G.R. No.

124922 June 22, 1998

JIMMY CO, doing business under the name & style DRAGON METAL
MANUFACTURING, petitioner,
vs.
COURT OF APPEALS and BROADWAY MOTOR SALES CORPORATION, respondents.

MARTINEZ, J.:

On July 18, 1990, petitioner entrusted his Nissan pick-up car 1988 model 1 to private respondent — which is
engaged in the sale, distribution and repair of motor vehicles — for the following job repair services and supply
of parts:

— Bleed injection pump and all nozzles;

— Adjust valve tappet;

— Change oil and filter;

— Open up and service four wheel brakes, clean and adjust;

— Lubricate accelerator linkages;

— Replace aircon belt; and

— Replace battery 2

Private respondent undertook to return the vehicle on July 21, 1990 fully serviced and supplied in accordance
with the job contract. After petitioner paid in full the repair bill in the amount of P1,397.00 3 private respondent
issued to him a gate pass for the release of the vehicle on said date. But came July 21, 1990, the latter could not
release the vehicle as its battery was weak and was not yet replaced. Left with no option, petitioner himself
bought a new battery nearby and delivered it to private respondent for installation on the same day. However,
the battery was not installed and the delivery of the car was rescheduled to July 24, 1990 or three (3) days later.
When petitioner sought to reclaim his car in the afternoon of July 24, 1990, he was told that it was carnapped
earlier that morning while being road-tested by private respondent's employee along Pedro Gil and Perez Streets
in Paco, Manila. Private respondent said that the incident was reported to the police.

Having failed to recover his car and its accessories or the value thereof, petitioner filed a suit for damages
against private respondent anchoring his claim on the latter's alleged negligence. For its part, private respondent
contended that it has no liability because the car was lost as result of a fortuitous event — the carnapping.
During pre-trial, the parties agreed that:

(T)he cost of the Nissan Pick-up four (4) door when the plaintiff purchased it from the defendent
is P332,500.00 excluding accessories which were installed in the vehicle by the plaintiff
consisting of four (4) brand new tires, magwheels, stereo speaker, amplifier which amount all to
P20,000.00. It is agreed that the vehicle was lost on July 24, 1990 "approximately two (2) years
and five (5) months from the date of the purchase." It was agreed that the plaintiff paid the
defendant the cost of service and repairs as early as July 21, 1990 in the amount of P1,397.00
which amount was received and duly receipted by the defendant company. It was also agreed
that the present value of a brand new vehicle of the same type at this time is P425,000.00 without
accessories. 4

They likewise agreed that the sole issue for trial was who between the parties shall bear the loss of the vehicle
which necessitates the resolution of whether private respondent was indeed negligent. 5 After trial, the court a
quo found private respondent guilty of delay in the performance of its obligation and held it liable to petitioner
for the value of the lost vehicle and its accessories plus interest and attorney's fees. 6 On appeal, the Court of
Appeals (CA) reversed the ruling of the lower court and ordered the dismissal of petitioner's damage suit. 7 The
CA ruled that: (1) the trial court was limited to resolving the issue of negligence as agreed during pre-trial;
hence it cannot pass on the issue of delay; and (2) the vehicle was lost due to a fortuitous event.

In a petition for review to this Court, the principal query raised is whether a repair shop can be held liable for
the loss of a customer's vehicle while the same is in its custody for repair or other job services?
The Court resolves the query in favor of the customer. First, on the technical aspect involved. Contrary to the
CA' s pronouncement, the rule that the determination of issues at a pre-trial conference bars the consideration of
other issues on appeal, except those that may involve privilege or impeaching matter, 8 is inapplicable to this
case. The question of delay, though not specifically mentioned as an issue at the pre-trial may be tackled by the
court considering that it is necessarily intertwined and intimately connected with the principal issue agreed upon
by the parties, i.e., who will bear the loss and whether there was negligence. Petitioner's imputation of
negligence to private respondent is premised on delay which is the very basis of the former's complaint. Thus, it
was unavoidable for the court to resolve the case, particularly the question of negligence without considering
whether private respondent was guilty of delay in the performance of its obligation.

On the merits. It is a not defense for a repair shop of motor vehicles to escape liability simply because the
damage or loss of a thing lawfully placed in its possession was due to carnapping. Carnapping per se cannot be
considered as a fortuitous event. The fact that a thing was unlawfully and forcefully taken from another's
rightful possession, as in cases of carnapping, does not automatically give rise to a fortuitous event. To be
considered as such, carnapping entails more than the mere forceful taking of another's property. It must be
proved and established that the event was an act of God or was done solely by third parties and that neither the
claimant nor the person alleged to be negligent has any participation. 9 In accordance with the Rules of
evidence, the burden of proving that the loss was due to a fortuitous event rests on him who invokes it 10 —
which in this case is the private respondent. However, other than the police report of the alleged carnapping
incident, no other evidence was presented by private respondent to the effect that the incident was not due to its
fault. A police report of an alleged crime, to which only private respondent is privy, does not suffice to establish
the carnapping. Neither does it prove that there was no fault on the part of private respondent notwithstanding
the parties' agreement at the pre-trial that the car was carnapped. Carnapping does not foreclose the pissibility of
fault or negligence on the part of private respondent.

Even assuming arguendo that carnapping was duly established as a fortuitous event, still private respondent
cannot escape liability. Article 1165 11 of the New Civil Code makes an obligor who is guilty of delay
responsible even for a fortuitous event until he has effected the delivery. In this case, private respondent was
already in delay as it was supposed to deliver petitioner's car three (3) days before it was lost. Petitioner's
agreement to the rescheduled delivery does not defeat his claim as private respondent had already breached its
obligation. Moreover, such accession cannot be construed as waiver of petitioner's right to hold private
respondent liable because the car was unusable and thus, petitioner had no option but to leave it.

Assuming further that there was no delay, still working against private respondent is the legal presumption
under Article 1265 that its possession of the thing at the time it was lost was due to its fault. 12 This presumption
is reasonable since he who has the custody and care of the thing can easily explain the circumstances of the loss.
The vehicle owner has no duty to show that the repair shop was at fault. All that petitioner needs to prove, as
claimant, is the simple fact that private respondent was in possession of the vehicle at the time it was lost. In
this case, private respondent's possession at the time of the loss is undisputed. Consequently, the burden shifts
to the possessor who needs to present controverting evidence sufficient enough to overcome that presumption.
Moreover, the exempting circumstances — earthquake, flood, storm or other natural calamity — when the
presumption of fault is not applicable 13 do not concur in this case. Accordingly, having failed to rebut the
presumption and since the case does not fall under the exceptions, private respondent is answerable for the loss.

It must likewise be emphasized that pursuant to Articles 1174 and 1262 of the New Civil Code, liability
attaches even if the loss was due to a fortuitous event if "the nature of the obligation requires the assumption of
risk". 14 Carnapping is a normal business risk for those engaged in the repair of motor vehicles. For just as the
owner is exposed to that risk so is the repair shop since the car was entrusted to it. That is why, repair shops are
required to first register with the Department of Trade and Industry (DTI) 15 and to secure an insurance policy
for the "shop covering the property entrusted by its customer for repair, service or maintenance" as a pre-
requisite for such registration/accreditation.16 Violation of this statutory duty constitutes negligence per
se.17 Having taken custody of the vehicle private respondent is obliged not only to repair the vehicle but must
also provide the customer with some form of security for his property over which he loses immediate control.
An owner who cannot exercise the seven (7) juses or attributes of ownership — the right to possess, to use and
enjoy, to abuse or consume, to accessories, to dispose or alienate, to recover or vindicate and to the fruits — 18 is
a crippled owner. Failure of the repair shop to provide security to a motor vehicle owner would leave the latter
at the mercy of the former. Moreover, on the assumption that private respondent's repair business is duly
registered, it presupposes that its shop is covered by insurance from which it may recover the loss. If private
respondent can recover from its insurer, then it would be unjustly enriched if it will not compensate petitioner to
whom no fault can be attributed. Otherwise, if the shop is not registered, then the presumption of negligence
applies.
One last thing. With respect to the value of the lost vehicle and its accessories for which the repair shop is
liable, it should be based on the fair market value that the property would command at the time it was entrusted
to it or such other value as agreed upon by the parties subsequent to the loss. Such recoverable value is fair and
reasonable considering that the value of the vehicle depreciates. This value may be recovered without prejudice
to such other damages that a claimant is entitled under applicable laws.

WHEREFORE, premises considered, the decision of the Court Appeals is REVERSED and SET ASIDE and
the decision of the court a quo is REINSTATED.

SO ORDERED.

Regalado, Puno and Mendoza, JJ., concur.

Melo, J., is on leave.

G.R. No. 153827             April 25, 2006

ASIAN CONSTRUCTION AND DEVELOPMENT CORPORATION, Petitioner,

vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, Respondent.

DECISION

GARCIA, J.:

In this petition for review under Rule 45 of the Rules of Court, petitioner Asian Construction and Development
Corporation or "ASIAKONSTRUKT," seeks the reversal and setting aside of the decision 1dated March 15,
2002 and the Resolution2 dated June 3, 2002 of the Court of Appeals (CA) in CA-G.R. CV No. 68189. The
assailed decision affirm with modification the Summary Judgment rendered by the Regional Trial Court (RTC)
of Makati City in an action for a sum of money thereat commenced by the herein respondent, Philippine
Commercial International Bank (PCIBANK) against the petitioner, while the challenged resolution denied
petitioner’s motion for reconsideration.

The facts:

On February 24, 1999, in the RTC of Makati City, respondent PCIBANK filed a complaint3 for a sum of money
with prayer for a writ of preliminary attachment against petitioner ASIAKONSTRUKT. Docketed as Civil Case
No. 99-432, the complaint alleged, inter alia, as follows:

FIRST CAUSE OF ACTION

2.01 On various occasions, ASIAKONSTRUKT obtained U.S. dollar denominated credit accommodations from
PCIBANK in the amount of Four Million Four Hundred Eighty Seven Thousand U.S. dollars
(US$4,487,000.00), exclusive of interests, charges and fees thereon and the cost of collecting the same. These
credit accommodations are covered by the following promissory notes:

xxx xxx xxx

2.02 Prompt and faithful payment of all the foregoing promissory notes was secured by the following deeds of
assignment executed by ASIAKONSTRUKT in favor of PCIBANK:

(a) Deed of Assignment of Receivables/Contract Proceeds dated 20 July 1994… where

ASIAKONSTRUKT assigned its receivables from its Contract … with the National Power Corporation
(NPC) in the amount of ….P54,500,000;

(b) Deed of Assignment of Receivables … dated 28 June 1995 … where ASIAKONSTRUKT assigned
its receivables from its Contract … with the NPC in the amount of …P26,281,000.00;

(c) Deed of Assignment of Receivables dated 28 August 1995 … where ASIAKONSTRUKT assigned
its receivables from its Sub-Contract with ABB Power, Inc., in the amount of P43,000,000.00;

(d) Deed of Assignment of Contract Proceeds dated 27 March 1996 … where ASIAKONSTRUKT
assigned its receivables from its contracts with PNOC … in the aggregate amount of P46,000,000.00;
and

(e) Deed of Assignment of Contract Proceeds … dated 20 February 1997 … where ASIAKONSTRUKT
assigned its receivables from the Ormat Philippines, Inc., in the aggregate amount of US$3,350,000.00;

2.03 All the foregoing deeds of assignments stipulate, among others, the following terms and conditions:
 a) The assignment is for the purpose of securing payment of the principal amount and the interests and
bank charges accruing thereon, the costs of collecting the same and all other expenses which PCIBANK
may be put in connection with or as an incident of the assignment;

b) That the assignment secures also any extension or renewal of the credit which is the subject thereof as
any and all other obligations of ASIAKONSTRUKT of whatever kind and nature as appear in the
records of PCIBANK, which ASIAKONSTRUKT accepts as the final and conclusive evidence of such
obligations to PCIBANK, "whether contracted before, during or after the constitution of [the assignment
agreement]";

c) That PCIBANK authorizes ASIAKONSTRUKT, at the latter’s expense, to "collect and receive for
[PCIBANK] all the Receivables"; and

d) That ASIAKONSTRUKT "shall have no right, and agrees not to use any of the proceeds of any
collections, it being agreed by the parties that [ASIAKONSTRUKT] divests itself of all the rights, title
and interest in said Receivables and the proceeds of the collection received thereon."1avvphil.net

2.04 The promissory notes have remained not fully paid despite their having become due and demandable.
Repeated verbal and written demands were made upon ASIAKONSTRUKT, but to no avail. It has failed and
refused, and continues to fail and refuse, to pay its outstanding obligations to PCIBANK…;

2.05 As a result of ASIAKONSTRUKT’s refusal to pay its outstanding obligations, PCIBANK was constrained
to refer the matter … to counsel and thus incur attorney’s fees and legal costs.

2.06 The aggregate unpaid obligation of ASIAKONSTRUKT to PCIBANK, as of 31 December 1998, amounts
to… US$4,553,446.06, broken down as follows:

Principal US$ 4,067,867.23

Interest US$ 291,263.27

Penalties US$ 194,315.56

TOTAL US$ 4,553,446.06

For its second cause of action, PCIBANK alleged in the same complaint as follows:

SECOND CAUSE OF ACTION

4.02 … as a result of the fraudulent acts of ASIAKONSTRUKT, PCIBANK suffered the following damages, all
of which ASIAKONSTRUKT must be held to pay PCIBANK:

4.02.1 Exemplary damages, in the interest of public good and purposes of correction, in the amount of not less
than ….P50,000.00;

4.02.2 Attorney’s fees in the amount of not less than …. P1,800,000.00; and

4.02.3 Costs of suit.

In support of its prayer for a writ of preliminary attachment embodied in the complaint, plaintiff PCIBANK
alleges the following:

3.02 … ASIAKONSTRUKT is guilty of fraud in contracting the debt, in the performance thereof, or both, xxx;

303. PCIBANK agreed to enter into the above-mentioned credit accommodations primarily because of the
existence of the deeds of assignment listed above. However, from telephone inquiries made with responsible
officers of the National Power Corporation, ABB Power, Inc., PNOC and Ormat Philippines, Inc., PCIBANK
was surprised to learn that ASIAKONSTRUKT had long ago collected the contract proceeds, or portions
thereof, which were previously assigned to PCIBANK. However, to date, it has yet to turn over these proceeds
to PCIBANK. Worse, PCIBANK learned that the contract proceeds were used by ASIAKONSTRUKT for its
own purposes – clear evidence of fraud, which has deprived PCIBANK of its security. ASIAKONSTRUKT’s
unauthorized use of the contract proceeds for its own purposes was subsequently confirmed by Mr. Napoleon
Garcia, Vice President for Finance of ASIAKONSTRUKT, in a telephone discussion on 12 January 1999 with
Ms. Maricel E. Salaveria of PCIBANK. xxx Needless to say, ASIAKONSTRUKT has fraudulently collected
such receivables to the prejudice of PCIBANK.

3.04 … it is evident that ASIAKONSTRUKT never had any intention of complying with the deeds of
assignment. ASIAKONSTRUKT only misled PCIBANK into believing that it had sufficient security to ensure
payment of its loan obligations.

3.05 Alternatively, granting, in argumenti gratia, that ASIAKONSTRUKT, at the time it executed the foregoing
deeds of assignment, really intended to abide by their terms and conditions, it nevertheless committed manifest
fraud when it collected the contract proceeds, and instead of remitting them to PCIBANK, used them for its
own purposes.

In an order4 dated April 13, 1999, the trial court, after receiving ex parte PCIBANK’s evidence in support of its
prayer for preliminary attachment, directed the issuance of the desired writ, thus:

WHEREFORE, let a writ of preliminary attachment issue against all the property of defendant not exempt from
execution or so much thereof as may be sufficient to satisfy plaintiff’s principal claim of US$4,553,446.06,
representing the alleged unpaid obligation of defendant, inclusive of interest and penalty charges, as of
December 31, 1998, which is equivalent to P174,260,380.72, upon plaintiff’s filing of a bond in an equal
amount to answer for all it may sustain by reason of the attachment if the Court shall finally adjudge that
plaintiff was not entitled thereto.

SO ORDERED.

With plaintiff PCIBANK having posted the requisite bond, a writ of preliminary attachment was thereafter
issued by the trial court. Per records, defendant ASIAKONSTRUKT did not file any motion for the quashal or
dissolution of the writ.

Meanwhile, on August 27, 1999, defendant ASIAKONSTRUKT filed its Answer, 5 thereunder making
admissions and denials. Defendant admits, subject to its defenses, the material allegations of the Complaint as
regards its indebtedness to plaintiff PCIBANK and its execution of the various deeds of assignment enumerated
therein. It, however, denies, for lack of knowledge sufficient to form a belief as to the truth thereof, the
averments in the Complaint that it has not paid, despite demands, its due and demandable obligations, as well as
the amounts due the plaintiff as itemized in paragraph 2.06, supra, of the Complaint. It likewise denies
PCIBANK’s allegations in the same Complaint in support of its prayer for a writ of preliminary attachment,
particularly its having fraudulently misappropriated for its own use the contract proceeds/receivables under the
contracts mentioned in the several deeds of assignments, claiming in this respect that it has still remaining
receivables from those contracts.

By way of defenses, defendant pleads in its Answer the alleged "severe financial and currency crisis" which hit
the Philippines in July 1997, which adversely affected and ultimately put it out of business. Defendant adds that
the deeds of assignments it executed in favor of PCIBANK were standard forms proposed by the bank as pre-
condition for the release of the loans and therefore partake of the nature of contracts of adhesion, leaving the
defendant to the alternative of "taking it or leaving it." By way of counterclaim, defendant prayed for an award
of P1,000,000.00 as and for attorney’s fees and P200,000.00 as litigation expenses.

On January 24, 2000, plaintiff PCIBANK filed a verified Motion for Summary Judgment, 6 therein contending
that the defenses interposed by the defendant are sham and contrived, that the alleged financial crisis pleaded in
the Answer is not a fortuitous event that would excuse debtors from their loan obligations, nor is it an
exempting circumstance under Article 1262 of the New Civil Code where, as here, the same is attended by bad
faith. In the same motion, PCIBANK also asserts that the deeds of assignments executed in its favor are not
contracts of adhesion, and even if they were, the same are valid.

To the Motion for Summary Judgment, defendant interposed an Opposition 7 insisting that its Answer tendered
or raised genuine and substantial issues of material facts which require full-blown trial, namely:
 1. Whether or not defendant received all or part of the proceeds/receivables due from the contracts
mentioned in the deeds of assignment at the time the complaint was filed;

2. Granting that defendant received those proceeds/receivables, whether or not defendant fraudulently
misappropriated the same;

3. Whether or not defendant is virtually insolvent as a result of the regionwide economic crisis that hit
Asia, causing the Philippine peso to depreciate drastically; and

4. Whether the parties dealt with each other on equal footing with respect to the execution of the deeds
of assignment as to give the defendant an honest opportunity to reject the onerous terms imposed
therein.

Significantly, defendant did not append to its aforementioned Opposition any affidavit in support of the alleged
genuine issues of material facts mentioned therein.

Before the pending incident (motion for summary judgment) could be resolved by the trial court, plaintiff
PCIBANK waived its claim for exemplary damages and agreed to reduce its claim for attorney’s fees
from P1,800,000.00 to P1,260,000.00, but made it clear that its waiver of exemplary damages and reduction of
attorney’s fees are subject to the condition that a full and final disposition of the case is obtained via summary
judgment.

On May 16, 2000, the trial court, acting favorably on PCIBANK’s motion for summary judgment, came out
with its Summary Judgment,8 the decretal portion of which reads:

WHEREFORE, judgment is hereby rendered ordering defendant to pay plaintiff:

1. the sum of US$4,553,446.06, or its equivalent in Philippine currency at the time of payment, with
interest thereon at the rate of 8.27% per annum from February 24, 1999 until fully paid;

2. P1,260,000.00 as and for attorney’s fees; and

3. the costs of suit.

SO ORDERED.

Explains the trial court in rendering its Summary Judgment:

A thorough examination of the parties’ pleadings and their respective stand in the foregoing motion, the court
finds that indeed with defendant’s admission of the first cause of action there remains no question of facts in
issue. Further, the proffered defenses are worthless, unsubstantial, sham and contrived.

Considering that there is no more issue to be resolved, the court hereby grants plaintiff’s Motion and renders
Judgment in favor of the plaintiff against the defendant based on their respective pleadings in accordance with
Section 4, Rule 35 of the Rules of Court.

In time, petitioner went to the CA whereat its appellate recourse was docketed as CA-G.R. CV No. 68189. As
stated at the threshold hereof, the CA, in its decision9 of May 15, 2002, affirmed with modification the
Summary Judgment rendered by the trial court, the modification being as regards the award for attorney’s fees
which the CA reduced to P1,000,000.00, to wit:

IN THE LIGHT OF ALL THE FOREGOING, the appeal is PARTIALLY GRANTED. The "Decision"
appealed from is AFFIRMED with the MODIFICATION THAT THE AWARD FOR ATTORNEY’S FEES is
reduced to P1,000,000.00.

SO ORDERED.

With its motion for reconsideration having been denied by the CA in its Resolution10 of June 3, 2002, petitioner
is now with us via the present recourse, raising the following issues:

I WHETHER OR NOT THERE IS A GENUINE ISSUE AS TO A MATERIAL FACT WHICH RULES OUT
THE PROPRIETY OF A SUMMARY JUDGMENT.
II WHETHER OR NOT THE AWARD OF ATTORNEY’S FEES IS EXORBITANT OR
UNCONSCIONABLE.

We DENY.

As in the two courts below, it is petitioner’s posture that summary judgment is improper in this case because
there are genuine issues of fact which have to be threshed out during trial, to wit: (a) whether or not petitioner
was able to collect only a portion of the contract proceeds/receivables it was bound to deliver, remit and tender
to respondent under the several deeds of assignment it executed in favor of the latter; and (b) whether or not
petitioner fraudulently misappropriated and used for its benefit the said proceeds/receivables. Ergo, so petitioner
maintains, genuine triable issues of fact are present in this case, which thereby precludes rendition of summary
judgment.

We are not persuaded.

Under Rule 35 of the 1997 Rules of Procedure, as amended, except as to the amount of damages, when there is
no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law,
summary judgment may be allowed.11 Summary or accelerated judgment is a procedural technique aimed at
weeding out sham claims or defenses at an early stage of litigation thereby avoiding the expense and loss of
time involved in a trial.12

Under the Rules, summary judgment is appropriate when there are no genuine issues of fact which call for the
presentation of evidence in a full-blown trial. Even if on their face the pleadings appear to raise issues, when the
affidavits, depositions and admissions show that such issues are not genuine, then summary judgment as
prescribed by the Rules must ensue as a matter of law. The determinative factor, therefore, in a motion for
summary judgment, is the presence or absence of a genuine issue as to any material fact.

A "genuine issue" is an issue of fact which requires the presentation of evidence as distinguished from a sham,
fictitious, contrived or false claim. When the facts as pleaded appear uncontested or undisputed, then there is no
real or genuine issue or question as to the facts, and summary judgment is called for. The party who moves for
summary judgment has the burden of demonstrating clearly the absence of any genuine issue of fact, or that the
issue posed in the complaint is patently unsubstantial so as not to constitute a genuine issue for trial. Trial courts
have limited authority to render summary judgments and may do so only when there is clearly no genuine issue
as to any material fact. When the facts as pleaded by the parties are disputed or contested, proceedings for
summary judgment cannot take the place of trial.13

The CA, in its challenged decision, stated and we are in full accord with it:

In the present recourse, the [petitioner] relied not only on the judicial admissions … in its pleadings, more
specifically its "Answer" to the complaint, the testimony of Maricel Salaveria as well as Exhibits "A" to "T-3",
adduced in evidence by the [respondent], during the hearing on its plea for the issuance, by the Court a quo, of a
writ of preliminary attachment. Significantly, the [petitioner] did not bother filing a motion for the quashal of
the "Writ" issued by the Court a quo.

It must be borne in mind, too, that the [petitioner] admitted, in its "Answer" … the due execution and
authenticity of the documents appended to the complaint … . The [petitioner] did not deny its liability for the
principal amount claimed by the [respondent] in its complaint. The [petitioner] merely alleged, by way of
defenses, that it failed to pay its account … because of the region-wide economic crisis that engulfed Asia, in
July, 1997, and the "Deeds of Assignment" executed by it in favor of the [respondent] were contracts of
adhesion:

xxx xxx xxx

The [petitioner] elaborated on and catalogued its defenses in its "Appellants Brief" what it believed, as "genuine
issues".

"(i) Whether or not [petitioner] received all or part of the proceeds/receivables due from the construction
contracts at the time the civil action was filed;

(ii) Granting that [petitioner] received the proceeds/receivables from the construction contracts, whether
or not [petitioner] fraudulently misappropriated the same;
 (iii) Whether or not [petitioner] had become virtually insolvent as a result of the region-wide economic
crisis that hit Asia, causing the Philippine peso to depreciate dramatically; and

(iv) Whether or not [respondent] and [petitioner] dealt with each other on equal footing with respect to
the execution of the deeds of assignment of receivables as to give [petitioner] an honest opportunity to
reject the onerous terms imposed on it."

However, the [petitioner] failed to append, to its "Opposition" to the "Motion for Summary Judgment", …
"Affidavits" showing the factual basis for its defenses of "extraordinary deflation," including facts, figures and
data showing its financial condition before and after the economic crisis and that the crisis was the proximate
cause of its financial distress. It bears stressing that the [petitioner] was burdened to demonstrate, by its
"Affidavits" and documentary evidence, that, indeed, the Philippines was engulfed in an extraordinary deflation
of the Philippine Peso and that the same was the proximate cause of the financial distress, it claimed, it suffered.

xxx xxx xxx

Where, on the basis of the records, inclusive of the pleadings of the parties, and the testimonial and
documentary evidence adduced by the [respondent], supportive of its plea for a writ of preliminary attachment,
the [respondent] had causes of action against the [petitioner], it behooved the [petitioner] to controvert the same
with affidavits/documentary evidence showing a prima facie genuine defense. As the Appellate Court of Illinois
so aptly declared:

The defendant must show that he has a bona fide defense to the action, one which he may be able to establish. It
must be a plausible ground of defense, something fairly arguable and of a substantial character. This he must
show by affidavits or other proof.

The trial court, of course, must determine from the affidavits filed whether the defendant has interposed a
sufficiently good defense to entitle it to defend, but where defendant’s affidavits present no substantial triable
issues of fact, the court will grant the motion for summary judgment.

xxx xxx xxx

The failure of the [petitioner] to append to its "Opposition" any "Affidavits" showing that its defenses were not
contrived or cosmetic to delay judgment … created a presumption that the defenses of the [petitioner] were not
offered in good faith and that the same could not be sustained (Unites States versus Fiedler, et al., Federal
Reported, 2nd, 578).

If, indeed, the [petitioner] believed it that was prevented from complying with its obligations to the
[respondent], under its contracts, it should have interposed a counterclaims for rescission of contracts,
conformably with the pronouncement of our Supreme Court, thus:

xxx xxx xxx

The [petitioner] did not. This only exposed the barrenness of the pose of the [petitioner].

The [petitioner] may have experienced financial difficulties because of the "1997 economic crisis" that ensued
in Asia. However, the same does not constitute a valid justification for the [petitioner] to renege on its
obligations to the [respondent]. The [petitioner] cannot even find solace in Articles 1266 and 1267 of the New
Civil Code for, as declared by our Supreme Court:

It is a fundamental rule that contracts, once perfected, bind both contracting parties, and obligations arising
therefrom have the force of law between the parties and should be complied with in good faith. But the law
recognizes exceptions to the principle of the obligatory force of contracts. One exception is laid down in Article
1266 of the Civil Code, which reads: ‘The debtor in obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the obligor.’

Petitioner cannot, however, successfully take refuge in the said article, since it is applicable only to obligations
"to do," and not obligations "to give." An obligation "to do" includes all kinds of work or service; while an
obligation "to give" is a prestation which consists in the delivery of a movable or an immovable thing in order
to create a real right, or for the use of the recipient, or for its simple possession, or in order to return it to its
owner.
xxx xxx xxx

In this case, petitioner wants this Court to believe that the abrupt change in the political climate of the country
after the EDSA Revolution and its poor financial condition "rendered the performance of the lease contract
impractical and inimical to the corporate survival of the petitioner." (Philippine National Construction
Corporation versus Court of Appeals, et al., 272 SCRA 183, at pages 191-192, supra)

The [petitioner] even failed to append any "Affidavit" to its "Opposition" showing how much it had received
from its construction contracts and how and to whom the said collections had been appended. The [petitioner]
had personal and sole knowledge of the aforesaid particulars while the [respondent] did not.

In fine, we rule and so hold that the CA did not commit any reversible error in affirming the summary judgment
rendered by the trial court as, at bottom, there existed no genuine issue as to any material fact. We also sustain
the CA’s reduction in the award of attorney’s fees to only P1,000,000.00, given the fact that there was no full-
blown trial.

WHEREFORE, the assailed CA decision is AFFIRMED in toto and this petition is DENIED for lack of merit.

Costs against petitioner.

SO ORDERED.

CANCIO C. GARCIA
Associate Justice

WE CONCUR:

(On leave)
REYNATO S. PUNO
Associate Justice
Chairperson

ANGELINA SANDOVAL-GUTIERREZ RENATO C. CORONA

Associate Justice Asscociate Justice

ADOLFO S. AZCUNA
Associate Justice

ATTESTATION

I attest that the conclusions in the above decision were reached in consultation before the case was assigned to
the writer of the opinion of the Court’s Division.

ANGELINA SANDOVAL-GUTIERREZ
Associate Justice
Acting Chairperson, Second Division

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby
certified that the conclusions in the above decision were reached in consultation before the case was assigned to
the writer of the opinion of the Court.

ARTEMIO V. PANGANIBAN
Chief Justice
G.R. No. 107112 February 24, 1994
NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, petitioners,
vs.
THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC.
(CASURECO II), respondents.

Ernesto P. Pangalangan for petitioners.

Luis General, Jr. for private respondent.

NOCON, J.:

The case of Reyes v. Caltex (Philippines), Inc.1 enunciated the doctrine that where a person by his contract
charges himself with an obligation possible to be performed, he must perform it, unless its performance is
rendered impossible by the act of God, by the law, or by the other party, it being the rule that in case the party
desires to be excused from performance in the event of contingencies arising thereto, it is his duty to provide the
basis therefor in his contract.

With the enactment of the New Civil Code, a new provision was included therein, namely, Article 1267 which
provides:

When the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in whole or in part.

In the report of the Code Commission, the rationale behind this innovation was explained, thus:

The general rule is that impossibility of performance releases the obligor. However, it is
submitted that when the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the court should be authorized to release the obligor in whole or in
part. The intention of the parties should govern and if it appears that the service turns out to be so
difficult as to have been beyond their contemplation, it would be doing violence to that intention
to hold their contemplation, it would be doing violence to that intention to hold the obligor still
responsible.2

In other words, fair and square consideration underscores the legal precept therein.

Naga Telephone Co., Inc. remonstrates mainly against the application by the Court of Appeals of Article 1267
in favor of Camarines Sur II Electric Cooperative, Inc. in the case before us. Stated differently, the former
insists that the complaint should have been dismissed for failure to state a cause of action.

The antecedent facts, as narrated by respondent Court of Appeals are, as follows:

Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long
distance telephone service in Naga City while private respondent Camarines Sur II Electric Cooperative, Inc.
(CASURECO II) is a private corporation established for the purpose of operating an electric power service in
the same city.

On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by petitioners in the operation
of its telephone service the electric light posts of private respondent in Naga City. In consideration therefor,
petitioners agreed to install, free of charge, ten (10) telephone connections for the use by private respondent in
the following places:

(a) 3 units — The Main Office of (private respondent);

 (b) 2 Units — The Warehouse of (private respondent);

(c) 1 Unit — The Sub-Station of (private respondent) at Concepcion Pequeña;

(d) 1 Unit — The Residence of (private respondent's) President;

(e) 1 Unit — The Residence of (private respondent's) Acting General Manager; &

(f) 2 Units — To be determined by the General Manager.3

Said contract also provided:

(a) That the term or period of this contract shall be as long as the party of the first part has need
for the electric light posts of the party of the second part it being understood that this contract
shall terminate when for any reason whatsoever, the party of the second part is forced to stop,
abandoned [sic] its operation as a public service and it becomes necessary to remove the electric
lightpost; (sic)4

It was prepared by or with the assistance of the other petitioner, Atty. Luciano M. Maggay, then a member of
the Board of Directors of private respondent and at the same time the legal counsel of petitioner.

After the contract had been enforced for over ten (10) years, private respondent filed on January 2, 1989 with
the Regional Trial Court of Naga City (Br. 28) C.C. No. 89-1642 against petitioners for reformation of the
contract with damages, on the ground that it is too one-sided in favor of petitioners; that it is not in conformity
with the guidelines of the National Electrification Administration (NEA) which direct that the reasonable
compensation for the use of the posts is P10.00 per post, per month; that after eleven (11) years of petitioners'
use of the posts, the telephone cables strung by them thereon have become much heavier with the increase in the
volume of their subscribers, worsened by the fact that their linemen bore holes through the posts at which points
those posts were broken during typhoons; that a post now costs as much as P2,630.00; so that justice and equity
demand that the contract be reformed to abolish the inequities thereon.

As second cause of action, private respondent alleged that starting with the year 1981, petitioners have used 319
posts in the towns of Pili, Canaman, Magarao and Milaor, Camarines Sur, all outside Naga City, without any
contract with it; that at the rate of P10.00 per post, petitioners should pay private respondent for the use thereof
the total amount of P267,960.00 from 1981 up to the filing of its complaint; and that petitioners had refused to
pay private respondent said amount despite demands.

And as third cause of action, private respondent complained about the poor servicing by petitioners of the ten
(10) telephone units which had caused it great inconvenience and damages to the tune of not less than
P100,000.00

In petitioners' answer to the first cause of action, they averred that it should be dismissed because (1) it does not
sufficiently state a cause of action for reformation of contract; (2) it is barred by prescription, the same having
been filed more than ten (10) years after the execution of the contract; and (3) it is barred by estoppel, since
private respondent seeks to enforce the contract in the same action. Petitioners further alleged that their
utilization of private respondent's posts could not have caused their deterioration because they have already
been in use for eleven (11) years; and that the value of their expenses for the ten (10) telephone lines long
enjoyed by private respondent free of charge are far in excess of the amounts claimed by the latter for the use of
the posts, so that if there was any inequity, it was suffered by them.

Regarding the second cause of action, petitioners claimed that private respondent had asked for telephone lines
in areas outside Naga City for which its posts were used by them; and that if petitioners had refused to comply
with private respondent's demands for payment for the use of the posts outside Naga City, it was probably
because what is due to them from private respondent is more than its claim against them.

And with respect to the third cause of action, petitioners claimed, inter alia, that their telephone service had
been categorized by the National Telecommunication Corporation (NTC) as "very high" and of "superior
quality."

During the trial, private respondent presented the following witnesses:

(1) Dioscoro Ragragio, one of the two officials who signed the contract in its behalf, declared that it was
petitioner Maggay who prepared the contract; that the understanding between private respondent and petitioners
was that the latter would only use the posts in Naga City because at that time, petitioners' capability was very
limited and they had no expectation of expansion because of legal squabbles within the company; that private
respondent agreed to allow petitioners to use its posts in Naga City because there were many subscribers therein
who could not be served by them because of lack of facilities; and that while the telephone lines strung to the
posts were very light in 1977, said posts have become heavily loaded in 1989.

(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and Maintenance Department, declared
that the posts being used by petitioners totalled 1,403 as of April 17, 1989, 192 of which were in the towns of
Pili, Canaman, and Magarao, all outside Naga City (Exhs. "B" and "B-1"); that petitioners' cables strung to the
posts in 1989 are much bigger than those in November, 1977; that in 1987, almost 100 posts were destroyed by
typhoon Sisang: around 20 posts were located between Naga City and the town of Pili while the posts in
barangay Concepcion, Naga City were broken at the middle which had been bored by petitioner's linemen to
enable them to string bigger telephone lines; that while the cost per post in 1977 was only from P700.00 to
P1,000.00, their costs in 1989 went up from P1,500.00 to P2,000.00, depending on the size; that some lines that
were strung to the posts did not follow the minimum vertical clearance required by the National Building Code,
so that there were cases in 1988 where, because of the low clearance of the cables, passing trucks would
accidentally touch said cables causing the posts to fall and resulting in brown-outs until the electric lines were
repaired.

(3) Dario Bernardez, Project Supervisor and Acting General Manager of private respondent and Manager of
Region V of NEA, declared that according to NEA guidelines in 1985 (Exh. "C"), for the use by private
telephone systems of electric cooperatives' posts, they should pay a minimum monthly rental of P4.00 per post,
and considering the escalation of prices since 1985, electric cooperatives have been charging from P10.00 to
P15.00 per post, which is what petitioners should pay for the use of the posts.

(4) Engineer Antonio Macandog, Department Head of the Office of Services of private respondent, testified on
the poor service rendered by petitioner's telephone lines, like the telephone in their Complaints Section which
was usually out of order such that they could not respond to the calls of their customers. In case of disruption of
their telephone lines, it would take two to three hours for petitioners to reactivate them notwithstanding their
calls on the emergency line.

(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that the Board of Directors asked him
to study the contract sometime during the latter part of 1982 or in 1983, as it had appeared very disadvantageous
to private respondent. Notwithstanding his recommendation for the filing of a court action to reform the
contract, the former general managers of private respondent wanted to adopt a soft approach with petitioners
about the matter until the term of General Manager Henry Pascual who, after failing to settle the matter
amicably with petitioners, finally agreed for him to file the present action for reformation of contract.

On the other hand, petitioner Maggay testified to the following effect:

(1) It is true that he was a member of the Board of Directors of private respondent and at the same time the
lawyer of petitioner when the contract was executed, but Atty. Gaudioso Tena, who was also a member of the
Board of Directors of private respondent, was the one who saw to it that the contract was fair to both parties.

(2) With regard to the first cause of action:

(a) Private respondent has the right under the contract to use ten (10) telephone units of petitioners for as long as
it wishes without paying anything therefor except for long distance calls through PLDT out of which the latter
get only 10% of the charges.

(b) In most cases, only drop wires and not telephone cables have been strung to the posts, which posts have
remained erect up to the present;

(c) Petitioner's linemen have strung only small messenger wires to many of the posts and they need only small
holes to pass through; and

(d) Documents existing in the NTC show that the stringing of petitioners' cables in Naga City are according to
standard and comparable to those of PLDT. The accidents mentioned by private respondent involved trucks that
were either overloaded or had loads that protruded upwards, causing them to hit the cables.
(3) Concerning the second cause of action, the intention of the parties when they entered into the contract was
that the coverage thereof would include the whole area serviced by petitioners because at that time, they already
had subscribers outside Naga City. Private respondent, in fact, had asked for telephone connections outside
Naga City for its officers and employees residing there in addition to the ten (10) telephone units mentioned in
the contract. Petitioners have not been charging private respondent for the installation, transfers and re-
connections of said telephones so that naturally, they use the posts for those telephone lines.

(4) With respect to the third cause of action, the NTC has found petitioners' cable installations to be in
accordance with engineering standards and practice and comparable to the best in the country.

On the basis of the foregoing countervailing evidence of the parties, the trial court found, as regards private
respondent's first cause of action, that while the contract appeared to be fair to both parties when it was entered
into by them during the first year of private respondent's operation and when its Board of Directors did not yet
have any experience in that business, it had become disadvantageous and unfair to private respondent because
of subsequent events and conditions, particularly the increase in the volume of the subscribers of petitioners for
more than ten (10) years without the corresponding increase in the number of telephone connections to private
respondent free of charge. The trial court concluded that while in an action for reformation of contract, it cannot
make another contract for the parties, it can, however, for reasons of justice and equity, order that the contract
be reformed to abolish the inequities therein. Thus, said court ruled that the contract should be reformed by
ordering petitioners to pay private respondent compensation for the use of their posts in Naga City, while
private respondent should also be ordered to pay the monthly bills for the use of the telephones also in Naga
City. And taking into consideration the guidelines of the NEA on the rental of posts by telephone companies
and the increase in the costs of such posts, the trial court opined that a monthly rental of P10.00 for each post of
private respondent used by petitioners is reasonable, which rental it should pay from the filing of the complaint
in this case on January 2, 1989. And in like manner, private respondent should pay petitioners from the same
date its monthly bills for the use and transfers of its telephones in Naga City at the same rate that the public are
paying.

On private respondent's second cause of action, the trial court found that the contract does not mention anything
about the use by petitioners of private respondent's posts outside Naga City. Therefore, the trial court held that
for reason of equity, the contract should be reformed by including therein the provision that for the use of
private respondent's posts outside Naga City, petitioners should pay a monthly rental of P10.00 per post, the
payment to start on the date this case was filed, or on January 2, 1989, and private respondent should also pay
petitioners the monthly dues on its telephone connections located outside Naga City beginning January, 1989.

And with respect to private respondent's third cause of action, the trial court found the claim not sufficiently
proved.

Thus, the following decretal portion of the trial court's decision dated July 20, 1990:

WHEREFORE, in view of all the foregoing, decision is hereby rendered ordering the
reformation of the agreement (Exh. A); ordering the defendants to pay plaintiff's electric poles in
Naga City and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other
places where defendant NATELCO uses plaintiff's electric poles, the sum of TEN (P10.00)
PESOS per plaintiff's pole, per month beginning January, 1989 and ordering also the plaintiff to
pay defendant NATELCO the monthly dues of all its telephones including those installed at the
residence of its officers, namely; Engr. Joventino Cruz, Engr. Antonio Borja, Engr. Antonio
Macandog, Mr. Jesus Opiana and Atty. Luis General, Jr. beginning January, 1989. Plaintiff's
claim for attorney's fees and expenses of litigation and defendants' counterclaim are both hereby
ordered dismissed. Without pronouncement as to costs.

Disagreeing with the foregoing judgment, petitioners appealed to respondent Court of Appeals. In the decision
dated May 28, 1992, respondent court affirmed the decision of the trial court,5 but based on different grounds to
wit: (1) that Article 1267 of the New Civil Code is applicable and (2) that the contract was subject to a
potestative condition which rendered said condition void. The motion for reconsideration was denied in the
resolution dated September 10, 1992.6 Hence, the present petition.

Petitioners assign the following pertinent errors committed by respondent court:

1) in making a contract for the parties by invoking Article 1267 of the New Civil Code;
 2) in ruling that prescription of the action for reformation of the contract in this case commenced
from the time it became disadvantageous to private respondent; and

3) in ruling that the contract was subject to a potestative condition in favor of petitioners.

Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable primarily because the
contract does not involve the rendition of service or a personal prestation and it is not for future service with
future unusual change. Instead, the ruling in the case of Occeña, et al. v. Jabson, etc., et al.,7 which interpreted
the article, should be followed in resolving this case. Besides, said article was never raised by the parties in their
pleadings and was never the subject of trial and evidence.

In applying Article 1267, respondent court rationalized:

We agree with appellant that in order that an action for reformation of contract would lie and
may prosper, there must be sufficient allegations as well as proof that the contract in question
failed to express the true intention of the parties due to error or mistake, accident, or fraud.
Indeed, in embodying the equitable remedy of reformation of instruments in the New Civil Code,
the Code Commission gave its reasons as follows:

Equity dictates the reformation of an instrument in order that the true intention of
the contracting parties may be expressed. The courts by the reformation do not
attempt to make a new contract for the parties, but to make the instrument express
their real agreement. The rationale of the doctrine is that it would be unjust and
inequitable to allow the enforcement of a written instrument which does not
reflect or disclose the real meeting of the minds of the parties. The rigor of the
legalistic rule that a written instrument should be the final and inflexible criterion
and measure of the rights and obligations of the contracting parties is thus
tempered to forestall the effects of mistake, fraud, inequitable conduct, or
accident. (pp. 55-56, Report of Code Commission)

Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code provide in essence that
where through mistake or accident on the part of either or both of the parties or mistake or fraud
on the part of the clerk or typist who prepared the instrument, the true intention of the parties is
not expressed therein, then the instrument may be reformed at the instance of either party if there
was mutual mistake on their part, or by the injured party if only he was mistaken.

Here, plaintiff-appellee did not allege in its complaint, nor does its evidence prove, that there was
a mistake on its part or mutual mistake on the part of both parties when they entered into the
agreement Exh. "A", and that because of this mistake, said agreement failed to express their true
intention. Rather, plaintiff's evidence shows that said agreement was prepared by Atty. Luciano
Maggay, then a member of plaintiff's Board of Directors and its legal counsel at that time, who
was also the legal counsel for defendant-appellant, so that as legal counsel for both companies
and presumably with the interests of both companies in mind when he prepared the aforesaid
agreement, Atty. Maggay must have considered the same fair and equitable to both sides, and
this was affirmed by the lower court when it found said contract to have been fair to both parties
at the time of its execution. In fact, there were no complaints on the part of both sides at the time
of and after the execution of said contract, and according to 73-year old Justino de Jesus, Vice
President and General manager of appellant at the time who signed the agreement Exh. "A" in its
behalf and who was one of the witnesses for the plaintiff (sic), both parties complied with said
contract "from the very beginning" (p. 5, tsn, April 17, 1989).

That the aforesaid contract has become inequitous or unfavorable or disadvantageous to the
plaintiff with the expansion of the business of appellant and the increase in the volume of its
subscribers in Naga City and environs through the years, necessitating the stringing of more and
bigger telephone cable wires by appellant to plaintiff's electric posts without a corresponding
increase in the ten (10) telephone connections given by appellant to plaintiff free of charge in the
agreement Exh. "A" as consideration for its use of the latter's electric posts in Naga City, appear,
however, undisputed from the totality of the evidence on record and the lower court so found.
And it was for this reason that in the later (sic) part of 1982 or 1983 (or five or six years after the
subject agreement was entered into by the parties), plaintiff's Board of Directors already asked
Atty. Luis General who had become their legal counsel in 1982, to study said agreement which
they believed had become disadvantageous to their company and to make the proper
recommendation, which study Atty. General did, and thereafter, he already recommended to the
Board the filing of a court action to reform said contract, but no action was taken on Atty.
General's recommendation because the former general managers of plaintiff wanted to adopt a
soft approach in discussing the matter with appellant, until, during the term of General Manager
Henry Pascual, the latter, after failing to settle the problem with Atty. Luciano Maggay who had
become the president and general manager of appellant, already agreed for Atty. General's filing
of the present action. The fact that said contract has become inequitous or disadvantageous to
plaintiff as the years went by did not, however, give plaintiff a cause of action for reformation of
said contract, for the reasons already pointed out earlier. But this does not mean that plaintiff is
completely without a remedy, for we believe that the allegations of its complaint herein and the
evidence it has presented sufficiently make out a cause of action under Art. 1267 of the New
Civil Code for its release from the agreement in question.

xxx xxx xxx

The understanding of the parties when they entered into the Agreement Exh. "A" on November
1, 1977 and the prevailing circumstances and conditions at the time, were described by Dioscoro
Ragragio, the President of plaintiff in 1977 and one of its two officials who signed said
agreement in its behalf, as follows:

Our understanding at that time is that we will allow NATELCO to utilize the
posts of CASURECO II only in the City of Naga because at that time the
capability of NATELCO was very limited, as a matter of fact we do [sic] not
expect to be able to expand because of the legal squabbles going on in the
NATELCO. So, even at that time there were so many subscribers in Naga City
that cannot be served by the NATELCO, so as a mater of public service we
allowed them to sue (sic) our posts within the Naga City. (p. 8, tsn April 3, 1989)

Ragragio also declared that while the telephone wires strung to the electric posts of plaintiff were
very light and that very few telephone lines were attached to the posts of CASURECO II in
1977, said posts have become "heavily loaded" in 1989 (tsn, id.).

In truth, as also correctly found by the lower court, despite the increase in the volume of
appellant's subscribers and the corresponding increase in the telephone cables and wires strung
by it to plaintiff's electric posts in Naga City for the more 10 years that the agreement Exh. "A"
of the parties has been in effect, there has been no corresponding increase in the ten (10)
telephone units connected by appellant free of charge to plaintiff's offices and other places
chosen by plaintiff's general manager which was the only consideration provided for in said
agreement for appellant's use of plaintiffs electric posts. Not only that, appellant even started
using plaintiff's electric posts outside Naga City although this was not provided for in the
agreement Exh. "A" as it extended and expanded its telephone services to towns outside said
city. Hence, while very few of plaintiff's electric posts were being used by appellant in 1977 and
they were all in the City of Naga, the number of plaintiff's electric posts that appellant was using
in 1989 had jumped to 1,403,192 of which are outside Naga City (Exh. "B"). Add to this the
destruction of some of plaintiff's poles during typhoons like the strong typhoon Sisang in 1987
because of the heavy telephone cables attached thereto, and the escalation of the costs of electric
poles from 1977 to 1989, and the conclusion is indeed ineluctable that the agreement Exh. "A"
has already become too one-sided in favor of appellant to the great disadvantage of plaintiff, in
short, the continued enforcement of said contract has manifestly gone far beyond the
contemplation of plaintiff, so much so that it should now be released therefrom under Art. 1267
of the New Civil Code to avoid appellant's unjust enrichment at its (plaintiff's) expense. As
stated by Tolentino in his commentaries on the Civil Code citing foreign civilist
Ruggiero, "equity demands a certain economic equilibrium between the prestation and the
counter-prestation, and does not permit the unlimited impoverishment of one party for the
benefit of the other by the excessive rigidity of the principle of the obligatory force of
contracts (IV Tolentino, Civil Code of the Philippines, 1986 ed.,
pp. 247-248).

We therefore, find nothing wrong with the ruling of the trial court, although based on a different
and wrong premise (i.e., reformation of contract), that from the date of the filing of this case,
appellant must pay for the use of plaintiff's electric posts in Naga City at the reasonable monthly
rental of P10.00 per post, while plaintiff should pay appellant for the telephones in the same City
 that it was formerly using free of charge under the terms of the agreement Exh. "A" at the same
rate being paid by the general public. In affirming said ruling, we are not making a new contract
for the parties herein, but we find it necessary to do so in order not to disrupt the basic and
essential services being rendered by both parties herein to the public and to avoid unjust
enrichment by appellant at the expense of plaintiff, said arrangement to continue only until such
time as said parties can re-negotiate another agreement over the same
subject-matter covered by the agreement Exh. "A". Once said agreement is reached and executed
by the parties, the aforesaid ruling of the lower court and affirmed by us shall cease to exist and
shall be substituted and superseded by their new agreement. . . ..8

Article 1267 speaks of "service" which has become so difficult. Taking into consideration the rationale behind
this provision,9 the term "service" should be understood as referring to the "performance" of the obligation. In
the present case, the obligation of private respondent consists in allowing petitioners to use its posts in Naga
City, which is the service contemplated in said article. Furthermore, a bare reading of this article reveals that it
is not a requirement thereunder that the contract be for future service with future unusual change. According to
Senator Arturo M. Tolentino,10 Article 1267 states in our law the doctrine of unforseen events. This is said to be
based on the discredited theory of rebus sic stantibus in public international law; under this theory, the parties
stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the contract also
ceases to exist. Considering practical needs and the demands of equity and good faith, the disappearance of the
basis of a contract gives rise to a right to relief in favor of the party prejudiced.

In a nutshell, private respondent in the Occeña case filed a complaint against petitioner before the trial court
praying for modification of the terms and conditions of the contract that they entered into by fixing the proper
shares that should pertain to them out of the gross proceeds from the sales of subdivided lots. We ordered the
dismissal of the complaint therein for failure to state a sufficient cause of action. We rationalized that the Court
of Appeals misapplied Article 1267 because:

. . . respondent's complaint seeks not release from the subdivision contract but that the court
"render judgment modifying the terms and conditions of the contract . . . by fixing the proper
shares that should pertain to the herein parties out of the gross proceeds from the sales of
subdivided lots of subject subdivision". The cited article (Article 1267) does not grant the courts
(the) authority to remake, modify or revise the contract or to fix the division of shares between
the parties as contractually stipulated with the force of law between the parties, so as to substitute
its own terms for those covenanted by the parties themselves. Respondent's complaint for
modification of contract manifestly has no basis in law and therefore states no cause of action.
Under the particular allegations of respondent's complaint and the circumstances therein averred,
the courts cannot even in equity grant the relief sought.11

The ruling in the Occeña case is not applicable because we agree with respondent court that the allegations in
private respondent's complaint and the evidence it has presented sufficiently made out a cause of action under
Article 1267. We, therefore, release the parties from their correlative obligations under the contract. However,
our disposition of the present controversy does not end here. We have to take into account the possible
consequences of merely releasing the parties therefrom: petitioners will remove the telephone wires/cables in
the posts of private respondent, resulting in disruption of their service to the public; while private respondent, in
consonance with the contract12 will return all the telephone units to petitioners, causing prejudice to its business.
We shall not allow such eventuality. Rather, we require, as ordered by the trial court: 1) petitioners to pay
private respondent for the use of its posts in Naga City and in the towns of Milaor, Canaman, Magarao and Pili,
Camarines Sur and in other places where petitioners use private respondent's posts, the sum of ten (P10.00)
pesos per post, per month, beginning January, 1989; and 2) private respondent to pay petitioner the monthly
dues of all its telephones at the same rate being paid by the public beginning January, 1989. The peculiar
circumstances of the present case, as distinguished further from the Occeña case, necessitates exercise of our
equity jurisdiction.13 By way of emphasis, we reiterate the rationalization of respondent court that:

. . . In affirming said ruling, we are not making a new contract for the parties herein, but we find
it necessary to do so in order not to disrupt the basic and essential services being rendered by
both parties herein to the public and to avoid unjust enrichment by appellant at the expense of
plaintiff . . . .14

Petitioners' assertion that Article 1267 was never raised by the parties in their pleadings and was never the
subject of trial and evidence has been passed upon by respondent court in its well reasoned resolution, which we
hereunder quote as our own:
First, we do not agree with defendant-appellant that in applying Art. 1267 of the New Civil Code
to this case, we have changed its theory and decided the same on an issue not invoked by
plaintiff in the lower court. For basically, the main and pivotal issue in this case is whether the
continued enforcement of the contract Exh. "A" between the parties has, through the years (since
1977), become too inequitous or disadvantageous to the plaintiff and too one-sided in favor of
defendant-appellant, so that a solution must be found to relieve plaintiff from the continued
operation of said agreement and to prevent defendant-appellant from further unjustly enriching
itself at plaintiff's expense. It is indeed unfortunate that defendant had turned deaf ears to
plaintiffs requests for renegotiation, constraining the latter to go to court. But although plaintiff
cannot, as we have held, correctly invoke reformation of contract as a proper remedy (there
having been no showing of a mistake or error in said contract on the part of any of the parties so
as to result in its failure to express their true intent), this does not mean that plaintiff is absolutely
without a remedy in order to relieve itself from a contract that has gone far beyond its
contemplation and has become so highly inequitous and disadvantageous to it through the years
because of the expansion of defendant-appellant's business and the increase in the volume of its
subscribers. And as it is the duty of the Court to administer justice, it must do so in this case in
the best way and manner it can in the light of the proven facts and the law or laws applicable
thereto.

It is settled that when the trial court decides a case in favor of a party on a certain ground, the
appellant court may uphold the decision below upon some other point which was ignored or
erroneously decided by the trial court (Garcia Valdez v. Tuazon, 40 Phil. 943; Relativo v. Castro,
76 Phil. 563; Carillo v. Salak de Paz, 18 SCRA 467). Furthermore, the appellate court has the
discretion to consider an unassigned error that is closely related to an error properly assigned
(Paterno v. Jao Yan, 1 SCRA 631; Hernandez v. Andal, 78 Phil. 196). It has also been held that
the Supreme Court (and this Court as well) has the authority to review matters, even if they are
not assigned as errors in the appeal, if it is found that their consideration is necessary in arriving
at a just decision of the case (Saura Import & Export Co., Inc. v. Phil. International Surety Co.
and PNB, 8 SCRA 143). For it is the material allegations of fact in the complaint, not the legal
conclusion made therein or the prayer, that determines the relief to which the plaintiff is entitled,
and the plaintiff is entitled to as much relief as the facts warrant although that relief is not
specifically prayed for in the complaint (Rosales v. Reyes and Ordoveza, 25 Phil. 495; Cabigao
v. Lim, 50 Phil. 844; Baguioro v. Barrios, 77 Phil. 120). To quote an old but very illuminating
decision of our Supreme Court through the pen of American jurist Adam C. Carson:

"Under our system of pleading it is the duty of the courts to grant the relief to
which the parties are shown to be entitled by the allegations in their pleadings and
the facts proven at the trial, and the mere fact that they themselves misconstrue
the legal effect of the facts thus alleged and proven will not prevent the court from
placing the just construction thereon and adjudicating the issues accordingly."
(Alzua v. Johnson, 21 Phil. 308)

And in the fairly recent case of Caltex Phil., Inc. v IAC, 176 SCRA 741, the Honorable Supreme
Court also held:

We rule that the respondent court did not commit any error in taking cognizance
of the aforesaid issues, although not raised before the trial court. The presence of
strong consideration of substantial justice has led this Court to relax the well-
entrenched rule that, except questions on jurisdiction, no question will be
entertained on appeal unless it has been raised in the court below and it is within
the issues made by the parties in their pleadings (Cordero v. Cabral, L-36789, July
25, 1983, 123 SCRA 532). . . .

We believe that the above authorities suffice to show that this Court did not err in applying Art.
1267 of the New Civil Code to this case. Defendant-appellant stresses that the applicability of
said provision is a question of fact, and that it should have been given the opportunity to present
evidence on said question. But defendant-appellant cannot honestly and truthfully claim that it
(did) not (have) the opportunity to present evidence on the issue of whether the continued
operation of the contract Exh. "A" has now become too one-sided in its favor and too inequitous,
unfair, and disadvantageous to plaintiff. As held in our decision, the abundant and copious
evidence presented by both parties in this case and summarized in said decision established the
 following essential and vital facts which led us to apply Art. 1267 of the New Civil Code to this
case:

xxx xxx xxx 15

On the issue of prescription of private respondent's action for reformation of contract, petitioners allege that
respondent court's ruling that the right of action "arose only after said contract had already become
disadvantageous and unfair to it due to subsequent events and conditions, which must be sometime during the
latter part of 1982 or in 1983 . . ." 16 is erroneous. In reformation of contracts, what is reformed is not the
contract itself, but the instrument embodying the contract. It follows that whether the contract is
disadvantageous or not is irrelevant to reformation and therefore, cannot be an element in the determination of
the period for prescription of the action to reform.

Article 1144 of the New Civil Code provides, inter alia, that an action upon a written contract must be brought
within ten (10) years from the time the right of action accrues. Clearly, the ten (10) year period is to be
reckoned  from the time the right of action accrues which is not necessarily the date of execution of the contract.
As correctly ruled by respondent court, private respondent's right of action arose "sometime during the latter
part of 1982 or in 1983 when according to Atty. Luis General, Jr. . . ., he was asked by (private respondent's)
Board of Directors to study said contract as it already appeared disadvantageous to (private respondent) (p. 31,
tsn, May 8, 1989). (Private respondent's) cause of action to ask for reformation of said contract should thus be
considered to have arisen only in 1982 or 1983, and from 1982 to January 2, 1989 when the complaint in this
case was filed, ten (10) years had not yet elapsed." 17

Regarding the last issue, petitioners allege that there is nothing purely potestative about the prestations of either
party because petitioner's permission for free use of telephones is not made to depend purely on their will,
neither is private respondent's permission for free use of its posts dependent purely on its will.

Apart from applying Article 1267, respondent court cited another legal remedy available to private respondent
under the allegations of its complaint and the preponderant evidence presented by it:

. . . we believe that the provision in said agreement —

(a) That the term or period of this contract shall be as long as the party of the first
part  [herein appellant] has need for the electric light posts of the party of the
second part [herein plaintiff] it being understood that this contract shall terminate
when for any reason whatsoever, the party of the second part is forced to stop,
abandoned [sic] its operation as a public service and it becomes necessary to
remove the electric light post [sic]"; (Emphasis supplied)

is invalid for being purely potestative on the part of appellant as it leaves the continued
effectivity of the aforesaid agreement to the latter's sole and exclusive will as long as plaintiff is
in operation. A similar provision in a contract of lease wherein the parties agreed that the lessee
could stay on the leased premises "for as long as the defendant needed the premises and can meet
and pay said increases" was recently held by the Supreme Court in Lim v. C.A., 191 SCRA 150,
citing the much earlier case of Encarnacion v. Baldomar, 77 Phil. 470, as invalid for being "a
purely potestative condition because it leaves the effectivity and enjoyment of leasehold rights to
the sole and exclusive will of the lessee." Further held the High Court in the Lim case:

The continuance, effectivity and fulfillment of a contract of lease cannot be made

to depend exclusively upon the free and uncontrolled choice of the lessee between
continuing the payment of the rentals or not, completely depriving the owner of
any say in the matter. Mutuality does not obtain in such a contract of lease of no
equality exists between the lessor and the lessee since the life of the contract is
dictated solely by the lessee.

The above can also be said of the agreement Exh. "A" between the parties in this case. There is
no mutuality and equality between them under the afore-quoted provision thereof since the life
and continuity of said agreement is made to depend as long as appellant needs plaintiff's electric
posts. And this is precisely why, since 1977 when said agreement was executed and up to 1989
when this case was finally filed by plaintiff, it could do nothing to be released from or terminate
said agreement notwithstanding that its continued effectivity has become very disadvantageous
and inequitous to it due to the expansion and increase of appellant's telephone services within
 Naga City and even outside the same, without a corresponding increase in the ten (10) telephone
units being used by plaintiff free of charge, as well as the bad and inefficient service of said
telephones to the prejudice and inconvenience of plaintiff and its customers. . . . 18

Petitioners' allegations must be upheld in this regard. A potestative condition is a condition, the fulfillment of
which depends upon the sole will of the debtor, in which case, the conditional obligation is void. 19 Based on
this definition, respondent court's finding that the provision in the contract, to wit:

(a) That the term or period of this contract shall be as long as the party of the first part
(petitioner) has need for the electric light posts of the party of the second part (private
respondent) . . ..

is a potestative condition, is correct. However, it must have overlooked the other conditions in the same
provision, to wit:

. . . it being understood that this contract shall terminate when for any reason whatsoever, the
party of the second part (private respondent) is forced to stop, abandoned (sic) its operation as a
public service and it becomes necessary to remove the electric light post (sic);

which are casual conditions since they depend on chance, hazard, or the will of a third person. 20 In sum, the
contract is subject to mixed conditions, that is, they depend partly on the will of the debtor and partly on chance,
hazard or the will of a third person, which do not invalidate the aforementioned provision. 21 Nevertheless, in
view of our discussions under the first and second issues raised by petitioners, there is no reason to set aside the
questioned decision and resolution of respondent court.

WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals dated May 28, 1992 and
its resolution dated September 10, 1992 are AFFIRMED.

SO ORDERED.

Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.

G.R. No. 120236 July 20, 1999

E.G.V. REALTY DEVELOPMENT CORPORATION and CRISTINA CONDOMINIUM

CORPORATION, petitioners,
vs.
COURT OF APPEALS and UNISPHERE INTERNATIONAL, INC. respondents.

KAPUNAN, J.:

This petition for review on certiorari seeks to set aside the decision and resolution of the Court of Appeals
rendered on February 17, 1995 and on May 15, 1995, respectively, in CA-G.R. SP No. 22735 reversing the
order of the securities and Exchange Commission (SEC) in SEC-AC No. 271 issued on August 21, 1990.

The following facts are not disputed:

Petitioner E.G.V. Realty Development Corporation (hereinafter referred to as E.G.V. Realty) is the
owner/develops of a seven-storey condominium building known as Cristina Condominium. Cristina
Condominium Corporation (hereinafter referred to as CCC) holds title to all common areas of Cristina
Condominium and is in charge of managing, maintaining and administering the condominium's common areas
and providing for the building's security.

Respondent Unisphere International, Inc. (hereinafter referred to as Unisphere) is the owner/occupant of Unit
301 of said condominium.

On November 28, 1981, respondent Unisphere's Unit 301 was allegedly robbed of various items valued at
P6,165.00. The incident was reported to petitioner CCC.

On July 25, 1982, another robbery allegedly occurred at Unit 301 where the items carted away were valued at
P6,130.00, bringing the total value of items lost to P12,295.00. This incident was likewise reported to petitioner
CCC.

On October 5, 1982, respondent Unisphere demanded compensation and reimbursement from petitioner CCC
for the losses incurred as a result of the robbery.1âwphi1.nêt

Petitioner CCC denied any liability for the losses claimed to have been incurred by respondent Unisphere,
stating that the goods lost belonged to Amtrade, a third party.

As a consequence of the denial, respondent Unisphere withheld payment of its monthly dues starting November
1982.

On September 13, 1983, respondent Unisphere received a letter from petitioner CCC demanding payment of
past dues.

On December 5, 1984, petitioner E.G.V. Realty executed a Deed of Absolute Sale over Unit 301 in favor of
respondent Unisphere. Thereafter, Condominium Certificate of Title No. 7010 was issued in respondent
Unisphere's name bearing the annotation of a lien in favor of petitioner E.G.V. Realty for the unpaid
condominium dues in the amount of P13,142.67.

On January 28, 1987, petitioners E.G.V. Realty and CCC jointly filed a petition with the Securities and
Exchange Commission (SEC) for the collection of the unpaid monthly dues in the amount of P13,142.67 against
respondent Unisphere.

In its answer, respondent Unisphere alleged that it could not be deemed in default in the payment of said unpaid
dues because its tardiness was occasioned by the petitioners' failure to comply with what was incumbent upon
them, that is, to provide security for the building premises in order to prevent, if not to stop, the robberies taking
place therein. It asserted as counterclaim that the amount of P12,295.00 representing the total value of its loss
due to the two robberies be awarded to it by way of damages for the latter's failure to secure the premises.
On January 11, 1989, SEC Hearing Officer Antero F.L. Villaflor, Jr. rendered a decision which dispositively
reads as follows:

WHEREFORE, respondent is hereby ordered to pay petitioner the sum of P13,142.67 within
fifteen (15) days from receipt of this Decision. Further, petitioner is hereby ordered to pay
respondent within fifteen (15) days from receipt of this Decision, the sum of P12,295.00.

Let copy of this Decision be furnished the Register of Deeds of Makati, Metro Manila for the
purpose of cancellation of the lien in favor of Cristina Condominium found at the back of Title
for unpaid monthly dues in the sum of P13,142.67, upon full payment of respondent of said
amount unto petitioner.

SO ORDERED.1

Both parties filed their respective motions for reconsideration.

On July 17, 1989, the decision of Hearing Officer Villaflor was modified and amended by Hearing Officer
Enrique L. Flores, Jr. to read as follows:

WHEREFORE, respondent's motion for reconsideration should be, as it is, hereby DENIED and
the petitioners' motion for reconsideration is hereby GRANTED.

Accordingly, the decision dated January 11, 1989, is partially reconsidered to the effect that
petitioners are not made liable for the value of the items/articles burglarized from respondent's
condominium unit.

SO ORDERED.2

On July 18, 1989, respondent Unisphere filed a notice of appeal with the SEC en banc questioning the above-
mentioned decision.

On August 15, 1989, it filed a motion for an extension of thirty (30) days to file its memorandum on appeal
thirty (30) days from the stated deadline of August 18, 1989.

Said motion was granted on August 17, 1989.

On September 18, 1989, respondent Unisphere filed a second motion for extension of time to file its
memorandum on appeal for another twenty (20) days.

The motion was likewise granted on September 26, 1989.

On October 9, 1989, respondent Unisphere filed its memorandum on appeal.

After the petitioners filed their reply thereto, the SEC en banc issued the Order dated February 23, 1990 which
is quoted hereunder:

Before this Commission en banc is an appeal from the Order dated July 17, 1989 of the Hearing
Officer in SEC Case No. 3119 entitled "E.G.V. Realty Development Corporation and Cristina
Condominium Corporation vs. Unisphere International, Inc."

The records of the case show that respondent-appellant received a copy of the above order on
July 18, 1989 and filed its Notice of Appeal on July 21, 1989. On August 15, 1989, respondent
asked for an extension of thirty (30) days to file its Memorandum on Appeal which was granted
on August 17, 1989.

On September 18, 1989, respondent asked for an additional period of twenty (20) days until
October 8, 1989 to file his Appeal which was also granted.

Respondent filed his Memorandum on October 13, 1989, five days after the due date.

The penultimate paragraph of Section 6 of Presidential Decree No. 902-A (as amended) clearly
provides:
 . . . The decision, ruling or order of any such Commissioner, bodies, boards,
committees, and/or officer as may be appealed to the Commission sitting en
banc within thirty (30) days after receipt by the appellant of notice of such
decision, ruling or order. The Commission shall promulgate rules or procedure to
govern the proceedings, hearings and appeals of cases falling within its
jurisdiction.

Pursuant to the above provision, the Commission promulgated the Revised Rules of Procedure of
the Securities and Exchange Commission, Section 3, Rule XVI of said Rules reiterates the thirty
(30)-day period provided for under the above provision:

Appeal may be taken by filing with the Hearing Officer who promulgated the
decision, order or ruling within thirty (30) days from notice thereof, and serving
upon the adverse party, a notice of appeal and a memorandum on appeal and
paying the corresponding docket fee therefor. The appeal shall be considered
perfected upon the filing of the memorandum on appeal and payment of the
docket fee within the period hereinabove fixed.

The Commission en banc notes that respondent had, extensions included, a total of eighty (80)
days to file its Appeal memorandum but failed to do so.

WHEREFORE, premises considered, the instant appeal is hereby dismissed for having been filed
out of time.

SO ORDERED. 3

Respondent Unisphere moved for a reconsideration of the above-quoted order but the same was denied, and so
was its second motion for reconsideration.

On September 6, 1990, respondent Unisphere filed a notice of appeal to the SEC en banc in order to question
the latter's ruling to the Court of Appeals pursuant to Rule 43 of the Rules of Court, as amended by Republic
Act No. 5434.

On September 10, 1990, it filed a notice of appeal to the Court of Appeals.

The Court of Appeals reversed the SEC en banc in Order of August 21, 1990 in its Decision dated February 17,
1995 which dispositively reads as follows:

WHEREFORE, the instant petition is GRANTED and the assailed Order dated August 21, 1989
is hereby REVERSED and SET ASIDE. Another judgment is entered declaring that the appeal
memorandum before the SEC ten (en banc) of appellant Unisphere was filed on time and that the
amount of P13,142.67, the unpaid monthly dues of Unisphere to the Corporation should be offset
by the losses suffered by the Unisphere in the amount of P12,295.00. Unisphere is hereby
ordered to pay the Cristina Condominium Corporation the amount of P847.67 representing the
balance after offsetting the amount of P12,295.00 against the said P13,142.67, with 12%
interest per annum from January 28, 1987 when the Joint Petition of the petitioners-appellees
was filed before the SEC (for collection and damages) until fully paid.

No pronouncement as to costs.

SO ORDERED.4

Petitioners moved for reconsideration of the said decision but the same was denied by the appellate court on
May 15, 1995.

Hence, the instant petition for review interposed by petitioners E.G.V. Realty and CCC challenging the decision
of the Court of Appeals on the following grounds: (a) the Court of Appeals did not acquire jurisdiction over
respondent Unisphere's appeal because the latter failed to comply with the prescribed mode of appeal; (b) even
if the jurisdictional infirmity is brushed aside, the SEC en banc Order dated February 23, 1990 has already
attained finality; and (c) the ruling of the Court of Appeals on the offsetting of the parties' claims is unfounded.
A perusal of the foregoing issues readily reveals that petitioners raise two (2) aspects of the case for
consideration, that is, the procedural aspect and the substantive aspect.

We will discuss the procedural aspect first. Petitioners contend that (a) the Court of Appeals did not acquire
jurisdiction over the appeal because respondent failed to comply with the prescribed mode of appeal; and (b)
assuming that the Court of Appeals has jurisdiction, the assailed SEC en banc Order of February 23, 1990 had
already become final and executory.

Anent the first contention, petitioners claim that respondent Unisphere erred in merely filing a notice of appeal
as in ordinary civil cases from the regular courts instead of a petition for review with the Court of Appeals.

Contrary to petitioners' contention, respondent Unisphere complied with the prescribed mode of appeal. At the
time the appeal was elevated to the Court of Appeals in 1990, the rule governing recourse to the Court of
Appeals from the decision, resolution or final order of a quasi-judicial body was Rule 43 of the Revised Rules
of Court, as amended by Republic Act No. 5434 as embodied in Batas Pambansa Blg. 129 and its Interim Rules
and Guidelines.5 The rule provided for a uniform procedure for appeals from the specified administrative
tribunals, SEC included, to the Court of Appeals by filing a notice of appeal with the appellate court and with
the court, officer, board, commission or agency that made or rendered the assailed ruling within fifteen (15)
days from notice thereof. Records bear out that respondent Unisphere complied with the foregoing rules when it
filed a notice of appeal with the SEC en banc on September 6, 1990 and with the Court of Appeals on
September 10, 1990. Clearly therefore, respondent Unisphere complied with the proper mode of appeal as
mandated by the rules.

With respect to the second contention, petitioners asseverate that the February 23, 1990 order of the SEC en
banc has already become final and unappealable, therefore can no longer be reversed, amended or modified.
They maintain that respondent Unisphere received a copy of said order on February 26, 1990 and that ten (10)
days thereafter, it filed its motion for reconsideration. Said motion was denied by the SEC on May 14, 1990
which was received by respondent Unisphere on May 15, 1990. Consequently, they assert that respondent
Unisphere had only the remaining five (5) days or May 20, 1990 within which to file a notice of appeal.
However, instead of appealing therefrom, respondent Unisphere second motion for reconsideration on May 25,
1990 with the SEC en banc. Petitioner contend that no second motion for reconsideration is allowed by SEC
Rules unless with express prior leave of the hearing officer. Said second motion for reconsideration was
likewise denied on August 21, 1990. Fifteen (15) days later on September 5, 1990, respondent Unisphere filed
its notice of appeal.

Sec. 8, Rule XII of the Revised Rules of Procedure of the SEC provides that:

Sec. 8. Reconsideration. — Within thirty (30) days from receipt of the order or decision of the
Hearing Officer, the aggrieved party may file a motion for reconsideration of such order or
decision together with proof of service thereof upon the adverse party. No more than one motion
for reconsideration shall be allowed unless with the express prior leave of the Hearing Officer.

Respondent Unisphere's non-observance of the foregoing rule rendered the February 23, 1990 and the May 14,
1990 orders of the SEC en banc final and unappealable. Its failure to perfect its appeal in the manner and within
the period fixed by law rendered the decision sought to be appealed final, with the result that no court can
exercise appellate jurisdiction to review the decision.6 Contrary to petitioners' view, the appeal to the Court of
Appeals in this case should have been perfected within fifteen (15) days from the receipt of the order denying
the motion for reconsideration on May 15, 1990. But instead of appealing, respondent Unisphere filed a
prohibited second motion for reconsideration without express prior leave of the hearing officer. Consequently,
when it subsequently filed its notice of appeal on September 6, 1990, it was already eighty-two (82) days late.
Therefore, the appeal before the Court of Appeals could have been dismissed outright for being time-barred.
Rules of procedure are intended to ensure the proper administration of justice and the protection of substantive
rights in judicial and quasi-judicial proceedings. Blatant violation of such rules smacks of a dilatory tactic
which we simply cannot countenance.

Now, we go to the substantive aspect.1âwphi1.nêt

It is petitioners' assertion that the ruling of the Court of Appeals to offset the alleged losses as a result of the
robberies in the amount of P12,295.00 from the unpaid monthly dues of P13,142.67 is unfounded because
respondent Unisphere is not the owner of the goods lost but a third party, Amtrade. Respondent Unisphere, on
its part, claims that this issue is factual, hence, not a proper issue to raise before this Court.
Actually, the issue for our consideration is whether or not set-off or compensation has taken place in the instant
case. The Court of Appeals' dissertation on the matter is commendably instructive, but, lamentably, it reached a
different conclusion. We quote pertinent portions of the assailed decision:

Compensation or offset under the New Civil Code takes place only when two persons or entities
in their own rights, are creditors and debtors of each other. (Art. 1278). . . .

A distinction must be made between a debt and a mere claim. A debt is an amount actually
ascertained. It is a claim which has been formally passed upon by the courts or quasi-judicial
bodies to which it can in law be submitted and has been declared to be a debt. A claim, on the
other hand, is a debt in embryo. It is mere evidence of a debt and must pass thru the process
prescribed by law before it develops into what is properly called a debt. (Vallarta vs. CA, 163
SCRA 587). Absent, however, any such categorical admission by an obligor or final
adjudication, no compensation or off-set can take place. Unless admitted by a debtor himself, the
conclusion that he is in truth indebted to another cannot be definitely and finally pronounced, no
matter how convinced he may be from the examination of the pertinent records of the validity of
that conclusion the indebtedness must be one that is admitted by the alleged debtor or
pronounced by final judgment of a competent court or in this case by the Commission
(Villanueva vs. Tantuico, 182 SCRA 263).

There can be no doubt that Unisphere is indebted to the Corporation for its unpaid monthly dues
in the amount of P13,142,67. This is admitted. But whether the Corporation is indebted to
Unisphere is vigorously disputed by the former.

It appears quite clear that the offsetting of debts does not extend to unliquidated, disputed claims
arising from tort or breach of contract. (Compania General de Tabacos vs. French and Unson, 39
Phil. 34; Lorenzo and Martinez vs. herrero, 17 Phil. 29).

It must be noted that Unisphere just stopped paying its monthly dues to the Corporation on
September 23, 1983 without notifying the latter. It was only on February 24, 1984, or five
months after, that it informed the corporation of its suspension of payment of the condominium
dues to offset the losses it suffered because of the robberies.

In resisting the finding which underscores their negligence, E.G.V. Realty and Cristina
condominium corporation, would have this Court appreciate in their favor the admission of Mr.
Alfonso Zamora of Unisphere that there was no such agreement among the unit owners that any
member who incurred losses will be indemnified from the common contribution. (TSN, July 7,
1987, p. 60).

The herein appellees further argue that the cause of action for reimbursement of the value of the
items lost because of the robberies should be against the security agency and not the Corporation.

On the other hand, Unisphere invokes ART. 1170 of the Civil Code which provides:

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

There is weight in the initial factual findings of the SEC Hearing Officer with respect to the
losses suffered by Unisphere in the amount of P12,295.00:

Plaintiff likewise does not dispute the fact of robbery that occurred on November
28, 1981 and July 26, 1982 inside 301 Cristina Condominium.

Plaintiff admits that it had secured the services of Jimenez Protective and Security
Agency to safeguard the Condominium premises under its instructions and
supervision, but which failed to detect the robbery incidents that occurred twice at
Unit 301 of respondent, canting (sic) away bulk items.

x x x           x x x          x x x
 From the undisputed facts, plaintiff was remissed (sic) within its obligation to
provide safety to respondent inside its unit. This was demonstrated by the fact that
two robbery incidents befell respondents under the negligent eye of plaintiffs
hired security guards. It can be safely pronounced that plaintiff has not complied
with what was incumbent upon it to do in a proper manner.

Since it has been determined and proven by the evidence presented before the hearing office of
respondent SEC that Unisphere indeed suffered losses because of the robbery incidents and since
it (Unisphere) did not refute its liability to the corporation for the unpaid monthly dues in the
amount of P13,142.67, this amount should be set-off against the aforestated losses of
Unisphere. 7

We fully agree with the appellate court's dissertation on the nature and character of a set-off or compensation.
However, we cannot subscribe to its conclusion that a set-off or compensation took place in this case.

In Article 1278 of the Civil Code, compensation is said to take place when two persons, in their own right, are
creditors and debtors of each other. Compensation is "a mode of extinguishing to the concurrent amount, the
obligations of those persons who in their own right are reciprocally debtors and creditors of each other" and "the
offsetting of two obligations which are reciprocally extinguished if they are of equal value, or extinguished to
the concurrent amount if of different values." 8 Article 1279 of the same Code provides:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor.

Absent any showing that all of these requisites exist, compensation may not take place.

While respondent Unisphere does not deny its liability for its unpaid dues to petitioners, the latter do not admit
any responsibility for the loss suffered by the former occasioned by the burglary. At best, what respondent
Unisphere has against petitioners is just a claim, not a debt. Such being the case, it is not enforceable in court. It
is only the debts that are enforceable in court, there being no apparent defenses inherent in them. 9 Respondent
Unisphere's claim for its loss has not been passed upon by any legal authority so as to elevate it to the level of a
debt. So we held in Alfonso Vallarta v. Court of Appeals, et al., 10 that:

Compensation or offset takes place by operation of law when two (2) persons, in their own right,
are creditor and debtor of each other. For compensation to take place, a distinction must be made
between a debt and a mere claim. A debt is a claim which has been formally passed upon by the
highest authority to which it can in law be submitted and has been declared to be a debt. A claim,
on the other hand, is a debt in embryo. It is mere evidence of a debt and must pass thru the
process prescribed by law before it develops into what is properly called a debt. 11

Tested by the foregoing yardstick, it has not been sufficiently established that compensation or set-off is proper
here as there is lack of evidence to show that petitioners E.G.V. Realty and CCC and respondent Unisphere are
mutually debtors and creditors to each other.

Considering the foregoing disquisition, therefore, we find that respondent Court of Appeals committed
reversible error in ruling that compensation or set-off is proper in the instant case.

WHEREFORE, for all the foregoing, the instant petition is hereby GRANTED. The Decision of the Court of
Appeals dated February 17, 1995 is REVERSED and SET ASIDE. The Order of the Securities and Exchange
Commission dated August 21, 1990 reiterating the Hearing Officer's Decision dated January 11, 1989, as
amended by the Order of July 17, 1989, is hereby REINSTATED.

SO ORDERED.

Davide, Jr., C.J., Melo, Pardo and Ynares-Santiago, JJ., concur.