1, 1955, or after the expiration of 90 days. In the opinion of the Court, the decision

rendered in this case has already become final and executory under the terms and conditions stipulated by the parties and upon which said decision was based.

IN VIEW OF THE FOREGOING, the said motion to compel the plaintiffs to comply with the condition embodied in the judgment is hereby DENIED.".

The above ordered is now the subject to the present appeal, appellants contending in their lone assignment of error that the lower court erred "in denying the motion of December 1, 1955 (to compel the plaintiffs to grant the authority), on the ground that because of the failure of defendants-appelants to pay the plaintiffs-appelees the amount P35,000.00 within the period of seventy days, the judgment of August 30,1955, has already become due and executory.".

Whether the denial of the motion of compel the plaintiffs to grant the authority is proper and legal, would seem to be the dominant issue..

On the plaintiffs-appellees was impose the obligation of granting to defendants-appellants the requisite authority to negotiate either the sale or mortgage of the 36% interest in the property. This is understandable, because on the face of the two certificates of the title covering the properties, defendants owned only 14%, while plaintiffs owned 86%. Without such authority executed by plaintiffs in favor of the defendants, it was difficult, not to say impossible for the latter to affect a negotiation. This the plaintiffs the fully knew, because in the compromise, they acknowledged that the amount of P35,000.00 due to them would be paid within 70 days from the August 30, 1953, with money to be delivered from the sale of mortgage of the property. It was, therefore, incumbent upon the plaintiffs "to grant authority" to defendants to negotiate the sale or mortgage of the 36% of the property. Considering that the reciprocal obligation has been established by the compromise agreement, the sequence in which the reciprocal obligations of the parties are to be performed, is quite clear. The giving of the authority to sell or mortgage precedes the obligation of the defendants to pay P35,000.00(Martinez vs. Cavives, 25 Phil. 581). Until this authority is granted by the plaintiff, the 70 day period for payment will not commence to run. The plaintiffs insinuated that defendant did not ask for the authority. There was, however the statement or allegation by the defendants to the effects that they made verbal request for such authority but

plaintiffs refused to give, a statement or allegation discredited by the lower court. But even without a request, from the very nature of the obligation assumed by plaintiffs, demand by defendants that it be performed, was not necessary (Article 1169, par. 2, Civil Code).

It is true that defendants' petition to compel the plaintiffs to grant the authority repeatedly mentioned, was only filed on December 1, 1955, after the expiration of the 70-day period. It should, however, be observed that the actuations or acts of the defendants have always been lulled by a sense of an honest but insecure misunderstanding, as to the scope and extent of the terms and conditions of the compromise. To show that defendants had not abandoned their obligation to pay the sum of P35,000.00, on September 3, 1955, within the 70-day period which expired on November 8, 1955, they filed a motion to withdraw documents and certificates of title to delimit the respective portions, in order that they (defendants) might have an opportunity of negotiating one-half or any portion to raise P35,000.00 to which motion the plaintiffs agreed. While waiting for the grant of authority to descend, like manna from Heaven, the defendants were surprised to receive, on November 19, 1955, plaintiffs' motion to have the titles returned so that the defendants' 14% could be segregated, as they (plaintiffs) wanted to remain with the 86% of the properties.

The lower court and with it, the plaintiffs-appellees had indulged in fine technicalities which in this particular case, would work injustice to the defendants-appellants, more than anything else. The compromise agreement being onerous the doubt should be settled in favor of the greatest reciprocity of interests. Without the authority in question the obligation of the defendants to pay the plaintiffs the sum of P35,000.00 cannot be considered as having matured, and the lapse of the 70-day period fixed in the decision can not be adjudged as having resulted in the forfeiture of their right to repurchase their 36% interest in the properties (Price, Inc. v. Rilloraza, et al.. No. L-8253, May 25, 1955).

The claim of the appellees that the appellants failed to comply with their initial obligation to delimit the property, as stated by them in their motion to withdraw, is not supported by the evidence. The delimitation or segregation of the property to be sold or mortgaged which appellants should have done first so that the authority could have been granted, had long been accomplished. This is clear

from the words of appellees' counsel when he said, "According to my clients, Your Honor, I was instructed to choose the portion which is nearest to Quezon City . . .".

In view hereof, the resolution of the lower court dated December 15, 1955, is reversed, and another entered, ordering the plaintiffs-appellees to execute in favor of the defendants-appellants the proper authority to sell or mortgage 36% of the properties in litigation within 30 days from notice of this decision and further directing the defendants-appellants to pay unto the plaintiffs-appellees the sum of P35,000.00 within 30 days from the date such authority is granted. Without special pronouncement as to costs.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-4874             March 2, 1909MARIANO VELOSO, ET AL., plaintiffs-appellees, vs.ANICETA FONTANOSA, ET AL., defendants-appellants.Martin M. Levering for appellants. Rodriguez and Del Rosario for appellees.ARELLANO, C.J.:

This case was brought by means of a bill of exceptions to this court for a revision of the facts and evidence. The appeal being heard it appears:

That a complaint was filed with the Court of First Instance of Cebu as follows: (1) That Mariano Veloso, Damiana Veloso, and Melchor Veloso are the sole lawful heirs of Gavino Veloso and Buenaventura Veloso, their father and brother respectively; (2) that the defendants are Aniceta Fontanosa, as widow of Roberto Ancajas, and Florentina, Leona, Maria, Juan, Romualda, Vicenta, and Felix, all of the surname of Ancajas, the lawful children of the deceased Roberto, and Estefania Fontanosa, mother and legal guardian of the minor Jose Ancajas; (3) that at he death of Gavino Veloso, Roberto Ancajas owed him the sum of 5,065 pesos which he had borrowed prior to the year 1881; (4) that in the apportionment of the estate, this debt of 5,065 pesos went to Buenaventura Veloso as his portion; (5) that in the year 1882, Roberto Ancajas, after having acknowledged the transfer of his indebtedness by inheritance to Buenaventura Veloso, continued to receive sums of money from the latter on the same conditions, that is, as loans, and bound himself to make annual payments in sugar; (6) that on the 11th of October, 1883, the debt of Roberto Ancajas amounted to 10,449.18 pesos, as shown by a liquidation of accounts made between them and ratified by Roberto Ancajas in the said month on October, 1883; (7) that on August 4, 1884, this balance amounted to 12,199.65 pesos; (8) that on May 31, 1887, it rose to 14,439.40 pesos, which sum, however, was reduced to 12,365.20 pesos by the payment of 2,074.20 pesos on account; (9) that up to the year 1893 the defendants made payments amounting to 642.27 pesos which reduced the amount owing to 11,722.43 pesos; (10) that on the death of Buenaventura Veloso, the defendants, as his sole and lawful heirs, inherited, and that same

year divided between them all his property with the exception of the above-mentioned credit, which is at present held pro indiviso between them, and they, as the lawful heirs of Buenaventura Veloso, the creditor, have repeatedly called upon the defendants to pay the said credit, but the latter have constantly refused to do so, thus having rise to the filing of the complaint; (11) that on account of their delinquency in payment they have caused the plaintiffs damages to the value of 14,068.48 pesos; they therefore asked the court below to sentence the defendants to pay both sums, with legal interest thereon from the time they ceased to make payments, and the costs.

That the attorneys who answered the complaint, subscribed their answer: "Attorneys for Aniceta Fontanosa, Maria, Juana, Romualda, Vicenta, and Felix, all surnamed Ancajas, and for Estefania Fontanosa," having previously signed the receipt for the complaint in this manner: "Attorneys for the defendants, with the exception of Florentina and Leona Ancajas."

That in the answer, in addition to the general of all the allegations in the complaint, there was put forward as special defense: (1) That this supposed right of action had prescribed before the action was instituted; (2) that Romualda Ancajas and some of the other general heirs of Roberto Ancajas were not of age, at the time of the death of Roberto Ancajas, nor at the time of the supposed acceptance of the inheritance, and that there was no judicial intervention in said acceptance.

The trial judge in his findings of fact considers that, among other allegations of the complaint, the following have been proven:

That Aniceta Ancajas is the wife of the said deceased and that with the exception of the minor Jose Ancajas, who is represented in these proceedings by his legal guardian, Estefania Fontanosa, and is the grandchild of the said deceased Roberto Ancajas, most of the defendants are his children; that as heirs the said defendants took possession of all the property of the said deceased after his death, and at the present time are in possession as the undivided owners thereof. (B. of E., 12.)

And as conclusions of law he says:

That the defendants being the heirs of Roberto Ancajas, deceased, and having

taken possession of the latter's property from the time of his death to the present time, as heirs of the said deceased, and exercising over the same all those acts which show ownership, which, if they were not the heirs, they could not exercised, they have purely and simply accepted the inheritance from their principal, and consequently, under article 1003 of the Civil Code, they are liable for the encumbrances with which the heritage is charged, not only with the property of their principal but also with their own; that the defendants, as heirs of the late Roberto Ancajas, having acknowledged and admitted the latter's debt to Buenaventura Veloso, the principal of the plaintiffs, which acknowledgment was made expressly and by means of the payments made by them to the creditor, have contracted the express obligation to pay it under the same terms as their aforesaid principal; that the defendants are liable for the payment of the sum of P11,722.43 to the plaintiffs, in their capacity of heirs, to Buenaventura Veloso, for the debt contracted in his favor by their late principal Roberto Ancajas, and which debt was acknowledged and admitted by them; that as the defendants have acknowledged and admitted the said debt, toward the settlement of which they made the last payment in the year 1893, the right of action for its recovery, by article 1964 of the Civil Code, and in accordance with article 943 of the Code of Commerce, prescribes after the lapse of fifteen years, and inasmuch as the period fifteen years from said date until the time the complaint herein was presented, has not expired, the conclusion is that the said action is enforceable and should be made effective; that, it being proven that Buenaventura Veloso, the plaintiffs' principal, had brought suit against the defendants in the year 1896 for the payment of said debt, it must be concluded that the prescription of the action for recovery has been legally interrupted, in conformity with the provisions of article 1973 of the Civil Code; that the debt of P11,722.43 is a credit which originated from a mercantile contract, and as the interest due the plaintiffs can not be determined, they are entitled to recover the legal interest on said amount from the defendants at the rate of 6 per cent per annum from the month of September, 1893, until the full payment thereof.

The defendants appealed from this judgment of the lower court, alleging the following errors:

1. The admission of the books marked as Exhibits A, B, and C as evidence, and the overruling of the motion for their exclusion.

2. The admission of Exhibits D, E, F, and G as evidence.

3. The finding that the defendants are the heirs of the late Roberto Ancajas, and that they purely and simply accepted the inheritance from the said deceased.

4. The overruling of the motion for a new trial.

With regard to the first and second errors, charged against the admission of the documentary evidence of the appellees, the rulings of the court below are in accordance with the law. The books marked as Exhibits A and B simply serve to show the origin and progress of the debt, and they may be ignored from the moment there was entered on folio 88 of the book marked Exhibit C a debit and credit account, of which Exhibit E is an exact copy, and which shows the account maintained between Buenaventura Veloso and Roberto Ancajas as accepted by the latter and signed by him in proof of his conformity with the balance of P10,449.18 appearing therein. This acknowledgment by their principal must be decisive as to the heirs, and it must be held to be proven that at least they are indebted in said sum of P10,449.18, since against the admission and validity of Exhibit E nothing has been alleged by the appellants in this instance.

As the successive liquidations which the trial court took into consideration until reaching the one at bar are not specifically impugned, either in this instance or in the court below, they are not now, therefore, subject to revision by this court.

As to the prescription of the right of action which is subsidiarily alleged in order to impugn the obligation which, according to the judgment appealed from still exists, the appellants say that "the debt had prescribed so far as the defendants are concerned, with the questionable exception of the defendant Aniceta Fontanosa, widow of Roberto Ancajas, because it appears that said Aniceta Fontanosa was the only person who made any payment, and it is not possible that an act performed by one of the defendants can prejudice the legal rights of the others." (Brief, 5.)

The court below considered as proven: (1) The payments made by the heirs after the death of Roberto Ancajas, the last of which was in 1893; (2) a judicial complaint filed against these same defendants in 1896. From these facts the court below makes the following deductions: First, that the right of action that existed in 1893 to demand the settlement of the debt which, by article 1964 of the Civil Code should prescribe at the expiration of fifteen years, had not prescribed in 1906, the time of filing the present complaint. Second, that in consequence of the filing of the said complaint in 1896, the running of the statute was interrupted, as prescribed by article 1973 of the Civil Code.

It has been proven that on the 11th of October, 1883, Roberto Ancajas acknowledged that a balance of 10,449.18 pesos was standing against him; that since that time he has received and paid amounts in connection with said obligation, the last payment being made "shortly before his death in 1888," as stated by the appellants in their brief on page 5, that is, on May 5, 1888, as appears at folio 223 of the book offered in evidence by the appellees as Exhibit C. It therefore follows that in computing the time for prescription from said date it would be necessary to take into consideration the fact that the Civil Code was not yet in force, as it did not become effective until December 8, 1889, and that, at that time, the period for the prescription of personal actions, such as the one at issue, by law 5, title 8, book 11, of the Novisima Recopilacion, was twenty years, which period should expire in 1908, so that when the complaint herein was presented in 1906, the term had not expired; therefore, we have not to consider the legal interruption of a term which has not yet expired, as in the present case the question is one of a period of prescription that commenced before the enforcement of the Civil Code, which period, by the terms of the article 1939 of the said code, must be governed by the laws then in force.

The Civil Code would only be applicable, if the whole period required thereby for prescription had transpired after it was put in force, notwithstanding the fact that, under the old laws, a longer lapse of time was necessary (art. 1939, Civil Code). And since the 8th of December, 1889, when the Civil Code went into effect, the fifteen years required by the provisions thereof for the prescription of the right of personal actions have certainly elapsed. But in the present case the court below has considered two forms of interruption of prescription of the right, namely, the exercise thereof before the courts, and the act of the acknowledgment of the debt by the

debtor. The said court found that payments were made in the years 1891, 1892, and 1893 by the widow of the late Roberto Ancajas, and the period for the prescription must be counted from the last-mentioned date, because the action could only have been exercised thereafter. It is evident that since then the term required by article 1964 of the Civil Code has not expired, and supposing that such payments had not been made, the court below considered as proven that in 1896, an action was brought for the recovery of this debt, and against this consideration no error of law or fact has been assigned. No judgment was rendered by reason of the revolution that took place in 1898, and the record of the case was lost through the same cause; facts which were agreed to between the contending parties at this trial. And in conformity with the decision of the supreme court of Spain of July 5, 1904, which interprets the right sense of the aforesaid article 1973, the action then instituted and that now brought are one and the same.

Against the finding of the court below as to the first method of interruption of the prescription, in so far as it considered that the payments made after the death of Roberto Ancajas by his widow, Aniceta Fontanosa, were an acknowledgment of the debt, the appellants allege "that an act performed by one of the defendants can not prejudice the legal rights of the others." But, in accordance with article 1974, interruption of prescription of rights of action in all kind of obligations of the heirs of the debtor, benefits or prejudices them all alike, inasmuch as each and all of them represent the principal, and they jointly succeed him in his rights and obligations.

For all the above reasons the judgment entered by the trial court "That payment shall be made to plaintiffs of the sum of P11,722.43 with costs," is proper, for the reason that it is in accordance with the law and the merits of the case.

But that the above-stated amount shall be in the Philippine pesos "(P11,722.43)," as determined in the judgment, is not in accordance with the law or the merits. Even the latest sum loaned on the 31st of May, 1887, according to the last liquidation considered in point 8 of the complaint, was that current at the time, and certainly the unit was not then the Philippine peso.

Neither is the sentence contained in the judgment appealed from, that "Legal interest on the said sum at the rate of 6 per cent per annum shall be payable

from the month of September, 1893," in accordance with the law. It is proper to sentence the defendants to pay the legal interest of 6 per cent per annum by reason of the default incurred by the heirs of Ancajas (art. 1108, Civil Code), but such default can not date back of September, 1893, that is, from the time of the last payment made by them or by Aniceta Fontanosa. Article 1100 of the Civil Code reads:

Persons obliged . . . are in default from the moment when the creditor demands the fulfillment of their obligation, judicially or extrajudicially,

And the judicial demand for the fulfillment of said obligation was only made in 1896; hence, as the date of the complaint interposed in that year has not been fixed, the next amount claimed therein should only commence to bear legal interest from the latter part of 1896, or rather from the beginning of 1897. In a decision of December 3, 1902, the supreme court of Spain held:

That it is a principle of law, acknowledged and sanctioned by article 1100, in relation to article 1108 of the Civil Code, that interest upon default only becomes due from the time of the judicial or extrajudicial notice by the creditor to the debtor, unless otherwise expressly provided by law, or by virtue of a contract, or on account of special circumstances depending upon the nature of the obligation.

As to the third and fourth errors, it is true that, in view of the evidence submitted with the bill of exceptions, and because all the facts of the complaint have been generally denied by the defendants, the following facts, which are stated in the judgment as resulting from the record, have not been proven:

That the other defendants, apart from the widow of Ancajas, are the children of the latter, and that Jose Ancajas is his grandchild, all of them being his only heirs; that Estefania Fontanosa is the legal guardian of the minor Jose Ancajas; that as such heirs they took possession of all the property of the deceased and hold the same pro indiviso.

And as a natural consequence, there is no ground for the most important conclusion of law in the decision:

That, inasmuch as they took possession of the property of the late Roberto Ancajas, and performed all those acts of ownership thereof which, without being heirs they could not have performed, they purely and simply accepted the inheritance from their principal, and have ever since become liable for his debt, not only with the property they received from him, but also with their own property.

Florentina Ancajas is the only person who appeared as the daughter of Roberto Ancajas and testified as a witness for the plaintiffs, but it does not appear that she, or another of the name of Leona (often called León), have ever been summoned and cited to appear or that they failed to answer the complaint. It is certain that they have not answered it. From the testimony of this witness it appears that it was Aniceta Fontanosa who, after the death of her husband, Roberto Ancajas, made the three last payments on account of the latter's debt.

Thus, it is not proper that a sentence, rightly entered against the heirs or successors of Roberto Ancajas, should particularly fall upon the persons named in the complaint, and to whom the judgment refers, for no other reason than that they were designated as such heirs in the complaint.

For the reasons above set forth we hold that the net amount due to the plaintiffs by such persons as may turn out to be the lawful heirs of Roberto Ancajas, in addition to those who, apart from the minor Jose Ancajas, appeared in this suit, has been rightly determined, that is, the sum of 11,722.43 pesos, with legal interest thereon at the rate of 6 per cent, from the time the suit was filed in 1896, with the costs of the first instance against the defendants who answered the complaint. The judgment appealed from is hereby set aside in order that a new trial may he held for the purpose of properly determining who are the heirs against whom should be directed the order of payment, and what were the acts and form of acceptance of the inheritance, and of the possession and method of possession of the property remaining at the death of Roberto Ancajas; after which let a new judgment be rendered which shall include a finding of the equivalent of the amount owing in Philippine currency at the time of such decision. No special ruling is made as to the costs in this instance. So ordered.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

 

G.R. No. 118126 March 4, 1996

TRANS-ASIA SHIPPING LINES, INC., petitioner,

vs.

COURT OF APPEALS and ATTY. RENATO T. ARROYO, respondents.

 

DAVIDE, JR., J.:p

As formulated by the petitioner, the issue in this petition for review on certiorari under Rule 45 of the Rules of Court is as follows:

In case of interruption of a vessel's voyage and the consequent delay in that vessel's arrival at its port of destination, is the right of a passenger affected thereby to be determined and governed by the vague Civil Code provision on common carriers, or shall it be, in the absence of a specific provision thereongoverned by Art. 698 of the Code of Commerce? 1

The petitioner considers it a "novel question of law."

Upon a closer evaluation, however, of the challenged decision of the Court of Appeals of 23 November 1994, 2 vis-a-vis, the decision of 29 June 1992 in Civil Case No. 91-491 of the Regional Trial Court (RTC) of Cagayan de Oro City, Branch 24, 3 as well as the allegations and arguments adduced by the parties, we find the petitioner's formulation of the issue imprecise. As this Court sees it, what stands for resolution is a common carrier's liability for damages to a passenger who disembarked from the vessel upon its return to the port of origin, after it suffered engine trouble and had to stop at sea, having commenced the contracted voyage on one engine.

The antecedents are summarized by the Court of Appeals as follows:

Plaintiff [herein private respondent Atty. Renato Arroyo], a public attorney, bought a ticket [from] defendant [herein petitioner], a corporation engaged in . . . inter-island shipping, for the voyage of M/V Asia Thailand vessel to Cagayan de Oro City from Cebu City on November 12, 1991.

At around 5:30 in the evening of November 12, 1991, plaintiff boarded the M/V Asia Thailand vessel. At that instance, plaintiff noticed that some repair works [sic] were being undertaken on the engine of the vessel. The vessel departed at around 11:00 in the evening with only one (1) engine running.

After an hour of slow voyage, the vessel stopped near Kawit Island and dropped its anchor thereat. After half an hour of stillness, some passengers demanded that they should be allowed to return to Cebu City for they were no longer willing to continue their voyage to, Cagayan de Oro City. The captain acceeded [sic] to their request and thus the vessel headed back to Cebu City.

At Cebu City, plaintiff together with the other passengers who requested to be brought back to Cebu City, were allowed to disembark. Thereafter, the vessel proceeded to Cagayan de Oro City. Plaintiff, the next day, boarded the M/V Asia Japan for its voyage to Cagayan de Oro City, likewise a vessel of defendant.

On account of this failure of defendant to transport him to the place of destination on November 12, 1991, plaintiff filed before the trial court a complaint for damages against defendant. 4

In his complaint, docketed as Civil Case No. 91-491, plaintiff (hereinafter private respondent)

alleged that the engines of the M/V Asia Thailand conked out in the open sea, and for more than an hour it was stalled and at the mercy of the waves, thus causing fear in the passengers. It sailed back to Cebu City after it regained power, but for unexplained reasons, the passengers, including the private respondent, were arrogantly told to disembark without the necessary precautions against possible injury to them. They were thus unceremoniously dumped, which only exacerbated the private respondent's mental distress. He further alleged that by reason of the petitioner's wanton, reckless, and willful acts, he was unnecessarily exposed to danger and, having been stranded in Cebu City for a day, incurred additional expenses and loss of income. He then prayed that he be awarded P1,100.00, P50,000.00, and P25,000.00 as compensatory, moral; and exemplary damages, respectively. 5

In his pre-trial brief, the private respondent asserted that his complaint was "an action for damages arising from bad faith, breach of contract and from tort," with the former arising from the petitioner's "failure to carry [him] to his place of destination as contracted," while the latter from the "conduct of the [petitioner] resulting [in] the infliction of emotional distress" to the private respondent. 6

After due trial, the trial court rendered its decision 7 and ruled that the action was only for breach of contract, with Articles 1170, 1172, and 1173 of the Civil Code as applicable law — not Article 2180 of the same Code. It was of the opinion that Article 1170 made a person liable for damages if, in the performance of his obligation, he was guilty of fraud, negligence, or delay, or in any manner contravened the tenor thereof; moreover, pursuant to Article 2201 of the same Code, to be entitled to damages, the non-performance of the obligation must have been tainted not only by fraud, negligence, or delay, but also bad faith, malice, and wanton attitude. It then disposed of the case as follows:

WHEREFORE, it not appearing from the evidence that plaintiff was left in the Port of Cebu because of the fault, negligence, malice or wanton attitude of defendant's employees, the complaint is DISMISSED. Defendant's counterclaim is likewise dismissed it not appearing also that filing of the case by plaintiff was motivated by malice or bad faith. 8

The trial court made the following findings to support its disposition:

In the light of the evidence adduced by the parties and of the above provisions of the New Civil Code, the issue to be resolved, in the resolution of this case is whether or not, defendant thru its employees in [sic] the night of November 12, 1991, committed fraud, negligence, bad faith or malice when it left plaintiff in the Port of Cebu when it sailed back to Cagayan de Oro City after it has [sic] returned from Kawit Island.

Evaluation of the evidence of the parties tended to show nothing that defendant committed fraud. As early as 3:00 p.m. of November 12, 1991, defendant did not hide the fact that the cylinder head cracked. Plaintiff even saw during its repair. If he had doubts as to the vessel's capacity to sail, he had time yet to take another boat. The ticket could be returned to defendant and corresponding cash [would] be returned to him.

Neither could negligence, bad faith or malice on the part of defendant be inferred from the evidence of the parties. When the boat arrived at [the] Port of Cebu after it returned from Kawit Island, there was an announcement that passengers who would like to disembark were given ten (10) minutes only to do so. By this announcement, it could be inferred that the boat will [sic] proceed to Cagayan de Oro City. If plaintiff entertained doubts, he should have asked a member of the crew of the boat or better still, the captain of the boat. But as admitted by him, he was of the impression only that the boat will not proceed to Cagayan de Oro that evening so he disembarked. He was instead, the ones [sic] negligent. Had he been prudent, with the announcement that those who will disembark were given ten minutes only, he should have lingered a little by staying in his cot and inquired whether the boat will proceed to Cagayan de Oro City or

not. Defendant cannot be expected to be telling [sic] the reasons to each passenger. Announcement by microphone was enough.

The court is inclined to believe that the story of defendant that the boat returned to the Port of Cebu because of the request of the passengers in view of the waves. That it did not return because of the defective engines as shown by the fact that fifteen (15) minutes after the boat docked [at] the Port of Cebu and those who wanted to proceed to Cagayan de Oro disembarked, it left for Cagayan de Oro City.

The defendant got nothing when the boat returned to Cebu to let those who did not want to proceed to Cagayan de Oro City including plaintiff disembarked. On the contrary, this would mean its loss instead because it will have to refund their tickets or they will use it the next trip without paying anymore. It is hard therefore, to imagine how defendant by leaving plaintiff in Cebu could have acted in bad faith, negligently, wantonly and with malice.

If plaintiff, therefore, was not able to [m]ake the trip that night of November 12, 1991, it was not because defendant maliciously did it to exclude him [from] the trip. If he was left, it was because of his fault or negligence. 9

Unsatisfied, the private respondent appealed to the Court of Appeals (CA-G.R. CV No. 39901) and submitted for its determination the following assignment of errors: (1) the trial court erred in not finding that the defendant-appellee was guilty of fraud, delay, negligence, and bad faith; and (2) the trial court. erred in not awarding moral and exemplary damages. 10

In its decision of 23 November 1994, 11 the Court of Appeals reversed the trial court's decision by applying Article 1755 in relation to Articles 2201, 2208, 2217, and 2232 of the Civil Code and, accordingly, awarded compensatory, moral, and exemplary damages as follows:

WHEREFORE, premises considered, the appealed decision is hereby REVERSED and SET ASIDE and another one is rendered ordering defendant-appellee to pay plaintiff-appellant:

1. P20,000.00 as moral damages;

2. P10,000.00 as exemplary damages;

3. P5,000.00 as attorney's fees;

4. Cost of suit.

SO ORDERED. 12

It did not, however, allow the grant of damages for the delay in the performance of the petitioner's obligation as the requirement of demand set forth in Article 1169 of the Civil Code had not been met by the private respondent. Besides, it found that the private respondent offered no evidence to prove that his contract of carriage with the petitioner provided for liability in case of delay in departure, nor that a designation of the time of departure was the controlling motive for the establishment of the contract. On the latter, the court a quo observed that the private respondent even admitted he was unaware of the vessel's departure time, and it was only when he boarded the vessel that he became aware of such. Finally, the respondent Court found no reasonable basis for the private respondent's belief that demand was useless because the petitioner had rendered it beyond its power to perform its obligation; on the contrary, he even admitted that the petitioner had been assuring the passengers that the vessel would leave on time, and that it could still perform its obligation to transport them as scheduled.

To justify its award of damages, the Court of Appeals ratiocinated as follows:

It is an established and admitted fact that the vessel before the voyage had undergone some repair work on the cylinder head of the engine. It is likewise admitted by defendant-appellee that it left the port of Cebu City with only one engine running. Defendant-appellee averred:

. . . The dropping of the vessel's anchor after running slowly on only one engine when it departed earlier must have alarmed some nervous passengers . . .

The entries in the logbook which defendant-appellee itself offered as evidence categorically stated therein that the vessel stopped at Kawit Island because of engine trouble. It reads:

2330 HRS STBD ENGINE' EMERGENCY STOP

2350 HRS DROP ANCHOR DUE TO ENGINE TROUBLE, 2 ENGINE STOP.

The stoppage was not to start and synchronized [sic] the engines of the vessel as claimed by defendant-appellee. It was because one of the engines of the vessel broke down; it was because of the disability of the vessel which from the very beginning of the voyage was known to defendant-appellee.

Defendant-appellee from the very start of the voyage knew for a fact that the vessel was not yet in its sailing condition because the second engine was still being repaired. Inspite of this knowledge, defendant-appellee still proceeded to sail with only one engine running.

Defendant-appellee at that instant failed to exercise the diligence which all common carriers should exercise in transporting or carrying passengers. The law does not merely require extraordinary diligence in the performance of the obligation. The law mandates that common carrier[s] should exercise utmost diligence  the transport of passengers.

Article 1755 of the New Civil Code provides:

Art. 1755. A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances.

Utmost diligence of a VERY CAUTIOUS person dictates that defendant-appellee should have pursued the voyage only when its vessel was already fit to sail. Defendant-appellee should have made certain that the vessel [could] complete the voyage before starting [to] sail. Anything less than this, the vessel [could not] sail . . . with so many passengers on board it.

However, defendant-appellant [sic] in complete disregard of the safety of the passengers, chose to proceed with its voyage even if only one engine was running as the second engine was still being repaired during the voyage. Defendant-appellee disregarded the not very remote possibility that because of the disability of the vessel, other problems might occur which would endanger the lives of the passengers sailing with a disabled vessel.

As expected, . . . engine trouble occurred. Fortunate[ly] for defendant-appellee, such trouble only necessitated the stoppage of the vessel and did not cause the vessel to capsize. No wonder why some passengers requested to be brought back to Cebu City. Common carriers which are mandated to exercise utmost diligence should not be taking these risks.

On this premise, plaintiff-appellant should not be faulted why he chose

to disembark from the vessel with the other passengers when it returned back to Cebu City. Defendant-appellee may call him a very "panicky passenger" or a "nervous person", but this will not relieve defendant-appellee from the liability it incurred for its failure to exercise utmost diligence. 13

xxx xxx xxx

As to the second assigned error, we find that plaintiff-appellant is entitled to the award of moral and exemplary damages for the breach committed by defendant-appellee.

As discussed, defendant-appellee in sailing to Cagayan de Oro City with only one engine and with full knowledge of the true condition of the vessel, acted. in bad faith with malice, in complete disregard for the safety of the passengers and only for its own personal advancement/interest.

The Civil Code provides:

Art. 2201.

xxx xxx xxx

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

Plaintiff-appellant is entitled to moral damages for the mental anguish, fright and serious anxiety he suffered during the voyage when the vessel's engine broke down and when he disembarked from the vessel during the wee hours of the morning at Cebu City when it returned. 14

Moral damages are recoverable in a damage suit predicated upon a breach of contract of carriage where it is proved that the carrier was guilty of fraud or bad faith even if death does not result. 15

Fraud and bad faith by defendant-appellee having been established, the award of moral damages is in order.16

To serve as a deterrent to the commission of similar acts in the future, exemplary damages should be imposed upon defendant-appellee. 17 Exemplary damages are designed by our civil law to permit the courts to reshape behavior that is socially deleterious in its consequence by creating . . . negative incentives or deterrents against such behavior. 18

Moral damages having been awarded, exemplary damages maybe properly awarded. When entitlement to moral damages has been established, the award of exemplary damages is proper. 19

The petitioner then instituted this petition and submitted the question of law earlier adverted to.

Undoubtedly, there was, between the petitioner and the private respondent, a contract of common carriage. The laws of primary application then are the provisions on common carriers under Section 4, Chapter 3, Title VIII, Book IV of the Civil Code, while for all other matters not regulated thereby, the Code of Commerce and special laws. 20

Under Article 1733 of the Civil Code, the petitioner was bound to observe extraordinary diligence in ensuring the safety of the private respondent. That meant that the petitioner was, pursuant to Article 1755 of the said Code, bound to carry the private respondent safely as far as human care and foresight could provide, using the utmost diligence of very cautious persons, with due regard for all the circumstances. In this case, we are in full accord with the Court of Appeals that the petitioner failed to discharge this obligation.

Before commencing the contracted voyage, the petitioner undertook some repairs on the cylinder

head of one of the vessel's engines. But even before it could finish these repairs, it allowed the vessel to leave the port of origin on only one functioning engine, instead of two. Moreover, even the lone functioning engine was not in perfect condition as sometime after it had run its course, it conked out. This caused the vessel to stop and remain a drift at sea, thus in order to prevent the ship from capsizing, it had to drop anchor. Plainly, the vessel was unseaworthy even before the voyage began. For a vessel to be seaworthy, it must be adequately equipped for the voyage and manned with a sufficient number of competent officers and crew. 21 The failure of a common carrier to maintain in seaworthy condition its vessel involved in a contract of carriage is a clear breach of its duty prescribed in Article 1755 of the Civil Code.

As to its liability for damages to the private respondent, Article 1764 of the Civil Code expressly provides:

Art. 1764. Damages in cases comprised in this Section shall be awarded in accordance with Title XVIII of this Book, concerning Damages. Article 2206 shall also apply to the death of a passenger caused by the breach of contract by common carrier.

The damages comprised in Title XVIII of the Civil Code are actual or compensatory, moral, nominal, temperate or moderate, liquidated, and exemplary.

In his complaint, the private respondent claims actual or compensatory, moral, and exemplary damages.

Actual or compensatory damages represent the adequate compensation for pecuniary loss suffered and for profits the obligee failed to obtain. 22

In contracts or quasi-contracts, the obligor is liable for all the damages which may be reasonably attributed to the non-performance of the obligation if he is guilty of fraud, bad faith, malice, or wanton attitude. 23

Moral damages include moral suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, or similar injury. They may be recovered in the cases enumerated in Article 2219

of the Civil Code, likewise, if they are the proximate result of, as in this case, the petitioner's breach of the contract of carriage. 24 Anent a breach of a contract of common carriage, moral damages may be awarded if the common carrier, like the petitioner, acted fraudulently or in bad faith. 25

Exemplary damages are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated or compensatory damages. 26 In contracts and quasi-contracts, exemplary damages may be awarded if the defendant acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. 27 It cannot, however, be considered as a matter of right; the court having to decide whether or not they should be adjudicated. 28 Before the court may consider an award for exemplary damages, the plaintiff must first show that he is entitled to moral, temperate or compensatory damages; but it is not necessary that he prove the monetary value thereof. 29

The Court of Appeals did not grant the private respondent actual or compensatory damages, reasoning that no delay was incurred since there was no demand, as required by Article 1169 of the Civil Code. This article, however, finds no application in this case because, as found by the respondent Court, there was in fact no delay in the commencement of the contracted voyage. If any delay was incurred, it was after the commencement of such voyage, more specifically, when the voyage was subsequently interrupted when the vessel had to stop near Kawit Island after the only functioning engine conked out.

As to the rights and duties of the parties strictly arising out of such delay, the Civil Code is silent. However, as correctly pointed out by the petitioner, Article 698 of the Code of Commerce specifically provides for such a situation. It reads:

In case a voyage already begun should be interrupted, the passengers shall be obliged to pay the fare in proportion to the distance covered, without right to recover for losses and damages if the interruption is due to fortuitous event or  force majeure, but with a right to indemnity if the interruption should have been caused by the captain exclusively. If the interruption should be caused by the disability of the vessel and a passenger should

agree to await the repairs, he may not be required to pay any increased price of passage, but his living expenses during the stay shall be for his own account.

This article applies suppletorily pursuant to Article 1766 of the Civil Code.

Of course, this does not suffice for a resolution of the case at bench for, as earlier stated, the cause of the delay or interruption was the petitioner's failure to observe extraordinary diligence. Article 698 must then be read together with Articles 2199, 2200, 2201, and 2208 in relation to Article 21 of the Civil Code. So read, it means that the petitioner is liable for any pecuniary loss or loss of profits which the private respondent may have suffered by reason thereof. For the private respondent, such would be the loss of income if unable to report to his office on the day he was supposed to arrive were it not for the delay. This, however, assumes that he stayed on the vessel and was with it when it thereafter resumed its voyage; but he did not. As he and some passengers resolved not to complete the voyage, the vessel had to return to its port of origin and allow them to disembark. The private respondent then took the petitioner's other vessel the following day, using the ticket he had purchased for the previous day's voyage.

Any further delay then in the private respondent's arrival at the port of destination was caused by his decision to disembark. Had he remained on the first vessel, he would have reached his destination at noon of 13 November 1991, thus been able to report to his office in the afternoon. He, therefore, would have lost only the salary for half of a day. But actual or compensatory damages must be proved, 30 which the private respondent failed to do. There is no convincing evidence that he did not receive his salary for 13 November 1991 nor that his absence was not excused.

We likewise fully agree with the Court of Appeals that the petitioner is liable for moral and exemplary damages. In allowing its unseaworthy M/V Asia Thailand to leave the port of origin and undertake the contracted voyage, with full awareness that it was exposed to perils of the sea, it deliberately disregarded its solemn duty to exercise extraordinary diligence and obviously acted with bad faith and in a wanton and reckless manner. On this score, however, the petitioner asserts that the safety or the vessel and passengers was never at stake because the sea was "calm" in the vicinity

where it stopped as faithfully recorded in the vessel's log book (Exhibit "4"). Hence, the petitioner concludes, the private respondent was merely "over-reacting" to the situation obtaining then. 31

We hold that the petitioner's defense cannot exculpate it nor mitigate its liability. On the contrary, such a claim demonstrates beyond cavil the petitioner's lack of genuine concern for the safety of its passengers. It was, perhaps, only providential then the sea happened to be calm. Even so, the petitioner should not expect its passengers to act in the manner it desired. The passengers were not stoics; becoming alarmed, anxious, or frightened at the stoppage of a vessel at sea in an unfamiliar zone as nighttime is not the sole prerogative of the faint-hearted. More so in the light of the many tragedies at sea resulting in the loss of lives of hopeless passengers and damage to property simply because common carriers failed in their duty to exercise extraordinary diligence in the performance of their obligations.

We cannot, however, give our affirmance to the award of attorney's fees. Under Article 2208 of the Civil Code, these are recoverable only in the concept of actual damages, 32 not as moral damages 33 nor judicial costs. 34 Hence, to merit such an award, it is settled that the amount thereof must be proven. 35 Moreover, such must be specifically prayed for — as was not done in this case—and may not be deemed incorporated within a general prayer for "such other relief and remedy as this court may deem just and equitable." 36 Finally, it must be noted that aside from the following, the body of the respondent Court's decision was devoid of any statement regarding attorney's fees:

Plaintiff-appellant was forced to litigate in order that he can claim moral and exemplary damages for the suffering he encurred [sic]. He is entitled to attorney's fees pursuant to Article 2208 of the Civil Code. It states:

Art. 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs cannot be recovered except:

1. When exemplary damages are awarded;

2. When the defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest.

This Court holds that the above does not satisfy the benchmark of "factual, legal and equitable justification" needed as basis for an award of attorney's fees. 37 In sum, for lack of factual and legal basis, the award of attorney's fees must be deleted.

WHEREFORE, the instant petition is DENIED and the challenged decision of the Court of Appeals in CA-G.R. CV No. 39901 is AFFIRMED subject to the modification as to the award for attorney's fees which is hereby SET ASIDE.

Costs against the petitioner.

SO ORDERED.

FIRST DIVISION

[G.R. No. L-46558 : July 31, 1981.]

PHILIPPINE AIR LINES, INC., Petitioner, vs. THE COURT OF APPEALS and JESUS V. SAMSON, Respondents.

D E C I S I O N

GUERRERO, J.:

This is a petition for review on Certiorari of the decision of the Court of Appeals 1 dated April 18, 1977, affirming with modification the decision of the Court of First Instance of Albay in Civil Case No. 1279, entitled “Jesus V. Samson, plaintiff, vs. Philippine Air Lines, Inc., defendant,” for damages.

The dispositive portion of the trial court’s decision reads:

“WHEREFORE, for all the foregoing considerations, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering the defendant to pay the plaintiff, the following sums: P1988,000.00 as unearned income or damages; P50,000.00 for moral damages; P20,000.00 as attorney’s fees and P5,000.00 as expenses of litigation, or a total of P273,000.00. Costs against the defendant.”

The appellate court modified the above decision, to wit:

“However, Plaintiff-Appellee, who has been deprived of his job since 1954, is entitled to the legal rate of interest on the P198,000.00 unearned income from the filing of the complaint cranad(Sec. 8, Rule 51, Rules of Court).

WHEREFORE, with the modification indicated above, the judgment appealed from is affirmed, with costs against defendant-appellant.”

The complaint filed on July 1, 1954 by plaintiff Jesus V. Samson, private respondent herein, averred that on January 8, 1951, he flew as co-pilot on a regular flight from Manila to Legaspi with stops at Daet, Camarines Norte and Pili, Camarines Sur, with Captain Delfin Bustamante as commanding pilot of a C-47 plane belonging to defendant Philippine Air Lines, Inc., now the herein petitioner; that on attempting to land the plane at Daet airport, Captain Delfin Bustamante due to

his very slow reaction and poor judgment overshot the airfield and as a result, notwithstanding the diligent efforts of the plaintiff co-pilot to avert an accident, the airplane crashlanded beyond the runway; that the jolt caused the head of the plaintiff to hit and break through the thick front windshield of the airplane causing him severe brain concussion, wounds and abrasions on the forehead with intense pain and sufferingcranad(par. 6, complaint).:onad

The complaint further alleged that instead of giving plaintiff expert and proper medical treatment called for by the nature and severity of his injuries, defendant simply referred him to a company physician, a general medical practitioner, who limited the treatment to the exterior injuries without examining the severe brain concussion of plaintiff cranad(par. 7, complaint); that several days after the accident, defendant Philippine Air Lines called back the plaintiff to active duty as co-pilot, and inspite of the latter’s repeated request for expert medical assistance, defendant had not given him anycranad(par. 8, complaint); that as a consequence of the brain injury sustained by plaintiff from the crash, he had been having periodic dizzy spells and had been suffering from general debility and nervousness cranad(par. 9, complaint); that defendant airline company instead of submitting the plaintiff to expert medical treatment, discharged the latter from its employ on December 21, 1953 on grounds of physical disability, thereby causing plaintiff not only to lose his job but to become physically unfit to continue as aviator due to defendant’s negligence in not giving him the proper medical attentioncranad(pars. 10-11, complaint). Plaintiff prayed for damages in the amount of P180,000.00 representing his unearned income, P50,000.00 as moral damages, P20,000.00 as attorney’s fees and P5,000.00 as expenses, or a total of P255,000.00.

In its answer filed on July 28, 1954, defendant PAL denied the substantial averments in the complaint, alleging among others, that the accident was due solely and exclusively to inevitable unforeseen circumstances whereby plaintiff sustained only superficial wounds and minor injuries which were promptly treated by defendant’s medical personnel cranad(par. 5, answer); that plaintiff did not sustain brain injury or cerebral concussion from the accident since he passed the annual physical and medical examination given thereafter on April 24, 1951; that the headaches and

dizziness experienced by plaintiff were due to emotional disturbance over his inability to pass the required up-grading or promotional course given by defendant companycranad(par. 6, answer), and that, as confirmed by an expert neuro-surgeon, plaintiff was suffering-from neurosis and in view of this unfitness and disqualification from continuing as a pilot, defendant had to terminate plaintiff’s employment cranad(pars. 7, 9, answer).

Further, defendant alleged that by the very nature of its business as a common carrier, it is bound to employ only pilots who are proficient and in good mental, emotional and physical condition; that the pilot, Captain Delfin Bustamante, was a competent and proficient pilot, and although he was already afflicted with a tumor of the nasopharynx even before the accident of January 8, 1951, the Civil Aeronautics Administration, in passing upon the fitness of pilots, gave Capt. Bustamante a waiver of physical standards to enable him to retain his first class airman certificate since the affliction had not in the least affected his proficiency cranad(pars. 16-17, answer). By way of counterclaim, defendant prayed for P10,000.00 as expenses for the litigation.

On March 25, 1958, defendant filed a Motion to Dismiss on the ground that the complaint is essentially a Workmen’s Compensation claim, stating a cause of action not cognizable within the general jurisdiction of the court. The Motion to Dismiss was denied in the order of April 14, 1958. After the reception of evidence, the trial court rendered on January 15, 1973 the decision, the dispositive portion of which has been earlier cited.

The defendant Philippine Air Lines, Inc. appealed the decision to the Court of Appeals as being contrary to law and unsupported by the evidence. It raised as errors of the trial court cranad(a) the holding that the damages allegedly suffered by plaintiff are attributable to the accident of January 8, 1951 which was due to the negligence of defendant in having allowed Capt. Delfin Bustamante to continue flying despite his alleged slow reaction and poor judgment; cranad(b) the finding that defendant was negligent in not having given plaintiff proper and adequate expert medical treatment and assistance for the injuries allegedly sustained in the accident of January 8, 1951; and cranad(c) in ordering defendant to pay actual or compensatory damages, moral damages and attorney’s fees to the plaintiff.

On April 18, 1977, the Court of Appeals rendered its decision affirming the judgment of the lower court but modified the award of damages by imposing legal rate of interest on the P198,000.00 unearned income from the filing of the complaint, citing Sec. 8, Rule 51 of the Rules of Court.

Its motion for reconsideration of the above judgment having been denied, Philippine Air Lines, Inc. filed this instant petition for Certiorari on the ground that the decision is not in accord with law or with the applicable jurisprudence, aside from its being replete with findings in the nature of speculation, surmises and conjectures not borne out by the evidence on record thereby resulting to misapprehension of facts and amounting to a grave abuse of discretion cranad(p. 7, Petition).

Petitioner raises the fundamental question in the case at bar as follows: Is there a causal connection between the injuries suffered by private respondent during the accident on 8 January 1951 and the subsequent “periodic dizzy spells, headache and general debility” of which private respondent complained every now and then, on the one hand, and such “periodic dizzy spells, headache and general debility” allegedly caused by the accident and private respondent’s eventual discharge from employment, on the other? PAL submits that respondent court’s award of damages to private respondent is anchored on findings in the nature of speculations, surmises and conjectures and not borne out by the evidence on record, thereby resulting in a misapprehension of facts and amounting to a grave abuse of discretion.

Petitioner’s submission is without merit.

As found by the respondent court, the following are the essential facts of the case:

“It appears that plaintiff, a licensee aviator, was employed by defendant a few years prior to January 8, 1951 as a regular co-pilot on a guaranteed basic salary of P750.00 a month. He was assigned to and/or paired with pilot Delfin Bustamante.

Sometime in December 1950, he complained to defendant through its authorized official about the slow reaction and poor judgment of pilot Delfin Bustamante. Notwithstanding said complaint, defendant allowed the pilot to continue flying.

On January 8, 1951, the two manned the regular afternoon flight of defendant’s plane from Manila to Legaspi, with stops at Daet, Camarines Norte, and Pili, Camarines Sur. Upon making a landing at Daet, the pilot, with his slow reaction and poor judgment, overshot the airfield and, as a result of and notwithstanding diligent efforts of plaintiff to avert an accident, the airplane crash-landed beyond the runway into a mangrove. The jolt and impact caused plaintiff to hit his head upon the front windshield of the plane thereby causing his brain concussions and wounds on the forehead, with concomittant intense pain.

Plaintiff was not given proper medical attention and treatment demanded by the nature and severity of his injuries. Defendant merely referred him to its clinic attended by general practitioners on his external injuries. His brain injury was never examined, much less treated. On top of that negligence, defendant recalled plaintiff to active duty as a co-pilot, completely ignoring his plea for expert medical assistance.

Suffering periodic dizzy spells, headache and general debility, plaintiff every now and then complained to defendant. To make matters worst for plaintiff, defendant discharged him from his employment on December 21, 1953. In consequence, plaintiff has been beset with additional worries, basically financial. He is now a liability instead of a provider, of his family.

On July 1, 1954, plaintiff filed a complaint for damages. Defendant vainly sought to dismiss the complaint after filing an answer. Then, the judgment and this appeal.”

Continuing, the respondent Court of Appeals further held:

“There is no question about the employment of plaintiff by defendant, his age and salary, the overshooting by pilot Bustamante of the airfield and crashlanding in a mangrove, his hitting his head on the front windshield of the plane, his intermittent dizzy spells, headache and general debility for which he was discharged from his employment on December 21, 1953. As the lower court aptly stated:

‘From the evidence adduced by the parties, the Court finds the following facts to be uncontroverted: That the plaintiff Jesus V. Samson, on January 8, 1951 and a few years prior thereto, December 21, 1953, was a duly licensed pilot employed as a regular co-pilot of the defendant with assignment in its domestic air service in

the Philippines; that on January 8, 1951, the defendant’s airplane met an accident in crashlanding at the Daet Airport, Camarines Norte by overshooting the runway and reaching the mangroves at the edge of the landing strip; that the jolt caused plaintiff’s head to hit the front windshield of the airplane causing him to suffer wounds and abrasion on the forehead; that the defendant, instead of giving the plaintiff expert and proper medical treatment called for by the nature and severity of the injuries of the plaintiff, simply referred him to the clinic of the defendant’s physicians who are only general medical practitioners and not brain specialists; that the defendant’s physicians limited their treatment to the exterior injuries on the forehead of the plaintiff and made no examination of the severe concussion of the brain of the plaintiff; that the Medical Director and Flight Surgeon of the defendant were not able to definitely determine the cause of the complaint of the plaintiff as to the periodic attack of dizziness, spells and headache; that due to this laxity of the defendant’s physician and the continuous suffering of the ailment of the plaintiff complained of, he demanded for expert medical assistance for his brain injury and to send him to the United States, which demand was turned down and in effect denied by the defendant; that instead the defendant referred the plaintiff to a neurologist, Dr. Victor Reyes; that from the time that said accident occurred on January 21, 1953, he was ordered grounded on several occasions because of his complaint of dizzy spells and headache; that instead of submitting the plaintiff to expert medical treatment as demanded by him and denied by the defendant, he was discharged from its employment on December 21, 1953 on the ground of physical disability, and that the plaintiff, at the time when the defendant’s plane met the accident, up to the time he was discharged, was regularly employed as a co-pilot and receiving a basic salary of P750.00 a month plus extra pay for flying time, and bonuses amounting to P300.00 a month.’

Even defendant-appellant itself admits as not controverted the following facts which generally admit what have been stated above as not controverted.

“In the case at bar, the following facts are not the subject of controversy:

‘(1) First, that from July 1950 to 21 December 1953, plaintiff was employed with defendant company as a first officer or co-pilot and served in that capacity in defendant’s domestic services.

(2) Second, that on January 1951, plaintiff did fly on defendant’s PI-C 94, as first officer or co-pilot, with the late Capt. Delfin Bustamante in command as pilot; that while making a landing at the Daet airport on that date, PI-C 94 did meet an accident as stated above.

(3) Third, that at or about the time of the discharge from defendant company, plaintiff had complained of “spells of dizziness,” “headaches” and “nervousness”, by reason of which he was grounded from flight duty. In short, that at that time, or approximately from November 1953 up to the date of his discharge on 21 December 1953, plaintiff was actually physically unfit to discharge his duties as pilot.

(4) Fourth, that plaintiff’s unfitness for flight duty was properly established after a thorough medical examination by competent medical experts.’cralaw cranad(pp. 11-12, appellant’s brief)

hence, there can hardly be an issue, factual, legal or medical.”

Taking exception from “the rest of the essential facts of the case as found by the respondent court” PAL claims said facts are not fully borne out by the evidence on record and insists that the injuries suffered by private respondent during the accident on January 8, 1951 were superficial in nature; that the “periodic spells, headache, and general debility” complaint of every now and then by private respondent subsequent to the Jan. 8, 1951 incident were due to emotional disturbances and that no negligence can be attributed to Capt. Delfin Bustamante much less to PAL for the occurrence on January 8, 1951, hence PAL cannot be held liable for damages.

Petitioner claims absence of any causal connection between private respondent’s superficial injuries and his alleged subsequent “periodic spells, headache and general debility,” pointing out that these subsequent ailments were found by competent physician, including an expert neuro-surgeon, to be due to emotional disturbances insights the conclusions of Dr. Trajano V. Bernardo that respondent’s complaints were “psychosomatic symptoms” on the basis of declarations made by respondent himself, which conclusions are supported by similar diagnosis made by Drs. Damaceno J. Ago and Villaraza stating that respondent Samson was suffering from neurosis as well as the report of Dr. Victor Reyes, a neurological specialist, indicating that

the symptoms were probably, most probably due to psychogenic factors and have no organic basis.

In claiming that there is no factual basis for the finding of the respondent court that the crash-landing caused respondent’s “brain concussion . cra ., with concomittant intense pain, for on the contrary, testimonial evidence establish the superficiality of the injuries sustained by respondent during the accident of January 8, 1951,” petitioner quotes portions of the testimony of Dr. Manuel S. Sayas, who declared that he removed the band-aid on the forehead of respondent and that he found out after removal that the latter had two contussed superficial wounds over the supra orbiter regions or just above the eyes measuring one centimeter long and one millimeter deep. He examined and found his blood pressure normal, no discharges from the nose and ears. Dr. Trajano V. Bernardo also testified that when he examined respondent Samson three days after the accident, the wound was already healed and found nothing wrong with his ears, nose and throat so that he was declared fit for duty after the sixth day.

Petitioner goes further. It contends that there is no causal connection between respondent’s superficial injuries sustained during the accident on January 8, 1951 and plaintiff’s discharge from employment with PAL on December 21, 1953. According to PAL, it was the repeated recurrence of respondent’s neurasthenic symptoms cranad(dizzy spells, headache, nervousness) which prompted PAL’s Flight Surgeon, Dr. Bernardo, to recommend that plaintiff be grounded permanently as respondent was “psychologically unfit to resume his duties as pilot.” PAL concludes that respondent’s eventual discharge from employment with PAL was effected for absolutely valid reasons, and only after he was thoroughly examined and found unfit to carry out his responsibilities and duties as a pilot.:onad

We agree with the respondent court in finding that the dizzy spells, headache and general debility of private respondent Samson was an after-effect of the crash-landing and We find that such holding is supported by substantial evidence, which We quote from the court’s decision, to wit:

“Defendant would imply that plaintiff suffered only superficial wounds which were treated and not brain injury. It would, by the opinion of its company doctors, Dr. Bernardo and Dr. Reyes, attribute the dizzy spells

and headache to organic or as phychosomatic, neurasthenic or psychogenic, which we find outlandishly exaggerated.

That plaintiff’s condition as psychosomatic rather than organic in nature is allegedly confirmed by the fact that on six cranad(6) separate occasions after the accident he passed the required CAA physical examination for airman’s certificate. cranad(Exhs. 78, 79, 80, 81, 83 and 92). We noticed, however, that there were other similar physical examinations conducted by the CAA on the person of plaintiff the report on which were not presented in evidence. Obviously, only those which suited defendants cause were hand-picked and offered in evidence.

We hesitate to accept the opinion of the defendant’s two physicians, considering that Dr. Bernardo admittedly referred to Dr. Reyes because he could not determine the cause of the dizzy spells and headache and the latter admitted that ‘it is extremely hard to be certain of the cause of his dizzy spells,’ and suggested a possibility that it ‘was due to postraumatic syndrome, evidently due to the injuries suffered by the plaintiff in hitting the forehead against the windshield of the plane during the accident.’ Judgment are not based on possibilities.

The admitted difficulty of defendant’s doctors in determining the cause of the dizzy spells and headache cannot be a sound basis for finding against the plaintiff and in favor of defendant. Whatever it might be, the fact is that such dizzy spells, headache and general debility was an after-effect of the crash-landing. Be it brain injury or psychosomatic, neurasthenic or psychogenic, there is no gainsaying the fact that it was caused by the crash-landing. As an effect of the cause, not fabricated or concocted, plaintiff has to be indemnified. The fact is that such effect caused his discharge.

We are prone to believe the testimony of the plaintiff’s doctors.

Dr. Morales, a surgeon, found that blood was coming from plaintiff’s ears and nose. He testified that plaintiff was suffering from cerebral concussion as a result of traumatic injury to the brain caused by his head hitting on the windshield of the plane during the crash-landing cranad(Exhibit “G”).

Dr. Conrado Aramil, a neurologist and psychiatrist with experience in two hospitals abroad, found abnormality reflected by the electroencephalogram examination in the frontal area on both sides of plaintiff’s head cranad(Exhibits “K”, “K-1”).

The opinion of these two specialist renders unnecessary that of plaintiff’s wife who is a physician in her own right and because of her relation to the plaintiff, her testimony and opinion may not be discussed here, although her testimony is crystallized by the opinions of Dr. Ador Dionisio, Dr. Marquez, Dr. Jose O. Chan, Dr. Yambao and Dr. Sandico.

Even the doctors presented by defendant admit vital facts about plaintiff’s brain injury. Dr. Bernardo admits that due to the incident, the plaintiff continuously complained of his fainting spells, dizziness and headache everytime he flew as a co-pilot and everytime he went to defendant’s clinic no less than 25 times cranad(Exhibits “15” to “36”), that he complained of the same to Dr. Reyes; that he promised to help send plaintiff to the United States for expert medical assistance provided that whatever finding thereat should not be attributed to the crash-landing incident to which plaintiff did not agree and that plaintiff was completely ignored by the defendant in his plea for expert medical assistance. They admitted that they could not determine definitely the cause of the fainting spells, dizziness and headache, which justifies the demand for expert medical assistance.”

We also find the imputation of gross negligence by respondent court to PAL for having allowed Capt. Delfin Bustamante to fly on that fateful day of the accident on January 8, 1951 to be correct, and We affirm the same, duly supported as it is by substantial evidence, clearly established and cited in the decision of said court which states as follows:

“The pilot was sick. He admittedly had tumor of the nasopharynx cranad(nose). He is now in the Great Beyond. The spot is very near the brain and the eyes. Tumor on the spot will affect the sinus, the breathing, the eyes which are very near it. No one will certify the fitness to fly a plane of one suffering from the disease.

“. cra . The fact First Pilot Bustamante has a long standing tumor of the Nasopharynx for which reason he was grounded since November 1947 is admitted in the letter cranad(Exh. 69-A) of Dr. Bernardo to the Medical

Director of the CAA requesting waiver of physical standards. The request for waiver of physical standards is itself a positive proof that the physical condition of Capt. Bustamante is short of the standard set by the CAA. The Deputy Administrator of the CAA granted the request relying on the representation and recommendation made by Dr. Bernardo cranad(See Exh. 69). We noted, however, that the request cranad(Exh. 69-A) says that ‘it is believed that his continuing to fly as a co-pilot does not involve any hazard.’cralaw cranad(Italics supplied). Flying as a First Officer entails a very different responsibility than flying as a mere co-pilot. Defendant requested the CAA to allow Capt. Bustamante to fly merely as a co-pilot and it is safe to conclude that the CAA approved the request thus allowing Bustamante to fly only as a co-pilot. For having allowed Bustamante to fly as a First Officer on January 8, 1951, defendant is guilty of gross negligence and therefore should be made liable for the resulting accident.

As established by the evidence, the pilot used to get treatments from Dr. Sycangco. He used to complain of pain in the face more particularly in the nose which caused him to have sleepless nights. Plaintiff’s observation of the pilot was reported to the Chief Pilot who did nothing about it. Captain Carbonel of the defendant corroborated plaintiff of this matter. The complaint against the slow reaction of the pilot at least proved the observation. The observation could be disregarded. The fact that the complaint was not in writing does not detract anything from the seriousness thereof, considering that a miscalculation would not only cause the death of the crew but also of the passengers.

One month prior to the crash-landing, when the pilot was preparing to land in Daet, plaintiff warned him that they were not in the vicinity of Daet but above the town of Ligao. The plane hit outside the airstrip. In another instance, the pilot would hit the Mayon Volcano had not plaintiff warned him. These more than prove what plaintiff had complained of. Disregard thereof by defendant is condemnable.

To bolster the claim that Capt. Bustamante has not suffered from any kind of sickness which hampered his flying ability, appellant contends that for at least one or more years following the accident of January 8, 1951, Capt. Bustamante continued to fly for defendant company as a pilot, and did so with great skill and

proficiency, and without any further accident or mishap, citing tsn. pp. 756-765, January 20, 1965. We have painstakingly perused the records, particularly the transcript of stenographic notes cited, but found nothing therein to substantiate appellant’s contention. Instead, We discovered that the citation covers the testimony of Dr. Bernardo on the physical condition of Bustamante and nothing about his skills or proficiency to fly nor on the mishaps or accidents, matters which are beyond Dr. Bernardo’s competence anyway.

Assuming that the pilot was not sick or that the tumor did not affect the pilot in managing the plane, the evidence shows that the overshooting of the runway and crash-landing at the mangrove was caused by the pilot for which acts the defendant must answer for damages caused thereby. And for this negligence of defendant’s employee, it is liable cranad(Joaquin vs. Aniceto, 12 SCRA 308). At least, the law presumes the employer negligent imposing upon it the burden of proving that it exercised the diligence of a good father of a family in the supervision of its employees.

Defendant would want to tie plaintiff to the report he signed about the crash-landing. The report was prepared by his pilot and because the latter pleaded that he had a family too and would have nowhere to go if he lost his job, plaintiff’s compassion would not upturn the truth about the crash-landing. We are for the truth not logic of any argumentation.

At any rate, it is incorrect to say that the Accident Report cranad(Exh. 12 & 12-A), signed by plaintiff, exculpated Capt. Bustamante from any fault. We observed that the Report does not categorically state that Capt. Bustamante was not at fault. It merely relates in chronological sequence what Capt. Bustamante and plaintiff did from the take-off from Manila to the landing in Daet which resulted in an accident. On the contrary, we may infer the negligence of Bustamante from the following portion of the Report, to wit:

“. cra . I felt his brakes strong but as we neared the intersection of the NE-SW runway, the brakes were not as strong and I glanced at the system pressure which indicated 900 lbs. per sq. m.”

It was during the above precise instance that Capt. Bustamante lost his bearing and disposition. Had he maintained the pressure on the brakes the plane would not have overshot the runway. Verily, Bustamante

displayed slow reaction and poor judgment.cranad(CA decision, pp. 8-12).

This Court is not impressed by, much less can We accept petitioner’s invocation to calibrate once again the evidence testified to in detail and plucked from the voluminous transcript to support petitioner’s own conclusion. It is not the task of this Court to discharge the functions of a trier of facts much less to enter into a calibration of the evidence, notwithstanding petitioner’s wail that the judgment of the respondent court is based entirely on speculations, surmises and conjectures. We are convinced that respondent court’s judgment is supported by strong, clear and substantial evidence.:onad

Petitioner is a common carrier engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public, as defined in Art. 1732, New Civil Code. The law is clear in requiring a common carrier to exercise the highest degree of care in the discharge of its duty and business of carriage and transportation under Arts. 1733, 1755 and 1756 of the New Civil Code. These Articles provide:

Art. 1733. Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case.

Such extraordinary diligence in the vigilance over the goods is further expressed in Articles 1734, and 1745, Nos. 5, 6, and 7, while the extraordinary diligence for the safety of the passengers is further set forth in articles 1755 and 1756.

Art. 1755. A common carrier is bound to carry the passenger safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances.

Art. 1756. In case of death of or injuries to passengers, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as prescribed in Articles 1733 and 1755.

The duty to exercise the utmost diligence on the part of common carriers is for the safety of passengers as well

as for the members of the crew or the complement operating the carrier, the airplane in the case at bar. And this must be so for any omission, lapse or neglect thereof will certainly result to the damage, prejudice, nay injuries and even death to all aboard the plane, passengers and crew members alike.

Now to the damages. The Court of Appeals affirmed the award of damages made by the trial court, stating that “the damages awarded plaintiff by the lower court are in accordance with the facts, law and jurisprudence.” The court further observed that “defendant-appellant is still fortunate, considering that the unearned income was reckoned with only up to 1968 and not up to the present as plaintiff-appellee is still living. Whatever mathematical error defendant-appellant could show by abstract argumentation, the same must be compensated by such deficiency of the damages awarded to plaintiff-appellee.”

As awarded by the trial court, private respondent was entitled to P198,000.00 as unearned income or compensatory damages; P50,000.00 for moral damages, P20,000.00 as attorney’s fees and P5,000.00 as expenses of litigation, or a total of P273,000.00.

The trial court arrived at the sum of P198,000.00 as unearned income or damages by considering that respondent Samson “could have continued to work as airline pilot for fifteen more years, he being only 38 years at the time the services were terminated by the defendant cranad(PAL) and he would have earned P120,000.00 from 1954 to 1963 or a period of ten cranad(10) years at the rate of one thousand per month cranad(P750.00 basic salary plus P300.00 extra pay for extra flying time and bonuses; and considering further that in 1964 the basic pay of defendant’s pilot was increased to P12,000.00 annually, the plaintiff could have earned from 1964 to 1968 the sum of P60,000.00 in the form of salaries and another P18,000.00 as bonuses and extra pay for extra flying time at the same rate of P300 a month, or a grand total of P198,000.00 for the entire period. This claim of the plaintiff for loss or impairment of earning capacity is based on the provision of Article 2205 of the New Civil Code of the Philippines which provides that “damages may be recovered for loss or impairment of earning capacity in cases of temporary or permanent personal injury.” This provision of law has been construed and interpreted in the case of Aureliano Ropato, et al. vs. La Mallorca General Partnership, 56 O.G., 7812, which

rules that law allows the recovery of damages for loss or impairment of earning capacity in cases of temporary or permanent personal injury.” chanroblesvirtualawlibrary(Decision, CFI, pp. 98-99, Record on Appeal)

The respondent appellate court modified the above award by ordering payment of legal interest on the P198,000.00 unearned income from the filing of the claim, citing Sec. 8, Rule 51 of the Rules of Court.

Petitioner assails the award of the total sum of P198,000.00 as unearned income up to 1968 as being tenuous because firstly, the trial court’s finding affirmed by the respondent court is allegedly based on pure speculation and conjecture and secondly, the award of P300.00 a month as extra pay for extra flying time from 1954 to 1968 is likewise speculative. PAL likewise rejects the award of moral damages in the amount of P50,000.00 on the ground that private respondent’s action before the trial court does not fall under any of the cases enumerated in the law cranad(Art. 2219 of the New Civil Code) for which moral damages are recoverable and that although private respondent’s action gives the appearance that it is covered under quasi-delict as provided in Art. 21 of the New Civil Code, the definition of quasi-delict in Art. 2176 of the New Civil Code expressly excludes cases where there is a pre-existing contractual relation between the parties, as in the case under consideration, where an employer-employee relationship existed between PAL and private respondent. It is further argued that private respondent’s action cannot be deemed to be covered by Art. 21, inasmuch as there is no evidence on record to show that PAL “wilfully cause(d) loss or injury to cranad(private respondent) in a manner that is contrary to morals, good customs or public policy . cra .” Nor can private respondent’s action be considered “analogous” to either of the foregoing, for the reasons are obvious that it is not.” chanroblesvirtualawlibrary(Memorandum of petitioner, pp. 418-421, Records)

Having affirmed the gross negligence of PAL in allowing Capt. Delfin Bustamante to fly the plane to Daet on January 8, 1951 whose slow reaction and poor judgment was the cause of the crash-landing of the plane which resulted in private respondent Samson hitting his head against the windshield and causing him injuries for which reason PAL terminated his services and employment as pilot after refusing to provide him

with the necessary medical treatment of respondent’s periodic spells, headache and general debility produced from said injuries, We must necessarily affirm likewise the award of damages or compensation under the provisions of Art. 1711 and Art. 1712 of the New Civil Code which provide:

Art. 1711. Owners of enterprises and other employers are obliged to pay compensation for the death or injuries to their laborers, workmen, mechanics or other employees, even though the event may have been purely accidental or entirely due to a fortuitous cause, if the death or personal injury arose out of and in the course of the employment. The employer is also liable for compensation if the employee contracts any illness or disease caused by such employment or as the result of the nature of the employment. If the mishap was due to the employee’s own notorious negligence, or voluntary act, or drunkenness, the employer shall not be liable for compensation. When the employee’s lack of due care contributed to his death or injury, the compensation shall be equitably reduced.

Art. 1712. If the death or injury is due to the negligence of a fellow-worker, the latter and the employer shall be solidarily liable for compensation. If a fellow-worker’s intentional or malicious act is the only cause of the death or injury, the employer shall not be answerable, unless it should be shown that the latter did not exercise due diligence in the selection or supervision of the plaintiffs fellow-worker.

The grant of compensatory damages to the private respondent made by the trial court and affirmed by the appellate court by computing his basic salary per annum at P750.00 a month as basic salary and P300.00 a month for extra pay for extra flying time including bonus given in December every year is justified. The correct computation however should be P750 plus P300 x 12 months = P12,600 per annum x 10 years = P126,000.00 cranad(not P120,000.00 as computed by the court a quo). The further grant of increase in the basic pay of the pilots to P12,000 annually for 1964 to 1968 totalling P60,000.00 and another P18,000.00 as bonuses and extra pay for extra flying time at the same rate of P300.00 a month totals P78,000.00. Adding P126,000.00 cranad(1964 to 1968 compensation) makes a grand total of P204,000.00 cranad(not P198,000.00 as originally computed).

As to the grant of moral damages in the sum of P50,000.00 We also approve the same. We have noted and considered the holding of the appellate court in the matter of bad faith on the part of PAL, stated hereunder, this wise:

“None of the essential facts material to the determination of the case have been seriously assailed: the overshooting of runway and crash-landing into the mangroves; the hitting of plaintiff’s head to the front windshield of the plane; the oozing of blood out of his ears, nose and mouth; the intermittent dizzy spells, headaches and general debility thereafter for which he was discharged from his employment; the condition of not to attribute the cause of the ailment to the crash-landing imposed in bad faith for a demanded special medical service abroad; and the resultant brain injury which defendant’s doctors could not understand nor diagnose.”

x x x

“The act of defendant-appellant in unjustly refusing plaintiff-appellee’s demand for special medical service abroad for the reason that plaintiff-appellee’s deteriorating physical condition was not due to the accident violates the provisions of Article 19 of the Civil Code on human relations “to act with justice, give everyone his due, and observe honesty and good faith.” chanroblesvirtualawlibrary(CA Resolution, pp. 151-152, Records)

We reject the theory of petitioner that private respondent is not entitled to moral damages. Under the facts found by the trial court and affirmed by the appellate court and under the law and jurisprudence cited and applied, the grant of moral damages in the amount of P50,000.00 is proper and justified.

The fact that private respondent suffered physical injuries in the head when the plane crash-landed due to the negligence of Capt. Bustamante is undeniable. The negligence of the latter is clearly a quasi-delict and therefore Article 2219, cranad(2) New Civil Code is applicable, justifying the recovery of moral damages.

Even from the standpoint of the petitioner that there is an employer-employee relationship between it and private respondent arising from the contract of employment, private respondent is still entitled to moral damages in view of the finding of bad faith or malice by the appellate court, which finding We hereby

affirm, applying the provisions of Art. 2220, New Civil Code which provides that willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith.

The justification in the award of moral damages under Art. 19 of the New Civil Code on Human Relations which requires that every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith, as applied by respondent court is also well-taken and We hereby give Our affirmance thereto.

With respect to the award of attorney’s fees in the sum of P20,000.00 the same is likewise correct. As pointed out in the decision of the Court of Appeals, “the plaintiff is entitled to attorney’s fees because he was forced to litigate in order to enforce his valid claim cranad(Ganaban vs. Bayle, 30 SCRA 365; De la Cruz vs. De la Cruz, 22 SCRA 33; and many others); defendant acted in bad faith in refusing plaintiff’s valid claimcranad(Filipino Pipe Foundry Corporation vs. Central Bank, 23 SCRA 1044); and plaintiff was dismissed and was forced to go to court to vindicate his right cranad(Nadura vs. Benguet Consolidated, Inc., 5 SCRA 879).”

We also agree with the modification made by the appellate court in ordering payment of legal interest from the date judicial demand was made by Pilot Samson against PAL with the filing of the complaint in the lower court. We affirm the ruling of the respondent court which reads:

“Lastly, the defendant-appellant claims that the legal rate of interest on the unearned compensation should be computed from the date of the judgment in the lower court, not from the filing of the complaint, citing a case where the issue raised in the Supreme Court was limited to when the judgment was rendered in the lower court or in the appellate court, which does not mean that it should not be computed from the filing of the complaint.

Articles 1169, 2209 and 2212 of the Civil Code govern when interest shall be computed. Thereunder interest begins to accrue upon demand, extrajudicial or judicial. A complaint is a judicial demand cranad(Cabarroguis vs.

Vicente, 107 Phil. 340). Under Article 2212 of the Civil Code, interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.” chanroblesvirtualawlibrary(CA Resolution, pp. 153-154, Records).

The correct amount of compensatory damages upon which legal interest shall accrue from the filing of the complaint is P204,000.00 as herein computed and not P198,000.00.

WHEREFORE, in view of all the foregoing, the judgment of the appellate court is hereby affirmed with slight modification in that the correct amount of compensatory damages is P204,000.00. With costs against petitioner.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISIONG.R. No. 145871             January 31, 2006LEONIDES C. DIÑO, petitioner, vs.LINA JARDINES, Respondent.

D E C I S I O NAUSTRIA-MARTINEZ, J.:This resolves the petition for review on certiorari seeking to set aside the Decision1 of the Court of Appeals (CA) dated June 9, 2000 dismissing the appeal in CA-G.R. CV No. 56118 and the Resolution dated October 25, 2000 denying the motion for reconsideration.

The antecedent facts are as follows.

On December 14, 1992, Leonides C. Diño (petitioner) filed a Petition for Consolidation of Ownership with the Regional Trial Court of Baguio City, Branch 7 (RTC). She alleged that: on January 31, 1987, Lina Jardines (respondent) executed in her favor a Deed of Sale with Pacto de Retro over a parcel of land with improvements thereon covered by Tax Declaration No. 44250, the consideration for which amounted to P165,000.00; it was stipulated in the deed that the period for redemption would expire in six months or on July 29, 1987; such period expired but neither respondent nor any of her legal representatives were able to redeem or repurchase the subject property; as a consequence, absolute ownership over the property has been consolidated in favor of petitioner.2

Respondent countered in her Answer that: the Deed of Sale with Pacto de Retro did not embody the real intention of the parties; the transaction actually entered into by the parties was one of simple loan and the Deed of Sale withPacto de Retro was executed just as a security for the loan; the amount borrowed by respondent during the first week of January 1987 was only P50,000.00 with monthly interest of 9% to be paid within a period of six months, but since said amount was insufficient to buy construction materials for the house she was then building, she again borrowed an additional amount of P30,000.00; it was never the intention of respondent to sell her property to petitioner; the value of respondent’s residential house alone is over a million pesos and if the value of the lot is added, it would be around one and a half million pesos; it is unthinkable that respondent would sell

her property worth one and a half million pesos for only P165,000.00; respondent has even paid a total of P55,000.00 out of the amount borrowed and she is willing to settle the unpaid amount, but petitioner insisted on appropriating the property of respondent which she put up as collateral for the loan; respondent has been the one paying for the realty taxes on the subject property; and due to the malicious suit filed by petitioner, respondent suffered moral damages.

On September 14, 1993, petitioner filed an Amended Complaint adding allegations that she suffered actual and moral damages. Thus, she prayed that she be declared the absolute owner of the property and/or that respondent be ordered to pay her P165,000.00 plus the agreed monthly interest of 10%; moral and exemplary damages, attorney’s fees and expenses of litigation.

Respondent then filed her Answer to the Amended Complaint reiterating the allegations in her Answer but increasing the alleged valuation of the subject property to more than two million pesos.

After trial, the RTC rendered its Decision dated November 20, 1996, the dispositive portion of which reads as follows:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered as follows:

a) Declaring the contract (Exh. A) entered into by the contending parties as one of deed of sale with right to repurchase or pacto de retro sale;

b) Declaring the plaintiff Diño to have acquired whatever rights Jardines has over the parcel of land involved it being that Jardines has no torrens title yet over said land;

c) Declaring the plaintiff Diño the owner of the residential house and other improvements standing on the parcel of land in question;

d) Ordering the consolidation of ownership of Diño over the residential house and other improvements, and over the rights, she (Diño) acquired over the parcel of land in question; and ordering the corresponding government official (The City Assessor) of Baguio City to undertake the consolidation by putting in the name of plaintiff Diño the

ownership and/or rights which she acquired from the defendant Jardines in the corresponding document (Tax Declarations) on file in his/her office; after the plaintiff has complied with all the requirements and has paid the fees necessary or incident to the issuance of a new tax declaration as required by law;

e) Ordering the cancellation of Tax Declaration 44250;

f) Ordering defendant Jardines to pay actual and/or compensatory damages to the plaintiff as follows:

1) P3,000.00 representing expenses in going to and from Jardines’ place to collect the redemption money;

2) P1,000.00 times the number of times Diño came to Baguio to attend the hearing of the case as evidenced by the signatures of Diño appearing on the minutes of the proceedings found in the Rollo of the case;

3) P10,000.00 attorney’s fee.

Costs against defendant Jardines.

SO ORDERED.3

Respondent then appealed to the CA which reversed the RTC judgment. The CA held that the true nature of the contract between herein parties is one of equitable mortgage, as shown by the fact that (a) respondent is still in actual physical possession of the property; (b) respondent is the one paying the real property taxes on the property; and (c) the amount of the supposed sale price, P165,000.00, earns monthly interest. The dispositive portion of the CA Decision promulgated on June 9, 2000 reads:

WHEREFORE, foregoing premises considered, we find that the Regional Trial Court, First Judicial Region, Branch 07, Baguio City, committed reversible errors in rendering its decision dated 20 November 1996 in Civil Case No. 2669-R, entitled Leonides G. Diño, etc. vs. Lina Jardines". The appeal at bar is herby GRANTED and the assailed decision is hereby REVERSED and SET ASIDE. Let a new judgment be entered as follows:

1. Declaring that the true nature of the contract entered into by the contending parties as one of equitable mortgage and not a pacto de retro sale;

2. Ordering the defendant-appellant to pay plaintiff-appellee legal interest on the amount of P165,000.00 from July 29, 1987, the time the said interest fell due, until fully paid;

3. No pronouncement as to cost.

SO ORDERED.4

Petitioner moved for reconsideration of said decision, but the same was denied per Resolution dated October 25, 2000.

Hence, herein petition for review on certiorari alleging that:

1. THE LOWER COURT COMMITTED AN ERROR IN DECLARING THAT THE TRUE NATURE OF THE CONTRACT ENTERED INTO BY THE PARTIES AS ONE EQUITABLE MORTGAGE AND NOT A PACTO DE RETRO SALE;

2. THE LOWER COURT COMMITTED AN ERROR IN ORDERING THE RESPONDENT TO PAY PETITIONER LEGAL INTEREST DESPITE THE CONFLICTING ADMISSIONS OF THE PARTIES THAT THE AGREED INTERESTS WAS EITHER 9% OR 10%;

3. THE FINDINGS OF FACTS OF THE LOWER COURT ARE CONTRARY TO EVIDENCE AND THE ADMISSIONS OF THE PARTIES;

4. THE LOWER COURT COMMITTED AN ERROR IN GOING BEYOND THE ISSUES OF THE CASE BY DELETING THE AWARD FOR DAMAGES DESPITE THE FACT THAT THE SAME WAS NOT RAISED AS AN ISSUE IN THE APPEAL; 5

The petition lacks merit.

The Court finds the allegations of petitioner that the findings of fact of the CA are contrary to evidence and admissions of the parties and that it erred in

declaring the contract between the parties as an equitable mortgage to be absolutely unfounded.

A close examination of the records of this case reveals that the findings of fact of the CA are all based on documentary evidence and on admissions and stipulation of facts made by the parties. The CA’s finding that there was no gross inadequacy of the price of respondent’s residential house as stated in the contract, was based on respondent’s own evidence, Tax Declaration No. 44250, which stated that the actual market value of subject residential house in 1986 was only P93,080.00. The fact that respondent has remained in actual physical possession of the property in question, and that respondent has been the one paying the real property taxes on the subject property was established by the admission made by petitioner during the pre-trial conference and embodied in the Pre-Trial Order6 dated May 25, 1994. The finding that the purchase price in the amount of P165,000.00 earns monthly interest was based on petitioner’s own testimony and admission in her appellee’s brief that the amount ofP165,000.00, if not paid on July 29, 1987, shall bear an interest of 10% per month.

The Court sees no reversible error with the foregoing findings of fact made by the CA. The CA correctly ruled that the true nature of the contract entered into by herein parties was one of equitable mortgage.

Article 1602 of the Civil Code enumerates the instances when a purported pacto de retro sale may be considered an equitable mortgage, to wit:

Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.

In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws. (Emphasis supplied)

In Legaspi vs. Ong,7 the Court further explained that:

The presence of even one of the above-mentioned circumstances as enumerated in Article 1602 is sufficient basis to declare a contract of sale with right to repurchase as one of equitable mortgage. As stated by the Code Commission which drafted the new Civil Code, in practically all of the so-called contracts of sale with right of repurchase, the real intention of the parties is that the pretended purchase price is money loaned and in order to secure the payment of the loan, a contract purporting to be a sale with pacto de retro is drawn up.8

In the same case, the Court cited Article 1603 of the Civil Code, which provides that in case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage.9

In the instant case, the presence of the circumstances provided for under paragraphs (2) and (5) of Article 1602 of the Civil Code, and the fact that petitioner herself demands payment of interests on the purported purchase price of the subject property, clearly show that the intention of the parties was merely for the property to stand as security for a loan. The transaction between herein parties was then correctly construed by the CA as an equitable mortgage.

The allegation that the appellate court should not have deleted the award for actual and/or compensatory damages is likewise unmeritorious.

Section 8, Rule 51 of the Rules of Court provides as follows:

Sec. 8. Questions that may be decided. – No error which does not affect the jurisdiction over the subject matter or the validity of the judgment appealed from or the proceedings therein will be considered unless stated in the assignment of errors, or closely related to or dependent on an assigned error and properly argued in the brief, save as the court may pass upon plain errors and clerical errors.

Clearly, the appellate court may pass upon plain errors even if they are not stated in the assignment of errors. InVillegas vs. Court of Appeals,10 the Court held:

[T]he Court is clothed with ample authority to review matters, even if they are not assigned as errors in the appeal, if it finds that their consideration is necessary in arriving at a just decision of the case.11

In the present case, the RTC’s award for actual damages is a plain error because a reading of said trial court’s Decision readily discloses that there is no sufficient evidence on record to prove that petitioner is entitled to the same. Petitioner’s only evidence to prove her claim for actual damages is her testimony that she has spentP3,000.00 in going to and from respondent’s place to try to collect payment and that she spent P1,000.00 every time she travels from Bulacan, where she resides, to Baguio in order to attend the hearings.

In People vs. Sara,12 the Court held that a witness’ testimony cannot be "considered as competent proof and cannot replace the probative value of official receipts to justify the award of actual damages, for jurisprudence instructs that the same must be duly substantiated by receipts."13 Hence, there being no official receipts whatsoever to support petitioner’s claim for actual or compensatory damages, said claim must be denied.

The appellate court was also correct in ordering respondent to pay "legal interest" on the amount of P165,000.00.

Both parties admit that they came to an agreement whereby respondent shall pay petitioner interest, at 9% (according to respondent) or 10% (according to petitioner) per month, if she is unable to pay the principal amount ofP165,000.00 on July 29, 1987.

In the Pre-Trial Order14 dated May 25, 1994, one of the issues for resolution of the trial court was

"whether or not the interest to be paid under the agreement is 10% or 9% or whether or not this amount of interest shall be reduced equitably pursuant to law."15

The factual milieu of Carpo vs. Chua16 is closely analogous to the present case. In the Carpo case, petitioners therein contracted a loan in the amount of P175,000.00 from respondents therein, payable within six months with an interest rate of 6% per month. The loan was not paid upon demand. Therein petitioners claimed that following the Court’s ruling in Medel vs. Court of Appeals,17 the rate of interest of 6% per month or 72% per annum as stipulated in the principal loan agreement is null and void for being excessive, iniquitous, unconscionable and exorbitant. The Court then held thus:

In a long line of cases, this Court has invalidated similar stipulations on interest rates for being excessive, iniquitous, unconscionable and exorbitant. In Solangon v. Salazar, we annulled the stipulation of 6% per month or 72% per annum interest on a P60,000.00 loan. In Imperial v. Jaucian, we reduced the interest rate from 16% to 1.167% per month or 14% per annum. In Ruiz v. Court of Appeals, we equitably reduced the agreed 3% per month or 36% per annum interest to 1% per month or 12% per annum interest. The 10% and 8% interest rates per month on aP1,000,000.00 loan were reduced to 12% per annum in Cuaton v. Salud. Recently, this Court, in Arrofo v. Quino, reduced the 7% interest per month on a P15,000.00 loan amounting to 84% interest per annum to 18% per annum.

There is no need to unsettle the principle affirmed in Medel and like cases. From that perspective, it is apparent that the stipulated interest in the subject loan is excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract principle embodied in Article 1306 of the Civil Code, contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. In the ordinary course, the codal provision may be invoked to annul the excessive stipulated interest.

In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the standards set in the above-cited cases, this stipulation is similarly invalid. x x x.18

Applying the afore-cited rulings to the instant case, the inescapable conclusion is that the agreed interest rate of 9% per month or 108% per annum, as claimed by respondent; or 10% per month or 120% per annum, as claimed by petitioner, is clearly excessive, iniquitous, unconscionable and exorbitant. Although respondent admitted that she agreed to the interest rate of 9%, which she believed was exorbitant, she explained that she was constrained to do so as she was badly in need of money at that time. As declared in the Medel case19 and Imperial vs. Jaucian,20 "[i]niquitous and unconscionable stipulations on interest rates, penalties and attorney’s fees are contrary to morals." Thus, in the present case, the rate of interest being charged on the principal loan of P165,000.00, be it 9% or 10% per month, is void. The CA correctly reduced the exhorbitant rate to "legal interest."

In Trade & Investment Development Corporation of the Philippines vs. Roblett Industrial Construction Corporation,21the Court held that:

In Eastern Shipping Lines, Inc. v. Court of Appeals, this Court laid down the following rules with respect to the manner of computing legal interest:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on 'Damages' of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing.Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 22 (Underscoring supplied)

Applied to the present case, since the agreed interest rate is void, the parties are considered to have no stipulation regarding the interest rate.

Thus, the rate of interest should be 12% per annum to be computed from judicial or extrajudicial demand, subject to the provisions of Article 1169 of the Civil Code, to wit:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of the obligation.

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

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

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

x x x xThe records do not show any of the circumstances enumerated above. Consequently, the 12% interest should be reckoned from the date of extrajudicial demand.

Petitioner testified that she went to respondent’s place several times to try to collect payment, but she (petitioner) failed to specify the dates on which she made such oral demand. The only evidence which clearly shows the date when petitioner made a demand on respondent is the demand letter dated March 19, 1989 (Exh. "C"), which was received by respondent or her agent on March 29, 1989 per the Registry Return Receipt (Exh. "C-1"). Hence, the interest of 12% per annum should only begin to run from March 29, 1989, the date respondent received the demand letter from petitioner.

WHEREFORE, the petition is hereby DENIED. The Decision of the Court of Appeals dated June 9, 2000 isAFFIRMED with the MODIFICATION that the legal interest rate to be paid by respondent on the principal amount ofP165,000.00 is twelve (12%) percent per annum from March 29, 1989 until fully paid.

SO ORDERED

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 34147           September 24, 1935

SEBASTIANA RODRIGUEZ, plaintiff-appellee, vs.IRINEA CAOIBES, defendant-appellant.

Ramon Diokno for appellant.Claro M. Recto, Jesus Morfe and Sumulong, Lavides and Sumulong for appellee.

VILLA-REAL, J.:

This is an appeal taken by the defendant Irinea Caoibes from the order of the Court First Instance of Batangas of December 14, 1934, denying the motion of said defendant-appellant of September 25, 1934, asking that the order of the said court of September 10, 1934, be set aside, and that the sale made by the sheriff and the deed executed thereunder be disapproved. The order of September 10, 1934, is as follows:

Upon submission of the plaintiff's motion of August 2, 1934, asking for the approval of the sale made by the sheriff to the plaintiff of the properties which are the subject of this case, and the opposition to the approval of said sale, the said opposition is overruled, and the deed of sale of July 27, 1934, made by the sheriff, ratified before the notary public, N.U. Babao, and registered on page 34 of his notarial book No. 2, as document No. 137, series of 1934, is approved. So ordered.

Batangas, Batangas, September 10, 1934.

(Sgd.) PEDRO MA. SISON, Judge

In support of her appeal, the defendant-appellant assigns the following alleged errors committed by the trial court in its judgment, namely:

1. In amending the judgment of this Honorable Supreme Court by converting an ordinary judgment to pay a sum of money

into a foreclosure of a mortgage indebtedness, and in executing it as such.

2. In confirming the sale by the provincial sheriff without trial or notice of trial to the parties in order that they may befully heard, and notwithstanding the fact (1) That the final judgment rendered in the case was not for the foreclosure of the mortgage but an ordinary judgment to pay a sum of money; (2) that the bidding being by parcels, the award was for a lump sum; (3) that there has been included in the notice of the public sale interest from November 9, 1931, whereas it should be only from the date of decision of this Honorable Supreme Court, November 22, 1933, when the account of the advertised debit to P1,183.64; (4) that there has been included in the deed "fees and publication P219.12", without justification and, apparently, exaggerated, there being no right to charge interest.

3. In ordering the issuance of a writ of possession in favor of the plaintiff of the properties foreclosed.

The order to which the defendant-appellant's first alleged alleged assignment of error refers is not that of September 14, 1934, to which she accepted and from which she announced her intention to appeal, but that of March 12, 1934, which reads:

Motion granted: the defendant is ordered to pay the plaintiff, within three months, three months, the sum of P10,180.97, with legal interest from the date of the complaint, and the costs, and in the event said payment is not made within the period fixed, the properties will be sold in accordance with law in order to make good said amount. So ordered.

Given in open court, Batangas, Batangas, March 12, 1934.

(Sgd.) FERNANDO JUGO, Judge

The defendant neither excepted to nor appealed from this last order. The question raised by the defendant-appellant in the first alleged error assigned is the jurisdiction of the trial court rendered in this same case on the former appeal (G.R. No. 39044, Nov. 22, 1933 [58 Phil., 977]), the dispositive part of which is as follows:

Wherefore, the appealed judgment is reversed, and the defendant-appellant Irinea Caoibes is ordered to pay the palintiff-appellant Sebastiana Rodriguez the sum of P10,180.97, with legal interest and costs. So ordered.

Section 256 of the Code of Civil Procedure, as amended by Act No. 2640, provides:

SEC. 256. Trial and judgment in foreclosure suits. — If upon trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and costs, and shall render judgment for the sum so found due and order that the same be paid into court within a period of not less than three months from and after the date on which the order was made, and that in default of such payment the land shall be sold to realize the mortgage debt and costs.

In Soriano vs. Enriquez (24 Phil., 584), this court enunciated the following doctrine:

4. ID.; ID.; JUDGMENT UNDER CODE OF CIVIL PROCEDURE. — Section 256 of the code of Civil Procedure requires a judgment to be rendered for a specific amount, and that an order be made requiring that the amount, and that an order be made requiring that the amount for which judgment is rendered be paid into court within a specified time. Section 260 requires the rendition of a judgment for the defficiency against the defendant, who shall be personally liable to the plaintiff, and execution may issue thereon at once.

The case at hand is for the foreclosure of a mortgage. It was tried as such in the Court of First Instance of Batangas as well as in this court on appeal. In reversing the appealed decision, by an involuntarily omission it was not ordered to deposit the amount of the judgment with the clerk of the court of origin, within the period of not less than three months, and, in default thereof, to sell the mortgaged properties to pay the motgaged indebtedness and the costs. This involuntarily omission of an imperative mandate of section 256 of the Code of Civil Procedure, above quoted, cannot alter the nature of the action, and the amendment of the decision may be asked to

correct the defect, inasmuch as said provision is a necessary part hereof.

On this point the America jurisprudence has laid down the following doctrine:

A judgment or decree of foreclosure may be corrected after its rendition in respect of an error or omission, so as to make it conform to the intention of the court of the facts of the case, . . .. (42 Corpus Juris, 158.)

If anything has been omitted from the judgment which is necessarily or properly a part of it, and which was intended and understood to be a part of it, but failed to be incorporated in it through the negligence or inadvertence of the court of counsel, or the clerk, the omission may be supplied by an amendment even after the term. . . . (34 Corpus Juris, 235.)

As to whether or not the herein plaintiff-appellee had waived her right to foreclose the mortgage in the first appeal, it was held in Hijos de I. de la Rama vs. Sajo (45 Phil., 703), cited by said plaintiff-appellee, that:

ACTION; MORTAGE, FORECLOSURE OF. — In the absence of statutory provisions of the contrary, the mortgagee may waived his right to foreclose a mortgage, and maintain a personal action for the recovery of his indebtedness. He may also obtain an attachment when the property of the defendant is in danger of being disposed of or lost.

In said case there was a waiver from the commencement of the action to foreclosed the mortgage, the mortgagee having merely brought a personal suit to recover a sum of money. In the present case, there was no such waiver because, as has been said, the case was tried as an action to foreclose a mortgage in the Court of First Instance as well as in this court, and the mere fact that in her brief in the first appeal the herein plaintiff-appellee only asked that the appealed judgment be reversed and another be rendered ordering the defendant-appellant to pay to said plaintiff-appellee the sum of P10,180.97, with legal interest and the costs in both instances, does not constitute a waiver of the action to foreclose the mortgage which had already been commenced and tried in first and second instances.

While the order of the Court of First Instance of Batangas of March 12, 1934, above quoted, is more comprehensive than the dispositive part of the judgment of this court, and while the proper thing to do would have been to file a motion with this court asking the amendment of said dispositive part and supplying the omission, the aforesaid amendatory order not being prejudicial, we do not believe it necessary to reverse the same, it being sufficient that we adopt the amplification as we do hereby.

As the second alleged error assigned, it appears from the bill of exceptions that the defendant-appellant, on August 9, 1934, filed on opposition to the motion for the plaintiff-appellee wherein the latter asked for the confirmation of the sale of the mortgaged properties made by the sheriff, setting forth reasons in support of her opposition and asking that the aforesaid sale be disapproved. The order confirming the aforesaid sale from which the defendant-appellant has taken the instant appeal has been entered after considering the plaintiff's motion and the defendant's opposition thereto, and this is the sufficient compliance with the law inasmuch as the defendant-appellant has had the opportunity, through her opposition, to set out her grounds against the confirmation of said sale, consisting in that the prices for which the different lots were sold were inadequate in the light of their market value.

As to the sale of the mortgaged properties, the record shows that said properties consist of several lots and these were sold to the purchaser as the highest bidder for each lot, but when the sheriff issued the deed of sale he did so for all the lots as a whole and for the total price thereof. While section 463 of the Code of Civil Procedure requires that the certificate of sale to be furnished by the sheriff to the purchaser should specify the price paid for each lot, the omission to make this specification in the certificate of sale is not a sufficient ground to annul the sale, the purchaser being entitled, if she so desires, to ask for the amendment of said certificate of sale.

As to the question of the date from which interest should be paid on the amount of the judgment, which is the amount of the indebtedness, the same should be the date of the filing of the complaint to recover the mortgage indebtedness and to foreclose the mortgage, because the defendant-appellant was legally in default and the amount owing already liquidated from the said date.

(Veloso vs. Fontanosa, 13 Phil., 79; De la Peña vs. Hidalgo, 16 Phil., 450.)

The challenge as the sum of P219.12 which the sheriff charged for fees and expenses of publication is no ground for the disapproval of the sale.

The points raised in the second alleged error assigned are, therefore, without merit.

Passing on to the third alleged error assigned, the fact that the real property is undivided is no bar to placing the purchaser in possession of the property owned in common by various co-owners in order to take the place of the vendors as to his undivided share. The holding in Pabico vs. Ong Pauco (43 Phil., 572), was that the purchaser of land at the public sale under an ordinary execution is not entitled to the possession of the land at a public sale under an ordinary execution is not entitled to the possession of the land sold before the expiration of the period of one year for the consolidation of the sale. (See also Powell vs. National Bank, 54 Phil., 54.) The case at hand being for the judicial foreclosure of a mortgage, there is no right of redemption and the purchaser acquires full ownership of the land sold as soon as the sale is confirmed. (Benedicto vs. Yulo, 26 Phil., 160.)

For the foregoing considerations, we are of the opinion and so hold: (1) That the omission to state in the dispositive part of a judgment, rendered in a case for the foreclosure of a mortgage, that the mortgagor should pay the amount of the judgment to the court within a period or not the less than three months, as provided in section 256 of the Code of Civil Procedure, may be corrected even after the said judgment had become final; and (2) that the filing of a written opposition to a motion to approve a sale of mortgaged properties is sufficient compliance with the requirement that the confirmation of the sale be made upon hearing the parties.

Wherefore, the appealed order being in accordance with law, it is hereby affirmed in all its parts, with the cost to the appellant. So ordered.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 153004             November 5, 2004

SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner, vs.ERNESTO V. SANTOS and RIVERLAND, INC., respondents.

D E C I S I O N

QUISUMBING, J.:

Subject of the present petition for review on certiorari is the Decision,1 dated January 30, 2002, as well as the April 12, 2002, Resolution2 of the Court of Appeals in CA-G.R. CV No. 55122. The appellate court reversed the Decision,3 dated October 4, 1996, of the Regional Trial Court of Makati City, Branch 148, in Civil Case No. 95-811, and likewise denied petitioner's Motion for Reconsideration.

The facts of this case are undisputed.

Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were the plaintiff and defendant, respectively, in several civil cases filed in different courts in the Philippines. On October 26, 1990, the parties executed a Compromise Agreement4 which amicably ended all their pending litigations. The pertinent portions of the Agreement read as follows:

1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million in the following manner:

a. P1.5 Million immediately upon the execution of this agreement;

b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the discretion of

the Foundation, within a period of not more than two (2) years from the execution of this agreement; provided, however, that in the event that the Foundation does not pay the whole or any part of such balance, the same shall be paid with the corresponding portion of the land or real properties subject of the aforesaid cases and previously covered by the notices of lis pendens, under such terms and conditions as to area, valuation, and location mutually acceptable to both parties; but in no case shall the payment of such balance be later than two (2) years from the date of this agreement; otherwise, payment of any unpaid portion shall only be in the form of land aforesaid;

2. Immediately upon the execution of this agreement (and [the] receipt of the P1.5 Million), plaintiff Santos shall cause the dismissal with prejudice of Civil Cases Nos. 88-743, 1413OR, TC-1024, 45366 and 18166 and voluntarily withdraw the appeals in Civil Cases Nos. 4968 (C.A.-G.R. No. 26598) and 88-45366 (C.A.-G.R. No. 24304) respectively and for the immediate lifting of the aforesaid various notices of lis pendens on the real properties aforementioned (by signing herein attached corresponding documents, for such lifting); provided, however, that in the event that defendant Foundation shall sell or dispose of any of the lands previously subject of lis pendens, the proceeds of any such sale, or any part thereof as may be required, shall be partially devoted to the payment of the Foundation's obligations under this agreement as may still be subsisting and payable at the time of any such sale or sales;

. . .

5. Failure of compliance of any of the foregoing terms and conditions by either or both parties to this agreement shall ipso facto and ipso jure automatically entitle the aggrieved party to a writ of execution for the enforcement of this agreement. [Emphasis supplied]5

In compliance with the Compromise Agreement, respondent Santos moved for the dismissal of the aforesaid civil cases. He also caused the lifting of the notices of lis pendens on the real properties involved. For its part, petitioner SVHFI, paid P1.5 million to respondent Santos, leaving a balance of P13 million.

Subsequently, petitioner SVHFI sold to Development Exchange Livelihood Corporation two real properties, which were previously subjects of lis pendens. Discovering the disposition made by the petitioner, respondent Santos sent a letter to the petitioner demanding the payment of the remaining P13 million, which was ignored by the latter. Meanwhile, on September 30, 1991, the Regional Trial Court of Makati City, Branch 62, issued a Decision6approving the compromise agreement.

On October 28, 1992, respondent Santos sent another letter to petitioner inquiring when it would pay the balance of P13 million. There was no response from petitioner. Consequently, respondent Santos applied with the Regional Trial Court of Makati City, Branch 62, for the issuance of a writ of execution of its compromise judgment dated September 30, 1991. The RTC granted the writ. Thus, on March 10, 1993, the Sheriff levied on the real properties of petitioner, which were formerly subjects of the lis pendens. Petitioner, however, filed numerous motions to block the enforcement of the said writ. The challenge of the execution of the aforesaid compromise judgment even reached the Supreme Court. All these efforts, however, were futile.

On November 22, 1994, petitioner's real properties located in Mabalacat, Pampanga were auctioned. In the said auction, Riverland, Inc. was the highest bidder for P12 million and it was issued a Certificate of Sale covering the real properties subject of the auction sale. Subsequently, another auction sale was held on February 8, 1995, for the sale of real properties of petitioner in Bacolod City. Again, Riverland, Inc. was the highest bidder. The Certificates of Sale issued for both properties provided for the right of redemption within one year from the date of registration of the said properties.

On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief and Damages7 alleging that there was delay on the part of petitioner in paying the balance of P13 million. They further alleged that under the Compromise Agreement, the obligation became due on October

26, 1992, but payment of the remaining P12 million was effected only on November 22, 1994. Thus, respondents prayed that petitioner be ordered to pay legal interest on the obligation, penalty, attorney's fees and costs of litigation. Furthermore, they prayed that the aforesaid sales be declared final and not subject to legal redemption.

In its Answer,8 petitioner countered that respondents have no cause of action against it since it had fully paid its obligation to the latter. It further claimed that the alleged delay in the payment of the balance was due to its valid exercise of its rights to protect its interests as provided under the Rules. Petitioner counterclaimed for attorney's fees and exemplary damages.

On October 4, 1996, the trial court rendered a Decision9 dismissing herein respondents' complaint and ordering them to pay attorney's fees and exemplary damages to petitioner. Respondents then appealed to the Court of Appeals. The appellate court reversed the ruling of the trial court:

WHEREFORE, finding merit in the appeal, the appealed Decision is hereby REVERSED and judgment is hereby rendered ordering appellee SVHFI to pay appellants Santos and Riverland, Inc.: (1) legal interest on the principal amount of P13 million at the rate of 12% per annum from the date of demand on October 28, 1992 up to the date of actual payment of the whole obligation; and (2) P20,000 as attorney's fees and costs of suit.

SO ORDERED.

Hence this petition for review on certiorari where petitioner assigns the following issues:

I

WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT AWARDED LEGAL INTEREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT NEITHER IN THE COMPROMISE AGREEMENT NOR IN THE COMPROMISE JUDGEMENT OF HON. JUDGE DIOKNO PROVIDES FOR PAYMENT OF INTEREST TO THE RESPONDENT

II

WHETHER OF NOT THE COURT OF APPEALS ERRED IN AWARDING LEGAL IN[T]EREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT THE OBLIGATION OF THE PETITIONER TO RESPONDENT SANTOS TO PAY A SUM OF MONEY HAD BEEN CONVERTED TO AN OBLIGATION TO PAY IN KIND – DELIVERY OF REAL PROPERTIES OWNED BY THE PETITIONER – WHICH HAD BEEN FULLY PERFORMED

III

WHETHER OR NOT RESPONDENTS ARE BARRED FROM DEMANDING PAYMENT OF INTEREST BY REASON OF THE WAIVER PROVISION IN THE COMPROMISE AGREEMENT, WHICH BECAME THE LAW AMONG THE PARTIES10

The only issue to be resolved is whether the respondents are entitled to legal interest.

Petitioner SVHFI alleges that where a compromise agreement or compromise judgment does not provide for the payment of interest, the legal interest by way of penalty on account of fault or delay shall not be due and payable, considering that the obligation or loan, on which the payment of legal interest could be based, has been superseded by the compromise agreement.11 Furthermore, the petitioner argues that the respondents are barred by res judicata from seeking legal interest on account of the waiver clause in the duly approved compromise agreement.12 Article 4 of the compromise agreement provides:

Plaintiff Santos waives and renounces any and all other claims that he and his family may have on the defendant Foundation arising from and in connection with the aforesaid civil cases, and defendant Foundation, on the other hand, also waives and renounces any and all claims that it may have against plaintiff Santos in connection with such cases.13 [Emphasis supplied.]

Lastly, petitioner alleges that since the compromise agreement did not provide for a period within which

the obligation will become due and demandable, it is incumbent upon respondent Santos to ask for judicial intervention for purposes of fixing the period. It is only when a fixed period exists that the legal interests can be computed.

Respondents profer that their right to damages is based on delay in the payment of the obligation provided in the Compromise Agreement. The Compromise Agreement provides that payment must be made within the two-year period from its execution. This was approved by the trial court and became the law governing their contract. Respondents posit that petitioner's failure to comply entitles them to damages, by way of interest.14

The petition lacks merit.

A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced.15 It is an agreement between two or more persons, who, for preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner which they agree on, and which everyone of them prefers in the hope of gaining, balanced by the danger of losing.16

The general rule is that a compromise has upon the parties the effect and authority of res judicata, with respect to the matter definitely stated therein, or which by implication from its terms should be deemed to have been included therein.17 This holds true even if the agreement has not been judicially approved.18

In the case at bar, the Compromise Agreement was entered into by the parties on October 26, 1990.19 It was judicially approved on September 30, 1991.20 Applying existing jurisprudence, the compromise agreement as a consensual contract became binding between the parties upon its execution and not upon its court approval. From the time a compromise is validly entered into, it becomes the source of the rights and obligations of the parties thereto. The purpose of the compromise is precisely to replace and terminate controverted claims.21

In accordance with the compromise agreement, the respondents asked for the dismissal of the pending civil cases. The petitioner, on the other hand, paid the initial P1.5 million upon the execution of the agreement. This act of the petitioner showed that it acknowledges that the agreement was immediately executory and enforceable upon its execution.

As to the remaining P13 million, the terms and conditions of the compromise agreement are clear and unambiguous. It provides:

. . .

b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at the discretion of the Foundation, within a period of not more than two (2) years from the execution of this agreement…22[Emphasis supplied.]

. . .

The two-year period must be counted from October 26, 1990, the date of execution of the compromise agreement, and not on the judicial approval of the compromise agreement on September 30, 1991. When respondents wrote a demand letter to petitioner on October 28, 1992, the obligation was already due and demandable. When the petitioner failed to pay its due obligation after the demand was made, it incurred delay.

Article 1169 of the New Civil Code provides:

Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. [Emphasis supplied]

Delay as used in this article is synonymous to default or mora which means delay in the fulfillment of obligations. It is the non-fulfillment of the obligation with respect to time.23

In order for the debtor to be in default, it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially.24

In the case at bar, the obligation was already due and demandable after the lapse of the two-year period from the execution of the contract. The two-year period ended on October 26, 1992. When the respondents gave a demand letter on October 28, 1992, to the petitioner, the obligation was already due and demandable. Furthermore, the obligation is liquidated because the debtor knows precisely how much he is to pay and when he is to pay it.

The second requisite is also present. Petitioner delayed in the performance. It was able to fully settle its outstanding balance only on February 8, 1995, which is more than two years after the extra-judicial demand. Moreover, it filed several motions and elevated adverse resolutions to the appellate court to hinder the execution of a final and executory judgment, and further delay the fulfillment of its obligation.

Third, the demand letter sent to the petitioner on October 28, 1992, was in accordance with an extra-judicial demand contemplated by law.

Verily, the petitioner is liable for damages for the delay in the performance of its obligation. This is provided for in Article 117025 of the New Civil Code.

When the debtor knows the amount and period when he is to pay, interest as damages is generally allowed as a matter of right.26 The complaining party has been deprived of funds to which he is entitled by virtue of their compromise agreement. The goal of compensation requires that the complainant be compensated for the loss of use of those funds. This compensation is in the form of interest.27 In the absence of agreement, the legal rate of interest shall prevail.28 The legal interest for loan as forbearance of money is 12% per annum29 to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.30

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 30, 2002 of the Court of Appeals and its April 12, 2002 Resolution in CA-G.R. CV No. 55122 are AFFIRMED. Costs against petitioner.

SO ORDERED.

FIRST DIVISION

[G.R. No. 154973.  June 21, 2005]

THE PRESIDENT OF PHILIPPINE DEPOSIT INSURANCE CORPORATION AS LIQUIDATOR OF PACIFIC BANKING CORPORATION, petitioner, vs. HON. WILFREDO D. REYES, Pairing Judge, RTC Manila, Branch 31; ANG ENG JOO; ANG KEONG LAN; and E.J. ANG INTERNATIONAL, LTD., represented by FORNIER & FORNIER LAW, respondents.

D E C I S I O N

DAVIDE, JR., C.J.:

May an investment in a corporation, whose existence has been terminated, be entitled to an interest in the concept of actual and compensatory damages from the time such investment was made until the closure of the corporation?  This is the pivotal issue in this petition for certiorari filed by the President of the Philippine Deposit Insurance Corporation (PDIC), in his capacity as the Liquidator of the Pacific Banking Corporation (PaBC).

The antecedent facts are as follows:

On 5 July 1985, pursuant to Resolution No. 699 of the Monetary Board of the Central Bank of the Philippines, the PaBC was placed under receivership on the ground of insolvency.  Subsequently, it was placed under liquidation, and a liquidator was designated.

On 7 April 1986, the Central Bank of the Philippines, through the Office of the Solicitor General, filed with the Regional Trial Court (RTC) of Manila, Branch 31, a petition for assistance in the liquidation of PaBC.

On 17 May 1991, Vitaliano N. Nañagas, President of the PDIC, was appointed by the Central Bank as Liquidator.

On 26 June 1992, private respondents Ang Eng Joo, Ang Keong Lan, and E.J. Ang International Ltd. (hereafter Singaporeans), then represented by their attorney-in-fact Gonzalo C. Sy, filed their claim before the liquidating court.  Citing Republic Act No. 5186, otherwise known as

the Investment Incentives Act, they claimed to be preferred creditors and prayed for the return of their equity investment in the amount of US$2,531,632.18 with interest until the closure of the PaBC.

After due hearing or on 11 September 1992, the liquidation court, through Presiding Judge Regino Veridiano II, issued an order that reads as follows:

At this stage of the liquidation proceedings, the claimants who are foreign investors should already be paid.  If there is any doubt as to whether claimants who are foreign investors should be treated as preferred claimants, the doubt should be resolved in favor of claimants since it is of judicial notice that government adopted the policy to entice foreign investors to help boost the economy.  Claimants who are foreign investors should be treated with liberality such that they should be categorized among preferred creditors.  Claimants were invited to invest at PaBC in 1981 and after a short period of less than four (4) years the bank was closed in 1985 due to mismanagement.[1]

…

WHEREFORE, premises considered, the Liquidator of PaBC is ordered to pay claimants through their Attorney-in-Fact Gonzalo C. Sy, their total investment of US$2,531,632.18 as preferred creditors. Dividends and/or interest that accrued in favor of claimants is hereby deferred pending study by the Liquidator who is hereby ordered to submit his report and recommendation within thirty (30) days from receipt of this Order.[2]

His motion for reconsideration having been denied, the Liquidator filed a notice of appeal.  In an Order dated 28 October 1992, the liquidation court struck off the record the notice of appeal for having been filed beyond the 15-day period to appeal, and directed the execution of the Order of 11 September 1992.

The Liquidator thus filed a petition for certiorari before the Court of Appeals, which was, however, dismissed on the ground that the notice of appeal was correctly dismissed by the liquidation court for having been filed out of time.  In our decision[3] of 20 March 1995 in G.R. Nos. 109373 and 112991, we sustained the Court of Appeals, but on a different ground.  We held that while the Liquidator filed the notice of appeal within the reglementary 30-day period provided in special proceedings, he failed to file the requisite record on appeal, and thus the appeal was not perfected on

time, causing the 11 September 1992 Order to become final and executory.

Consequently, the liquidation court, through the pairing judge Hon. Wilfredo D. Reyes, issued an Order dated 13 April 1998 implementing the execution order of 28 October 1992 by directing the President of the Land Bank of the Philippines (LBP) to release to the Sheriff the garnished amount of US$2,531,632.18 or its peso equivalent computed at the current exchange rate, to be paid to the Singaporeans.

The Bureau of Internal Revenue (BIR) and the Bangko Sentral ng Pilipinas promptly filed before the liquidation court separate motions to hold in abeyance the liquidation court’s orders of 28 October 1992 and 13 April 1998.[4] The Liquidator also filed an urgent motion to prohibit the Singaporeans from withdrawing the money from their account with the LBP.[5] It was accompanied by an application for a temporary restraining order and/or preliminary injunction praying that Gonzalo C. Sy be prohibited from withdrawing the amount of P82,658,671.43 from his account with the LBP and be directed to return any funds that might already have been withdrawn by him.

On 12 May 1998, Judge Reyes issued an Order[6] denying the motions and ordered the payment of accrued legal interest on the Singaporeans’ equity investment of US$2,531,632.18 at the rate of 12% per annum computed from 15 October 1981, the date the outward remittance and the investment were actually made, until its full payment, at the exchange rate prevailing at the time of payment.

Finally, on 15 May 1998, Judge Reyes issued another Order[7] directing the President of the Philippine National Bank (PNB) to release the garnished amount sufficient to cover the additional sum ofP172,374,220.64.

Aggrieved by these orders, the BIR, PDIC, and the Liquidator filed before the Court of Appeals a petition for certiorari, mandamus, and prohibition with a prayer for a temporary restraining order[8] assailing Judge Reyes’ Orders of 13 April 1998, 12 May 1998, and 15 May 1998.

In its decision[9] of 31 January 2002, the Court of Appeals affirmed the Orders of 13 April 1998 and 15 May 1998, but modified the Order of 12 May 1998 as follows:

(1)     [P]ayment of accrued legal interest in the sum of P56,034,877.04 still left uncollected shall be made to private

respondents, Singaporeans, directly or through their new attorney-in-fact and legal counsel, the law firm of Fornier & Fornier;

(2)   [E]njoining respondent Gonzalo C. Sy from withdrawing the garnished amount from his savings/current account with the Land Bank of the Philippines or any other bank in which funds released from the garnished accounts of PaBC, LBP and PNB have been deposited; and

(3)   [A]n amount equivalent to 15% of the remaining garnished amount or the balance of accrued legal interest of Pesos 56,034,877.04 shall be withheld and remitted to petitioner Bureau of Internal Revenue, without prejudice to the right of said petitioner to make other assessments for taxes in the future.

Consequently, the writ of preliminary injunction issued on September 14, 1998 is hereby DISSOLVED.  By virtue hereof, the garnished amount from the savings/current account with the Land Bank of the Philippines or any other bank in which funds released from the garnished accounts of PaBC, LBP and PNB have been deposited may now be released only to private respondents, Singaporeans, directly or through their new attorney-in-fact and legal counsel, the law firm of Fornier & Fornier.[10]

After an unsuccessful motion for reconsideration,[11] the Liquidator came before us assigning the following errors:

4.1

THE RESPONDENT APPELLATE COURT COMMITTED A FUNDAMENTAL ERROR OF FACT AND LAW WHEN IT DECLARED THE SINGAPOREANS’ EQUITY INVESTMENT WITH CLOSED PACIFIC BANKING CORPORATION ENTITLED TO PAYMENT OF INTEREST.

4.2

THE RESPONDENT APPELLATE COURT COMMITTED A FUNDAMENTAL ERROR OF FACT AND LAW WHEN IT APPLIED THE LANDMARK CASE OF EASTERN SHIPPING LINES, INC. V. CA (G.R. NO. 97412, JULY 12, 1994) IN FIXING THE RATES OF INTEREST AND/OR DIVIDENDS THAT

ALLEGEDLY ACCRUED ON THE EQUITY INVESTMENT OF THE SINGAPOREANS ON PABC.

4.3

ASSUMING FOR THE SAKE OF ARGUMENT THAT PABC IS LIABLE FOR COMPENSATORY DAMAGES TO THE SINGAPOREAN EQUITY HOLDERS, ACCRUAL OF THE 6% INTEREST RATE SHOULD COMMENCE FROM DEMAND.

4.4

ASSUMING FOR THE SAKE OF ARGUMENT THE CORRECTNESS OF THE RESPONDENT APPELLATE COURT’S IMPOSITION OF THE 6% AND 12% INTEREST RATE ON THE EQUITY INVESTMENTS OF THE SINGAPOREAN EQUITY HOLDERS, THE LATTER SHOULD ONLY BE ENTITLED TO A TOTAL AMOUNT OF P73,246,702.21 BY WAY OF THE ALLEGED ACCRUED DIVIDENDS AND/OR INTERESTS.

4.5

FOLLOWING THE JANUARY 31, 2002 DECISION OF THE RESPONDENT APPELLATE COURT WHICH DIRECTED THE PAYMENT OF ALLEGED ACCRUED DIVIDENDS AND/OR INTEREST COMMENCING ON OCTOBER 15, 1981 WHERE THE PREVAILING EXCHANGE RATE WAS P8.067 TO A DOLLAR, THE OVERPAYMENT TO THE SINGAPOREAN EQUITY HOLDERS SHALL AMOUNT TO P182,893,303.55. [12]

Anent the first issue, the Liquidator interprets the affirmation by the Court of Appeals of the 12 May 1998 Order of Judge Reyes as amounting to an unlawful grant of undeclared dividends.  He argues that the only fruits that can arise from an equity investment are dividends declared from unrestricted retained earnings by the Board of Directors in accordance with the Corporation Code.  Absent a declaration in this case, the interest awarded has no legal basis.

As for the second and third issues, the Liquidator argues that no actual damages can arise from the closure of the bank.  The ruling in Eastern Shipping Lines, Inc. v. Court of Appeals[13] is not applicable because that case clearly refers to an award of interest in the concept of actual and compensatory damages in case of breach of an obligation.  The failure of PaBC to return the Singaporeans’ equity investment because of its closure is not a breach of an obligation – the

closure being akin to a force majeure.  If indeed PaBC is liable to the Singaporeans for actual and compensatory damages, accrual thereof should be reckoned from the date of demand pursuant to Article 1169 of the Civil Code.  Instead of running from 15 October 1981 when the Singaporeans bought their shares in PaBC, the 6% interest rate should be reckoned from 26 June 1992, the date the Singaporeans filed their claim in the liquidation court.

The Liquidator likewise asserts that there is already an overpayment of accrued dividends or interests.  The liquidation court’s Order of 12 May 1998 awarded an interest of 12% per annum to be computed from 15 October 1981 (the date of actual remittance of the investment) until full payment. Pursuant to that Order, the PNB released P116,339,343.60. On appeal, however, the Court of Appeals modified the decision and awarded an interest of 6% per annum from 15 October 1981 up to PaBC’s closure, as well as an interest of 12% per annum  from 11 October 1992, when the 11 September 1992 Order became final and executory, until 17 April 1998, when the equity investment of US$2,531,632.18 was fully paid. With the prevailing exchange rate of P8.067 to a dollar on 15 October 1981, the total peso equivalent of the Singaporeans’ claim is only P30,230,338.29 – P20,422,676.80 of which represents the principal equity investment of US$2,531,632.18 and P9,807,661.49, as alleged accrued interest.  As of 18 May 1998, the total releases to the Singaporeans from the garnished funds of the PaBC amounted to P213,123,641.84.  There is therefore an overpayment of P182,893,303.55.  Thus, the order of the Court of Appeals to further release P56,034,877.04 from the garnished funds would result to unjust enrichment in favor of the Singaporeans.

For their part, the Singaporeans assert that the Court of Appeals committed no error in affirming their entitlement to accrued interests in the amount of P56,034,877.04 and in ordering its payment less 15% in taxes as agreed upon by the BIR.  The Order of 11 September 1992 included the payment of the principal due the Singaporeans as preferred creditors, but it deferred the payment of interest on the principal for study by the Liquidator.  Unfortunately, no study and recommendation was done since September 1992; thus, the liquidation court took it upon itself to arithmetically compute and fix the amount of interest at the legal rate of 12% per annum as reflected in the Order of 12 May 1998.  Likewise, the award of 12% interest has

become the law of the case with respect to the Liquidator and the Singaporeans.

The Singaporeans also argue that the petition should be dismissed because it assails errors of judgment, not errors of jurisdiction.  They submit that the filing of a special civil action for certiorari rather than an appeal is wrong, improper, and fatal to the case.  Moreover, the issue of overpayment is a question of fact that could not be threshed out in a special civil action for certiorari.

We shall first tackle the procedural issue of the propriety of the petition filed by the Liquidator.

A petition for certiorari is the proper remedy when a tribunal, board, or officer exercising judicial or quasi-judicial functions has acted without or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction and there is no appeal nor any plain, speedy, and adequate remedy at law.[14] Grave abuse of discretion is defined as the capricious, whimsical exercise of judgment as is equivalent to lack of jurisdiction.  An error of judgment committed in the exercise of its legitimate jurisdiction is not the same as grave abuse of discretion.  Thus, the special writ of certiorari is not the remedy for errors of judgment that can be corrected by appeal.[15]

Although denominated as a petition for certiorari under Rule 65 of the Rules of Civil Procedure, the petition assigns errors of judgment of the Court of Appeals.  It does not allege grave abuse of discretion committed by the Court of Appeals. However, in the interest of justice, this Court shall treat the petition as an appeal under Rule 45 of the Rules of Civil Procedure especially since it was filed within the reglementary period for filing an appeal.  Sections 1 and 2 of Rule 45 of the 1997 Rules of Civil Procedure provide:

SECTION 1. Filing of petition with Supreme Court. – A party desiring to appeal by certiorari from a judgment or final order or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts whenever authorized by law, may file with the Supreme Court a verified petition for review on certiorari. The petition shall raise only questions of law which must be distinctly set forth.

SEC. 2. Time for filing; extension. – The petition shall be filed within fifteen (15) days from notice of the judgment or final order or resolution appealed from, or of the denial of the petitioner’s motion for new trial or reconsideration filed in due time after notice of the judgment. On motion duly filed and served, with full

payment of the docket and other lawful fees and the deposit for costs before the expiration of the reglementary period, the Supreme Court may for justifiable reasons grant an extension of thirty (30) days only within which to file the petition.

The records show that the Liquidator received on 30 August 2002 a copy of the resolution of the Court of Appeals denying his motion for reconsideration.  He had fifteen days, or until 14 September 2002, to file a petition for review on certiorari.  Since 14 September 2002 fell on a Saturday, he could file his petition on the next working day, which was 16 September 2002.[16] Indeed, the Liquidator filed the instant petition and paid the necessary docket and legal fees on 16 September 2002.

Before delving into the merits of the case, it bears stressing that we are constrained to make our judgment according to the confines set by the 11 September 1992 Order of the liquidation court.

According to the principle of the  law of the case, “whatever is once irrevocably established as the controlling legal rule or decision between the same parties in the same case continues to be the law of the case.”[17] To this the Court must adhere, whether the legal principles laid down were “correct on general principles or not,” or “whether the question is right or wrong.”[18]

As a result, upon the finality of the 11 September 1992 Order, the following issues were laid to rest: (1) the Singaporeans are deemed preferred creditors; and (2) they are entitled to the payment of their total investment amounting to US$2,531,632.18.

The determination of interests or dividends was, however, deferred pending a report to be submitted by the Liquidator.  It was only in the 12 May 1998 Order of the liquidation court that an interest was awarded, giving rise to a new question of law.  Therefore, the award of interest is not a controlling legal rule or decision that had been previously established as between the parties, since the parties did not have the chance to argue on that issue.

A perusal of the 12 May 1998 Order shows that the liquidation court awarded interest not as a form of accrued dividends or return of investment, but as actual and compensatory damages.  Categorically, the order states:

The December 16, 1993 decision of the Court of Appeals ruled that the remittance of earnings of this type

of foreign investment is guaranteed (CA decision, p. 15, emphasis supplied).  Legal interests are earnings and they are provided for by law arising from the withholding of funds due to a party.  They are not computed on the amount of earnings of a business.[19]

We take note of the fact that when the trial court, in its Order of 11 September 1992, declared the Singaporeans to have the status of preferred creditors, it did so only for the purpose of giving them priority in the order of payment upon the liquidation of the PaBC.  Relying only on the Investment Incentive Act, the trial court did not decide whether the Singaporeans’ investment was a loan or equity.  Since the Singaporeans were declared preferred creditors for a limited purpose, it does not follow that the court likewise implied that the original remittance of the Singaporeans was in the nature of a loan or forbearance of money, goods, or credit.

The Court of Appeals found that the equity investment of US$2,531,632.18 was not a loan or forbearance of money; hence, Central Bank Circular No. 416, prescribing 12% interest per annum on loans or forbearance of money, goods, or credit is inapplicable.  It applied Article 2209 of the Civil Code, which provides for the legal interest of 6% per annum in the absence of a stipulation to the contrary.  Thus, the Court of Appeals modified the Order of 12 May 1998 and reduced the rate of interest on the investment of US$2,531,632.18 from 12% to 6% to run from 15 October 1981 – when the outward remittance and equity investment was actually made – up to the closure of PaBC.  Also, following Eastern Shipping Lines,  Inc. v. Court of Appeals  it upheld the grant of 12% interest on the monetary award of US$2,531,632.18 to run from the date of the finality of the 11 September 1992 Order until its satisfaction.

In Eastern Shipping Lines, Inc. v. Court of Appeals, we laid down the following guidelines:

I.        When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on “Damages” of the Civil Code govern in determining the measure of recoverable damages.

II.       With regard particularly to an award of interest, in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1.            When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.  In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2.            When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.  No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained).  The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3.            When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.[20]

It is undisputed that the amount of US$2,531,632.58 remitted by the Singaporeans represented the 154,462 PaBC common shares previously issued to, and owned by, Mandarin Development Corporation bought by the Singaporeans at the price of US$16.39 per share. The investment was approved by the Central Bank under Monetary Board Resolution No. 323 dated 19 February 1982 and constituted about 11% of the total subscribed capital stock of PaBC. Clearly, the amount remitted to PaBC by the Singaporeans was an investment.

An “investment” is an expenditure to acquire property or other assets in order to produce revenue.  It is the placing of capital or laying out of money in a way intended to secure income or profit from its employment. “To invest” is to purchase securities of a more or less permanent nature, or to

place money or property in business ventures or real estate, or otherwise lay it out, so that it may produce a revenue or income.[21]

Thus, unlike a deposit of money or a loan that earns interest, the investment of the Singaporeans cannot be assured of a dividend or an interest on the amount invested.  For, interests or dividends are granted only after profits or gains are generated.

We therefore agree with the Court of Appeals in holding that the amount of US$2,531,632.18 remitted by the Singaporeans to PaBC was not a loan or forbearance of money in favor of PaBC.  Hence No. II-1 of the above-quoted guidelines in Eastern Shipping Lines does not come into play.  Neither can we apply Central Bank Circular No. 416, which imposes the rate of 12% per annum on loans and forbearance of money.  Nor can No. II-2 of the above-quoted guidelines be invoked because, as correctly pointed out by the Liquidator, the closure of the PaBC did not constitute a breach of obligation.  Article 2209 of the Civil Code, which was relied upon by the Court of Appeals, does not find application either.  That Article, which provides for 6% interest per annum, governs when there is a delay in the payment of a sum of money.  Such is not the case here.

Thus, the Court of Appeals’ award of 6% interest on the Singaporeans’ equity investment as actual or compensatory damages from the date of its remittance until the closure of PaBC has no leg to stand on and must, therefore, be deleted.

The interest that may be awarded as actual or compensatory damages in this case is that provided in No. II-3 of the afore-quoted guidelines.  Upon the finality of the Order of 11 September 1992, the award of US$2,531,632.18 representing the Singaporeans’ equity investment became a judgment debt.  As such, it shall bear an interest of 12% per annum from the finality of the Order until its full satisfaction.

However, the grant of the said interest does not bar the Singaporeans from claiming liquidating dividends which may have accrued from their equity investment after being determined by the Liquidator.  In the liquidation of a corporation, after the payment of all corporate debts and liabilities, the remaining assets, if any, must be distributed to the stockholders in proportion to their interests in the corporation. The share of each stockholder in the assets upon liquidation is what is known as liquidating dividend.[22] Verily, the Singaporeans are entitled to 11% of the total liquidating dividend,

this being in proportion to their 11% interest of the total subscribed capital stock of PaBC.

Anent the fourth issue, the Court is unable to determine the veracity of the alleged overpayments in the absence of verified records on the total payments made in favor of the Singaporeans.  The award of the Court of Appeals of P56,034,877.04 representing uncollected interest is likewise unsubstantiated because it was not shown how the amount was derived.

To resolve this question of fact, the case is hereby remanded to the trial court to recompute the payments vis-à-vis the total amount due the Singaporeans, also considering the undisputed award of 12% interest per annum on the judgment debt of US$2,531,632.18 to be reckoned from 22 October 1992,[23] when the 11 September 1992 Order became final, until its full satisfaction.

WHEREFORE, the decision of the Court of Appeals of 31 January 2002 in CA-G.R. SP No. 47878 is hereby AFFIRMED insofar as the respondents ANG ENG JOO, ANG KEONG LAN, and E.J. ANG INTERNATIONAL, LTD., are entitled to the payment of 12% interest per annum in the form of actual or compensatory damages on the judgment award of US$2,531,632.18 to run from 22 October 1992, when the 11 September 1992 Order of the Regional Trial Court of Manila, Branch 31, became final and executory, until the amount is fully paid.  The said decision is, however, MODIFIED as follows:

1.  The award of interest at the rate of 6% per annum as actual or compensatory damages from 15 October 1981 until the closure of PaBC is hereby deleted for lack of basis without prejudice, however, to liquidating dividends or interests as may be determined by the Liquidator.

2.  The Regional Trial Court of Manila, Branch 31, is hereby directed to make a recomputation of all the total amounts paid by the petitioner Liquidator in favor of the private respondent Singaporeans taking into account the exact amount due them, and to issue the proper orders for payment, if warranted.  The amount due shall include the 12% rate of legal interests on the judgment debt of US$2,531,632.18.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 149734             November 19, 2004

DR. DANIEL VAZQUEZ and MA. LUIZA M. VAZQUEZ, petitioners, vs.AYALA CORPORATION, respondent.

D E C I S I O N

TINGA, J.:

The rise in value of four lots in one of the country's prime residential developments, Ayala Alabang Village in Muntinlupa City, over a period of six (6) years only, represents big money. The huge price difference lies at the heart of the present controversy. Petitioners insist that the lots should be sold to them at 1984 prices while respondent maintains that the prevailing market price in 1990 should be the selling price.

Dr. Daniel Vazquez and Ma. Luisa Vazquez1 filed this Petition for Review on Certiorari2 dated October 11, 2001 assailing the Decision3 of the Court of Appeals dated September 6, 2001 which reversed the Decision4 of the Regional Trial Court (RTC) and dismissed their complaint for specific performance and damages against Ayala Corporation.

Despite their disparate rulings, the RTC and the appellate court agree on the following antecedents:5

On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M. Vasquez (hereafter,

Vasquez spouses) entered into a Memorandum of Agreement (MOA) with Ayala Corporation (hereafter, AYALA) with AYALA buying from the Vazquez spouses, all of the latter's shares of stock in Conduit Development, Inc. (hereafter, Conduit). The main asset of Conduit was a 49.9 hectare property in Ayala Alabang, Muntinlupa, which was then being developed by Conduit under a development plan where the land was divided into Villages 1, 2 and 3 of the "Don Vicente Village." The development was then being undertaken for Conduit by G.P. Construction and Development Corp. (hereafter, GP Construction).

Under the MOA, Ayala was to develop the entire property, less what was defined as the "Retained Area" consisting of 18,736 square meters. This "Retained Area" was to be retained by the Vazquez spouses. The area to be developed by Ayala was called the "Remaining Area". In this "Remaining Area" were 4 lots adjacent to the "Retained Area" and Ayala agreed to offer these lots for sale to the Vazquez spouses at the prevailing price at the time of purchase. The relevant provisions of the MOA on this point are:

"5.7. The BUYER hereby commits that it will develop the 'Remaining Property' into a first class residential subdivision of the same class as its New Alabang Subdivision, and that it intends to complete the first phase under its amended development plan within three (3) years from the date of this Agreement. x x x"

5.15. The BUYER agrees to give the SELLERS a first option to purchase four developed lots next to the "Retained Area" at the prevailing market price at the time of the purchase."

The parties are agreed that the development plan referred to in paragraph 5.7 is not Conduit's development plan, but Ayala's amended development plan which was still to be formulated as of the time of the MOA. While in the Conduit plan, the 4 lots to be offered for sale to the Vasquez Spouses were in the first phase thereof or Village 1, in the Ayala plan which was formulated a year later, it was in the third phase, or Phase II-c.

Under the MOA, the Vasquez spouses made several express warranties, as follows:

"3.1. The SELLERS shall deliver to the BUYER:

xxx

3.1.2. The true and complete list, certified by the Secretary and Treasurer of the Company showing:

xxx

D. A list of all persons and/or entities with whom the Company has pending contracts, if any.

xxx

3.1.5. Audited financial statements of the Company as at Closing date.

4. Conditions Precedent

All obligations of the BUYER under this Agreement are subject to fulfillment prior to or at the Closing, of the following conditions:

4.1. The representations and warranties by the SELLERS contained in this Agreement shall be true and correct at the time of Closing as though such representations and warranties were made at such time; and

xxx

6. Representation and Warranties by the SELLERS

The SELLERS jointly and severally represent and warrant to the BUYER that at the time of the execution of this Agreement and at the Closing:

xxx

6.2.3. There are no actions, suits or proceedings pending, or to the knowledge of the SELLERS, threatened against or affecting the SELLERS with respect to the Shares or the Property; and

7. Additional Warranties by the SELLERS

7.1. With respect to the Audited Financial Statements required to be submitted at Closing in accordance with Par. 3.1.5 above, the SELLER jointly and severally warrant to the BUYER that:

7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the Company shall own the "Remaining Property", free from all liens and encumbrances and that the Company shall have no obligation to any party except for billings payable to GP Construction & Development Corporation and advances made by Daniel Vazquez for which BUYER shall be responsible in accordance with Par. 2 of this Agreement.

7.1.2 Except to the extent reflected or reserved in the Audited Financial Statements of the Company as of Closing, and those disclosed to BUYER, the Company as of the date thereof, has no liabilities of any nature whether accrued, absolute, contingent or otherwise, including, without limitation, tax liabilities due or to become due and whether incurred in respect of or measured in respect of the Company's income prior to Closing or arising out of transactions or state of facts existing prior thereto.

7.2 SELLERS do not know or have no reasonable ground to know of any basis for any assertion against the Company as at closing or any liability of any nature and in any amount not fully reflected or reserved against such Audited Financial Statements referred to above, and those disclosed to BUYER.

xxx xxx xxx

7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the Closing, the Company is not engaged in or a party to, or to the best of the knowledge of the SELLERS, threatened with, any legal action or other proceedings before any court or administrative body, nor do the SELLERS know or have reasonable grounds to know of any basis for any such action or proceeding or of any governmental investigation relative to the Company.

7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due performance and observance by the Company of any term, covenant or condition of any instrument or agreement to which the company is a party or by which it is bound, and no condition exists which, with notice or lapse of time or both, will constitute such default or breach."

After the execution of the MOA, Ayala caused the suspension of work on Village 1 of the Don Vicente Project. Ayala then received a letter from one Maximo Del Rosario of Lancer General Builder Corporation informing Ayala that he was claiming the amount of P1,509,558.80 as the subcontractor of G.P. Construction...

G.P. Construction not being able to reach an amicable settlement with Lancer, on March 22, 1982, Lancer sued G.P. Construction, Conduit and Ayala in the then Court of First Instance of Manila in Civil Case No. 82-8598. G.P. Construction in turn filed a cross-claim against Ayala. G.P. Construction and Lancer both tried to enjoin Ayala from undertaking the development of the property. The suit was terminated only on February 19, 1987, when it was dismissed with prejudice after Ayala paid both Lancer and GP Construction the total of P4,686,113.39.

Taking the position that Ayala was obligated to sell the 4 lots adjacent to the "Retained Area" within 3 years from the date of the MOA, the Vasquez spouses sent several "reminder" letters of the approaching so-called deadline. However, no demand after April 23, 1984, was ever made by the Vasquez spouses for Ayala to sell the 4 lots. On the contrary, one of the letters signed by their authorized agent, Engr. Eduardo Turla, categorically stated that they expected "development of Phase 1 to be completed by February 19, 1990, three years from the settlement of the legal problems with the previous contractor."

By early 1990 Ayala finished the development of the vicinity of the 4 lots to be offered for sale. The four lots were then offered to be sold to the Vasquez spouses at the prevailing price in 1990. This was rejected by the Vasquez spouses who

wanted to pay at 1984 prices, thereby leading to the suit below.

After trial, the court a quo rendered its decision, the dispositive portion of which states:

"THEREFORE, judgment is hereby rendered in favor of plaintiffs and against defendant, ordering defendant to sell to plaintiffs the relevant lots described in the Complaint in the Ayala Alabang Village at the price of P460.00 per square meter amounting to P1,349,540.00; ordering defendant to reimburse to plaintiffs attorney's fees in the sum of P200,000.00 and to pay the cost of the suit."

In its decision, the court a quo concluded that the Vasquez spouses were not obligated to disclose the potential claims of GP Construction, Lancer and Del Rosario; Ayala's accountants should have opened the records of Conduit to find out all claims; the warranty against suit is with respect to "the shares of the Property" and the Lancer suit does not affect the shares of stock sold to Ayala; Ayala was obligated to develop within 3 years; to say that Ayala was under no obligation to follow a time frame was to put the Vasquezes at Ayala's mercy; Ayala did not develop because of a slump in the real estate market; the MOA was drafted and prepared by the AYALA who should suffer its ambiguities; the option to purchase the 4 lots is valid because it was supported by consideration as the option is incorporated in the MOA where the parties had prestations to each other. [Emphasis supplied]

Ayala Corporation filed an appeal, alleging that the trial court erred in holding that petitioners did not breach their warranties under the MOA6 dated April 23, 1981; that it was obliged to develop the land where the four (4) lots subject of the option to purchase are located within three (3) years from the date of the MOA; that it was in delay; and that the option to purchase was valid because it was incorporated in the MOA and the consideration therefor was the commitment by Ayala Corporation to petitioners embodied in the MOA.

As previously mentioned, the Court of Appeals reversed the RTC Decision. According to the appellate court, Ayala Corporation was never

informed beforehand of the existence of the Lancer claim. In fact, Ayala Corporation got a copy of the Lancer subcontract only on May 29, 1981 from G.P. Construction's lawyers. The Court of Appeals thus held that petitioners violated their warranties under the MOA when they failed to disclose Lancer's claims. Hence, even conceding that Ayala Corporation was obliged to develop and sell the four (4) lots in question within three (3) years from the date of the MOA, the obligation was suspended during the pendency of the case filed by Lancer.

Interpreting the MOA's paragraph 5.7 above-quoted, the appellate court held that Ayala Corporation committed to develop the first phase of its own amended development plan and not Conduit's development plan. Nowhere does the MOA provide that Ayala Corporation shall follow Conduit's development plan nor is Ayala Corporation prohibited from changing the sequence of the phases of the property it will develop.

Anent the question of delay, the Court of Appeals ruled that there was no delay as petitioners never made a demand for Ayala Corporation to sell the subject lots to them. According to the appellate court, what petitioners sent were mere reminder letters the last of which was dated prior to April 23, 1984 when the obligation was not yet demandable. At any rate, the Court of Appeals found that petitioners in fact waived the three (3)-year period when they sent a letter through their agent, Engr. Eduardo Turla, stating that they "expect that the development of Phase I will be completed by 19 February 1990, three years from the settlement of the legal problems with the previous contractor."7

The appellate court likewise ruled that paragraph 5.15 above-quoted is not an option contract but a right of first refusal there being no separate consideration therefor. Since petitioners refused Ayala Corporation's offer to sell the subject lots at the reduced 1990 price of P5,000.00 per square meter, they have effectively waived their right to buy the same.

In the instant Petition, petitioners allege that the appellate court erred in ruling that they violated their warranties under the MOA; that Ayala Corporation was not obliged to develop the "Remaining Property" within three (3) years from the execution of the MOA; that Ayala was not in delay; and that paragraph 5.15 of the MOA is a mere right of first refusal. Additionally, petitioners insist that the Court should review the factual

findings of the Court of Appeals as they are in conflict with those of the trial court.

Ayala Corporation filed a Comment on the Petition8 dated March 26, 2002, contending that the petition raises questions of fact and seeks a review of evidence which is within the domain of the Court of Appeals. Ayala Corporation maintains that the subcontract between GP Construction, with whom Conduit contracted for the development of the property under a Construction Contract dated October 10, 1980, and Lancer was not disclosed by petitioners during the negotiations. Neither was the liability for Lancer's claim included in the Audited Financial Statements submitted by petitioners after the signing of the MOA. These justify the conclusion that petitioners breached their warranties under the afore-quoted paragraphs of the MOA. Since the Lancer suit ended only in February 1989, the three (3)-year period within which Ayala Corporation committed to develop the property should only be counted thence. Thus, when it offered the subject lots to petitioners in 1990, Ayala Corporation was not yet in delay.

In response to petitioners' contention that there was no action or proceeding against them at the time of the execution of the MOA on April 23, 1981, Ayala Corporation avers that the facts and circumstances which gave rise to the Lancer claim were already extant then. Petitioners warranted that their representations under the MOA shall be true and correct at the time of "Closing" which shall take place within four (4) weeks from the signing of the MOA.9 Since the MOA was signed on April 23, 1981, "Closing" was approximately the third week of May 1981. Hence, Lancer's claims, articulated in a letter which Ayala Corporation received on May 4, 1981, are among the liabilities warranted against under paragraph 7.1.2 of the MOA.

Moreover, Ayala Corporation asserts that the warranties under the MOA are not just against suits but against all kinds of liabilities not reflected in the Audited Financial Statements. It cannot be faulted for relying on the express warranty that except for billings payable to GP Construction and advances made by petitioner Daniel Vazquez in the amount of P38,766.04, Conduit has no other liabilities. Hence, petitioners cannot claim that Ayala Corporation should have examined and investigated the Audited Financial Statements of Conduit and should now assume all its obligations and liabilities including the Lancer suit and the cross-claim of GP Construction.

Furthermore, Ayala Corporation did not make a commitment to complete the development of the first phase of the property within three (3) years from the execution of the MOA. The provision refers to a mere declaration of intent to develop the first phase of its (Ayala Corporation's) own development plan and not Conduit's. True to its intention, Ayala Corporation did complete the development of the first phase (Phase II-A) of its amended development plan within three (3) years from the execution of the MOA. However, it is not obliged to develop the third phase (Phase II-C) where the subject lots are located within the same time frame because there is no contractual stipulation in the MOA therefor. It is free to decide on its own the period for the development of Phase II-C. If petitioners wanted to impose the same three (3)-year timetable upon the third phase of the amended development plan, they should have filed a suit to fix the time table in accordance with Article 119710 of the Civil Code. Having failed to do so, Ayala Corporation cannot be declared to have been in delay.

Ayala Corporation further contends that no demand was made on it for the performance of its alleged obligation. The letter dated October 4, 1983 sent when petitioners were already aware of the Lancer suit did not demand the delivery of the subject lots by April 23, 1984. Instead, it requested Ayala Corporation to keep petitioners posted on the status of the case. Likewise, the letter dated March 4, 1984 was merely an inquiry as to the date when the development of Phase 1 will be completed. More importantly, their letter dated June 27, 1988 through Engr. Eduardo Turla expressed petitioners' expectation that Phase 1 will be completed by February 19, 1990.

Lastly, Ayala Corporation maintains that paragraph 5.15 of the MOA is a right of first refusal and not an option contract.

Petitioners filed their Reply11 dated August 15, 2002 reiterating the arguments in their Petition and contending further that they did not violate their warranties under the MOA because the case was filed by Lancer only on April 1, 1982, eleven (11) months and eight (8) days after the signing of the MOA on April 23, 1981. Ayala Corporation admitted that it received Lancer's claim before the "Closing" date. It therefore had all the time to rescind the MOA. Not having done so, it can be concluded that Ayala Corporation itself did not consider the matter a violation of petitioners' warranty.

Moreover, petitioners submitted the Audited Financial Statements of Conduit and allowed an acquisition audit to be conducted by Ayala Corporation. Thus, the latter bought Conduit with "open eyes."

Petitioners also maintain that they had no knowledge of the impending case against Conduit at the time of the execution of the MOA. Further, the MOA makes Ayala Corporation liable for the payment of all billings of GP Construction. Since Lancer's claim was actually a claim against GP Construction being its sub-contractor, it is Ayala Corporation and not petitioners which is liable.

Likewise, petitioners aver that although Ayala Corporation may change the sequence of its development plan, it is obliged under the MOA to develop the entire area where the subject lots are located in three (3) years.

They also assert that demand was made on Ayala Corporation to comply with their obligation under the MOA. Apart from their reminder letters dated January 24, February 18 and March 5, 1984, they also sent a letter dated March 4, 1984 which they claim is a categorical demand for Ayala Corporation to comply with the provisions of the MOA.

The parties were required to submit their respective memoranda in the Resolution12 dated November 18, 2002. In compliance with this directive, petitioners submitted their Memorandum13 dated February 14, 2003 on even date, while Ayala Corporation filed its Memorandum14 dated February 14, 2003 on February 17, 2003.

We shall first dispose of the procedural question raised by the instant petition.

It is well-settled that the jurisdiction of this Court in cases brought to it from the Court of Appeals by way of petition for review under Rule 45 is limited to reviewing or revising errors of law imputed to it, its findings of fact being conclusive on this Court as a matter of general principle. However, since in the instant case there is a conflict between the factual findings of the trial court and the appellate court, particularly as regards the issues of breach of warranty, obligation to develop and incurrence of delay, we have to consider the evidence on record and resolve such factual issues as an exception to the general rule.15 In any event, the submitted issue relating to the categorization of the right to purchase granted to petitioners under the MOA is legal in character.

The next issue that presents itself is whether petitioners breached their warranties under the MOA when they failed to disclose the Lancer claim. The trial court declared they did not; the appellate court found otherwise.

Ayala Corporation summarizes the clauses of the MOA which petitioners allegedly breached when they failed to disclose the Lancer claim:

a) Clause 7.1.1. – that Conduit shall not be obligated to anyone except to GP Construction for P38,766.04, and for advances made by Daniel Vazquez;

b) Clause 7.1.2. – that except as reflected in the audited financial statements Conduit had no other liabilities whether accrued, absolute, contingent or otherwise;

c) Clause 7.2. – that there is no basis for any assertion against Conduit of any liability of any value not reflected or reserved in the financial statements, and those disclosed to Ayala;

d) Clause 7.6.3. – that Conduit is not threatened with any legal action or other proceedings; and

e) Clause 7.6.4. – that Conduit had not breached any term, condition, or covenant of any instrument or agreement to which it is a party or by which it is bound.16

The Court is convinced that petitioners did not violate the foregoing warranties.

The exchanges of communication between the parties indicate that petitioners substantially apprised Ayala Corporation of the Lancer claim or the possibility thereof during the period of negotiations for the sale of Conduit.

In a letter17 dated March 5, 1984, petitioner Daniel Vazquez reminded Ayala Corporation's Mr. Adolfo Duarte (Mr. Duarte) that prior to the completion of the sale of Conduit, Ayala Corporation asked for and was given information that GP Construction sub-contracted, presumably to Lancer, a greater percentage of the project than it was allowed. Petitioners gave this information to Ayala Corporation because the latter intimated a desire to "break the contract of Conduit with GP." Ayala Corporation did not deny this. In fact, Mr. Duarte's

letter18 dated March 6, 1984 indicates that Ayala Corporation had knowledge of the Lancer subcontract prior to its acquisition of Conduit. Ayala Corporation even admitted that it "tried to explore…legal basis to discontinue the contract of Conduit with GP" but found this "not feasible when information surfaced about the tacit consent of Conduit to the sub-contracts of GP with Lancer."

At the latest, Ayala Corporation came to know of the Lancer claim before the date of Closing of the MOA. Lancer's letter19 dated April 30, 1981 informing Ayala Corporation of its unsettled claim with GP Construction was received by Ayala Corporation on May 4, 1981, well before the "Closing"20 which occurred four (4) weeks after the date of signing of the MOA on April 23, 1981, or on May 23, 1981.

The full text of the pertinent clauses of the MOA quoted hereunder likewise indicate that certain matters pertaining to the liabilities of Conduit were disclosed by petitioners to Ayala Corporation although the specifics thereof were no longer included in the MOA:

7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the Company shall own the "Remaining Property", free from all liens and encumbrances and that the Company shall have no obligation to any party except for billings payable to GP Construction & Development Corporation and advances made by Daniel Vazquez for which BUYER shall be responsible in accordance with Paragraph 2 of this Agreement.

7.1.2 Except to the extent reflected or reserved in the Audited Financial Statements of the Company as of Closing, and those disclosed to BUYER, the Company as of the date hereof, has no liabilities of any nature whether accrued, absolute, contingent or otherwise, including, without limitation, tax liabilities due or to become due and whether incurred in respect of or measured in respect of the Company's income prior to Closing or arising out of transactions or state of facts existing prior thereto.

7.2 SELLERS do not know or have no reasonable ground to know of any basis for any assertion against the Company as at Closing of any liability of any nature and in

any amount not fully reflected or reserved against such Audited Financial Statements referred to above, and those disclosed to BUYER.

xxx xxx xxx

7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the Closing, the Company is not engaged in or a party to, or to the best of the knowledge of the SELLERS, threatened with, any legal action or other proceedings before any court or administrative body, nor do the SELLERS know or have reasonable grounds to know of any basis for any such action or proceeding or of any governmental investigation relative to the Company.

7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due performance and observance by the Company of any term, covenant or condition of any instrument or agreement to which the Company is a party or by which it is bound, and no condition exists which, with notice or lapse of time or both, will constitute such default or breach."21 [Emphasis supplied]

Hence, petitioners' warranty that Conduit is not engaged in, a party to, or threatened with any legal action or proceeding is qualified by Ayala Corporation's actual knowledge of the Lancer claim which was disclosed to Ayala Corporation before the "Closing."

At any rate, Ayala Corporation bound itself to pay all billings payable to GP Construction and the advances made by petitioner Daniel Vazquez. Specifically, under paragraph 2 of the MOA referred to in paragraph 7.1.1, Ayala Corporation undertook responsibility "for the payment of all billings of the contractor GP Construction & Development Corporation after the first billing and any payments made by the company and/or SELLERS shall be reimbursed by BUYER on closing which advances to date is P1,159,012.87."22

The billings knowingly assumed by Ayala Corporation necessarily include the Lancer claim for which GP Construction is liable. Proof of this is Ayala Corporation's letter23 to GP Construction dated before "Closing" on May 4, 1981, informing the latter of Ayala Corporation's receipt of the Lancer claim embodied in the letter dated April 30, 1981, acknowledging that it is taking over the

contractual responsibilities of Conduit, and requesting copies of all sub-contracts affecting the Conduit property. The pertinent excerpts of the letter read:

…

In this connection, we wish to inform you that this morning we received a letter from Mr. Maximo D. Del Rosario, President of Lancer General Builders Corporation apprising us of the existence of subcontracts that they have with your corporation. They have also furnished us with a copy of their letter to you dated 30 April 1981.

Since we are taking over the contractual responsibilities of Conduit Development, Inc., we believe that it is necessary, at this point in time, that you furnish us with copies of all your subcontracts affecting the property of Conduit, not only with Lancer General Builders Corporation, but all subcontracts with other parties as well…24

Quite tellingly, Ayala Corporation even attached to its Pre-Trial Brief25 dated July 9, 1992 a copy of the letter26dated May 28, 1981 of GP Construction's counsel addressed to Conduit furnishing the latter with copies of all sub-contract agreements entered into by GP Construction. Since it was addressed to Conduit, it can be presumed that it was the latter which gave Ayala Corporation a copy of the letter thereby disclosing to the latter the existence of the Lancer sub-contract.

The ineluctable conclusion is that petitioners did not violate their warranties under the MOA. The Lancer sub-contract and claim were substantially disclosed to Ayala Corporation before the "Closing" date of the MOA. Ayala Corporation cannot disavow knowledge of the claim.

Moreover, while in its correspondence with petitioners, Ayala Corporation did mention the filing of the Lancer suit as an obstacle to its development of the property, it never actually brought up nor sought redress for petitioners' alleged breach of warranty for failure to disclose the Lancer claim until it filed its Answer27 dated February 17, 1992.

We now come to the correct interpretation of paragraph 5.7 of the MOA. Does this paragraph express a commitment or a mere intent on the part of Ayala Corporation to develop the property within

three (3) years from date thereof? Paragraph 5.7 provides:

5.7. The BUYER hereby commits that it will develop the 'Remaining Property' into a first class residential subdivision of the same class as its New Alabang Subdivision, and that it intends to complete the first phase under its amended development plan within three (3) years from the date of this Agreement….28

Notably, while the first phrase of the paragraph uses the word "commits" in reference to the development of the "Remaining Property" into a first class residential subdivision, the second phrase uses the word "intends" in relation to the development of the first phase of the property within three (3) years from the date of the MOA. The variance in wording is significant. While "commit"29 connotes a pledge to do something, "intend"30 merely signifies a design or proposition.

Atty. Leopoldo Francisco, former Vice President of Ayala Corporation's legal division who assisted in drafting the MOA, testified:

COURT

You only ask what do you mean by that intent. Just answer on that point.

ATTY. BLANCO

Don't talk about standard.

WITNESS

A Well, the word intent here, your Honor, was used to emphasize the tentative character of the period of development because it will be noted that the sentence refers to and I quote "to complete the first phase under its amended development plan within three (3) years from the date of this agreement, at the time of the execution of this agreement, your Honor." That amended development plan was not yet in existence because the buyer had manifested to the seller that the buyer could amend the subdivision plan originally belonging to the seller to conform with its own standard of development and second, your Honor, (interrupted)31

It is thus unmistakable that this paragraph merely expresses an intention on Ayala Corporation's part to complete the first phase under its amended development plan within three (3) years from the execution of the MOA. Indeed, this paragraph is so plainly worded that to misunderstand its import is deplorable.

More focal to the resolution of the instant case is paragraph 5.7's clear reference to the first phase of Ayala Corporation's amended development plan as the subject of the three (3)-year intended timeframe for development. Even petitioner Daniel Vazquez admitted on cross-examination that the paragraph refers not to Conduit's but to Ayala Corporation's development plan which was yet to be formulated when the MOA was executed:

Q: Now, turning to Section 5.7 of this Memorandum of Agreement, it is stated as follows: "The Buyer hereby commits that to develop the remaining property into a first class residential subdivision of the same class as New Alabang Subdivision, and that they intend to complete the first phase under its amended development plan within three years from the date of this agreement."

Now, my question to you, Dr. Vasquez is that there is no dispute that the amended development plan here is the amended development plan of Ayala?

A: Yes, sir.

Q: In other words, it is not Exhibit "D-5" which is the original plan of Conduit?

A: No, it is not.

Q: This Exhibit "D-5" was the plan that was being followed by GP Construction in 1981?

A: Yes, sir.

Q: And point of fact during your direct examination as of the date of the agreement, this amended development plan was still to be formulated by Ayala?

A: Yes, sir.32

As correctly held by the appellate court, this admission is crucial because while the subject lots to be sold to petitioners were in the first phase of the Conduit development plan, they were in the third or last phase of the Ayala Corporation

development plan. Hence, even assuming that paragraph 5.7 expresses a commitment on the part of Ayala Corporation to develop the first phase of its amended development plan within three (3) years from the execution of the MOA, there was no parallel commitment made as to the timeframe for the development of the third phase where the subject lots are located.

Lest it be forgotten, the point of this petition is the alleged failure of Ayala Corporation to offer the subject lots for sale to petitioners within three (3) years from the execution of the MOA. It is not that Ayala Corporation committed or intended to develop the first phase of its amended development plan within three (3) years. Whether it did or did not is actually beside the point since the subject lots are not located in the first phase anyway.

We now come to the issue of default or delay in the fulfillment of the obligation.

Article 1169 of the Civil Code provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

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

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

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins.

In order that the debtor may be in default it is necessary that the following requisites be present:

(1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially.33

Under Article 1193 of the Civil Code, obligations for whose fulfillment a day certain has been fixed shall be demandable only when that day comes. However, no such day certain was fixed in the MOA. Petitioners, therefore, cannot demand performance after the three (3) year period fixed by the MOA for the development of the first phase of the property since this is not the same period contemplated for the development of the subject lots. Since the MOA does not specify a period for the development of the subject lots, petitioners should have petitioned the court to fix the period in accordance with Article 119734 of the Civil Code. As no such action was filed by petitioners, their complaint for specific performance was premature, the obligation not being demandable at that point. Accordingly, Ayala Corporation cannot likewise be said to have delayed performance of the obligation.

Even assuming that the MOA imposes an obligation on Ayala Corporation to develop the subject lots within three (3) years from date thereof, Ayala Corporation could still not be held to have been in delay since no demand was made by petitioners for the performance of its obligation.

As found by the appellate court, petitioners' letters which dealt with the three (3)-year timetable were all dated prior to April 23, 1984, the date when the period was supposed to expire. In other words, the letters were sent before the obligation could become legally demandable. Moreover, the letters were mere reminders and not categorical demands to perform. More importantly, petitioners waived the three (3)-year period as evidenced by their agent, Engr. Eduardo Turla's letter to the effect that petitioners agreed that the three (3)-year period should be counted from the termination of the case filed by Lancer. The letter reads in part:

I. Completion of Phase I

As per the memorandum of Agreement also dated April 23, 1981, it was undertaken by your goodselves to complete the development of Phase I within three (3) years. Dr. & Mrs. Vazquez were made to understand that you were unable to accomplish this because of legal problems with the previous contractor. These legal problems were resolved as of February 19,

1987, and Dr. & Mrs. Vazquez therefore expect that the development of Phase I will be completed by February 19, 1990, three years from the settlement of the legal problems with the previous contractor. The reason for this is, as you know, that security-wise, Dr. & Mrs. Vazquez have been advised not to construct their residence till the surrounding area (which is Phase I) is developed and occupied. They have been anxious to build their residence for quite some time now, and would like to receive assurance from your goodselves regarding this, in compliance with the agreement.

II. Option on the adjoining lots

We have already written your goodselves regarding the intention of Dr. & Mrs. Vazquez to exercise their option to purchase the two lots on each side (a total of 4 lots) adjacent to their "Retained Area". They are concerned that although over a year has elapsed since the settlement of the legal problems, you have not presented them with the size, configuration, etc. of these lots. They would appreciate being provided with these at your earliest convenience.35

Manifestly, this letter expresses not only petitioners' acknowledgement that the delay in the development of Phase I was due to the legal problems with GP Construction, but also their acquiescence to the completion of the development of Phase I at the much later date of February 19, 1990. More importantly, by no stretch of semantic interpretation can it be construed as a categorical demand on Ayala Corporation to offer the subject lots for sale to petitioners as the letter merely articulates petitioners' desire to exercise their option to purchase the subject lots and concern over the fact that they have not been provided with the specifications of these lots.

The letters of petitioners' children, Juan Miguel and Victoria Vazquez, dated January 23, 198436 and February 18, 198437 can also not be considered categorical demands on Ayala Corporation to develop the first phase of the property within the three (3)-year period much less to offer the subject lots for sale to petitioners. The letter dated January 23, 1984 reads in part:

You will understand our interest in the completion of the roads to our property, since we cannot develop it till you have constructed the same. Allow us to remind you of our Memorandum of Agreement, as per which you committed to develop the roads to our property "as per the original plans of the company", and that

1. The back portion should have been developed before the front portion – which has not been the case.

2. The whole project – front and back portions be completed by 1984.38

The letter dated February 18, 1984 is similarly worded. It states:

In this regard, we would like to remind you of Articles 5.7 and 5.9 of our Memorandum of Agreement which states respectively:…39

Even petitioner Daniel Vazquez' letter40 dated March 5, 1984 does not make out a categorical demand for Ayala Corporation to offer the subject lots for sale on or before April 23, 1984. The letter reads in part:

…and that we expect from your goodselves compliance with our Memorandum of Agreement, and a definite date as to when the road to our property and the development of Phase I will be completed.41

At best, petitioners' letters can only be construed as mere reminders which cannot be considered demands for performance because it must appear that the tolerance or benevolence of the creditor must have ended.42

The petition finally asks us to determine whether paragraph 5.15 of the MOA can properly be construed as an option contract or a right of first refusal. Paragraph 5.15 states:

5.15 The BUYER agrees to give the SELLERS first option to purchase four developed lots next to the "Retained Area" at the prevailing market price at the time of the purchase.43

The Court has clearly distinguished between an option contract and a right of first refusal. An option is a preparatory contract in which one party grants

to another, for a fixed period and at a determined price, the privilege to buy or sell, or to decide whether or not to enter into a principal contract. It binds the party who has given the option not to enter into the principal contract with any other person during the period designated, and within that period, to enter into such contract with the one to whom the option was granted, if the latter should decide to use the option. It is a separate and distinct contract from that which the parties may enter into upon the consummation of the option. It must be supported by consideration.44

In a right of first refusal, on the other hand, while the object might be made determinate, the exercise of the right would be dependent not only on the grantor's eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that are yet to be firmed up.45

Applied to the instant case, paragraph 5.15 is obviously a mere right of first refusal and not an option contract. Although the paragraph has a definite object, i.e., the sale of subject lots, the period within which they will be offered for sale to petitioners and, necessarily, the price for which the subject lots will be sold are not specified. The phrase "at the prevailing market price at the time of the purchase" connotes that there is no definite period within which Ayala Corporation is bound to reserve the subject lots for petitioners to exercise their privilege to purchase. Neither is there a fixed or determinable price at which the subject lots will be offered for sale. The price is considered certain if it may be determined with reference to another thing certain or if the determination thereof is left to the judgment of a specified person or persons.46

Further, paragraph 5.15 was inserted into the MOA to give petitioners the first crack to buy the subject lots at the price which Ayala Corporation would be willing to accept when it offers the subject lots for sale. It is not supported by an independent consideration. As such it is not governed by Articles 1324 and 1479 of the Civil Code, viz:

Art. 1324. When the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised.

Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price.

Consequently, the "offer" may be withdrawn anytime by communicating the withdrawal to the other party.47

In this case, Ayala Corporation offered the subject lots for sale to petitioners at the price of P6,500.00/square meter, the prevailing market price for the property when the offer was made on June 18, 1990.48 Insisting on paying for the lots at the prevailing market price in 1984 of P460.00/square meter, petitioners rejected the offer. Ayala Corporation reduced the price to P5,000.00/square meter but again, petitioners rejected the offer and instead made a counter-offer in the amount of P2,000.00/square meter.49 Ayala Corporation rejected petitioners' counter-offer. With this rejection, petitioners lost their right to purchase the subject lots.

It cannot, therefore, be said that Ayala Corporation breached petitioners' right of first refusal and should be compelled by an action for specific performance to sell the subject lots to petitioners at the prevailing market price in 1984.

WHEREFORE, the instant petition is DENIED. No pronouncement as to costs.

SO ORDERED.