Far East Bank and Trust Company vs. Court of Appeals

In culpa contractual, moral damages are recoverable only where the defendant acted fraudulently or in bad faith, and Article 2220 of the Civil Code prevails over the general principle in Article 21; simple or inadvertent negligence in breaching a credit card contract does not suffice. Exemplary damages likewise require wanton, fraudulent, reckless, oppressive, or malevolent conduct, while nominal damages may be awarded to vindicate a violated right.

Luis A. Luna was a FAREASTCARD holder with Far East Bank and Trust Company, having applied for and been issued the card at the bank's Pasig Branch in October 1986; at his request, the bank issued a supplemental card to Clarita S. Luna. Their relationship with FEBTC was contractual, governed by the credit card agreement and the bank's internal security procedures for lost cards. The dispute concerns the Civil Code rules on moral, exemplary, and nominal damages for breach of contract, particularly Articles 2220, 2221, and 2232.

In October 1986, Luis A. Luna applied for and was issued a FAREASTCARD by Far East Bank and Trust Company at its Pasig Branch. At his request, the bank also issued a supplemental card to Clarita S. Luna. The cards were governed by the bank's credit card arrangement, including its internal security procedures for lost cards.

In August 1988, Clarita lost her credit card. FEBTC was immediately informed. To replace the lost card, Clarita submitted an affidavit of loss. Under the bank's internal security procedures and policy, the lost card, along with the principal card, would meanwhile be recorded as a "Hot Card" or "Cancelled Card" in its master file.

On October 6, 1988, Luis tendered a despedida lunch for a close friend, a Filipino-American, and another guest at the Bahia Rooftop Restaurant of the Hotel Intercontinental Manila. To pay for the lunch, Luis presented his FAREASTCARD to the attending waiter, who promptly had it verified through a telephone call to the bank's Credit Card Department. The card was not honored, and Luis was forced to pay in cash the bill amounting to P588.13. He felt embarrassed by the incident.

In a letter dated October 11, 1988, Luis, through counsel, demanded from FEBTC the payment of damages. Adrian V. Festejo, a vice-president of the bank, expressed the bank's apologies to Luis. In his letter dated November 3, 1988, Festejo stated that when a card is reported lost, FAREASTCARD undertakes the necessary action to avert its unauthorized use, such as tagging the card as hotlisted, and that an investigation revealed FAREASTCARD failed to inform Luis about its security policy; an overzealous employee of the bank's Credit Card Department did not consider the possibility that it may have been Luis who was presenting the card at that time, for which reason the unfortunate incident occurred. Festejo also sent a letter to the Manager of the Bahia Rooftop Restaurant to assure the latter that private respondents were very valued clients of FEBTC. William Anthony King, Food and Beverage Manager of the Intercontinental Hotel, wrote back to say that the credibility of private respondent had never been in question; a copy of this reply was sent to Luis by Festejo.

Still evidently feeling aggrieved, private respondents filed a complaint for damages with the Regional Trial Court of Pasig against FEBTC on December 5, 1988. On March 30, 1990, the RTC rendered a decision ordering FEBTC to pay private respondents P300,000.00 moral damages, P50,000.00 exemplary damages, and P20,000.00 attorney's fees. The trial court and the Court of Appeals found FEBTC remiss in neglecting to personally inform Luis of his own card's cancellation, but their findings did not sufficiently indicate any deliberate intent on the part of FEBTC to cause harm to private respondents.

• Moral Damages in Contractual Breach: Whether moral damages may be awarded for FEBTC's failure to honor Luis A. Luna's credit card absent proof of fraud, bad faith, or malice.
• Article 21 and Article 2220: Whether Article 21 of the Civil Code, in relation to Articles 2217 and 2219, may justify moral damages for a contractual breach notwithstanding Article 2220's requirement of fraud or bad faith.
• Quasi-Delict Theory: Whether the breach of the credit card contract may be treated as a quasi-delict to allow moral damages despite the absence of fraud or bad faith.
• Exemplary Damages: Whether exemplary damages may be awarded where FEBTC's failure to honor the card was not shown to be wanton, fraudulent, reckless, oppressive, or malevolent.
• Nominal Damages: Whether nominal damages may be awarded to vindicate Luis A. Luna's right violated by FEBTC's failure to honor the credit card.
• Attorney's Fees: Whether the award of attorney's fees may be sustained.

• Moral Damages in Contractual Breach: No. In culpa contractual, Article 2220 requires fraud or bad faith; simple negligence is insufficient. FEBTC's failure to personally notify Luis was at most simple negligence, not gross enough to amount to malice or bad faith.
• Article 21 and Article 2220: No. Article 21 requires a conscious act to cause harm and must give way to the specific provision of Article 2220 in contractual relations; no deliberate disregard approximating fraud or bad faith was shown.
• Quasi-Delict Theory: No. The claim was predicated solely on the contractual relationship; without the contract, the act or omission complained of would not stand as an independent actionable tort.
• Exemplary Damages: No. Article 2232 requires wanton, fraudulent, reckless, oppressive, or malevolent conduct; such conduct was not shown.
• Nominal Damages: Yes. Article 2221 allows nominal damages to vindicate a violated right; FEBTC's failure to honor the card violated Luis's right, warranting P5,000.00.
• Attorney's Fees: Yes. Article 2208 permits reasonable attorney's fees where just and equitable; no abuse of discretion was shown in allowing the trial court's award.

• Moral Damages in Contractual Breach: In culpa contractual, moral damages may be recovered where the defendant is shown to have acted in bad faith or with malice in the breach of the contract. Article 2220 provides that willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due, and the same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. Bad faith in this context includes gross, but not simple, negligence. The bank was remiss in neglecting to personally inform Luis of his own card's cancellation. However, nothing in the findings of the trial court and the appellate court sufficiently indicated any deliberate intent on the part of FEBTC to cause harm to private respondents. Neither could FEBTC's negligence in failing to give personal notice to Luis be considered so gross as to amount to malice or bad faith. Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity; it is different from the negative idea of negligence in that malice or bad faith contemplates a state of mind affirmatively operating with furtive design or ill will. The award of moral damages was therefore inordinate and substantially devoid of legal basis.

• Article 21 and Article 2220: The Court acknowledged previous rulings, such as American Express International, Inc. vs. Intermediate Appellate Court and Bank of Philippine Islands vs. Intermediate Appellate Court, sanctioning the application of Article 21, in relation to Articles 2217 and 2219, to a contractual breach similar to the case at bench. Article 21 contemplates a conscious act to cause harm. Even if the provision could properly relate to a breach of contract, its application can be warranted only when the defendant's disregard of his contractual obligation is so deliberate as to approximate a degree of misconduct certainly no less worse than fraud or bad faith. Most importantly, Article 21 is a mere declaration of a general principle in human relations that must give way to the specific provision of Article 2220 authorizing the grant of moral damages in culpa contractual solely when the breach is due to fraud or bad faith. Fores vs. Miranda explained with clarity the predominance that should be given to Article 2220 in contractual relations: proof of bad faith or fraud, i.e., wanton or deliberately injurious conduct, is essential to justify an award of moral damages; a breach of contract cannot be considered included in the descriptive term "analogous cases" used in Article 2219, not only because Article 2220 specifically provides for the damages caused by contractual breach, but because the definition of quasi-delict in Article 2176 expressly excludes cases where there is a pre-existing contractual relation between the parties. Mere carelessness of the obligor does not per se constitute or justify an inference of malice or bad faith. To award moral damages for breach of contract without proof of bad faith or malice on the part of the defendant, as required by Article 2220, would violate the clear provisions of the law and constitute unwarranted judicial legislation.

• Quasi-Delict Theory: The Court did not overlook the rule that a quasi-delict can be the cause for breaching a contract that might thereby permit the application of applicable principles on tort even where there is a pre-existing contract between the plaintiff and the defendant, as in Philippine Airlines vs. Court of Appeals, Singson vs. Bank of Phil. Islands, and Air France vs. Carrascoso. This doctrine cannot improve private respondents' case, however, for it can aptly govern only where the act or omission complained of would constitute an actionable tort independently of the contract. The test is whether, without a pre-existing contract between two parties, an act or omission can nonetheless amount to an actionable tort by itself; if so, the fact that the parties are contractually bound is no bar to the application of quasi-delict provisions. Here, private respondents' damage claim was predicated solely on their contractual relationship; without such agreement, the act or omission complained of cannot by itself be held to stand as a separate cause of action or as an independent actionable tort.

• Exemplary Damages: Exemplary or corrective damages are intended to serve as an example or as correction for the public good in addition to moral, temperate, liquidated, or compensatory damages under Article 2229. In criminal offenses, exemplary damages are imposed when the crime is committed with one or more aggravating circumstances under Article 2230. In quasi-delicts, such damages are granted if the defendant is shown to have been so guilty of gross negligence as to approximate malice under Article 2231. In contracts and quasi-contracts, the court may award exemplary damages if the defendant is found to have acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner under Article 2232. Given these premises and the factual circumstances obtaining, it would be just as arduous to sustain the exemplary damages granted by the courts below.

• Nominal Damages: Nevertheless, the bank's failure, even perhaps inadvertent, to honor its credit card issued to Luis should entitle him to recover a measure of damages sanctioned under Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him. The Court accordingly awarded P5,000.00 by way of nominal damages.

• Attorney's Fees: Reasonable attorney's fees may be recovered where the court deems such recovery to be just and equitable under Article 2208. No issue of sound discretion on the part of the appellate court was found in allowing the award thereof by the trial court.

• Moral damages in culpa contractual require bad faith or malice — In a breach of contract, moral damages are recoverable only where the defendant acted fraudulently or in bad faith; bad faith includes gross, but not simple, negligence. The Court applied this rule by holding that FEBTC's failure to personally notify Luis of the cancellation of his card was at most simple negligence and did not amount to malice or bad faith.

• Article 2220 prevails over Article 21 in contractual relations — Article 21 is a mere declaration of a general principle in human relations and must give way to the specific provision of Article 2220, which authorizes moral damages in culpa contractual solely when the breach is due to fraud or bad faith. The Court applied this by rejecting the award of moral damages notwithstanding prior rulings that had applied Article 21 to similar contractual breaches.

• Malice or bad faith defined — Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity; it is different from the negative idea of negligence in that malice or bad faith contemplates a state of mind affirmatively operating with furtive design or ill will. The Court used this definition to distinguish FEBTC's inadvertent failure from actionable bad faith.

• Quasi-delict independent tort test — Where, without a pre-existing contract between two parties, an act or omission can nonetheless amount to an actionable tort by itself, the fact that the parties are contractually bound is no bar to the application of quasi-delict provisions. The doctrine cannot apply where the damage claim is predicated solely on the contractual relationship and the act or omission would not stand as an independent actionable tort. The Court applied this test to reject the quasi-delict theory.

• Exemplary damages in contracts — In contracts and quasi-contracts, the court may award exemplary damages if the defendant is found to have acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner under Article 2232. The Court found no such conduct and deleted the exemplary damages awarded below.

• Nominal damages — Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him under Article 2221. The Court applied this by awarding P5,000.00 nominal damages for the bank's failure to honor the credit card.

• Attorney's fees — Reasonable attorney's fees may be recovered where the court deems such recovery to be just and equitable under Article 2208. The Court sustained the award of attorney's fees.

• "In culpa contractual, moral damages may be recovered where the defendant is shown to have acted in bad faith or with malice in the breach of the contract." — This states the ratio decidendi for denying moral damages: the governing standard in contractual breach is bad faith or malice, not mere negligence.

• "Bad faith, in this context, includes gross, but not simple, negligence." — This defines the threshold for bad faith in culpa contractual and was applied to hold that FEBTC's failure to notify Luis personally was not sufficient.

• "Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity; it is different from the negative idea of negligence in that malice or bad faith contemplates a state of mind affirmatively operating with furtive design or ill will." — This is the Court's canonical formulation distinguishing bad faith from negligence and supports the deletion of moral damages.

• "Most importantly, Article 21 is a mere declaration of a general principle in human relations that clearly must, in any case, give way to the specific provision of Article 2220 of the Civil Code authorizing the grant of moral damages in culpa contractual solely when the breach is due to fraud or bad faith." — This resolves the relationship between Articles 21 and 2220 and limits the application of Article 21 to contractual breaches.

• "Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him." — This defines nominal damages and justifies the P5,000.00 award notwithstanding the absence of bad faith.

• Fores vs. Miranda, 105 Phil. 266, 273-276 — Quoted at length; establishes that Article 2220 prevails in contractual relations and that moral damages require proof of bad faith or fraud, not mere negligence.

• American Express International, Inc. vs. Intermediate Appellate Court, 167 SCRA 209 — Cited as a prior ruling sanctioning the application of Article 21 in relation to Articles 2217 and 2219 to a similar contractual breach; limited by the holding that Article 21 must give way to Article 2220.

• Bank of Philippine Islands vs. Intermediate Appellate Court, 206 SCRA 408 — Cited together with American Express for the same prior application of Article 21 to contractual breach, likewise limited by the Court's ruling.

• Philippine Airlines vs. Court of Appeals, 106 SCRA 143 — Cited for the rule that negligence may occasionally be so gross as to amount to malice, and for the quasi-delict doctrine in relation to contractual breach.

• Singson vs. Bank of Phil. Islands, 23 SCRA 1117 — Cited for the rule that a quasi-delict can underlie a breach of contract where the act or omission is independently tortious.

• Air France vs. Carrascoso, 18 SCRA 155 — Cited for the same quasi-delict doctrine in relation to a pre-existing contract.

• Necesito vs. Paras, 104 Phil. 75 — Cited for the rule that moral damages are not recoverable in damage actions predicated on a breach of the contract of transportation absent proof of bad faith or malice, except in the case of death of a passenger.

• Article 2220, Civil Code — Provides that willful injury to property may be a legal ground for moral damages if justly due, and that the same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. Applied to deny moral damages because FEBTC did not act with fraud or bad faith.

• Article 21, Civil Code — Declares that any person who willfully causes loss or injury to another in a manner contrary to morals, good customs, or public policy shall compensate the latter for the damage. Held to be a general principle that must give way to Article 2220 in contractual relations.

• Article 2217, Civil Code — Defines moral damages to include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Cited in relation to Article 21 but not made the basis for an award.

• Article 2219, Civil Code — Enumerates the cases in which moral damages may be recovered, including analogous cases. Held not to include breach of contract because Article 2220 specifically governs contractual breach.

• Article 2176, Civil Code — Defines quasi-delict as fault or negligence causing damage where there is no pre-existing contractual relation between the parties. Applied to reject the quasi-delict theory because the parties had a credit card contract.

• Article 2201, Civil Code — Distinguishes damages for which an obligor in good faith is liable from damages for which an obligor in fraud, bad faith, malice, or wanton attitude is responsible. Cited to support the distinction between negligence and bad faith.

• Article 2229, Civil Code — Provides that exemplary or corrective damages are imposed as an example or correction for the public good in addition to moral, temperate, liquidated, or compensatory damages. Cited in denying exemplary damages.

• Article 2230, Civil Code — Provides that in criminal offenses, exemplary damages are imposed when the crime is committed with one or more aggravating circumstances. Cited as part of the rules on exemplary damages.

• Article 2231, Civil Code — Provides that in quasi-delicts, exemplary damages may be granted if the defendant is shown to have been so guilty of gross negligence as to approximate malice. Cited as part of the rules on exemplary damages.

• Article 2232, Civil Code — Provides that in contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Applied to deny exemplary damages.

• Article 2221, Civil Code — Provides that nominal damages are adjudicated to vindicate or recognize a right violated or invaded by the defendant, not to indemnify for loss. Applied to award P5,000.00 nominal damages.

• Article 2208, Civil Code — Provides that reasonable attorney's fees may be recovered where the court deems such recovery just and equitable. Applied to sustain the award of attorney's fees.

• Article 1764, Civil Code — Cited in the quoted discussion in Fores vs. Miranda as the exception allowing moral damages in the case of death of a passenger caused by breach of contract by a common carrier.

Narvasa, C.J., Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno, Kapunan, Mendoza and Francisco, JJ., concur.