RELATIVITY OF CONTRACTS

G.R. No. 184041

ANICETO G. SALUDO, JR.,
Petitioner,
Present:
CORONA, C.J.,
Chairperson
NACHURA,*
LEONARDO-DE CASTRO,
DEL CASTILLO, and
PEREZ, JJ.

-versus-

Promulgated:

October 13, 2010

SECURITY BANK CORPORATION,
Respondent.

x---------------------------------------------------------------------------------------- x

DECISION

PEREZ, J.:

Before this Court is a petition for review on certiorari seeking the reversal of
the Decision1 of the Court of Appeals in CA-G.R. CV No. 88079 dated 24 January
2008 which affirmed the Decision2 of Branch 149 of the Regional Trial Court (RTC) of
Makati City, finding petitioner Aniceto G. Saludo, Jr. and Booklight, Inc. (Booklight)
jointly and severally liable to Security Bank Corporation (SBC).

The basic facts follow

On 30 May 1996, Booklight was extended an omnibus line credit facility 3 by

SBC in the amount of P10,000,000.00. Said loan was covered by a Credit
Agreement4 and a Continuing Suretyship5 with petitioner as surety, both documents
dated 1 August 1996, to secure full payment and performance of the obligations
arising from the credit accommodation.

1
2
3
4
5

Booklight drew several availments of the approved credit facility from 1996 to 1997
and faithfully complied with the terms of the loan. On 30 October 1997, SBC
approved the renewal of credit facility of Booklight in the amount of P10,000,000.00
under the prevailing security lending rate. 6 From August 3 to 14, 1998, Booklight
executed nine (9) promissory notes7 in favor of SBC in the aggregate amount of
P9,652,725.00. For failure to settle the loans upon maturity, demands 8 were made
on Booklight and petitioner for the payment of the obligation but the duo failed to
pay. As of 15 May 2000, the obligation of Booklight stood at P10,487,875.41,
inclusive of interest past due and penalty. 9

On 16 June 2000, SBC filed against Booklight and herein petitioner an action
for collection of sum of money with the RTC. Booklight initially filed a motion to
dismiss, which was later on denied for lack of merit. In his Answer, Booklight
asserted that the amount demanded by SBC was not based on the omnibus credit
line facility of 30 May 1996, but rather on the amendment of the credit facilities on
15 October 1996 increasing the loan line from P8,000,000.00 to P10,000,000.00.
Booklight denied executing the promissory notes. It also claimed that it was not in
default as in fact, it paid the sum of P1,599,126.11 on 30 September 1999 as a
prelude to restructuring its loan for which it earnestly negotiated for a mutually
acceptable agreement until 5 July 2000, without knowing that SBC had already filed
the collection case.10

6
7
8
9
10

In his Answer to the complaint, herein petitioner alleged that under the Continuing
Suretyship, it was the parties understanding that his undertaking and liability was
merely as an accommodation guarantor of Booklight. He countered that he came to
know that Booklight offered to pay SBC the partial payment of the loan and
proposed the restructuring of the obligation. Petitioner argued that said offer to pay
constitutes a valid tender of payment which discharged Booklights obligation to the
extent of the offer. Petitioner also averred that the imposition of the penalty on the
supposed due and unpaid principal obligation based on the penalty rate of 2% per
month is clearly unconscionable.11

On 7 March 2005, Booklight was declared in default. Consequently, SBC presented

its evidence ex-parte. The case against petitioner, however, proceeded and the
latter was able to present evidence on his behalf.

After trial, the RTC ruled that petitioner is jointly and solidarily liable with
Booklight under the Continuing Suretyship Agreement. The dispositive portion
reads:

WHEREFORE, in view of the foregoing considerations, the Court

hereby finds in favor of the plaintiff against the defendants by ordering
the defendants Booklight, Inc. and Aniceto G. Saludo, Jr., jointly and
severally liable (solidarily liable) to plaintiff [sic], the following sums of
Philippine Pesos:

11

PN No.

74/787/98

Amount

P1,927,000.0

Interest Rate

BeginningUntil fully

(per annum)

paid

20.189%

November 2, 1998

74/788/98

913,545.00

20.189%

November 2, 1998

74/789/98

1,927,090.00

20.189%

November 2, 1998

74/791/98

500,000.0

20.178%

November 4, 1998

74/792/98

800,000.00

20.178%

November 4, 1998

74/793/98

665,000.00

20.178%

November 3, 1998

74/808/98

970,000.00

20.178%

November 9, 1998

74/822/98

975,000.00

20.178%

November 12, 1998

74/823/98

975,000.00

20.178%

November 12, 1998

with attorneys fee of P100,000.00 plus cost of suit.12

12

The Court of Appeals affirmed in toto the ruling of the RTC.13 Petitioner filed a
motion for reconsideration but it was denied by the Court of Appeals on 7 August
2008.14

Hence, the instant petition on the following arguments:

1.

The first credit facility has a one-year term from 30 June

1996 to 30 June 1997 while the second credit facility runs from
30 October 1997 to 30 October 1998.

2.

When the first credit facility expired, its accessory

contract, the Continuing Surety agreement likewise expired.

3.

The second credit facility is not covered by the Continuing

Suretyship, thus, availments made in 1998 by Booklight are not
covered by the Continuing Suretyship.

4.

The approval of the second credit facility necessitates the

consent of petitioner for the latters Continuing Suretyship to be
effective.

5.

The nine (9) promissory notes executed and drawn by

Booklight in 1998 did not specify that they were drawn against
and subject to the Continuing Suretyship. Neither was it
mentioned in the Continuing Suretyship that it was executed to
serve as collateral to the nine (9) promissory notes.

6.

The Continuing Suretyship is a contract of adhesion and

petitioners participation to it is his signing of his contract.

13
14

7.

The approval of the second credit facility is considered a

novation of the first sufficient to extinguish the Continuing
Suretyship and discharge petitioner.

8.

The 20.178% interest rate imposed by the RTC is

unconscionable.15

The main derivative of these averments is the issue of whether or not

petitioner should be held solidarily liable for the second credit facility extended to
Booklight.
We rule in the affirmative.

There is no doubt that Booklight was extended two (2) credit facilities, each with
a one-year term, by SBC. Booklight availed of these two (2) credit lines. While
Booklight was able to comply with its obligation under the first credit line, it
defaulted in the payment of the loan obligation amounting to P9,652,725.00 under
the second credit line. There is likewise no dispute that the first credit line facility,
with a term from 30 June 1996 to 30 June 1997, was covered by a Continuing
Suretyship with petitioner acting as the surety. The dispute is on the coverage by
the Continuing Suretyship of the loan contracted under the second credit facility.

Under the Continuing Suretyship, petitioner undertook to guarantee the

following obligations:

a)

Guaranteed Obligations the obligations of the Debtor

arising from all credit accommodations extended by the Bank to
the Debtor, including increases, renewals, roll-overs,
extensions, restructurings, amendments or novations

15

thereof, as well as (i) all obligations of the Debtor presently or

hereafter owing to the Bank, as appears in the accounts, books
and records of the Bank, whether direct or indirect, and (ii) any
and all expenses which the Bank may incur in enforcing any of
its rights, powers and remedies under the Credit Instruments as
defined hereinbelow;

16

(Emphasis supplied.)

Whether the second credit facility is considered a renewal of the first or a

brand new credit facility altogether was indirectly answered by the trial court when
it invoked paragraph 10 of the Continuing Suretyship which provides:

10.

Continuity of Suretyship. This Suretyship shall remain in full

force and effect until full and due payment and performance of
the Guaranteed Obligations. This Suretyship shall not be
terminated by the partial payment to the Bank of Guaranteed
Obligations by any other surety or sureties of the Guaranteed
Obligations, even if the particular surety or sureties are relieved
of further liabilities.17

and concluded that the liability of petitioner did not expire upon the termination of
the first credit facility.

It cannot be gainsaid that the second credit facility was renewed for another oneyear term by SBC. The terms of renewal read:

16
17

30 October 1997
BOOKLIGHT, INC.
xxxx
Gentlemen:
We are pleased to advise you that the Bank has approved the renewal
of your credit facility subject to the terms and conditions set forth
below:
Facility

: Loan Line

Amount

: P10,000,000.00

Collateral : Existing JSS of Atty. Aniceto Saludo (marital consent waived)

Term

: 180 day Promissory Notes

Interest Rate : Prevailing SBC lending rate; subject to monthly setting

and payment
Expiry : October 31, 1998
x x x x.18

This very renewal is explicitly covered by the guaranteed obligations of the

Continuing Suretyship.

The essence of a continuing surety has been highlighted in the case of Totanes v.
China Banking Corporation19 in this wise:
Comprehensive or continuing surety agreements are, in fact, quite
commonplace in present day financial and commercial practice. A bank
18
19

or financing company which anticipates entering into a series of credit

transactions with a particular company, normally requires the
projected principal debtor to execute a continuing surety agreement
along with its sureties. By executing such an agreement, the principal
places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship agreement, there
would be no need to execute a separate surety contract or bond for
each financing or credit accommodation extended to the principal
debtor.20

In Gateway Electronics Corporation v. Asianbank Corporation, 21 the Court

emphasized that [b]y its nature, a continuing suretyship covers current and future
loans, provided that, with respect to future loan transactions, they are x x x within
the description or contemplation of the contract of guaranty.

Petitioner argues that the approval of the second credit facility necessitates his
consent considering the onerous and solidary liability of a surety. This is contrary to
the express waiver of his consent to such renewal, contained in paragraph 12 of the
Continuing Suretyship, which provides in part:

12. Waivers by the Surety. The Surety hereby waives: x x x (v) notice or
consent to any modification, amendment, renewal, extension or grace
period granted by the Bank to the Debtor with respect to the Credit
Instruments.22

20
21
22

Respondent, as last resort, harps on the novation of the first credit facility to
exculpate itself from liability from the second credit facility.

At the outset, it must be pointed out that the Credit Agreement is actually the
principal contract and it covers all credit facilities now or hereafter extended by
[SBC] to [Booklight];23 and that the suretyship agreement was executed precisely to
guarantee these obligations, i.e., the credit facilities arising from the credit
agreement. The principal contract is the credit agreement covered by the
Continuing Suretyship.

The two loan facilities availed by Booklight under the credit agreement are
the Omnibus Line amounting to P10,000,000.00 granted to Booklight in 1996 and
the other one is the Loan Line of the same amount in 1997. Petitioner however
seeks to muddle the issue by insisting that these two availments were two separate
principal contracts, conveniently ignoring the fact that it is the credit agreement
which constitutes the principal contract signed by Booklight in order to avail of SBCs
credit facilities. The two credit facilities are but loans made available to Booklight
pursuant to the credit agreement.

On these facts the novation argument advanced by petitioner must fail.

There is no novation to speak of. It is the first credit facility that expired and
not the Credit Agreement. There was a second loan pursuant to the same credit
agreement. The terms and conditions under the Credit Agreement continue to apply
and the Continuing Suretyship continues to guarantee the Credit Agreement.

23

The lameness of petitioners stand is pointed up by his attempt to escape

from liability by labelling the Continuing Suretyship as a contract of adhesion.
A contract of adhesion is defined as one in which one of the
parties imposes a ready-made form of contract, which the other party
may accept or reject, but which the latter cannot modify. One party
prepares the stipulation in the contract, while the other party merely
affixes his signature or his adhesion thereto, giving no room for
negotiation and depriving the latter of the opportunity to bargain on
equal footing.24

A contract of adhesion presupposes that the party adhering to the contract is

a weaker party. That cannot be said of petitioner. He is a lawyer. He is deemed
knowledgeable of the legal implications of the contract that he is signing.

It must be borne in mind, however, that contracts of adhesion

are not invalid per se. Contracts of adhesion, where one party imposes
a ready-made form of contract on the other, are not entirely prohibited.
The one who adheres to the contract is, in reality, free to reject it
entirely; if he adheres, he gives his consent. 25

Finally, petitioner challenges the imposition of 20.189% interest rate as

unconscionable. We rule otherwise. In Development Bank of the Philippines v.
Family Foods Manufacturing Co. Ltd.,26 this Court upheld the validity of the
imposition of 18% and 22% stipulated rates of interest in the two (2) promissory
notes. Likewise in Spouses Bacolor v. Banco Filipino Savings and Mortgage Bank, 27
24
25
26
27

the 24% interest rate agreed upon by parties was held as not violative of the Usury
Law, as amended by Presidential Decree No. 116.

WHEREFORE, the petition is DENIED. The Decision dated 24 January 2008 of the
Court of Appeals in CA-G.R. CV No. 88079 is AFFIRMED in toto.

SO ORDERED.

FIRST DIVISION
G.R. No. 164538 : August 9, 2010
METROPOLITAN BANK and TRUST COMPANY, Petitioner, v. ROGELIO
REYNADO and JOSE C. ADRANDEA,**Respondents.
DECISION
DEL CASTILLO, J.:
"It is a hornbook doctrine in our criminal law that the criminal liability for estafa is
not affected by a compromise, for it is a public offense which must be prosecuted
and punished by the government on its own motion, even though complete
reparation [has] been made of the damage suffered by the private offended party.
Since a criminal offense like estafa is committed against the State, the private
offended party may not waive or extinguish the criminal liability that the law
imposes for the commission of the crime."1cra1aw
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks the
reversal of the Court of Appeals' (CA's) Decision 2cra1aw dated October 21, 2002 in
CA-G.R. SP No. 58548 and its further Resolution 3cra1aw dated July 12, 2004 denying
petitioner's Motion for Reconsideration.4cra1aw

Factual Antecedents
On January 31, 1997, petitioner Metropolitan Bank and Trust Company charged
respondents before the Office of the City Prosecutor of Manila with the crime of
estafa under Article 315, paragraph 1(b) of the Revised Penal Code. In the
affidavit5cra1aw of petitioner's audit officer, Antonio Ivan S. Aguirre, it was alleged
that the special audit conducted on the cash and lending operations of its Port Area
branch uncovered anomalous/fraudulent transactions perpetrated by respondents in
connivance with client Universal Converter Philippines, Inc. (Universal); that
respondents were the only voting members of the branch's credit committee
authorized to extend credit accommodation to clients up to P200,000.00; that
through the so-called Bills Purchase Transaction, Universal, which has a paid-up
capital of only P125,000.00 and actual maintaining balance of P5,000.00, was able
to make withdrawals totaling P81,652,000.006cra1aw against uncleared regional
checks deposited in its account at petitioner's Port Area branch; that, consequently,
Universal was able to utilize petitioner's funds even before the seven-day clearing
period for regional checks expired; that Universal's withdrawals against uncleared
regional check deposits were without prior approval of petitioner's head office; that
the uncleared checks were later dishonored by the drawee bank for the reason
"Account Closed"; and, that respondents acted with fraud, deceit, and abuse of
confidence.
In their defense, respondents denied responsibility in the anomalous transactions
with Universal and claimed that they only intended to help the Port Area branch
solicit and increase its deposit accounts and daily transactions.
Meanwhile, on February 26, 1997, petitioner and Universal entered into a Debt
Settlement Agreement7cra1aw whereby the latter acknowledged its indebtedness to
the former in the total amount of P50,990,976.278cra1aw as of February 4, 1997
and undertook to pay the same in bi-monthly amortizations in the sum of
P300,000.00 starting January 15, 1997, covered by postdated checks, "plus balloon
payment of the remaining principal balance and interest and other charges, if any,
on December 31, 2001."9cra1aw
Findings of the Prosecutor

Following the requisite preliminary investigation, Assistant City Prosecutor Winnie M.

Edad (Prosecutor Edad) in her Resolution 10cra1aw dated July 10, 1997 found
petitioner's evidence insufficient to hold respondents liable for estafa. According to
Prosecutor Edad:chan robles virtual law library
The execution of the Debt Settlement Agreement puts complainant bank in estoppel
to argue that the liability is criminal. Since the agreement was made even before
the filing of this case, the relations between the parties [have] change[d], novation
has set in and prevented the incipience of any criminal liability on the part of
respondents.11cra1aw
Thus, Prosecutor Edad recommended the dismissal of the case:chan robles virtual
law library
WHEREFORE, for insufficiency of evidence, it is respectfully recommended that the
case be dismissed.12cra1aw
On December 9, 1997, petitioner appealed the Resolution of Prosecutor Edad to the
Department of Justice (DOJ) by means of a Petition for Review. 13cra1aw
Ruling of the Department of Justice
On June 22, 1998, the DOJ dismissed the petition ratiocinating that:chan robles
virtual law library
It is evident that your client based on the same transaction chose to file estafa only
against its employees and treat with kid gloves its big time client Universal who was
the one who benefited from this transaction and instead, agreed that it should be
paid on installment basis.
To allow your client to make the choice is to make an unwarranted classification
under the law which will result in grave injustice against herein respondents. Thus, if
your client agreed that no estafa was committed in this transaction with Universal
who was the principal player and beneficiary of this transaction[,] more so with
herein respondents whose liabilities are based only on conspiracy with Universal.

Equivocally, there is no estafa in the instant case as it was not clearly shown how
respondents misappropriated the P53,873,500.00 which Universal owed your client
after its checks deposited with Metrobank were dishonored. Moreover, fraud is not
present considering that the Executive Committee and the Credit Committee of
Metrobank were duly notified of these transactions which they approved. Further, no
damage was caused to your client as it agreed [to] the settlement [with]
Universal.14cra1aw
A Motion for Reconsideration15cra1aw was filed by petitioner, but the same was
denied on March 1, 2000 by then Acting Secretary of Justice Artemio G.
Tuquero.16cra1aw
Aggrieved, petitioner went to the CA by filing a Petition for Certiorari &
Mandamus.17cra1aw
Ruling of the Court of Appeals
By Decision18cra1aw of October 21, 2002, the CA affirmed the twin resolutions of
the Secretary of Justice. Citing jurisprudence 19cra1aw wherein we ruled that while
novation does not extinguish criminal liability, it may prevent the rise of such
liability as long as it occurs prior to the filing of the criminal information in
court.20cra1aw Hence, according to the CA, "[j]ust as Universal cannot be held
responsible under the bills purchase transactions on account of novation, private
respondents, who acted in complicity with the former, cannot be made liable [for]
the same transactions."21cra1aw The CA added that "[s]ince the dismissal of the
complaint is founded on legal ground, public respondents may not be compelled by
mandamus to file an information in court." 22cra1aw
Incidentally, the CA totally ignored the Comment 23cra1aw of the Office of the
Solicitor General (OSG) where the latter, despite being the statutory counsel of
public respondent DOJ, agreed with petitioner that the DOJ erred in dismissing the
complaint. It alleged that where novation does not extinguish criminal liability for
estafa neither does restitution negate the offense already committed. 24cra1aw

Additionally, the OSG, in sharing the views of petitioner contended that failure to
implead other responsible individuals in the complaint does not warrant its
dismissal, suggesting that the proper remedy is to cause their inclusion in the
information.25cra1aw This notwithstanding, however, the CA disposed of the petition
as follows:chan robles virtual law library
WHEREFORE, the petition is DENIED due course and, accordingly, DISMISSED.
Consequently, the resolutions dated June 22, 1998 and March 1, 2000 of the
Secretary of Justice are AFFIRMED.
SO ORDERED.26cra1aw
Hence, this instant petition before the Court.
On November 8, 2004, we required27cra1aw respondents to file Comment, not a
motion to dismiss, on the petition within 10 days from notice. The OSG filed a
Manifestation and Motion in Lieu of Comment28cra1aw while respondent Jose C.
Adraneda (Adraneda) submitted his Comment29cra1aw on the petition. The
Secretary of Justice failed to file the required comment on the OSG's Manifestation
and Motion in Lieu of Comment and respondent Rogelio Reynado (Reynado) did not
submit any. For which reason, we issued a show cause order 30cra1aw on July 19,
2006. Their persistent non-compliance with our directives constrained us to resolve
that they had waived the filing of comment and to impose a fine of P1,000.00 on
Reynado. Upon submission of the required memorandum by petitioner and
Adraneda, the instant petition was submitted for resolution.
Issues
Petitioner presented the following main arguments for our consideration:
1. Novation and undertaking to pay the amount embezzled do not extinguish
criminal liability.
2. It is the duty of the public prosecutor to implead all persons who appear
criminally liable for the offense charged.

Petitioner persistently insists that the execution of the Debt Settlement Agreement
with Universal did not absolve private respondents from criminal liability for estafa.
Petitioner submits that the settlement affects only the civil obligation of Universal
but did not extinguish the criminal liability of the respondents. Petitioner thus faults
the CA in sustaining the DOJ which in turn affirmed the finding of Prosecutor Edad
for committing apparent error in the appreciation and the application of the law on
novation. By petitioner's claim, citing Metropolitan Bank and Trust Co. v.
Tonda,31cra1aw the "negotiations pertain [to] and affect only the civil aspect of the
case but [do] not preclude prosecution for the offense already committed." 32cra1aw
In his Comment, Adraneda denies being a privy to the anomalous transactions and
passes on the sole responsibility to his co-respondent Reynado as the latter was
able to conceal the pertinent documents being the head of petitioner's Port Area
branch. Nonetheless, he contends that because of the Debt Settlement Agreement,
they cannot be held liable for estafa.
The OSG, for its part, instead of contesting the arguments of petitioner, even prayed
before the CA to give due course to the petition contending that DOJ indeed erred in
dismissing the complaint for estafa.
Given the facts of the case, the basic issue presented before this Court is whether
the execution of the Debt Settlement Agreement precluded petitioner from holding
respondents liable to stand trial for estafa under Art. 315 (1)(b) of the Revised Penal
Code.33cra1aw
Our Ruling
We find the petition highly meritorious.
Novation not a mode of extinguishing criminal liability for estafa;
Criminal liability for estafa not affected by compromise or novation of
contract.
Initially, it is best to emphasize that "novation is not one of the grounds prescribed
by the Revised Penal Code for the extinguishment of criminal liability." 34cra1aw

In a catena of cases, it was ruled that criminal liability for estafa is not affected by a
compromise or novation of contract. In Firaza v. People 35cra1aw and Recuerdo v.
People,36cra1aw this Court ruled that in a crime of estafa, reimbursement or belated
payment to the offended party of the money swindled by the accused does not
extinguish the criminal liability of the latter. We also held in People v.
Moreno37cra1aw and in People v. Ladera38cra1aw that "criminal liability for estafa is
not affected by compromise or novation of contract, for it is a public offense which
must be prosecuted and punished by the Government on its own motion even
though complete reparation should have been made of the damage suffered by the
offended party." Similarly in the case of Metropolitan Bank and Trust Company v.
Tonda39cra1aw cited by petitioner, we held that in a crime of estafa, reimbursement
of or compromise as to the amount misappropriated, after the commission of the
crime, affects only the civil liability of the offender, and not his criminal liability.
Thus, the doctrine that evolved from the aforecited cases is that a compromise or
settlement entered into after the commission of the crime does not extinguish
accused's liability for estafa. Neither will the same bar the prosecution of said crime.
Accordingly, in such a situation, as in this case, the complaint for estafa against
respondents should not be dismissed just because petitioner entered into a Debt
Settlement Agreement with Universal. Even the OSG arrived at the same
conclusion:chan robles virtual law library
Contrary to the conclusion of public respondent, the Debt Settlement Agreement
entered into between petitioner and Universal Converter Philippines extinguishes
merely the civil aspect of the latter's liability as a corporate entity but not the
criminal liability of the persons who actually committed the crime of estafa against
petitioner Metrobank. x x x40cra1aw
Unfortunately for petitioner, the above observation of the OSG was wittingly glossed
over in the body of the assailed Decision of the CA.
Execution of the Debt Settlement Agreement did not prevent the
incipience of criminal liability.

Even if the instant case is viewed from the standpoint of the law on contracts, the
disposition absolving the respondents from criminal liability because of novation is
still erroneous.
Under Article 1311 of the Civil Code, "contracts take effect only between the
parties, their assigns and heirs, except in case where the rights and obligations
arising from the contract are not transmissible by their nature, or by stipulation or
by provision of law." The civil law principle of relativity of contracts provides that
"contracts can only bind the parties who entered into it, and it cannot favor or
prejudice a third person, even if he is aware of such contract and has acted with
knowledge thereof."41cra1aw
In the case at bar, it is beyond cavil that respondents are not parties to the
agreement. The intention of the parties thereto not to include them is evident either
in the onerous or in the beneficent provisions of said agreement. They are not
assigns or heirs of either of the parties. Not being parties to the agreement,
respondents cannot take refuge therefrom to bar their anticipated trial for the crime
they committed. It may do well for respondents to remember that the criminal
action commenced by petitioner had its genesis from the alleged fraud,
unfaithfulness, and abuse of confidence perpetrated by them in relation to their
positions as responsible bank officers. It did not arise from a contractual dispute or
matters strictly between petitioner and Universal. This being so, respondents cannot
rely on subject settlement agreement to preclude prosecution of the offense already
committed to the end of extinguishing their criminal liability or prevent the
incipience of any liability that may arise from the criminal offense. This only
demonstrates that the execution of the agreement between petitioner and Universal
has no bearing on the innocence or guilt of the respondents.
Determination of the probable cause, a function belonging to the public
prosecutor;
judicial review allowed where it has been clearly established that the
prosecutor committed grave abuse of discretion.
In a preliminary investigation, a public prosecutor determines whether a crime has
been committed and whether there is probable cause that the accused is guilty

thereof.42cra1aw The Secretary of Justice, however, may review or modify the

resolution of the prosecutor.
"Probable cause is defined as such facts and circumstances that will engender a
well-founded belief that a crime has been committed and that the respondent is
probably guilty thereof and should be held for trial." 43cra1aw Generally, a public
prosecutor is afforded a wide latitude of discretion in the conduct of a preliminary
investigation. By way of exception, however, judicial review is allowed where
respondent has clearly established that the prosecutor committed grave abuse of
discretion that is, when he has exercised his discretion "in an arbitrary, capricious,
whimsical or despotic manner by reason of passion or personal hostility, patent and
gross enough as to amount to an evasion of a positive duty or virtual refusal to
perform a duty enjoined by law."44cra1aw Tested against these guidelines, we find
that this case falls under the exception rather than the general rule.
A close scrutiny of the substance of Prosecutor Edad's Resolution dated July 10,
1997 readily reveals that were it not for the Debt Settlement Agreement, there was
indeed probable cause to indict respondents for the crime charged. From her own
assessment of the Complaint-Affidavit of petitioner's auditor, her preliminary finding
is that "Ordinarily, the offense of estafa has been sufficiently established." 45cra1aw
Interestingly, she suddenly changed tack and declared that the agreement altered
the relation of the parties and that novation had set in preventing the incipience of
any criminal liability on respondents. In light of the jurisprudence herein earlier
discussed, the prosecutor should not have gone that far and executed an apparent
somersault. Compounding further the error, the DOJ in dismissing petitioner's
petition, ruled out estafa contrary to the findings of the prosecutor. Pertinent portion
of the ruling reads:chan robles virtual law library
Equivocally, there is no estafa in the instant case as it was not clearly shown how
respondents misappropriated the P53,873,500.00 which Universal owed your client
after its checks deposited with Metrobank were dishonored. Moreover, fraud is not
present considering that the Executive Committee and the Credit Committee of
Metrobank were duly notified of these transactions which they approved. Further, no

damage was caused to your client as it agreed [to] the settlement [with]
Universal.46cra1aw
The findings of the Secretary of Justice in sustaining the dismissal of the Complaint
are matters of defense best left to the trial court's deliberation and contemplation
after conducting the trial of the criminal case. To emphasize, a preliminary
investigation for the purpose of determining the existence of probable cause is "not
a part of the trial. A full and exhaustive presentation of the parties' evidence is not
required, but only such as may engender a well-grounded belief that an offense has
been committed and that the accused is probably guilty thereof." 47cra1aw A "finding
of probable cause does not require an inquiry into whether there is sufficient
evidence to procure a conviction. It is enough that it is believed that the act or
omission complained of constitutes the offense charged." 48cra1aw So we held in
Balangauan v. Court of Appeals: 49cra1aw
Applying the foregoing disquisition to the present petition, the reasons of DOJ for
affirming the dismissal of the criminal complaints for estafa and/or qualified estafa
are determinative of whether or not it committed grave abuse of discretion
amounting to lack or excess of jurisdiction. In requiring "hard facts and solid
evidence" as the basis for a finding of probable cause to hold petitioners Bernyl and
Katherene liable to stand trial for the crime complained of, the DOJ disregards the
definition of probable cause - that it is a reasonable ground of presumption that a
matter is, or may be, well-founded, such a state of facts in the mind of the
prosecutor as would lead a person of ordinary caution and prudence to believe, or
entertain an honest or strong suspicion, that a thing is so. The term does not mean
"actual and positive cause" nor does it import absolute certainty. It is merely based
on opinion and reasonable belief; that is, the belief that the act or omission
complained of constitutes the offense charged. While probable cause demands
more than "bare suspicion," it requires "less than evidence which would justify
conviction." Herein, the DOJ reasoned as if no evidence was actually presented by
respondent HSBC when in fact the records of the case were teeming; or it
discounted the value of such substantiation when in fact the evidence presented
was adequate to excite in a reasonable mind the probability that petitioners Bernyl
and Katherene committed the crime/s complained of. In so doing, the DOJ

whimsically and capriciously exercised its discretion, amounting to grave abuse of

discretion, which rendered its resolutions amenable to correction and annulment by
the extraordinary remedy of certiorari.
In the case at bar, as analyzed by the prosecutor, a prima facie case of estafa exists
against respondents. As perused by her, the facts as presented in the ComplaintAffidavit of the auditor are reasonable enough to excite her belief that respondents
are guilty of the crime complained of. In Andres v. Justice Secretary Cuevas50cra1aw
we had occasion to rule that the "presence or absence of the elements of the crime
is evidentiary in nature and is a matter of defense that may be passed upon after a
full-blown trial on the merits." 51cra1aw
Thus confronted with the issue on whether the public prosecutor and the Secretary
of Justice committed grave abuse of discretion in disposing of the case of petitioner,
given the sufficiency of evidence on hand, we do not hesitate to rule in the
affirmative. We have previously ruled that grave abuse of discretion may arise when
a lower court or tribunal violates and contravenes the Constitution, the law or
existing jurisprudence.
Non-inclusion of officers of Universal not a ground for the dismissal of the
complaint.
The DOJ in resolving to deny petitioner's appeal from the resolution of the
prosecutor gave another ground - failure to implead the officers of Universal. It
explained:chan robles virtual law library
To allow your client to make the choice is to make an unwarranted classification
under the law which will result in grave injustice against herein respondents. Thus, if
your client agreed that no estafa was committed in this transaction with Universal
who was the principal player and beneficiary of this transaction[,] more so with
herein respondents whose liabilities are based only on conspiracy with
Universal.52cra1aw
The ratiocination of the Secretary of Justice conveys the idea that if the charge
against respondents rests upon the same evidence used to charge co-accused

(officers of Universal) based on the latter's conspiratorial participation, the noninclusion of said co-accused in the charge should benefit the respondents.
The reasoning of the DOJ is flawed.
Suffice it to say that it is indubitably within the discretion of the prosecutor to
determine who must be charged with what crime or for what offense. Public
prosecutors, not the private complainant, are the ones obliged to bring forth before
the law those who have transgressed it.
Section 2, Rule 110 of the Rules of Court53cra1aw mandates that all criminal actions
must be commenced either by complaint or information in the name of the People
of the Philippines against all persons who appear to be responsible therefor. Thus
the law makes it a legal duty for prosecuting officers to file the charges against
whomsoever the evidence may show to be responsible for the offense. The proper
remedy under the circumstances where persons who ought to be charged were not
included in the complaint of the private complainant is definitely not to dismiss the
complaint but to include them in the information. As the OSG correctly suggested,
the proper remedy should have been the inclusion of certain employees of Universal
who were found to have been in cahoots with respondents in defrauding petitioner.
The DOJ, therefore, cannot seriously argue that because the officers of Universal
were not indicted, respondents themselves should not likewise be charged. Their
non-inclusion cannot be perversely used to justify desistance by the public
prosecutor from prosecution of the criminal case just because not all of those who
are probably guilty thereof were charged.
Mandamus a proper remedy when resolution of public respondent is
tainted with grave abuse of discretion.
Mandamus is a remedial measure for parties aggrieved. It shall issue when "any
tribunal, corporation, board, officer or person unlawfully neglects the performance
of an act which the law specifically enjoins as a duty resulting from an office, trust
or station."54cra1aw The writ of mandamus is not available to control discretion
neither may it be issued to compel the exercise of discretion. Truly, it is a matter of
discretion on the part of the prosecutor to determine which persons appear

responsible for the commission of a crime. However, the moment he finds one to be
so liable it becomes his inescapable duty to charge him therewith and to prosecute
him for the same. In such a situation, the rule loses its discretionary character and
becomes mandatory. Thus, where, as in this case, despite the sufficiency of the
evidence before the prosecutor, he refuses to file the corresponding information
against the person responsible, he abuses his discretion. His act is tantamount to a
deliberate refusal to perform a duty enjoined by law. The Secretary of Justice, on the
other hand, gravely abused his discretion when, despite the existence of sufficient
evidence for the crime of estafa as acknowledged by the investigating prosecutor,
he completely ignored the latter's finding and proceeded with the questioned
resolution anchored on purely evidentiary matters in utter disregard of the concept
of probable cause as pointed out in Balangauan. To be sure, findings of the
Secretary of Justice are not subject to review unless shown to have been made with
grave abuse.55cra1aw The present case calls for the application of the exception.
Given the facts of this case, petitioner has clearly established that the public
prosecutor and the Secretary of Justice committed grave abuse of discretion.
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of
Appeals in CA-G.R. SP No. 58548 promulgated on October 21, 2002 affirming the
Resolutions dated June 22, 1998 and March 1, 2000 of the Secretary of Justice, and
its Resolution dated July 12, 2004 denying reconsideration thereon are hereby
REVERSED and SET ASIDE. The public prosecutor is ordered to file the necessary
information for estafa against the respondents.
SO ORDERED.

PRUDENTIAL BANK AND TRUST COMPANY (now BANK OF THE PHILIPPINE

ISLANDS,1cralaw) Petitioner, v. LIWAYWAY ABASOLO, Respondent.
DECISION
CARPIO MORALES, J.:

Leonor Valenzuela-Rosales inherited two parcels of land situated in Palanan, Sta.

Cruz, Laguna (the properties), registered as Original Certificates of Title Nos. RO527 and RO-528. After she passed away, her heirs executed on June 14, 1993 a
Special Power of Attorney (SPA) in favor of Liwayway Abasolo (respondent)
empowering her to sell the properties. 2cralaw
Sometime in 1995, Corazon Marasigan (Corazon) wanted to buy the properties
which were being sold for P2,448,960, but as she had no available cash, she
broached the idea of first mortgaging the properties to petitioner Prudential Bank
and Trust Company (PBTC), the proceeds of which would be paid directly to
respondent. Respondent agreed to the proposal.
On Corazon and respondent's consultation with PBTC's Head Office, its employee,
Norberto Mendiola (Mendiola), allegedly advised respondent to issue an
authorization for Corazon to mortgage the properties, and for her (respondent) to
act as one of the co-makers so that the proceeds could be released to both of them.
To guarantee the payment of the property, Corazon executed on August 25, 1995 a
Promissory Note for P2,448,960 in favor of respondent.
By respondent's claim, in October 1995, Mendiola advised her to transfer the
properties first to Corazon for the immediate processing of Corazon's loan
application with assurance that the proceeds thereof would be paid directly to her
(respondent), and the obligation would be reflected in a bank guarantee.
Heeding Mendiola's advice, respondent executed a Deed of Absolute Sale over the
properties in favor of Corazon following which or on December 4, 1995, Transfer
Certificates of Title Nos. 164159 and 164160 were issued in the name of Corazon.
Corazon's application for a loan with PBTC's Tondo Branch was approved on
December 1995. She thereupon executed a real estate mortgage covering the
properties to secure the payment of the loan. In the absence of a written request for
a bank guarantee, the PBTC released the proceeds of the loan to Corazon.

Respondent later got wind of the approval of Corazon's loan application and the
release of its proceeds to Corazon who, despite repeated demands, failed to pay the
purchase price of the properties.
Respondent eventually accepted from Corazon partial payment in kind consisting of
one owner type jeepney and four passenger jeepneys, 3cralaw plus installment
payments, which, by the trial court's computation, totaled P665,000.
In view of Corazon's failure to fully pay the purchase price, respondent filed a
complaint for collection of sum of money and annulment of sale and mortgage with
damages, against Corazon and PBTC (hereafter petitioner), before the Regional Trial
Court (RTC) of Sta. Cruz, Laguna. 4cralaw
In her Answer,5cralaw Corazon denied that there was an agreement that the
proceeds of the loan would be paid directly to respondent. And she claimed that the
vehicles represented full payment of the properties, and had in fact overpaid
P76,040.
Petitioner also denied that there was any arrangement between it and respondent
that the proceeds of the loan would be released to her. 6cralaw It claimed that it
"may process a loan application of the registered owner of the real property who
requests that proceeds of the loan or part thereof be payable directly to a third
party [but] the applicant must submit a letter request to the Bank." 7cralaw
On pre-trial, the parties stipulated that petitioner was not a party to the contract of
sale between respondent and Corazon; that there was no written request that the
proceeds of the loan should be paid to respondent; and that respondent received
five vehicles as partial payment of the properties. 8cralaw
Despite notice, Corazon failed to appear during the trial to substantiate her claims.
By Decision of March 12, 2004,9cralaw Branch 91 of the Sta. Cruz, Laguna RTC
rendered judgment in favor of respondent and against Corazon who was made
directly liable to respondent, and against petitioner who was made subsidiarily

liable in the event that Corazon fails to pay. Thus the trial court
disposed:chanroblesvirtuallawlibrar
WHEREFORE, premises considered, finding the plaintiff has established her claim
against the defendants, Corazon Marasigan and Prudential Bank and Trust
Company, judgment is hereby rendered in favor of the plaintiff
ordering:chanroblesvirtuallawlibrar
Defendant Corazon Marasigan to pay the plaintiff the amount of P1,783,960.00 plus
three percent (3%) monthly interest per month from August 25, 1995 until fully
paid. Further, to pay the plaintiff the sum equivalent to twenty percent five [sic]
(25%) of P1,783,960.00 as attorney's fees.
Defendant Prudential Bank and Trust Company to pay the plaintiff the amount of
P1,783,960.00 or a portion thereof plus the legal rate of interest per annum until
fully paid in the event that Defendant Corazon Marasigan fails to pay the
said amount or a portion thereof.
Other damages claimed not duly proved are hereby dismissed.
So Ordered.10cralaw(emphasis in the original; underscoring partly in the original,
partly supplied)
In finding petitioner subsidiarily liable, the trial court held that petitioner breached
its understanding to release the proceeds of the loan to
respondent:chanroblesvirtuallawlibrar
Liwayway claims that the bank should also be held responsible for breach of its
obligation to directly release to her the proceeds of the loan or part thereof as
payment for the subject lots. The evidence shows that her claim is valid. The Bank
had such an obligation as proven by evidence. It failed to rebut the credible
testimony of Liwayway which was given in a frank, spontaneous, and
straightforward manner and withstood the test of rigorous cross-examination
conducted by the counsel of the Bank. Her credibility is further strengthened by the
corroborative testimony of Miguela delos Reyes who testified that she went with

Liwayway to the bank for several times. In her presence, Norberto Mendiola, the
head of the loan department, instructed Liwayway to transfer the title over the
subject lots to Corazon to facilitate the release of the loan with the guarantee that
Liwayway will be paid upon the release of the proceeds.
Further, Liwayway would not have executed the deed of sale in favor of Corazon had
Norberto Mendiola did not promise and guarantee that the proceeds of the loan
would be directly paid to her. Based on ordinary human experience, she would not
have readily transferred the title over the subject lots had there been no strong and
reliable guarantee. In this case, what caused her to transfer title is the promise and
guarantee made by Norberto Mendiola that the proceeds of the loan would be
directly paid to her.

11

cralaw (emphasis Underscoring supplied)

On appeal, the Court of Appeals by Decision of January 14, 2008 12cralaw, affirmed
the trial court's decision with modification on the amount of the balance of the
purchase price which was reduced from P1,783,960 to P1,753,960. It
disposed:chanroblesvirtuallawlibrar
WHEREFORE, premises considered, the assailed Decision dated March 12, 2004 of
the Regional Trial Court of Sta. Cruz, Laguna, Branch 91, is AFFIRMED WITH
MODIFICATION as to the amount to be paid which is P1,753,960.00.
SO ORDERED.13cralaw (emphasis in the original; Underscoring supplied)
Petitioner's motion for reconsideration having been denied by the appellate court by
Resolution of February 23, 2009, the present petition for review was filed.
The only issue petitioner raises is whether it is subsidiarily liable.
The petition is meritorious.
In the absence of a lender-borrower relationship between petitioner and Liwayway,
there is no inherent obligation of petitioner to release the proceeds of the loan to
her.

To a banking institution, well-defined lending policies and sound lending practices

are essential to perform its lending function effectively and minimize the risk
inherent in any extension of credit.
Thus, Section X302 of the Manual of Regulations for Banks
provides:chanroblesvirtuallawlibrar
X-302. To ensure that timely and adequate management action is taken to maintain
the quality of the loan portfolio and other risk assets and that adequate loss
reserves are set up and maintained at a level sufficient to absorb the loss inherent
in the loan portfolio and other risk assets, each bank shall establish a system of
identifying and monitoring existing or potential problem loans and other risk assets
and of evaluating credit policies vis--vis prevailing circumstances and emerging
portfolio trends. Management must also recognize that loss reserve is a stabilizing
factor and that failure to account appropriately for losses or make adequate
provisions for estimated future losses may result in misrepresentation of the bank's
financial condition.
In order to identify and monitor loans that a bank has extended, a system of
documentation is necessary. Under this fold falls the issuance by a bank of a
guarantee which is essentially a promise to repay the liabilities of a debtor, in this
case Corazon. It would be contrary to established banking practice if Mendiola
issued a bank guarantee, even if no request to that effect was made.
The principle of relativity of contracts in Article 1311 of the Civil Code supports
petitioner's cause:chanroblesvirtuallawlibrar
Art. 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is not
liable beyond the value of the property he received from the decedent.
If a contract should contain some stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of a person is not

sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person. (Underscoring supplied)
For Liwayway to prove her claim against petitioner, a clear and deliberate act of
conferring a favor upon her must be present. A written request would have sufficed
to prove this, given the nature of a banking business, not to mention the amount
involved.
Since it has not been established that petitioner had an obligation to Liwayway,
there is no breach to speak of. Liwayway's claim should only be directed against
Corazon. Petitioner cannot thus be held subisidiarily liable.
To the Court, Liwayway did not rely on Mendiola's representations, even if he indeed
made them. The contract for Liwayway to sell to Corazon was perfected from the
moment there was a meeting of minds upon the properties-object of the contract
and upon the price. Only the source of the funds to pay the purchase price was yet
to be resolved at the time the two inquired from Mendiola. Consider Liwayway's
testimony:chanroblesvirtuallawlibrar
Q: We are referring to the promissory note which you aforementioned a while ago,
why did this promissory note come about?
A: Because the negotiation was already completed, sir, and the deed of sale will
have to be executed, I asked the defendant (Corazon) to execute the promissory
note first before I could execute a deed of absolute sale, for assurance that she
really pay me, sir.14cralaw (emphasis and Underscoring supplied)
That it was on Corazon's execution of a promissory note that prompted Liwayway to
finally execute the Deed of Sale is thus clear.
The trial Court's reliance on the doctrine of apparent authority - that the principal, in
this case petitioner, is liable for the obligations contracted by its agent, in this case
Mendiola, - does not lie. Prudential Bank v. Court of Appeals15cralaw
instructs:chanroblesvirtuallawlibrar

[A] banking corporation is liable to innocent third persons where the representation
is made in the course of its business by an agent acting within the general scope of
his authority even though, in the particular case, the agent is secretly abusing his
authority and attempting to perpetuate fraud upon his principal or some person, for
his own ultimate benefit.16cralaw (Underscoring supplied)
The onus probandi that attempt to commit fraud attended petitioner's employee
Mendiola's acts and that he abused his authority lies on Liwayway. She, however,
failed to discharge the onus. It bears noting that Mendiola was not privy to the
approval or disallowance of Corazon's application for a loan nor that he would
benefit by the approval thereof.
Aside from Liwayway's bare allegations, evidence is wanting to show that there was
collusion between Corazon and Mendiola to defraud her. Even in Liwayway's
Complaint, the allegation of fraud is specifically directed against Corazon. 17cralaw
IN FINE, Liwayway's cause of action lies against only Corazon.
WHEREFORE, the Decision of January 14, 2008 of the Court of Appeals, in so far as
it holds petitioner, Prudential Bank and Trust Company (now Bank of the Philippine
Islands), subsidiary liable in case its co-defendant Corazon Marasigan, who did not
appeal the trial court's decision, fails to pay the judgment debt, is REVERSED and
SET ASIDE. The complaint against petitioner is accordingly DISMISSED.
SO ORDERED.

SECOND DIVISION
G.R. No. 186550 : July 5, 2010
ASIAN CATHAY FINANCE AND LEASING CORPORATION, Petitioner, v. SPOUSES
CESARIO GRAVADOR and NORMA DE VERA and SPOUSES EMMA
CONCEPCION G. DUMIGPI and FEDERICO L. DUMIGPI, Respondents.
DECISION

NACHURA, J.:
On appeal is the June 10, 2008 Decision 1cralaw cralawof the Court of Appeals (CA)
in CA-G.R. CV No. 83197, setting aside the April 5, 2004 decision 2cralaw cralawof
the Regional Trial Court (RTC), Branch 9, Bulacan, as well as its subsequent
Resolution3cralaw cralawdated February 11, 2009, denying petitioner's motion for
reconsideration.
On October 22, 1999, petitioner Asian Cathay Finance and Leasing Corporation
(ACFLC) extended a loan of Eight Hundred Thousand Pesos (P800,000.00)4cralaw
cralawto respondent Cesario Gravador, with respondents Norma de Vera and Emma
Concepcion Dumigpi as co-makers. The loan was payable in sixty (60) monthly
installments of P24,400.00 each. To secure the loan, respondent Cesario executed a
real estate mortgage5cralaw cralawover his property in Sta. Maria, Bulacan, covered
by Transfer Certificate of Title No. T-29234.cra6cralaw cralaw
Respondents paid the initial installment due in November 1999. However, they were
unable to pay the subsequent ones. Consequently, on February 1, 2000,
respondents received a letter demanding payment of P1,871,480.00 within five (5)
days from receipt thereof. Respondents requested for an additional period to settle
their account, but ACFLC denied the request. Petitioner filed a petition for
extrajudicial foreclosure of mortgage with the Office of the Deputy Sheriff of
Malolos, Bulacan.
On April 7, 2000, respondents filed a suit for annulment of real estate mortgage and
promissory note with damages and prayer for issuance of a temporary restraining
order (TRO) and writ of preliminary injunction. Respondents claimed that the real
estate mortgage is null and void. They pointed out that the mortgage does not
make reference to the promissory note dated October 22, 1999. The promissory
note does not specify the maturity date of the loan, the interest rate, and the mode
of payment; and it illegally imposed liquidated damages. The real estate mortgage,
on the other hand, contains a provision on the waiver of the mortgagor's right of
redemption, a provision that is contrary to law and public policy. Respondents added
that ACFLC violated Republic Act No. 3765, or the Truth in Lending Act, in the
disclosure statement that should be issued to the borrower. Respondents, thus,

claimed that ACFLC's petition for foreclosure lacked factual and legal basis, and
prayed that the promissory note, real estate mortgage, and any certificate of sale
that might be issued in connection with ACFLC's petition for extrajudicial foreclosure
be declared null and void. In the alternative, respondents prayed that the court fix
their obligation at P800,000.00 if the mortgage could not be annulled, and declare
as null and void the provisions on the waiver of mortgagor's right of redemption and
imposition of the liquidated damages. Respondents further prayed for moral and
exemplary damages, as well as attorney's fees, and for the issuance of a TRO to
enjoin ACFLC from foreclosing their property.
On April 12, 2000, the RTC issued an Order, 7cralaw cralawdenying respondents'
application for TRO, as the acts sought to be enjoined were already fait accompli.
On May 12, 2000, ACFLC filed its Answer, denying the material allegations in the
complaint and averring failure to state a cause of action and lack of cause of action,
as defenses. ACFLC claimed that it was merely exercising its right as mortgagor;
hence, it prayed for the dismissal of the complaint.
After trial, the RTC rendered a decision, dismissing the complaint for lack of cause of
action. Sustaining the validity of the promissory note and the real estate mortgage,
the RTC held that respondents are well-educated individuals who could not feign
naivet in the execution of the loan documents. It, therefore, rejected respondents'
claim that ACFLC deceived them into signing the promissory note, disclosure
statement, and deed of real estate mortgage. The RTC further held that the alleged
defects in the promissory note and in the deed of real estate mortgage are too
insubstantial to warrant the nullification of the mortgage. It added that a promissory
note is not one of the essential elements of a mortgage; thus, reference to a
promissory note is neither indispensable nor imperative for the validity of the
mortgage. The RTC also upheld the interest rate and the penalty charge imposed by
ACFLC, and the waiver of respondents' right of redemption provided in the deed of
real estate mortgage.
The RTC disposed thus:

WHEREFORE, on the basis of the evidence on record and the laws/jurisprudence

applicable thereto, judgment is hereby rendered DISMISSING the complaint in the
above-entitled case for want of cause of action as well as the counterclaim of
[petitioner] Asian Cathay Finance & Leasing Corporation for moral and exemplary
damages and attorney's fees for abject lack of proof to justify the same.
SO ORDERED.cra8cralaw cralaw
Aggrieved, respondents appealed to the CA. On June 10, 2008, the CA rendered the
assailed Decision, reversing the RTC. It held that the amount of P1,871,480.00
demanded by ACFLC from respondents is unconscionable and excessive. Thus, it
declared respondents' principal loan to be P800,000.00, and fixed the interest rate
at 12% per annum and reduced the penalty charge to 1% per month. It explained
that ACFLC could not insist on the interest rate provided on the note because it
failed to provide respondents with the disclosure statement prior to the
consummation of the loan transaction. Finally, the CA invalidated the waiver of
respondents' right of redemption for reasons of public policy. Thus, the CA ordered:
WHEREFORE, premises considered, the appealed decision is REVERSED AND SET
ASIDE. Judgment is hereby rendered as follows:
1) Affirming the amount of the principal loan under the REM and Disclosure
Statement both dated October 22, 1999 to be P800,000.00, subject to:
a. 1% interest per month (12% per annum) on the principal from November 23,
1999 until the date of the foreclosure sale, less P24,000.00 paid by [respondents] as
first month amortization[;]
b. 1% penalty charge per month on the principal from December 23, 1999 until the
date of the foreclosure sale.
2) Declaring par. 14 of the REM as null and void by reason of public policy, and
granting mortgagors a period of one year from the finality of this Decision within
which to redeem the subject property by paying the redemption price as computed
under paragraph 1 hereof, plus one percent (1%) interest thereon from the time of

foreclosure up to the time of the actual redemption pursuant to Section 28, Rule 39
of the 1997 Rules on Civil Procedure.
The claim of the [respondents] for moral and exemplary damages and attorney's
fees is dismissed for lack of merit.
SO ORDERED.cra9
ACFLC filed a motion for reconsideration, but the CA denied it on February 11, 2009.
ACFLC is now before us, faulting the CA for reversing the dismissal of respondents'
complaint. It points out that respondents are well-educated persons who are familiar
with the execution of loan documents. Thus, they cannot be deceived into signing a
document containing provisions that they are not amenable to. ACFLC ascribes error
on the part of the CA for invalidating the interest rates imposed on respondents'
loan, and the waiver of the right of redemption.
The appeal lacks merit.
It is true that parties to a loan agreement have a wide latitude to stipulate on any
interest rate in view of Central Bank Circular No. 905, series of 1982, which
suspended the Usury Law ceiling on interest rate effective January 1, 1983.
However, interest rates, whenever unconscionable, may be equitably reduced or
even invalidated. In several cases, 10cralaw cralawthis Court had declared as null
and void stipulations on interest and charges that were found excessive, iniquitous
and unconscionable.
Records show that the amount of loan obtained by respondents on October 22,
1999 was P800,000.00. Respondents paid the installment for November 1999, but
failed to pay the subsequent ones. On February 1, 2000, ACFLC demanded payment
of P1,871,480.00. In a span of three months, respondents' obligation ballooned by
more than P1,000,000.00. ACFLC failed to show any computation on how much
interest was imposed and on the penalties charged. Thus, we fully agree with the
CA that the amount claimed by ACFLC is unconscionable.

In Spouses Isagani and Diosdada Castro v. Angelina de Leon Tan, Sps. Concepcion T.
Clemente and Alexander C. Clemente, Sps. Elizabeth T. Carpio and Alvin Carpio, Sps.
Marie Rose T. Soliman and Arvin Soliman and Julius Amiel Tan, 11cralaw cralawthis
Court held:
The imposition of an unconscionable rate of interest on a money debt, even if
knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a
repugnant spoliation and an iniquitous deprivation of property, repulsive to the
common sense of man. It has no support in law, in principles of justice, or in the
human conscience nor is there any reason whatsoever which may justify such
imposition as righteous and as one that may be sustained within the sphere of
public or private morals.
Stipulations authorizing the imposition of iniquitous or unconscionable interest are
contrary to morals, if not against the law. Under Article 1409 of the Civil Code, these
contracts are inexistent and void from the beginning. They cannot be ratified nor
the right to set up their illegality as a defense be waived. The nullity of the
stipulation on the usurious interest does not, however, affect the lender's right to
recover the principal of the loan. Nor would it affect the terms of the real estate
mortgage. The right to foreclose the mortgage remains with the creditors, and said
right can be exercised upon the failure of the debtors to pay the debt due. The debt
due is to be considered without the stipulation of the excessive interest. A legal
interest of 12% per annum will be added in place of the excessive interest formerly
imposed.cra12cralaw cralawThe nullification by the CA of the interest rate and the
penalty charge and the consequent imposition of an interest rate of 12% and
penalty charge of 1% per month cannot, therefore, be considered a reversible error.
ACFLC next faults the CA for invalidating paragraph 14 of the real estate mortgage
which provides for the waiver of the mortgagor's right of redemption. It argues that
the right of redemption is a privilege; hence, respondents are at liberty to waive
their right of redemption, as they did in this case.
Settled is the rule that for a waiver to be valid and effective, it must, in the first
place, be couched in clear and unequivocal terms which will leave no doubt as to
the intention of a party to give up a right or benefit which legally pertains to him.

Additionally, the intention to waive a right or an advantage must be shown clearly

and convincingly.cra13cralaw cralawUnfortunately, ACFLC failed to convince us that
respondents waived their right of redemption voluntarily.
As the CA had taken pains to demonstrate:
The supposed waiver by the mortgagors was contained in a statement made in fine
print in the REM. It was made in the form and language prepared by
[petitioner]ACFLC while the [respondents] merely affixed their signatures or
adhesion thereto. It thus partakes of the nature of a contract of adhesion. It is
settled that doubts in the interpretation of stipulations in contracts of adhesion
should be resolved against the party that prepared them. This principle especially
holds true with regard to waivers, which are not presumed, but which must be
clearly and convincingly shown. [Petitioner] ACFLC presented no evidence hence it
failed to show the efficacy of this waiver.
Moreover, to say that the mortgagor's right of redemption may be waived through a
fine print in a mortgage contract is, in the last analysis, tantamount to placing at
the mortgagee's absolute disposal the property foreclosed. It would render
practically nugatory this right that is provided by law for the mortgagor for reasons
of public policy. A contract of adhesion may be struck down as void and
unenforceable for being subversive to public policy, when the weaker party is
completely deprived of the opportunity to bargain on equal footing.cra 14cralaw
cralaw
In fine, when the redemptioner chooses to exercise his right of redemption, it is the
policy of the law to aid rather than to defeat his right.cra 15cralaw cralawThus, we
affirm the CA in nullifying the waiver of the right of redemption provided in the real
estate mortgage.
Finally, ACFLC claims that respondents' complaint for annulment of mortgage is a
collateral attack on its certificate of title. The argument is specious.
The instant complaint for annulment of mortgage was filed on April 7, 2000, long
before the consolidation of ACFLC's title over the property. In fact, when

respondents filed this suit at the first instance, the title to the property was still in
the name of respondent Cesario. The instant case was pending with the RTC when
ACFLC filed a petition for foreclosure of mortgage and even when a writ of
possession was issued. Clearly, ACFLC's title is subject to the final outcome of the
present case.
WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the
Court of Appeals in CA-G.R. CV No. 83197 are AFFIRMED. Costs against petitioner.
SO ORDERED.

Kauffman v. PNB [G.R. No. 16454. September 29, 1921]

24Mar
FACTS
Wicks, the treasurer of the Philippine Fiber and Produce Company (PFPC), presented
himself in the exchange department of the Philippine National Bank in Manila and
requested that a telegraphic transfer of $45,000 should be made to Kauffman in
New York City, upon account of the PFPC.
Pay George A. Kauffman, New York, account Philippine Fiber Produce Co.,
$45,000. (Sgd.) PHILIPPINE NATIONAL BANK, Manila.
PNBs representative in New York withheld the money from Kauffman, in view of his
reluctance to accept certain bills of the PFPC. Kauffman demanded the money but
was refused to be paid.
ISSUE
Whether or not Kauffman has a right of action based on Negotiable Instruments
Law.
RULING

NO. Kauffman has no right of action based on Negotiable Instruments Law on the
ground that it can only come into operation if there is a document in existence of
the character described in Section 1 of the said Law, and rights properly speaking
arise in respect to said instrument until it is delivered. In this case, there was an
order transmitted by PNB to its New York branch, for the payment of a specified sum
of money to Kauffman. But this order was not made payable to order or to
bearer, as required in subsection (d) of that Act; and inasmuch as it never left the
possession of the bank, or its representative in New York City, there was no delivery
in the sense intended in Section 16 of the same Law. In this connection it is
unnecessary to point out that the official receipt delivered by the bank to the
purchaser of the telegraphic order, and already set out above, cannot itself be
viewed in the light of a negotiable instrument, although it affords complete proof of
the obligation actually assumed by the bank. Kauffman, however, has remedy
based on the Civil Code, particularly on stipulations pour atrui.
G.R. No. L-20853

May 29, 1967

BONIFACIO BROS., INC., ET AL., plaintiffs-appellants,

vs.
ENRIQUE MORA, ET AL., defendants-appellees.
G. Magsaysay for plaintiffs-appellants.
Abad Santos and Pablo for defendant-appellee H. E. Reyes, Inc.
J. P. Santilla and A. D. Hidalgo, Jr. for other defendant-appellee.
CASTRO, J.:
This is an appeal from the decision of the Court of First Instance of Manila, Branch
XV, in civil case 48823, affirming the decision of the Municipal Court of Manila,
declaring the H.S. Reyes, Inc. as having a better right than the Bonifacio Bros., Inc.
and the Ayala Auto Parts Company, appellants herein, to the proceeds of motor
insurance policy A-0615, in the sum of P2,002.73, issued by the State Bonding &
Insurance Co. Inc., and directing payment of the said amount to the H. Reyes, Inc.

Enrique Mora, owner of Oldsmobile sedan model 1956, bearing plate No. QCmortgaged the same to the H.S. Reyes, Inc., with the condition that the former
would insure the automobile with the latter as beneficiary. The automobile was
thereafter insured on June 23, 1959 with the State Bonding & Insurance Co., Inc.,
and motor car insurance policy A-0615 was issued to Enrique Mora, the pertinent
provisions of which read:
1. The Company (referring to the State Bonding & Insurance Co., Inc.)
will, subject to the Limits of Liability, indemnify the Insured against loss
of or damages to the Motor Vehicle and its accessories and spare parts
whilst thereon; (a) by accidental collision or overturning or collision or
overturning consequent upon mechanical breakdown or consequent
upon wear and tear,
xxx

xxx

xxx

2. At its own option the Company may pay in cash the amount of the
loss or damage or may repair, reinstate, or replace the Motor Vehicle or
any part thereof or its accessories or spare parts. The liability of the
Company shall not exceed the value of the parts whichever is the less.
The Insured's estimate of value stated in the schedule will be the
maximum amount payable by the Company in respect of any claim for
loss or damage.1wph1.t
xxx

xxx

xxx

4. The Insured may authorize the repair of the Motor Vehicle

necessitated by damage for which the Company may be liable under
this Policy provided that: (a) The estimated cost of such repair does
not exceed the Authorized Repair Limit, (b) A detailed estimate of the
cost is forwarded to the Company without delay, subject to the
condition that "Loss, if any is payable to H.S. Reyes, Inc.," by virtue of
the fact that said Oldsmobile sedan was mortgaged in favor of the said
H.S. Reyes, Inc. and that under a clause in said insurance policy, any
loss was made payable to the H.S. Reyes, Inc. as Mortgagee;

xxx

xxx

xxx

During the effectivity of the insurance contract, the car met with an accident. The
insurance company then assigned the accident to the Bayne Adjustment Co. for
investigation and appraisal of the damage. Enrique Mora, without the knowledge
and consent of the H.S. Reyes, Inc., authorized the Bonifacio Bros. Inc. to furnish the
labor and materials, some of which were supplied by the Ayala Auto Parts Co. For
the cost of labor and materials, Enrique Mora was billed at P2,102.73 through the
H.H. Bayne Adjustment Co. The insurance company after claiming a franchise in the
amount of P100, drew a check in the amount of P2,002.73, as proceeds of the
insurance policy, payable to the order of Enrique Mora or H.S. Reyes,. Inc., and
entrusted the check to the H.H. Bayne Adjustment Co. for disposition and delivery to
the proper party. In the meantime, the car was delivered to Enrique Mora without
the consent of the H.S. Reyes, Inc., and without payment to the Bonifacio Bros. Inc.
and the Ayala Auto Parts Co. of the cost of repairs and materials.
Upon the theory that the insurance proceeds should be paid directly to them, the
Bonifacio Bros. Inc. and the Ayala Auto Parts Co. filed on May 8, 1961 a complaint
with the Municipal Court of Manila against Enrique Mora and the State Bonding &
Insurance Co., Inc. for the collection of the sum of P2,002.73 The insurance
company filed its answer with a counterclaim for interpleader, requiring the
Bonifacio Bros. Inc. and the H.S. Reyes, Inc. to interplead in order to determine who
has better right to the insurance proceeds in question. Enrique Mora was declared in
default for failure to appear at the hearing, and evidence against him was received
ex parte. However, the counsel for the Bonifacio Bros. Inc., Ayala Auto Parts Co. and
State Bonding & Insurance Co. Inc. submitted a stipulation of facts, on the basis of
which are Municipal Court rendered a decision declaring the H.S. Reyes, Inc. as
having a better right to the disputed amount and ordering State Bonding &
Insurance Co. Inc. to pay to the H. S. Reyes, Inc. the said sum of P2,002.73. From
this decision, the appellants elevated the case to the Court of First Instance of
Manila which the stipulation of facts was reproduced. On October 19, 1962 the latter
court rendered a decision, affirming the decision of the Municipal Court. The
Bonifacio Bros. Inc. and the Ayala Auto Parts Co. moved for reconsideration of the
decision, but the trial court denied the motion. Hence, this appeal.

The main issue raised is whether there is privity of contract between the Bonifacio
Bros. Inc. and the Ayala Auto Parts Co. on the one hand and the insurance company
on the other. The appellants argue that the insurance company and Enrique Mora
are parties to the repair of the car as well as the towage thereof performed. The
authority for this assertion is to be found, it is alleged, in paragraph 4 of the
insurance contract which provides that "the insured may authorize the repair of the
Motor Vehicle necessitated by damage for which the company may be liable under
the policy provided that (a) the estimated cost of such repair does not exceed the
Authorized Repair Limit, and (b) a detailed estimate of the cost is forwarded to the
company without delay." It is stressed that the H.H. Bayne Adjustment Company's
recommendation of payment of the appellants' bill for materials and repairs for
which the latter drew a check for P2,002.73 indicates that Mora and the H.H. Bayne
Adjustment Co. acted for and in representation of the insurance company.
This argument is, in our view, beside the point, because from the undisputed facts
and from the pleadings it will be seen that the appellants' alleged cause of action
rests exclusively upon the terms of the insurance contract. The appellants seek to
recover the insurance proceeds, and for this purpose, they rely upon paragraph 4 of
the insurance contract document executed by and between the State Bonding &
Insurance Company, Inc. and Enrique Mora. The appellants are not mentioned in the
contract as parties thereto nor is there any clause or provision thereof from which
we can infer that there is an obligation on the part of the insurance company to pay
the cost of repairs directly to them. It is fundamental that contracts take effect only
between the parties thereto, except in some specific instances provided by law
where the contract contains some stipulation in favor of a third person. 1 Such
stipulation is known as stipulation pour autrui or a provision in favor of a third
person not a pay to the contract. Under this doctrine, a third person is allowed to
avail himself of a benefit granted to him by the terms of the contract, provided that
the contracting parties have clearly and deliberately conferred a favor upon such
person.2 Consequently, a third person not a party to the contract has no action
against the parties thereto, and cannot generally demand the enforcement of the
same.3 The question of whether a third person has an enforcible interest in a
contract, must be settled by determining whether the contracting parties intended
to tender him such an interest by deliberately inserting terms in their agreement

with the avowed purpose of conferring a favor upon such third person. In this
connection, this Court has laid down the rule that the fairest test to determine
whether the interest of a third person in a contract is a stipulation pour autrui or
merely an incidental interest, is to rely upon the intention of the parties as disclosed
by their contract.4 In the instant case the insurance contract does not contain any
words or clauses to disclose an intent to give any benefit to any repairmen or
materialmen in case of repair of the car in question. The parties to the insurance
contract omitted such stipulation, which is a circumstance that supports the said
conclusion. On the other hand, the "loss payable" clause of the insurance policy
stipulates that "Loss, if any, is payable to H.S. Reyes, Inc." indicating that it was only
the H.S. Reyes, Inc. which they intended to benefit.
We likewise observe from the brief of the State Bonding & Insurance Company that
it has vehemently opposed the assertion or pretension of the appellants that they
are privy to the contract. If it were the intention of the insurance company to make
itself liable to the repair shop or materialmen, it could have easily inserted in the
contract a stipulation to that effect. To hold now that the original parties to the
insurance contract intended to confer upon the appellants the benefit claimed by
them would require us to ignore the indespensable requisite that a stipulation pour
autrui must be clearly expressed by the parties, which we cannot do.
As regards paragraph 4 of the insurance contract, a perusal thereof would show that
instead of establishing privity between the appellants and the insurance company,
such stipulation merely establishes the procedure that the insured has to follow in
order to be entitled to indemnity for repair. This paragraph therefore should not be
construed as bringing into existence in favor of the appellants a right of action
against the insurance company as such intention can never be inferred therefrom.
Another cogent reason for not recognizing a right of action by the appellants against
the insurance company is that "a policy of insurance is a distinct and independent
contract between the insured and insurer, and third persons have no right either in
a court of equity, or in a court of law, to the proceeds of it, unless there be some
contract of trust, expressed or implied between the insured and third person." 5 In
this case, no contract of trust, expressed or implied exists. We, therefore, agree with

the trial court that no cause of action exists in favor of the appellants in so far as
the proceeds of insurance are concerned. The appellants' claim, if at all, is merely
equitable in nature and must be made effective through Enrique Mora who entered
into a contract with the Bonifacio Bros. Inc. This conclusion is deducible not only
from the principle governing the operation and effect of insurance contracts in
general, but is clearly covered by the express provisions of section 50 of the
Insurance Act which read:
The insurance shall be applied exclusively to the proper interests of the
person in whose name it is made unless otherwise specified in the
policy.
The policy in question has been so framed that "Loss, if any, is payable to H.S.
Reyes, Inc.," which unmistakably shows the intention of the parties.
The final contention of the appellants is that the right of the H.S. Reyes, Inc. to the
insurance proceeds arises only if there was loss and not where there is mere
damage as in the instant case. Suffice it to say that any attempt to draw a
distinction between "loss" and "damage" is uncalled for, because the word "loss" in
insurance law embraces injury or damage.
Loss in insurance, defined. The injury or damage sustained by the
insured in consequence of the happening of one or more of the
accidents or misfortune against which the insurer, in consideration of
the premium, has undertaken to indemnify the insured. (1 Bouv. Ins.
No. 1215; Black's Law Dictionary; Cyclopedic Law Dictionary, cited in
Martin's Phil. Commercial Laws, Vol. 1, 1961 ed. p. 608).
Indeed, according to sec. 120 of the Insurance Act, a loss may be either total or
partial.
Accordingly, the judgment appealed from is hereby affirmed, at appellants' cost.

G.R. No. L-27696 September 30, 1977

MIGUEL FLORENTINO, ROSARIO ENCARNACION de FLORENTINO, MANUEL

ARCE, JOSE FLORENTINO, VICTORINO FLORENTINO, ANTONIO FLORENTINO,
REMEDION ENCARNACION and SEVERINA ENCARNACION, petitionersappellants,
vs.
SALVADOR ENCARNACION, SR., SALVADOR ENCARNACION, JR., and ANGEL
ENCARNACION, oppositors to encumbrance-petitioners-appelles.
Jose F. Singson and Miguel Florentino for appellants.
Pedro Singson for appellees.

GUERRERO, J.:
Appeal from the decision of the Court of First Instance of Ilocos Sur, acting as a land
registration court, in Land Registration case No. N-310.
On May 22, 1964, the petitioners-appellants Miguel Florentino, Remedios
Encarnacion de Florentino, Manuel Arce, Jose Florentino, Victorino Florentino,
Antonio Florentino, Remedior, Encarnacion and Severina Encamacion, and the
Petitiners-appellees Salvador Encamacion, Sr., Salvador Encamacion, Jr. and Angel
Encarnacion filed with the Court of First Instance of ilocos Sur an application for the
registration under Act 496 of a parcel of agricultural land located at Barrio Lubong
Dacquel Cabugao Ilocos Sur.
The application alleged among other things that the applicants are the common and
pro-indiviso owners in fee simple of the said land with the improvements existing
thereon; that to the best of their knowledge and belief, there is no mortgage, lien or
encumbrance of any kind whatever affecting said land, nor any other person having
any estate or interest thereon, legal or equitable, remainder, reservation or in
expectancy; that said applicants had acquired the aforesaid land thru and by
inheritance from their predecessors in interest, lately from their aunt, Doa
Encarnacion Florentino who died in Vigan, Ilocos Sur in 1941, and for which the said

land was adjudicated to them by virtue of the deed of extrajudicial partition dated
August 24, 1947; that applicants Salvador Encarnacion, Jr. and Angel Encarnacion
acquired their respective shares of the land thru purchase from the original heirs,
Jesus, Caridad, Lourdes and Dolores surnamed Singson one hand and from Asuncion
Florentino on the other.
After due notice and publication, the Court set the application for hearing. No
Opposition whatsoever was filed except that of the Director of Lands which was
later withdrawn, thereby leaving the option unopposed. Thereupon, an order of
general default was withdrawn against the whole world. Upon application of the
asets the Clerk Of court was commission will and to have the evidence of the agents
and or to submit the for the Court's for resolution.
The crucial point in controversy in this registration case is centered in the
stipulation marked Exhibit O-1 embodied in the deed of extrajudicial partition
(Exhibit O) dated August 24, 1947 which states:
Los productos de esta parcela de terreno situada en el Barrio
Lubong Dacquel Cabugao Ilocos Sur, se destination para costear
los tos de procesio de la Tercera Caida celebration y sermon de
Siete Palbras Seis Estaciones de Cuaresma, procesion del Nino
Jesus, tilaracion y conservacion de los mismos, construction le
union camarin en conde se depositan los carros mesas y otras
cosas que seven para lot leiracion de Siete Palabras y otras
cosas mas Lo que sobra de lihos productos despues de
descontados todos los gastos se repartira nosotros los
herederos.
In his testimony during the trial, applicant Miguel Florentino asked the court to
include the said stipulation (Exhibit O-1) as an encumbrance on the land sought to
be registered, and cause the entry of the same on the face of the title that will
finally be issued. Opposing its entry on the title as an encumbrance,
petitionersappellee Salvador Encamacion, Sr., Salvador Encarnaciori, Jr. and Angel
Encarriacion filed on October 3, 1966 a manifestation seeking to withdraw their

application on their respective shares of the land sought to be registered. The

withdrawal was opposed by the petitioners-appellants.
The Court after hearing the motion for withdrawal and the opposition thereto issued
on November 17, 1966 an order and for the purpose of ascertaining and implifying
the issues therein stated that all the applicants admit the truth of the following;
(1) That just after the death of Encarnacion FIorentino in 1941
up to last year and as had always been the case since time
immomorial the products of the land made subiect matter of this
land has been used in answering for the payment for the
religious functions specified in the Deed Extrajudicial Partition
belated August 24, 1947:
(2) That this arrangement about the products answering for the
comment of experisence for religions functions as mentioned
above was not registered in the office of the Register of Deeds
under Act No 3344, Act 496 or and, other system of registration;
(3) That all the herein applicants know of the existence of his
arrangement as specified in the Deed of Extra judicial Partition
of A adjust 24, 1947;
(4) That the Deed of Extrajudicial Partition of August 24, 194-,
not signed by Angel Encarnacion or Salvador Encarnacion, Jr,.
The court denied the petitioners-appellee motion to withdraw for
lack of merit, and rendered a decision under date of November
29, 1966 confirming the title of the property in favor of the f
appoints with their respective shares as follows:
Spouses Miguel Florentino and Rosario Encarnacion de
Florentino, both of legal age, Filipinos, and residents of Vigan,
Ilocos Sur, consisting of an undivided 31/297 and 8.25/297
portions, respectively;

Manuel Arce, of legal age, Filipino, married to Remedios Pichay

and resident of Vigan, Ilocos Sur, consisting of an undivided
66/297 portion;
Salvador Encarnacion, Jr., of legal age, Filipino, married to
Angelita Nagar and resident of Vigan, Ilocos Sur, consisting of an
undivided 66/297; Jose Florentino, of legal age, Filipino, married
to Salvacion Florendo and resident of 16 South Ninth Diliman,
Quezon City, consisting of an undivided 33/297 portion;
Angel Encarnacion, of legal age, Filipino, single and resident of
1514 Milagros St., Sta. Cruz, Manila, consisting of an undivided
33/297 portion;
Victorino Florentino, of legal age, Filipino, married to Mercedes L.
Encarnacion and resident of Vigan, Ilocos Sur, consisting of an
undivided 17.5/297 portion;
Antonio Florentino, of legal age, Filipino, single and resident of
Vigan, Ilocos Sur, consisting of an undivided 17.5/297;
Salvador Encarnacion, Sr., of legal age, Filipino, married to
Dolores Singson, consisting of an undivided 8.25/297;
Remedios Encarnacion, of legal age, Filipino, single and resident
of Vigan, Ilocos Sur, consisting of an undivided 8.25/297 portion;
and
Severina Encarnacion, of legal age, Filipino, single and resident
of Vigan, Ilocos Sur, consisting of 8.25/297 undivided portion.
The court, after ruling "that the contention of the proponents of encumbrance is
without merit bemuse, taking the self-imposed arrangement in favor of the Church
as a pure and simple donation, the same is void for the that the donee here has riot
accepted the donation (Art. 745, Civil Code) and for the further that, in the case of
Salvador Encarnacion, Jr. and Angel Encarnacion, they had made no oral or written

grant at all (Art. 748) as in fact they are even opposed to it,"

held in the Positive

portion, as follows:
In view of all these, therefore, and insofar as the question of
encumbrance is concerned, let the religious expenses as herein
specified be made and entered on the undivided shares,
interests and participations of all the applicants in this case,
except that of Salvador Encarnacion, Sr., Salvador Encarnacion,
Jr. and Angel Encarnacion.
On January 3, 1967, petitioners-appellants filed their Reply to the Opposition
reiterating their previous arguments, and also attacking the junction of the
registration court to pass upon the validity or invalidity of the agreement Exhibit O1, alleging that such is specified only in an ordinary action and not proper in a land
registration proceeding.
The Motion for Reconsideration and of New Trial was denied on January 14, 1967 for
lack of merit, but the court modified its earlier decision of November 29, 1966, to
wit:
This Court believes, and so holds, that the contention of the
movants (proponents of the encumbrance) is without merit
because the arrangement, stipulation or grant as embodied in
Exhibit O (Escritura de Particion Extrajudicial), by whatever
name it may be (called, whether donation, usufruct or
ellemosynary gift, can be revoked as in fact the oppositors
Salvador Encarnacion, Sr., who is the only one of the three
oppositors who is a party to said Exhibit O (the two others,
Salvador Encarnacion, Jr. and Angel Encarnacion no parties to it)
did revoke it as shown by acts accompanying his refusal to have
the same appear as an encumbrance on the title to be issued. In
fact, legally, the same can also be ignored or discararded by will
the three oppositors. The reasons are: First, if the said
stipulation is pour bodies in Exhibit O-1 is to be viewed as a
stipulation pour autrui the same cannot now be enforced

because the Church in whose favor it was made has not

communicated its acceptance to the oppositors before the latter
revoked it. Says the 2nd par. of Art. 1311 of the New Civil Code:
"If a contract should contain some stipulation in favor of a third
person he may demand its fulfillment provided he
communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest of a person is
not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person." No evide
nee has ever been submitted by the Church to show its clear
acceptance of the grant before its revocation by the oppositor
Salvador Encarnacion, Sr. (or of the two other oppositors,
Salvador Encarnacion, Jr. and Angel Encarnacion, who didn't
even make any giant, in the first place), and so not even the
movants who have officiously taken into themselves the right to
enforce the grant cannot now maintain any action to compel
compliance with it. (Bank of the P.I. v. Concepcion y Hijos, Inc.,
53 Phil. 806). Second, the Church in whose favor the stipulation
or grant had apparently been made ought to be the proper party
to compel the herein three oppositors to abide with the
stipulation. But it has not made any appearance nor registered
its opposition to the application even before Oct. 18, 1965 when
an order of general default was issued. Third, the movants are
not, in the contemplation of Section 2, Rule 3 of the Rules of
Court, the real party in interest to raise the present issue; and
Fourth, the movants having once alleged in their application for
registration that the land is without encumbrance (par. 3
thereof), cannot now be alloted by the rules of pleading to
contradict said allegation of theirs. (McDaniel v. Apacible, 44
Phil. 248)
SO ORDERED.

After Motions for Reconsideration were denied by the court, the petitionersappellants appealed directly to this Court pursuant to Rule 4 1, Rules of Court,
raising the following assign of error:
I. The lower court erred in concluding that the stipulation
embodied in Exhibit O on religious expenses is just an
arrangement stipulation, or grant revocable at the unilateral
option of the coowners.
II. The lower court erred in finding and concluding that the
encumbrance or religious expenses embodied in Exhibit O, the
extrajudicial partition between the co-heirs, is binding only on
the appoints Miguel Florentino, Rosario Encarnacion de
Florentino, Manuel Arce, Jose Florentino, Antonio Florentino,
Victorino Florentino, Remedios Encarnacion and Severina
Encarnacion.
III. The lower court as a registration court erred in passing upon
the merits of the encumbrance (Exhibit O-1) as the sanie was
never put to issue and as the question involved is an
adjudication of rights of the parties.
We find the first and second assignments of error impressed with merit and,
therefore, tenable. The stipulation embodied in Exhibit O-1 on religious expenses is
not revocable at the unilateral option of the co-owners and neither is it binding only
on the petitioners-appellants Miguel Florentino, Rosario Encarnacion de Florentino
Manuel Arce, Jose Florentino, Victorino Florentino Antonio Florentino, Remedios
Encarnacion and Severina E It is also binding on the oppositors-appellees Angel
Encarnacion,
The stipulation (Exhibit 411) in pan of an extrajudicial partition (Exh. O) duly agreed
and signed by the parties, hence the sanie must bind the contracting parties thereto
and its validity or compliance cannot be left to the with of one of them (Art. 1308,
N.C.C.). Under Art 1311 of the New Civil Code, this stipulation takes effect between
the parties, their assign and heirs. The article provides:

Art. 1311. Contracts take effect only between the parties,

their assigns and heirs, except in cases where the rights and
obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. The heir is
not liable beyond the value of the property he received from the
decedent.
If a contract should contain a stipulation in favor of a third
person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest of a person is
not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person.
The second paragraph of Article 1311 above-quoted states the law on stipulations
pour autrui. Consent the nature and purpose of the motion (Exh. O-1), We hold that
said stipulation is a station pour autrui. A stipulation pour autrui is a stipulation in
favor of a third person conferring a clear and deliberate favor upon him, and which
stipulation is merely a part of a contract entered into by the parties, neither of
whom acted as agent of the third person, and such third person and demand its
fulfillment provoked that he communicates his to the obligor before it is revoked.

The requisites are: (1) that the stipulation in favor of a third person should be a part,
not the whole, of the contract; (2) that the favorable stipulation should not be
conditioned or compensated by any kind of obligation whatever; and (3) neither of
the contracting bears the legal represented or authorization of third person.
To constitute a valid stipulation pour autrui it must be the purpose and intent of the
stipulating parties to benefit the third and it is not sufficient that the third person
may be incidentally benefited by the stipulation. The fairest test to determine
whether the interest of third person in a contract is a stipulation pour autrui or
merely an incidental interest, is to rely upon the intention of the parties as disclosed
by their contract. In applying this test, it meters not whether the stipulation is in the
nature of a gift or whether there is an obligation owing from the promisee to the

third person. That no such obsorption exists may in some degree assist in
determining whether the parties intended to benefit a third person. 4
In the case at bar, the determining point is whether the co-owners intended to
benefit the Church when in their extrajudicial partition of several parcels of land
inherited by them from Doa Encarnacion Florendo they agreed that with respect to
the land situated in Barrio Lubong Dacquel Cabugao Ilocos Sur, the fruits thereof
shall serve to defray the religious expenses specified in Exhibit O-1. The evidence
on record shows that the true intent of the parties is to confer a direct and material
benefit upon the Church. The fruits of the aforesaid land were used thenceforth to
defray the expenses of the Church in the preparation and celebration of the Holy
Week, an annual Church function. Suffice it to say that were it not for Exhibit O-1,
the Church would have necessarily expended for this religious occasion, the annual
relisgious procession during the Holy Wock and also for the repair and preservation
of all the statutes, for the celebration of the Seven Last Word.
We find that the trial court erred in holding that the stipulation, arrangement or
grant (Exhibit O-1) is revocable at the option of the co-owners. While a stipulation in
favor of a third person has no binding effect in itself before its acceptance by the
party favored, the law does not provide when the third person must make his
acceptance. As a rule, there is no time at such third person has after the time until
the stipulation is revoked. Here, We find that the Church accepted the stipulation in
its favor before it is sought to be revoked by some of the co-owners, namely the
petitioners-appellants herein. It is not disputed that from the time of the with of
Doa Encarnacion Florentino in 1941, as had always been the case since time
immemorial up to a year before the firing of their application in May 1964, the
Church had been enjoying the benefits of the stipulation. The enjoyment of benefits
flowing therefrom for almost seventeen years without question from any quarters
can only be construed as an implied acceptance by the Church of the stipulation
pour autrui before its revocation.
The acceptance does not have to be in any particular form, even
when the stipulation is for the third person an act of liberality or
generosity on the part of the promisor or promise.

It need not be made expressly and formally. Notification of

acceptance, other than such as is involved in the making of
demand, is unnecessary.

A trust constituted between two contracting parties for the

benefit of a third person is not subject to the rules governing
donation of real property. The beneficiary of a trust may demand
performance of the obligation without having formally accepted
the benefit of the this in a public document, upon mere
acquiescence in the formation of the trust and acceptance under
the second paragraph of Art. 1257 of the Civil Code.

Hence, the stipulation (Exhibit O-1) cannot now be revoked by any of the stipulators
at their own option. This must be so because of Article 1257, Civil Code and the
cardinal rule of contracts that it has the force of law between the parties.
this Court ruled in Garcia v. Rita Legarda, Inc.,

Thus,

"Article 1309 is a virtual

reproduction of Article 1256 of the Civil Code, so phrased to emphasize that the
contract must bind both parties, based on the principles (1) that obligation arising
from contracts have the force of law between the contracting parties; and (2) that
there must be mutuality between the parties based on their principle equality, to
which is repugnant to have one party bound by the contract leaving the other free
therefrom."
Consequently, Salvador Encarnacion, Sr. must bear with Exhibit O-1, being a
signatory to the Deed of Extrajudicial Partition embodying such beneficial
stipualtion. Likewise, with regards to Salvador, Jr. and Angel Encarnacion, they too
are bound to the agreement. Being subsequent purchasers, they are privies or
successors in interest; it is axiomatic that contracts are enforceable against the
parties and their privies.

10

Furthermore, they are shown to have given their

conformity to such agreement when they kept their peace in 1962 and 1963, having
already bought their respective shares of the subject land but did not question the
enforcement of the agreement as against them. They are also shown to have
knowledge of Exhibit O-1 as they had admitted in a Deed of Real Mortgage executed
by them on March 8, 1962 involving their shares of the subject land that, "This

parcel of land is encumbered as evidenced by the document No. 420, page 94, Book
1, series 1947, executed by the heirs of the late Encarnacion Florentino, on August
26, 1947, before M. Francisco Ante, Notwy Public of Vigan, Ilocos Sur, in its page 10
of the said document of partition, and also by other documents."
The annotation of Exhibit O-1 on the face of the title to be issued in this case is
merely a guarantee of the continued enforcement and fulfillment of the beneficial
stipulation. It is error for the lower court to rule that the petitioners-appellants are
not the real parties in interest, but the Church. That one of the parties to a contract
pour autrui is entitled to bring an action for its enforcement or to prevent its breach
is too clear to need any extensive discussion. Upon the other hand, that the
contract involved contained a stipulation pour autrui amplifies this settled rule only
in the sense that the third person for whose benefit the contract was entered into
may also demand its fulfillment provoked he had communicated his acceptance
thereof to the obligor before the stipulation in his favor is revoked.

11

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

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

12

In the case at

bar, the records clearly show that the second and third premism enumerated abow
are fully mt. With regards to first premise, the petioners-appellants cannot claim

that the issues anent Exhibit O-1 were not put in issue because this is contrary to
their stand before the lower court where they took the initial step in praying for the
court's determination of the merits of Exhibit O-1 as an encumbrance to be
annotated on the title to be issued by such court. On the other hand, the
petitioners-appellees who had the right to invoke the limited jurisdiction of the
registration court failed to do so but met the issues head-on.
Secondly, for this very special reason, We win uphold the actuation of the lower
court in determining the conflicting interests of the parties in the registration
proceedings before it. This case has been languishing in our courts for thirteen tong
years. To require that it be remanded to the lower court for another proceeding
under its general jurisdiction is not in consonance with our avowed policy of speedy
justice. It would not be amiss to note that if this case be remanded to the lower
court, and should appeal again be made, the name issues will once more be raised
before us hence, Our decision to resolve at once the issues in the instant petition.
IN VIEW OF THE FOREGOING, the decision of the Court of First Instance of Ilocos Sur
in Land Registration Case No. N-310 is affirmed but modified to allow the annotation
of Exhibit O-1 as an encumbrance on the face of the title to be finally issued in favor
of all the applications (herein appellants and herein appellees) in the registration
proceedings below.
No pronouncement as to cost.
SO ORDERED.

FIRST DIVISION
[G.R. No. L-40234. December 14, 1987.]
MARIMPERIO COMPAIA NAVIERA, S.A., Petitioner, v. COURT OF APPEALS
and UNION IMPORT & EXPORT CORPORATION and PHILIN TRADERS
CORPORATION, Respondents.

DECISION

PARAS, J.:

This is a petition for certiorari under Section 1, Rule 65 of the Rules of Court seeking
the annulment and setting aside of the decision of the Court of Appeals * and
promulgated on September 2, 1974 in CA-G.R. No. 48521-R entitled "Union Import
and Export Corporation, Et Al., Plaintiffs-Appellees v. Marimperio Compaia Naviera,
S.A., Defendant-Appellant", ordering petitioner to pay respondent the total sum of
US $265,482.72 plus attorneys fees of US $100,000.00 and (b) the resolution of the
said Court of Appeals in the same case, dated February 17, 1975 fixing the amount
of attorneys fees to P100,000.00 instead of $100,000.00 as erroneously stated in
the decision but denying petitioners motion for reconsideration and/or new trial.
The dispositive portion of the decision sought to be annulled (Rollo, p. 215) reads as
follows:chanrob1es virtual 1aw library
For all the foregoing, and in accordance therewith, let judgment be entered (a)
affirming the decision appealed from insofar as it directs the defendant-appellant:
(1) to pay plaintiffs the sum of US$22,500.00 representing the remittance of
plaintiffs to said defendant for the first 15-day hire of the vessel SS PAXOI,
including overtime and an overpayment of US$254.00; (2) to pay plaintiffs the sum
of US$16,000.00, corresponding to the remittance of plaintiffs to defendant for the
second 15-day hire of the aforesaid vessel; (3) to pay plaintiffs the sum of
US$6,982.72, representing the cost of bunker oil, survey and watering of the said
vessel; (4) to pay plaintiffs the sum of US$100,000.00 as and for attorneys fees;
and, (b) reversing the portion granting commission to the intervenor-appellee and
hereby dismissing the complaint-in-intervention. The order of the court a quo
denying the plaintiffs Motion for Partial Reconsideration, is likewise, affirmed,
without any special pronouncement as to costs."cralaw virtua1aw library
The facts of the case as gathered from the amended decision of the lower court

(Amended Record on Appeal, p. 352), are as follows:chanrob1es virtual 1aw library

In 1964 Philin Traders Corporation and Union Import and Export Corporation entered
into a joint business venture for the purchase of copra from Indonesia for sale in
Europe. James Liu, President and General Manager of the Union took charge of the
European market and the chartering of a vessel to take the copra to Europe. Peter
Yap of Philin on the other hand, found one P.T. Karkam in Dumai, Sumatra who had
around 4,000 tons of copra for sale. Exequiel Toeg of Interocean was commissioned
to look for a vessel and he found the vessel "SS Paxoi" of Marimperio available.
Philin and Union authorized Toeg to negotiate for its charter but with instructions to
keep confidential the fact that they are the real charterers.
Consequently on March 21, 1965, in London England, a "Uniform Time Charter" for
the hire of vessel "Paxoi" was entered into by the owner, Marimperio Compaia
Naviera, S.A. through its agents N. & J. Vlassopulos, Ltd. and Matthews Wrightson,
Burbridge, Ltd. to be referred to simply as Matthews, representing Interocean
Shipping Corporation, which was made to appear as charterer, although it merely
acted in behalf of the real charterers, private respondents herein.chanrobles.com.ph
: virtual law library
The pertinent provisions or clauses of the Charter Party read:chanrob1es virtual 1aw
library
1. The owners let, and the Charterers hire the Vessel for a period of 1 (one) trip via
safe port or ports Hong Kong, Philippine Islands and or INDONESIA from the time the
Vessel is delivered and placed at the disposal of the Charterers on sailing HSINKANG
...
4. The Charterers are to provide and pay for oil-fuel, water for boilers, port charges,
pilotages . . .
6. The Charterers to pay as hire s.21 (Twenty-one Shillings per dead weights ton per
30 days or pro rata commencing in accordance with Clause 1 until her redelivery to
the owners.

"Payment of hire to be made in cash as per Clause 40 without discount, every 15

days in advance.
"In default of payment of the Owners to have the right of withdrawing the vessel
from the services of the Charterers, without noting any protest and without
interference by any court or any for mality whatsoever and without prejudice the
Owners may otherwise have on the Charterers under the Charter.
7. The Vessel to be redelivered on the expiration of the Charter in the same good
order as when delivered to the Charterers (fair wear and tear expected) in the
Charterers option in ANTWERP HAMBURG RANGE.
20. The Charterers to have the option of subletting the Vessel, giving due notice to
the Owners, but the original Charterers always to remain responsible to the Owners
for due performance of the Charter.
29. Export and/or import permits for Charterers cargo to the Charterers risk and
expense. Charterers to obtain and be responsible for all the necessary permits to
enter and/or trade in and out of all ports during the currency of the Charter at their
risk and expense. . . .
33. Charterers to pay as overtime, bonus and premiums to Master, Officers and
crew, the sum of 200 (Two Hundred Pounds) per month to be paid together with
hire.
37. Bunkers on delivery as on board. Bunkers on redelivery maximum 110 tons.
Prices of bunkers at 107 per long ton at both ends.
38. Upon sailing from each loading port, Master to cable SEASHIPS MANILA advising
the quantity loaded and the time of completion.
40. The hire shall be payable in external sterling or at Charterers option in U.S.
dollars in London; Williams Deacons Vlassopulos Ltd., Account No.

861769."cralaw virtua1aw library

In view of the aforesaid Charter, on March 30, 1965 plaintiff Charterer cabled a firm
offer to P.T. Karkam to buy the 4,000 tons of copra for U.S. $180.00 per ton, the
same to be loaded either in April or May, 1965. The offer was accepted and plaintiffs
opened two irrevocable letters of Credit in favor of P.T. Karkam.
On March 29, 1965, the Charterer was notified by letter by Vlassopulos through
Matthews that the vessel "PAXOI" had sailed from Hsinkang at noontime on March
27, 1965 and that it had left on hire at that time and date under the Uniform TimeCharter.
The Charterer was however twice in default in its payments which were supposed to
have been done in advance. The first 15-day hire comprising the period from March
27 to April 11, 1965 was paid despite follow-ups only on April 6, 1965 and the
second 15-day hire for the period from April 12 to April 27, 1965 was paid also
despite follow-ups only on April 26, 1965. On April 14, 1965 upon representation of
Toeg, the Esso Standard Oil (Hongkong) Company supplied the vessel with 400 tons
of bunker oil at a cost of US $6,982.73.
Although the late payments for the charter of the vessel were received and
acknowledged by Vlassopulos without comment or protest, said agent notified
Matthews, by telex on April 23, 1965 that the shipowners in accordance with Clause
6 of the Charter Party were withdrawing the vessel from Charterers service and
holding said Charterer responsible for unpaid hirings and all legal claims.chanrobles
lawlibrary : rednad
On April 29, 1965, the shipowners entered into another charter agreement with
another Charterer, the Nederlansche Stoomvart of Amsterdam, the delivery date of
which was around May 3, 1965 for a trip via Indonesia to Antwep/Hamburg at an
increased charter cost.
Meanwhile, the original Charterer again remitted on April 30, 1965, the amount
corresponding to the 3rd 15-day hire of the vessel PAXOI, but this time the

remittance was refused.

On May 3, 1965, respondents Union Import and Export Corporation and Philin
Traders Corporation filed a complaint with the Court of First Instance of Manila,
Branch VIII, against the Unknown Owners of the Vessel "SS Paxoi", for specific
performance with prayer for preliminary attachment, alleging, among other things,
that the defendants (unknown owners) through their duly authorized agent in
London, the N & J Vlassopulos, Ltd., ship brokers, entered into a contract of Uniform
Time-Charter with the Interocean Shipping Company of Manila through the latters
duly authorized broker, the Overseas Steamship Co., Inc., for the Charter of the
vessel "SS PAXOI" under the terms and conditions appearing therein . . .; that,
immediately thereafter, the Interocean Shipping Company sublet the said vessel to
the plaintiff Union Import & Export Corporation which in turn sublet the same to the
other plaintiff, the Philin Traders Corporation (Amended Record on Appeal, p. 17).
Respondents as plaintiffs in the complaint obtained a writ of preliminary attachment
of vessel "PAXOI" which was anchored at Davao on May 5, 1969, upon the filing of
the corresponding bond of P1,663,030.00 (Amended Record on Appeal, p. 27).
However, the attachment was lifted on May 15, 1969 upon defendants motion and
filing of a counterbond for P1,663,030 (Amended Record on Appeal, p. 62).
On May 11, 1965, the complaint was amended to identify the defendant as
Marimperio Compaia Naviera S.A., petitioner herein (Amended Record on Appeal,
p. 38). In answer to the amended complaint, by way of special defenses defendant
(petitioner herein) alleged among others that the Charter Party covering its vessel
"SS (PAXOI) was entered into by defendant with Interocean Shipping Co. which is not
a party in the complaint; that defendant has no agreement or relationship
whatsoever with the plaintiffs; that plaintiffs are unknown to defendant; that the
charter party entered into by defendant with the Interocean Shipping Co. over the
vessel "SS PAXOI" does not authorize a sub-charter of said vessel to other parties;
and that at any rate, any such sub-charter was without the knowledge or consent of
defendant or defendants agent, and therefore, has no effect and/or is not binding
upon defendant. By way of counterclaim, defendant prayed that plaintiffs be
ordered to pay defendant (1) the sum of 5,085.133d or its equivalent, in Philippine
currency of P54,929.60, which the defendant failed to realize under the substitute

charter, from May 3, 1965 to May 16, 1965, while the vessel was under attachment;
(2) the sum of 68.7.10 or its equivalent of P7,132.83, Philippine currency, as
premium for defendants counterbond for the first year, and such other additional
premiums that will have to be paid by defendant for additional premiums while the
case is pending; and (3) a sum of not less than P200,000.00 for and as attorneys
fees and expenses of litigations (Amended Record on Appeal, p. 64).
On March 16, 1966, respondent Interocean Shipping Corporation filed a complaintin-intervention to collect what it claims to be its loss of income by way of
commission and expenses in the amount of P15,000.00 and the sum of P2,000.00
for attorneys fees (Amended Record on Appeal, p. 87). In its amended answer to
the complaint-in-intervention petitioner, by way of special defenses alleged that (1)
the plaintiff-in-intervention, being the charterer, did not notify the defendant
shipowner, Petitioner, herein, about any alleged sub-charter of the vessel "SS
PAXOI" to the plaintiffs; consequently, there is no privity of contract between
defendant and plaintiffs and it follows that plaintiff-in-intervention, as charterer, is
responsible for defendant shipowner for the proper performance of the charter
party; (2) that the charter party provides that any dispute arising from the charter
party should be referred to arbitration in London; that Charterer plaintiff-inintervention has not complied with this provision of the charter party; consequently
its complaint-in intervention is premature; and (3) that the alleged commission of 2
1/2% and not become due for the reason, among others, that the charterer violated
the contract, and the full hiring fee due the shipowner was not paid in accordance
with the terms and conditions of the charter party. By way of counterclaim
defendant shipowner charged the plaintiff-in-intervention attorneys fees and
expenses of litigation in the sum of P10,000.00 (Amended Record on Appeal, p.
123).chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
On November 22, 1969 the Court of First Instance of Manila, Branch VIII rendered its
decision ** in favor of defendant Marimperio Compaia Naviera, S.A., petitioner
herein, and against plaintiffs Union Import and Export Corporation and Philin Traders
Corporation, respondents herein, dismissing the amended complaint, and ordering
said plaintiff on the counterclaim to pay defendant, jointly and severally, the
amount of 8,011.38 or its equivalent in Philippine currency of P76,303.40, at the

exchange rate of P9.40 to 1 for the unearned charter hire due to the attachment of
the vessel "PAXOI" in Davao, plus premiums paid on the counterbond as of April 22,
1968 plus the telex and cable charges and the sum of P10,000.00 as attorneys fees
and costs. The trial court dismissed the complaint-in-intervention, ordering the
intervenor, on the counterclaim, to pay defendant the sum of P10,000.00 as
attorneys fees, and the costs (Amended Record on Appeal, p. 315).
Plaintiffs filed a Motion for Reconsideration and/or new trial of the decision of the
trial court on December 23, 1969 (Amended Record on Appeal, p. 286); the
intervenor filed its motion for reconsideration and/or new trial on January 7, 1970
(Amended Record on Appeal, p. 315).
Acting on the two motions for reconsideration, the trial court reversed its stand in its
amended decision dated January 24, 1978. The dispositive portion of the amended
decision states:jgc:chanrobles.com.ph
"FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment for the
plaintiffs Union Import & Export Corporation and Philin Traders Corporation, and
plaintiff-in-intervention, Interocean Shipping Corporation, and consequently orders
the defendant, Marimperio Compaia Naveria, S.A.:chanrob1es virtual 1aw library
(1) To pay plaintiffs the sum of US$22,500.00 representing the remittance of
plaintiffs to said defendant for the first 15-day hire of the vessel SS PAXOI,
including overtime and an overpayment of US$254.00;
(2) To pay plaintiffs the sum of US$16,000.00 corresponding to the remittance of
plaintiffs to defendant for the second 15-day hire of the aforesaid vessel;
(3) To pay plaintiffs the sum of US$6,982.72 representing the cost of bunker oil,
survey and watering of the said vessel;
(4) To pay plaintiffs the sum of US$220,000.00 representing the unrealized profits;
and

(5) To pay plaintiffs the sum of P100,000.00, as and for attorneys fees (Moran,
Comments on the Rules of Court, Vol. III, 1957 5d, 644, citing Haussermann v.
Rahmayer, 12 Phil. 350; and others)" (Francisco v. Matias, G.R. No. L-16349, January
31, 1964; Sison v. Suntay, G.R. No. L-1000, December 28, 1957).
The Court further orders defendant to pay plaintiff-in-intervention the amount of
P15,450.44, representing the latters commission as broker, with interest thereon at
6% per annum from the date of the filing of the complaint-in-intervention, until fully
paid, plus the sum of P2,000.00 as attorneys fees.
The Court finally orders the defendant to pay the costs.
In view of the above conclusion, the Court orders the dismissal of the counterclaims
filed by defendant against the plaintiffs and plaintiff-in-intervention, as well as its
motion for the award of damages in connection with the issuance of the writ of
preliminary attachment."cralaw virtua1aw library
Defendant (petitioner herein), filed a motion for reconsideration and/or new trial of
the amended decision on February 19, 1970 (Amended Record on Appeal, p. 382).
Meanwhile a new Judge was assigned to the Trial Court (Amended Record on Appeal,
p. 541). On September 10, 1970 the trial court issued its order of September 10,
1970 *** denying defendants motion for reconsideration (Amended Record on
Appeal, p. 583).
On Appeal, the Court of Appeals affirmed the amended decision of the lower court
except the portion granting commission to the intervenor-appellee, which it
reversed thereby dismissing the complaint-in-intervention. Its two motions (1) for
reconsideration and/or new trial and (2) for new trial having been denied by the
Court of Appeals in its Resolution of February 17, 1975 which, however, fixed the
amount of attorneys fees at P100,000.00 instead of $100,000.00 (Rollo, p. 81),
petitioner filed with this Court its petition for review on certiorari on March 19, 1975
(Rollo, p. 86).chanrobles.com:cralaw:red
After deliberating on the petition, the Court resolved to require the respondents to

comment thereon, in its resolution dated April 2, 1975 (rollo, p. 225).

The comment on petition for review by certiorari was filed by respondents on April
21, 1975, praying that the petition for review by certiorari dated March 18, 1975 be
dismissed for lack of merit (Rollo, p. 226). The reply to comment was filed on May 8,
1975 (Rollo, p. 259). The rejoinder to reply to comment was filed on May 13, 1975
(Rollo, p. 264).
On October 20, 1975, the Court resolved (a) to give due course to the petition; (b)
to treat the petition for review as a special civil action; and (c) to require both
parties to submit their respective memoranda within thirty (30) days from notice
hereof (Rollo, p. 27).
Respondents filed their memoranda on January 27, 1976 (Rollo, p. 290); petitioner,
on February 26, 1976 (Rollo, p. 338). Respondents reply memorandum was filed on
April 14, 1976 (Rollo, p. 413) and Rejoinder to respondents reply memorandum was
filed on May 28, 1976 (Rollo, p. 460).
On June 11, 1976, the Court resolved to admit petitioners rejoinder to respondents
reply memorandum and to declare this case submitted for decision (Rollo, p. 489).
The main issues raised by petitioner are:chanrob1es virtual 1aw library
1. Whether or not respondents have the legal capacity to bring the suit for specific
performance against petitioner based on the charter party; and
2. Whether or not the default of Charterer in the payment of the charter hire within
the time agreed upon gives petitioner a right to rescind the charter party
extrajudicially.
I.

According to Article 1311 of the Civil Code, a contract takes effect between the

parties who made it, and also their assigns and heirs, except in cases where the
rights and obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. Since a contract may be violated
only by the parties, thereto as against each other, in an action upon that contract,
the real parties in interest, either as plaintiff or as defendant, must be parties to
said contract. Therefore, a party who has not taken part in it cannot sue or be sued
for performance or for cancellation thereof, unless he shows that he has a real
interest affected thereby (Macias & Co. v. Warner Barners & Co., 43 Phil. 155 [1922]
and Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125 [1951]; Coquia v. Fieldmens
Insurance Co., Inc., 26 SCRA 178 [1968]).
It is undisputed that the charter party, basis of the complaint, was entered into
between petitioner Marimperio Compaia Naviera, S.A., through its duly authorized
agent in London, the N & J Vlassopulos, Ltd., and the Interocean Shipping Company
of Manila through the latters duly authorized broker, the Overseas Steamship Co.,
Inc., represented by Matthews, Wrightson Burbridge Ltd., for the Charter of the "SS
PAXOI" (Amended Complaint, Amended Record on Appeal, p. 33; Complaint-inIntervention, Amended Record on Appeal, p. 87). It is also alleged in both the
Complaint (Amended Record on Appeal 18) and the Amended Complaint (Amended
Record on Appeal, p. 39) that the Interocean Shipping Company sublet the said
vessel to respondent Union Import and Export Corporation which in turn sublet the
same to respondent Philin Traders Corporation. It is admitted by respondents that
the charterer is the Interocean Shipping Company. Even paragraph 3 of the
complaint-in-intervention alleges that respondents were given the use of the vessel
"pursuant to paragraph 20 of the Uniform Time Charter . . ." which precisely
provides for the subletting of the vessel by the charterer (Rollo, p. 24). Furthermore,
Article 652 of the Code of Commerce provides that the charter party shall contain,
among others, the name, surname, and domicile of the charterer, and if he states
that he is acting by commission, that of the person for whose account he makes the
contract. It is obvious from the disclosure made in the charter party by the
authorized broker, the Overseas Steamship Co., Inc., that the real charterer is the
Interocean Shipping Company (which sublet the vessel to Union Import and Export
Corporation which in turn sublet it to Philin Traders Corporation).chanrobles virtual
lawlibrary

In a sub-lease, there are two leases and two distinct judicial relations although
intimately connected and related to each other, unlike in a case of assignment of
lease, where the lessee transmits absolutely his right, and his personality
disappears; there only remains in the juridical relation two persons, the lessor and
the assignee who is converted into a lessee (Moreno, Philippine Law Dictionary, 2nd
ed., p. 594). In other words, in a contract of sub-lease, the personality of the lessee
does not disappear; he does not transmit absolutely his rights and obligations to the
sub-lessee; and the sub-lessee generally does not have any direct action against
the owner of the premises as lessor, to require the compliance of the obligations
contracted with the plaintiff as lessee, or vice versa (10 Manresa, Spanish Civil
Code, 438).
However, there are at least two instances in the Civil Code which allow the lessor to
bring an action directly (accion directa) against the sub-lessee (use and
preservation of the premises under Art. 1651, and rentals under Article 1652).
Art. 1651 reads:jgc:chanrobles.com.ph
"Without prejudice to his obligation toward the sub-lessor, the sub-lessee is bound
to the lessor for all acts which refer to the use and preservation of the thing leased
in the manner stipulated between the lessor and the lessee."cralaw virtua1aw
library
Article 1652 reads:jgc:chanrobles.com.ph
"The sub-lessee is subsidiarily liable to the lessor for any rent due from the lessee.
However, the sub-lessee shall not be responsible beyond the amount of rent due
from him, in accordance with the terms of the sub-lease, at the time of the extrajudicial demand by the lessor.
Payments of rent in advance by the sub-lessee shall be deemed not to have been
made, so far as the lessors claim is concerned, unless said payments were effected
in virtue of the custom of the place."cralaw virtua1aw library

It will be noted however that in said two Articles it is not the sub-lessee, but the
lessor, who can bring the action. In the instant case, it is clear that the sub-lessee
as such cannot maintain the suit they filed with the trial court (See A. Maluenda and
Co. v. Enriquez, 46 Phil. 916).
In the law of agency "with an undisclosed principal, the Civil Code in Article 1883
reads:jgc:chanrobles.com.ph
"If an agent acts in his own name, the principal has no right of action against the
persons with whom the agent has contracted; neither have such persons against
the principal.
In such case the agent is the one directly bound in favor of the person with whom
he has contracted, as if the transaction were his own, except when the contract
involves things belonging to the principal.
The provisions of this article shall be understood to be without prejudice to the
actions between the principal and agent."cralaw virtua1aw library
While in the instant case, the true charterers of the vessel were the private
respondents herein and they chartered the vessel through an intermediary which
upon instructions from them did not disclose their names. Article 1883 cannot help
the private respondents, because although they were the actual principals in the
charter of the vessel, the law does not allow them to bring any action against the
adverse party and vice-versa.
II.

The answer to the question of whether or not the default of charterer in the
payment of the charter hire within the time agreed upon gives petitioner a right to
rescind the charter party extrajudicially, is undoubtedly in the affirmative.

Clause 6 of the Charter party specifically provides that the petitioner has the right
to withdraw the vessel from the service of the charterers, without noting any protest
and without interference of any court or any formality in the event that the
charterer defaults in the payment of hire. The payment of hire was to be made
every fifteen (15) days in advance.
It is undisputed that the vessel "SS PAXOI" came on hire on March 27, 1965. On
March 29, Vlassopulos notified by letter the charterer through Matthews of that fact,
enclosing therein owners debit note for a 15-day hire payable in advance. On March
30, 1965 the shipowner again notified Matthews that the payment for the first 15day hire was overdue. Again on April 2 the shipowner telexed Matthews insisting on
the payment, but it was only on April 7 that the amount of US $22,500.00 was
remitted to Williams Deacons Bank, Ltd. through the Rizal Commercial Banking
Corporation for the account of Vlassopulos, agent of petitioner, corresponding to the
first 15-day hire from March 27 to April 11, 1965.chanroblesvirtualawlibrary
On April 8, 1965, Vlassopulos acknowledged receipt of the payment, again with a
debit note for the second 15-day hire and overtime which was due on April 11,
1965. On April 23, 1965, Vlassopulos notified Matthews by telex that charterers
were in default and in accordance with Clause 6 of the charter party, the vessel was
being withdrawn from charterers service, holding them responsible for unpaid hire
and all other legal claims of the owner. Respondents remitted the sum of US
$6,000.00 and US $10,000.00 to the bank only on April 26, 1965 representing
payment for the second 15-day hire from April 12 to April 27, 1965, received and
accepted by the payee, Vlassopulos without any comment or protest.
Unquestionably, as of April 23, 1965, when Vlassopulos notified Matthews of the
withdrawal of the vessel from the Charterers service, the latter was already in
default. Accordingly, under Clause 6 of the charter party the owners had the right to
withdraw "SS PAXOI" from the service of charterers, which withdrawal they did.
The question that now arises is whether or not petitioner can rescind the charter
party extrajudicially. The answer is also in the affirmative. A contract is the law
between the contracting parties, and when there is nothing in it which is contrary to

law, morals, good customs, public policy or public order, the validity of the contract
must be sustained (Consolidated Textile Mills, Inc. v. Reparations Commission, 22
SCRA 674 [1968]; Lazo v. Republic Surety & Insurance Co., Inc., 31 SCRA 329
[1970]; Castro v. Court of Appeals, 99 SCRA 722 [1980]; Escano v. Court of Appeals,
100 SCRA 197 [1980]). A judicial action for the rescission of a contract is not
necessary where the contract provides that it may be revoked and cancelled for
violation of any of its terms and conditions (Enrile v. Court of Appeals, 29 SCRA 504
[1969]; University of the Philippines v. De los Angeles, 35 SCRA 102 [1970]; Palay,
Inc. v. Clave, 124 SCRA 638 [1983]).
PREMISES CONSIDERED, (1) the decision of the Court of Appeals affirming the
amended decision of the Court of First Instance of Manila, Branch VIII, is hereby
REVERSED and SET ASIDE except for that portion of the decision dismissing the
complaint-in-intervention; and (2) the original decision of the trial court is hereby
REINSTATED.
SO ORDERED.

G.R. No. 120554 September 21, 1999

SO PING BUN, petitioner,
vs.
COURT OF APPEALS, TEK HUA ENTERPRISES CORP. and MANUEL C. TIONG,
respondents.

QUISUMBING, J.:
This petition for certiorari challenges the Decision
October 10, 1994, and the Resolution

of the Court of Appeals dated

dated June 5, 1995, in CA-G.R. CV No.

38784. The appellate court affirmed the decision of the Regional Trial Court of
Manila, Branch 35, except for the award of attorney's fees, as follows:

WHEREFORE, foregoing considered, the appeal of respondentappellant So Ping Bun for lack of merit is DISMISSED. The
appealed decision dated April 20, 1992 of the court a quo is
modified by reducing the attorney's fees awarded to plaintiff Tek
Hua Enterprising Corporation from P500,000.00 to P200,000.00.
3

The facts are as follows:

In 1963, Tek Hua Trading Co, through its managing partner, So Pek Giok, entered
into lease agreements with lessor Dee C. Chuan & Sons Inc. (DCCSI). Subjects of
four (4) lease contracts were premises located at Nos. 930, 930-Int., 924-B and 924C, Soler Street, Binondo, Manila. Tek Hua used the areas to store its textiles. The
contracts each had a one-year term. They provided that should the lessee continue
to occupy the premises after the term, the lease shall be on a month-to-month
basis.
When the contracts expired, the parties did not renew the contracts, but Tek Hua
continued to occupy the premises. In 1976, Tek Hua Trading Co. was dissolved.
Later, the original members of Tek Hua Trading Co. including Manuel C. Tiong,
formed Tek Hua Enterprising Corp., herein respondent corporation.
So Pek Giok, managing partner of Tek Hua Trading, died in 1986. So Pek Giok's
grandson, petitioner So Ping Bun, occupied the warehouse for his own textile
business, Trendsetter Marketing.
On August 1, 1989, lessor DCCSI sent letters addressed to Tek Hua Enterprises,
informing the latter of the 25% increase in rent effective September 1, 1989. The
rent increase was later on reduced to 20% effective January 1, 1990, upon other
lessees' demand. Again on December 1, 1990, the lessor implemented a 30% rent
increase. Enclosed in these letters were new lease contracts for signing. DCCSI
warned that failure of the lessee to accomplish the contracts shall be deemed as
lack of interest on the lessee's part, and agreement to the termination of the lease.
Private respondents did not answer any of these letters. Still, the lease contracts
were not rescinded.

On March 1, 1991, private respondent Tiong sent a letter to petitioner which reads
as follows:
March 1, 1991
Mr. So Ping Bun
930 Soler Street
Binondo, Manila
Dear Mr. So,
Due to my closed (sic) business associate (sic) for three decades
with your late grandfather Mr. So Pek Giok and late father, Mr. So
Chong Bon, I allowed you temporarily to use the warehouse of
Tek Hua Enterprising Corp. for several years to generate your
personal business.
Since I decided to go back into textile business, I need a
warehouse immediately for my stocks. Therefore, please be
advised to vacate all your stocks in Tek Hua Enterprising Corp.
Warehouse. You are hereby given 14 days to vacate the
premises unless you have good reasons that you have the right
to stay. Otherwise, I will be constrained to take measure to
protect my interest.
Please give this urgent matter your preferential attention to
avoid inconvenience on your part.
Very truly yours,
(Sgd) Manuel C. Tiong
MANUEL C. TIONG
President

Petitioner refused to vacate. On March 4, 1992, petitioner requested formal

contracts of lease with DCCSI in favor Trendsetter Marketing. So Ping Bun claimed
that after the death of his grandfather, So Pek Giok, he had been occupying the
premises for his textile business and religiously paid rent. DCCSI acceded to
petitioner's request. The lease contracts in favor of Trendsetter were executed.
In the suit for injunction, private respondents pressed for the nullification of the
lease contracts between DCCSI and petitioner. They also claimed damages.
After trial, the trial court ruled:
WHEREFORE, judgment is rendered:
1. Annulling the four Contracts of
Lease (Exhibits A, A-1 to A-3, inclusive)
all dated March 11, 1991, between
defendant So Ping Bun, doing business
under the name and style of
"Trendsetter Marketing", and
defendant Dee C. Chuan & Sons, Inc.
over the premises located at Nos. 924B, 924-C, 930 and 930, Int.,
respectively, Soler Street, Binondo
Manila;
2. Making permanent the writ of
preliminary injunction issued by this
Court on June 21, 1991;
3. Ordering defendant So Ping Bun to
pay the aggrieved party, plaintiff Tek
Hua Enterprising Corporation, the sum
of P500,000.00, for attorney's fees;

4. Dismissing the complaint, insofar as

plaintiff Manuel C. Tiong is concerned,
and the respective counterclaims of
the defendant;
5. Ordering defendant So Ping Bun to
pay the costs of this lawsuit;
This judgment is without prejudice to the rights of plaintiff Tek
Hua Enterprising Corporation and defendant Dee C. Chuan &
Sons, Inc. to negotiate for the renewal of their lease contracts
over the premises located at Nos. 930, 930-Int., 924-B and 924-C
Soler Street, Binondo, Manila, under such terms and conditions
as they agree upon, provided they are not contrary to law, public
policy, public order, and morals.
SO ORDERED.

Petitioner's motion for reconsideration of the above decision was denied.

On appeal by So Ping Bun, the Court of Appeals upheld the trial court. On motion for
reconsideration, the appellate court modified the decision by reducing the award of
attorney's fees from five hundred thousand (P500,000.00) pesos to two hundred
thousand (P200,000.00) pesos.
Petitioner is now before the Court raising the following issues:
I. WHETHER THE APPELLATE COURT ERRED
IN AFFIRMING THE TRIAL COURT'S DECISION
FINDING SO PING BUN GUILTY OF TORTUOUS
INTERFERENCE OF CONTRACT?
II. WHETHER THE APPELLATE COURT ERRED
IN AWARDING ATTORNEY'S FEES OF
P200,000.00 IN FAVOR OF PRIVATE
RESPONDENTS.

The foregoing issues involve, essentially, the correct interpretation of the applicable
law on tortuous conduct, particularly unlawful interference with contract. We have
to begin, obviously, with certain fundamental principles on torts and damages.
Damage is the loss, hurt, or harm which results from injury, and damages are the
recompense or compensation awarded for the damage suffered.

One becomes

liable in an action for damages for a nontrespassory invasion of another's interest in

the private use and enjoyment of asset if (a) the other has property rights and
privileges with respect to the use or enjoyment interfered with, (b) the invasion is
substantial, (c) the defendant's conduct is a legal cause of the invasion, and (d) the
invasion is either intentional and unreasonable or unintentional and actionable
under general negligence rules.

The elements of tort interference are: (1) existence of a valid contract; (2)
knowledge on the part of the third person of the existence of contract; and (3)
interference of the third person is without legal justification or excuse.

A duty which the law of torts is concerned with is respect for the property of others,
and a cause of action ex delicto may be predicated upon an unlawful interference
by one person of the enjoyment by the other of his private
property. 9 This may pertain to a situation where a third person induces a party to
renege on or violate his undertaking under a contract. In the case before us,
petitioner's Trendsetter Marketing asked DCCSI to execute lease contracts in its
favor, and as a result petitioner deprived respondent corporation of the latter's
property right. Clearly, and as correctly viewed by the appellate court, the three
elements of tort interference above-mentioned are present in the instant case.
Authorities debate on whether interference may be justified where the defendant
acts for the sole purpose of furthering his own financial or economic interest.

10

One

view is that, as a general rule, justification for interfering with the business relations
of another exists where the actor's motive is to benefit himself. Such justification
does not exist where his sole motive is to cause harm to the other. Added to this,
some authorities believe that it is not necessary that the interferer's interest
outweigh that of the party whose rights are invaded, and that an individual acts
under an economic interest that is substantial, not merely de minimis, such that

wrongful and malicious motives are negatived, for he acts in self-protection.

11

Moreover justification for protecting one's financial position should not be made to
depend on a comparison of his economic interest in the subject matter with that of
others.

12

It is sufficient if the impetus of his conduct lies in a proper business

interest rather than in wrongful motives.

As early as Gilchrist vs. Cuddy,

14

13

we held that where there was no malice in the

interference of a contract, and the impulse behind one's conduct lies in a proper
business interest rather than in wrongful motives, a party cannot be a malicious
interferer. Where the alleged interferer is financially interested, and such interest
motivates his conduct, it cannot be said that he is an officious or malicious
intermeddler.

15

In the instant case, it is clear that petitioner So Ping Bun prevailed upon DCCSI to
lease the warehouse to his enterprise at the expense of respondent corporation.
Though petitioner took interest in the property of respondent corporation and
benefited from it, nothing on record imputes deliberate wrongful motives or malice
on him.
Sec. 1314 of the Civil Code categorically provides also that, "Any third person who
induces another to violate his contract shall be liable for damages to the other
contracting party." Petitioner argues that damage is an essential element of tort
interference, and since the trial court and the appellate court ruled that private
respondents were not entitled to actual, moral or exemplary damages, it follows
that he ought to be absolved of any liability, including attorney's fees.
It is true that the lower courts did not award damages, but this was only because
the extent of damages was not quantifiable. We had a similar situation in Gilchrist,
where it was difficult or impossible to determine the extent of damage and there
was nothing on record to serve as basis thereof. In that case we refrained from
awarding damages. We believe the same conclusion applies in this case.
While we do not encourage tort interferers seeking their economic interest to
intrude into existing contracts at the expense of others, however, we find that the
conduct herein complained of did not transcend the limits forbidding an obligatory

award for damages in the absence of any malice. The business desire is there to
make some gain to the detriment of the contracting parties. Lack of malice,
however, precludes damages. But it does not relieve petitioner of the legal liability
for entering into contracts and causing breach of existing ones. The respondent
appellate court correctly confirmed the permanent injunction and nullification of the
lease contracts between DCCSI and Trendsetter Marketing, without awarding
damages. The injunction saved the respondents from further damage or injury
caused by petitioner's interference.
Lastly, the recovery of attorney's fees in the concept of actual or compensatory
damages, is allowed under the circumstances provided for in Article 2208 of the
Civil Code.

16

One such occasion is when the defendant's act or omission has

compelled the plaintiff to litigate with third persons or to incur expenses to protect
his interest.

17

But we have consistently held that the award of considerable

damages should have clear factual and legal bases.

18

In connection with attorney's

fees, the award should be commensurate to the benefits that would have been
derived from a favorable judgment. Settled is the rule that fairness of the award of
damages by the trial court calls for appellate review such that the award if far too
excessive can be reduced.

19

This ruling applies with equal force on the award of

attorney's fees. In a long line of cases we said, "It is not sound policy to place in
penalty on the right to litigate. To compel the defeated party to pay the fees of
counsel for his successful opponent would throw wide open the door of temptation
to the opposing party and his counsel to swell the fees to undue proportions." 20
Considering that the respondent corporation's lease contract, at the time when the
cause of action accrued, ran only on a month-to-month basis whence before it was
on a yearly basis, we find even the reduced amount of attorney's fees ordered by
the Court of Appeals still exorbitant in the light of prevailing jurisprudence.

21

Consequently, the amount of two hundred thousand (P200,000.00) awarded by

respondent appellate court should be reduced to one hundred thousand
(P100,000.00) pesos as the reasonable award or attorney's fees in favor of private
respondent corporation.

WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of
the Court of Appeals in CA-G.R. CV No. 38784 are hereby AFFIRMED, with
MODIFICATION that the award of attorney's fees is reduced from two hundred
thousand (P200,000.00) to one hundred thousand (P100,000.00) pesos. No
pronouncement as to costs.1wphi1.nt
SO ORDERED.