Oblicon Prelims Coverage Part 2 PDF

29 Chapter 2 NATURE AND EFFECT OF OBLIGATIONS ART. 1163. Every person obliged to give something is also obliged to take care of it with the proper d...

29 Chapter 2 NATURE AND EFFECT OF OBLIGATIONS ART. 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care. (1094a) Meaning of specific or determinate thing. The above provision refers to an obligation to give a specific or determinate thing. A thing is said to be specific or determinate when it is particularly designated or physically segregated from all others of the same class. (Art. 1459.) EXAMPLES: (1) The watch I am wearing. (2) The car sold by X. (3) My dog named “Terror.” (4) The house at the corner of Rizal and Del Pilar Streets. (5) The Toyota car with Plate No. AAV 344. (6) This cavan of rice. (7) The money I gave you. Meaning of generic or indeterminate thing. A thing is generic or indeterminate when it refers only to a class or genus to which it pertains and cannot be pointed out with particular- ity. 29 30 OBLIGATIONS Art. 1163 EXAMPLES: (1) a Bulova calendar watch. (2) a 2006 model Japanese car. (3) a police dog. (4) a cavan of rice. (5) the sum of P10,000.00. Specific thing and generic thing distinguished. (1) A determinate thing is identified by its individuality. The debtor cannot substitute it with another although the latter is of the same kind and quality without the consent of the creditor. (Art. 1244.) (2) A generic thing is identified only by its specie. The debtor can give anything of the same class as long as it is of the same kind. EXAMPLES: (1) If D’s obligation is to deliver to C a Bulova calendar watch, D can deliver any watch as long as it is Bulova with calendar. But if D’s obligation is to deliver to C a particular watch, the one D is wearing, D cannot substitute it with another watch without C’s consent nor can C require D to deliver another watch without D’s consent although it may be of the same kind and value. (see Arts. 1244, 1246.) (2) If D’s obligation is to deliver to C one of his cars, the object refers to a class which in itself is determinate. Here, the particular thing to be delivered is determinable without the need of a new contract between the parties (see Art. 1349.); it becomes determinate upon its delivery. Duties of debtor in obligation to give a determinate thing. They are: (1) To preserve or take care of the thing due; (2) To deliver the fruits of the thing (see Art. 1164.); (3) To deliver its accessions and accessories (see Art. 1166.); (4) To deliver the thing itself (see Arts. 1163, 1233, 1244; as to kinds of delivery, Arts. 1497 to 1501.); and Art. 1163 NATURE AND EFFECT OF OBLIGATIONS 31 (5) To answer for damages in case of non-fulfillment or breach. (see Art. 1170.) Obligation to take care of the thing due. (1) Diligence of a good father of a family. — In obligations to give (real obligations), the obligor has the incidental duty to take care of the thing due with the diligence of a good father of a family pending delivery. The phrase has been equated with ordinary care or that diligence which an average (a reasonably prudent) person exercises over his own property. (2) Another standard of care. — However, if the law or the stipu- lation of the parties provides for another standard of care (slight or extraordinary diligence), said law or stipulation must prevail. (Art. 1163.) (a) Under the law, for instance, a common carrier (person or company engaged in the transportation of persons and/or cargoes) is “bound to carry the passengers safely as far as human care and foresight can provide, using utmost (extraordinary) diligence of very cautious persons, with a due regard for all the circumstances.” (Art. 1755.) In case of accident, therefore, the common carrier will be liable if it exercised only ordinary diligence or the diligence of a good father of a family. (b) Banks are duty bound to treat the deposit accounts of their depositors with the highest degree of care where the fiduciary nature of their relationship with their depositors is concerned. But such degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors. (Reyes vs. Court of Appeals, 363 SCRA 51.) (c) While parties may agree upon diligence which is more or less than that of a good father of a family, it is contrary to public policy (see Art. 1306.) to stipulate for absolute exemption from liability for any fault or negligence. (see Arts. 1173, 1174.) Thus, a stipulation exempting a carrier from liability for gross negligence is against public policy. (Heacock vs. Macondray, 32 Phil. 205 ; see Arts. 1306, 1744, 1745.) 32 OBLIGATIONS Art. 1164 (3) Factors to be considered. — The diligence required depends upon the nature of the obligation and corresponds with the circumstances of the person, of the time, and of the place. (Art. 1173.) It is not necessarily the standard of care one always uses in the protection of his own property. As a general rule, the debtor is not liable if his failure to preserve the thing is not due to his fault or negligence but to fortuitous events or force majeure. (Art. 1174.) (4) Reason for debtor’s obligation. — The debtor must exercise diligence to insure that the thing to be delivered would subsist in the same condition as it was when the obligation was contracted. Without the accessory duty to take care of the thing, the debtor would be able to afford being negligent and he would not be liable even if the property is lost or destroyed, thus rendering illusory the obligation to give. (8 Manresa 35-37.) Duties of debtor in obligation to deliver a generic thing. They are: (1) To deliver a thing which is of the quality intended by the parties taking into consideration the purpose of the obligation and other circumstances (see Art. 1246.); and (2) To be liable for damages in case of fraud, negligence, or delay, in the performance of his obligation, or contravention of the tenor thereof. (see Art. 1170.) ART. 1164. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been deliv- ered to him. (1095) Different kinds of fruits. The fruits mentioned by the law refer to natural, industrial, and civil fruits. (1) Natural fruits are the spontaneous products of the soil, and the young and other products of animals, e.g., grass; all trees and plants on lands produced without the intervention of human labor. (2) Industrial fruits are those produced by lands of any kind through cultivation or labor, e.g., sugar cane; vegetables; rice; and all products of lands brought about by reason of human labor. Art. 1164 NATURE AND EFFECT OF OBLIGATIONS 33 (3) Civil fruits are those derived by virtue of a juridical relation, e.g., rents of buildings, price of leases of lands and other property and the amount of perpetual or life annuities or other similar income. (Art. 442.) Right of creditor to the fruits. This article is a logical application of the basic principle stated in Article 712, paragraph two of the Civil Code that “Ownership and other real rights over property are acquired and transmitted by law, by donation, by testate and intestate succession, and in consequence of certain contracts, by tradition.” (see Arts. 734, 774, 777; Fidelity & Deposit Co. vs. Wilson, 8 Phil. 51.) By law, the creditor is entitled to the fruits of the thing to be deliv- ered from the time the obligation to make delivery of the thing arises. The intention of the law is to protect the interest of the obligee should the obligor commit delay, purposely or otherwise, in the fulfillment of his obligation. In case of rescission, the parties are under “obligation to return the things which were the object of the contract, together with their fruits and the price with its interest.’’ (Art. 1385.) When obligation to deliver arises. (1) Generally, the obligation to deliver the thing due and, conse- quently, the fruits thereof, if any, arises from the time of the perfection of the contract. Perfection in this case refers to the birth of the contract or to the meeting of the minds between the parties. (Arts. 1305, 1315, 1319.) (2) If the obligation is subject to a suspensive condition or period (Arts. 1179, 1189, 1193.), it arises upon fulfillment of the condition or arrival of the period. However, the parties may make a stipulation to the contrary as regards the right of the creditor to the fruits of the thing. (3) In a contract of sale, the obligation arises from the perfection of the contract even if the obligation is subject to a suspensive condition or a suspensive period where the price has been paid. (4) In obligations to give arising from law, quasi-contracts, delicts, and quasi-delicts, the time of performance is determined by the specific provisions of law applicable. 34 OBLIGATIONS Art. 1164 EXAMPLE: S sold his horse to B for P15,000.00. No date or condition was stipulated for the delivery of the horse. While still in the possession of S, the horse gave birth to a colt. Who has the right to the colt? In a contract of sale “all the fruits shall pertain to the vendee from the day on which the contract was perfected.” (Art. 1537, 2nd par.) Hence, B is entitled to the colt. This holds true even if the delivery is subject to a suspensive condition (see Art. 1179; e.g., upon the demand of B) or a suspensive period (see Art. 1193; e.g., next month) if B has paid the purchase price. But S has a right to the colt if it was born before the obligation to deliver the horse has arisen (Art. 1164.) and B has not yet paid the purchase price. In this case, upon the fulfillment of the condition or the arrival of the period, S does not have to give the colt and B is not obliged to pay legal interests on the price since the colt and the interests are deemed to have been mutually compensated. (see Art. 1187.) Meaning of personal right and real right. (1) Personal right1 is the right or power of a person (creditor) to demand from another (debtor), as a definite passive subject, the fulfillment of the latter’s obligation to give, to do, or not to do. (2) Real right2 is the right or interest of a person over a specific thing (like ownership, possession, mortgage, lease record) without a definite passive subject against whom the right may be personally enforced. Personal right and real right distinguished. While in personal right there is a definite active subject and a definite passive subject, in real right, there is only a definite active subject without any definite passive subject. A personal right is, therefore, binding or enforceable only against a particular person while a real right is directed against the whole world. 1 Also called jus in personam or jus ad rem. 2 Also called jus in re. Art. 1164 NATURE AND EFFECT OF OBLIGATIONS 35 EXAMPLE: X is the owner of a parcel of land under a torrens title registered in his name in the Registry of Property. His ownership is a real right directed against everybody. There is no definite passive subject. If the land is claimed by Y who takes possession, X has a personal right to recover from Y, as a definite passive subject, the property. If the same land is mortgaged by X to Z, the mortgage, if duly registered, is binding against third persons. A purchaser buys the land subject to the mortgage which is a real right. Ownership acquired by delivery. Ownership and other real rights over property are acquired and transmitted by law, by donation, by testate and intestate succession, and in consequence of certain contracts by tradition (Art. 712.) or de- livery. Delivery in sale may be actual or real, constructive or legal, or in any other manner signifying an agreement that the possession of the thing sold is transferred from the vendor to the vendee.3 (see Arts. 1496-1501.) The meaning of the phrase “he shall acquire no real right over it until the same has been delivered to him,” is that the creditor does not become the owner until the specific thing has been delivered to him. Hence, when there has been no delivery yet, the proper action of the creditor is not one for recovery of possession and ownership but one for specific performance or rescission of the obligation. (see Art. 1165.) ILLUSTRATIVE CASE: A document transfers to a person certain funds in the possession of another but there is no actual delivery of said funds. Facts: For the security of the Government, X Company (and another company) became a surety on the official bond of W, an employee of the Government for the sum of $15,000.00. W defaulted in the amount of $8,900.00 and X Company paid the Government the sum of $14,462.00. When W was apprehended, he had on his person $750.00 which amount was turned over to B, the Insular Treasurer. 3 Contracts only constitute titles or rights to the transfer or acquisition of ownership, while delivery or tradition is the mode of accomplishing the same. Thus, sale by itself does not transfer or effect ownership. The most that a sale does is to create the obligation to transfer ownership. It is delivery, as a consequence of sale, that actually transfers ownership. (San Lorenzo Dev. Corp. vs. Court of Appeals, 449 SCRA 99.) 36 OBLIGATIONS Art. 1165 Later, W signed a document transferring to T all his rights to said $785.00 for professional services rendered by the latter as attorney’s fee. B was duly notified of the transfer. X filed an action against W to recover the sum of $785.00 in partial payment of the amount paid by X to the Government. T filed a complaint in intervention and claimed the money as his. Issue: On the basis of these facts, will the complaint of T prosper? Held: No. (1) Ownership was not acquired by T. — The delivery of a thing constitutes a necessary and indispensable requisite for the purpose of acquiring the ownership of the same by virtue of a contract. The transfer by itself, and afterwards the notification to B, did not produce the effect of delivery to T of the funds so transferred. (see Arts. 1497, 1498, 1501.) To have this effect, it would have been necessary that the delivery of the funds had been made directly to T. Therefore, by reason of the non- delivery, T did not acquire the ownership of the property transferred to him by W. (2) Mere personal right was acquired by T. — It is only the jus ad rem, and not the jus in re, that was acquired by T by virtue of the transfer made by the consent of the transferor and the transferee but not consummated by the delivery which never came to pass and which delivery was the object of such transfer. (Fidelity & Deposit Co. vs. Wilson, 8 Phil. 51 ; see also Cruzado vs. Bustos, 34 Phil. 17.) ART. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by Article 1170, may compel the debtor to make the delivery. If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor. If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same inter- est, he shall be responsible for any fortuitous event until he has effected the delivery. (1096) Remedies of creditor in real obligation. (1) In a specific real obligation (obligation to deliver a determinate thing), the creditor may exercise the following remedies or rights in case the debtor fails to comply with his obligation: (a) demand specific performance or fulfillment (if it is still possible) of the obligation with a right to indemnity for damages; or Art. 1165 NATURE AND EFFECT OF OBLIGATIONS 37 (b) demand rescission or cancellation (in certain cases) of the obligation also with a right to recover damages (Art. 1170.); or (c) demand the payment of damages only (see Art. 1170.) where it is the only feasible remedy. In an obligation to deliver a determinate thing, the very thing itself must be delivered. (Art. 1244.) Consequently, only the debtor can comply with the obligation. This is the reason why the creditor is granted the right to compel the debtor to make the delivery. (Art. 1165, par. 1.) It should be made clear, however, that the law does not mean that the creditor can use force or violence upon the debtor. The creditor must bring the matter to court and the court will be the one to order the delivery. (2) A generic real obligation (obligation to deliver a generic thing), on the other hand, can be performed by a third person since the object is expressed only according to its family or genus. It is thus not necessary for the creditor to compel the debtor to make the delivery although he may ask for performance of the obligation. In any case, the creditor has a right to recover damages under Article 1170 in case of breach of the obligation. The manner of compliance with an obligation to deliver a generic thing is governed by Article 1246. Under the Constitution, no person shall be imprisoned for non-payment of debt. (Art. III, Sec. 20 thereof.) However, a person may be subject to subsidiary imprisonment for non-payment of civil liability adjudged in a criminal case. (see Art. 1161.) The constitutional prohibition refers to purely civil debt or one arising from contractual obligations only. Where debtor delays or has promised delivery to separate creditors. Paragraph 3 gives two instances when a fortuitous event does not exempt the debtor from responsibility. It likewise refers to a determinate thing. An indeterminate thing cannot be the object of destruction by a fortuitous event because genus nunquam perit (genus never perishes). (see Arts. 1174, 1263.) Delay is discussed in Article 1169, and fortuitous events, in Article 1174. 38 OBLIGATIONS Art. 1166 ART. 1166. The obligation to give a determinate thing in- cludes that of delivering all its accessions and accessories, even though they may not have been mentioned. (1097a) Meaning of accessions and accessories. (1) Accessions are the fruits of, or additions to, or improvements upon, a thing (the principal), e.g., house or trees on a land; rents of a building; airconditioner in a car; profits or dividends accruing from shares of stocks; etc. The concept includes accession in its three forms of building, planting, and sowing (see Art. 445.), and accession natural, such as alluvion (see Art. 457.), avulsion (see Art. 459.), change of course of rivers (see Arts. 461-462.), and formation of islands. (see Arts. 464-465.) “Fruits of the thing” are specifically provided for in Article 1164. (2) Accessories are things joined to, or included with, the principal thing for the latter’s embellishment, better use, or completion, e.g., key of a house; frame of a picture; bracelet of a watch; machinery in a factory; bow of a violin. Note that while accessions are not necessary to the principal thing, the accessory and the principal thing must go together but both accessions and accessories can exist only in relation to the principal. Right of creditor to accessions and accessories. The general rule is that all accessions and accessories are considered included in the obligation to deliver a determinate thing although they may not have been mentioned. This rule is based on the principle of law that the accessory follows the principal. In order that they will be excluded, there must be a stipulation to that effect. Unless otherwise stipulated, an obligation to deliver the accessions or accessories of a thing does not include the latter. Thus, a sale of the improvements (e.g., house) upon a thing (e.g., land) is not sufficient to convey title or any right to the thing. (see Pornellosa vs. Land Tenure Administration, 1 SCRA 375.) But the lease of a building or house naturally includes the lease of the lot, and the rentals include those of the lot for the occupancy of a building or house not only suggests but also implies the tenancy or possession in fact of the land on which it is constructed. (Caleon vs. Agus Development Corp., 207 SCRA 748.) Art. 1167 NATURE AND EFFECT OF OBLIGATIONS 39 Accession as a right. Accession is also used in the sense of a right. In that sense, it may be defined as the right pertaining to the owner of a thing over its prod- ucts and whatever is incorporated or attached thereto, either naturally or artificially. (3 Sanchez Roman 89; Art. 440.) Accession includes, therefore, the right to the fruits and the right to the accessory. It is one of the rights which go to make up dominion or ownership. (3 Manresa 166.) But it is not, under the law, a mode of acquiring ownership. (see Art. 712.) ART. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost. This same rule shall be observed if he does it in contra- vention of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone. (1098) Situations contemplated in Article 1167. Article 1167 refers to an obligation to do, i.e., to perform an act or render a service. It contemplates three situations: (1) The debtor fails to perform an obligation to do; or (2) The debtor performs an obligation to do but contrary to the terms thereof; or (3) The debtor performs an obligation to do but in a poor manner. Remedies of creditor in positive personal obligation. (1) If the debtor fails to comply with his obligation to do, the creditor has the right: (a) to have the obligation performed by himself, or by another unless personal considerations are involved, at the debtor’s expense; and (b) to recover damages. (Art. 1170.) (2) In case the obligation is done in contravention of the terms of the same or is poorly done, it may be ordered (by the court) that it be undone if it is still possible to undo what was done. 40 OBLIGATIONS Art. 1167 Performance by a third person. A personal obligation to do, like a real obligation to deliver a generic thing, can be performed by a third person. While the debtor can be compelled to make the delivery of a specific thing (Art. 1165.), a specific performance cannot be ordered in a personal obligation to do because this may amount to involuntary servitude which, as a rule, is prohibited under our Constitution. (Art. III, Sec. 18 thereof.) Where, however, the personal qualifications of the debtor are the determining motive for the obligation contracted (e.g., to sing in a night club), the performance of the same by another would be impossible or would result to be so different that the obligation could not be considered performed. Hence, the only feasible remedy of the creditor is indemnification for damages. But where the obligation can still be performed at the expense of the debtor notwithstanding his failure or refusal to do so, the court is not authorized to merely grant damages to the creditor. ILLUSTRATIVE CASE: Liability of debtor who fails to comply with an obligation to do. Facts: A delivered to B, a typewriter repairer, a portable typewriter for routine cleaning and servicing. B was not able to finish the job after some time despite repeated reminders made by A. Finally, B returned the typewriter unrepaired, some of the parts missing. A had the typewriter repaired by F Business Machines, and the repair job cost him P58.75 for labor or service and P31.10 for the missing parts or a total of P89.85. The lower court rendered judgment ordering B to pay only P31.10. Issue: Is B liable also for P58.75, the cost of the service expended in the repair? Held: Yes. B contravened the tenor of his obligation (see Art. 1170.) because he not only did not repair the typewriter but returned it “in shambles.” For such contravention, he is liable under Article 1167 for the cost of executing the obligation in a proper manner, which in the case should be the cost of the labor or service expended in its repair, because the obligation or contract was to repair it. In addition, he is liable under Article 1170 for the cost of the miss- ing parts for in his obligation to repair the typewriter he was bound, but failed or neglected to return it in the same condition it was when he re- ceived it. (Chaves vs. Gonzales, 32 SCRA 547 ; see Tanguilig vs. Court of Appeals, 266 SCRA 78.) Arts. 1168-1169 NATURE AND EFFECT OF OBLIGATIONS 41 ART. 1168. When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall also be undone at his expense. (1099a) Remedies of creditor in negative personal obligation. In an obligation not to do, the duty of the obligor is to abstain from an act. Here, there is no specific performance. The very obligation is fulfilled in not doing what is forbidden. Hence, in this kind of obliga- tion the debtor cannot be guilty of delay. (Art. 1169.) As a rule, the remedy of the obligee is the undoing of the forbidden thing plus damages. (Art. 1170.) However, if it is not possible to undo what was done, either physically or legally, or because of the rights acquired by third persons who acted in good faith, or for some other reason, his remedy is an action for damages caused by the debtor’s violation of his obligation. (see 8 Manresa 58.) EXAMPLE: S sold a land to B. It was stipulated that S would not construct a fence on a certain portion of his land adjoining that sold to B. Should S construct a fence in violation of the agreement, B can have the fence removed at the expense of S. ART. 1169. Those obliged to deliver or to do something in- cur in delay from the time the obligee judicially or extra-judicial- ly demands from them the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: (1) When the obligation or the law expressly so declares; or (2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment 42 OBLIGATIONS Art. 1169 one of the parties fulfills his obligation, delay by the other be- gins. (1100a) Meaning of delay. The word delay, as used in the law, is not to be understood according to its meaning in common parlance. A distinction, therefore, should be made between ordinary delay and legal delay (default or mora) in the performance of an obligation. (1) Ordinary delay is merely the failure to perform an obligation on time. (2) Legal delay or default or mora is the failure to perform an obligation on time which failure, constitutes a breach of the obligation. Kinds of delay (mora). They are: (1) Mora solvendi or the delay on the part of the debtor to fulfill his obligation (to give or to do) by reason of a cause imputable to him; (2) Mora accipiendi or the delay on the part of the creditor without justifiable reason to accept the performance of the obligation; and (3) Compensatio morae or the delay of the obligors in reciprocal obligations (like in sale), i.e., the delay of the obligor cancels the delay of the obligee, and vice versa. No delay in negative personal obligation. In an obligation not to do, non-fulfillment may take place but delay is impossible for the debtor fulfills by not doing what has been forbidden him. (see Art. 1168.) Requisites of delay or default by the debtor. There are three conditions that must be present before mora solvendi can exist or its effects arise: (1) failure of the debtor to perform his (positive) obligation on the date agreed upon; (2) demand (not mere reminder or notice) made by the creditor upon the debtor to fulfill, perform, or comply with his obligation which demand, may be either judicial (when a complaint is filed in court) or extra-judicial (when made outside of court, orally or in writing); and Art. 1169 NATURE AND EFFECT OF OBLIGATIONS 43 (3) failure of the debtor to comply with such demand. The above presupposes that the obligation is already due or demandable and liquidated. (see Art. 1279.) There is no delay if the obligation is not yet due or demandable.4 A debt is liquidated when the amount is known or is determinable by inspection of the terms and conditions of relevant documents. Failure to furnish a debtor a detailed statement of account does not ipso facto result in an unliquidated obligation. (Selegna Management and Dev. Corp. vs. United Coconut Planters Bank, 489 SCRA 125.) The creditor has the burden of proving that demand has been made.5 It is incumbent upon the debtor, to relieve himself from liability, to prove that the delay was not caused by his fault, i.e., there was no fraud or negligence on his part. (Arts. 1170, 1173, 1174.) EXAMPLE: S obliged himself to deliver to B a specific refrigerator on December 10. If S does not deliver the refrigerator on December 10, he is only in ordinary delay in the absence of any demand from B although a period has been fixed for the fulfillment of the obligation. The law presumes that B is giving S an extension of time within which to deliver the refrigerator. Hence, there is no breach of the obligation and S is not liable for damages. If a demand is made upon S by B on December 15 and S fails to deliver the refrigerator, S is considered in default only from the date. If an action for specific performance is filed by B on December 20, the payment of damages for the default must commence on December 15 when he made the extra-judicial demand and not on December 20. In the absence of evidence as to such extra-judicial demand, the effects of default arise from the date of the judicial demand, that is, from the filing of the complaint. (see Compania General de Tabacos vs. Areza, 7 Phil. 455 ; Lopez vs. Tan Tioco, 8 Phil. 693 ; Queblar vs. Garduño and Martinez, 62 Phil. 879.) 4 A demand is only necessary in order to put an obligor in a due and demandable obliga- tion in delay. An extrajudicial demand is not required before a judicial demand. (Auto Corp. Group. vs. Intra Strata Assurance Corp., 556 SCRA 250.) 5 A grace period is a right, not an obligation, of the debtor. It must not be likened to an obligation the non-payment of which under Article 1169 would generally still require judicial or extra-judicial demand before default can be said to arise. When unconditionally conferred, it is effective without further need of demand either calling for the payment of the obligation or for honoring the right. (Bricktown Dev’t. Corp. vs. Amor Tierra Dev’t. Corp., 239 SCRA 126.) 44 OBLIGATIONS Art. 1169 ILLUSTRATIVE CASES: 1. Non-payment of taxes by mortgagor on mortgaged realty rendered entire loan due and payable but no demand was made either of the taxes or of loan itself. Facts: As security for a loan, R executed a real estate mortgage in favor of E. R bound himself to pay on time the taxes on the mortgaged property; otherwise, the entire loan would become due and payable. R failed to pay the taxes as stipulated. No demand was made by E either in respect of the taxes or the loan itself, the only notice given to R being the letter received by him from E’s lawyer to the effect that he was taking the necessary steps to foreclose the mortgage extrajudicially because the taxes had not been paid. Acting on the foregoing communication, R paid the back taxes complained of. Issue: Did R incur in delay in the payment of the taxes and the loan? Held: No, in view of the absence of previous demand for him to make such payment notwithstanding that the failure to pay the taxes rendered the entire loan due and demandable. None of the circumstances in Article 1169 which would dispense E from making the demand was present. In the light of the principal stipulation of the contract when the mortgage debt was to be paid, the non-payment of taxes was not a material breach of the contract. In any event, there was substantial compliance with the obligation in this particular aspect so as to arrest effectively the foreclosure sale. (De Los Reyes vs. De Leon, 11 SCRA 27.) —-— —-— —-— 2. Filing of foreclosure suit as equivalent to demand for payment. Facts: B obliged himself to pay S the balance of the purchase price of a subdivision lot within two years from completion by S of the roads in said subdivision. S brought action to foreclose the real estate mortgage executed by B to secure the payment of the unpaid price. B contends lack of previous notice of the completion of the roads and the absence of a demand for payment. Issue: Is this contention of B tenable? Held: No. The filing of the foreclosure suit by S is sufficient notice to S of the completion of the roads and of S’s desire to be paid the purchase price. (Enriquez vs. Ramos, 73 SCRA 116.) —-— —-— —-— Art. 1169 NATURE AND EFFECT OF OBLIGATIONS 45 3. Buyer bound herself to pay the balance of the purchase price within a period of 10 years at a fixed monthly amortization. Facts: Petitioners CL (buyer) bound herself to pay HF (seller) P107,750.00 as the total price of the lot purchased: P10,775 shall be paid at the signing of the contract as downpayment, the balance of P96,975 shall be paid within a period of 10 years at a monthly amortization of P1,747.30 to begin from December 7, 1985 with interest at 18% per annum based on the balance and corresponding penalty in case of default. CL failed to pay the installments after April 1, 1989. She claims, however, that the 10-year period for the payment of the whole purchase price has not yet elapsed. Issue: Did CL incur in delay when she failed to pay the monthly amortizations? Held: Yes. CL cannot ignore the provision on the payment of monthly installments by claiming that the 10-year period within which to pay has not elapsed. HF performed his part of the obligation by allowing CL to continue in possession and use of the property. Clearly, when CL did not pay the monthly amortizations in accordance with the terms of the contract, she was in delay and liable for damages. However, the default committed by CL in respect of the obligation could be compensated by the interests and surcharges imposed upon her under the contract in question. (Leaño vs. Court of Appeals, 369 SCRA 36.) Effects of delay. (1) Mora solvendi. — The following are the effects: (a) The debtor is guilty of breach of the obligation; (b) He is liable for interest in case of obligations to pay money (Art. 2209.) or damages in other obligations. (Art. 1170.) In the absence of extrajudicial demand, the interest shall commence from the filing of the complaint; and (c) He is liable even for a fortuitous event when the obligation is to deliver a determinate thing. (Arts. 1165, 1170.) However, if the debtor can prove that the loss would have resulted just the same even if he had not been in default, the court may equitably mitigate the damages. (Art. 2215.) In an obligation to deliver a generic thing, the debtor is not relieved from liability for loss due to a fortuitous event. He can still 46 OBLIGATIONS Art. 1169 be compelled to deliver a thing of the same kind (see Art. 1263.) or held liable for damages. (Art. 1170; see Lee vs. De Guzman, Jr., 187 SCRA 276.) (2) Mora accipiendi. — The effects are as follows: (a) The creditor is guilty of breach of obligation; (b) He is liable for damages suffered, if any, by the debtor; (c) He bears the risk of loss of the thing due (see Art. 1162.); (d) Where the obligation is to pay money, the debtor is not liable for interest from the time of the creditor’s delay; and (e) The debtor may release himself from the obligation by the consignation of the thing or sum due. (see Art. 1256.) (3) Compensatio morae. — The delay of the obligor cancels out the effects of the delay of the obligee and vice versa. The net result is that there is no actionable default on the part of both parties, such that as if neither one is guilty of delay. If the delay of one party is followed by that of the other, the liability of the first infractor shall be equitably tempered or balanced by the courts. If it cannot be determined which of the parties is guilty of delay, the contract shall be deemed extinguished and each shall bear his own damages. (Art. 1192.) When demand not necessary to put debtor in delay. The general rule is that delay begins only from the moment the creditor demands, judicially or extrajudicially, the fulfillment of the obligation. The demand for performance marks the time when the obligor incurs mora or delay and is deemed to have violated his obligation. Without such demand, the effect of default will not arise unless any of the exceptions mentioned below is clearly proved. (1) When the obligation so provides. — EXAMPLE: D promised to pay C the sum of P20,000.00 on or before November 30 without the need of any demand. Therefore, if D fails to pay on November 30, he is automatically in default. In this case, the parties stipulate to dispense with the demand. Art. 1169 NATURE AND EFFECT OF OBLIGATIONS 47 The mere fixing of the period is not enough. The arrival of the period merely makes the obligation demandable. Before its arrival, the creditor cannot demand performance. The obligation must expressly so declare that demand is not necessary or must use words to that effect, as for instance, “the debtor will be in default” or “I will be liable for damages.” EXAMPLE: The contract of loan between D and C provides that failure of D to pay any installment therein stipulated would mature the entire obligation. It does not state that in such an event, D shall thereafter be in default. Demand is still necessary to hold D in default upon failure to pay any such installments. He is not liable for interest for default for the whole debt except from the time that judicial or extrajudicial demand for payment is made upon him. (see Quebar vs. Garduno and Martinez, 62 Phil. 879 ; De los Reyes vs. De Leon, 11 SCRA 27.) (2) When the law so provides. — EXAMPLES: (a) Under the law, taxes should be paid on or before a specific date; otherwise, penalties and surcharges are imposed without the need of demand for payment by the government. (b) The partner is liable for the fruits of the thing he may have promised to contribute to the partnership from the time they should have been delivered without the need of any demand. (Art. 1786; see also Art. 1788.) (3) When time is of the essence. — EXAMPLES: The delivery of balloons on a particular date when a children’s party will be held; the making of a wedding dress where the wedding is scheduled at a certain time; payment of money at a particular time so that the creditor could pay off certain debts due on the same date; the delivery of a car to be used in a trip at a particular time; etc. In all the foregoing cases, the debtor is fully aware that the performance of the obligation after the designated time would no longer benefit the creditor. When the time of delivery is not fixed or is stated in general and indefinite terms, time is not of the essence 48 OBLIGATIONS Art. 1169 of the contract. In such cases, the delivery must be made within a reasonable time, in the absence of anything to show that an immediate delivery was intended. (Smith, Bell & Co., Ltd. vs. Matti, 44 Phil. 874.) Even where time is of the essence, a breach of the contract in that respect by one of the parties may be waived by the other party’s subsequently treating the contract as still in force. (Lorenzo Shipping Corp. vs. BJ Marthel International, Inc., 443 SCRA 163.) ILLUSTRATIVE CASE: Prizes in a contest were not awarded on date specified, but winner did not make any demand. Facts: B (bank) started a contest of designs and plans for the construction of a building, announcing that the prizes would be awarded not later than November 30, 1921. C took part in the contest, performing work and incurring expenses for that purpose. B did not name judges and failed to award the prizes on the date specified. C contended that the said date was the principal inducement in the creation of the obligation, because the current cost of concrete buildings at that time was fixed. Issue: Was B in default in not awarding the prizes on November 30, 1921? Held: No. The fixation of said price cannot be considered as the principal inducement of the contract for the contestants; neither was it for the bank, which could not be certain that said price would continue to be the current price when it desired to construct the building designed. There is no sufficient reason for considering that the date set for the award of the prizes was the principal inducement to the creation of the obligation. The bank cannot be held in default through the mere lapse of time. There must be a demand, judicial or extrajudicial. (De la Rosa vs. Bank of the Phil. Islands, 51 Phil. 926.) It is not necessary for the contract to categorically state that time is of the essence; intent is sufficient. (Hanlon vs. Hauserman, 40 Phil. 766.) (4) When demand would be useless. — EXAMPLE: S obliged himself to deliver a specific horse to B on December 5. Through S’s negligence or deliberate act, or by reason of a fortuitous Art. 1169 NATURE AND EFFECT OF OBLIGATIONS 49 event for which S has expressly bound himself responsible (see Art. 1174.), the horse died on December 2. Under this situation, any demand for the delivery of the horse on December 5 would be useless as S has made it impossible for him to perform his obligation. Demand is also unnecessary where it is apparent that it would be unavailing, as where there has been a prior absolute refusal by S (see 13 C.J. 661.) or S has manifested an intention not to comply with his obligation. (5) When there is performance by a party in reciprocal obligations. — In case of reciprocal obligations (see Art. 1191.), the performance of one is conditioned upon the simultaneous fulfillment on the part of the other. (a) So neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. (Art. 11699, last par.) This is compensatio morae. Thus, where the contract of sale imposes on the seller the obligation to deliver to the buyer a reasonably habitable dwelling in return for his undertaking to pay the stipulated price in monthly amortizations, the seller cannot invoke the buyer’s suspension of payment of amortizations as cause to cancel the contract where the seller did not fulfill its obligation and is not willing to put the house in habitable state. (Agcaoili vs. GSIS, 165 SCRA 1.) (b) From the moment a party in reciprocal obligations fulfills or is ready to fulfill his obligation, delay by the other begins. Where the parties fix a period for the performance of their reciprocal obligations, neither party can demand performance nor incur in delay before the expiration of the period. (Abesamis vs. Woodcraft Works, Ltd., 30 SCRA 372.) The parties may provide different dates for performance of their respective obligations. (c) Obligations under an option to buy (see Art. 1324.) are reciprocal obligations, i.e., the payment of the purchase price by the would-be buyer is contingent upon the execution of the deed of sale by the owner of the property; hence, notice to the latter of the former’s decision to exercise his option to buy and readiness to pay the price need not be coupled with actual payment thereof and since the obligation is not yet due, consignation in court (Art. 1256.) of the purchase price is not required. (Heirs of Luis Bacus vs. Court of Appeals, 371 SCRA 295.) 50 OBLIGATIONS Art. 1169 ILLUSTRATIVE CASES: 1. Payment of purchase price is conditioned upon conveyance by all the co-owners of their entire interest in the property sold. Facts: S sold to B a piece of land owned by her in common with the understanding that S was to procure the conveyance and also the interests of her co-owners. B refused to make further payments of the purchase price because of S’s failure to procure that conveyance of the entire estate to B. After some years, S became the owner of the whole estate. In view of its increased value, S brought action for rescission. Issue: Has S the right to rescind the contract on the ground that B has failed to pay the purchase price? Held: No. The failure of B to pay was due to S’s failure to convey to him the interests in the whole land and, therefore, he should not be deemed to have been in default. The contract entailed mutual obligations, and if either party can be said to have been in default it was S rather than B. The contract contemplated a conveyance of the entire interest in the land and S clearly obligated herself to that extent. S was, therefore, not in position to compel B to pay until she could offer to him a deed sufficient to pass the whole legal estate; and for the same reason, to rescind the contract on the ground that B failed to pay the purchase price. (Causing vs. Bencer, 37 Phil. 417.) —-— —-— —-— 2. Payment of purchase price is conditioned upon grant by seller to buyer of authority to sell or mortgage the property seller agreed to convey. Facts: S agreed to convey to B a 36% share in two parcels of land upon payment of P35,000.00 and to authorize B to sell or mortgage the said 36% interest for the purpose of raising the P35,000.00 within 70 days from the date of the agreement. It was stipulated that should B fail to pay the P35,000.00 within the 70-day period fixed, S would automatically be the owner of the 36% interest in the properties. B failed to pay the P35,000.00 within the 70-day period. He alleges that his inability was due to the refusal of S to grant the authority to sell or mortgage the 36% of the properties. Issue: Without the authority in question did the obligation of B to pay S mature? Held: No. The stipulation has established reciprocal obligations between the parties. The sequence in which they are to be performed is quite clear. The giving of the authority to sell or mortgage precedes Art. 1169 NATURE AND EFFECT OF OBLIGATIONS 51 the obligation of B to pay P35,000.00. (Martinez vs. Cavives, 25 Phil. 581.) Without the authority, the 70-day period for payment did not commence to run. From the very nature of the obligation assumed by S, demand by B that it be performed was not necessary. (Art. 1169, par. 2.) In this case, S was ordered to execute in favor of B the proper authority to sell or mortgage within 30 days from notice of the decision and B to pay S P35,000.00 within 30 days from the date such authority is granted. (Rodriguez vs. Belgica, 1 SCRA 611.) When time of the essence even without express stipulation. It is not necessary, in order to make time of the essence of a con- tract, that the contract should expressly so declare. Words of this im- port need not be used. It is sufficient that the intention to this effect should appear, and there are certain situations wherein it is held, from the nature of the agreement itself, that time is of the essence of the con- tract. Time may be of the essence, without express stipulation to that effect by implication from the nature of the contract itself, of the subject matter, or of the circumstances under which the contract is made. (36 Cyc. 709.) (1) In agreements which are executed in the form of options, time is always held to be of the essence of the contract, and it is well recognized that in such contracts, acceptance of the option and payment of the purchase price constitute conditions precedent to specific performance. (Ibid., 711.) (2) The same is true generally of all unilateral contracts. (Ibid.) (3) In mercantile contracts for the manufacture and sale of goods, time is also held to be of the essence of the agreement. (13 C.J. 688.) (4) Likewise, where the subject matter of a contract is of speculative or fluctuating value, it is held that the parties must have intended time to be of the essence. (Ibid.) (5) Most conspicuous among all the situations where time is presumed to be of the essence of a contract from the very nature of the subject-matter is that where the contract relates to mining property. As has been well said by the Supreme Court of the United States, such property requires, and of all properties perhaps the most requires, the persons interested in it to be vigilant and active in asserting their 52 OBLIGATIONS Art. 1170 rights. (Waterman vs. Banks, 144 U.S. 394, 36 L. Ed., 479, 483.) Hence, it is uniformly held that time is of the essence of the contract in the case of an option on mining property, or a contract for the sale thereof, even though there is no express stipulation to that effect. (27 Cyc., 675, cited in Hanlon vs. Hausserman, 40 Phil. 796.) ART. 1170. Those who in the performance of their obliga- tions are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for dam- ages. (1101) Grounds for liability. Article 1170 gives the four grounds for liability which may entitle the injured party to damages (see Art. 2197.) for all kinds of obligations regardless of their source, mentioned in Article 1157, whether the obli- gations are real or personal. (supra.) It contemplates that the obligation was eventually performed but the obligor is guilty of breach thereof. Here, the breach of the obligation is voluntary; in Article 1174, it is in- voluntary. (1) Fraud (deceit or dolo). — As used in Article 1170, it is the deliberate or intentional evasion of the normal fulfillment of an obligation. (see 8 Manresa 72.) (a) As a ground for damages, it implies some kind of malice or dishonesty and it cannot cover cases of mistake and errors of judgment made in good faith. It is synonymous to bad faith in that it involves a design to mislead or deceive another.6 (O’leary Ma- condray & Co., 45 Phil. 812 ; Solid Bank Corp. vs. Mindanao Ferroalloy Corp., 464 SCRA 409.) Moral damages may be recovered in addition to other damages. (see Art. 2220; Far East Bank & Trust Co. vs. Court of Appeals, 241 SCRA 671.) (b) Article 1170 refers to incidental fraud (dolo incidente) com- mitted in the performance of an obligation already existing be- cause of contract. It is to be differentiated from causal fraud (dolo 6 Bad faith does not simply connote bad judgment or negligence; it imports a dishon- est purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or interest or ill-will that partakes of the nature of fraud. Bad faith and fraud are allegations of a fact that demand clear and convincing proof. (Cathay Pacific Airways, Ltd. vs. Vasquez, 399 SCRA 207.) It is good faith, not bad faith, which is pre- sumed. Art. 1170 NATURE AND EFFECT OF OBLIGATIONS 53 causante) or fraud employed in the execution of a contract under Article 1338, which vitiates consent and makes the contract void- able and to incidental fraud under Article 1344 also employed for the purpose of securing the consent of the other party to enter into the contract but such fraud was not the principal inducement to the making of the contract. (c) Under Article 1170, the fraud is employed for the purpose of evading the normal fulfillment of an obligation and its existence merely results in breach thereof giving rise to a right by the innocent party to recover damages. The Civil Code refers to civil fraud. Criminal fraud gives rise to criminal liability. EXAMPLE: S obliged himself to deliver to B 20 bottles of wine, of a particular brand. S delivered 20 bottles knowing that they contain cheaper wine. S is guilty of fraud and is liable for damages to B. If B bought the 20 bottles of wine on the false representation of S that the wine is that as represented by the labels, the fraud committed by S is causal fraud. Without the fraud, B would not have given his consent to the contract. He has the right to have the contract annulled or set aside on the ground of the fraud. (Arts. 1390, 1391.) In the first situation, the remedy of B is not annulment of the contract of sale which is not affected by the incidental fraud but to claim damages. If the fraud employed by S to get B’s consent was not the principal inducement that led B to enter into the contract, the fraud is also incidental under Article 1344 and it will likewise give rise only to an action for damages. (see Art. 1344, par. 2.) ILLUSTRATIVE CASE: Liability of a party authorized by another to exercise discretion, for honest mistakes or errors of judgment. Facts: C, contractor, brought action to recover the actual costs of the construction of the building of B, plus 12-1/2% for and on account of his services and superintendence of the building, as per contract. B alleged that through C’s negligence in the construction of the building and the purchase of materials, B suffered damages. B’s counterclaims are founded upon C’s mistakes and errors of judgment in the employment of labor and the purchase of materials. Issue: Assuming that there were such mistakes or errors of judgment, would C be liable for them under the contract? 54 OBLIGATIONS Art. 1170 Held: No. The fact that the price of lumber or of labor went up or down, or was cheaper at a certain time, would not make C liable for a breach of contract, so long as he was exercising his best judgment and acting in good faith. Under the contract, the materials were to be purchased by C “in such quantities and at such times as may appear to be to your [B’s] interest.” This vested in C a discretionary power as to the time and manner for the purchase of materials. The same thing is true as to the employment of labor. While it is true that the contract recites that time is an important provision, it does not say, however, when the building is to be completed or that time is of the essence of the contract. In other words, under the terms of the contract, the employment of labor, the purchase of materials, and the construction and completion of the building were all matters which were largely left to the discretion of C, for which he should not be held liable for honest mistakes or errors of judgment. (O’leary vs. Macondray & Co., 45 Phil. 812.) (2) Negligence (fault or culpa). — It is any voluntary act or omis- sion, there being no malice, which prevents the normal fulfillment of an obligation.7 (see Arts. 1173, 1174.) (3) Delay (mora). — This has already been discussed under Article 1169 which determines the commencement of delay. It has been ruled that the delay in the performance of the obligation under Article 1170 must be either malicious or negligent. Thus, where the omission of the buyer to sign a check, one of 24 post dated checks which were delivered to the seller who did not bother to call the buyer to ask him to sign the check, was mere “inadvertence’’ on the part of the buyer, the latter was held not liable for damages resulting from the delay in the payment of the value of the unsigned check. (Rizal Commercial Banking Corp. vs. Court of Appeals, 305 SCRA 449.) (4) Contravention of the terms of the obligation. — This is the violation of the terms and conditions stipulated in the obligation. The contravention must not be due to a fortuitous event or force majeure. (Art. 1174.) The unilateral act of terminating a contract without legal 7 The act of a bank of allowing complete strangers to take possession of the owner’s duplicate certificate of title entrusted to it even if the purpose is merely for photo copying constitutes manifest negligence which would hold it liable for damages to those contractually and legally entitled to its possession, under Article 1170 and other relevant provisions of the Civil Code. (Heirs of E. Manlapat vs. Court of Appeals, 459 SCRA 412.) Art. 1170 NATURE AND EFFECT OF OBLIGATIONS 55 justification by a party makes him liable for damages suffered by the other pursuant to Article 1170. (Pacmac, Inc. vs. Intermediate Appellate Court, 150 SCRA 555.) Recovery of damages for breach of contract or obligation. Breach of contract is the failure without justifiable excuse to comply with the terms of a contract. The breach may be willful or done unintentionally. It has been defined as the failure, without legal excuse, to perform any promise which forms the whole or part of the contract. (Nakpil vs. Manila Towers Dev. Corp., 502 SCRA 470.) (1) Measure of recoverable damages. — The provisions under Title XVIII on “Damages’’ of the Civil Code govern in determining the mea- sure of recoverable damages.8 Fundamental in the law on damages is that one injured by a breach of a contract, or by a wrongful or negligent act or omission shall have a fair and just compensation commensurate to the loss sustained as a consequence of the defendant’s act. (Llorente, Jr. vs. Sandiganbayan, 287 SCRA 382.) (2) Contractual interests of obligee or promisee, remedy serves to preserve. — A breach upon the contract confers upon the injured party a valid cause for recovering that which may have been lost or suffered. The remedy serves to preserve the interests of the promisee that may include: (a) Expectation interest, which is his interest in having the benefit of his bargain by being put in as good a position as he would have been had the contract been performed; or (b) Reliance interest, which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been had the contract not been made; or (c) Restitution interest, which is his interest in having restored to him any benefit that he has conferred on the other party. (FGU Insurance Corp. vs. G.P. Sarmiento Trucking Corp., 386 SCRA 312.) 8 The award of the different kinds of damages cannot be lumped together (e.g., to pay plaintiff actual, moral and exemplary damages in the amount of P100,000). The damages as well as attorney’s fees must each be independently identified and justified. (Herbosa vs. Court of Appeals, 374 SCRA 578.) 56 OBLIGATIONS Art. 1170 (3) Excuse from ensuing liability. — The effect of every infraction is to create a new duty, that is, to make recompense to the one who has been injured by the failure of another to observe his contractual obligation. The mere proof of the existence of the contract and the failure of its compliance justify a corresponding right of relief to the obligee unless the obligor can show extenuating circumstance, like proof of his exercise of due diligence (normally that of the diligence of a good father of a family or, exceptionally by stipulation or by law such as in the case of common carriers, that of extraordinary diligence) or of the attendance of fortuitous event, to excuse him from his ensuing liability. (Ibid.) (4) Duty of obligee to minimize his damages. — An obligee is duty bound to minimize the damages for which he intends to hold any obligor responsible. (see Art. 2203.) He cannot recover damages for any loss which he might have avoided with ordinary care. If his negligence was contributory to the loss, the court may equitably mitigate the damages. (infra.) The duty to minimize his damages as much as possible is imposed by law upon the claimant, regardless of the unquestionability of his entitlement thereto. Such indeed is the demand of equity, for the juridical concept of damages is nothing more than to repair what has been lost materially and morally. It may not be taken advantage of to allow unjust enrichment. (Lina vs. Purisima, 82 SCRA 344.) Damages recoverable where obligation to pay money. (1) Penalty interest for delay or non-performance. — Damages may be recovered under Article 1170 when the obligation is to do something other than the payment of money but when the obligation which the debtor failed to perform consists only in the payment of money, the rule of damages is that laid down in Article 2209 of the Civil Code. (Quiros vs. Tan-Guinlay, 5 Phil. 675 ; Talisay Silay Milling Co., Inc. vs. Court of Industrial Relations, 4 SCRA 1009.) Said article is as follows: “If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. (1108)” Art. 1170 NATURE AND EFFECT OF OBLIGATIONS 57 The damage dues (or penalty interest) do not include and are not included in the computation of interest as the two are distinct claims which may be demanded separately. While interest agreed upon forms part of the consideration of the contract itself, damage dues are usually made payable only in case of default or non-performance of the contract. (Sentinel Insurance Co., Inc. vs. Court of Appeals, 182 SCRA 516.) (2) Rate of the penalty interest. — The rate of the penalty interest payable shall be that agreed upon. In the absence of stipulation of a particular rate of penalty interest, then the additional interest shall be at a rate equal to the regular monetary interest; and if no regular interest had been agreed upon, then the legal interest shall be paid. The payment of the regular interest constitutes the price or cost of the use of money and thus, until the principal due is returned to the creditor, such interest continues to accrue since the debtor continues to use such principal amount. (State Investment House, Inc. vs. Court of Appeals, 198 SCRA 390.) Note: By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise known as the “Usury Law,” the Mon- etary Board, in its Resolution No. 1622, dated July 29, 1974, has pre- scribed that the rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be 12% per annum.9 (C.B. Circ. No. 416, July 29, 1974.) Fraud and negligence distinguished. Fraud may be distinguished from negligence as follows: (1) In fraud, there is deliberate intention to cause damage or injury, while in negligence, there is no such intention; (2) Waiver of the liability for future fraud is void (Art. 1171.), while such waiver may, in a certain sense, be allowed in negligence; (3) Fraud must be clearly proved, mere preponderance of evidence not being sufficient, while negligence is presumed from the breach of a contractual obligation; and 9 See “Liability for legal interest’’ under Article 1175 when an obligation, whether it con- sists or not in the payment of money, is breached. 58 OBLIGATIONS Art. 1171 (4) Lastly, liability for fraud cannot be mitigated by the courts, while liability for negligence may be reduced according to the circumstances. (Art. 1173.) They are similar in that both are voluntary, that is, they are committed with volition but in fraud, a party, by his voluntary execution of a wrongful act, or a willful omission, knows and intends the effects which naturally and necessarily arise from such act or omission which deliberate intent is lacking in negligence. (Legaspi Oil Co., Inc. vs. Court of Appeals, 224 SCRA 213 ; International Corporate Bank vs. Gueco, 351 SCRA 516.) It being a state of the mind, fraud may be inferred from the circumstances of the case. When negligence equivalent to fraud. Where the negligence shows bad faith or is so gross that it amounts to malice or wanton attitude on the part of the defendant, the rules on fraud shall apply. (see Art. 1173.) In such case, no more distinction exists between the two at least as to effects. Gross negligence is negligence characterized by want or absence of or failure to exercise even slight care or diligence, or the entire absence of care, acting or omitting to act on a situation where there is a duty to act, not inadvertently but willfully and intentionally. It evinces a thoughtless disregard of or conscious indifferences to consequences insofar as other persons may be affected, without exerting any effort to avoid them. (Judy Philippines, Inc. vs. National Labor Relations Commission, 289 SCRA 755 ; Evangelista vs. People, 315 SCRA 525 ; Macalinao vs. Ong, 477 SCRA 740 ; Ilao-Oreta vs. Ronquillo, 535 SCRA 633 ; Hao vs. Andres, 555 SCRA 8.) ART. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. (1102a) Responsibility arising from fraud demandable. This article refers to incidental fraud which is employed in the fulfillment of an obligation. (Art. 1170.) Art. 1172 NATURE AND EFFECT OF OBLIGATIONS 59 Responsibility arising from fraud can be demanded with respect to all kinds of obligation and unlike in the case of responsibility arising from negligence (Art. 1172.), the court is not given the power to miti- gate or reduce the damages to be awarded. This is so because fraud is deemed serious and evil that its employment to avoid the fulfillment of one’s obligation should be discouraged. Waiver of action for future fraud void. According to the time of commission, fraud may be past or future. A waiver of an action for future fraud is void (no effect, as if there is no waiver) as being against the law and public policy. (Art. 1409.) A contrary rule would encourage the perpetration of fraud because the obligor knows that even if he should commit fraud he would not be liable for it thus making the obligation illusory. Waiver of action for past fraud valid. What the law prohibits is waiver anterior to the fraud and to the knowledge thereof by the aggrieved party. A past fraud can be the subject of a valid waiver because the waiver can be considered as an act of generosity and magnanimity on the part of the party who is the victim of the fraud. Here, what is renounced is the effects of the fraud, that is, the right to indemnity of the party entitled thereto. ART. 1172. Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. (1103) Responsibility arising from negligence demandable. (1) In the performance of every kind of obligation, the debtor is also liable for damages resulting from his negligence or culpa. The courts, however, are given wide discretion in fixing the measure of damages. The reason is because negligence is a question which must necessarily depend upon the circumstances of each particular case. Moreover, negligence is not as serious as fraud because in the case of the former, there is no bad faith or deliberate intention to cause injury or damages. The courts, however, may increase the damages. 60 OBLIGATIONS Art. 1172 (2) When both parties to a transaction are mutually negligent in the performance of their obligations, the fault of one cancels the negligence of the other. Thus, their rights and obligations may be determined equitably under the law prescribing unjust enrichment. No one shall enrich himself at the expense of another. (Rodzssen Supply, Inc. vs. Far East Bank & Trust Co., 357 SCRA 618 ; Remington Industrial Sales Corp. vs. Chinese Young Men’s Christian Assoc., 531 SCRA 750 ; see Arts. 1160, 1192.) Validity of waiver of action arising from negligence. (1) An action for future negligence (not fraud) may be renounced except where the nature of the obligation requires the exercise of extraordinary diligence as in the case of common carriers. (see Art. 1733.) (2) Where negligence is gross or shows bad faith, it is considered equivalent to fraud. Bad faith does not simply connote negligence or bad judgment causing damages to another. Any waiver of an action for future negligence of this kind is, therefore, void. Kinds of negligence according to source of obligation. Culpa or negligence may be understood in three different senses. They are: (1) Contractual negligence (culpa contractual) or negligence in con- tracts resulting in their breach Article 1172 refers to “culpa contractual.” This kind of negligence is not a source of obligation. (Art. 1157.) It merely makes the debtor liable for damages in view of his negligence in the fulfillment of a pre-existing obligation resulting in its breach or non-fulfillment. (Arts. 1170-1174, 2201.) It is a kind of civil negligence if it does not amount to a crime; (2) Civil negligence (culpa aquiliana) or negligence which by itself is the source of an obligation between the parties not formally bound before by any pre-existing contract. It is also called “tort” or “quasi- delict.” (Art. 2176.10 ); 10 Article 2176 (see Note 1 under Art. 1162, Chap. 1.) covers not only acts committed with negligence, but also acts which are voluntary and intentional. (Dulay vs. Court of Appeals, 243 SCRA 220.) Art. 1172 NATURE AND EFFECT OF OBLIGATIONS 61 A pre-existing contractual relation between the parties does not, however, preclude the existence of culpa aquiliana. (Syquia vs. Court of Appeals, 217 SCRA 614.) A quasi-delict can be the cause for breaching a contract that might thereby permit the application of governing principles of tort even when there is a pre-existing contract between the parties. This rule, however, governs only where the act or omission complained of would constitute an actionable tort independently of the contract (Far East Bank & Trust Co. vs. Court of Appeals, 241 SCRA 671.); and (3) Criminal negligence (culpa criminal) or negligence resulting in the commission of a crime. (Arts. 3, 365, Revised Penal Code.) The same negligent act causing damages may produce civil liability arising from a crime under Article 100 of the Revised Penal Code (supra.), or create an action for quasi-delict under Article 2176, et seq., of the Civil Code. (see Barredo vs. Garcia and Almario, 73 Phil. 607 ; Elcano vs. Hill, 77 SCRA 98.) In negligence cases, the aggrieved party may choose between a criminal action under Article 100 of the Revised Penal Code or a civil action for damages under Article 2176 of the Civil Code. What is prohibited under Article 2177 of the Civil Code is to recover twice for the same negligent act. (Virata vs. Ochoa, 81 SCRA 472.) EXAMPLES: (1) If S entered into a contract of sale with B to deliver a specific horse on a certain day and the horse died through the negligence of S before delivery, S is liable for damages to B for having failed to fulfill a pre-existing obligation (contract may be either express or implied) because of his negligence. This is culpa contractual. (2) Assume now, that the horse belongs to and is in the possession of B. The negligence of S which results in the death of the horse is culpa aquiliana. In this case, there is no pre-existing contractual relation between S and B. The negligence itself is the source of liability. (Art. 1157.) (3) A crime can be committed by negligence. If B wants, he can bring an action for culpa criminal (damage to property through simple or reckless imprudence). Here, the crime is the source of the obligation of S to pay damages. (Arts. 1157, 1161.) But B cannot recover damages twice for the same act or omission of S. In other words, responsibility for quasi-delict is not demandable together with the civil liability arising from a criminal offense. (Art. 2177.) 62 OBLIGATIONS Art. 1172 Importance of distinction between culpa contractual and culpa aquiliana. The distinction between the first two kinds of negligence is important in our jurisdiction. Where liability arises from a mere tort (culpa aquiliana), not involving a breach of positive obligation, an employer or master may excuse himself under the last paragraph of Article 218011 by proving that he had exercised “all the diligence of a good father of a family to prevent the damage.” It is a complete defense. This defense is not available if the liability of the employer or master arises from a breach of contractual duty (culpa contractual) though this may mitigate damages. (Del Prado vs. Manila Electric Co., 51 Phil. 900 ; Cangco vs. Manila Railroad Co., 38 Phil. 769 ; De Guia vs. Manila Electric Railroad and Light Co., 40 Phil. 706.) It has been held that where the injury is due to the concurrent negligence of the drivers of the colliding vehicles, the drivers and owners of the said vehicles shall be primarily, directly and solidarily liable for damages and it is immaterial that one action is based on quasi-delict and the other on culpa contractual as the solidarity of the obligation (see Art. 1207.) is justified by the very nature thereof.12 (Metro Manila Transit Corp. vs. Court of Appeals, 223 SCRA 521.) 11 See Note 3, under Article 1162, Chapter 1. Article 2180 in relation to Article 2176 of the Civil Code provides that the employer of a negligent employee is liable for the damages caused by the latter. When an injury is caused by the negligence (quasi-delict) of an employee there instantly arises a presumption of the law that there was negligence on the part of the employer either in the selection of his employee or in the supervision over him after such selection. (Baliwag Transit, Inc. vs. Court of Appeals, 262 SCRA 230.) 12 In culpa contractual, the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief. In a contract of carriage, the driver who is not a party to the contract, may not be held liable under the agreement. The action against him can only be based on culpa aquiliana, which unlike culpa contractual, would require the claimant for damages to prove negligence or fault on the part of the defendant. (FGU Insurance Corporation vs. G.P. Sarmiento Trucking Corporation, 386 SCRA 312.) In an action based on a breach of contract of carriage, the aggrieved party does not have to prove that the common carrier was at fault or was negligent. (China Airlines, Ltd. vs. Court of Appeals, 406 SCRA 113.) In culpa aquilina, the plaintiff has the burden of proving that the defendant was at fault or negligent while in culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that the defendant was at fault or negligent. Unlike in the first, the defense of exercising the required diligence in the selection and supervision of employees is not a complete defense in the second. (Consolidated Bank and Trust Corporation vs. Court of Appeals, 410 SCRA 562.) Art. 1172 NATURE AND EFFECT OF OBLIGATIONS 63 Effect of negligence on the part of the injured party. Suppose the creditor is also guilty of negligence, can he recover damages? Article 2179 of the Civil Code provides: “When the plaintiff’s own negligence was the immediate and proximate cause of his injury, he cannot recover damages. But if his negligence was only contributory, the immediate and proximate cause of the injury being the defendant’s lack of due care, the plaintiff may recover damages, but the courts shall mitigate the damages to be awarded.” (see Arts. 2214, 2215.13) In other words, to be entitled to damages, the law does not require that the negligence of the defendant should be the sole cause of the damage. (Astudillo vs. Manila Electric Co., 55 Phil. 427.) There is contributory negligence on the part of the injured party where his conduct has contributed, as a legal cause to the harm he has suffered, which falls below the standard to which he is required to conform for his own protection. (Valenzuela vs. Court of Appeals, 253 SCRA 303.) The defense of contributory negligence of the injured party does not apply in criminal cases where the offense was committed by the accused through reckless imprudence since one cannot allege the negligence of another (e.g., deceased was driving with an expired license) to evade the effects of his own negligence. (Genobiagon vs. Court of Appeals, 504 SCRA 354.) Presumption of contractual negligence. (1) In an action for quasi-delict or tort, the negligence or fault should be clearly established because it is the basis of the action, 13 Art. 2214. In quasi-delicts, the contributory negligence of the plaintiff shall reduce the damages that he may recover. Art. 2215. In contracts, quasi-contracts, and quasi-delicts, the court may equitably miti- gate the damages under circumstances other than the case referred to in the preceding article, as in the following instances: (1) That the plaintiff himself has contravened the terms of the contract; (2) That the plaintiff has derived some benefit as a result of the contract; (3) In cases where exemplary damages are to be awarded, that the defendant acted upon the advice of counsel; (4) That the loss would have resulted in any event; (5) That since the filing of the action, the defendant has done his best to lessen the plaintiff’s loss or injury. 64 OBLIGATIONS Art. 1172 whereas in a breach of contract, the action can be pursued by proving the existence of the contract, and the fact that the obligor failed to comply with the same. (2) When the action is based on a contract of carriage, and the obligor, in this case the carrier, failed to transport the passenger to his destination, the fault or negligence of the carrier is presumed. It is sufficient for the plaintiff to prove the existence of the contract of carriage and the damages or injuries suffered by him. It is the obligation of the carrier to transport its passengers or goods safely. (see San Pedro Bus Lines vs. Navarro, 94 Phil. 846 ; Davila vs. Phil. Air Lines, 21 SCRA 642 ; Roque vs. Buan, 21 SCRA 642 ; Calalas vs. Court of Appeals, 332 SCRA 356 ; DSR-Senator Lines vs. Federal Phoenix Assur. Co., Inc., 413 SCRA 14.) (a) The driver’s negligence is the carrier’s. Hence, in culpa contractual, the moment a passenger dies or is injured, the com- mon carrier is presumed to have been at fault or to have acted negligently, and the disputable presumption may only be over- come by evidence that he had exercised extraordinary diligence as prescribed in Articles 1733, 1755, and 1756 of Civil Code or that the death or injury of the passenger was due to a fortuitous event. However, the presumption of fault or negligence will not arise if the loss is due to any of the causes enumerated in Article 173414 of the Civil Code. This is a closed list. If the cause of destruction, loss or deterioration of goods transported is other than the enumerated circumstances, then the carrier is liable therefor. (Belgian Overseas Chartering and Shipping N.V. vs. Phil. First Insurance Co., Inc., 383 SCRA 23.) (b) The driver is not solidarily liable (see Arts. 1207, 1208.) with the carrier, the latter being exclusively responsible to the passenger without the right of the carrier to recover from his driver for the latter’s negligence. (Phil. Rabbit Bus Lines, Inc. vs. Intermediate Appellate Court, 189 SCRA 158.) 14 Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless the same is due to any of the following causes only: 1. Flood, storm, earthquake, lightning, or other natural disaster or calamity; 2. Act of the public enemy in war, whether international or civil; 3. Act or omission of the shipper or owner of the goods; 4. The character of the goods or defects in the packing or in the containers; 5. Order or act of competent public authority. Art. 1173 NATURE AND EFFECT OF OBLIGATIONS 65 ART. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2, shall apply. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. (1104a) Meaning of fault or negligence. (1) Fault or negligence is defined by the above provision. (par. 1.) (2) According to our Supreme Court, “negligence is conduct that creates undue risk or harm to another. It is the failure to observe for the protection of the interests of another person, that degree of care, precaution and vigilance which the circumstances justly demand, whereby such other person suffers injury.”15 (United States vs. Barrias, 23 Phil. 434 , adopting the definition given by Judge Cooley; Jarco Marketing Corporation vs. Court of Appeals, 321 SCRA 375.) It is “the want of care required by the circumstances.’’ (Cortes vs. Manila Railroad Company, 27 SCRA 674 ; Valenzuela vs. Court of Appeals, 253 SCRA 303 ; Smith Bell Dodwell Shipping Agency Corp. vs. Borja, 383 SCRA 341.) Test for determining whether a person is negligent. (1) Reasonable care and caution expected of an ordinary prudent person. — “The test for determining whether a person is negligent in doing an act whereby injury or damage results to the person or property of another is this: Would a prudent man, in the position of the person to whom negligence is attributed, foresee harm to the person injured as a 15 “An accident pertains to an unforeseen event in which no fault or negligence attaches to the defendant. It is “a fortuitous circumstance, event or happening; an event happening without any human agency, or if happening wholly or partly through human agency, an event which under the circumstances is unusual or unexpected by the person to whom it happens. x x x Accident and negligence are intrinsically contradictory; one cannot exist with the other. Accident occurs when the person concerned is exercising ordinary care, which is not caused by fault of any person and which could not have been prevented by any means suggested by common prudence.’’ (Jarco Marketing Corporation vs. Court of Appeals, 321 SCRA 375 ; People vs. Fallouna, 424 SCRA 655.) 66 OBLIGATIONS Art. 1173 reasonable consequence of the course about to the pursued? If so, the law imposes the duty on the actor to refrain from that course or to take precaution against its mischievous results, and the failure two do so constitutes negligence. Reasonable foresight of harm followed by the ignoring of the admonition born of this provision, is the constitutive fact of negligence.” (Picart vs. Smith, 37 Phil. 809.) Simply stated: “Did the defendant in doing the alleged negligent act use the reasonable care and caution which an ordinary prudent person would have used in the same situation. If not, then he is guilty of negligence.’’ (Mandarin Villa, Inc. vs. Court of Appeals, 257 SCRA 538 ; Jarco Marketing Corp. vs. Court of Appeals, supra.) (2) No hard and fast rule for measuring degree of care. — By such a test, it can readily be seen that there is no hard and fast rule whereby the degree of care and vigilance required is measured. It is dependent upon the circumstances in which a person finds himself situated. All that the law requires is that it is always incumbent upon a person to use that care and diligence expected of prudent and reasonable men under similar circumstances. (Cusi vs. Phil. National Railways, 90 SCRA 357 ; see Illusorio vs. Court of Appeals, 393 SCRA 89 ; Phil. National Railways vs. Court of Appeals, 536 SCRA 147.) In other words, the existence of negligence in a given case is not determined by reference to the personal judgment of the actor in the situation before him. It is the law that considers what would be reckless or negligent in the man of ordinary intelligence and determines liability by that. (Layugan vs. Intermediate Court, 107 SCRA 363.) Factors to be considered. Negligence is a question of fact, its existence being dependent upon the particular circumstances of each case. It is never presumed but must be proven by the party who alleges it. In determining the issue of negligence where loss or damage occurs, the following factors must be considered: (1) Nature of the obligation. — e.g., smoking while carrying materials known to be inflammable constitutes negligence; (2) Circumstances of the person. — e.g., a guard, a man in the prime of life, robust and healthy, sleeping while on duty is guilty of negli- gence; (3) Circumstances of time. — e.g., driving a car without headlights Art. 1173 NATURE AND EFFECT OF OBLIGATIONS 67 at night is gross negligence but it does not by itself constitute negli- gence when driving during the day; and (4) Circumstances of the place. — e.g., driving at 60 kilometers per hour on the highway is permissible but driving at the same rate of speed in Quezon Boulevard, Manila, when traffic is always heavy is gross recklessness. When the source of an obligation is derived from a contract, the mere breach or non-fulfillment of the prestation gives rise to the presumption of fault on the part of the obligor. (Sabena Belgian World Airlines vs. Court of Appeals, 255 SCRA 38.) ILLUSTRATIVE CASES: 1. Negligence in the care of goods. Facts: S discharged a large shipment of potatoes belonging to B into a lorcha which was then left for two days in the sun tightly closed and without ventilation. As a result, the potatoes rotted and became useless. Issue: Is S liable for the loss? Held: Yes. S was guilty of gross negligence with respect to the care of the potatoes, a perishable property. (Haskim & Co. vs. Rocha & Co., 18 Phil. 315 ; see Tan Chiong Sian vs. Inchausti & Co., 22 Phil. 152.) —-— —-— —-— 2. Negligence in not giving previous warning against a dangerous machine. Facts: R employed a young ignorant boy to do ordinary chores in the performance of which he did not come in contact with machinery. Without giving any previous warning, and over the objections of the boy, the latter was ordered to assist in the cleaning of a dangerous machine. His fingers were cut in the machine. Issue: Is R liable for damages? Held: Yes. It was negligence on his part not to warn the boy and give him instructions to avoid accidents in the cleaning of a machine with which the boy was unfamiliar. (Tamayo vs. Gsell, 35 Phil. 953.) Measure of liability for damages. (1) Civil Code provisions. — The Civil Code, in the Title on Damages, provides: “Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable shall be those 68 OBLIGATIONS Art. 1173 that are the natural and probable consequences of the breach of the obligation, and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted. In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation.” “Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith.’’16 “Art. 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.’’ “Art. 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage.’’17 (2) Contractual breach committed in good faith/bad faith. — The law distinguishes a contractual breach effected in good faith from one attended by bad faith. Where in breaching the contract, the defendant is not shown to have acted fraudulently or in bad faith (see Art. 2220.), liability for damages is limited to the natural and probable consequences of the breach of the obligation and which the parties had foreseen or could have reasonably foreseen; and in that case, such liability would not include liability for moral and exemplary damages. (China Airlines Limited vs. Court of Appeals, 211 SCRA 897.) (a) In a case, L, a sister company of another company M, which was indebted to the defendant-creditor, filed a replevin suit for the recovery of certain office furnitures and equipment owned by M which the defendant sold at an auction sale for unpaid rentals of M. It was held that the act of L of filing a replevin suit without 16 Bad faith in the context of Article 2220, includes gross, but not simple, negligence. But in a contract of carriage, moral damages are also allowed in case of death of a passenger attrib- utable to the fault (which is presumed) of the common carrier. (see Arts. 1756, 1764; Far East Bank & Trust Co. vs. Court of Appeals, 241 SCRA 671 ; see Lufthansa German Airlines vs. Court of Appeals, 243 SCRA 600.) 17 Article 21 contemplates a conscious or deliberate act to cause harm approximating a degree of misconduct no less worse than fraud or bad faith. (Ibid.) Art. 1173 NATURE AND EFFECT OF OBLIGATIONS 69 the intention of prosecuting the same but for the mere purpose of disappearing with the provisionally recovered property in order to evade lawfully contracted obligations constituted a wanton, fraudulent, reckless, oppressive and malevolent breach of contract which justified award of exemplary damages under Article 2232. (Stronghold Insurance Co., Inc. vs. Court of Appeals, 208 SCRA 336.) (b) In another case, the unexplained misshipment of the subject goods destined for Manila but was inexplicably shipped to the United States, committed by the common carrier resulting in the unreasonable delay in the delivery of the same for more than two (2) months was held as constituting gross carelessness or negligence amounting to bad faith and wanton misconduct; hence, moral and exemplary damages were awarded to the aggrieved party. (Maersk Line vs. Court of Appeals, 223 SCRA 108.) (3) With respect to moral damages. — They are not punitive in nature. Although incapable of pecuniary estimation, such damages must somehow be proportional to and in approximation of the suffering inflicted, the factual basis for which must be satisfactorily established by the aggrieved party. (Phil. National Bank vs. Court of Appeals, 395 SCRA 272.) EXAMPLE: S agreed to sell and deliver certain goods to B on a certain date for P300,000.00. Then, B agreed to sell the goods to be received from S to C for P325,000.00. This contract with C was known to S. On the date designated, S did not deliver the goods so that C bought the goods from another. The breach of the obligation by S, resulting in the loss of the amount of P25,000 as expected profit, so angered B that he suffered a heart attack for which he was hospitalized for five (5) days. In this case, if S acted in good faith, the damage which B ought to receive should be the amount of P25,000, the profit which B failed to realize. (par. 1, Art. 2200.) But, if S acted in bad faith, he is also liable to pay for the hospitalization expenses incurred by B which clearly originated from the breach although they might not have been reasonably contemplated by the parties at the time they entered into the contract. (4) Code of Commerce provisions. — The principle of limited liability in maritime law is enunciated in the following provisions of the Code of Commerce: 70 OBLIGATIONS Art. 1173 “Art. 587. The ship agent shall also be civilly liable for the indemnities in favor of third persons which may arise from the conduct of the captain in the care of goods which he loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel with all the equipments and the freight it may have earned during the voyage.’’ “Art. 590. The co-owners of a vessel shall be civilly liable in the proportion of their interests in the common fund for the results of the acts of the captain referred to in Art. 587.’’ “Art. 837. The civil liability incurred by shipowners in the case prescribed in this section, shall be understood as limited to the value with all the appurtenances and the freightage served during the voyage.’’ Article 837 applies the principle of limited liability in cases of collision, hence, Articles 587 and 59