G.R. No.

L-24968 April 27, 1972

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.

5. That release shall be made at the discretion of the Rehabilitation Finance

Corporation, subject to availability of funds, and as the construction of the factory
buildings progresses, to be certified to by an appraiser of this Corporation;"

MAKALINTAL, J.:p

Saura, Inc. was officially notified of the resolution on January 9, 1954. The day
before, however, evidently having otherwise been informed of its approval, Saura,
Inc. wrote a letter to RFC, requesting a modification of the terms laid down by it,
namely: that in lieu of having China Engineers, Ltd. (which was willing to assume
liability only to the extent of its stock subscription with Saura, Inc.) sign as co-maker
on the corresponding promissory notes, Saura, Inc. would put up a bond for
P123,500.00, an amount equivalent to such subscription; and that Maria S. Roca
would be substituted for Inocencia Arellano as one of the other co-makers, having
acquired the latter's shares in Saura, Inc.

In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was
rendered on June 28, 1965 sentencing defendant Development Bank of the
Philippines (DBP) to pay actual and consequential damages to plaintiff Saura Import
and Export Co., Inc. in the amount of P383,343.68, plus interest at the legal rate from
the date the complaint was filed and attorney's fees in the amount of P5,000.00. The
present appeal is from that judgment.

In view of such request RFC approved Resolution No. 736 on February 4, 1954,
designating of the members of its Board of Governors, for certain reasons stated in
the resolution, "to reexamine all the aspects of this approved loan ... with special
reference as to the advisability of financing this particular project based on present
conditions obtaining in the operations of jute mills, and to submit his findings thereon
at the next meeting of the Board."

In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the
Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an
industrial loan of P500,000.00, to be used as follows: P250,000.00 for the
construction of a factory building (for the manufacture of jute sacks); P240,900.00 to
pay the balance of the purchase price of the jute mill machinery and equipment; and
P9,100.00 as additional working capital.

On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again
agreed to act as co-signer for the loan, and asked that the necessary documents be
prepared in accordance with the terms and conditions specified in Resolution No.
145. In connection with the reexamination of the project to be financed with the loan
applied for, as stated in Resolution No. 736, the parties named their respective
committees of engineers and technical men to meet with each other and undertake
the necessary studies, although in appointing its own committee Saura, Inc. made the
observation that the same "should not be taken as an acquiescence on (its) part to
novate, or accept new conditions to, the agreement already) entered into," referring to
its acceptance of the terms and conditions mentioned in Resolution No. 145.

Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiffappellee.
Jesus A. Avancea and Hilario G. Orsolino for defendant-appellant.

Parenthetically, it may be mentioned that the jute mill machinery had already been
purchased by Saura on the strength of a letter of credit extended by the Prudential
Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure its
release without first paying the draft, Saura, Inc. executed a trust receipt in favor of
the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application
for P500,000.00, to be secured by a first mortgage on the factory building to be
constructed, the land site thereof, and the machinery and equipment to be installed.
Among the other terms spelled out in the resolution were the following:
1. That the proceeds of the loan shall be utilized exclusively for the
following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00
T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and
Gregoria Estabillo and China Engineers, Ltd. shall sign the promissory notes jointly
with the borrower-corporation;

On April 13, 1954 the loan documents were executed: the promissory note, with F.R.
Halling, representing China Engineers, Ltd., as one of the co-signers; and the
corresponding deed of mortgage, which was duly registered on the following April 17.
It appears, however, that despite the formal execution of the loan agreement the
reexamination contemplated in Resolution No. 736 proceeded. In a meeting of the
RFC Board of Governors on June 10, 1954, at which Ramon Saura, President of
Saura, Inc., was present, it was decided to reduce the loan from P500,000.00 to
P300,000.00. Resolution No. 3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc.
under Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd.
Res. No. 736, c.s., authorizing the re-examination of all the various aspects of the
loan granted the Saura Import & Export Co. under Resolution No. 145, c.s., for the
purpose of financing the manufacture of jute sacks in Davao, with special reference
as to the advisability of financing this particular project based on present conditions
obtaining in the operation of jute mills, and after having heard Ramon E. Saura and
after extensive discussion on the subject the Board, upon recommendation of the
Chairman, RESOLVED that the loan granted the Saura Import & Export Co. be
REDUCED from P500,000 to P300,000 and that releases up to P100,000 may be
authorized as may be necessary from time to time to place the factory in actual

operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not
inconsistent herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the
promissory note for China Engineers Ltd. jointly and severally with the other RFC that
his company no longer to of the loan and therefore considered the same as cancelled
as far as it was concerned. A follow-up letter dated July 2 requested RFC that the
registration of the mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00
be granted. The request was denied by RFC, which added in its letter-reply that it was
"constrained to consider as cancelled the loan of P300,000.00 ... in view of a
notification ... from the China Engineers Ltd., expressing their desire to consider the
loan insofar as they are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and
informed RFC that China Engineers, Ltd. "will at any time reinstate their signature as
co-signer of the note if RFC releases to us the P500,000.00 originally approved by
you.".

Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955:
(1) stating that according to a special study made by the Bureau of Forestry
"kenaf will not be available in sufficient quantity this year or probably even next year;"
(2) requesting "assurances (from RFC) that my company and associates will be able
to bring in sufficient jute materials as may be necessary for the full operation of the
jute mill;" and (3) asking that releases of the loan be made as follows:
a) For the payment of the receipt
machineries with the Prudential Bank &

The action thus taken was communicated to Saura, Inc. in a letter of RFC dated
December 22, 1954, wherein it was explained that the certification by the Department
of Agriculture and Natural Resources was required "as the intention of the original
approval (of the loan) is to develop the manufacture of sacks on the basis of locally
available raw materials." This point is important, and sheds light on the subsequent
actuations of the parties. Saura, Inc. does not deny that the factory he was building in
Davao was for the manufacture of bags from local raw materials. The cover page of
its brochure (Exh. M) describes the project as a "Joint venture by and between the
Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance,
manage and operate aKenaf mill plant, to manufacture copra and corn bags, runners,
floor mattings, carpets, draperies; out of 100% local raw materials, principal kenaf."
The explanatory note on page 1 of the same brochure states that, the venture "is the
first serious attempt in this country to use 100% locally grown raw materials
notably kenaf which is presently grown commercially in theIsland of Mindanao where
the proposed jutemill is located ..."
This fact, according to defendant DBP, is what moved RFC to approve the loan
application in the first place, and to require, in its Resolution No. 9083, a certification
from the Department of Agriculture and Natural Resources as to the availability of
local raw materials to provide adequately for the requirements of the factory. Saura,

mill

(For immediate release)

b)
For
the
purchase
of
materials
and
equipment
per
attached
list
to
enable
the
jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the opening of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.

That in view of observations made of the shortage and high cost of

imported raw materials, the Department of Agriculture and Natural
Resources shall certify to the following:

2. That there is prospect of increased production thereof to provide

adequately for the requirements of the factory."

jute

Trust Company P250,000.00

On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the
original amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing
to sign the promissory notes jointly with the borrower-corporation," but with the
following proviso:

1. That the raw materials needed by the borrower-corporation to

carry out its operation are available in the immediate vicinity; and

for

3) P17,586.09 to be released as soon as the

mill is ready to operate.
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Dear Sirs:
This is with reference to your letter of January 21, 1955,
regarding the release of your loan under consideration of
P500,000. As stated in our letter of December 22, 1954,
the releases of the loan, if revived, are proposed to be
made from time to time, subject to availability of funds
towards the end that the sack factory shall be placed in
actual operating status. We shall be able to act on your
request for revised purpose and manner of releases upon
re-appraisal of the securities offered for the loan.
With respect to our requirement that the Department of
Agriculture and Natural Resources certify that the raw
materials needed are available in the immediate vicinity
and that there is prospect of increased production thereof
to provide adequately the requirements of the factory, we
wish to reiterate that the basis of the original approval is to
develop the manufacture of sacks on the basis of the
locally available raw materials. Your statement that you
will have to rely on the importation of jute and your request
that we give you assurance that your company will be able
to bring in sufficient jute materials as may be necessary
for the operation of your factory, would not be in line with
our principle in approving the loan.

With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not
pursue the matter further. Instead, it requested RFC to cancel the mortgage, and so,
on June 17, 1955 RFC executed the corresponding deed of cancellation and
delivered it to Ramon F. Saura himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a
mortgage contract, executed on August 6, 1954, over the same property in favor of
the Prudential Bank and Trust Co., under which contract Saura, Inc. had up to
December 31 of the same year within which to pay its obligation on the trust receipt
heretofore mentioned. It appears further that for failure to pay the said obligation the
Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled
at the request of Saura, Inc., the latter commenced the present suit for damages,
alleging failure of RFC (as predecessor of the defendant DBP) to comply with its
obligation to release the proceeds of the loan applied for and approved, thereby
preventing the plaintiff from completing or paying contractual commitments it had
entered into, in connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected
contract between the parties and that the defendant was guilty of breach thereof. The
defendant pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of
action had prescribed, or that its claim had been waived or abandoned; (2) that there
was no perfected contract; and (3) that assuming there was, the plaintiff itself did not
comply with the terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in
Article 1934 of the Civil Code, which provides:
ART. 1954. An accepted promise to deliver something, by way of
commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perferted until the delivery of
the object of the contract.
There was undoubtedly offer and acceptance in this case: the application of Saura,
Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and the
corresponding mortgage was executed and registered. But this fact alone falls short
of resolving the basic claim that the defendant failed to fulfill its obligation and the
plaintiff is therefore entitled to recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the
assumption that the factory to be constructed would utilize locally grown raw
materials, principally kenaf. There is no serious dispute about this. It was in line with
such assumption that when RFC, by Resolution No. 9083 approved on December 17,
1954, restored the loan to the original amount of P500,000.00. it imposed two
conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to
carry out its operation are available in the immediate vicinity; and (2) that there is
prospect of increased production thereof to provide adequately for the requirements
of the factory." The imposition of those conditions was by no means a deviation from
the terms of the agreement, but rather a step in its implementation. There was
nothing in said conditions that contradicted the terms laid down in RFC Resolution
No. 145, passed on January 7, 1954, namely "that the proceeds of the loan shall
be utilizedexclusively for the following purposes: for construction of factory building
P250,000.00; for payment of the balance of purchase price of machinery and
equipment P240,900.00; for working capital P9,100.00." Evidently Saura, Inc.

realized that it could not meet the conditions required by RFC, and so wrote its letter
of January 21, 1955, stating that local jute "will not be able in sufficient quantity this
year or probably next year," and asking that out of the loan agreed upon the sum of
P67,586.09 be released "for raw materials and labor." This was a deviation from the
terms laid down in Resolution No. 145 and embodied in the mortgage contract,
implying as it did a diversion of part of the proceeds of the loan to purposes other
than those agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the negotiations
which had been going on for the implementation of the agreement reached an
impasse. Saura, Inc. obviously was in no position to comply with RFC's conditions. So
instead of doing so and insisting that the loan be released as agreed upon, Saura,
Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The
action thus taken by both parties was in the nature cf mutual desistance what
Manresa terms "mutuo disenso" 1 which is a mode of extinguishing obligations. It is
a concept that derives from the principle that since mutual agreement can create a
2
contract, mutual disagreement by the parties can cause its extinguishment.
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest
against any alleged breach of contract by RFC, or even point out that the latter's
stand was legally unjustified. Its request for cancellation of the mortgage carried no
reservation of whatever rights it believed it might have against RFC for the latter's
non-compliance. In 1962 it even applied with DBP for another loan to finance a rice
and corn project, which application was disapproved. It was only in 1964, nine years
after the loan agreement had been cancelled at its own request, that Saura, Inc.
brought this action for damages.All these circumstances demonstrate beyond doubt
that the said agreement had been extinguished by mutual desistance and that on
the initiative of the plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to consider and resolve the
other issues raised in the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed,
with costs against the plaintiff-appellee.

G.R. No. L-26578 January 28, 1974

LEGARDA HERMANOS and JOSE LEGARDA, petitioners,
vs.
FELIPE SALDAA and COURT OF APPEALS (FIFTH DIVISION) * respondents.
Manuel Y. Macias for petitioners.
Mario E. Ongkiko for private respondent.

TEEHANKEE, J.:
The Court, in affirming the decision under review of the Court of Appeals, which holds
that the respondent buyer of two small residential lots on installment contracts on a
ten-year basis who has faithfully paid for eight continuous years on the principal alone
already more than the value of one lot, besides the larger stipulated interests on both
lots, is entitled to the conveyance of one fully paid lot of his choice, rules that the
judgment is fair and just and in accordance with law and equity.
The action originated as a complaint for delivery of two parcels of land in Sampaloc,
Manila and for execution of the corresponding deed of conveyance after payment of
the balance still due on their purchase price. Private respondent as plaintiff had
entered into two written contracts with petitioner Legarda Hermanos as defendant
subdivision owner, whereby the latter agreed to sell to him Lots Nos. 7 and 8 of block
No. 5N of the subdivision with an area of 150 square meters each, for the sum of
P1,500.00 per lot, payable over the span of ten years divided into 120 equal monthly
installments of P19.83 with 10% interest per annum, to commence on May 26, 1948,
date of execution of the contracts. Subsequently, Legarda Hermanos partitioned the
subdivision among the brothers and sisters, and the two lots were among those
allotted to co-petitioner Jose Legarda who was then included as co-defendant in the
action.
It is undisputed that respondent faithfully paid for eight continuous years about 95 (of
the stipulated 120) monthly installments totalling P3,582.06 up to the month of
February, 1956, which as per petitioners' own statement of account, Exhibit "1", was
applied to respondent's account (without distinguishing the two lots), as follows:
To interests P1,889.78
To principal 1,682.28
Total P3,582.06 1
It is equally undisputed that after February, 1956 up to the filing of respondent's
complaint in the Manila court of first instance in 1961, respondent did not make
further payments. The account thus shows that he owed petitioners the sum of
P1,317.72 on account of the balance of the purchase price (principal) of the two lots
(in the total sum of P3,000.00), although he had paid more than the stipulated
purchase price of P1,500.00 for one lot.
Almost five years later, on February 2, 1961 just before the filing of the action,
respondent wrote petitioners stating that his desire to build a house on the lots was
prevented by their failure to introduce improvements on the subdivision as "there is
still no road to these lots," and requesting information of the amount owing to update
his account as "I intend to continue paying the balance due on said lots."

Petitioners replied in their letter of February 11, 1961 that as respondent had failed to
complete total payment of the 120 installments by May, 1958 as stipulated in the
contracts to sell, "pursuant to the provisions of both contracts all the amounts paid in
accordance with the agreement together with the improvements on the premises
have been considered as rents paid and as payment for damages suffered by your
2
failure," and "Said cancellation being in order, is hereby confirmed."
From the adverse decision of July 17, 1963 of the trial court sustaining petitioners'
cancellation of the contracts and dismissing respondent's complaint, respondent
appellate court on appeal rendered its judgment of July 27, 1966 reversing the lower
court's judgment and ordering petitioners "to deliver to the plaintiff possession of one
of the two lots, at the choice of defendants, and to execute the corresponding deed of
conveyance to the plaintiff for the said lot," 3 ruling as follows:
During the hearing, plaintiff testified that he suspended payments
because the lots were not actually delivered to him, or could not be,
due to the fact that they were completely under water; and also
because the defendants-owners failed to make improvements on
the premises, such as roads, filling of the submerged areas, etc.,
despite repeated promises of their representative, the said Mr.
Cenon. As regards the supposed cancellation of the contracts,
plaintiff averred that no demand has been made upon him
regarding the unpaid installments, and for this reason he could not
be declared in default so as to entitle the defendants to cancel the
said contracts.
The issue, therefore, is: Under the above facts, may defendants be
compelled, or not, to allow plaintiff to complete payment of the
purchase price of the two lots in dispute and thereafter to execute
the final deeds of conveyance thereof in his favor?
xxx xxx xxx
Whether or not plaintiffs explanation for his failure to pay the
remaining installments is true, considering the circumstances
obtaining in this case, we elect to apply the broad principles
of equity and justice. In the case at bar, we find that the plaintiff has
paid the total sum of P3,582.06 including interests, which is
even more than the value of the two lots. And even if the sum
applied to the principal alone were to be considered, which was of
the total ofP1,682.28, the same was already more than the value
of one lot, which is P1,500.00. The only balance due on both lots
was P1,317.72, which was even less than the value of one lot. We
will consider as fully paid by the plaintiff at least one of the two lots,
at the choice of thedefendants. This is more in line with good
conscience than a total denial to the plaintiff of a little token of what
he has paid the defendant Legarda Hermanos. 4
Hence, the present petition for review, wherein petitioners insist on their right of
cancellation under the "plainly valid written agreements which constitute the law
between the parties" as against "the broad principles of equity and justice" applied by
the appellate court. Respondent on the other hand while adhering to the validity of the
5
doctrine of the Caridad Estates cases which recognizes the right of a vendor of land
under a contract to sell to cancel the contract upon default, with forfeiture of the

installments paid as rentals, disputes its applicability herein contending that here
petitioners-sellers were equally in default as the lots were "completely under water"
and "there is neither evidence nor a finding that the petitioners in fact cancelled the
6
contracts previous to receipt of respondent's letter."
The Court finds that the appellate court's judgment finding that of the total sum of
P3,582.06 (including interests of P1,889.78) already paid by respondent (which
was more than the value of two lots), the sum applied by petitioners to the principal
alone in the amount of P1,682.28 was already more than the value of one lot
of P1,500.00 and hence one of the two lots as chosen by respondent would be
considered asfully paid, is fair and just and in accordance with law and equity.
As already stated, the monthly payments for eight years made by respondent were
applied to his account without specifying or distinguishing between the two lots
subject of the two agreements under petitioners' own statement of account, Exhibit
"1". 7 Even considering respondent as having defaulted after February 1956, when he
suspended payments after the 95th installment, he had as of the already paid by way
ofprincipal (P1,682.28) more than the full value of one lot (P1,500.00). The judgment
recognizing this fact and ordering the conveyance to him of one lot of his choice while
also recognizing petitioners' right to retain the interests of P1,889.78 paid by him for
eight years on both lots, besides the cancellation of the contract for one lot which thus
reverts to petitioners, cannot be deemed to deny substantial justice to petitioners nor
to defeat their rights under the letter and spirit of the contracts in question.
8

The Court's doctrine in the analogous case of J.M. Tuason & Co. Inc. vs. Javier is
fully applicable to the present case, with the respondent at bar being
granted lesser benefits, since no rescission of contract was therein permitted. There,
where the therein buyer-appellee identically situated as herein respondent buyer had
likewise defaulted in completing the payments after having religiously paid the
stipulated monthly installments for almost eight years and notwithstanding that the
seller-appellant had duly notified the buyer of the rescission of the contract to sell, the
Court upheld the lower court's judgment denying judicial confirmation of the rescission
and instead granting the buyer an additional grace period of sixty days from notice of
judgment to pay all the installment payments in arrears together with the stipulated
10% interest per annum from the date of default,APART from reasonable attorney's
fees and costs, which payments, the Court observed, would have the plaintiff-seller
"recover everything due thereto, pursuant to its contract with the defendant, including
such damages as the former may have suffered in consequence of the latter's
default."
In affirming, the Court held that "Regardless, however, of the propriety of applying
said Art. 1592 thereto, We find that plaintiff herein has not been denied substantial
justice, for, according to Art. 1234 of said Code: 'If the obligation has
been substantially performed in good faith, the obligor may recover as though there
had been a strict and complete fulfillment, less damages suffered by the obligee,'"
and "that in the interest of justice and equity, the decision appealed from may be
9
upheld upon the authority of Article 1234 of the Civil Code."
ACCORDINGLY, the appealed judgment of the appellate court is hereby affirmed.
Without pronouncement as to costs.

G.R. No. 121413

January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK

OF ASIA AND AMERICA),petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK,
N.A., respondents.

G.R. No. 121479

January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff,

vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL
INTERNATIONAL BANK,respondents.

G.R. No. 128604

January 29, 2001

FORD PHILIPPINES, INC., petitioner,

vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and
COURT OF APPEALS, respondents.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the
drawee bank, CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial
International Bank (PCIBank) [formerly Insular Bank of Asia and America], the value
of several checks payable to the Commissioner of Internal Revenue, which were
embezzled allegedly by an organized syndicate.1wphi1.nt
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995
1
Decision of the Court of Appeals in CA-G.R. CV No. 25017, entitled "Ford
Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now
Philipppine Commercial International Bank), and the August 8, 1995
Resolution,2 ordering the collecting bank, Philippine Commercial International Bank,
to pay the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996
3
4
Decision of the Court of Appeals and its March 5, 1997 Resolution in CA-G.R. No.
28430 entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial
International Bank," affirming in toto the judgment of the trial court holding the
defendant drawee bank, Citibank, N.A., solely liable to pay the amount of
P12,163,298.10 as damages for the misapplied proceeds of the plaintiff's Citibanl
Check Numbers SN-10597 and 16508.

of Internal Revenue as payment of plaintiff;s percentage or manufacturer's

sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the degendant IBAA (now PCIBank)
and was subsequently cleared at the Central Bank. Upon presentment with
the defendant Citibank, the proceeds of the check was paid to IBAA as
collecting or depository bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or
received by the payee thereof, the Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of
Internal Revenue, the plaintiff was compelled to make a second payment to
the Bureau of Internal Revenue of its percentage/manufacturers' sales taxes
for the third quarter of 1977 and that said second payment of plaintiff in the
amount of P4,746,114.41 was duly received by the Bureau of Internal
Revenue.
It is further admitted by defendant Citibank that during the time of the
transactions in question, plaintiff had been maintaining a checking account
with defendant Citibank; that Citibank Check No. SN-04867 which was
drawn and issued by the plaintiff in favor of the Commissioner of Internal
Revenue was a crossed check in that, on its face were two parallel lines and
written in between said lines was the phrase "Payee's Account Only"; and
that defendant Citibank paid the full face value of the check in the amount of
P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff's percentage tax
for the last quarter of 1977, the Bureau of Internal Revenue issued Revenue
Tax Receipt No. 18747002, dated October 20, 1977, designating therein in
Muntinlupa, Metro Manila, as the authorized agent bank of Metrobanl,
Alabang branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together
with the Revenue Tax Receipt No. 18747002, was deposited with defendant
IBAA, through its Ermita Branch. The latter accepted the check and sent it to
the Central Clearing House for clearing on the samd day, with the
indorsement at the back "all prior indorsements and/or lack of indorsements
guaranteed." Thereafter, defendant IBAA presented the check for payment
to defendant Citibank on same date, December 19, 1977, and the latter paid
the face value of the check in the amount of P4,746,114.41. Consequently,
the amount of P4,746,114.41 was debited in plaintiff's account with the
defendant Citibank and the check was returned to the plaintiff.

The stipulated facts submitted by the parties as accepted by the Court of Appeals are
as follows:

Upon verification, plaintiff discovered that its Citibank Check No. SN-04867
in the amount of P4,746,114.41 was not paid to the Commissioner of
Internal Revenue. Hence, in separate letters dated October 26, 1979,
addressed to the defendants, the plaintiff notified the latter that in case it will
be re-assessed by the BIR for the payment of the taxes covered by the said
checks, then plaintiff shall hold the defendants liable for reimbursement of
the face value of the same. Both defendants denied liability and refused to
pay.

"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check
No. SN-04867 in the amount of P4,746,114.41, in favor of the Commissioner

In a letter dated February 28, 1980 by the Acting Commissioner of Internal

Revenue addressed to the plaintiff - supposed to be Exhibit "D", the latter

I. G.R. Nos. 121413 and 121479

was officially informed, among others, that its check in the amount of P4,
746,114.41 was not paid to the government or its authorized agent and
instead encashed by unauthorized persons, hence, plaintiff has to pay the
said amount within fifteen days from receipt of the letter. Upon advice of the
plaintiff's lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal
Revenue, the amount of P4,746,114.41, representing payment of plaintiff's
percentage tax for the third quarter of 1977.
As a consequence of defendant's refusal to reimburse plaintiff of the
payment it had made for the second time to the BIR of its percentage taxes,
plaintiff filed on January 20, 1983 its original complaint before this Court.

"2. On defendant Citibank's cross-claim: ordering the crossdefendant IBAA (now PCI Bank) to reimburse defendant Citibank
for whatever amount the latter has paid or may pay to the plaintiff in
accordance with next preceding paragraph;
"3. The counterclaims asserted by the defendants against the
plaintiff, as well as that asserted by the cross-defendant against the
cross-claimant are dismissed, for lack of merits; and
"4. With costs against the defendants.
6

SO ORDERED."

On December 24, 1985, defendant IBAA was merged with the Philippine
Commercial International Bank (PCI Bank) with the latter as the surviving
entity.

Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated
their respective petitions for review on certiorari to the Courts of Appeals. On March
27, 1995, the appellate court issued its judgment as follows:

Defendant Citibank maintains that; the payment it made of plaintiff's Citibank

Check No. SN-04867 in the amount of P4,746,114.41 "was in due course"; it
merely relied on the clearing stamp of the depository/collecting bank, the
defendant IBAA that "all prior indorsements and/or lack of indorsements
guaranteed"; and the proximate cause of plaintiff's injury is the gross
negligence of defendant IBAA in indorsing the plaintiff's Citibank check in
question.

"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed

decision with modifications.

It is admitted that on December 19, 1977 when the proceeds of plaintiff's

Citibank Check No. SN-048867 was paid to defendant IBAA as collecting
bank, plaintiff was maintaining a checking account with defendant Citibank."5
Although it was not among the stipulated facts, an investigation by the National
Bureau of Investigation (NBI) revealed that Citibank Check No. SN-04867 was
recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He
purportedly needed to hold back the check because there was an error in the
computation of the tax due to the Bureau of Internal Revenue (BIR). With Rivera's
instruction, PCIBank replaced the check with two of its own Manager's Checks (MCs).
Alleged members of a syndicate later deposited the two MCs with the Pacific Banking
Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading
Pacific Banking Corporation (PBC) and Godofredo Rivera, as third party defendants.
But the court dismissed the complaint against PBC for lack of cause of action. The
course likewise dismissed the third-party complaint against Godofredo Rivera
because he could not be served with summons as the NBI declared him as a "fugitive
from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as follows:
"1. Ordering the defendants Citibank and IBAA (now PCI Bank),
jointly and severally, to pay the plaintiff the amount of
P4,746,114.41 representing the face value of plaintiff's Citibank
Check No. SN-04867, with interest thereon at the legal rate starting
January 20, 1983, the date when the original complaint was filed
until the amount is fully paid, plus costs;

The court hereby renderes judgment:

1. Dismissing the complaint in Civil Case No. 49287 insofar as
defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff
the amount of P4,746,114.41 representing the face value of
plaintiff's Citibank Check No. SN-04867, with interest thereon at the
legal rate starting January 20, 1983, the date when the original
complaint was filed until the amount is fully paid;
3. Dismissing the counterclaims asserted by the defendants against
the plaintiff as well as that asserted by the cross-defendant against
the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
7

IT IS SO ORDERED."

PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals,
while Ford filed a "Motion for Partial Reconsideration." Both motions were denied for
lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari
under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the
Twelfth Division of the Court of Appeals contending that it merely acted on the
instruction of Ford and such casue of action had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the petitioner acted on
the check drawn by respondent Ford on the said respondent's instructions, it
nevertheless found the petitioner liable to the said respondent for the full
amount of the said check.
II. Did the respondent court err when it did not find prescription in favor of the
8
petitioner.

In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning
the same decision and resolution of the Court of Appeals, and praying for the
reinstatement in toto of the decision of the trial court which found both PCIBank and
Citibank jointly and severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for
consideration:
I. Respondent Citibank is liable to petitioner Ford considering that:

1979 and payable to the Commissioner of Internal Revenue. Again a BIR Revenue
Tax Receipt No. A-1697160 was issued for the said purpose.
Both checks were "crossed checks" and contain two diagonal lines on its upper
corner between, which were written the words "payable to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980,
the BIR, Region 4-B, demanded for the said tax payments the corresponding periods
above-mentioned.

1. As drawee bank, respondent Citibank owes to petitioner Ford, as

the drawer of the subject check and a depositor of respondent
Citibank, an absolute and contractual duty to pay the proceeds of
the subject check only to the payee thereof, the Commissioner of
Internal Revenue.

As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were
considered "fake and spurious". This anomaly was confirmed by the NBI upon the
initiative of the BIR. The findings forced Ford to pay the BIR a new, while an action
was filed against Citibank and PCIBank for the recovery of the amount of Citibank
Check Numbers SN-10597 and 16508.

2. Respondent Citibank failed to observe its duty as banker with

respect to the subject check, which was crossed and payable to
"Payee's Account Only."

The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings
on the modus operandi of the syndicate, as follows:

3. Respondent Citibank raises an issue for the first time on appeal;

thus the same should not be considered by the Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross
9
negligence on the part of petitioner Ford.
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to deliver the
proceeds of the subject check to a person other than the payee
named therein, the Commissioner of the Bureau of Internal
Revenue; thus, PCIBank's only obligation is to deliver the proceeds
to the Commissioner of the Bureau of Internal Revenue. 10
2. PCIBank which affixed its indorsement on the subject check ("All
prior indorsement and/or lack of indorsement guaranteed"), is liable
as collecting bank.11
3. PCIBank is barred from raising issues of fact in the instant
proceedings.12
4. Petitioner Ford's cause of action had not prescribed.13
II. G.R. No. 128604
The same sysndicate apparently embezzled the proceeds of checks intended, this
time, to settle Ford's percentage taxes appertaining to the second quarter of 1978 and
the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of
P5,851,706.37 representing the percentage tax due for the second quarter of 1978
payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No.
28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of
P6,311,591.73, representing the payment of percentage tax for the first quarter of

"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its
General Ledger Accountant. As such, he prepared the plaintiff's check
marked Ex. 'A' [Citibank Check No. Sn-10597] for payment to the BIR.
Instead, however, fo delivering the same of the payee, he passed on the
check to a co-conspirator named Remberto Castro who was a pro-manager
of the San Andres Branch of PCIB.* In connivance with one Winston Dulay,
Castro himself subsequently opened a Checking Account in the name of a
fictitious person denominated as 'Reynaldo reyes' in the Meralco Branch of
PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a
worthless Bank of America Check in exactly the same amount as the first
FORD check (Exh. "A", P5,851,706.37) while this worthless check was
coursed through PCIB's main office enroute to the Central Bank for clearing,
replaced this worthless check with FORD's Exhibit 'A' and accordingly
tampered the accompanying documents to cover the replacement. As a
result, Exhibit 'A' was cleared by defendant CITIBANK, and the fictitious
deposit account of 'Reynaldo Reyes' was credited at the PCIB Meralco
Branch with the total amount of the FORD check Exhibit 'A'. The same
method was again utilized by the syndicate in profiting from Exh. 'B' [Citibank
Check No. SN-16508] which was subsequently pilfered by Alexis Marindo,
Rivera's Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew various checks distributing
the sahres of the other participating conspirators namely (1) CRISANTO
BERNABE, the mastermind who formulated the method for the
embezzlement; (2) RODOLFO R. DE LEON a customs broker who
negotiated the initial contact between Bernabe, FORD's Godofredo Rivera
and PCIB's Remberto Castro; (3) JUAN VASTILLO who assisted de Leon in
the initial arrangements; (4) GODOFREDO RIVERA, FORD's accountant
who passed on the first check (Exhibit "A") to Castro; (5) REMERTO
CASTRO, PCIB's pro-manager at San Andres who performed the switching
of checks in the clearing process and opened the fictitious Reynaldo Reyes
account at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's
Assistant Manager at its Meralco Branch, who assisted Castro in switching
the checks in the clearing process and facilitated the opening of the fictitious

Reynaldo Reyes' bank account; (7) ALEXIS MARINDO, Rivera's Assistant at

FORD, who gave the second check (Exh. "B") to Castro; (8) ELEUTERIO
JIMENEZ, BIR Collection Agent who provided the fake and spurious
revenue tax receipts to make it appear that the BIR had received FORD's tax
payments.

The main issue presented for our consideration by these petitions could be simplified
as follows: Has petitioner Ford the right to recover from the collecting bank (PCIBank)
and the drawee bank (Citibank) the value of the checks intended as payment to the
Commissioner of Internal Revenue? Or has Ford's cause of action already
prescribed?

Several other persons and entities were utilized by the syndicate as conduits
in the disbursements of the proceeds of the two checks, but like the
aforementioned participants in the conspiracy, have not been impleaded in
the present case. The manner by which the said funds were distributed
among them are traceable from the record of checks drawn against the
original "Reynaldo Reyes" account and indubitably identify the parties who
illegally benefited therefrom and readily indicate in what amounts they did
so."14

Note that in these cases, the checks were drawn against the drawee bank, but the
title of the person negotiating the same was allegedly defective because the
instrument was obtained by fraud and unlawful means, and the proceeds of the
checks were not remitted to the payee. It was established that instead of paying the
checks to the CIR, for the settlement of the approprite quarterly percentage taxes of
Ford, the checks were diverted and encashed for the eventual distribution among the
mmbers of the syndicate. As to the unlawful negotiation of the check the applicable
law is Section 55 of the Negotiable Instruments Law (NIL), which provides:

On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank,
Citibank, liable for the value of the two checks while adsolving PCIBank from any
liability, disposing as follows:

"When title defective -- The title of a person who negotiates an instrument is

defective within the meaning of this Act when he obtained the instrument, or
any signature thereto, by fraud, duress, or fore and fear, or other unlawful
means, or for an illegal consideration, or when he negotiates it in breach of
faith or under such circumstances as amount to a fraud."

"WHEREFORE, judgment is hereby rendered sentencing defendant

CITIBANK to reimburse plaintiff FORD the total amount of P12,163,298.10
prayed for in its complaint, with 6% interest thereon from date of first written
demand until full payment, plus P300,000.00 attorney's fees and expenses
litigation, and to pay the defendant, PCIB (on its counterclaim to crossclaim)
the sum of P300,000.00 as attorney's fees and costs of litigation, and pay
the costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the
decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court
of Appeals decision and its resolution dated March 5, 1997, with respect to the
dismissal of the complaint against PCIBank and holding Citibank solely responsible
for the proceeds of Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73
and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against
defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to exercise the
diligence required to be exercised by it as a banking insitution.
II. Defendant PCIBank clearly failed to observe the diligence required in the
selection and supervision of its officers and employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss
or damage resulting to the plaintiff Ford as a consequence of the substitution
of the check consistent with Section 5 of Central Bank Circular No. 580
series of 1977.
IV. Assuming arguedo that defedant PCIBank did not accept, endorse or
negotiate in due course the subject checks, it is liable, under Article 2154 of
the Civil Code, to return the money which it admits having received, and
16
which was credited to it its Central bank account.

Pursuant to this provision, it is vital to show that the negotiation is made by the
perpetator in breach of faith amounting to fraud. The person negotiating the checks
must have gone beyond the authority given by his principal. If the principal could
prove that there was no negligence in the performance of his duties, he may set up
the personal defense to escape liability and recover from other parties who. Though
their own negligence, alowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the
embezzlers belonging to a syndicate, are now fugitives from justice. They have, even
if temporarily, escaped liability for the embezzlement of millions of pesos. We are thus
left only with the task of determining who of the present parties before us must bear
the burden of loss of these millions. It all boils down to thequestion of liability based
on the degree of negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed
contributory negligence" that would defeat its claim for reimbursement, bearing ing
mind that its employees, Godofredo Rivera and Alexis Marindo, were among the
members of the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to
negotiate the checks to his co-conspirators, instead of delivering them to the
designated authorized collecting bank (Metrobank-Alabang) of the payee, CIR.
Citibank bewails the fact that Ford was remiss in the supervision and control of its
own employees, inasmuch as it only discovered the syndicate's activities through the
information given by the payee of the checks after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo
Rivera to divert the proceeds of Citibank Check No. SN-04867, instead of using it to
pay the BIR. As to the subsequent run-around of unds of Citibank Check Nos. SN10597 and 16508, PCIBank claims that the proximate cause of the damge to Ford lies
in its own officers and employees who carried out the fradulent schemes and the
transactions. These circumstances were not checked by other officers of the
company including its comptroller or internal auditor. PCIBank contends that the
inaction of Ford despite the enormity of the amount involved was a sheer negligence

and stated that, as between two innocent persons, one of whom must suffer the
consequences of a breach of trust, the one who made it possible, by his act of
negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that
there was no evidence presented before the trial court showing lack of diligence on
the part of Ford. And, citing the case of Gempesaw vs. Court of Appeals,17 Ford
argues that even if there was a finding therein that the drawer was negligent, the
drawee bank was still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not authorized to make any
representation in its behalf, specifically, to divert the proceeds of the checks. It adds
that Citibank raised the issue of imputed negligence against Ford for the first time on
appeal. Thus, it should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a
master-servant relationship is instructive. Since a master may be held for his
servant's wrongful act, the law imputes to the master the act of the servant, and if that
act is negligent or wrongful and proximately results in injury to a third person, the
negligence or wrongful conduct is the negligence or wrongful conduct of the master,
for which he is liable.18 The general rule is that if the master is injured by the
negligence of a third person and by the concuring contributory negligence of his own
servant or agent, the latter's negligence is imputed to his superior and will defeat the
superior's action against the third person, asuming, of course that the contributory
19
negligence was the proximate cause of the injury of which complaint is made.

With respect to the negligence of PCIBank in the payment of the three checks
involved, separately, the trial courts found variations between the negotiation of
Citibank Check No. SN-04867 and the misapplication of total proceeds of Checks SN10597 and 16508. Therefore, we have to scrutinize, separately, PCIBank's share of
negligence when the syndicate achieved its ultimate agenda of stealing the proceeds
of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch.
It was coursed through the ordinary banking transaction, sent to Central Clearing with
the indorsement at the back "all prior indorsements and/or lack of indorsements
guaranteed," and was presented to Citibank for payment. Thereafter PCIBank,
instead of remitting the proceeds to the CIR, prepared two of its Manager's checks
and enabled the syndicate to encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the
checks. The neglect of PCIBank employees to verify whether his letter requesting for
the replacement of the Citibank Check No. SN-04867 was duly authorized, showed
lack of care and prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment of
taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is duty bound to consult
its principal regarding the unwarranted instructions given by the payor or its agent. As
aptly stated by the trial court, to wit:

Accordingly, we need to determine whether or not the action of Godofredo Rivera,

Ford's General Ledger Accountant, and/or Alexis Marindo, his assistant, was the
proximate cause of the loss or damage. AS defined, proximate cause is that which, in
the natural and continuous sequence, unbroken by any efficient, intervening cause
produces the injury and without the result would not have occurred. 20

"xxx. Since the questioned crossed check was deposited with IBAA [now
PCIBank], which claimed to be a depository/collecting bank of BIR, it has the
responsibility to make sure that the check in question is deposited in Payee's
account only.

It appears that although the employees of Ford initiated the transactions attributable
to an organized syndicate, in our view, their actions were not the proximate cause of
encashing the checks payable to the CIR. The degree of Ford's negligence, if any,
could not be characterized as the proximate cause of the injury to the parties.

As agent of the BIR (the payee of the check), defendant IBAA should receive
instructions only from its principal BIR and not from any other person
especially so when that person is not known to the defendant. It is very
imprudent on the part of the defendant IBAA to just rely on the alleged
telephone call of the one Godofredo Rivera and in his signature considering
that the plaintiff is not a client of the defendant IBAA."

The Board of Directors of Ford, we note, did not confirm the request of Godofredo
Rivera to recall Citibank Check No. SN-04867. Rivera's instruction to replace the said
check with PCIBank's Manager's Check was not in theordinary course of business
which could have prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was
established that these checks were made payable to the CIR. Both were crossed
checks. These checks were apparently turned around by Ford's emploees, who were
acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a
drawer-payor's confidential employee or agent, who by virtue of his position had
unusual facilities for perpertrating the fraud and imposing the forged paper upon the
bank, does notentitle the bank toshift the loss to the drawer-payor, in the absence of
21
some circumstance raising estoppel against the drawer. This rule likewise applies to
the checks fraudulently negotiated or diverted by the confidential employees who hold
them in their possession.

xxx

xxx

xxx

It is a well-settled rule that the relationship between the payee or holder of

commercial paper and the bank to which it is sent for collection is, in the absence of
22
an argreement to the contrary, that of principal and agent. A bank which receives
23
such paper for collection is the agent of the payee or holder.
Even considering arguendo, that the diversion of the amount of a check payable to
the collecting bank in behalf of the designated payee may be allowed, still such
diversion must be properly authorized by the payor. Otherwise stated, the diversion
can be justified only by proof of authority from the drawer, or that the drawer has
clothed his agent with apparent authority to receive the proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp appearing at the back of the
questioned checks stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF
INDORSEMENTS GURANTEED should render PCIBank liable because it made it
pass through the clearing house and therefore Citibank had no other option but to pay
it. Thus, Citibank had no other option but to pay it. Thus, Citibank assets that the

proximate cause of Ford's injury is the gross negligence of PCIBank. Since the
questione dcrossed check was deposited with PCIBank, which claimed to be a
depository/collecting bank of the BIR, it had the responsibility to make sure that the
check in questions is deposited in Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is a
warning that the check should be deposited only in the account of the CIR. Thus, it is
the duty of the collecting bank PCIBank to ascertain that the check be deposited in
payee's account only. Therefore, it is the collecting bank (PCIBank) which is bound to
scruninize the check and to know its depositors before it could make the clearing
indorsement "all prior indorsements and/or lack of indorsement guaranteed".
In Banco de Oro Savings
Corporation,24 we ruled:

and

Mortgage

Bank

vs.

Equitable

Banking

"Anent petitioner's liability on said instruments, this court is in full accord with
the ruling of the PCHC's Board of Directors that:
'In presenting the checks for clearing and for payment, the defendant made
an express guarantee on the validity of "all prior endorsements." Thus,
stamped at the back of the checks are the defedant's clear warranty: ALL
PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty, plaintiff would not have paid on the
checks.'
No amount of legal jargon can reverse the clear meaning of defendant's
warranty. As the warranty has proven to be false and inaccurate, the
defendant is liable for any damage arising out of the falsity of its
representation."25
Lastly, banking business requires that the one who first cashes and negotiates the
check must take some percautions to learn whether or not it is genuine. And if the
one cashing the check through indifference or othe circumstance assists the forger in
committing the fraud, he should not be permitted to retain the proceeds of the check
from the drawee whose sole fault was that it did not discover the forgery or the defect
in the title of the person negotiating the instrument before paying the check. For this
reason, a bank which cashes a check drawn upon another bank, without requiring
proof as to the identity of persons presenting it, or making inquiries with regard to
them, cannot hold the proceeds against the drawee when the proceeds of the checks
were afterwards diverted to the hands of a third party. In such cases the drawee bank
has a right to believe that the cashing bank (or the collecting bank) had, by the usual
proper investigation, satisfied itself of the authenticity of the negotiation of the checks.
Thus, one who encashed a check which had been forged or diverted and in turn
received payment thereon from the drawee, is guilty of negligence which proximately
contributed to the success of the fraud practiced on the drawee bank. The latter may
recover from the holder the money paid on the check. 26
Having established that the collecting bank's negligence is the proximate cause of the
loss, we conclude that PCIBank is liable in the amount corresponding to the proceeds
of Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the
ordinary course of business that would attribute to it the case of the embezzlement of

Citibank Check Numbers SN-10597 and 16508, because PCIBank did not actually
receive nor hold the two Ford checks at all. The trial court held, thus:
"Neither is there any proof that defendant PCIBank contributed any official or
conscious participation in the process of the embezzlement. This Court is
convinced that the switching operation (involving the checks while in transit
for "clearing") were the clandestine or hidden actuations performed by the
members of the syndicate in their own personl, covert and private capacity
and done without the knowledge of the defendant PCIBank"27
In this case, there was no evidence presented confirming the conscious particiapation
of PCIBank in the embezzlement. As a general rule, however, a banking corporation
is liable for the wrongful or tortuous acts and declarations of its officers or agents
within the course and scope of their employment.28 A bank will be held liable for the
negligence of its officers or agents when acting within the course and scope of their
employment. It may be liable for the tortuous acts of its officers even as regards that
species of tort of which malice is an essential element. In this case, we find a situation
where the PCIBank appears also to be the victim of the scheme hatched by a
syndicate in which its own management employees had particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received
Citibank Check Numbers SN-10597 and 16508. He passed the checks to a coconspirator, an Assistant Manager of PCIBank's Meralco Branch, who helped Castro
open a Checking account of a fictitious person named "Reynaldo Reyes." Castro
deposited a worthless Bank of America Check in exactly the same amount of Ford
checks. The syndicate tampered with the checks and succeeded in replacing the
worthless checks and the eventual encashment of Citibank Check Nos. SN 10597
and 16508. The PCIBank Ptro-manager, Castro, and his co-conspirator Assistant
Manager apparently performed their activities using facilities in their official capacity
or authority but for their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of confidence will not be
permitted to profit by the frauds these officers or agents were enabled to perpetrate in
the apparent course of their employment; nor will t be permitted to shirk its
responsibility for such frauds, even though no benefit may accrue to the bank
therefrom. For the general rule is that a bank is liable for the fraudulent acts or
representations of an officer or agent acting within the course and apparent scope of
his employment or authority. 29 And if an officer or employee of a bank, in his official
capacity, receives money to satisfy an evidence of indebetedness lodged with his
bank for collection, the bank is liable for his misappropriation of such sum.30
31

Moreover, as correctly pointed out by Ford, Section 5 of Central Bank Circular No.
580, Series of 1977 provides that any theft affecting items in transit for clearing, shall
be for the account of sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's shoulders
alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent
in the performance of its duties. Citibank failed to establish that its payment of Ford's
checjs were made in due course and legally in order. In its defense, Citibank claims
the genuineness and due execution of said checks, considering that Citibank (1) has
no knowledge of any informity in the issuance of the checks in question (2) coupled
by the fact that said checks were sufficiently funded and (3) the endorsement of the

Payee or lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the
obligation to honor and pay the same.

negligent act took place prior to December 19, 1977 but the relief was sought only in
1983, or seven years thereafter.

For its part, Ford contends that Citibank as the drawee bank owes to Ford an
absolute and contractual duty to pay the proceeds of the subject check only to the
32
payee thereof, the CIR. Citing Section 62 of the Negotiable Instruments Law, Ford
argues that by accepting the instrument, the acceptro which is Citibank engages that
it will pay according to the tenor of its acceptance, and that it will pay only to the
payee, (the CIR), considering the fact that here the check was crossed with
annotation "Payees Account Only."

The statute of limitations begins to run when the bank gives the depositor notice of
the payment, which is ordinarily when the check is returned to the alleged drawer as a
39
voucher with a statement of his account, and an action upon a check is ordinarily
governed by the statutory period applicable to instruments in writing. 40

As ruled by the Court of Appeals, Citibank must likewise answer for the damages
incurred by Ford on Citibank Checks Numbers SN 10597 and 16508, because of the
contractual relationship existing between the two. Citibank, as the drawee bank
breached its contractual obligation with Ford and such degree of culpability
contributed to the damage caused to the latter. On this score, we agree with the
respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508
before paying the amount of the proceeds thereof to the collecting bank of the BIR.
One thing is clear from the record: the clearing stamps at the back of Citibank Check
Nos. SN 10597 and 16508 do not bear any initials. Citibank failed to notice and verify
the absence of the clearing stamps. Had this been duly examined, the switching of
the worthless checks to Citibank Check Nos. 10597 and 16508 would have been
discovered in time. For this reason, Citibank had indeed failed to perform what was
incumbent upon it, which is to ensure that the amount of the checks should be paid
only to its designated payee. The fact that the drawee bank did not discover the
irregularity seasonably, in our view, consitutes negligence in carrying out the bank's
duty to its depositors. The point is that as a business affected with public interest and
because of the nature of its functions, the bank is under obligation to treat the
accounts of its depositors with meticulous care, always having in mind the fiduciary
nature of their relationship.33
Thus, invoking the doctrine of comparative negligence, we are of the view that both
PCIBank and Citibank failed in their respective obligations and both were negligent in
the selection and supervision of their employees resulting in the encashment of
Citibank Check Nos. SN 10597 AND 16508. Thus, we are constrained to hold them
equally liable for the loss of the proceeds of said checks issued by Ford in favor of the
CIR.
Time and again, we have stressed that banking business is so impressed with public
interest where the trust and confidence of the public in general is of paramount
umportance such that the appropriate standard of diligence must be very high, if not
34
the highest, degree of diligence. A bank's liability as obligor is not merely vicarious
but primary, wherein the defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.35
36

Banks handle daily transactions involving millions of pesos. By the very nature of
their work the degree of responsibility, care and trustworthiness expected of their
employees and officials is far greater than those of ordinary clerks and
employees.37 Banks are expected to exercise the highest degree of diligence in the
38
selection and supervision of their employees.
On the issue of prescription, PCIBank claims that the action of Ford had prescribed
because of its inability to seek judicial relief seasonably, considering that the alleged

Our laws on the matter provide that the action upon a written contract must be
brought within ten year from the time the right of action accrues. 41 hence, the
reckoning time for the prescriptive period begins when the instrument was issued and
the corresponding check was returned by the bank to its depositor (normally a month
thereafter). Applying the same rule, the cause of action for the recovery of the
proceeds of Citibank Check No. SN 04867 would normally be a month after
December 19, 1977, when Citibank paid the face value of the check in the amount of
P4,746,114.41. Since the original complaint for the cause of action was filed on
January 20, 1984, barely six years had lapsed. Thus, we conclude that Ford's cause
of action to recover the amount of Citibank Check No. SN 04867 was seasonably filed
within the period provided by law.
Finally, we also find thet Ford is not completely blameless in its failure to detect the
fraud. Failure on the part of the depositor to examine its passbook, statements of
account, and cancelled checks and to give notice within a reasonable time (or as
required by statute) of any discrepancy which it may in the exercise of due care and
diligence find therein, serves to mitigate the banks' liability by reducing the award of
interest from twelve percent (12%) to six percent (6%) per annum. As provided in
Article 1172 of the Civil Code of the Philippines, respondibility 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. In quasi-delicts, the
contributory negligence of the plaintiff shall reduce the damages that he may
recover.42
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CAG.R. CV No. 25017 areAFFIRMED. PCIBank, know formerly as Insular Bank of Asia
and America, id declared solely responsible for the loss of the proceeds of Citibank
Check No SN 04867 in the amount P4,746,114.41, which shall be paid together with
six percent (6%) interest thereon to Ford Philippines Inc. from the date when the
original complaint was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430
are MODIFIED as follows: PCIBank and Citibank are adjudged liable for and must
share the loss, (concerning the proceeds of Citibank Check Numbers SN 10597 and
16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDEREDto
pay Ford Philippines Inc. P6,081,649.05, with six percent (6%) interest thereon, from
the date the complaint was filed until full payment of said amount.1wphi1.nt
Costs against Philippine Commercial International Bank and Citibank N.A.
SO ORDERED.

G.R. No. 125862

April 15, 2004

FRANCISCO CULABA and DEMETRIA CULABA, doing business under the

name and style "Culaba Store",petitioners,
vs.
COURT OF APPEALS and SAN MIGUEL CORPORATION, respondents.
DECISION

the publication of the notice of loss in the July 9, 1983 issue of the Daily Express, as
follows:
NOTICE OF LOSS
OUR CUSTOMERS ARE HEREBY INFORMED THAT TEMPORARY
CHARGE SALES LIQUIDATION RECEIPTS WITH SERIAL NOS. 2730127350 HAVE BEEN LOST.
ANY TRANSACTION, THEREFORE, ENTERED INTO WITH THE USE OF
THE ABOVE RECEIPTS WILL NOT BE HONORED.

CALLEJO, SR., J.:

This is a petition for review under Rule 45 of the Revised Rules of Civil Procedure of
the Decision1 of the Court of Appeals in CA-G.R. CV No. 19836 affirming in toto the
Decision2 of the Regional Trial Court of Makati, Branch 138, in Civil Case No. 1033
for collection of sum of money, and the Resolution3 denying the motion for
reconsideration of the said decision.
The Undisputed Facts

SAN MIGUEL CORPORATION

BEER DIVISION
Makati Beer Region10
The Trial Courts Ruling
After trial on the merits, the trial court rendered judgment in favor of SMC, and held
the Culaba spouses liable on the balance of its obligation, thus:
Wherefore, judgment is hereby rendered in favor of the plaintiff, as follows:

The spouses Francisco and Demetria Culaba were the owners and proprietors of the
Culaba Store and were engaged in the sale and distribution of San Miguel
Corporations (SMC) beer products. SMC sold beer products on credit to the Culaba
spouses in the amount of P28,650.00, as evidenced by Temporary Credit Invoice No.
42943.4 Thereafter, the Culaba spouses made a partial payment of P3,740.00,
leaving an unpaid balance of P24,910.00. As they failed to pay despite repeated
demands, SMC filed an action for collection of a sum of money against them before
the RTC of Makati, Branch 138.
The defendant-spouses denied any liability, claiming that they had already paid the
plaintiff in full on four separate occasions. To substantiate this claim, the defendants
presented four (4) Temporary Charge Sales (TCS) Liquidation Receipts, as follows:
April 19, 1983

Receipt No. 27331

for P8,0005

April 22, 1983

Receipt No. 27318

for P9,0006

April 27, 1983

Receipt No. 27339

for P4,500

April 30, 1983

Receipt No. 27346

for P3,4108

1. Ordering defendants to pay the amount of P24,910.00 plus legal interest

of 6% per annum from April 12, 1983 until the whole amount is fully paid;
2. Ordering defendants to pay 20% of the amount due to plaintiff as and for
attorneys fees plus costs.
SO ORDERED.11
According to the trial court, it was unusual that defendant Francisco Culaba forgot the
name of the collector to whom he made the payments and that he did not require the
said collector to print his name on the receipts. The court also noted that although
they were part of a single booklet, the TCS Liquidation Receipts submitted by the
defendants did not appear to have been issued in their natural sequence.
Furthermore, they were part of the lost booklet receipts, which the public was duly
warned of through the Notice of Loss the plaintiff caused to be published in a daily
newspaper. This confirmed the plaintiffs claim that the receipts presented by the
defendants were spurious ones.
The Case on Appeal
On appeal, the appellants interposed the following assignment of errors:

Defendant Francisco Culaba testified that he made the foregoing payments to an

SMC supervisor who came in an SMC van. He was then showed a list of customers
accountabilities which included his account. The defendant, in good faith, then paid to
the said supervisor, and he was, in turn, issued genuine SMC liquidation receipts.

I
THE TRIAL COURT ERRED IN FINDING THAT THE RECEIPTS
PRESENTED BY DEFENDANTS EVIDENCING HIS PAYMENTS TO
PLAINTIFF SAN MIGUEL CORPORATION, ARE SPURIOUS.
II
THE TRIAL COURT ERRED IN CONCLUDING THAT PLAINTIFFAPPELLEE HAS SUFFICIENTLY PROVED ITS CAUSE OF ACTION
AGAINST THE DEFENDANTS.

For its part, SMC submitted a publishers affidavit to prove that the entire booklet of
TCSL Receipts bearing Nos. 27301-27350 were reported lost by it, and that it caused

III

THE TRIAL COURT ERRED IN ORDERING DEFENDANTS TO PAY 20%

OF THE AMOUNT DUE TO PLAINTIFF AS ATTORNEYS FEES. 12
The appellants asserted that while the trial courts observations were true, it was the
usual business practice in previous transactions between them and SMC. The SMC
previously honored receipts not bearing the salesmans name. According to appellant
Francisco Culaba, he even lost some of the receipts, but did not encounter any
problems.
According to appellant Francisco, he could not be faulted for paying the SMC
collector who came in a van and was in uniform, and that any regular customer
would, without any apprehension, transact with such an SMC employee. Furthermore,
the respective receipts issued to him at the time he paid on the four occasions
mentioned had not yet then been declared lost. Thus, the subsequent publication in a
daily newspaper declaring the booklets lost did not affect the validity and legality of
the payments made. Accordingly, by its actuations, the SMC was estopped from
questioning the legality of the payments and had no cause of action against the
appellants.
Anent the issue of attorneys fees, the order of the trial court for payment thereof is
without basis. According to the appellant, the provision for attorneys fees is a
contingent fee, already provided for in the SMCs contract with the law firm. To further
order them to pay 20% of the amount due as attorneys fees is double payment,
13
tantamount to undue enrichment and therefore improper.
The appellee, for its part, contended that the primary issue in the case at bar revolved
around the basic and fundamental principles of agency. 14 It was incumbent upon the
defendants-appellants to exercise ordinary prudence and reasonable diligence to
verify and identify the extent of the alleged agents authority. It was their burden to
establish the true identity of the assumed agent, and this could not be established by
mere representation, rumor or general reputation. As they utterly failed in this regard,
the appellants must suffer the consequences.
The Court of Appeals affirmed the decision of the trial court, thus:
In the face of the somewhat tenuous evidence presented by the appellants,
we cannot fault the lower court for giving more weight to appellees
testimonial and documentary evidence, all of which establish with some
degree of preponderance the existence of the account sued upon.
ALL CONSIDERED, we cannot find any justification to reject the factual
findings of the lower court to which we must accord respect, for which
reason, the judgment appealed from is hereby AFFIRMED in all respects.
SO ORDERED.

15

Hence, the instant petition.

The petitioners pose the following issues for the Courts resolution:

According to the petitioners, receiving receipts from the private respondents agents
instead of its salesmen was a usual occurrence, as they had been operating the store
since 1979. Thus, on four occasions in April 1983, when an agent of the respondent
came to the store wearing an SMC uniform and driving an SMC van, petitioner
Francisco Culaba, without question, paid his accounts. He received the receipts
without fear, as they were similar to what he used to receive before. Furthermore, the
petitioners assert that, common experience will attest that unless the attention of the
customers is called for, they would not take note of the serial number of the receipts.
The petitioners contend that the private respondent advertised its warning to the
public only after the damage was done, or on July 9, 1993. Its belated notice showed
its glaring lack of interest or concern for its customers welfare, and, in sum, its
negligence.
Anent the second issue, petitioner Francisco Culaba avers that the agent to whom the
accounts were paid had all the physical and material attributes or indications of a
representative of the private respondent, leaving no doubt that he was duly
authorized by the latter. Petitioner Francisco Culabas testimony that "he does not
necessarily check the contents of the receipts issued to him except for the amount
indicated if [the] same accurately reflects his actual payment" is a common attitude of
customers. He could, thus, not be faulted for paying the private respondents agent on
four occasions. Petitioner Francisco Culaba asserts that he made the payment in
good faith, to an agent who issued SMC receipts which appeared to be genuine.
Thus, according to the petitioners, they had duly paid their obligation in accordance
with Articles 1240 and 1242 of the New Civil Code.
The private respondent, for its part, avers that the burden of proving payment is with
the debtor, in consonance with the express provision of Article 1233 of the New Civil
Code. The petitioners miserably failed to prove the self-serving allegation that they
already paid their liability to the private respondent. Furthermore, under normal
circumstances, an obligor would not just pay a substantial amount to someone whom
he saw for the first time, without even asking for the latters name.
The Ruling of the Court
The petition is dismissed.
The petitioners question the findings of the Court of Appeals as to whether the
payment of the petitioners obligation to the private respondent was properly made,
thus, extinguishing the same. This is clearly a factual issue, and beyond the purview
of the Court to delve into. This is in consonance with the well-settled rule that findings
of fact of the trial court, especially when affirmed by the Court of Appeals, are
accorded the highest degree of respect, and generally will not be disturbed on appeal.
Such findings are binding and conclusive on the Court.17 Furthermore, it is not the
Courts function under Rule 45 of the Rules of Court, as amended, to review, examine
and evaluate or weigh the probative value of the evidence presented. 18

I. WHETHER OR NOT THE RESPONDENT HAD PROVEN BY

PREPONDERANT EVIDENCE THAT IT HAD PROPERLY AND TIMELY
NOTIFIED PETITIONER OF LOST BOOKLET OF RECEIPTS

To reiterate, the issue being raised by the petitioners does not involve a question of
law, but a question of fact, not cognizable by this Court in a petition for review under
Rule 45. The jurisdiction of the Court in such a case is limited to reviewing only errors
of law, unless the factual findings being assailed are not supported by evidence on
record or the impugned judgment is based on a misapprehension of facts. 19

II. WHETHER OR NOT RESPONDENT HAD PROVEN BY

PREPONDERANT EVIDENCE THAT PETITIONER WAS REMISS IN THE
PAYMENT OF HIS ACCOUNTS TO ITS AGENT.16

A careful study of the records of the case reveal that the appellate court affirmed the
trial courts factual findings as follows:

First. Receipts Nos. 27331, 27318, 27339 and 27346 were included in the private
respondents lost booklet, which loss was duly advertised in a newspaper of general
circulation; thus, the private respondent could not have officially issued them to the
petitioners to cover the alleged payments on the dates appearing thereon.
Second. There was something amiss in the way the receipts were issued to the
petitioners, as one receipt bearing a higher serial number was issued ahead of
another receipt bearing a lower serial number, supposedly covering a later payment.
The petitioners failed to explain the apparent mix-up in these receipts, and no attempt
was made in this regard.
Third. The fact that the salesmans name was invariably left blank in the four receipts
and that the petitioners could not even remember the name of the supposed impostor
who received the said payments strongly argue against the veracity of the petitioners
claim.
We find no cogent reason to reverse the said findings.
The dismissal of the petition is inevitable even upon close perusal of the merits of the
case.
Payment is a mode of extinguishing an obligation. 20 Article 1240 of the Civil Code
provides that payment shall be made to the person in whose favor the obligation has
been constituted, or his successor-in-interest, or any person authorized to receive
it.21 In this case, the payments were purportedly made to a "supervisor" of the private
respondent, who was clad in an SMC uniform and drove an SMC van. He appeared
to be authorized to accept payments as he showed a list of customers
accountabilities and even issued SMC liquidation receipts which looked genuine.
Unfortunately for petitioner Francisco Culaba, he did not ascertain the identity and
authority of the said supervisor, nor did he ask to be shown any identification to prove
that the latter was, indeed, an SMC supervisor. The petitioners relied solely on the
mans representation that he was collecting payments for SMC. Thus, the payments
the petitioners claimed they made were not the payments that discharged their
obligation to the private respondent.
The basis of agency is representation.22 A person dealing with an agent is put upon
inquiry and must discover upon his peril the authority of the agent. 23 In the instant
case, the petitioners loss could have been avoided if they had simply exercised due
diligence in ascertaining the identity of the person to whom they allegedly made the
payments. The fact that they were parting with valuable consideration should have
made them more circumspect in handling their business transactions. Persons
dealing with an assumed agent are bound at their peril to ascertain not only the fact of
agency but also the nature and extent of authority, and in case either is controverted,
the burden of proof is upon them to establish it. 24 The petitioners in this case failed to
discharge this burden, considering that the private respondent vehemently denied
that the payments were accepted by it and were made to its authorized
representative.
Negligence is the omission to do something which a reasonable man, guided by
those considerations which ordinarily regulate the conduct of human affairs, would do,
25
or the doing of something, which a prudent and reasonable man would not do. In
the case at bar, the most prudent thing the petitioners should have done was to
ascertain the identity and authority of the person who collected their payments.
Failing this, the petitioners cannot claim that they acted in good faith when they made
such payments. Their claim therefor is negated by their negligence, and they are

bound by its consequences. Being negligent in this regard, the petitioners cannot
seek relief on the basis of a supposed agency. 26
WHEREFORE, the instant petition is hereby DENIED. The assailed Decision dated
April 16, 1996, and the Resolution dated July 19, 1996 of the Court of Appeals are
AFFIRMED. Costs against the petitioners.
SO ORDERED.

G.R. No. 149420

October 8, 2003

SONNY LO, petitioner,

vs.
KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent.
DECISION
YNARES-SANTIAGO, J.:
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in
the sale of steel scaffoldings, while petitioner Sonny L. Lo, doing business under the
name and style Sans Enterprises, is a building contractor. On February 22, 1990,
petitioner ordered scaffolding equipments from respondent worth P540,425.80. 1 He
paid a downpayment in the amount of P150,000.00. The balance was made payable
in ten monthly installments.
Respondent delivered the scaffoldings to petitioner.2 Petitioner was able to pay the
first two monthly installments.1a\^/phi1.netHis business, however, encountered
financial difficulties and he was unable to settle his obligation to respondent despite
oral and written demands made against him. 3
On October 11, 1990, petitioner and respondent executed a Deed of
Assignment,4 whereby petitioner assigned to respondent his receivables in the
amount of P335,462.14 from Jomero Realty Corporation. Pertinent portions of the
Deed provide:
WHEREAS, the ASSIGNOR is the contractor for the construction of a
residential house located at Greenmeadow Avenue, Quezon City owned by
Jomero Realty Corporation;
WHEREAS, in the construction of the aforementioned residential house, the
ASSIGNOR purchased on account scaffolding equipments from the
ASSIGNEE payable to the latter;
WHEREAS, up to the present the ASSIGNOR has an obligation to the
ASSIGNEE for the purchase of the aforementioned scaffoldings now in the
amount of Three Hundred Thirty Five Thousand Four Hundred Sixty Two
and 14/100 Pesos (P335,462.14);
NOW, THEREFORE, for and in consideration of the sum of Three Hundred
Thirty Five Thousand Four Hundred Sixty Two and 14/100 Pesos
(P335,462.14), Philippine Currency which represents part of the
ASSIGNORs collectible from Jomero Realty Corp., said ASSIGNOR hereby
assigns, transfers and sets over unto the ASSIGNEE all collectibles
amounting to the said amount of P335, 462.14;
And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and
assigns, the full power and authority to demand, collect, receive, compound,
compromise and give acquittance for the same or any part thereof, and in
the name and stead of the said ASSIGNOR;
And the ASSIGNOR does hereby agree and stipulate to and with said
ASSIGNEE, its successors and assigns that said debt is justly owing and
due to the ASSIGNOR for Jomero Realty Corporation and that said
ASSIGNOR has not done and will not cause anything to be done to diminish

or discharge said debt, or delay or to prevent the ASSIGNEE, its successors

or assigns, from collecting the same;
And the ASSIGNOR further agrees and stipulates as aforesaid that the said
ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at
times hereafter, at the request of said ASSIGNEE, its successors or assigns,
at his cost and expense, execute and do all such further acts and deeds as
shall be reasonably necessary to effectually enable said ASSIGNEE to
recover whatever collectibles said ASSIGNOR has in accordance with the
5
true intent and meaning of these presents. xxx (Italics supplied)
However, when respondent tried to collect the said credit from Jomero Realty
Corporation, the latter refused to honor the Deed of Assignment because it claimed
that petitioner was also indebted to it.6 On November 26, 1990, respondent sent a
letter7 to petitioner demanding payment of his obligation, but petitioner refused to pay
claiming that his obligation had been extinguished when they executed the Deed of
Assignment.
Consequently, on January 10, 1991, respondent filed an action for recovery of a sum
of money against the petitioner before the Regional Trial Court of Makati, Branch 147,
which was docketed as Civil Case No. 91-074.8
During the trial, petitioner argued that his obligation was extinguished with the
execution of the Deed of Assignment of credit. Respondent, for its part, presented the
testimony of its employee, Almeda Baaga, who testified that Jomero Realty refused
to honor the assignment of credit because it claimed that petitioner had an
outstanding indebtedness to it.
On August 25, 1994, the trial court rendered a decision9 dismissing the complaint on
the ground that the assignment of credit extinguished the obligation. The decretal
portion thereof provides:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment
in favor of the defendant and against the plaintiff, dismissing the complaint
and ordering the plaintiff to pay the defendant attorneys fees in the amount
of P25,000.00.
Respondent appealed the decision to the Court of Appeals. On April 19,
10
2001, the appellate court rendered a decision, the dispositive portion of
which reads:
WHEREFORE, finding merit in this appeal, the court REVERSES the
appealed Decision and enters judgment ordering defendant-appellee Sonny
Lo to pay the plaintiff-appellant KJS ECO-FORMWORK SYSTEM
PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four Hundred
Sixty-Two and 14/100 (P335,462.14) with legal interest of 6% per annum
from January 10, 1991 (filing of the Complaint) until fully paid and attorneys
fees equivalent to 10% of the amount due and costs of the suit.
SO ORDERED.11
In finding that the Deed of Assignment did not extinguish the obligation of the
petitioner to the respondent, the Court of Appeals held that (1) petitioner failed to
comply with his warranty under the Deed; (2) the object of the Deed did not exist at
the time of the transaction, rendering it void pursuant to Article 1409 of the Civil Code;
and (3) petitioner violated the terms of the Deed of Assignment when he failed to

execute and do all acts and deeds as shall be necessary to effectually enable the
respondent to recover the collectibles.12
Petitioner filed a motion for reconsideration of the said decision, which was denied by
13
the Court of Appeals.
In this petition for review, petitioner assigns the following errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN
DECLARING THE DEED OF ASSIGNMENT (EXH. "4") AS NULL AND VOID FOR
LACK OF OBJECT ON THE BASIS OF A MERE HEARSAY CLAIM.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED
OF ASSIGNMENT (EXH. "4") DID NOT EXTINGUISH PETITIONERS OBLIGATION
ON THE WRONG NOTION THAT PETITIONER FAILED TO COMPLY WITH HIS
WARRANTY THEREUNDER.
III
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION
OF THE TRIAL COURT AND IN ORDERING PAYMENT OF INTERESTS AND
14
ATTORNEYS FEES.
The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner of a credit,
known as the assignor, by a legal cause, such as sale, dacion en pago, exchange or
donation, and without the consent of the debtor, transfers his credit and accessory
rights to another, known as the assignee, who acquires the power to enforce it to the
same extent as the assignor could enforce it against the debtor. 15
Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers
another thing to the creditor who accepts it as equivalent of payment of an
16
outstanding debt. In order that there be a valid dation in payment, the following are
the requisites: (1) There must be the performance of the prestation in lieu of payment
(animo solvendi) which may consist in the delivery of a corporeal thing or a real right
or a credit against the third person; (2) There must be some difference between the
prestation due and that which is given in substitution (aliud pro alio); (3) There must
be an agreement between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different from that
due.17 The undertaking really partakes in one sense of the nature of sale, that is, the
creditor is really buying the thing or property of the debtor, payment for which is to be
charged against the debtors debt. As such, the vendor in good faith shall be
responsible, for the existence and legality of the credit at the time of the sale but not
for the solvency of the debtor, in specified circumstances.18
Hence, it may well be that the assignment of credit, which is in the nature of a sale of
19
personal property, produced the effects of a dation in payment which may extinguish
20
the obligation. However, as in any other contract of sale, the vendor or assignor is
bound by certain warranties. More specifically, the first paragraph of Article 1628 of
the Civil Code provides:

The vendor in good faith shall be responsible for the existence and legality of the
credit at the time of the sale, unless it should have been sold as doubtful; but not for
the solvency of the debtor, unless it has been so expressly stipulated or unless the
insolvency was prior to the sale and of common knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to warrant the
existence and legality of the credit at the time of the sale or assignment. When
Jomero claimed that it was no longer indebted to petitioner since the latter also had
an unpaid obligation to it, it essentially meant that its obligation to petitioner has been
21
extinguished by compensation. In other words, respondent alleged the nonexistence of the credit and asserted its claim to petitioners warranty under the
assignment. Therefore, it behooved on petitioner to make good its warranty and paid
the obligation.
Furthermore, we find that petitioner breached his obligation under the Deed of
Assignment, to wit:
And the ASSIGNOR further agrees and stipulates as aforesaid that the said
ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at times
hereafter, at the request of said ASSIGNEE, its successors or assigns, at his cost and
expense, execute and do all such further acts and deeds as shall be reasonably
necessary to effectually enable said ASSIGNEE to recover whatever collectibles said
ASSIGNOR has in accordance with the true intent and meaning of these
22
presents. (underscoring ours)
Indeed, by warranting the existence of the credit, petitioner should be deemed to
have ensured the performance thereof in case the same is later found to be
inexistent. He should be held liable to pay to respondent the amount of his
indebtedness.
Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay
respondent the sum of P335,462.14 with legal interest thereon. However, we find that
the award by the Court of Appeals of attorneys fees is without factual basis. No
evidence or testimony was presented to substantiate this claim. Attorneys fees, being
in the nature of actual damages, must be duly substantiated by competent proof.
WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals dated
April 19, 2001 in CA-G.R. CV No. 47713, ordering petitioner to pay respondent the
sum of P335,462.14 with legal interest of 6% per annum from January 10, 1991 until
fully paid is AFFIRMED with MODIFICATION. Upon finality of this Decision, the rate
of legal interest shall be 12% per annum, inasmuch as the obligation shall thereafter
become equivalent to a forbearance of credit. 23 The award of attorneys fees is
DELETED for lack of evidentiary basis.
SO ORDERED.

G.R. No. L-46658

May 13, 1991

PHILIPPINE NATIONAL BANK, petitioner,

vs.
HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of the Court of
First Instance of Rizal, Branch XXI and TAYABAS CEMENT COMPANY,
INC., respondents.
The Chief Legal Counsel for petitioner.
Ortille Law Office for private respondent.

FERNAN, C.J.:
In this petition for certiorari, petitioner Philippine National Bank (PNB) seeks to annul
and set aside the orders dated March 4, 1977 and May 31, 1977 rendered in Civil
1
Case No. 24422 of the Court of First Instance of Rizal, Branch XXI, respectively
granting private respondent Tayabas Cement Company, Inc.'s application for a writ of
preliminary injunction to enjoin the foreclosure sale of certain properties in Quezon
City and Negros Occidental and denying petitioner's motion for reconsideration
thereof.
In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo Spouses),
obtained a loan of P580,000.00 from petitioner bank to purchase 60% of the
subscribed capital stock, and thereby acquire the controlling interest of private
2
respondent Tayabas Cement Company, Inc. (TCC). As security for said loan, the
spouses Arroyo executed a real estate mortgage over a parcel of land covered by
Transfer Certificate of Title No. 55323 of the Register of Deeds of Quezon City known
as the La Vista property.
Thereafter, TCC filed with petitioner bank an application and agreement for the
establishment of an eight (8) year deferred letter of credit (L/C) for $7,000,000.00 in
favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to cover the importation of a
cement plant machinery and equipment.
Upon approval of said application and opening of an L/C by PNB in favor of Toyo
Menka Kaisha, Ltd. for the account of TCC, the Arroyo spouses executed the
following documents to secure this loanACCOMMODATION : Surety Agreement
dated August 5, 1964 3 and Covenant dated August 6, 1964. 4
The imported cement plant machinery and equipment arrived from Japan and were
released to TCC under a trust receipt agreement. Subsequently, Toyo Menka Kaisha,
Ltd. made the corresponding drawings against the L/C as scheduled. TCC, however,
failed to remit and/or pay the corresponding amount covered by the drawings. Thus,
on May 19, 1968, pursuant to the trust receipt agreement, PNB notified TCC of its
intention to repossess, as it later did, the imported machinery and equipment for
failure of TCC to settle its obligations under the L/C. 5
In the meantime, the personal accounts of the spouses Arroyo, which included
another loan of P160,000.00 secured by a real estate mortgage over parcels of
agricultural land known as Hacienda Bacon located in Isabela, Negros Occidental,
had likewise become due. The spouses Arroyo having failed to satisfy their
obligations with PNB, the latter decided to foreclose the real estate mortgages
executed by the spouses Arroyo in its favor.

On July 18, 1975, PNB filed with the City Sheriff of Quezon City a petition for extrajudicial foreclosure under Act 3138, as amended by Act 4118 and under Presidential
Decree No. 385 of the real estate mortgage over the properties known as the La Vista
6
property covered by TCT No. 55323. PNB likewise filed a similar petition with the
City Sheriff of Bacolod, Negros Occidental with respect to the mortgaged properties
located at Isabela, Negros Occidental and covered by OCT No. RT 1615.
The foreclosure sale of the La Vista property was scheduled on August 11, 1975. At
the auction sale, PNB was the highest bidder with a bid price of P1,000,001.00.
However, when said property was about to be awarded to PNB, the representative of
the mortgagor-spouses objected and demanded from the PNB the difference between
the bid price of P1,000,001.00 and the indebtedness of P499,060.25 of the Arroyo
spouses on their personal account. It was the contention of the spouses Arroyo's
representative that the foreclosure proceedings referred only to the personal account
of the mortgagor spouses without reference to the account of TCC.
To remedy the situation, PNB filed a supplemental petition on August 13, 1975
requesting the Sheriff's Office to proceed with the sale of the subject real properties to
satisfy not only the amount of P499,060.25 owed by the spouses Arroyos on their
personal account but also the amount of P35,019,901.49 exclusive of interest,
commission charges and other expenses owed by said spouses as sureties of
TCC. 7 Said petition was opposed by the spouses Arroyo and the other bidder, Jose
L. Araneta.
On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff Diana L. Dungca
issued a resolution finding that the questions raised by the parties required the
reception and evaluation of evidence, hence, proper for adjudication by the courts of
law. Since said questions were prejudicial to the holding of the foreclosure sale, she
ruled that her "Office, therefore, cannot properly proceed with the foreclosure sale
unless and until there be a court ruling on the aforementioned issues." 8
Thus, in May, 1976, PNB filed with the Court of First Instance of Quezon City, Branch
V a petition for mandamus 9against said Diana Dungca in her capacity as City Sheriff
of Quezon City to compel her to proceed with the foreclosure sale of the mortgaged
properties covered by TCT No. 55323 in order to satisfy both the personal obligation
10
of the spouses Arroyo as well as their liabilities as sureties of TCC.
On September 6, 1976, the petition was granted and Dungca was directed to proceed
with the foreclosure sale of the mortgaged properties covered by TCT No. 55323
pursuant to Act No. 3135 and to issue the corresponding Sheriff's Certificate of
Sale. 11
Before the decision could attain finality, TCC filed on September 14, 1976 before the
Court of First Instance of Rizal, Pasig, Branch XXI a complaint 12 against PNB,
Dungca, and the Provincial Sheriff of Negros Occidental and Ex-Officio Sheriff of
Bacolod City seeking, inter alia, the issuance of a writ of preliminary injunction to
restrain the foreclosure of the mortgages over the La Vista property and Hacienda
Bacon as well as a declaration that its obligation with PNB had been fully paid by
reason of the latter's repossession of the imported machinery and equipment. 13
On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda, issued a
restraining order 14 and on March 4, 1977, granted a writ of preliminary
15
injunction. PNB's motion for reconsideration was denied, hence this petition.

Petitioner PNB advances four grounds for the setting aside of the writ of preliminary
injunction, namely: a) that it contravenes P.D. No. 385 which prohibits the issuance of
a restraining order against a government financial institution in any action taken by
such institution in compliance with the mandatory foreclosure provided in Section 1
thereof; b) that the writ countermands a final decision of a co-equal and coordinate
court; c) that the writ seeks to prohibit the performance of acts beyond the court's
territorial jurisdiction; and, d) private respondent TCC has not shown any clear legal
right or necessity to the relief of preliminary injunction.

xxx

Private respondent TCC counters with the argument that P.D. No. 385 does not apply
to the case at bar, firstly because no foreclosure proceedings have been instituted
against it by PNB and secondly, because its account under the L/C has been fully
satisfied with the repossession of the imported machinery and equipment by PNB.

xxx

The resolution of the instant controversy lies primarily on the question of whether or
not TCC's liability has been extinguished by the repossession of PNB of the imported
cement plant machinery and equipment.
We rule for the petitioner PNB. It must be remembered that PNB took possession of
the imported cement plant machinery and equipment pursuant to the trust receipt
agreement executed by and between PNB and TCC giving the former the unqualified
right to the possession and disposal of all property shipped under the Letter of Credit
until such time as all the liabilities and obligations under said letter had been
16
17
discharged. In the case of Vintola vs. Insular Bank of Asia and America wherein
the same argument was advanced by the Vintolas as entrustees of imported
seashells under a trust receipt transaction, we said:
Further, the VINTOLAS take the position that their obligation to IBAA has
been extinguished inasmuch as, through no fault of their own, they were
unable to dispose of the seashells, and that they have relinquished
possession thereof to the IBAA, as owner of the goods, by depositing them
with the Court.
The foregoing submission overlooks the nature and mercantile usage of the
transaction involved. A letter of credit-trust receipt arrangement is endowed
with its own distinctive features and characteristics. Under that set-up, a
bank extends a loan covered by the Letter of Credit, with the trust receipt as
a security for the loan. In other words, the transaction involves a loan feature
represented by the letter of credit, and a security feature which is in the
covering trust receipt.
xxx

xxx

xxx

A trust receipt, therefore, is a security agreement, pursuant to which a bank

acquires a "security interest" in the goods.1wphi1 It secures an
indebtedness and there can be no such thing as security interest that
secures no obligation. As defined in our laws:
(h) "Security interest" means a property interest in goods,
documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to the
entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or retained for
security only.

xxx

xxx

Contrary to the allegation of the VINTOLAS, IBAA did not become the real
owner of the goods. It was merely the holder of a security title for the
advances it had made to the VINTOLAS. The goods the VINTOLAS had
purchased through IBAA financing remain their own property and they hold it
at their own risk. The trust receipt arrangement did not convert the IBAA into
an investor; the latter remained a lender and creditor.
xxx

xxx

Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot
justifiably claim that because they have surrendered the goods to IBAA and
subsequently deposited them in the custody of the court, they are absolutely
relieved of their obligation to pay their loan because of their inability to
dispose of the goods. The fact that they were unable to sell the seashells in
question does not affect IBAA's right to recover the advances it had made
under the Letter of Credit.
PNB's possession of the subject machinery and equipment being precisely as a form
of security for the advances given to TCC under the Letter of Credit, said possession
by itself cannot be considered payment of the loan secured thereby. Payment would
legally result only after PNB had foreclosed on said securities, sold the same and
applied the proceeds thereof to TCC's loan obligation. Mere possession does not
amount to foreclosure for foreclosure denotes the procedure adopted by the
mortgagee to terminate the rights of the mortgagor on the property and includes the
sale itself. 18
Neither can said repossession amount to dacion en pago. Dation in payment takes
place when property is alienated to the creditor in satisfaction of a debt in money and
19
the same is governed by sales. Dation in payment is the delivery and transmission
of ownership of a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation. 20 As aforesaid, the repossession of the machinery and
equipment in question was merely to secure the payment of TCC's loan obligation
and not for the purpose of transferring ownership thereof to PNB in satisfaction of
said loan. Thus, no dacion en pago was ever accomplished.
Proceeding from this finding, PNB has the right to foreclose the mortgages executed
by the spouses Arroyo as sureties of TCC. A surety is considered in law as being the
same party as the debtor in relation to whatever is adjudged touching the obligation of
the latter, and their liabilities are interwoven as to be inseparable. 21 As sureties, the
Arroyo spouses are primarily liable as original promissors and are bound immediately
22
to pay the creditor the amount outstanding.
Under Presidential Decree No. 385 which took effect on January 31, 1974,
government financial institutions like herein petitioner PNB are required to foreclose
on the collaterals and/or securities for any loan, credit orACCOMMODATION
whenever the arrearages on such account amount to at least twenty percent (20%)
of the total outstanding obligations, including interests and charges, as appearing in
the books of account of the financial institution concerned. 23 It is further provided
therein that "no restraining order, temporary or permanent injunction shall be issued
by the court against any government financial institution in any action taken by such
institution in compliance with the mandatory foreclosure provided in Section 1 hereof,
whether such restraining order, temporary or permanent injunction is sought by the
borrower(s) or any third party or parties . . ." 24

It is not disputed that the foreclosure proceedings instituted by PNB against the
Arroyo spouses were in compliance with the mandate of P.D. 385. This being the
case, the respondent judge acted in excess of his jurisdiction in issuing the injunction
specifically proscribed under said decree.
Another reason for striking down the writ of preliminary injunction complained of is
that it interfered with the order of a co-equal and coordinate court. Since Branch V of
the CFI of Rizal had already acquired jurisdiction over the question of foreclosure of
mortgage over the La Vista property and rendered judgment in relation thereto, then it
retained jurisdiction to the exclusion of all other coordinate courts over its judgment,
including all incidents relative to the control and conduct of its ministerial officers,
namely the sheriff thereof. 25 The foreclosure sale having been ordered by Branch V
of the CFI of Rizal, TCC should not have filed injunction proceedings with Branch XXI
of the same CFI, but instead should have first sought relief by proper motion and
application from the former court which had exclusive jurisdiction over the foreclosure
proceeding. 26
This doctrine of non-interference is premised on the principle that a judgment of a
court of competent jurisdiction may not be opened, modified or vacated by any court
of concurrent jurisdiction. 27
Furthermore, we find the issuance of the preliminary injunction directed against the
Provincial Sheriff of Negros Occidental and ex-officio Sheriff of Bacolod City a
jurisdictional faux pas as the Courts of First Instance, now Regional Trial Courts, can
28
only enforce their writs of injunction within their respective designated territories.
WHEREFORE, the instant petition is hereby granted. The assailed orders are hereby
set aside. Costs against private respondent.

G.R. No. 126891 August 5, 1998

LIM TAY, petitioner,
vs.
COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE ESTATE OF
ALFONSO LIM, respondents.

PANGANIBAN, J.:
The duty of a corporate secretary to record transfers of stocks is ministerial. However,
he cannot be compelled to do so when the transferee's title to said shares has
no prima facie validity or is uncertain. More specifically, a pledgor, prior to foreclosure
and sale, does not acquire ownership rights over the pledged shares and thus cannot
compel the corporate secretary to record his alleged ownership of such shares on the
basis merely of the contract of pledge. Similarly, the SEC does not acquire jurisdiction
over a dispute when a party's claim to being a shareholder is, on the face of the
complaint, invalid or inadequate or is otherwise negated by the very allegations of
such complaint. Mandamus will not issue to establish a right, but only to enforce one
that is already established.
Statement of the Case
There are the principles, used by this Court in resolving this Petition for Review
on Certiorari before us, assailing the October 24, 1996 Decision 1 of the Court of
Appeals 2 in CA-GR SP No. 40832, the dispositive portion of which reads:
IN THE LIGHT OF ALL THE FOREGOING, the Petition at bench is
DENIED DUE COURSE and is hereby DISMISSED. With costs
against the [p]etitioner. 3
By the foregoing disposition, the Court of Appeals effectively affirmed the March 7,
4
1996 Decision of the Securities and Exchange Commission (SEC) en banc:
WHEREFORE, in view of all the foregoing, judgment is hereby
rendered dismissing the appeal on the ground that mandamus will
only issue upon a clear showing of ownership over the assailed
shares of stock, [t]he determination of which, on the basis of the
foregoing facts, is within the jurisdiction of the regular courts and
5
not with the SEC.
The SEC en banc upheld the August 16, 1993 Decision 6 of SEC Hearing Officer
Rolando C. Malabonga, which dismissed the action for mandamus filed by petitioner.
The Facts
As found by the Court of Appeals, the facts of the case are as follows:
. . . On January 8, 1980, Respondent-Appellee Sy Guiok secured a
loan from the [p]etitioner in the amount of P40,000 payable within
six (6) months. To secure the payment of the aforesaid loan and
interest thereon, Respondent Guiok executed a Contract of Pledge
in favor of the [p]etitioner whereby he pledged his three hundred
(300) shares of stock in the Go Fay & Company Inc., Respondent
Corporation, for brevity's sake. Respondent Guiok obliged himself
to pay interest on said loan at the rate of 10% per annum from the

date of said contract of pledge. On the same date, Alfonso Sy Lim

secured a loan from the [p]etitioner in the amount of P40,000
payable in six (6) months. To secure the payment of his loan, Sy
Lim executed a "Contract of Pledge" covering his three hundred
(300) shares of stock in Respondent Corporation. Under said
contract, Sy Lim obliged himself to pay interest on his loan at the
rate of 10% per annum from the date of the execution of said
contract.
Under said "Contracts of Pledge," Respondent[s] Guiok and Sy Lim
covenanted, inter alia, that:
3. In the event of the failure of the PLEDGOR to pay the
amount within a period of six (6) months from the date
hereof, the PLEDGEE is hereby authorized to foreclose
the pledge upon the said shares of stock hereby created
by selling the same at public or private sale with or without
notice to the PLEDGOR, at which sale the PLEDGEE may
be the purchaser at his option; and the PLEDGEE is
hereby authorized and empowered at his option to transfer
the said shares of stock on the books of the corporation to
his own name and to hold the certificate issued in lieu
thereof under the terms of this pledge, and to sell the said
shares to issue to him and to apply the proceeds of the
sale to the payment of the said sum and interest, in the
manner hereinabove provided;
4. In the event of the foreclosure of this pledge and the
sale of the pledged certificate, any surplus remaining in
the hands of the PLEDGEE after the payment of the said
sum and interest, and the expenses, if any, connected
with the foreclosure sale, shall be paid by the PLEDGEE
to the PLEDGOR;
5. Upon payment of the said amount and interest in full,
the PLEDGEE will, on demand of the PLEDGOR, redeliver
to him the said shares of stock by surrendering the
certificate delivered to him by the PLEDGOR or by
retransferring each share to the PLEDGOR, in the event
that the PLEDGEE, under the option hereby granted, shall
have caused such shares to be transferred to him upon
the books of the issuing company."(idem, supra)
Respondent Guiok and Sy Lim endorsed their respective shares of
stock in blank and delivered the same to the [p]etitioner. 7
However, Respondent Guiok and Sy Lim failed to pay their
respective loans and the accrued interests thereon to the
[p]etitioner. In October, 1990, the [p]etitioner filed a "Petition for
Mandamus" against Respondent Corporation, with the SEC entitled
"Lim Tay versus Go Fay & Company. Inc., SEC Case No. 03894",
praying that:
PRAYER

WHEREFORE, premises considered, it is respectfully

prayed that an order be issued directing the corporate
secretary of [R]espondent Go Fay & Co., Inc. to register
the stock transfers and issue new certificates in favor of
Lim Tay. It is likewise prayed that [R]espondent Go Fay &
Co., Inc[.] be ordered to pay all dividends due and
unclaimed on the said certificates to [P]laintiff Lim Tay.
Plaintiff further prays for such other relief just and
equitable in the premises. ( page 34,Rollo)
The [p]etitioner alleged, inter alia, in his Petition that the
controversy between him as stockholder and the Respondent
Corporation was intra-corporate in view of the obstinate refusal of
the corporate secretary of Respondent Corporation to record the
transfer of the shares of stock of Respondent Guiok and Sy Lim in
favor of and under the name of the [p]etitioner and to issue new
certificates of stock to the [p]etitioner.
The Respondent Corporation filed its Answer to the Complaint and
alleged, as Affirmative Defense, that:
AFFIRMATIVE DEFENSE
7. Respondent repleads and incorporates herein by
reference the foregoing allegations.
8. The Complaint states no cause of action against
[r]espondent.
9. Complainant is not a stockholder of [r]espondent.
Hence, the Honorable Commission has no jurisdiction to
enter the present controversy since their [sic] is no
intracorporate relationship between complainant and
respondent.
10. Granting arguendo that a pledge was constituted over
the shareholdings of Sy Guiok in favor of the complainant
and that the former defaulted in the payment of his
obligations to the latter, the same did not automatically
vest [i]n complainant ownership of the pledged shares.
( pace 37, Rollo)
In the interim, Sy Lim died. Respondents Guiok and the Intestate
Estate of Alfonso Sy Lim, represented by Conchita Lim, filed their
Answer-In-Intervention with the SEC alleging, inter alia, that:

"B", it is clear that upon failure to pay the amount within

the stipulated period, the pledgee is authorized to
foreclose the pledge and thereafter, to sell the same to
satisfy the loan. [H]owever, to this point in time, plaintiff
has not performed any operative act of foreclosing the
shares of stocks of [i]ntervenors in accordance with the
Chattel Mortgage law, [n]either was there any sale of
stocks by way of public or private auction made after
foreclosure in favor of the plaintiff to speak about, and
therefore, the respondent company could not be force[d]
to [sic] by way of mandamus, to transfer the subject
shares of stocks from the name of your [i]ntervenors to
that of the plaintiff in the absence of clear and legal basis
for such;
4. DENY specifically the allegations under paragraphs 6, 7
and 8 of the complaint as to the existence of the alleged
intracorporate dispute between plaintiff and company for
being without proper and legal basis. In the first place,
plaintiff is not a stockholder of the respondent corporation;
there was no foreclosure of shares executed in
accordance with the Chattel Mortgage Law whatsoever;
there were no sales consummated that would transfer to
the plaintiff the subject shares of stocks and therefore, any
demand to transfer the shares of stocks to the name of the
plaintiff has no legal basis. In the second place,
[i]ntervenors had been in the past negotiating possible
compromise and at the same time, had tendered payment
of the loan secured by the subject pledges but plaintiff
refused unjustifiably to oblige and accept payment o[r]
even agree on the computation of the principal amount of
the loan and interest on top of a substantial amount
offered just to settle and compromise the indebtedness of
[i]ntervenors;
II. SPECIAL AFFIRMATIVE DEFENSES
Intervenors replead by way of reference all the foregoing
allegations to form part of the special affirmative defenses;
5. This Honorable Commission has no jurisdiction over the
person of the respondent and nature of the action, plaintiff
having no personality at all to compel respondent by way
of mandamus to perform certain corporate function[s];

xxx xxx xxx

6. The complaint states no cause of action;

3. Deny specifically the allegation under paragraph 5 of

the Complaint that, failure to pay the loan within the
contract period automatically foreclosed the pledged
shares of stocks and that the share of stocks are
automatically purchased by the plaintiff, for being false
and distorted, the truth being that pursuant to the [sic]
paragraph 3 of the contract of pledges, Annexes "A" and

7. That respondent is not [a] real party in interest;

8. The appropriation of the subject shares of stocks by
plaintiff, without compliance with the formality of law,
amounted to "[p]actum commis[s]orium" therefore, null and
void;

9. Granting for the sake of argument only that there was a

valid foreclosure and sale of the subject st[o]cks in favor of
the plaintiff which [i]ntervenors deny still paragraph 5
of the contract allows redemption, for which intervenors
are willing to redeem the share of stocks pledged;
10. Even the Chattel Mortgage law allowed redemption of
the [c]hattel foreclosed;
11. As a matter of fact, on several occasions, [i]ntervenors
had made representations with the plaintiff for the
compromise and settlement of all the obligations secured
by the subject pledges even offering to pay
compensation over and above the value of the obligations,
interest[s] and dividends accruing to the share of stocks
but, plaintiff unjustly refused to accept the offer of
payment; ( pages 39-42, Rollo)
The [r]espondents-[i]ntervenors prayed the SEC that judgment be
rendered in their favor, as follows:
IV. PRAYER
It is respectfully prayed to this Honorable Commission
after due hearing, to dismiss the case for lack of merit,
ordering plaintiff to accept payment for the loans secured
by the subject shares of stocks and to pay plaintiff:
1. The sum of P50,000.00, as moral damages;
2. the sum of P50,000.00, as attorneys fees; and,
3. costs of suit.
Other reliefs just and equitable [are] likewise prayed for.
( pages 42-43, Rollo)
After due proceedings, the [h]earing [o]fficer promulgated a
Decision dismissing [p]etitioner's Complaint on the ground that
although the SEC had jurisdiction over the action, pursuant to the
Decision of the Supreme Court in the case of "Rural Bank of
Salinas, et al. vs. Court of Appeals, et al., 210 SCRA 510", he failed
to prove the legal basis for the secretary of the Respondent
Corporation to be compelled to register stock transfers in favor of
the [p]etitioner and to issue new certificates of stock under his
name ( pages 67-77, Rollo). The [p]etitioner appealed the Decision
of the [h]earing [o]fficer to the SEC, but, on March 7, 1996, the SEC
promulgated a Decision, dismissing [p]etitioner's appeal on the
grounds that: (a) the issue between the [p]etitioner and the
[r]espondents being one involving the ownership of the shares of
stock pledged by Respondent Guiok and Sy Lim, the SEC had no
jurisdiction over the action filed by the [p]etitioner; (b) the latter had
no cause of action for mandamus against the Respondent
Corporation, the right of ownership of the [p]etitioner over the 300
shares of stock pledged by Respondent Guiok and Sy Lim not

having been as yet, established, preparatory to the institution of

said Petition for Mandamus with the SEC.
Ruling of the Court of Appeals
On the issue of jurisdiction, the Court of Appeals ruled:
In ascertaining whether or not the SEC had exclusive jurisdiction over
[p]etitioner's action, the [a]ppellate [c]ourt must delve into and ascertain: (a)
whether or not there is a need to enlist the expertise and technical know-how
of the SEC in resolving the issue of the ownership of the shares of stock; (b)
the status of the relationships of the parties; [and] (c) the nature of the
question that is the subject of the controversy. Where the controversy is
purely a civil matter resoluble by civil law principles and there is no need for
the application of the expertise and technical know-how of the SEC, then the
regular courts have jurisdiction over the action. 8 [citations omitted]
On the issue of whether mandamus can be availed of by the petitioner, the Court of
Appeals agreed with the SEC,viz.:
. . . [T]he [p]etitioner failed to establish a clear and legal right to the writ of
mandamus prayed for by him. . . . Mandamus will not issue to enforce a right
which is in substantial dispute or to which a substantial doubt exists . . . .
The principal function of the writ of mandamus is to command and expedite,
and not to inquire and adjudicate and, therefore it is not the purpose of the
writ to establish a legal right, but to enforce one which has already been
9
established. [citations omitted]
The Court of Appeals debunked petitioner's claim that he had acquired ownership
over the shares by virtue of novation, holding that respondents' indorsement and
delivery of the shares were pursuant to Articles 2093 and 2095 of the Civil Code and
that petitioner's receipt of dividends was in compliance with Article 2102 of the same
Code. Petitioner's claim that he had acquired ownership of the shares by virtue of
prescription was likewise dismissed by Respondent Court in this wise:
The prescriptive period for the action of Respondent[s] Guiok and Sy Lim to
recover the shares of stock from the [p]etitioner accrued only from the time
they paid their loans and the interests thereon and [made] a demand for their
10
return.
Hence, the petitioner brought before us this Petition for Review on Certiorari in
accordance with Rule 45 of the Rules of Court. 11
Assignment of Errors
Petitioner submits, for the consideration of this Court, these issues:

12

(a) Whether the Securities and Exchange Commission had jurisdiction over
the complaint filed by the petitioner; and
(b) Whether the petitioner is entitled to the relief of mandamus as against the
respondent Go Fay & Co., Inc.
In addition, petitioner contends that it has acquired ownership of the shares "through
extraordinary prescription," pursuant to Article 1132 of the Civil Code, and through
respondents' subsequent acts, which amounted to a novation of the contracts of
pledge. Petitioner also claims that there was dacion en pago, in which the shares of

stock were deemed sold to petitioner, the consideration for which was the
extinguishment of the loans and the interests thereon. Petitioner likewise claims that
laches bars respondents from recovering the subject shares.
The Court's Ruling
The petition has no merit.
First Issue: Jurisdiction of the SEC
Claiming that the present controversy is intra-corporate and falls within the exclusive
jurisdiction of the SEC, petitioner relies heavily on Abejo v. De la Cruz, 13 which
upheld the jurisdiction of the SEC over a suit filed by an unregistered stockholder
seeking to enforce his rights. He also seeks support from Rural Bank of Salinas, Inc.
v. Court of Appeals, 14 which ruled that the right of a transferee or an assignee to
have stocks transferred to his name was an inherent right flowing from his ownership
of the said stocks.
The registration of shares in a stockholder's name, the issuance of stock certificates,
and the right to receive dividends which pertain to the said shares are all rights that
flow from ownership. The determination of whether or not a shareholder is entitled to
exercise the above-mentioned rights falls within the jurisdiction of the SEC. However,
if ownership of the shares is not clearly established and is still unresolved at the time
the action for mandamus is filed, then jurisdiction lies with the regular courts.
Sec. 5 of Presidential Decree No. 902-A sets forth the jurisdiction of the SEC as
follows:
Sec. 5. In addition to the regulatory and adjudicative functions of the
Securities and Exchange Commission over corporations, partnerships and
other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
(a) Devices or schemes employed by or any acts of the board of directors,
business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public
and/or of stockholders, partners, members of associations or organizations
registered with the Commission;
(b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members, or associates; between any or
all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such
corporation, partnership or association and the State insofar as it concerns
their individual franchise or right to exist as such entity;
(c) Controversies in the election or appointment of directors, trustees,
officers or managers of such corporations, partnerships or associations.
(d) Petitions of corporations, partnerships or associations to be declared in
the state of suspension of payments in cases where the corporation,
partnership or association possesses property to cover all its debts but
foresees the impossibility of meeting them when they respectively fall due or
in cases where the corporation, partnership or association has no sufficient

assets to cover its liabilities, but is under the Management Committee

created pursuant to this decree. 15
Thus, a controversy "among stockholders, partners or associates themselves"
intra-corporate in nature and falls within the jurisdiction of the SEC.

16

is

As a general rule, the jurisdiction of a court or tribunal over the subject matter is
determined by the allegations in the complaint. 17 In the present case, however,
petitioner's claim that he was the owner of the shares of stock in question has
no prima facie basis.
In his Complaint, petitioner alleged that, pursuant to the contracts of pledge, he
became the owner of the shares when the term for the loans expired. The Complaint
contained the following pertinent averments:
xxx xxx xxx
3. On [J]anuary 8, 1990, under a Contract of Pledge, Lim Tay received three
hundred (300) shares of stock of Go Fay & Co., Inc., from Sy Guiok as
security for the payment of a loan of [f]orty [t]housand [p]esos (P40,000.00)
Philippine currency, the sum of which was payable within six (6) months
[with interest] at ten percentum (10%) per annum from the date of the
execution of the contract; a copy of this Contract of Pledge is attached as
Annex "A" and made part hereof;
4. On the same date January 8, 1980, under a similar Contract of Pledge,
Lim Tay received three hundred (300) shares of stock of Go Pay & Co., Inc.
from Alfonso Sy Lim as security for the payment of a loan of [f]orty
[t]housand [p]esos (P40,000.00) Philippine currency, the sum of which was
payable within six (6) months [with interest] at ten percentum (10%) per
annum from the date of the execution of the contract; a copy of this Contract
of Pledge is attached as Annex "B" and made part hereof;
5. By the express terms of the agreements, upon failure of the borrowers to
pay the stated amounts within the contract period, the pledge is foreclosed
and the shares of stock are purchased by [p]laintiff, who is expressly
authorized and empowered to transfer the duly endorsed shares of stock on
the books of the corporation to his own name; . . . 18 (emphasis supplied)
However, the contracts of pledge, which were made integral parts of the Complaint,
contain this common proviso:
3. In the event of the failure of the PLEDGOR to pay the amount within a
period of six (6) months from the date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without notice to
the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his
option; and the PLEDGEE is hereby authorized and empowered at his
option, to transfer the said shares of stock on the books of the corporation to
his own name and to hold the certificate issued in lieu thereof under the
terms of this pledge, and to sell the said shares to issue to him and to apply
the proceeds of the sale to the payment of the said sum and interest, in the
manner hereinabove provided;
This contractual stipulation, which was part of the Complaint, shows that plaintiff was
merely authorized to foreclose the pledge upon maturity of the loans, not to own

them. Such foreclosure is not automatic, for it must be done in a public or private
sale. Nowhere did the Complaint mention that petitioner had in fact foreclosed the
pledge and purchased the shares after such foreclosure. His status as a mere
pledgee does not, under civil law, entitle him to ownership of the subject shares. It is
also noteworthy that petitioner's Complaint did not aver that said shares were
acquired through extraordinary prescription, novation or laches. Moreover, petitioner's
claim, subsequent to the filing of the Complaint, that he acquired ownership of the
said shares through these three modes is not indubitable and still has to be resolved.
In fact, as will be shown, such allegation-has no merit. Manifestly, the Complaint by
itself did not contain any prima facie showing that petitioner was the owner of the
shares of stocks. Quite the contrary, it demonstrated that he was merely a pledgee,
not an owner. Accordingly, it failed to lay down a sufficient basis for the SEC to
exercise jurisdiction over the controversy. In fact, the very allegations of the
Complaint and its annexes negated the jurisdiction of the SEC.
Petitioner's reliance on the doctrines set forth in Abejo v. De la Cruz and Rural Bank
of Salinas, Inc. v. Court of Appeals is misplaced. In Abejo, he Abejo spouses sold to
Telectronic Systems, Inc. shares of stock in Pocket Bell Philippines, Inc. Subsequent
to such contract of sale, the corporate secretary, Norberto Braga, refused to record
the transfer of the shares in the corporate books and instead asked for the annulment
of the sale, claiming that he and his wife had a preemptive right over some of the
shares, and that his wife's shares were sold without consideration or consent.
At the time the Bragas questioned the validity of the sale, the contract had already
been perfected, thereby demonstrating that Telectronic Systems, Inc. was already
the prima facie owner of the shares and, consequently, a stockholder of Pocket Bell
Philippines, Inc. Even if the sale were to be annulled later on, Telectronic Systems,
Inc. had, in the meantime, title over the shares from the time the sale was perfected
until the time such sale was annulled. The effects of an annulment operate
prospectively and do not, as a rule, retroact to the time the sale was made. Therefore,
at the time the Bragas questioned the validity of the tranfers made by the Abejos,
Telectronic Systems, Inc. was already a prima facie shareholder of the corporation,
thus making the dispute between the Bragas and the Abejos "intra-corporate" in
nature. Hence, the Court held that "the issue is not on ownership of shares but rather
the non-performance by the corporate secretary of the ministerial duty of recording
transfers of shares of stock of the corporation of which he is secretary." 19
Unlike Abejo, however, petitioner's ownership over the shares in this case was not yet
perfected when the Complaint was filed. The contract of pledge certainly does not
make him the owner of the shares pledged. Further, whether prescription effectively
transferred ownership of the shares, whether there was a novation of the contracts of
pledge, and whether laches had set in were difficult legal issues, which were
unpleaded and unresolved when herein petitioner asked the corporate secretary of
Go Fay to effect the transfer, in his favor, of the shares pledged to him.
In Rural Bank of Salinas, Melenia Guerrero executed deeds of assignment for the
shares in favor of the respondents in that case. When the corporate secretary refused
to register the transfer, an action for mandamus was instituted. Subsequently, a
motion for intervention was filed, seeking the annulment of the deeds of assignment
on the grounds that the same were fictitious and antedated, and that they were in fact
donations because the considerations therefor were below the book value of the
shares.

Like the Abejo spouses, the respondents in Rural Bank of Salinas were already prima
facie shareholders when the deeds of assignment were questioned. If the said deeds
were to be annulled later on, respondents would still be considered shareholders of
the corporation from the time of the assignment until the annulment of such contracts.
Second Issue: Mandamus Will Not
Issue to Establish a Right
Petitioner prays for the issuance of a writ of mandamus, directing the corporate
secretary of respondent corporation to have the shares transferred to his name in the
corporate books, to issue new certificates of stock and to deliver the corresponding
20
dividends to him.
In order that a writ of mandamus may issue, it is essential that the person petitioning
for the same has a clear legal right to the thing demanded and that it is the imperative
duty of the respondent to perform the act required. It neither confers powers nor
imposes duties and is never issued in doubtful cases. It is simply a command to
21
exercise a power already possessed and to perform a duty already imposed.
In the present case, petitioner has failed to establish a clear legal right. Petitioner's
contention that he is the owner of the said shares is completely without merit. Quite
the contrary and as already shown, he does not have any ownership rights at all. At
the time petitioner instituted his suit at the SEC, his ownership claim had no prima
facie leg to stand on. At best, his contention was disputable and uncertain Mandamus
will not issue to establish a legal right, but only to enforce one that is already clearly
established.
Without Foreclosure and
Purchase at Auction, Pledgor
Is Not the Owner of Pledged Shares
Petitioner initially argued that ownership of the shares pledged had passed to him,
upon Respondents Sy Guiok and Sy Lim's failure to pay their respective loans. But on
appeal, petitioner claimed that ownership over the shares had passed to him, not via
the contracts of pledge, but by virtue of prescription and by respondents' subsequent
acts which amounted to a novation of the contracts of pledge. We do not agree.
At the outset, it must be underscored that petitioner did not acquire ownership of the
shares by virtue of the contracts of pledge. Article 2112 of the Civil Code states:
The creditor to whom the credit has not been satisfied in due time, may
proceed before a Notary Public to the sale of the thing pledged. This sale
shall be made at a public auction, and with notification to the debtor and the
owner of the thing pledged in a proper case, stating the amount for which the
public sale is to be held. If at the first auction the thing is not sold, a second
one with the same formalities shall be held; and if at the second auction
there is no sale either, the creditor may appropriate the thing pledged. In this
case he shall be obliged to give an acquittance for his entire claim.
Furthermore, the contracts of pledge contained a common proviso, which we quote
again for the sake of clarity:
3. In the event of the failure of the PLEDGOR to pay the amount within a
period of six (6) months from the date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without notice to

the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his
option; and "the PLEDGEE is hereby authorized and empowered at his
option to transfer the said shares of stock on the books of the corporation to
his own name, and to hold the certificate issued in lieu thereof under the
terms of this pledge, and to sell the said shares to issue to him and to apply
the proceeds of the sale to the payment of the said sum and interest, in the
manner
hereinabove
provided; 22

Petitioner contends that he can be deemed to have acquired ownership over the
certificates of stock through extraordinary prescription, as provided for in Article 1132
of the Civil Code which states:

There is no showing that petitioner made any attempt to foreclose or sell the shares
through public or private auction, as stipulated in the contracts of pledge and as
required by Article 2112 of the Civil Code. Therefore, ownership of the shares could
not have passed to him. The pledgor remains the owner during the pendency of the
pledge and prior to foreclosure and sale, as explicitly provided by Article 2103 of the
same Code:

Petitioner's argument is untenable. What is required by Article 1132 is possession in

the concept of an owner. In the present case, petitioner's possession of the stock
certificates came about because they were delivered to him pursuant to the contracts
of pledge. His possession as a pledgee cannot ripen into ownership by prescription.
As aptly pointed out by Justice Jose C. Vitug:

Unless the thing pledged is expropriated, the debtor continues to be the

owner thereof.
Nevertheless, the creditor may bring the actions which pertain to the owner
of the thing pledged in order to recover it from, or defend it against a third
person.
No Ownership
by Prescription
Petitioner did not acquire the shares by prescription either. The period of prescription
of any cause of action is reckoned only from the date the cause of action accrued.
Since a cause of action requires as an essential element not only a legal right of the
plaintiff and a correlative obligation of the defendant, but also an act or omission of
the defendant in violation of said legal right, the cause of action does not accrue until
the party obligated refuses, expressly or impliedly, to comply with its
duty." 23Accordingly, a cause of action on a written contract accrues when a breach or
violation thereof occurs.
Under the contracts of pledge, private respondents would have a right to ask for the
redelivery of their certificates of stock upon payment of their debts to petitioner,
consonant with Article 2105 of the Civil Code, which reads:
The debtor cannot ask for the return of the thing pledged against the will of
the creditor, unless and until he has paid the debt and its interest, with
24
expenses in a proper case.
Thus, the right to recover the shares based on the written contract of pledge between
petitioner and respondents would arise only upon payment of their respective loans.
Therefore, the prescriptive period within which to demand the return of the thing
pledged should begin to run only after the payment of the loan and a demand for the
thing has been made, because it is only then that respondents acquire a cause of
action for the return of the thing pledged.
Prescription should not begin to run on the action to demand the return of the thing
pledged while the loan still exists. This is because the right to ask for the return of the
thing pledged will not arise so long as the loan subsists. In the present case, the
prescriptive period did not begin to run when the loan became due. On the other
hand, it is petitioner's right to demand payment that may be in danger of prescription.

Art. 1132. The ownership of movables prescribes through uninterrupted

possession for four years in good faith.
The ownership of personal property also prescribes through uninterrupted
possession for eight years, without need of any other condition. . . . .

Acquisitive prescription is a mode of acquiring ownership by a possessor

through the requisite lapse of time. In order to ripen into ownership,
possession must be in the concept of an owner, public, peaceful and
uninterrupted. Thus, possession with a juridical title, such as by a
usufructory, a trustee, a lessee, agent or a pledgee, not being in the concept
of an owner, cannot ripen into ownership by acquisitive prescription unless
the juridical relation is first expressly repudiated and such repudiation has
been communicated to the other party. 25
Petitioner expressly repudiated the pledge, only when he filed his Complaint and
claimed that he was not a mere pledgee, but that he was already the owner of the
shares. Based on the foregoing, petitioner has not acquired the certificates of stock
through extraordinary prescription.
No Novation
in Favor of Petitioner
Neither did petitioner acquire the shares by virtue of a novation of the contract of
pledge. Novation is defined as "the extinguishment of an obligation by a subsequent
one which terminates it, either by changing its object or principal conditions, by
substituting a new debtor in place of the old one, or by subrogating a third person to
the rights of the creditor." 26 Novation of a contract must not be presumed. "In the
absence of an express agreement, novation takes place only when the old and the
new obligations are incompatible on every point." 27
In the present case, novation cannot be presumed by (a) respondents' indorsement
and delivery of the certificates of stock covering the 600 shares, (b) petitioner's
receipt of dividends from 1980 to 1983, and (c) the fact that respondents have not
instituted any action to recover the shares since 1980.
Respondents' indorsement and delivery of the certificates of stock were pursuant to
paragraph 2 of the contract of pledge which reads:
2. The said certificates had been delivered by the PLEDGOR endorsed in
blank to be held by the PLEDGEE under the pledge as security for the
payment
of
the aforementioned
sum
and interest
thereon
accruing. 28
This stipulation did not effect the transfer of ownership to petitioner. It was merely in
29
compliance with Article 2093 of the Civil Code, which requires that the thing

pledged be placed in the possession of the creditor or a third person of common

agreement; and Article 2095, 30 which states that if the thing pledged are shares of
stock, then the "instrument proving the right pledged" must be delivered to the
creditor.
Moreover, the fact that respondents allowed the petitioner to receive dividends
pertaining to the shares was not meant to relinquish ownership thereof. As stated by
respondent corporation, the same was done pursuant to an agreement between the
petitioner and Respondents Sy Guiok and Sy Lim, following Article 2102 of the civil
Code which provides:
It the pledge earns or produces fruits, income, dividends, or interests, the
creditor shall compensate what he receives with those which are owing him;
but if none are owing him, or insofar as the amount may exceed that which is
due, he shall apply it to the principal. Unless there is a stipulation to the
contrary, the pledge shall extend to the interest and the earnings of the right
pledged.
Novation cannot be inferred from the mere fact that petitioner has not, since 1980,
instituted any action to recover the shares. Such action is in fact premature, as the
loan is still outstanding. Besides, as already pointed out, novation is never presumed
or inferred.
No Dacion en Pago
in Favor of Petitioner
Neither can there be dacion en pago, in which the certificates of stock are deemed
sold to petitioner, the consideration for which is the extinguishment of the loans and
the accrued interests thereon. Dacion en pago is a form of novation in which a
change takes place in the object involved in the original contract. Absent an explicit
agreement, petitioner cannot simply presume dacion en pago.
Laches Not
a Bar to Petitioner
Petitioner submits that "the inaction of the individual respondents with respect to the
recovery of the shares of stock serves to bar them from asserting rights over said
shares on the basis of laches." 31
Laches has been defined as "the failure or neglect, for an unreasonable length of
time, to do that which by exercising due diligence could or should have been done
earlier; it is negligence or omission to assert a right within a reasonable time,
warranting a presumption that the party entitled to assert it either has abandoned it or
declined to assert it." 32
In this case, it is in fact petitioner who may be guilty of laches. Petitioner had all the
time to demand payment of the debt. More important, under the contracts of pledge,
petitioner could have foreclosed the pledges as soon as the loans became due. But
for still unknown or unexplained reasons, he failed to do so, preferring instead to
pursue his baseless claim to ownership.
WHEREFORE, the petition is hereby DENIED and the assailed Decision is
AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 135043

July 14, 2004

TOWNE & CITY DEVELOPMENT CORPORATION, petitioner,

vs.
COURT OF APPEALS and GUILLERMO R. VOLUNTAD (substituted by TOMAS
VOLUNTAD and FLORDELIZA ESTEBAN Vda. De VOLUNTAD) respondents.
DECISION
TINGA, J.:
Before us is a Petition for Review on Certiorari under Rule 45 assailing the August 12,
1
1998 Decision of the Court of Appeals, Tenth Division, in CA-G.R. CV No. 50919.
Respondent Guillermo Voluntad (Guillermo) and petitioner Towne & City
Development Corporation were both engaged in the construction business. From
1984 to 1985, Guillermo and petitioner entered into a contract for the (a) construction
of several housing units belonging to or reserved for different individuals; (b) repair of
several existing housing units belonging to different individuals; and (c) repair of
facilities, all located at the Virginia Valley Subdivision, owned and developed by the
petitioner. The total contract cost amounted to One Million Forty One Thousand Three
Hundred Fifty Nine (P1,041,359.00) Pesos.
The parties agreed that Guillermo should be paid in full by petitioner the agreed
contract cost upon completion of the project. In 1985, pending completion of the
project, Guillermo was allowed by petitioner to occupy, free of charge, one of its
houses at the Virginia Valley Subdivision.
After completing the construction and repair works subject of the contract, Guillermo
demanded payment for his services.
When petitioner failed to satisfy his claim in full, Guillermo filed on April 30, 1990
a Complaint for collection against petitioner before the Regional Trial Court of Manila
(RTC). The case was docketed as Civil Case No. 90-52880 and raffled to Branch 25
of the RTC. Guillermo alleged that petitioner paid him only the amount of P69,400.00,
leaving a balance of P971,959.00 under the terms of their contract. 2
In its Answer with Counter-claims (sic), petitioner averred that it had already paid
Guillermo the amount ofP1,022,793.46 for his services and that there was even an
overpayment of P58,189.46. Petitioner further claimed that Guillermo is liable for
unpaid rentals amounting to P66,000.00 as of June 1990 for his occupancy of one of
the houses in Virginia Valley Subdivision since 1985.3
During the pre-trial of the case, the parties agreed to limit the issues to: (1) whether
petitioner had paid Guillermo in full in accordance with their contract; (2) if payment in
full had been made by petitioner, whether there was an overpayment on its part; and
4
(3) whether either or both parties are entitled to attorney's fees.
While the case was pending before the trial court, Guillermo passed away. Upon
motion of respondents Tomas Voluntad and Flordeliza Vda. de Voluntad, the trial
court issued an Order substituting them as plaintiffs in place of the deceased
Guillermo.5
Guillermo did not adduce evidence, whether testimonial or documentary, as
evidence-in-chief in view of the admissions made by petitioner in its Answer with
6
Counter-claims that indeed it entered into a contract with him and that it was obliged
to pay him for his services. Petitioner, for its part, presented as its sole witness Ms.

Rhodora Aguila (Ms. Aguila), its Corporate Secretary, to prove that it paid Guillermo
for his services under the contract. She testified that she personally handed or
delivered the cash or check payments to Guillermo, adding that Guillermo
7
acknowledged payments with his signatures on the vouchers. In rebuttal, Guillermo
testified along with two employees of the Special Security System.
On December 29, 1994, the trial court rendered its Decision, the dispositive portion of
which states:
"WHEREFORE, premises considered, judgment is hereby rendered, as
follows:
1. Ordering defendant to pay plaintiff the total sum of P715,228.50
representing defendant's unpaid balance owing in favor of plaintiff, with 3%
interest from the time of filing of the complaint until the full amount is
satisfied;
2. Ordering plaintiff to vacate the house occupied by him belonging to
defendant;
3. No pronouncement as to cost and attorney's fees.
SO ORDERED."8
Petitioner filed a Motion for Reconsideration on March 2, 1995, stressing that the
9
lower court erred that it had not paid Guillermo's claim in full. The trial court denied
10
the motion for lack of merit in its Order dated April 24, 1995.
Consequently, on May 3, 1995 petitioner filed its Notice of Partial Appeal to the Court
of Appeals insofar as theDecision ordered it to pay Guillermo the total sum
of P715,228.50, which according to the lower court represented its unpaid balance,
with interest thereon.11
On August 12, 1998, the appellate court rendered a Decision affirming the judgment
of the lower court. The dispositive portion reads:
"ACCORDINGLY, finding no reversible error in the decision appealed from
dated December 29, 1994, the same is hereby AFFIRMED in all respects.
Costs against defendant-appellant.
SO ORDERED."12
Hence, this Petition.
Petitioner submits that the "Court a quo committed reversible errors of law and/or
acted with grave abuse of discretion" in not considering as proofs of payment the
vouchers and other documentary exhibits, and in ignoring the ruling in Philippine
National Bank vs. Court of Appeals,13 although it was cited in the assailed
decisions.14
The alleged errors, however, refer to the appreciation of evidence which the appellate
and trial courts made. As such, they involve questions of fact of which the Court
cannot take cognizance of In the case of Naguiat v. Court of Appeals,15 the Court said
that there is a question of fact when a doubt or difference arises as to the truth or the
falsehood of alleged facts, while there is a question of law when such doubt or
difference refers to what the law is on a certain state of facts.

It must be emphasized that this Court is not a trier of facts, and under Rule 45 of the
1997 Rules of Civil Procedure, a petition for review to be given due course should
raise only questions of law.16 This rule finds even greater application when the
findings of fact of the trial court were affirmed by the Court of Appeals, as in this
17
case.
18

Neither does the present case fall under any of the recognized exceptions to
warrant a review of the assailed factual findings. Truth to tell, the findings of the Court
of Appeals are amply supported by the evidence on record.
To skirt the procedural obstacle, petitioner insists that the issue of whether a voucher
suffices as evidence of payment is a question of law. Significantly, petitioner claims
that the appellate court's failure to consider the vouchers as proof of payment runs
counter to our ruling in Philippine National Bank (PNB) v. Court of Appeals19that "the
best evidence for proving payment is by evidence of receipts showing the same."
Fundamentally, however, petitioner's point raises a question of fact which is definitely
out of place in a petition for review under Rule 45. The question of whether
petitioner's vouchers bearing Guillermo's signature constitute adequate proof of
payment of Guillermo's claim requires an examination of the vouchers and an inquiry
into the circumstances surrounding petitioner's issuance thereof. Such are functions
reserved for the trial courts and the Court of Appeals when reviewing findings of fact
by the trial court. They are not functions of this Court.
The ruling in PNB v. Court of Appeals20 is that while a receipt of payment is the best
evidence of the fact of payment, it is, however, not conclusive but merely
presumptive;21 neither it is exclusive evidence as the fact of payment may be
established also by parole evidence.22 Contrary to petitioner's stance, the appellate
court did not disregard but instead took into account the ruling in the cited case. This
may easily be confirmed by reviewing the factual predicates on which the ruling was
handed down.
In the cited case, private respondent Flores purchased from petitioner PNB and its
Manila Pavilion Unit, two (2) manager's check worth P500,000.00 each, paying a total
of P1,000,040.00, the extra P40.00 representing the service charge. PNB issued a
receipt for the amount. On the following day, Flores presented the checks at PNB
Baguio Hyatt Casino unit, but PNB initially refused to encash the checks. Eventually,
it agreed to encash one of the checks. However, it deferred payment of the other
check until after Flores agreed that it be broken down to five (5) checks
of P100,000.00 each. Moreover, PNB refused to encash one of the five (5) checks
until after it shall have been cleared by its Manila Pavilion Hotel Unit. The PNB Malate
Branch, to which Flores made representations upon his return to Manila, refused to
encash the last check. So, Flores filed a case for collection, plus damages.
PNB admitted that it issued a receipt for P1,000,040.00 but at same time countered
that the receipt is not the best evidence to prove how much Flores actually paid for
the purchase of its manager's checks. So, according to PNB, the issue was not what
appears on the receipt but how much money Flores paid to PNB which, also
according to PNB, allows the presentation of evidence aliunde.
This Court held:
Although a receipt is not conclusive evidence, in the case at bench, an
exhaustive review of the records fails to disclose any other evidence

sufficient and strong enough to overturn the acknowledgment embodied in

petitioner's receipt(as to the amount of money it actually received.)23
....
Having failed to adduce sufficient rebuttal evidence, petitioner is bound by
the contents of the receipt it issued to Flores. The subject receipt remains to
be the primary or best evidence or "that which affords the greatest certainty
of the fact in question."24
In the case at bar, petitioner has relied on vouchers to prove its defense of payment.
However, as correctly pointed out by the trial court which the appellate court upheld,
vouchers are not receipts.
It should be noted that a voucher is not necessarily an evidence of
payment. It is merely a way or method of recording or keeping track of
payments made. A procedure adopted by companies for the orderly and
proper accounting of funds disbursed. Unless it is supported by an actual
payment like the issuance of a check which is subsequently encashed or
negotiated, or an actual payment of cash duly receipted for as is customary
among businessmen, a voucher remains a piece of paper having no
evidentiary weight.25(Emphasis supplied).
A receipt is a written and signed acknowledgment that money has been or goods
have been delivered,26 while a voucher is documentary record of a business
transaction.27
The references to alleged check payments in the vouchers presented by the
petitioner do not vest them with the character of receipts. Under Article 1249 of the
Civil Code,28 payment of debts in money has to be made in legal tender and the
delivery of mercantile documents, including checks, "shall produce the effect of
payment only when they have been cashed, or when through the fault of the creditor
they have been impaired."
From the text of the Civil Code provision, it is clear that there are two exceptions to
the rule that payment by check does not extinguish the obligation. Neither exception
is present in this case. Concerning the first, petitioner failed to produce the originals of
the checks after their supposed encashment and even the bank statements although
the supposed payments by check were effected only about 5 years before the filing of
the collection suit. Anent the second exception, the doctrine is that it does not apply to
instruments executed by the debtor himself and delivered to the
creditor.29 Indubitably, that is not the situation in this case.
Petitioner also relied upon the testimony of its Corporate Secretary, Rhodora Aguila.
Again, the issue about the credibility of said witness involves a question of fact which
is a definite incongruity in petitions for review, as in the case before us. In any event,
the Court of Appeals convincingly debunked the testimony. 30
All told, the Court finds no reason to disturb the findings of the Court of Appeals which
affirmed in toto the trial court's Decision.
WHEREFORE, the Petition is DENIED. The assailed Decision of the Court of Appeals
is AFFIRMED. Costs against the petitioner.
SO ORDERED.

G.R. No. 157836

May 26, 2005

NOEMI M. CORONEL, petitioner,

vs.
ENCARNACION C. CAPATI, respondent.
DECISION

1. To pay plaintiff the amount of P484,000.00 as principal obligation plus

12% interest per annum computed from the time of the filing of this case up
to the time it is fully paid;
2. To pay plaintiff 10% of the principal obligation of P484,000.00 as
attorneys fees;

PUNO, J.:
On appeal is the Court of Appeals May 31, 2001 Decision1 in CA-G.R. CV No. 58060
and April 8, 2003 Resolution,2 affirming the April 30, 1997 Decision3 of the Regional
Trial Court of Guagua, Pampanga in Civil Case No. G-2549 which found petitioner
liable to pay respondent its loan obligation, plus attorney's fees and costs of suit.
The facts are as follows:
Petitioner contracted two loans from respondent on September 4, 1992 and October
25, 1992. The first amounted to P121,000.00 payable on or before February 4, 1993
and the second amounted to P363,000.00 payable on or before March 25, 1993. In
4
return, petitioner issued respondent two checks: Metrobank Check No. 114678 dated
September 4, 1992 for the first loan and Metrobank Check No. 1146795 dated
October 25, 1992 for the second loan. The two loans are embodied in two
handwritten instruments. The first one reads:
P121,000.

WHEREFORE, premises considered, judgment is rendered ordering

defendant:

00

/xx

Received the amount of one hundred twenty one thousand pesos

only P121,000. 00/xx from Mrs. Encarnacion C. Capati & payable in 5 months
from Sept. 4, 1992 & said loan is secured by Metrobank (Guagua Branch)
and with check # 114678.
(signed)
Noemi M. Coronel6
The second instrument, in like tenor, reads as follows:
Received the amount of three hundred sixty three thousand pesos
only P363,000. 00/xx from Mrs. Encarnacion C. Capati & payable from Oct.
25, 1992 (5 months) & said loan is secured with Metrobank check # 114679
(Guagua Branch).
(signed)
Noemi M. Coronel7
Petitioner failed to pay her loans upon maturity despite repeated demands from
respondent. The two checks she issued were dishonored when presented for
payment on February 16, 1993 and April 7, 1993. Hence, on September 14, 1993,
respondent filed a complaint for sum of money and damages with attachment against
petitioner before the Regional Trial Court of Guagua, Pampanga.
On April 30, 1997, the trial court ruled in favor of respondent, ordering petitioner to
pay, as follows:

3. To pay the costs of the suit.

SO ORDERED.
On appeal to the Court of Appeals, petitioner was unsuccessful as the appellate court
affirmed the ruling of the trial court.
Petitioners Motion for Reconsideration8 was denied.
Hence, this appeal.

Petitioner denied contracting the two loans in the amounts of P121,000.00

and P363,000.00 from respondent. She alleged that the Metrobank checks
representing the foregoing amounts were two of several checks she issued in favor of
respondent for a loan amounting to P1.101 million which she has fully paid. She
claimed that despite full payment, respondent still deposited the two checks because
of a dispute between them arising from respondents demand for exorbitant and
additional interest on the P1.101 million loan.
Petitioner alleged further that there were instances when respondent asked her to
affix her signature on blank sheets of paper thereby implying that the contents of
Exhibits "A-1" and "B-1," containing the loan agreements were written by respondent
on sheets of paper signed in advance by petitioner.
In detail, petitioner contended that on May 20, 1992, respondent informed her that her
loan
obligation
added
toP980,000.00
plus
interest
of P121,000.00,
totaling P1,101,000.00, to which computation petitioner agreed. At the same time,
respondent also asked her to sign a document entitled "Pacto de Retro Sale"10 with
the assurance that it will serve only as "security." On June 18, 1992, petitioner paid
respondent P66,000.00 in cash.11 Before the end of the redemption period under
the pacto de retro sale which was on August 20, 1992, petitioner, expecting that she
will be unable to pay the full amount on due date, issued respondent two checks:
Metrobank check no. 11466812 in the amount of P980,000.00 dated August 20, 1992
13
and Metrobank check no. 114669 in the amount of P121,000.00 dated September
4, 1992. Later, respondent returned these two Metrobank checks numbered 114668
and 114669 to petitioner. Petitioner replaced these checks with Metrobank check no.
14
114675 in the same amount of P980,000.00 and likewise dated August 20, 1992,
and Metrobank check no. 114678,15 again in the same amount of P121,000.00 and
likewise dated September 4, 1992.
On September 7, 1992, petitioner paid respondent another P40,000.00 in the form of
Metrobank check no. 114700.16 And on November 13, 1992, petitioner paid
17
respondent P1M, evidenced by a handwritten receipt signed by respondent. The
receipt reads as follows:
Received from Miss Noemi M. Coronel the Bank of Philippine Island
Cashiers Check No. 019877 dated Nov. 13, 1992 for ONE MILLION

(P1,000,000.00) pesos as partial payment of the loan from Mrs. Encarnacion

C. Capati, & the balance will be paid on or before Dec. 15, 1992.
(signed)
ENCARNACION
LENDER-MORTGAGEE

CAPATI

November 13, 1992

Respondent returned to petitioner check no. 11467518 in the amount of P980,000.00
dated August 20, 1992, upon payment of petitioner to respondent of the cashiers
check worth P1M. Petitioner also issued another postdated check Metrobank Check
19
No. 114679 in the amount of P363,000.00 dated October 25, 1992 allegedly for
interest of her obligation.20
Based on petitioners own computation, her remaining balance amounted to
only P50,000.00. Thus, on December 1, 1992, petitioner issued respondent a
21
Metrobank Check No. 147653 in the amount of P50,000.00. On January 4, 1993,
she allegedly ordered Metrobank Guagua, through a letter, 22 to stop payment of the
checks she issued respondent for P121,000.00 and P363,000.00. According to
petitioner, these two checks were not returned by respondent because the latter
claimed that she has not completed the payment of interest yet.
In sum, petitioner alleged that her total obligation is computed, as follows:
P 980,000.00

principal obligation

176,000.00

3% monthly interest from

P1,156,000.00

May to Nov 1992

which she claimed to have paid, as follows:

P 66,000.00

June 18, 1992

40,000.00

September 7, 1992

1,000,000.00

November 13, 1992

50,000.00

December 1, 1992

P1,156,000.00
We find petitioners contentions unmeritorious.
The existence of petitioners obligation is supported by documentary evidence.
Exhibits "A-1" and "B-1" are written instruments containing the loan agreements. The

signature of petitioner as debtor appears in both instruments. Petitioner does not

deny she owns these signatures. These exhibits are the best evidence of the subject
obligation. Petitioners contrary evidence has no leg to stand on. At first, she claims
that her total loan obligation amounted to P1.101 million, the amount of consideration
stated in the document entitled "Pacto de Retro Sale." At the end, however, she came
up with a different computation of her obligation as totaling P1.156 million, without
any document to support her allegation. The discrepancy between the two
computations is not explained. The age old rule of evidence is that oral testimony as
to a certain fact, depending as it does on human memory that is most often than not,
momentary and fleeting, is not as reliable as written or documentary evidence. 23 We
are, thus, more convinced that Exhibits "A-1" and "B-1" express the true agreement of
the parties, contrary to the oral testimony of petitioner that those amounts are part of
a loan amounting to P1.101 million which she has fully paid. The latter appears to be
another loan, distinct from the one involved in the case at bar.24 Incidentally, the pacto
de retro sale referred to by petitioner, is the subject matter of another litigation
25
between the same parties pending with the same court.
Petitioner tries to escape responsibility by testifying that it has been respondents
practice to ask her to sign blank sheets of paper. She wants the court to believe that
she did not know of the contents of Exhibits "A-1" and "B-1," and that these
documentary evidence could have been one of those blank sheets of paper that
respondent has asked her to sign. We find this tale unacceptable, absent any form of
duress or intimidation from respondent, which petitioner does not even allege. Time
and again, we have held that one who is of age and a businesswise is presumed to
have acted with due care and to have signed the documents in question with full
knowledge of its contents and consequences.26 Petitioner is not one ignorant, illiterate
person who could be easily duped into signing blank sheets of papers. She has
borrowed large sums of money from respondent. In fact, petitioners total loan
obligation to respondent has reached over millions of pesos. Petitioner has transacted
business with respondent several times. Among others, they include transactions
involving a pacto de retro sale which is the subject of another pending case between
the parties and loans amounting to P2M and P1M, secured by deeds of real estate
mortgage and chattel mortgage, respectively. As the lower court correctly pointed out,
petitioner apparently knows how to take care of her business dealings. Thus, on
October 21, 1992 and February 22, 1993, she caused the execution of two
documents entitled "Discharge of Real Estate Mortgage"27 and "Discharge of Chattel
Mortgage,"28 respectively, when she paid respondent the full consideration of the
promissory notes ofP2M and P1M, wherein the mortgages served as security for the
payment of said notes.29 Similarly, petitioner, upon payment of P1M to respondent on
November 13, 1992, retrieved the Metrobank Check No. 11467530 dated August 20,
1992 which she issued as security to respondent. Interestingly, in the case of the two
checks subject matter of this litigation, petitioner did not even demand their return
from respondent, notwithstanding her claim that she has paid in full her loan
obligation. All she presented was a letter31 ordering Metrobank Guagua to stop
payment of the checks without proof that it has been received by, nor actually sent to
Metrobank Guagua.
Again, we reiterate the rule that when the existence of a debt is fully established by
the evidence contained in the record, the burden of proving that it has been
extinguished by payment devolves upon the debtor who offers such defense to the
32
claim of the creditor. Even where respondent-creditor who was plaintiff in the lower
court, alleges non-payment, the general rule is that the onus rests on the petitionerdebtor who was defendant in the lower court, to prove payment, rather than on the

33

plaintiff-creditor to prove non-payment. The debtor has the burden of showing with
legal certainty that the obligation has been discharged by payment. 34 This, petitioner
failed to do.
IN VIEW THEREOF, petitioners appeal is DENIED. The Court of Appeals May 31,
2001 Decision in CA-G.R. CV No. 58060 and April 8, 2003 Resolution, affirming the
April 30, 1997 Decision of the Regional Trial Court of Guagua, Pampanga in Civil
Case No. G-2549, are AFFIRMED.
SO ORDERED.

G.R. No. 166704

December 20, 2006

AGRIFINA AQUINTEY, petitioner,

vs.
SPOUSES FELICIDAD AND RICO TIBONG, respondents.

The spouses Tibong specifically denied the material averments in paragraphs 2 and
2.1 of the complaint. While they did not state the total amount of their loans, they
declared that they did not receive anything from Agrifina without any written
7
receipt. They prayed for that the complaint be dismissed.
In their Pre-Trial Brief, the spouses Tibong maintained that they have never obtained
any loan from Agrifina without the benefit of a written document. 8

DECISION
CALLEJO, SR., J.:
Before us is a petition for review under Rule 45 of the Revised Rules on Civil
Procedure of the Decision1 of the Court of Appeals in CA-G.R. CV No. 78075, which
2
affirmed with modification the Decision of the Regional Trial Court (RTC), Branch 61,
3
Baguio City, and the Resolution of the appellate court denying reconsideration
thereof.

On August 17, 2000, the trial court issued a Pre-Trial Order where the following
issues of the case were defined:
Whether or not plaintiff is entitled to her claim of P773,000.00;
Whether or not plaintiff is entitled to stipulated interests in the promissory
notes; and
Whether or not the parties are entitled to their claim for damages. 9

The Antecedents
On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC of Baguio City, a
complaint for sum of money and damages against the respondents, spouses
Felicidad and Rico Tibong. Agrifina alleged that Felicidad had secured loans from her
on several occasions, at monthly interest rates of 6% to 7%. Despite demands, the
spouses Tibong failed to pay their outstanding loan, amounting to P773,000.00
exclusive of interests. The complaint contained the following prayer:
WHEREFORE, premises considered, it is most respectfully prayed of this
Honorable Court, after due notice and hearing, to render judgment ordering
defendants to pay plaintiff the following:
a). SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS
(P773,000.00) representing the principal obligation of the
defendants with the stipulated interests of six (6%) percent per
month from May 11, 1999 to date and or those that are stipulated
on the contracts as mentioned from paragraph two (2) of the
complaint.

The Case for Petitioner

Agrifina and Felicidad were classmates at the University of Pangasinan. Felicidad's
husband, Rico, also happened to be a distant relative of Agrifina. Upon Felicidad's
prodding, Agrifina agreed to lend money to Felicidad. According to Felicidad, Agrifina
would be earning interests higher than those given by the bank for her money.
Felicidad told Agrifina that since she (Felicidad) was engaged in the sale of dry goods
at the GP Shopping Arcade, she would use the money to buy bonnels and
thread.10 Thus, Agrifina lent a total sum of P773,000.00 to Felicidad, and each loan
transaction was covered by either a promissory note or an acknowledgment
11
receipt. Agrifina stated that she had lost the receipts signed by Felicidad for the
following amounts: P100,000.00,P34,000.00 and P2,000.00.12 The particulars of the
transactions are as follows:
Amount

Date Obtained Interest Per Mo. Due Date

b). FIFTEEN PERCENT (15%) of the total accumulated obligations

as attorney's fees.

P 100,000.00 May 11, 1989 6%

August 11, 1989

c). Actual expenses representing the filing fee and other charges
and expenses to be incurred during the prosecution of this case.

4,000.00

June 8, 1989

Further prays for such other relief and remedies just and equitable under the
premises.4

50,000.00

June 13, 1989 6%

On demand

Agrifina appended a copy of the Counter-Affidavit executed by Felicidad in I.S. No.

93-334, as well as copies of the promissory notes and acknowledgment receipts
executed by Felicidad covering the loaned amounts. 5

60,000.00

Aug. 16, 1989 7%

January 1990

205,000.00

Oct. 13, 1989 7%

January 1990

128,000.00

Oct. 19, 1989 7%

January 1990

2,000.00

Nov. 12, 1989 6%

April 28, 1990

10,000.00

June 13, 1990 -

In their Answer with Counterclaim, spouses Tibong admitted that they had secured
loans from Agrifina. The proceeds of the loan were then re-lent to other borrowers at
higher interest rates. They, likewise, alleged that they had executed deeds of
assignment in favor of Agrifina, and that their debtors had executed promissory notes
in Agrifina's favor. According to the spouses Tibong, this resulted in a novation of the
original obligation to Agrifina. They insisted that by virtue of these documents, Agrifina
became the new collector of their debtors; and the obligation to pay the balance of
their loans had been extinguished.

80,000.00

Jan. 4, 1990

34,000.00

6%

October 19, 1989

100,000.00

July 14, 1989 5%

In July 1990, Felicidad gave to Agrifina City Trust Bank Check No. 126804 dated
August 25, 1990 in the amount of P50,000.00 as partial payment.15 However, the
check was dishonored for having been drawn against insufficient funds. 16 Agrifina
then filed a criminal case against Felicidad in the Office of the City Prosecutor. An
Information for violation of Batas Pambansa Bilang 22 was filed against Felicidad,
docketed as Criminal Case No. 11181-R. After trial, the court ordered Felicidad to
pay P50,000.00. Felicidad complied and paid the face value of the check. 17
In the meantime, Agrifina learned that Felicidad had re-loaned the amounts to other
borrowers.18 Agrifina sought the assistance of Atty. Torres G. A-ayo who advised her
to require Felicidad to execute deeds of assignment over Felicidad's debtors. The
lawyer also suggested that Felicidad's debtors execute promissory notes in Agrifina's
favor, to "turn over" their loans from Felicidad. This arrangement would facilitate
collection of Felicidad's account. Agrifina agreed to the proposal. 19 Agrifina, Felicidad,
and the latter's debtors had a conference20 where Atty. A-ayo explained that Agrifina
could apply her collections as payments of Felicidad's account. 21
From August 7, 1990 to October, 1990, Felicidad executed deeds of assignment of
credits (obligations)22 duly notarized by Atty. A-ayo, in which Felicidad transferred and
23
assigned to Agrifina the total amount of P546,459.00 due from her debtors. In the
said deeds, Felicidad confirmed that her debtors were no longer indebted to her for
their respective loans. For her part, Agrifina conformed to the deeds of assignment
24
relative to the loans of Virginia Morada and Corazon Dalisay. She was furnished
25
copies of the deeds as well as the promissory notes.
The following debtors of Felicidad executed promissory notes where they obliged
themselves to pay directly to Agrifina:
Account

Date
Instrument

8,000.00

August 8, 1990 February 3, 1991

Fely Cirilo

63,600.00

September 13, No date

1990

Virginia Morada

62,379.00

August 9, 1990 February 9, 1991

Carmelita
Casuga

59,000.00

August
1990

28, February 28, 1991

Merlinda Gelacio 17,200.00

August
1990

29, November 29, 199026

October 198913

According to Agrifina, Felicidad was able to pay only her loans amounting
to P122,600.00.14

Debtors

Rosemarie
Bandas

of Date Payable

Juliet & Tommy P50,000.00 August 7, 1990 November 4, 1990 and

Tibong
February 4, 1991
Corazon Dalisay 8,000.00

August 7, 1990 No date

Rita Chomacog

4,480.00

August 8, 1990 September 23, 1990

Antoinette
Manuel

12,000.00

October
1990

19, March 30, 1991

Total

P284,659.00

Agrifina narrated that Felicidad showed to her the way to the debtors' houses to
enable her to collect from them. One of the debtors, Helen Cabang, did not execute
any promissory note but conformed to the Deed of Assignment of Credit which
27
Felicidad executed in favor of Agrifina. Eliza Abance conformed to the deed of
assignment for and in behalf of her sister, Fely Cirilo. 28 Edna Papat-iw was not able to
affix her signature on the deed of assignment nor sign the promissory note because
she was in Taipei, Taiwan.29
Following the execution of the deeds of assignment and promissory notes, Agrifina
30
was able to collect the total amount of P301,000.00 from Felicidad's debtors. In April
1990, she tried to collect the balance of Felicidad's account, but the latter told her to
wait until her debtors had money.31 When Felicidad reneged on her promise, Agrifina
filed a complaint in the Office of the Barangay Captain for the collection
of P773,000.00. However, no settlement was arrived at. 32
The Case for Respondents
Felicidad testified that she and her friend Agrifina had been engaged in the moneylending business.33 Agrifina would lend her money with monthly interest,34 and she, in
turn, would re-lend the money to borrowers at a higher interest rate. Their business
relationship turned sour when Agrifina started complaining that she (Felicidad) was
actually earning more than Agrifina.35 Before the respective maturity dates of her
debtors' loans, Agrifina asked her to pay her account since Agrifina needed money to
buy a house and lot in Manila. However, she told Agrifina that she could not pay yet,
as her debtors' loan payments were not yet due. 36 Agrifina then came to her store
every afternoon to collect from her, and persuaded her to go to Atty. Torres G. A-ayo
for legal advice.37 The lawyer suggested that she indorse the accounts of her debtors
to Agrifina so that the latter would be the one to collect from her debtors and she
would no longer have any obligation to Agrifina.38 She then executed deeds of
assignment in favor of Agrifina covering the sums of money due from her debtors.
She signed the deeds prepared by Atty. A-ayo in the presence of Agrifina.39 Some of
the debtors signed the promissory notes which were likewise prepared by the lawyer.
Thereafter, Agrifina personally collected from Felicidad's debtors. 40Felicidad further

narrated that she received P250,000.00 from one of her debtors, Rey Rivera, and
remitted the payment to Agrifina. 41
Agrifina testified, on rebuttal, that she did not enter into a re-lending business with
Felicidad. When she asked Felicidad to consolidate her loans in one document, the
42
latter told her to seek the assistance of Atty. A-ayo. The lawyer suggested that
Felicidad assign her credits in order to help her collect her loans. 43 She agreed to the
deeds of assignment to help Felicidad collect from the debtors. 44
On January 20, 2003, the trial court rendered its Decision45 in favor of Agrifina. The
fallo of the decision reads:
WHEREFORE, judgment is rendered in favor of the plaintiff and against the
defendants ordering the latter to pay the plaintiffs (sic) the following
amounts:
1. P472,000 as actual obligation with the stipulated interest of 6% per month
from May 11, 1999 until the said obligation is fully paid. However, the
amount of P50,000 shall be deducted from the total accumulated interest for
the same was already paid by the defendant as admitted by the plaintiff in
her complaint,
2. P25,000 as attorney's fees,

SO ORDERED.

48

The appellate court sustained the trial court's ruling that Felicidad's obligation to
Agrifina had not been novated by the deeds of assignment and promissory notes
executed in the latter's favor. Although Agrifina was subrogated as a new creditor in
lieu of Felicidad, Felicidad's obligation to Agrifina under the loan transaction
remained; there was no intention on their part to novate the original obligation.
Nonetheless, the appellate court held that the legal effects of the deeds of
assignment could not be totally disregarded. The assignments of credits were
onerous, hence, had the effect of payment, pro tanto, of the outstanding obligation.
The fact that Agrifina never repudiated or rescinded such assignments only shows
that she had accepted and conformed to it. Consequently, she cannot collect both
from Felicidad and her individual debtors without running afoul to the principle of
unjust enrichment. Agrifina's primary recourse then is against Felicidad's individual
debtors on the basis of the deeds of assignment and promissory notes.
The CA further declared that the deeds of assignment executed by Felicidad had the
effect of payment of her outstanding obligation to Agrifina in the amount
of P585,659.00. It ruled that, since an assignment of credit is in the nature of a sale,
the assignors remained liable for the warranties as they are responsible for the
existence and legality of the credit at the time of the assignment.

3. [T]o pay the costs.

Both parties moved to have the decision reconsidered, 49 but the appellate court
50
denied both motions on December 21, 2004.

SO ORDERED.46

Agrifina, now petitioner, filed the instant petition, contending that

The trial court ruled that Felicidad's obligation had not been novated by the deeds of
assignment and the promissory notes executed by Felicidad's borrowers. It explained
that the documents did not contain any express agreement to novate and extinguish
Felicidad's obligation. It declared that the deeds and notes were separate contracts
which could stand alone from the original indebtedness of Felicidad. Considering,
however, Agrifina's admission that she was able to collect from Felicidad's debtors
the total amount of P301,000.00, this should be deducted from the latter's
accountability.47 Hence, the balance, exclusive of interests, amounted
to P472,000.00.

1. The Honorable Court of Appeals erred in ruling that the deeds of

assignment in favor of petitioner has the effect of payment of the original
obligation even as it ruled out that the original obligation and the assigned
credit are distinct and separate and can stand independently from each
other;

On appeal, the CA affirmed with modification the decision of the RTC and stated that,
based on the promissory notes and acknowledgment receipts signed by Felicidad, the
appellants secured loans from the appellee in the total principal amount of
only P637,000.00, not P773,000.00 as declared by the trial court. The CA found that,
other than Agrifina's bare testimony that she had lost the promissory notes and
acknowledgment receipts, she failed to present competent documentary evidence to
substantiate her claim that Felicidad had, likewise, borrowed the amounts
of P100,000.00, P34,000.00,
and P2,000.00.
Of
the P637,000.00
total
account,P585,659.00 was covered by the deeds of assignment and promissory notes;
hence, the balance of Felicidad's account amounted to only P51,341.00. The fallo of
the decision reads:

Petitioner avers that the appellate court erred in ruling that respondents' original
obligation amounted to onlyP637,000.00 (instead of P773,000.00) simply because
she lost the promissory notes/receipts which evidenced the loans executed by
respondent Felicidad Tibong. She insists that the issue of whether Felicidad owed her
less than P773,000.00 was not raised by respondents during pre-trial and in their
appellate brief; the appellate court was thus proscribed from taking cognizance of the
issue.

WHEREFORE, in view of the foregoing, the decision dated January 20,

2003 of the RTC, Baguio City, Branch 61 in Civil Case No. 4370-R is
hereby MODIFIED. Defendants-appellants are hereby ordered to pay the
balance of the total indebtedness in the amount of P51,341.00 plus the
stipulated interest of 6% per month from May 11, 1999 until the finality of this
decision.

2. The Honorable Court of Appeals erred in passing upon issues raised for
the first time on appeal; and
3. The Honorable Court of Appeals erred in resolving fact not in issue.

51

Petitioner avers that respondents failed to deny, in their verified answer, that they had
secured the P773,000.00 loan; hence, respondents are deemed to have admitted the
allegation in the complaint that the loans secured by respondent from her amounted
to P773,000.00. As gleaned from the trial court's pre-trial order, the main issue is
whether or not she should be made to pay this amount.
Petitioner further maintains that the CA erred in deducting the total amount
of P585,659.00 covered by the deeds of assignment executed by Felicidad and the
promissory notes executed by the latter's debtors, and that the balance of
respondents' account was only P51,341.00. Moreover, the appellate court's ruling that

there was no novation runs counter to its holding that the primary recourse was
against Felicidad's debtors. Petitioner avers that of the 11 deeds of assignment and
promissory notes, only two bore her signature.52 She insists that she is not bound by
the deeds which she did not sign. By assigning the obligation to pay petitioner their
loan accounts, Felicidad's debtors merely assumed the latter's obligation and became
co-debtors to petitioner. Respondents were not released from their obligation under
their loan transactions, and she had the option to demand payment from them or their
debtors. Citing the ruling of this Court in Magdalena Estates, Inc. v.
53
Rodriguez, petitioner insists that the first debtor is not released from responsibility
upon reaching an agreement with the creditor. The payment by a third person of the
first debtor's obligation does not constitute novation, and the creditor can still enforce
the obligation against the original debtor. Petitioner also cites the ruling of this Court
in Guerrero v. Court of Appeals.54
In their Comment on the petition, respondents aver that by virtue of respondent
Felicidad's execution of the deeds of assignment, and the original debtors' execution
of the promissory notes (along with their conformity to the deeds of assignment with
petitioner's consent), their loan accounts with petitioner amounting to P585,659.00
had been effectively extinguished. Respondents point out that this is in accordance
with Article 1291, paragraph 2, of the Civil Code. Thus, the original debtors of
respondents had been substituted as petitioner's new debtors.
Respondents counter that petitioner had been subrogated to their right to collect the
loan accounts of their debtors. In fact, petitioner, as the new creditor of respondents'
former debtors had been able to collect the latter's loan accounts which amounted
to P301,000.00. The sums received by respondents' debtors were the same loans
which they obliged to pay to petitioner under the promissory notes executed in
petitioner's favor.
Respondents aver that their obligation to petitioner cannot stand or exist separately
from the original debtors' obligation to petitioner as the new creditor. If allowed to
collect from them as well as from their original debtors, petitioner would be enriching
herself at the expense of respondents. Thus, despite the fact that petitioner had
collected P172,600.00 from respondents and P301,000.00 from the original debtors,
petitioner still sought to collect P773,000.00 from them in the RTC. Under the deeds
of assignment executed by Felicidad and the original debtors' promissory notes, the
original debtors' accounts were assigned to petitioner who would be the new creditor.
In fine, respondents are no longer liable to petitioner for the balance of their loan
account inclusive of interests. Respondents also insist that petitioner failed to prove
that she (petitioner) was merely authorized to collect the accounts of the original
debtors so as to to facilitate the payment of respondents' loan obligation.
The Issues
The threshold issues are: (1) whether respondent Felicidad Tibong
borrowed P773,000.00 from petitioner; and (2) whether the obligation of respondents
to pay the balance of their loans, including interest, was partially extinguished by the
execution of the deeds of assignment in favor of petitioner, relative to the loans of
Edna Papat-iw, Helen Cabang, Antoinette Manuel, and Fely Cirilo in the total amount
of P371,000.00.
The Ruling of the Court
We have carefully reviewed the brief of respondents as appellants in the CA, and find
that, indeed, they had raised the issue of whether they received P773,000.00 by way

of loans from petitioner. They averred that, as gleaned from the documentary
evidence of petitioner in the RTC, the total amount they borrowed was
onlyP673,000.00. They asserted that petitioner failed to adduce concrete evidence
55
that they received P773,000.00 from her.
We agree, however, with petitioner that the appellate court erred in reversing the
finding of the RTC simply because petitioner failed to present any document or
receipt signed by Felicidad.
Section 10, Rule 8 of the Rules of Civil Procedure requires a defendant to "specify
each material allegation of fact the truth of which he does not admit and, whenever
practicable, x x x set forth the substance of the matters upon which he relies to
support his denial.56
Section 11, Rule 8 of the same Rules provides that allegations of the complaint not
specifically denied are deemed admitted. 57
The purpose of requiring the defendant to make a specific denial is to make him
disclose the matters alleged in the complaint which he succinctly intends to disprove
at the trial, together with the matter which he relied upon to support the denial. The
parties are compelled to lay their cards on the table. 58
A denial is not made specific simply because it is so qualified by the defendant. A
general denial does not become specific by the use of the word "specifically." When
matters of whether the defendant alleges having no knowledge or information
sufficient to form a belief are plainly and necessarily within the defendant's
knowledge, an alleged "ignorance or lack of information" will not be considered as a
specific denial. Section 11, Rule 8 of the Rules also provides that material averments
in the complaint other than those as to the amount of unliquidated damages shall be
deemed admitted when not specifically denied. 59 Thus, the answer should be so
definite and certain in its allegations that the pleader's adversary should not be left in
doubt as to what is admitted, what is denied, and what is covered by denials of
knowledge as sufficient to form a belief.60
In the present case, petitioner alleged the following in her complaint:
2. That defendants are indebted to the plaintiff in the principal amount of
SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS (P773,000.00)
Philippine Currency with a stipulated interest which are broken down as
follows. The said principal amounts was admitted by the defendants in their
counter-affidavit submitted before the court. Such affidavit is hereby
attached as Annex "A;"61
xxxx
H) The sum of THIRTY FOUR THOUSAND PESOS (P34,000.00) with
interest at six (6%) per cent per month and payable on October 19, 1989,
however[,] the receipt for the meantime cannot be recovered as it was
misplaced by the plaintiff but the letter of defendant FELICIDAD TIBONG is
hereby attached as Annex "H" for the appreciation of the Honorable court;
I) The sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) with
interest at five (5%) percent per month, obtained on July 14, 1989 and
payable on October 14, 1989. Such receipt was lost but admitted by the
defendants in their counter-affidavit as attached [to] this complaint and
marked as Annex "A" mentioned in paragraph one (1); x x x62

In their Answer, respondents admitted that they had secured loans from petitioner.
While the allegations in paragraph 2 of the complaint were specifically denied,
respondents merely averred that petitioner and respondent Felicidad entered into an
agreement for the lending of money to interested borrowers at a higher interest rate.
Respondents failed to declare the exact amount of the loans they had secured from
petitioner. They also failed to deny the allegation in paragraph 2 of the complaint that
respondent Felicidad signed and submitted a counter-affidavit in I.S. No. 93-334
where she admitted having secured loans from petitioner in the amount
ofP773,000.00. Respondents, likewise, failed to deny the allegation in paragraph 2(h)
of the complaint that respondents had secured a P34,000.00 loan payable on October
19, 1989, evidenced by a receipt which petitioner had misplaced. Although
respondents specifically denied in paragraph 2.11 of their Answer the allegations in
paragraph 2(I) of the complaint, they merely alleged that "they have not received
sums of money from the plaintiff without any receipt therefor."

an independent existence; if they cannot and are irreconciliable, the

subsequent obligation would also extinguish the first.

Respondents, likewise, failed to specifically deny another allegation in the complaint

that they had secured aP100,000.00 loan from petitioner on July 14, 1989; that the
loan was payable on October 14, 1989; and evidenced by a receipt which petitioner
claimed to have lost. Neither did respondents deny the allegation that respondents
admitted their loan of P100,000.00 in the counter-affidavit of respondent Felicidad,
which was appended to the complaint as Annex "A." In fine, respondents had
admitted the existence of their P773,000.00 loan from petitioner.

Novation which consists in substituting a new debtor (delegado) in the place of the
original one (delegante) may be made even without the knowledge or against the will
of the latter but not without the consent of the creditor. Substitution of the person of
the debtor may be effected by delegacion, meaning, the debtor offers, and the
creditor (delegatario), accepts a third person who consents to the substitution and
assumes the obligation. Thus, the consent of those three persons is necessary. 67 In
this kind of novation, it is not enough to extend the juridical relation to a third person;
it is necessary that the old debtor be released from the obligation, and the third
68
person or new debtor take his place in the relation. Without such release, there is no
novation; the third person who has assumed the obligation of the debtor merely
becomes a co-debtor or a surety. If there is no agreement as to solidarity, the first and
the new debtor are considered obligated jointly. 69

We agree with the finding of the CA that petitioner had no right to collect from
respondents the total amount ofP301,000.00, which includes more than P178,980.00
which respondent Felicidad collected from Tibong, Dalisay, Morada, Chomacog,
Cabang, Casuga, Gelacio, and Manuel. Petitioner cannot again collect the same
amount from respondents; otherwise, she would be enriching herself at their expense.
Neither can petitioner collect from respondents more than P103,500.00 which she
had already collected from Nimo, Cantas, Rivera, Donguis, Fernandez and Ramirez.
There is no longer a need for the Court to still resolve the issue of whether
respondents' obligation to pay the balance of their loan account to petitioner was
partially extinguished by the promissory notes executed by Juliet Tibong, Corazon
Dalisay, Rita Chomacog, Carmelita Casuga, Merlinda Gelacio and Antoinette Manuel
because, as admitted by petitioner, she was able to collect the amounts under the
notes from said debtors and applied them to respondents' accounts.
Under Article 1231(b) of the New Civil Code, novation is enumerated as one of the
ways by which obligations are extinguished. Obligations may be modified by changing
their object or principal creditor or by substituting the person of the debtor. 63 The
burden to prove the defense that an obligation has been extinguished by novation
64
falls on the debtor. The nature of novation was extensively explained in Iloilo
Traders Finance, Inc. v. Heirs of Sps. Oscar Soriano, Jr.,65 as follows:
Novation may either be extinctive or modificatory, much being dependent on
the nature of the change and the intention of the parties. Extinctive novation
is never presumed; there must be an express intention to novate; in cases
where it is implied, the acts of the parties must clearly demonstrate their
intent to dissolve the old obligation as the moving consideration for the
emergence of the new one. Implied novation necessitates that the
incompatibility between the old and new obligation be total on every point
such that the old obligation is completely superseded by the new one. The
test of incompatibility is whether they can stand together, each one having

An extinctive novation would thus have the twin effects of, first, extinguishing
an existing obligation and, second, creating a new one in its stead. This kind
of novation presupposes a confluence of four essential requisites: (1) a
previous valid obligation; (2) an agreement of all parties concerned to a new
contract; (3) the extinguishment of the old obligation; and (4) the birth of a
valid new obligation. Novation is merely modificatory where the change
brought about by any subsequent agreement is merely incidental to the main
obligation (e.g., a change in interest rates or an extension of time to pay); in
this instance, the new agreement will not have the effect of extinguishing the
first but would merely supplement it or supplant some but not all of its
provisions.66 (Citations Omitted)

In Di Franco v. Steinbaum,70 the appellate court ruled that as to the consideration

necessary to support a contract of novation, the rule is the same as in other contracts.
The consideration need not be pecuniary or even beneficial to the person promising.
It is sufficient if it be a loss of an inconvenience, such as the relinquishment of a right
or the discharge of a debt, the postponement of a remedy, the discontinuance of a
suit, or forbearance to sue.
71

In City National Bank of Huron, S.D. v. Fuller, the Circuit Court of Appeals ruled
that the theory of novation is that the new debtor contracts with the old debtor
that he will pay the debt, and also to the same effect with the creditor, while the
latter agrees to accept the new debtor for the old. A novation is not made by
showing that the substituted debtor agreed to pay the debt; it must appear that he
agreed with the creditor to do so. Moreover, the agreement must be based on the
consideration of the creditor's agreement to look to the new debtor instead of
the old. It is not essential that acceptance of the terms of the novation and release of
the debtor be shown by express agreement. Facts and circumstances surrounding
the transaction and the subsequent conduct of the parties may show acceptance as
clearly as an express agreement, albeit implied. 72
We find in this case that the CA correctly found that respondents' obligation to pay the
balance of their account with petitioner was extinguished, pro tanto, by the deeds of
assignment of credit executed by respondent Felicidad in favor of petitioner.
An assignment of credit is an agreement by virtue of which the owner of a credit,
known as the assignor, by a legal cause, such as sale, dation in payment, exchange
or donation, and without the consent of the debtor, transfers his credit and accessory

rights to another, known as the assignee, who acquires the power to enforce it to the
same extent as the assignor could enforce it against the debtor. 73 It may be in the
form of sale, but at times it may constitute a dation in payment, such as when a
debtor, in order to obtain a release from his debt, assigns to his creditor a credit he
74
has against a third person.
In Vda. de Jayme v. Court of Appeals,75 the Court held that dacion en pago is the
delivery and transmission of ownership of a thing by the debtor to the creditor as an
accepted equivalent of the performance of the obligation. It is a special mode of
payment where the debtor offers another thing to the creditor who accepts it as
equivalent of payment of an outstanding debt. The undertaking really partakes in one
sense of the nature of sale, that is, the creditor is really buying the thing or property of
the debtor, payment for which is to be charged against the debtor's obligation. As
such, the essential elements of a contract of sale, namely, consent, object certain,
and cause or consideration must be present. In its modern concept, what actually
takes place in dacion en pago is an objective novation of the obligation where the
thing offered as an accepted equivalent of the performance of an obligation is
considered as the object of the contract of sale, while the debt is considered as the
purchase price. In any case, common consent is an essential prerequisite, be it sale
or novation, to have the effect of totally extinguishing the debt or obligation. 76
The requisites for dacion en pago are: (1) there must be a performance of the
prestation in lieu of payment (animo solvendi) which may consist in the delivery of a
corporeal thing or a real right or a credit against the third person; (2) there must be
some difference between the prestation due and that which is given in substitution
(aliud pro alio); and (3) there must be an agreement between the creditor and debtor
that the obligation is immediately extinguished by reason of the performance of a
prestation different from that due. 77
All the requisites for a valid dation in payment are present in this case. As gleaned
from the deeds, respondent Felicidad assigned to petitioner her credits "to make
good" the balance of her obligation. Felicidad testified that she executed the deeds to
enable her to make partial payments of her account, since she could not comply with
petitioner's frenetic demands to pay the account in cash. Petitioner and respondent
Felicidad agreed to relieve the latter of her obligation to pay the balance of her
account, and for petitioner to collect the same from respondent's debtors.
Admittedly, some of respondents' debtors, like Edna Papat-iw, were not able to affix
their conformity to the deeds. In an assignment of credit, however, the consent of the
debtor is not essential for its perfection; the knowledge thereof or lack of it affecting
only the efficaciousness or inefficaciousness of any payment that might have been
made. The assignment binds the debtor upon acquiring knowledge of the assignment
but he is entitled, even then, to raise against the assignee the same defenses he
could set up against the assignor78 necessary in order that assignment may fully
produce legal effects. Thus, the duty to pay does not depend on the consent of the
debtor. The purpose of the notice is only to inform that debtor from the date of the
assignment. Payment should be made to the assignee and not to the original creditor.
The transfer of rights takes place upon perfection of the contract, and ownership of
the right, including all appurtenant accessory rights, is acquired by the
79
assignee who steps into the shoes of the original creditor as subrogee of the
80
latter from that amount, the ownership of the right is acquired by the assignee. The
law does not require any formal notice to bind the debtor to the assignee, all that the
law requires is knowledge of the assignment. Even if the debtor had not been notified,

but came to know of the assignment by whatever means, the debtor is bound by it. If
the document of assignment is public, it is evidence even against a third person of the
facts which gave rise to its execution and of the date of the latter. The transfer of the
credit must therefore be held valid and effective from the moment it is made to appear
in such instrument, and third persons must recognize it as such, in view of the
authenticity of the document, which precludes all suspicion of fraud with respect to
the date of the transfer or assignment of the credit.81
As gleaned from the deeds executed by respondent Felicidad relative to the accounts
of her other debtors, petitioner was authorized to collect the amounts of P6,000.00
from Cabang, and P63,600.00 from Cirilo. They obliged themselves to pay petitioner.
Respondent Felicidad, likewise, unequivocably declared that Cabang and Cirilo no
longer had any obligation to her.
Equally significant is the fact that, since 1990, when respondent Felicidad executed
the deeds, petitioner no longer attempted to collect from respondents the balance of
their accounts. It was only in 1999, or after nine (9) years had elapsed that petitioner
attempted to collect from respondents. In the meantime, petitioner had collected from
respondents' debtors the amount of P301,000.00.
While it is true that respondent Felicidad likewise authorized petitioner in the deeds to
collect the debtors' accounts, and for the latter to pay the same directly, it cannot
thereby be considered that respondent merely authorized petitioner to collect the
accounts of respondents' debtors and for her to apply her collections in partial
payments of their accounts. It bears stressing that petitioner, as assignee, acquired
all the rights and remedies passed by Felicidad, as assignee, at the time of the
assignment.82 Such rights and remedies include the right to collect her debtors'
obligations to her.
Petitioner cannot find solace in the Court's ruling in Magdalena Estates. In that case,
the Court ruled that the mere fact that novation does not follow as a matter of course
when the creditor receives a guaranty or accepts payments from a third person who
has agreed to assume the obligation when there is no agreement that the first debtor
would be released from responsibility. Thus, the creditor can still enforce the
obligation against the original debtor.
In the present case, petitioner and respondent Felicidad agreed that the amounts due
from respondents' debtors were intended to "make good in part" the account of
respondents. Case law is that, an assignment will, ordinarily, be interpreted or
construed in accordance with the rules of construction governing contracts generally,
the primary object being always to ascertain and carry out the intention of the parties.
This intention is to be derived from a consideration of the whole instrument, all parts
of which should be given effect, and is to be sought in the words and language
83
employed.
Indeed, the Court must not go beyond the rational scope of the words used in
construing an assignment, words should be construed according to their ordinary
meaning, unless something in the assignment indicates that they are being used in a
special sense. So, if the words are free from ambiguity and expressed plainly the
purpose of the instrument, there is no occasion for interpretation; but where
necessary, words must be interpreted in the light of the particular subject
84
matter. And surrounding circumstances may be considered in order to understand
more perfectly the intention of the parties. Thus, the object to be accomplished

through the assignment, and the relations and conduct of the parties may be
considered in construing the document.
Although it has been said that an ambiguous or uncertain assignment should be
construed most strictly against the assignor, the general rule is that any ambiguity or
uncertainty in the meaning of an assignment will be resolved against the party who
prepared it; hence, if the assignment was prepared by the assignee, it will be
construed most strictly against him or her. 85 One who chooses the words by which a
right is given ought to be held to the strict interpretation of them, rather than the other
86
who only accepts them.
Considering all the foregoing, we find that respondents still have a balance on their
account to petitioner in the principal amount of P33,841.00, the difference between
their loan of P773,000.00 less P585,659.00, the payment of respondents' other
debtors amounting to P103,500.00, and the P50,000.00 payment made by
respondents.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The Decision and
Resolution of the Court of Appeals are AFFIRMED with MODIFICATION in that the
balance of the principal account of the respondents to the petitioner is P33,841.00.
No costs.
SO ORDERED.

G.R. No. 130972

January 23, 2002

PHILIPPINE LAWIN BUS, CO., MASTER TOURS & TRAVEL CORP., MARCIANO
TAN, ISIDRO TAN, ESTEBAN TAN and HENRY TAN, petitioners,
vs.
COURT OF APPEALS and ADVANCE CAPITAL CORPORATION, respondents.
DECISION

"Defendant LAWIN failed to pay the aforementioned promissory note and the same
was renewed on 03 December 1990 to become due on or before 01 February 1991,
under Promissory Note 00037 (Exh. "K").
"On 15 May 1991 for failure to pay the two promissory notes, defendant LAWIN was
granted a loan re-structuring for two (2) months to mature on 31 July 1991.
"Despite the restructuring, defendant LAWIN failed to pay. Thus, plaintiff foreclosed
the mortgaged buses and as the sole bidder thereof, the amount of P2,000,000.00
was accepted by the deputy sheriff conducting the sale and credited to the account of
defendant LAWIN.

PARDO, J.:
The Case
The case is a petition for review via certiorari of the decision of the Court of
Appeals,1 reversing that of the trial court2 and sentencing petitioners as follows:
"WHEREFORE, the appealed decision should be, as it is hereby REVERSED and
SET ASIDE. In lieu thereof, a new one is hereby rendered ordering the defendantsappellees to pay, jointly and solidarily, in favor of plaintiff-appellant Advance Capital
Corporation, the following amounts:
"1. P16,484,994.42, the principal obligation under the two promissory note
Nos. 003 and 00037 plus interest and penalties;
"2. P100,000.00 for loss of goodwill and good reputation;
"3. An amount equivalent to 10% of the collectible amount, plus P50,000, as
acceptance fee and P500 per appearance, as and for attorneys fees: and
"4. P100,000 as litigation expenses.
"Costs shall be taxed against defendant-appellees.
3

"SO ORDERED."
The Facts

The facts, as found by the Court of Appeals, are as follows:

"On 7 August 1990 plaintiff Advance Capital Corporation, a licensed lending investor,
extended a loan to defendant Philippine Lawin Bus Company (hereafter referred to as
LAWIN), in the amount of P8,000,000.00 payable within a period of one (1) year, as
evidenced by a Credit Agreement (Exhibits "B" to "B-4-B"). The defendant, through
Marciano Tan, its Executive Vice President, executed Promissory Note No. 003, for
the amount of P8,000,000.00 (Exhs. "C" to "C-1").
"To guarantee payment of the loan, defendant Lawin executed in favor of plaintiff the
following documents: (1) A Deed of Chattel Mortgage wherein 9 units of buses were
constituted as collaterals (Exhibits "F" to "F-7"): (2) A joint and several
UNDERTAKING of defendant Master Tours and Travel Corporation dated 07 August
1990, signed by Isidro Tan and Marciano Tan (Exhs. "H" to "H-1): and (3) A joint and
several UNDERTAKING dated 21 August 1990, executed and signed by Esteban,
Isidro, Marciano and Henry, all surnamed Tan (Exhs. "I" to "I-6").
"Out of the P8,000,000.00 loan, P1,800,000.00 was paid. Thus, on 02 November
1990, defendant Bus Company was able to avail an additional loan of P2,000,000.00
for one (1) month under Promissory Note 00028 (Exhs. "J"-"J-1").

"Thereafter, on 27 May 1992, identical demand letters were sent to the defendants to
pay their obligation (Exhs. "X" to "CC"). Despite repeated demands, the defendants
failed to pay their indebtedness which totaled of P16,484,992.42 as of 31 July 1992
(Exhs. "DD"-"DD-1").
"Thus, the suit for sum of money, wherein the plaintiff prays that defendants solidarily
pay plaintiff as of July 31, 1992 the sum of (a) P16,484,994.12 as principal obligation
under the two promissory notes Nos. 003 and 00037, plus interests and penalties: (b)
P300,000.00 for loss of good will and good business reputation: (c) attorneys fees
amounting to P100,000.00 as acceptance fee and a sum equivalent to 10% of the
collectible amount, and P500.00 as appearance fee; (d) P200,000.00 as litigation
expenses; (e) exemplary damages in an amount to be awarded at the courts
discretion; and (f) the costs.
"On 04 September 1993, a writ of preliminary injunction was issued with respect to
movable and immovable properties of the defendants.
"In answer to the complaint, defendants-appellees assert by way of special and
affirmative defense, that there was already an arrangement as to the full settlement of
the loan obligation by way of:
"17.A. Sale of the nine (9) units passenger buses the proceeds of which will be
credited against the loan amount as full payment thereof; or in the alternative.
"17.B. Plaintiff will shoulder and bear the cost of rehabilitating the buses, with the
amount thereof to be included in the total obligation of defendant Lawin and the bus
operated, with the earnings thereof to be applied to the loan obligation of defendant
Lawin." (p. 4 Answer; p. 166, rec.)
"Defendants further assert that the foreclosure sale was in violation of the
aforequoted arrangement and prayed for the nullification of the same and the
dismissal of the complaint."4
On 28 June 1995, the trial court rendered a decision dismissing the complaint, as
follows:
"WHEREFORE, judgment is rendered as follows:
"1. Dismissing the complaint for lack of merit;
"2. Declaring the foreclosure and auction sale null and void;
"3. Declaring the obligation or indebtedness of defendants EXTINGUISHED;
"4. Declaring the writ of attachment issued in this case null and void and,
therefore, is hereby declared dissolved; and

"5. Ordering the Sheriff of this Branch or whoever is in possession, to return

all the personal properties attached in this case to the owner/s thereof within
one (1) week from the finality of this decision;
"6. Dismissing defendants counterclaim for lack of sufficient merit.
"No pronouncement as to costs.
"SO ORDERED."5
In time, respondent Advance Capital Corporation appealed from the decision to the
Court of Appeals.6
On 30 September 1997, the Court of Appeals promulgated a decision reversing that
of the trial court, the dispositive portion of which is set out in the opening paragraph of
this decision.
Hence, this appeal.7
The Issue
The issue raised is whether there was dacion en pago between the parties upon the
8
surrender or transfer of the mortgaged buses to the respondent.
The Courts Ruling
We deny the petition, with modification.
The issue raised is factual. In an appeal via certiorari, we may not review the factual
9
findings of the Court of Appeals. When supported by substantial evidence, the
findings of fact of the Court of Appeals are conclusive and binding on the parties and
are not reviewable by this Court,10 unless the case falls under any of the recognized
11
exceptions to the rule.
Petitioner failed to prove that the case falls within the exceptions. 12 The Supreme
Court is not a trier of facts. 13 It is not our function to review, examine and evaluate or
weigh the probative value of the evidence presented. 14 A question of fact would arise
in such event.15
Nonetheless, we agree with the Court of Appeals that there was no dacion en
pago that took place between the parties.
In dacion en pago, property is alienated to the creditor in satisfaction of a debt in
money.16 It is "the delivery and transmission of ownership of a thing by the debtor to
the creditor as an accepted equivalent of the performance of the obligation." 17 It
"extinguishes the obligation to the extent of the value of the thing delivered, either as
agreed upon by the parties or as may be proved, unless the parties by agreement,
express or implied, or by their silence, consider the thing as equivalent to the
obligation, in which case the obligation is totally extinguished."18
Article 1245 of the Civil Code provides that the law on sales shall govern an
agreement of dacion en pago. A contract of sale is perfected at the moment there is a
meeting of the minds of the parties thereto upon the thing which is the object of the
contract and upon the price.19 In Filinvest Credit Corporation v. Philippine Acetylene
Co., Inc., we said:
"x x x. In dacion en pago, as a special mode of payment, the debtor offers another
thing to the creditor who accepts it as equivalent of payment of an outstanding

obligation. The undertaking really partakes in one sense of the nature of sale, that is,
the creditor is really buying the thing or property of the debtor, payment for which is to
be charged against the debtors debt.1wphi1 As such, the essential elements of a
contract of sale, namely, consent, object certain, and cause or consideration must be
present. In its modern concept, what actually takes place indacion en pago is an
objective novation of the obligation where the thing offered as an accepted equivalent
of the performance of an obligation is considered as the object of the contract of sale,
while the debt is considered as the purchase price. In any case, common consent is
an essential prerequisite, be it sale or novation, to have the effect of totally
extinguishing the debt or obligation."20
In this case, there was no meeting of the minds between the parties on whether the
loan of the petitioners would be extinguished by dacion en pago. The petitioners
anchor their claim solely on the testimony of Marciano Tan that he proposed to
extinguish petitioners obligation by the surrender of the nine buses to the respondent
acceded to as shown by receipts its representative made.21 However, the receipts
executed by respondents representative as proof of an agreement of the parties that
delivery of the buses to private respondent would result in extinguishing petitioners
obligation do not in any way reflect the intention of the parties that ownership thereof
by respondent would be complete and absolute. The receipts show that the two
buses were delivered to respondent in order that it would take custody for the
purpose of selling the same. The receipts themselves in fact show that petitioners
deemed respondent as their agent in the sale of the two vehicles whereby the
proceeds thereof would be applied in payment of petitioners indebtedness to
respondent. Such an agreement negates transfer of absolute ownership over the
property to respondent, as in a sale. Thus, in Philippine National Bank v. Pineda22 we
held that where machinery and equipment were repossessed to secure the payment
of a loan obligation and not for the purpose of transferring ownership thereof to the
creditor in satisfaction of said loan, nodacion en pago was ever
accomplished.1wphi1
The Fallo
IN VIEW WHEREOF, the Court DENIES the petition and AFFIRMS the decision of
the Court of Appeals23 with MODIFICATION as follows:
WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE. In lieu
thereof, judgment is hereby rendered ordering defendants-appellees to pay, jointly
and severally, plaintiff-appellant Advance Capital Corp. the following amounts:
(1) P16,484,994.42, the principal obligation under the two promissory notes
plus 12% per annum from the finality of this decision until fully paid;
(2) P50,000.00 as attorneys fees;
(3) Costs of suit.
All other monetary awards are deleted.
SO ORDERED.

G.R. No. 72703 November 13, 1992

CALTEX (PHILIPPINES), INC., petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and ASIA PACIFIC AIRWAYS,
INC., respondents.

BIDIN, J.:
This is a petition for certiorari seeking the annulment of the decision dated August
27,1985 of the then Intermediate Appellate Court in CA-G.R. No. 02684, which
reversed the judgment of the trial court and ordered petitioner to return the amount of
P510, 550.63 to private respondent plus interest at the legal rate of 14% per annum.
The facts of the case are as follows:
On January 12, 1978, private respondent Asia Pacific Airways Inc., entered into an
agreement with petitioner Caltex (Philippines) Inc., whereby petitioner agreed to
supply private respondent's aviation fuel requirements for two (2) years, covering the
period from January 1, 1978 until December 31, 1979. Pursuant thereto, petitioner
supplied private respondent's fuel supply requirements. As of June 30, 1980, private
respondents had an outstanding obligation to petitioner in the total amount of
P4,072,682.13, representing the unpaid price of the fuel supplied. To settle this
outstanding obligation, private respondent executed a Deed of Assignment dated July
31, 1980, wherein it assigned to petitioner its receivables or refunds of Special Fund
Import Payments from National Treasury of the Philippines to be applied as payment
of the amount of P4,072,682.13 which private respondent owed to petitioner. On
February 12, 1981, pursuant to the Deed of Assignment, Treasury Warrant No.
B04708613 in the amount of P5,475,294.00 representing the refund to respondent of
Special Fund Import Payment on its fuel purchases was issued by the National
Treasury in favor of the petitioner. Four days later, on February 16, 1981, private
respondent, having learned that the amount remitted to petitioner exceeded the
amount covered by the Deed of Assignment, wrote a letter to petitioner, requesting a
refund in the amount of P900,000.00 plus in favor of private respondent. The latter,
believing that it was entitled to a larger amount by way of refund, wrote a petitioner
anew, demanding the refund of the remaining amount. In response thereto, petitioner
informed private respondent that the amount not returned (P510,550.63) represented
interest and service charges at the rate of 18% per annum on the unpaid and overdue
account of respondent from June 1, 1980 to July 31, 1981.
Thus, on September 13, 1982, private respondent filed a complaint against petitioner
in the Regional Trial Court of Manila, to collect the sum of P510,550.63.00.
Petitioner (defendant in the trial court) filed its answer, reiterating that the amount not
returned represented interest and service charges on the unpaid and overdue
account at the rate of 18% per annum. It was further alleged that the collection of said
interest and service charges is sanctioned by law, and is in accordance with the terms
and conditions of the sale of petroleum products to respondent, which was made with
the conformity of said private respondent who had accepted the validity of said
interest and service charges.
On November 7, 1983, the trial court rendered its decision dismissing the complaint,
as well as the counterclaim filed by defendant therein.

Private respondent (plaintiff) appealed to the Intermediate Appellate Court (IAC). On

August 27, 1985, a decision was rendered by the said appellate court reversing the
decision of the trial court, and ordering petitioner to return the amount of P510,550.63
to private respondent.
Counsel for petitioner received a copy of the appellate court's decision on September
6, 1985. On September 20, 1985 or 14 days after receipt of the aforesaid decision, an
Urgent Motion for extension of five days within which to file a motion for
reconsideration was filed by petitioner. On September 26, 1985, the Motion for
Reconsideration was filed. The following day, petitioner filed a motion to set the
motion for reconsideration for hearing.
In a Resolution dated October 24, 1985, the appellate court denied the aforesaid
three motions. The first motion praying for an extension of five days within which to
file a motion for reconsideration was denied by the appellate court citing the new
ruling of the Supreme Court in Habaluyas Enterprises Inc. vs. Japzon (138 SCRA 46
[1985]) as authority. The appellate court, following said ruling, held that the 15-day
period for filing a motion for reconsideration cannot be extended. Thus, the motion for
reconsideration filed on September 26, 1985 was stricken from the record, having
been filed beyond the non-extensible 15-day reglementary period. The third motion
was likewise denied for being moot and academic.
On November 4, 1985, the prevailing party (respondent herein) filed Urgent Motion for
Entry of Judgment. Two days latter, or on November 6, 1985, the petitioner filed a
Motion for Reconsideration of the Resolution dated October 24, 1985.
The appellate court in a Resolution dated November 12, 1985 granted the motion for
entry of judgment filed by private respondent. It directed the entry of judgment and
ordered the remand of the records of the case to the court of origin for execution.
On November 14, 1985, petitioner, without waiting for the resolution of the appellate
court in the urgent motion for reconsideration it filed on November 6, 1985, filed the
instant petition to annul and set aside the resolution of the appellate court dated
October 24, 1985 which denied the Motion for Reconsideration of its decision dated
August 27, 1985.
In a motion dated November 21, 1985, petitioner prayed of the issuance of temporary
restraining order to enjoin the appellate court from remanding the records of the case
for execution of the judgment. The petitioner also filed a Supplement to Petition
for Certiorari, dated November 21, 1985.
In a Resolution dated November 27, 1985, this Court, acting on the petition, required
private respondent to file its Comment; granted the prayer of the petitioner in his
urgent motion, and a temporary restraining order was issued enjoining the appellate
court from remanding the records of the case for execution of judgment.
Private respondent filed its COMMENT dated December 14, 1985.
In a Resolution dated January 27, 1986, the Court resolved to give due course to the
petition, and required the parties to submit their memoranda. In compliance with the
said Resolution, the parties filed their respective memoranda.
On August 15, 1986, petitioner filed a Motion to Remand Records to the Court of
Appeals in view of the resolution of this Court dated May 30, 1986 in the Habaluyas
case which considered and set aside its decision dated August 5, 1985 by giving it
prospective application beginning one month after the promulgation of the said

resolution. This motion was opposed by private respondent. On September 22, 1986,
petitioner filed its Reply to Opposition to which private respondent filed its rejoinder. In
a Resolution dated December 3, 1986, the motion to remand records was denied.
Petitioner's Brief raised six (6) assignment of errors, to wit:
I.
THE IAC ERRED IN APPLYING THE NEW POLICY OF NOT GRANTING
ANY EXTENSION OF TIME TO FILE MOTION FOR RECONSIDERATION.
II.
THE IAC ERRED IN RULING THAT THE OBLIGATION OF RESPONDENT
WAS LIMITED TO P4,072,682.13 NOTWITHSTANDING THAT FACT THAT
THE DEED OF ASSIGNMENT (THE CONTRACT SUED UPON) ITSELF
EXPRESSLY AND REPEATEDLY SPEAKS OF RESPONDENT'S
OBLIGATION AS "THE AMOUNT OF P4,072,682.13 AS JUNE 30, 1980
PLUS APPLICABLE INTEREST CHARGES ON OVERDUE ACCOUNT
AND OTHER AVTURBO FUEL LIFTING AND DELIVERIES THAT
ASSIGNOR MAY FROM TIME TO TIME RECEIVE FROM ASSIGNEE."
III.
THE IAC ERRED IN RULING THAT THE DEED OF ASSIGNMENT
SATISFIES THE REQUISITES OF DATION IN PAYMENT (WHICH HAS
THE EFFECT OF IMMEDIATE EXTINGUISHMENT OF THE OBLIGATION)
DESPITE THE FACT THAT SAID DEED OF ASSIGNMENT (1) COVERS
FUTURE OBLIGATION FOR "APPLICABLE INTEREST CHARGES ON
OVER DUE ACCOUNT AND OTHER AVTURBO FUEL LIFTING THE
DELIVERIES THAT ASSIGNOR MAY FROM TIME TO TIME RECEIVE
FROM ASSIGNEES" AND (2) INCLUDES AN EXPRESS RESERVATION
BY ASSIGNEE TO DEMAND FULL PAYMENT OF THE OBLIGATIONS OF
THE ASSIGNOR "IN CASE OF UNREASONABLE DELAY OR NONRECEIPT OF ASSIGNEE OF THE AFOREMENTIONED FUNDS AND/OR
REFUND OF SPECIAL FUND IMPORT PAYMENT FROM THE
GOVERNMENT DUE TO ANY CAUSE OR REASON WHATSOEVER.
IV.
THE IAC ERRED IN FAILING TO TAKE INTO ACCOUNT THE
CONTEMPORANEOUS AND SUBSEQUENT ACTS OF THE PARTIES
WHICH ALSO CLEARLY SHOW THAT THEY DID NOT INTEND THE
DEED OF ASSIGNMENT TO HAVE EFFECT OF DATION IN PAYMENT.
V.
IF THE DEED OF ASSIGNMENT HAD THE EFFECT OF A DATION IN
PAYMENT, THEN THE IAC ERRED IN NOT RULING THAT PETITIONER
HAS A RIGHT TO RETAIN THE ENTIRE CREDIT ASSIGNED TO IT IN
LIEU OF PAYMENT OF RESPONDENT'S OBLIGATION INSTEAD OF
BEING REQUIRED TO RETURN PORTION OF THE CREDIT WHICH IS
CLAIMED TO BE IN EXCESS OF RESPONDENT'S OBLIGATION.
VI.

ASSUMING THAT PETITIONER IS LIABLE TO MAKE A RETURN OF A

PORTION OF THE CREDIT ASSIGNED, THE IAC ERRED IN AWARDING
"INTEREST AT THE LEGAL RATE OF 14% PER ANNUM FROM THE
FILING OF THE LEGAL OF THE COMPLAINT."
We find merit in the instant petition.
The two vital issues presented to the Court for resolution are, as follows:
1. Whether or not the Urgent Motion for Extension of Time to File a Motion for
Reconsideration filed by petitioner on September 20, 1985, as well as the Motion for
Reconsideration filed on September 26, 1985 (within the period of extension prayed
for), may be validly granted; and
2. Whether or not the Deed of Assignment entered into by the parties herein on July
31, 1980 constituted dacion en pago, as ruled by the appellate court, such that the
obligation is totally extinguished, hence after said date, no interest and service
charges could anymore be imposed on private respondent, so that petitioner was not
legally authorized to deduct the amount of P510,550.63 as interest and service
charges on the unpaid and overdue accounts of private respondent.
Anent the first issue, we rule in the affirmative.
We held in the case of Habaluyas Enterprises, Inc., et. al. vs. Japson et. al. (138
SCRA 46 [1985], promulgated August 5, 1985), that the "15-day period for appealing
or for filing a motion for reconsideration cannot be extended". Subsequently, the
Court, acting on respondent's motion for reconsideration in the same entitled case
(142 SCRA 208 [1986]), restated and clarified the rule on this point for the guidance
of the Bench and Bar by giving the rule prospective application in its resolution dated
May 30, 1986;
After considering the able arguments of counsels for petitioners and
respondents, the Court resolved that the interest of justice would be
better served if the ruling in the original decision were applied
prospectively from the time herein stated. The reason is that it
would be unfair to deprive parties of the right to appeal simply
because they availed themselves of a procedure which was not
expressly prohibited or allowed by the law or the Rules. On the
otherhand, a motion for new trial or reconsideration is not a prerequisite to an appeal, a petition for review or a petition for review
oncertiorari, and since the purpose of the amendments above
referred to is to expedite the final disposition of cases, a strict but
prospective application of the said ruling is in order. Hence, for the
guidance of the Bench and Bar, the Court restates and clarifies the
rules on this point, as follows.
1.) Beginning one month after the promulgation of this Resolution,
the rule shall be strictly enforced that no motion for extension of
time to file a motion for new trial or reconsideration may be filed
with the Metropolitan or Municipal Trial Courts, the Regional Trial
Courts, and the Intermediate Appellate Court. Such a motion may
be filed only in cases pending with the Supreme Court as the court
of last resort, which may in its sound discretion either grant or deny
the extension requested.

In Singh vs. IAC, (148 SCRA 277 [1987]), this Court applying the aforesaid ruling in
the Habaluyas case, held.
In other words, there is one month grace period from the promulgation on
May 30, 1986, of the Court's Resolution in the clarificatory Habaluyas case,
or up to June 30, 1986, within which the rule barring extensions of time to file
motions for reconsideration is, as yet, not strictly enforceable (Bayaca vs.
IAC, G.R. No. 78424, September 15, 1986).
Since petitioners herein filed their Motion for Extension on August 6, 1985, it
was still within the grace period, which expired on June 30, 1986, and may
still be allowed.
Similarly, when petitioner herein filed its Motion for Extension of time to file motion for
reconsideration on September 20, 1985, the said motion was filed within the onemonth grace period, which expired on June 30, 1986, and may still be allowed.
Consequently, the Motion for Reconsideration filed by petitioner on September 26,
1985, was also filed on time.
With respect to the second issue, We rule that the Deed of Assignment executed by
the parties on July 31, 1980 is not a dation in payment and did not totally extinguish
respondent's obligation as stated therein.
The then Intermediate Appellate Court ruled that the three (3) requisites dacion en
pago * are all present in the instant case, and concluded that the Deed of Assignment
of July 31, 1980 (Annex "C" of Partial Stipulation of Facts) constitutes a dacion in
payment provided for in Article 1245 ** of the Civil Code which has the effect of
extinguishing the obligation, thus supporting the claim of private respondent for the
return of the amount retained by petitioner.
This Court, speaking of the concept of dation in payment, in the case of Lopez vs.
Court of Appeals (114 SCRA 671, 685 [1982]), among others, stated:
The dation in payment extinguishes the obligation to the extent of
the value of the thing delivered, either as agreed upon by the
parties or as may be proved, unless the parties by agreement,
express or implied, or by their silence, consider the thing as
equivalent to the obligation, in which case the obligation is totally
extinguished. (8 Manresa 324; 3 Valverde 174 fn.)
From the above, it is clear that a dation in payment does not necessarily mean total
extinguishment of the obligation. The obligation is totally extinguished only when the
parties, by agreement, express or implied, or by their silence, consider the thing as
equivalent to the obligation.
In the instant case, the then Intermediate Appellate Court failed to take into account
the following express recitals of the Deed of Assignment
That Whereas, ASSIGNOR has an outstanding obligation with ASSIGNEE in
the amount of P4,072,682.13 as of June 30, 1980, plus any applicable
interest on overdue account. (p. 2, Deed of Assignment)
Now therefore in consideration of the foregoing premises, ASSIGNOR by
virtue of these presents, does hereby irrevocably assign and transfer unto
ASSIGNEE any and all funds and/or Refund of Special Fund Payments,
including all its rights and benefits accruing out of the same, that ASSIGNOR

might be entitled to, by virtue of and pursuant to the decision in BOE Case
No. 80-123, in payment of ASSIGNOR's outstanding obligation plus any
applicable interest charges on overdue account and other avturbo fuel lifting
and deliveries that ASSIGNOR may from time to time receive from the
ASSIGNEE, and ASSIGNEE does hereby accepts such assignment in its
favor. (p. 2, Deed of Assignment) (Emphasis supplied)
Hence, it could easily be seen that the Deed of Assignment speaks of three (3)
obligations (1) the outstanding obligation of P4,072,682.13 as of June 30, 1980; (2)
the applicable interest charges on overdue accounts; and (3) the other avturbo fuel
lifting and deliveries that assignor (private respondent) may from time to time receive
from assignee (Petitioner). As aptly argued by petitioner, if it were the intention of the
parties to limit or fix respondent's obligation to P4,072.682.13; they should have so
stated and there would have been no need for them to qualify the statement of said
amount with the clause "as of June 30, 1980 plus any applicable interest charges on
overdue account" and the clause "and other avturbo fuel lifting and deliveries that
ASSIGNOR may from time to time receive from the ASSIGNEE". The terms of the
Deed of Assignment being clear, the literal meaning of its stipulations should control
(Art. 1370, Civil Code). In the construction of an instrument where there are several
provisions or particulars, such a construction is, if possible, to be adopted as will give
effect to all (Rule 130, Sec. 9, Rules of Court).
Likewise, the then Intermediate Appellate Court failed to take into consideration the
subsequent acts of the parties which clearly show that they did not intend the Deed of
Assignment to totally extinguish the obligation (1) After the execution of the Deed
of Assignment on July 31, 1980, petitioner continued to charge respondent with
interest on its overdue account up to January 31, 1981 (Annexes "H", "I", "J" and "K"
of the Partial Stipulation of Facts). This was pursuant to the Deed of Assignment
which provides for respondent's obligation for "applicable interest charges on overdue
account." The charges for interest were made every month and not once did
respondent question or take exception to the interest; and (2) In its letter of February
16, 1981 (Annex "J", Partial Stipulation of Facts), respondent addressed the following
request to petitioner;
Moreover, we would also like to request for a consideration in the following
1. Interest charges be limited up to December 31, 1980 only; and
2. Reduction of 2% of 18% interest rate p.a.
We are hoping for your usual kind consideration on this matter.
In order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered (Art. 1253, Civil Code). The foregoing
subsequent acts of the parties clearly show that they did not intend the Deed of
Assignment to have the effect of totally extinguishing the obligations of private
respondent without payment of the applicable interest charges on the overdue
account.
Finally, the payment of applicable interest charges on overdue account, separate
from the principal obligation of P4,072.682.13 was expressly stipulated in the Deed of
Assignment. The law provides that "if the debt produces interest, payment of the
principal shall not be deemed to have been made until the interests have been
covered." (Art. 1253, Civil Code).

WHEREFORE, the decision of the then Intermediate Appellate Court dated August
27, 1985 is hereby SET ASIDE, and the November 7, 1983 decision of the trial court
is REINSTATED.
SO ORDERED.

A.C. No. 6955

July 27, 2006

MAR YUSON, complainant,

vs.
ATTY. JEREMIAS R. VITAN, respondent.
DECISION
PANGANIBAN, C.J.:
Once again this Court exhorts members of the bar to live up to the strictures of the
Lawyers' Oath, the Code of Professional Responsibility, and the Canons of
Professional Ethics. Otherwise, they shall be sanctioned by this Court.
The Case
Before us is a Letter-Complaint1 for the disbarment of Atty. Jeremias R. Vitan, filed by
Mar Yuson with the Commission on Bar Discipline (CBD) of the Integrated Bar of the
Philippines (IBP). Respondent was accused of taking advantage of complainant's
generosity and credulity.
On August 5, 2004, IBP-CBD directed Atty. Vitan to submit his Answer within 15 days
from receipt of the Order; 2otherwise, he would be considered in default and the case
heard ex parte.
Because respondent failed to submit his Answer within the given period, the CBD
considered his failure and non-appearance as a waiver of his right to participate in the
proceedings.3 Thus, the hearing scheduled for August 11, 2005, pushed through, with
the original copies of the checks he had issued presented by complainant as
evidence. Afterwards, the CBD issued an Order submitting the case for
Resolution.4 On August 23, 2005, Commissioner Milagros V. San Juan rendered her
Report and Recommendation.5
Respondent denied having received a copy of the Complaint against him and alleged
that it was only on August 24, 2005, that he received the Order submitting the case
for resolution. Thus, he filed an Urgent Motion to Revive/Re-open and with Leave to
Admit Attached Answer.6
In its Resolution No. XVII-2005-101 dated October 22, 2005, the IBP Board of
Directors adopted and approved, with modification, the investigating commissioner's
Report and Recommendation. Upon respondent was imposed the penalty of
suspension from the practice of law for two years, after the board found that he had
taken advantage of complainant through deceit and dishonesty. The lawyer was
further ordered to give back the money he had received from complainant.
The Facts
Complainant Mar Yuson was a taxi driver with eight children. In October 2002, he
received a sum of money by way of inheritance. According to him, he and his wife
intended to use the money to purchase a taxi, repair their dilapidated house, and hold
a debut party for their daughter.7
They were able to purchase a secondhand taxi, and Atty. Vitan helped him with all the
legal matters concerning this purchase. Regrettably, their other plans were put on
hold, because the lawyer borrowed P100,000 from them in December 2002. It was
agreed that the loan would be repaid before the end of the following year, 8 in time for
9
the debut on November 24, 2003.

To guarantee payment, respondent executed in favor of complainant several

postdated checks to cover the loaned amount. Those checks, however, turned out to
be worthless, because they had been drawn against the lawyer's closed account in
the Bank of Commerce in Escolta, Manila. The six dishonored checks were presented
10
during the hearing before the IBP commissioner.
Complainant maintained that he had repeatedly tried to recover the debt, only to be
turned away empty-handed each time. He conceded, though, that respondent had
given an undisclosed amount covered by the checks dated January and February
11
2003. The amounts covered by the dishonored checks remained unpaid.
This development prompted complainant to seek the aid of the IBP National
Committee on Legal Aid (NCLA) in obtaining payment. On November 14, 2003, the
IBP-NCLA, through Deputy Director Rosalie J. de la Cruz, sent him a letter. 12 It
informed him of the impending administrative case and advised him to confer with
complainant, presumably to settle the matter. Upon receipt13 of the letter, he again
gave assurances that he would pay the loan in time for the debut.14
When the date passed without any payment, complainant demanded a collateral to
secure the loan. Thus, in his favor, Atty. Vitan executed a document denominated as
a Deed of Absolute Sale, covering the latter's parcel of land located in Sta. Maria,
Bulacan. According to complainant, their intention was to transfer the title of the
property to him temporarily, so that he could either sell or mortgage15 it. It was further
agreed that, if it was mortgaged, respondent would redeem it as partial or full
16
payment of the loan.
Curiously, however, the parties executed a second Deed of Absolute Sale,17 this time
in favor of Atty. Vitan, with complainant as vendor. The purpose of this particular
document was not explained by either party.
18

On April 12, 2004, complainant was able to mortgage the property

for P30,000.19 Contrary to their earlier agreement, respondent did not redeem it from
the mortgagee and, instead, simply sent complainant a letter 20dated July 7, 2004,
promising to pay on or before July 12, 2004. As this promise was not fulfilled, the
mortgagee demanded payment from complainant and thereby allegedly exposed the
21
latter to shame and ridicule.
22

On July 19, 2004, IBP-NCLA sent another letter on behalf of complainant.

Respondent was informed that an administrative case would be filed against him,
unless he settled his obligations by July 30, 2004, the date given by complainant.
On August 30, 2004, the IBP-NCLA received the reply23 dated July 30, 2004,
submitted by Atty. Vitan who explained that he had already settled his obligation. He
maintained that he had in fact executed, in complainant's favor, a Deed of Absolute
Sale over his 203-square-meter residential property in Sta. Maria, Bulacan. He
clarified that "[their] understanding was that [complainant] ha[d] the option to use,
mortgage or sell [the property] andreturn to me the excess of the proceeds after
24
obtaining his money represented by my six (6) dishonored checks." Interestingly,
respondent attached the Deed of Absolute Sale in which he was the vendee and
complainant the vendor.25 It appears that this was the second Deed of Absolute Sale,
26
also referred to in the Complaint.
Only after the IBP investigating commissioner had rendered her Report and
Recommendation27 did Atty. Vitan submit his Answer to the Letter-Complaint. He
called the second document a "Counter Deed of Sale," executed as a "sort of

28

collateral/security for the account of [his] liaison officer [Evelyn Estur]." He admitted
having given several postdated checks amounting to P100,000, supposedly to
guarantee the indebtedness of Estur to complainant. Atty. Vitan argued for the first
time that it was she who had incurred the debts, and that he had acted only as a
29
"character reference and/or guarantor." He maintained that he had given in to the
one-sided transactions, because he was "completely spellbound by complainant's
seeming sincerity and kindness."30 To corroborate his statements, he attached Estur's
Affidavit.31
Report of the Investigating Commissioner
In her Report and Recommendation, Commissioner San Juan recommended that
Atty. Vitan be suspended until his restitution of the amount he had borrowed. She
held that respondent, having taken advantage of complainant and thus shown
dishonesty and untrustworthiness, did not deserve to retain his membership in the
bar.
On November 24, 2005, the Supreme Court received the IBP Resolution adopting,
with modification, the Report and Recommendation of the investigating
commissioner.
The Court's Ruling
We agree with the findings of the IBP Board of Governors, but reduce the period of
suspension to six months.
Respondent's Administrative Liability
Lawyers are instruments for the administration of justice. They are expected to
maintain not only legal proficiency but also a high standard of ethics, honesty,
integrity and fair dealing. In this way, the people's faith and confidence in the judicial
system is ensured.32
In the present case, Atty. Vitan undoubtedly owed money to complainant. In a
33
letter to IBP Deputy Director de la Cruz, respondent admitted having incurred
the P100,000 loan. It was only in his Answer34 that the lawyer suddenly denied that
he had personally incurred this obligation. This time, he pointed to his employee,
Estur, as the true debtor. We find his version of the facts implausible.
First, the story involving a certain Evelyn Estur was clearly a mere afterthought,
conjured simply to escape his liability. If it were true that it was she who owed the
money, he should have mentioned this alleged fact in his letter to the IBP NCLA
deputy director. Instead, respondent was completely silent about Estur and merely
asserted that he had already settled his debt with complainant.
Second, the promise of Atty. Vitan to settle his obligations on particular dates is
contained in two handwritten notes signed by him and worded as follows:
"I undertake to settle the financial obligations of P100,000 plus before the
35
end of the year."
"Mar:
"We will settle on July 12, 2004, on or before said date."36
The wordings of these promissory notes disclose that he had a personal obligation to
complainant, without any mention of Estur at all. If it were true that Atty. Vitan had
executed those notes for the account of his liaison officer, he should have used words

to that effect. As a lawyer, he was aware that the preparation of promissory notes was
not a "mere formality;" it had legal consequences. It is quite far-fetched for a lawyer to
assume the role of guarantor, without saying so in the notes.
37

A lawyer may be disciplined for evading the payment of a debt validly incurred. In
this case, the failure of Atty. Vitan to pay his debt for over three years despite
repeated demands puts in question his standing as a member of the bar. Worse, he
made several promises to pay his debt promptly, but reneged on all of them. He even
started to hide from complainant according to the latter . 38
Failure to honor just debts, particularly from clients, constitutes dishonest conduct that
39
does not speak well of a member of the bar. It is vital that a lawyer's conduct be
kept beyond reproach and above suspicion at all times. Rule 1.01 of the Code of
Professional Responsibility clearly provides that lawyers must not engage in unlawful,
immoral or deceitful conduct. They must comport themselves in a manner that will
secure and preserve the respect and confidence of the public for the legal
profession.40
Atty. Vitan contends that his obligation was already extinguished, because he had
allegedly sold his Bulacan property to complainant.41 Basically, respondent is
asserting that what had transpired was a dation in payment. Governed by the law on
sales, it is a transaction that takes place when a piece of property is alienated to the
creditor in satisfaction of a debt in money. 42 It involves delivery and transmission of
ownership of a thing -- by the debtor to the creditor -- as an accepted equivalent of
43
the performance of the obligation.
Going over the records of this case, we find the contention of Atty. Vitan undeserving
of credence. The records reveal that he did not really intend to sell and relinquish
ownership over his property in Sta. Maria, Bulacan, notwithstanding the execution of
a Deed of Absolute Sale in favor of complainant. The second Deed of Absolute Sale,
which reconveyed the property to respondent, is proof that he had no such intention.
This second Deed, which he referred to as his "safety net,"44 betrays his intention to
counteract the effects of the first one .
In a manner of speaking, Atty. Vitan was taking back with his right hand what he had
given with his left. The second Deed of Absolute Sale returned the parties right back
where they started, as if there were no sale in favor of complainant to begin with. In
effect, on the basis of the second Deed of Sale, respondent took back and asserted
his ownership over the property despite having allegedly sold it. Thus, he fails to
convince us that there was a bona fide dation in payment or sale that took place
between the parties; that is, that there was an extinguishment of obligation.
It appears that the true intention of the parties was to use the Bulacan property
to facilitate payment. They only made it appear that the title had been transferred to
45
complainant to authorize him to sell or mortgage the property. Atty. Vitan himself
admitted in his letter dated July 30, 2004, that their intention was to convert the
property into cash, so that payment could be obtained by complainant and the excess
46
returned to respondent. The records, however, do not show that the proceeds
derived were sufficient to discharge the obligation of the lawyer fully; thus, he is still
liable to the extent of the deficiency.
We hasten to add, however, that this administrative case is not the proper venue for
us to determine the extent of the remaining liability. This Court will not act as a
collection agency from faltering debtors, when the amount of the indebtedness is
indefinite and disputed.47

Nevertheless, the records satisfactorily reveal the failure of respondent to live up to

his duties as a lawyer in consonance with the strictures of the Lawyer's Oath, the
Code of Professional Responsibility, and the Canons of Professional Ethics, thereby
degrading not only his person but his profession as well. So far, we find that his lack
of sincerity in fulfilling his obligations is revealed by his acts of issuing promissory
notes and reneging on them; executing a simulated Deed of Absolute Sale; and
breaking his promise to redeem the property from the mortgagee.
The repeated failure of Atty. Vitan to fulfill his promise puts in question his integrity
and character. Indeed, not only his integrity as an individual but, more important, his
stature as a member of the bar is affected by his acts of welching on his promises
and misleading complainant. Canon 1 and Rule 1.01 of the Code of Professional
Responsibility explicitly state thus:
"CANON 1 A lawyer shall uphold the constitution, obey the laws of the
land and promote respect for law and legal processes.
"Rule 1.01 A lawyer shall not engage in unlawful, dishonest, immoral or
deceitful conduct."
Any wrongdoing, whether professional or nonprofessional, indicating unfitness for the
profession justifies disciplinary action. 48
There is yet another reason to find Atty. Vitan administratively liable. In his letter of
July 30, 2004, was an admission that the personal checks he issued in favor of
complainant had all been dishonored.49 Whether those checks were issued for the
account of respondent or of Estur is not important. The fact remains that the lawyer
knowingly issued worthless checks and thus revealed his disposition to defraud
complainant.
The act of a lawyer in issuing a check without sufficient funds to cover them -- or,
worse, drawn against a closed account --constitutes such willful dishonesty and
unethical conduct as to undermine the public confidence in the law and in
lawyers.50 The act also manifests a low regard for the Oath taken by the lawyer upon
joining the profession, whose image should be held in high esteem, not seriously and
irreparably tarnished.51
Moreover, the inimical effect of the issuance of worthless checks has been
recognized by this Court in an earlier case, from which we quote:
"[T]he effect [of issuance of worthless checks] transcends the private
interests of the parties directly involved in the transaction and touches the
interests of the community at large. The mischief it creates is not only a
wrong to the payee or holder, but also an injury to the public since the
circulation of valueless commercial papers can very well pollute the
channels of trade and commerce, injure the banking system and eventually
hurt the welfare of society and the public interest."52
We have also held that the deliberate failure to pay just debts and the issuance of
worthless checks constitute gross misconduct, 53 for which a lawyer may be
54
sanctioned with one year's suspension from the practice of law, or a suspension of
55
six months upon partial payment of the obligation.
In the instant case, complainant himself admits that respondent had already paid the
amounts covered by the January and February checks.56 Thus, there has been a
partial payment that justifies a modification of IBP's recommended penalty.

WHEREFORE, Atty. Jeremias R. Vitan is hereby found guilty of gross misconduct

and SUSPENDED from the practice of law for six (6) months, effective upon his
receipt of this Decision, with the warning that a repetition of the same or any other
misconduct will be dealt with more severely.
Let a copy of this Decision be entered in respondent's record as a member of the Bar,
and notice served on the Integrated Bar of the Philippines and on the Office of the
Court Administrator for circulation to all courts in the country.
SO ORDERED.

G.R. No. 158086

February 14, 2008

ASJ CORPORATION and ANTONIO SAN JUAN, petitioners,

vs.
SPS. EFREN & MAURA EVANGELISTA, respondents.

1/30/1993 SR 112

15,346 eggs

February 20, 1993

2/3/1993

SR 113

10,24[5]7 eggs

February 24, 1993

TOTAL

101,350 eggs

DECISION
QUISUMBING, J.:
For review on certiorari is the Decision1 dated April 30, 2003 of the Court of Appeals
in CA-G.R. CV No. 56082, which had affirmed the Decision2 dated July 8, 1996 of the
Regional Trial Court (RTC) of Malolos, Bulacan, Branch 9 in Civil Case No. 745-M-93.
The Court of Appeals, after applying the doctrine of piercing the veil of corporate
fiction, held petitioners ASJ Corporation (ASJ Corp.) and Antonio San Juan solidarily
liable to respondents Efren and Maura Evangelista for the unjustified retention of the
chicks and egg by-products covered by Setting Report Nos. 108 to 113. 3
The pertinent facts, as found by the RTC and the Court of Appeals, are as follows:
Respondents, under the name and style of R.M. Sy Chicks, are engaged in the largescale business of buying broiler eggs, hatching them, and selling their hatchlings
(chicks) and egg by-products4 in Bulacan and Nueva Ecija. For the incubation and
hatching of these eggs, respondents availed of the hatchery services of ASJ Corp., a
corporation duly registered in the name of San Juan and his family.
Sometime in 1991, respondents delivered to petitioners various quantities of eggs at
an agreed service fee of 80 centavos per egg, whether successfully hatched or not.
Each delivery was reflected in a "Setting Report" indicating the following: the number
of eggs delivered; the date of setting or the date the eggs were delivered and laid out
in the incubators; the date of candling or the date the eggs, through a lighting system,
were inspected and determined if viable or capable of being hatched into chicks; and
the date of hatching, which is also the date respondents would pick-up the chicks and
by-products. Initially, the service fees were paid upon release of the eggs and byproducts to respondents. But as their business went along, respondents delays on
their payments were tolerated by San Juan, who just carried over the balance, as
there may be, into the next delivery, out of keeping goodwill with respondents.
From January 13 to February 3, 1993, respondents had delivered to San Juan a total
5
6
of 101,3[50] eggs, detailed as follows:
Date Set

SR Number No. of eggs delivered Date

hatched/
Pick-up date

1/13/1993 SR 108

32,566 eggs

February 3, 1993

1/20/1993 SR 109

21,485 eggs

February 10, 1993

1/22/1993 SR 110

7,213 eggs

February 12, 1993

1/28/1993 SR 111

14,495 eggs

February 18, 1993

On February 3, 1993, respondent Efren went to the hatchery to pick up the chicks and
by-products covered by Setting Report No. 108, but San Juan refused to release the
same due to respondents failure to settle accrued service fees on several setting
reports starting from Setting Report No. 90. Nevertheless, San Juan accepted from
Efren 10,245 eggs covered by Setting Report No. 113 and P15,000.008 in cash as
partial payment for the accrued service fees.
On February 10, 1993, Efren returned to the hatchery to pick up the chicks and byproducts covered by Setting Report No. 109, but San Juan again refused to release
the same unless respondents fully settle their accounts. In the afternoon of the same
9
day, respondent Maura, with her son Anselmo, tendered P15,000.00 to San Juan,
and tried to claim the chicks and by-products. She explained that she was unable to
pay their balance because she was hospitalized for an undisclosed ailment. San Juan
accepted the P15,000.00, but insisted on the full settlement of respondents accounts
before releasing the chicks and by-products. Believing firmly that the total value of the
eggs delivered was more than sufficient to cover the outstanding balance, Maura
promised to settle their accounts only upon proper accounting by San Juan. San Juan
disliked the idea and threatened to impound their vehicle and detain them at the
hatchery compound if they should come back unprepared to fully settle their accounts
with him.
On February 11, 1993, respondents directed their errand boy, Allan Blanco, to pick up
the chicks and by-products covered by Setting Report No. 110 and also to ascertain if
San Juan was still willing to settle amicably their differences. Unfortunately, San Juan
was firm in his refusal and reiterated his threats on respondents. Fearing San Juans
threats, respondents never went back to the hatchery.
The parties tried to settle amicably their differences before police authorities, but to no
avail. Thus, respondents filed with the RTC an action for damages based on
petitioners retention of the chicks and by-products covered by Setting Report Nos.
108 to 113.
On July 8, 1996, the RTC ruled in favor of respondents and made the following
findings: (1)
as of
Setting Report
No.
107, respondents owed
petitioners P102,336.80;10 (2) petitioners withheld the release of the chicks and byproducts covered by Setting Report Nos. 108-113;11 and (3) the retention of the
chicks and by-products was unjustified and accompanied by threats and intimidations
on respondents.12 The RTC disregarded the corporate fiction of ASJ Corp., 13 and held
it and San Juan solidarily liable to respondents for P529,644.80 as actual
damages, P100,000.00 as moral damages, P50,000.00 as attorneys fees, plus
interests and costs of suit. The decretal portion of the decision reads:
WHEREFORE, based on the evidence on record and the laws/jurisprudence
applicable thereon, judgment is hereby rendered ordering the defendants to
pay, jointly and severally, unto the plaintiffs the amounts ofP529,644.80,

representing the value of the hatched chicks and by-products which the
plaintiffs on the average expected to derive under Setting Reports Nos. 108
to 113, inclusive, with legal interest thereon from the date of this judgment
until the same shall have been fully paid, P100,000.00 as moral damages
and P50,000.00 as attorneys fees, plus the costs of suit.
SO ORDERED.

14

Both parties appealed to the Court of Appeals. Respondents prayed for an additional
award of P76,139.00 as actual damages for the cost of other unreturned by-products
and P1,727,687.52 as unrealized profits, while petitioners prayed for the reversal of
the trial courts entire decision.
On April 30, 2003, the Court of Appeals denied both appeals for lack of merit and
affirmed the trial courts decision, with the slight modification of including an award of
exemplary damages of P10,000.00 in favor of respondents. The Court of Appeals,
applying the doctrine of piercing the veil of corporate fiction, considered ASJ Corp.
and San Juan as one entity, after finding that there was no bona fide intention to treat
the corporation as separate and distinct from San Juan and his wife Iluminada.
The fallo of the Court of Appeals decision reads:

PETITIONERS JOINTLY AND SEVERALLY

RESPONDENTS THE SUM OF P529,644.[80].

LIABLE

TO

PAY

V.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONERS HAVE VIOLATED THE PRINCIPLES ENUNCIATED IN
ART. 19 OF THE NEW CIVIL CODE AND CONSEQUENTLY IN
AWARDING MORAL DAMAGES, EXEMPLARY DAMAGES AND
ATTORNEYS FEES.
VI.
THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING
PETITIONERS COUNTERCLAIM.16

WHEREFORE, in view of the foregoing, the Decision appealed from is

hereby AFFIRMED, with the slight modification that exemplary damages in
the amount of P10,000.00 are awarded to plaintiffs.

Plainly, the issues submitted for resolution are: First, did the Court of Appeals err
when (a) it ruled that petitioners withheld or failed to release the chicks and byproducts covered by Setting Report Nos. 108 and 109; (b) it admitted the testimony of
Maura; (c) it did not find that it was respondents who failed to return to the hatchery to
pick up the chicks and by-products covered by Setting Report Nos. 110 to 113; and
(d) it pierced the veil of corporate fiction and held ASJ Corp. and Antonio San Juan as
one entity? Second, was it proper to hold petitioners solidarily liable to respondents
for the payment of P529,644.80 and other damages?

Costs against defendants.

In our view, there are two sets of issues that the petitioners have raised.

SO ORDERED.

15

Hence, the instant petition, assigning the following errors:

I.
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN
HOLDING, AS DID THE COURT A QUO, THAT PETITIONERS
WITHHELD/OR FAILED TO RELEASE THE CHICKS AND BY-PRODUCTS
COVERED BY SETTING REPORT NOS. 108 AND 109.
II.
THE HONORABLE COURT OF APPEALS ERRED IN ADMITTING THE
HEARSAY TESTIMONY OF MAURA EVANGELISTA SUPPORTIVE OF ITS
FINDINGS THAT PETITIONERS WITHHELD/OR FAILED TO RELEASE
THE CHICKS AND BY-PRODUCTS COVERED BY SETTING REPORT
NOS. 108 AND 109.
III.
THE HONORABLE COURT OF APPEALS, AS DID THE COURT A QUO,
ERRED IN NOT FINDING THAT RESPONDENTS FAILED TO RETURN TO
THE PLANT TO GET THE CHICKS AND BY-PRODUCTS COVERED BY
SETTING REPORT NOS. 110, 111, 112 AND 113.
IV.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING, AS DID
THE COURT A QUO, THAT THE PIERCING OF THE VEIL OF
CORPORATE ENTITY IS JUSTIFIED, AND CONSEQUENTLY HOLDING

The first set is factual. Petitioners seek to establish a set of facts contrary to the
factual findings of the trial and appellate courts. However, as well established in our
jurisprudence, only errors of law are reviewable by this Court in a petition for review
under Rule 45.17 The trial court, having had the opportunity to personally observe and
analyze the demeanor of the witnesses while testifying, is in a better position to pass
18
judgment on their credibility. More importantly, factual findings of the trial court,
when amply supported by evidence on record and affirmed by the appellate court, are
binding upon this Court and will not be disturbed on appeal. 19 While there are
20
exceptional circumstances when these findings may be set aside, none of them is
present in this case.
Based on the records, as well as the parties own admissions, the following facts were
uncontroverted: (1) As of Setting Report No. 107, respondents were indebted to
petitioners for P102,336.80 as accrued service fees for Setting Report Nos. 90 to
107;21 (2) Petitioners, based on San Juans own admission, 22 did not release the
chicks and by-products covered by Setting Report Nos. 108 and 109 for failure of
respondents to fully settle their previous accounts; and (3) Due to San Juans threats,
respondents never returned to the hatchery to pick up those covered by Setting
Report Nos. 110 to 113.23
Furthermore, although no hard and fast rule can be accurately laid down under which
the juridical personality of a corporate entity may be disregarded, the following
probative factors of identity justify the application of the doctrine of piercing the veil of
24
corporate fiction in this case: (1) San Juan and his wife own the bulk of shares of
ASJ Corp.; (2) The lot where the hatchery plant is located is owned by the San Juan
spouses; (3) ASJ Corp. had no other properties or assets, except for the hatchery
plant and the lot where it is located; (4) San Juan is in complete control of the
corporation; (5) There is no bona fide intention to treat ASJ Corp. as a different entity

from San Juan; and (6) The corporate fiction of ASJ Corp. was used by San Juan to
insulate himself from the legitimate claims of respondents, defeat public convenience,
justify wrong, defend crime, and evade a corporations subsidiary liability for
25
26
damages. These findings, being purely one of fact, should be respected. We need
not assess and evaluate the evidence all over again where the findings of both courts
on these matters coincide.
On the second set of issues, petitioners contend that the retention was justified and
did not constitute an abuse of rights since it was respondents who failed to comply
with their obligation. Respondents, for their part, aver that all the elements on abuse
of rights were present. They further state that despite their offer to partially satisfy the
accrued service fees, and the fact that the value of the chicks and by-products was
more than sufficient to cover their unpaid obligations, petitioners still chose to
withhold the delivery.
The crux of the controversy, in our considered view, is simple enough. Was
petitioners retention of the chicks and by-products on account of respondents failure
to pay the corresponding service fees unjustified? While the trial and appellate courts
had the same decisions on the matter, suffice it to say that a modification is proper.
Worth stressing, petitioners act of withholding the chicks and by-products is entirely
different from petitioners unjustifiable acts of threatening respondents. The retention
had legal basis; the threats had none.
To begin with, petitioners obligation to deliver the chicks and by-products
corresponds to three dates: the date of hatching, the delivery/pick-up date and the
date of respondents payment. On several setting reports, respondents made delays
on their payments, but petitioners tolerated such delay. When respondents accounts
accumulated because of their successive failure to pay on several setting reports,
petitioners opted to demand the full settlement of respondents accounts as a
condition precedent to the delivery. However, respondents were unable to fully settle
their accounts.
Respondents offer to partially satisfy their accounts is not enough to extinguish their
obligation. Under Article 124827 of the Civil Code, the creditor cannot be compelled to
accept partial payments from the debtor, unless there is an express stipulation to that
effect. More so, respondents cannot substitute or apply as their payment the value of
the chicks and by-products they expect to derive because it is necessary that all the
debts be for the same kind, generally of a monetary character. Needless to say, there
was no valid application of payment in this case.
Furthermore, it was respondents who violated the very essence of reciprocity in
contracts, consequently giving rise to petitioners right of retention. This case is
clearly one among the species of non-performance of a reciprocal obligation.
Reciprocal obligations are those which arise from the same cause, wherein each
party is a debtor and a creditor of the other, such that the performance of one is
conditioned upon the simultaneous fulfillment of the other.28 From the moment one of
the parties fulfills his obligation, delay by the other party begins. 29
Since respondents are guilty of delay in the performance of their obligations, they are
liable to pay petitioners actual damages of P183,416.80, computed as follows: From
respondents outstanding balance of P102,336.80, as of Setting Report No. 107, we
30
add the corresponding services fees of P81,080.00 for Setting Report Nos. 108 to
113 which had remain unpaid.

Nonetheless, San Juans subsequent acts of threatening respondents should not

remain among those treated with impunity. Under Article 1931 of the Civil Code, an act
constitutes an abuse of right if the following elements are present: (a) the existence of
a legal right or duty; (b) which is exercised in bad faith; and (c) for the sole intent of
32
prejudicing or injuring another. Here, while petitioners had the right to withhold
delivery, the high-handed and oppressive acts of petitioners, as aptly found by the
two courts below, had no legal leg to stand on. We need not weigh the corresponding
pieces of evidence all over again because factual findings of the trial court, when
adopted and confirmed by the appellate court, are binding and conclusive and will not
be disturbed on appeal.33
Since it was established that respondents suffered some pecuniary loss anchored on
petitioners abuse of rights, although the exact amount of actual damages cannot be
ascertained, temperate damages are recoverable. In arriving at a reasonable level of
temperate damages of P408,852.10, which is equivalent to the value of the chicks
and by-products, which respondents, on the average, are expected to derive, this
Court was guided by the following factors: (a) award of temperate damages will cover
only Setting Report Nos. 109 to 113 since the threats started only on February 10 and
11, 1993, which are the pick-up dates for Setting Report Nos. 109 and 110; the rates
of (b) 41% and (c) 17%, representing the average rates of conversion of broiler eggs
into hatched chicks and egg by-products as tabulated by the trial court based on
available statistical data which was unrebutted by petitioners; (d) 68,784 eggs,34 or
the total number of broiler eggs under Setting Report Nos. 109 to 113; and (e)P14.00
and (f) P1.20, or the then unit market price of the chicks and by-products,
respectively.
Thus, the temperate damages of P408,852.10 is computed as follows:
[b X (d X e) + c X (d X f)]

= Temperate Damages

41% X (68,784 eggs X P14)

= P394,820.16

17% X (68,784 eggs X P1.20) = P 14,031.94

[P394,820.16 + P14,031.94]

= P408,852.10

At bottom, we agree that petitioners conduct flouts the norms of civil society and
justifies the award of moral and exemplary damages. As enshrined in civil law
jurisprudence: Honeste vivere, non alterum laedere et jus suum cuique tribuere. To
live virtuously, not to injure others and to give everyone his due.35 Since exemplary
damages are awarded, attorneys fees are also proper. Article 2208 of the Civil Code
provides that:
In the absence of stipulation, attorneys fees and expenses of litigation, other
than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
xxxx

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated April 30,
2003 of the Court of Appeals in CA-G.R. CV No. 56082 is hereby MODIFIED as
follows:
a. Respondents are ORDERED to pay petitioners P183,416.80 as actual damages,
with interest of 6% from the date of filing of the complaint until fully paid, plus legal
interest of 12% from the finality of this decision until fully paid.
b. The award of actual damages of P529,644.80 in favor of respondents is
hereby REDUCED to P408,852.10, with legal interest of 12% from the date of finality
of this judgment until fully paid.
c. The award of moral damages, exemplary damages and attorneys fees
of P100,000.00, P10,000.00,P50,000.00, respectively, in favor of respondents is
hereby AFFIRMED.
d. All other claims are hereby DENIED.
No pronouncement as to costs.
SO ORDERED.

G.R. No. 133498

April 18, 2002

C.F. SHARP & CO., INC., petitioner,

vs.
NORTHWEST AIRLINES, INC., respondent.
YNARES-SANTIAGO, J.:
This is a petition for review under Rule 45 of the Rules of Court assailing the February
17, 1997 Decision1 and the April 2, 1998 Resolution2 of the Court of Appeals3 in CAG.R. SP No. 40996.
The undisputed facts are as follows:
On May 9, 1974, respondent, through its Japan Branch, entered into an International
Passenger Sales Agency Agreement with petitioner, authorizing the latter to sell its air
transport tickets. Petitioner failed to remit the proceeds of the ticket sales, for which
reason, respondent filed a collection suit against petitioner before the Tokyo District
Court which rendered judgment on January 29, 1981, ordering petitioner to pay
respondent the amount of "83,158,195 Yen and damages for the delay at the rate of
6% per annum from August 28, 1980 up to and until payment is completed."4 Unable
to execute the decision in Japan, respondent filed a case to enforce said foreign
judgment with the Regional Trial Court of Manila, Branch 54.5 However, the case was
dismissed on the ground of failure of the Japanese Court to acquire jurisdiction over
the person of the petitioner. Respondent appealed to the Court of Appeals, which
affirmed the decision of the trial court.1wphi1.nt
Respondent filed a petition for review with this Court, docketed as G.R. No. 112573.
On February 9, 1995, a decision was rendered, the dispositive portion of which reads:
WHEREFORE, the instant petition is partly GRANTED, and the challenged
decision is AFFIRMED insofar as it denied NORTHWESTs claims for
attorneys fees, litigation expenses, and exemplary damages but
REVERSED insofar as it sustained the trial courts dismissal of
NORTHWESTs complaint in Civil Case No. 83-17637 of Branch 54 of the
Regional Trial Court of Manila, and another in its stead is hereby rendered
ORDERING private respondent C.F. SHARP & COMPANY, INC. to pay to
NORTHWEST the amounts adjudged in the foreign judgment subject of said
case, with interest thereon at the legal rate from the filing of the complaint
therein until the said foreign judgment is fully satisfied.
Costs against the private respondent.
SO ORDERED.6
Accordingly, the Regional Trial Court of Manila, Branch 54, issued a writ of execution
7
of the foregoing decision. On November 22, 1995, the trial court modified its order for
the execution of the decision, viz:
WHEREFORE, in view of the foregoing, this Court hereby issues another
order, as follows: the writ of execution is issued against defendant C.F.
Sharp ordering said defendant to pay the plaintiff the sum of 83,158,195 Yen
at the exchange rate prevailing on the date of the foreign judgment on
January 29, 1981, plus 6% per annum until May 19, 1983; and from said
date until full payment, 12% per annum (6% by way of damages and 6%
interest) until the entire obligation is fully satisfied.

SO ORDERED.

On December 18, 1995, petitioner filed a petition for certiorari under Rule 65,
docketed as G.R. No. 122890, assailing the aforequoted order. On May 29, 1996, the
case was referred to the Court of Appeals. Petitioner contended that it had already
made partial payments; hence, it was liable only for the amount of 61,734,633 Yen.
Moreover, it argued that it was not liable to pay additional interest on top of the 6%
interest imposed in the foreign judgment.
The Court of Appeals rendered the assailed decision on February 17, 1997. It
sustained the imposition of additional interest on the liability of petitioner as adjudged
in the foreign judgment. The appellate court likewise corrected the reckoning date of
the imposition of the interests in accordance with the February 9, 1995 decision to be
executed, but lowered the additional interest from 12% to 6% per annum. Further, it
ruled that the basis of the conversion of petitioners liability in its peso equivalent
should be the prevailing rate at the time of payment and not the rate on the date of
the foreign judgment. The dispositive portion of the said decision reads:
WHEREFORE, the petition is GRANTED. The assailed Orders dated
October 13, 1995 and November 22, 1995 are annulled and set aside on the
ground that they varied the final judgment of the First Division of the
Supreme Court in G.R. No. 112573, entitled, "NORTHWEST ORIENT
AIRLINES, INC., Petitioner, versus, COURT OF APPEALS and C. F.
SHARP & COMPANY, INC., Respondents".
Respondent court is enjoined to execute the said final judgment with an
unpaid principal balance ofY61,734,633 plus damages for delay at the rate
of 6% per annum from August 28, 1980, until fully paid, which may be paid in
local currency based on the conversion rate prevailing at the time of
payment; plus 6% legal interest per annum from August 28, 1980, the date
of the filing of the complaint in the foreign judgment.
No costs.
SO ORDERED.

On April 2, 1998, the Court of Appeals denied both the motion for reconsideration and
the partial motion for reconsideration filed by petitioner and respondent, respectively.
In the present recourse, petitioner questions the applicable conversion rate of its
liability, and claims that a ruling thereon by the Court of Appeals effectively deprived it
of due process of law because said rate was not among the issues submitted for
resolution.
The petition is without merit.
In ruling that the applicable conversion rate of petitioners liability is the rate at the
time of payment, the Court of Appeals cited the case of Zagala v.
Jimenez,10 interpreting the provisions of Republic Act No. 529, as amended by R.A.
No. 4100. Under this law, stipulations on the satisfaction of obligations in foreign
currency are void. Payments of monetary obligations, subject to certain exceptions,
shall be discharged in the currency which is the legal tender in the Philippines. But
since R.A. No. 529 does not provide for the rate of exchange for the payment of
foreign currency obligations incurred after its enactment, the Court held in a number
of cases11 that the rate of exchange for the conversion in the peso equivalent should
be the prevailing rate at the time of payment.

Petitioner, however, contends that with the repeal of R.A. No. 529 by R.A. No.
8183,12 the jurisprudence relied upon by the Court of Appeals is no longer applicable.
Republic Act No. 529, as amended by R.A. No. 4100, provides:
SECTION 1. Every provision contained in, or made with respect to, any
domestic obligation to wit, any obligation contracted in the Philippines which
provision purports to give the obligee the right to require payment in gold or
in a particular kind of coin or currency other than Philippine currency or in an
amount of money of the Philippines measured thereby, be as it is hereby
declared against public policy, and null, void, and of no effect, and no such
provision shall be contained in, or made with respect to, any obligation
hereafter incurred. The above prohibition shall not apply to (a) transactions
where the funds involved are the proceeds of loans or investments made
directly or indirectly, through bona fide intermediaries or agents, by foreign
governments, their agencies and instrumentalities, and international financial
banking institutions so long as the funds are identifiable, as having
emanated from the sources enumerated above; b) transactions affecting
high-priority economic projects for agricultural, industrial and power
development as may be determined by the National Economic Council which
are financed by or through foreign funds; (c) forward exchange transactions
entered into between banks or between banks and individuals or juridical
persons; (d) import-export and other international banking, financial
investment and industrial transactions. With the exception of the cases
enumerated in items (a), (b), (c) and (d) in the foregoing provision, in which
cases the terms of the parties agreement shall apply, every other domestic
obligation heretofore or hereafter incurred, whether or not any such provision
as to payment is contained therein or made with respect thereto, shall be
discharged upon payment in any coin or currency which at the time of
payment is legal tender for public and private debts: Provided, That if the
obligation was incurred prior to the enactment of this Act and required
payment in a particular kind of coin or currency other than Philippine
currency, it shall be discharged in Philippine currency, measured at the
prevailing rates of exchange at the time the obligation was incurred, except
in case of a loan made in a foreign currency stipulated to be payable in the
same currency in which case the rate of exchange prevailing at the time of
the stipulated date of payment shall prevail. All coin and currency, including
Central Bank notes, heretofore or hereafter issued and declared by the
Government of the Philippines shall be legal tender for all debts, public and
private.
Pertinent portion of Republic Act No. 8183 states:
SECTION 1. All monetary obligations shall be settled in the Philippine
currency which is legal tender in the Philippines. However, the parties may
agree that the obligation or transaction shall be settled in any other currency
at the time of payment.
SEC. 2. Republic Act Numbered Five Hundred and Twenty-Nine (R.A. No.
529), as amended, entitled "An Act to Assure the Uniform Value of Philippine
Coin and Currency" is hereby repealed.
The repeal of R.A. No. 529 by R.A. No. 8183 has the effect of removing the
prohibition on the stipulation of currency other than Philippine currency, such that

obligations or transactions may now be paid in the currency agreed upon by the
parties. Just like R.A. No. 529, however, the new law does not provide for the
applicable rate of exchange for the conversion of foreign currency-incurred
obligations in their peso equivalent. It follows, therefore, that the jurisprudence
established in R.A. No. 529 regarding the rate of conversion remains applicable.
13
Thus, in Asia World Recruitment, Inc. v. National Labor Relations Commission, the
Court, applying R.A. No. 8183, sustained the ruling of the NLRC that obligations in
foreign currency may be discharged in Philippine currency based on the prevailing
rate at the time of payment. The wisdom on which the jurisprudence interpreting R.A.
No. 529 is based equally holds true with R.A. No. 8183. Verily, it is just and fair to
preserve the real value of the foreign exchange- incurred obligation to the date of its
payment.14
We find no denial of due process in the instant case. Contrary to the argument of
petitioner, the matter of the applicable conversion rate was one of the issues
submitted for resolution before the Court of Appeals. Moreover, opportunity to be
heard, which is the very essence of due process, was afforded petitioner when it filed
a motion for reconsideration of the Court of Appeals decision.
Petitioners contention that it is Article 125015 of the Civil Code that should be applied
is untenable. The rule that the value of the currency at the time of the establishment
of the obligation shall be the basis of payment finds application only when there is an
official pronouncement or declaration of the existence of an extraordinary inflation or
16
deflation.
For its part, respondent prays for the modification of the Court of Appeals award of
interest. While as a general rule, a party who has not appealed is not entitled to
affirmative relief other than what was granted in the decision of the court below, law
and jurisprudence authorize a tribunal to consider errors, although unassigned, if they
involve (1) errors affecting the lower courts jurisdiction over the subject matter, (2)
plain errors not specified, and (3) clerical errors. 17
In the case at bar, the Court of Appeals failure to apply the correct legal rate of
interest, to which respondent is lawfully entitled, amounts to a "plain error." In Eastern
Shipping Lines, Inc. v. Court of Appeals,18 it was held that absent any stipulation, the
legal rate of interest in obligations which consists in the payment of a sum of money,
as in the present case, is 12% per annum. As stated in the decision of the Court in
G.R. No. 112573, which is final and executory, petitioner is liable to pay respondent
the amount adjudged in the foreign judgment, with "interest thereon at the legal rate
[12% per annum] from the filing of the complaint therein [on August 28, 1980] until the
said foreign judgment is fully satisfied." Since petitioner already made partial
payments, his obligation was reduced to 61,734,633 Yen. Thus, petitioner should pay
respondent the amount of 61,734,633 Yen plus "damages for the delay at the rate of
6% per annum from August 28, 1980 up to and until payment is completed," with
interest thereon at the rate of 12% per annum from the filing of the complaint on
August 28, 1980, until fully satisfied.
The Court is clothed with ample authority to review matters, even if they are not
assigned as errors on appeal, if it finds that their consideration is necessary in arriving
at a just decision of the case. Rules of procedure are mere tools designed to facilitate
the attainment of justice. Their strict and rigid application, which would result in
technicalities that tend to frustrate rather than promote substantial justice, must be
avoided. Hence, substantive rights, like the applicable legal rate of interest on

petitioners long due and demandable obligation, must not be prejudiced by a rigid
and technical application of the rules.19
WHEREFORE, in view of all the foregoing, the instant petition is DENIED. The
February 17, 1997 decision and the April 2, 1998 resolution of the Court of Appeals in
CA-G.R. SP No. 40996 are AFFIRMED with MODIFICATION. Petitioner is directed to
pay respondent 61,734,633 Yen plus damages for the delay at the rate of 6% per
annumfrom August 28, 1980 up to and until payment is completed, with interest at the
rate of 12% per annum counted from the date of filing of the complaint on August 28,
1980, until fully satisfied. Petitioners liability may be paid in Philippine currency,
computed at the exchange rate prevailing at the time of payment.
SO ORDERED.

G.R. No. 138703

June 30, 2006

1

DEVELOPMENT BANK OF THE PHILIPPINES and PRIVATIZATION AND

MANAGEMENT OFFICE (formerly ASSET PRIVATIZATION TRUST), Petitioners,
vs.
HON. COURT OF APPEALS, PHILIPPINE UNITED FOUNDRY AND MACHINERY
CORP. and PHILIPPINE IRON MANUFACTURING CO., INC., Respondents.
DECISION
AZCUNA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court of the
decision of the Court of Appeals (CA) dated May 7, 1999 in CA-G.R. CV No. 49239
entitled "Philippine United Foundry and Machinery Corp. and Philippine Iron
Manufacturing Co., Inc. v. Development Bank of the Philippines and Asset
Privatization Trust" which upheld the decision of the Regional Trial Court (RTC),
Branch 98 of Quezon City in Civil Case No. Q-49650.
Sometime in March 1968, the Development Bank of the Philippines (DBP) granted to
respondents Philippine United Foundry and Machineries Corporation and Philippine
Iron Manufacturing Company, Inc. an industrial loan in the amount of P2,500,000
consisting of P500,000 in cash and P2,000,000 in DBP Progress Bonds. The loan
was evidenced by a promissory note2 dated June 26, 1968 and secured by a
mortgage3 executed by respondents over their present and future properties such as
buildings, permanent improvements, various machineries and equipment for
manufacture.
Subsequently, DBP granted to respondents another loan in the form of a five-year
revolving guarantee amounting to P1,700,000 which was reflected in the amended
4
mortgage contract dated November 20, 1968. According to respondents, the loan
guarantee was extended to them when they encountered difficulty in negotiating the
DBP Progress Bonds. Respondents were only able to sell the bonds in 1972 or about
five years from its issuance for an amount that was 25% less than its face value. 5
On September 10, 1975, the outstanding accounts of respondents with DBP were
restructured in view of their failure to pay. Thus, the outstanding principal balance of
the loans and advances amounting to P4,655,992.35 were consolidated into a single
6
account. The restructured loan was evidenced by a new promissory note dated
November 12, 1975 payable within seven years, with partial payments on the
principal to be made beginning on the third year plus a 12% interest per annum
payable every month. The following paragraph appears at the bottom portion of the
note:

This promissory note represents all accrued interests and charges which are taken up
as "NOTES TAKEN FOR INTEREST" due on the accounts of PHILIMCO and
PHUMACO approved under Bd. Res. No. 3577, s. of 1975. This note is secured by
9
(a) mortgage on the existing assets of the firm.
Both notes provided for the following additional charges and penalties:
(1) 12% interest per annum on unpaid amortizations10 ;
(2) 10% penalty charge per annum on the total amortizations past due
effective 30 days from the date respondents failed to comply with any of the
11
terms stipulated in the notes ; and,
(3) Bank advances for insurance premiums, taxes, rentals, litigation and
acquired assets expenses, collection and other out-of-pocket expenses not
covered by inspection and processing fees subject to the following
charges12 :
(a) One time service charge of % on the amount advanced to be
included in the receivable account;
(b) Penalty charge of 8% per annum on past due advances; and
(c) Interest at 12% per annum.
Notwithstanding the restructuring, respondents were still unable to comply with the
terms and conditions of the new promissory notes. As a result, respondents
requested DBP to refinance the matured obligation. The request was granted by
DBP, pursuant to which three foreign currency denominated loans sourced from
DBPs own foreign borrowings were extended to respondents on various dates
between 1980 and 1981.13 These loans were secured by mortgages14 on the
properties of respondents and were evidenced by the following promissory notes:
Face Value

Maturity Date

Interest Rate Per

Annum

(1) Promissory
$661,330
15
Note
dated December
11, 1980

December 15, 3% over DBPs

16
1990
borrowing rate

This promissory note represents the consolidation into one account of the outstanding
principal balance of PHILIMCO and PHUMACOs account, and is prepared pursuant
to Res. No. 228, dated September 10, 1975, approved by the Executive Committee
pursuant to Bd. Res. No. 3577, s. of 1975. This note is secured by mortgages on the
7
existing assets of the firms.

(2) Promissory
Note17
dated June
1981

June 23, 1991

On the other hand, all accrued interest and charges due amounting to P3,074,672.21
were denominated as "Notes Taken for Interests" and evidenced by a separate
8
promissory note dated November 12, 1975. The following annotation appears at the
bottom portion of the note:

(3) Promissory
$486,472.37 December 31, 4% over DBPs
19
Note
1982
borrowing cost
dated December
16, 1981

$666,666

3% over DBPs
borrowing rate18

5,

Apart from the interest, the promissory notes imposed additional charges and
penalties if respondents defaulted on their payments. The notes dated December 11,
1980 and June 5, 1981 specifically provided for a 2% annual service fee computed on
the outstanding principal balance of the loans as well as the following additional
interest and penalty charges on the loan amortizations or portions in arrears:
(a) If in arrears for thirty (30) days or less:
i. Additional interest at the basic loan interest rate per annum
computed on total amortizations past due, irrespective of age.
ii. No penalty charge
(b) If in arrears for more than thirty (30) days:
i. Additional interest at the basic loan interest rate per annum
computed on total amortizations past due, irrespective of age, plus,
ii. Penalty charge of 16% per annum computed on amortizations or
portions thereof in arrears for more than thirty (30) days counted
20
from the date the amount in arrears becomes liable to this charge.
Under these two notes, respondents also bound themselves to pay bank advances
for insurance premiums, taxes, litigation and acquired assets expenses and other outof-pocket expenses not covered by inspection and processing fees as follows:
(a) One-time service charge of 2% of the amount advanced, same to be
included in the receivable account.
(b) Interest at 16% per annum.
(c) Penalty charge from date of advance at 16% per annum.
The note dated December 16, 1981, on the other hand, provided for the interest and
penalty charges on loan amortizations or portions of it in arrears as follows:
(a) Additional interest at the basic loan interest per annum computed on total
amortizations past due irrespective of age; plus
(b) Penalty charges of 8% per annum computed on total amortizations in
arrears, irrespective of age.21
Respondents were likewise bound to pay bank advances for insurance premiums,
taxes, litigation and acquired assets expenses and other out-of-pocket expenses not
covered by inspection and processing fees as follows:
(a) One-time service charge of 2% of (the) amount advanced, same to be
included and debited to the advances account;
(b) Interest at the basic loan interest rate; and
(c) Penalty charge from date of advance at 8% per annum.22
Sometime in October 1985, DBP initiated foreclosure proceedings upon its
computation that respondents loans were in arrears by P62,954,473.68.23 According
to DBP, this figure already took into account the intermittent payments made by
respondents between 1968 and 1981 in the aggregate amount of P5,150,827.71.24
However, the foreclosure proceedings were suspended on twelve separate occasions
from October 1985 to December 1986 upon the representations of respondents that a

financial rehabilitation fund arising from a contract with the military was forthcoming.
On December 23, 1986, before DBP could proceed with the foreclosure proceedings,
respondents instituted the present suit for injunction.
On January 6, 1987, the complaint was amended to include the annulment of
mortgage. On December 15, 1987, the complaint was amended a second time to
implead the Asset Privatization Trust (APT) (now the Privatization and Management
Office [PMO])25 as a party defendant.
Respondents cause of action arose from their claim that DBP was collecting from
them an unconscionable if not unlawful or usurious obligation of P62,954,473.68 as of
September 30, 1985, out of a mere P6,200,000 loan. Primarily, respondents
contended that the amount claimed by DBP is erroneous since they have remitted to
DBP approximately P5,300,000 to repay their original debt. Additionally, respondents
assert that since the loans were procured for the Self-Reliant Defense Posture
Program of the Armed Forces of the Philippines (AFP), the latters breach of its
commitment to purchase military armaments and equipment from respondents
amounts to a failure of consideration that would justify the annulment of the mortgage
on respondents properties.26
On December 24, 1986, the RTC issued a temporary restraining order. A Writ of
Preliminary Injunction was subsequently issued on May 4, 1987. After trial on the
merits, the court rendered a decision in favor of respondents,27 the dispositive portion
of which reads:
WHEREFORE, in view of the foregoing consideration, judgment is hereby rendered in
favor of the [respondents] and against the defendants [DBP and APT], ordering that:
(1) The Writ of Preliminary Injunction already issued be made permanent;
(2) The [respondents] be made to pay the original loans in the aggregate
amount of Six Million Two Hundred Thousand (P6,200,000) Pesos;
(3) The [respondents] payment in the amount of Five Million Three Hundred
Thirty-Five Thousand, Eight Hundred Twenty-seven Pesos and Seventy-one
Centavos (P5,335,827.71) be applied to payment for interest and penalties;
and
(4) No further interest and/or penalties on the aforementioned principal
obligation of P6.2 million shall be imposed/charged upon the [respondents]
for failure of the military establishment to honor their commitment to a valid
and consummated contract with the former. Costs against the defendants.
SO ORDERED.
Both DBP and PMO appealed the decision to the CA. The CA, however, affirmed the
decision of the RTC. Aggrieved, DBP filed with the CA a motion for a
reconsideration28 dated May 26, 1999, which motion has not been resolved by the CA
to date. PMO, on the other hand, sought relief directly with the Court by filing this
present petition upon the following grounds:
I. THE CA DISREGARDED THE BINDING AND OBLIGATORY FORCE OF
CONTRACTS WHICH IS THE LAW BETWEEN THE PARTIES.
xxx

II. THE CA VIOLATED THE PRINCIPLE OF LAW THAT CONTRACTS

TAKE EFFECT ONLY BETWEEN THE PARTIES AS IT LINKED
RESPONDENTS CONTRACTS WITH THE AFP WITH RESPONDENTS
LOANS WITH DBP.
xxx
III. THE CA ERRED IN PERMANENTLY ENJOINING THE DBP AND APT
FROM FORECLOSING THE MORTGAGES ON RESPONDENTS
PROPERTIES
THEREBY
VIOLATING
THE
PROVISIONS
OF
29
P[RESIDENTIAL] D[ECREE NO.] 385 AND PROCLAMATION NO. 50.
On the first issue, PMO asserts that the CA erred in declaring that the interest rate on
the loans had been unilaterally increased by DBP despite the evidence on record
(consisting of promissory notes and testimonies of witnesses for DBP) showing
otherwise. PMO also claims that the CA failed to take into account the effect of the
restructuring and refinancing of the loans granted by DBP upon the request of
respondents.
Anent the second issue, PMO argues that the failure of the AFP to honor its
commitment to respondents should have had no bearing on respondents loan
obligations to DBP as DBP was not a party to their contract. Hence, PMO contends
that the CA ran afoul of the principle of relativity of contracts when it ruled that no
further interest could be imposed on the loans.
Finally, PMO claims that DBP, being a government financial institution, could not be
enjoined by any restraining order or injunction, whether permanent or temporary, from
proceeding with the foreclosure proceedings mandated under Section 1 of
Presidential Decree No. 385.
For their part, respondents moved for the denial of the petition in their comment dated
30
October 27, 1999, stating that (1) the petition merely raises questions of fact and not
of law; (2) PMO is engaged in forum shopping considering that the motion for
reconsideration filed by its co-defendant, DBP, against the CA decision was still
pending before the appellate court; and, (3) the petition is fatally defective because
the attached certification against non-forum shopping does not conform to the
requirements set by law. After PMO filed its reply denying the foregoing allegations,
the parties submitted their respective memoranda.
The petition is partly meritorious.
Prefatorily, it bears stressing that only questions of law may be raised in a petition for
review on certiorari under Rule 45 of the Rules of Court. This Court is not a trier of
facts, its jurisdiction in such a proceeding being limited to reviewing only errors of law
that may have been committed by the lower courts. Consequently, findings of fact of
the trial court and the CA are final and conclusive, and cannot be reviewed on
appeal.31 It is not the function of the Court to reexamine or reevaluate evidence,
whether testimonial or documentary, adduced by the parties in the proceedings
32
below. Nevertheless, the rule admits of certain exceptions and has, in the past,
been relaxed when the lower courts findings were not supported by the evidence on
record or were based on a misapprehension of facts, 33 or when certain relevant and
undisputed facts were manifestly overlooked that, if properly considered, would justify
a different conclusion.34

The resolution of the present controversy turns on the issue regarding the precise
amount of respondents principal obligation under the series of mortgages which
DBP, as mortgagee-creditor, attempted to foreclose. In this case, the total amount of
respondents indebtedness is not simply a question of fact but is a question of law,
one requiring the application of legal principles for the computation of the amount
owed, and is thus a matter that can be properly brought up for the Courts
determination.35
PMO claims that the total outstanding obligation of respondents reached P62.9 Million
on September 30, 1985. This amount was purportedly the peso equivalent of the
foreign-currency denominated loans granted to respondents to refinance the original
loans they procured, and is inclusive of interest, penalties and other surcharges
incurred from that date as a result of respondents past defaults. Respondents
contend, on the other hand, that DBP grossly misstated the extent of their obligation,
and insist that they should be made liable only for the amount of P6.2 Million which
they actually received from DBP.
As mentioned, the RTC ultimately sustained respondents and made permanent the
writ of preliminary injunction it issued to enjoin the foreclosure proceedings.
Respondents were directed to pay only the amount of the original loans, that is, P6.2
Million, with the P5.3 Million which they previously paid to be applied as interest and
penalties. The RTC did not find respondents culpable for defaulting on their loan
obligations and passed the blame to the AFP for not fulfilling its contractual
obligations to respondents.
The CA affirmed the RTC decision and agreed that DBP cannot be allowed to
foreclose on the mortgage securing respondents loan. The CA surmised that since
DBP failed to adequately explain how it arrived at P62.9 Million, the original loan
amount of P6.2 Million could only have been "blatantly enlarged or erroneously
computed" by DBP through the imposition of an "unconscionable rate of interest and
charges." The CA also agreed with the trial court that there was no consideration for
the mortgage contracts executed by respondents considering the proceeds from the
alleged foreign currency loans were never actually received by the latter. This view is
untenable and lacks foundation.
As correctly pointed out by PMO, the original loans alluded to by respondents had
been refinanced and restructured in order to extend their maturity dates. Refinancing
is an exchange of an old debt for a new debt, as by negotiating a different interest
rate or term or by repaying the existing loan with money acquired from a new
loan.36 On the other hand, restructuring, as applied to a debt, implies not only a
postponement of the maturity37but also a modification of the essential terms of the
debt (e.g., conversion of debt into bonds or into equity, 38 or a change in or
39
amendment of collateral security) in order to make the account of the debtor current.
In this instance, it is important to note that DBP accommodated respondents request
to restructure and refinance their account twice in view of the financial difficulties the
latter were experiencing. The first restructuring/refinancing was granted in 1975 while
the second one was undertaken sometime in the early 1980s. Pursuant to the
restructuring schemes, respondents executed promissory notes and mortgage
contracts in favor of DBP,40 the second restructuring being evidenced by three
promissory notes dated December 11, 1980, June 5, 1981 and December 16, 1981 in
the total amount of $1.8 Million. The reason respondents seek to be excused from
fulfilling their obligation under the second batch of promissory notes is that first, they
allegedly had "no choice" but to sign the documents in order to have the loan

41

restructured and thus avert the foreclosure of their properties, and second, they
never received any proceeds from the same. This reasoning cannot be sustained.
Respondents allegation that they had no "choice" but to sign is tantamount to saying
that DBP exerted undue influence upon them. The Court is mindful that the law grants
an aggrieved party the right to obtain the annulment of a contract on account of
factors such as mistake, violence, intimidation, undue influence and fraud which
vitiate consent.42 However, the fact that the representatives were "forced" to sign the
promissory notes and mortgage contracts in order to have respondents original loans
restructured and to prevent the foreclosure of their properties does not amount to
vitiated consent.
The financial condition of respondents may have motivated them to contract with
DBP, but undue influence cannot be attributed to DBP simply because the latter had
lent money. The concept of undue influence is defined as follows:
There is undue influence when a person takes improper advantage of his power over
the will of another, depriving the latter of a reasonable freedom of choice. The
following circumstances shall be considered: the confidential, family, spiritual and
other relations between the parties or the fact that the person alleged to have been
unduly influenced was suffering from mental weakness, or was ignorant or in financial
distress.43
While respondents were purportedly financially distressed, there is no clear showing
that those acting on their behalf had been deprived of their free agency when they
executed the promissory notes representing respondents refinanced obligations to
DBP. For undue influence to be present, the influence exerted must have so
overpowered or subjugated the mind of a contracting party as to destroy the latters
free agency, making such party express the will of another rather than its own. The
alleged lingering financial woes of a debtor per secannot be equated with the
presence of undue influence.44
Corollarily, the threat to foreclose the mortgage would not in itself vitiate consent as it
45
is a threat to enforce a just or legal claim through competent authority. It bears
emphasis that the foreclosure of mortgaged properties in case of default in payment
46
of a debtor is a legal remedy given by law to a creditor. In the event of default by the
mortgage debtor in the performance of the principal obligation, the mortgagee
undeniably has the right to cause the sale at public auction of the mortgaged property
for payment of the proceeds to the mortgagee. 47
It is likewise of no moment that respondents never physically received the proceeds
of the foreign currency loans. When the loan was refinanced and restructured, the
proceeds were understandably not actually given by DBP to respondents since the
transaction was but a renewal of the first or original loan and the supposed proceeds
were applied as payment for the latter.
It also bears emphasis that the second set of promissory notes executed by
respondents must govern the contractual relation of the parties for they unequivocally
express the terms and conditions of the parties loan agreement, which are binding
and conclusive between them. Parties are free to enter into stipulations, clauses,
terms and conditions they may deem convenient; that is, as long as these are not
contrary to law, morals, good customs, public order or public policy. 48 With the
signatures of their duly authorized representatives on the subject notes and mortgage
contracts, the genuineness and due execution of which having been
admitted,49respondents in effect freely and voluntarily affirmed all the concurrent

rights and obligations flowing therefrom. Accordingly, respondents are barred from
claiming the contrary without transgressing the principle of estoppel and mutuality of
contracts. Contracts must bind both contracting parties; their validity or compliance
50
cannot be left to the will of one of them.
The significance of the promissory notes should not have been overlooked by the trial
court and the CA. By completely disregarding the promissory notes, the lower courts
unilaterally modified the contractual obligations of respondents after the latter already
benefited from the extension of the maturity date on their original loans, to the
damage and prejudice of PMO which steps into the shoes of DBP as mortgageecreditor.
At this juncture, it must be emphasized that a party to a contract cannot deny its
validity after enjoying its benefits without outrage to ones sense of justice and
fairness. Where parties have entered into a well-defined contractual relationship, it is
imperative that they should honor and adhere to their rights and obligations as stated
in their contracts because obligations arising from it have the force of law between the
51
contracting parties and should be complied with in good faith.
As a rule, a court in such a case has no alternative but to enforce the contractual
stipulations in the manner they have been agreed upon and written. Courts, whether
trial or appellate, generally have no power to relieve parties from obligations
voluntarily assumed simply because their contract turned out to be disastrous or
52
unwise investments.
Thus, respondents cannot be absolved from their loan obligations on the basis of the
failure of the AFP to fulfill its commitment under the manufacturing
agreement53 entered by them allegedly upon the prompting of certain AFP and DBP
officials. While it is true that the DBP representatives appear to have been aware that
the proceeds from the sale to the AFP were supposed to be applied to the loan, the
records are bereft of any proof that would show that DBP was a party to the contract
itself or that DBP would condone respondents credit if the contract did not
materialize. Even assuming that the AFP defaulted in its obligations under the
manufacturing agreement, respondents cause of action lies with the AFP, and not
with DBP or PMO. The loan contract of respondents is separate and distinct from
their manufacturing agreement with the AFP.
Incidentally, the CA sustained the validity of a loan obligation but annulled the
mortgage securing it on the ground of failure of consideration. This is erroneous. A
mortgage is a mere accessory contract and its validity would depend on the validity of
the loan secured by it.54 Hence, the consideration of the mortgage contract is the
same as that of the principal contract from which it receives life, and without which it
cannot exist as an independent contract. 55 The debtor cannot escape the
consequences of the mortgage contract once the validity of the loan is upheld.
Again, as a rule, courts cannot intervene to save parties from disadvantageous
provisions of their contracts if they consented to the same freely and
56
voluntarily. Thus, respondents cannot now protest against the fact that the loans
were denominated in foreign currency and were to be paid in its peso equivalent after
57
they had already given their consent to such terms. There is no legal impediment to
having obligations or transactions paid in a foreign currency as long as the parties
agree to such an arrangement. In fact, obligations in foreign currency may be
discharged in Philippine currency based on the prevailing rate at the time of
payment.58 For this reason, it was improper for the CA to reject outright DBPs claim

that the conversion of the remaining balance of the foreign currency loans into peso
accounted for the considerable differential in the total indebtedness of respondents
mainly because the exchange rates at the time of demand had been volatile and led
59
to the depreciation of the peso.
PMO also denies that a unilateral increase in the interest rates on the loans caused
the substantial increase in the indebtedness of respondents and points out that the
promissory notes themselves specifically provided for the rates of interest as well as
penalty and other charges which were merely applied on respondents outstanding
obligations. It should be noted, however, that at the time of the transaction, Act No.
2655, as amended by Presidential Decree No. 116 (Usury Law), was still in full force
and effect. Basic is the rule that the laws in force at the time the contract is made
governs the effectivity of its provisions.60 Section 2 of the Usury Law specifically
provides as follows:
Sec. 2. No person or corporation shall directly or indirectly take or receive in money or
other property, real or personal, or choses in action, a higher rate of interest or a
greater sum or value, including commissions, premiums, fines and penalties, for the
loan or renewal thereof or forbearance of money, goods, or credits, where such loan
or renewal or forbearance is secured in whole or in part by a mortgage upon real
estate the title to which is duly registered, or by any document conveying such real
estate or interest therein, than twelve per centum per annum or the maximum rate
prescribed by the Monetary Board and in force at the time the loan or renewal thereof
or forbearance is granted: Provided, that the rate of interest under this section or the
maximum rate of interest that may be prescribed by the monetary board under this
section may likewise apply to loans secured by other types of security as may be
specified by the Monetary Board.
A perusal of the promissory notes reveals that the interest charged upon the notes is
dependent upon the borrowing cost of DBP which, however, would be pegged at a
fixed rate assuming certain factors. The notes dated December 11, 1980 and June 5,
1981, for example, had a per annum interest rate of 3% over DBPs borrowing rate
that will become 1 % per annum in the event the loan is drawn under the Central
Banks Jumbo Loan. These were further subject to the condition that should the loan
from where they were drawn be fully repaid, the interest to be charged on
respondents remaining dollar obligation would be pegged at 16% per annum. 61 The
promissory note dated December 16, 1981, on the other hand, had a per annum
interest rate of 4% over DBPs borrowing rate. This rate would also become 1 % per
annum in the event the loan is drawn under the Central Banks Jumbo Loan.
However, should the loan from where respondents foreign currency loan was drawn
be fully repaid, the interest to be charged on their remaining dollar obligation would be
62
pegged at 18% per annum.
Due to the variable factors mentioned above, it cannot be determined whether DBP
did in fact apply an interest rate higher than what is prescribed under the law. It
appears on the records, however, that DBP attempted to explain how it arrived at the
63
amount stated in the Statement of Account it submitted in support of its claim but
was not allowed by the trial court to do so citing the rule that the best evidence of the
same is the document itself. 64 DBP should have been given the opportunity to explain
its entries in the Statement of Account in order to place the figures that were cited in
the proper context. Assuming the interest applied to the principal obligation did, in
fact, exceed 12%, in addition to the other penalties stipulated in the note, this should
be stricken out for being usurious.

In usurious loans, the entire obligation does not become void because of an
agreement for usurious interest; the unpaid principal debt still stands and remains
valid but the stipulation as to the interest is void. The debt is then considered to be
without stipulation as to the interest. In the absence of an express stipulation as to the
65
rate of interest, the legal rate of 12% per annum shall be imposed.
As to the issue raised by PMO that the injunction issued by the lower courts violated
Presidential Decree No. 385, the Court agrees with the ruling of the CA. Presidential
Decree No. 385 was issued primarily to see to it that government financial institutions
are not denied substantial cash inflows which are necessary to finance development
projects all over the country, by large borrowers who, when they become
delinquent,RESORT to court actions in order to prevent or delay the governments
collection of their debts and loans.66
The government, however, is bound by basic principles of fairness and decency
under the due process clause of the Bill of Rights. Presidential Decree No. 385 does
not provide the government blanket authority to unqualifiedly impose the mandatory
provisions of the decree without due regard to the constitutional rights of the
borrowers. In fact, it is required that a hearing first be conducted to determine whether
or not 20% of the outstanding arrearages has been paid, as a prerequisite for the
issuance of a temporary restraining order or a writ of preliminary injunction. Hence,
the trial court can, on the basis of the evidence then in its possession, make a
provisional determination on the matter of the actual existence of the arrearages and
the amount on which the 20% requirement is to be computed. Consequently,
Presidential Decree No. 385 cannot be invoked where the extent of the loan actually
received by the borrower is still to be determined. 67
Finally, respondents allegation that PMO is engaged in forum shopping is untenable.
Forum shopping is the act of a party, against whom an adverse judgment has been
rendered in one forum, of seeking another and possibly favorable opinion in another
forum by appeal or a special civil action of certiorari.68 As correctly pointed out by
PMO, the present petition is merely an appeal from the adverse decision rendered in
the same action where it was impleaded as co-defendant with DBP. That DBP opted
to file a motion for reconsideration with the CA rather than a direct appeal to this
Court does not bar PMO from seeking relief from the judgment by taking the latter
course of action.
It must be remembered that PMO was impleaded as party defendant through the
amended complaint69 dated November 25, 1987. Persons made parties-defendants
via a supplemental complaint possess locus standi or legal personality to seek a
review by the Court of the decision by the CA which they assail even if their codefendants did not appeal the said ruling of the appellate court. 70 Even assuming that
separate actions have been filed by two different parties involving essentially the
same subject matter, no forum shopping is committed where the parties did not resort
to multiple judicial remedies. 71
In any event, the Court deems it fit to put an end to this controversy and to finally
adjudicate the rights and obligations of the parties in the interest of a speedy
dispensation of justice, taking into account the length of time this action has been
pending with the courts as well as in light of the fact that PMO is the real party-ininterest in this case, being the successor-in-interest of DBP.
WHEREFORE, the petition is PARTLY GRANTED and the assailed Decision dated
May 7, 1999 rendered by the Court of Appeals in CA-G.R. CV No. 49239 is

REVERSED AND SET ASIDE. The case is hereby remanded to the trial court for
determination of the total amount of the respondents obligation based on the
promissory notes dated December 11, 1980, June 5, 1981 and December 16, 1981
according to the interest rate agreed upon by the parties or the interest rate of 12%
per annum, whichever is lower.
No costs.
SO ORDERED.

G.R. No. 150806

January 28, 2008

EUFEMIA ALMEDA and ROMEL ALMEDA, petitioners,

vs.
BATHALA MARKETING INDUSTRIES, INC., respondent.
DECISION
NACHURA, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, of the
Decision1 of the Court of Appeals (CA), dated September 3, 2001, in CA-G.R. CV No.
2
67784, and its Resolution dated November 19, 2001. The assailed Decision affirmed
with modification the Decision3 of the Regional Trial Court (RTC), Makati City, Branch
136, dated May 9, 2000 in Civil Case No. 98-411.

Respondent refused to pay the VAT and adjusted rentals as demanded by petitioners
but continued to pay the stipulated amount set forth in their contract.
On February 18, 1998, respondent instituted an action for declaratory relief for
purposes of determining the correct interpretation of condition Nos. 6 and 7 of the
10
lease contract to prevent damage and prejudice. The case was docketed as Civil
Case No. 98-411 before the RTC of Makati.
On March 10, 1998, petitioners in turn filed an action for ejectment, rescission and
damages against respondent for failure of the latter to vacate the premises after the
11
demand made by the former. Before respondent could file an answer, petitioners
12
filed a Notice of Dismissal. They subsequently refiled the complaint before the
Metropolitan Trial Court of Makati; the case was raffled to Branch 139 and was
docketed as Civil Case No. 53596.

Sometime in May 1997, respondent Bathala Marketing Industries, Inc., as lessee,

represented by its president Ramon H. Garcia, renewed its Contract of Lease4 with
Ponciano L. Almeda (Ponciano), as lessor, husband of petitioner Eufemia and father
of petitioner Romel Almeda. Under the said contract, Ponciano agreed to lease a
portion of the Almeda Compound, located at 2208 Pasong Tamo Street, Makati City,
consisting of 7,348.25 square meters, for a monthly rental of P1,107,348.69, for a
term of four (4) years from May 1, 1997 unless sooner terminated as provided in the
contract.5 The contract of lease contained the following pertinent provisions which
gave rise to the instant case:

Petitioners later moved for the dismissal of the declaratory relief case for being an
improper remedy considering that respondent was already in breach of the obligation
and that the case would not end the litigation and settle the rights of the parties. The
trial court, however, was not persuaded, and consequently, denied the motion.

SIXTH - It is expressly understood by the parties hereto that the rental rate
stipulated is based on the present rate of assessment on the property, and
that in case the assessment should hereafter be increased or any new tax,
charge or burden be imposed by authorities on the lot and building where
the leased premises are located, LESSEE shall pay, when the rental herein
provided becomes due, the additional rental or charge corresponding to the
portion hereby leased; provided, however, that in the event that the present
assessment or tax on said property should be reduced, LESSEE shall be
entitled to reduction in the stipulated rental, likewise in proportion to the
portion leased by him;

1) declaring that plaintiff is not liable for the payment of Value-Added Tax
(VAT) of 10% of the rent for [the] use of the leased premises;

SEVENTH - In case an extraordinary inflation or devaluation of Philippine

Currency should supervene, the value of Philippine peso at the time of the
establishment of the obligation shall be the basis of payment;6

4) holding defendants liable to plaintiff for the amount of P1,107,348.69, said

amount representing the balance of plaintiff's rental deposit still with
defendants.

During the effectivity of the contract, Ponciano died. Thereafter, respondent dealt with
7
petitioners. In a letter dated December 29, 1997, petitioners advised respondent that
the former shall assess and collect Value Added Tax (VAT) on its monthly rentals. In
response, respondent contended that VAT may not be imposed as the rentals fixed in
the contract of lease were supposed to include the VAT therein, considering that their
contract was executed on May 1, 1997 when the VAT law had long been in effect. 8
On January 26, 1998, respondent received another letter from petitioners informing
the former that its monthly rental should be increased by 73% pursuant to condition
No. 7 of the contract and Article 1250 of the Civil Code. Respondent opposed
petitioners' demand and insisted that there was no extraordinary inflation to warrant
the application of Article 1250 in light of the pronouncement of this Court in various
cases.9

After trial on the merits, on May 9, 2000, the RTC ruled in favor of respondent and
against petitioners. The pertinent portion of the decision reads:
WHEREFORE, premises considered, this Court renders judgment on the
case as follows:

2) declaring that plaintiff is not liable for the payment of any rental
adjustment, there being no [extraordinary] inflation or devaluation, as
provided in the Seventh Condition of the lease contract, to justify the same;
3) holding defendants liable to plaintiff for the total amount of P1,119,102.19,
said amount representing payments erroneously made by plaintiff as VAT
charges and rental adjustment for the months of January, February and
March, 1999; and

SO ORDERED.13
The trial court denied petitioners their right to pass on to respondent the burden of
paying the VAT since it was not a new tax that would call for the application of the
sixth clause of the contract. The court, likewise, denied their right to collect the
demanded increase in rental, there being no extraordinary inflation or devaluation as
provided for in the seventh clause of the contract. Because of the payment made by
respondent of the rental adjustment demanded by petitioners, the court ordered the
restitution by the latter to the former of the amounts paid, notwithstanding the wellestablished rule that in an action for declaratory relief, other than a declaration of
rights and obligations, affirmative reliefs are not sought by or awarded to the parties.
Petitioners elevated the aforesaid case to the Court of Appeals which affirmed with
modification the RTC decision. The fallo reads:

WHEREFORE, premises considered, the present appeal is DISMISSED and

the appealed decision in Civil Case No. 98-411 is hereby AFFIRMED with
MODIFICATION in that the order for the return of the balance of the rental
deposits and of the amounts representing the 10% VAT and rental
adjustment, is hereby DELETED.
No pronouncement as to costs.
SO ORDERED.14
The appellate court agreed with the conclusions of law and the application of the
decisional rules on the matter made by the RTC. However, it found that the trial court
exceeded its jurisdiction in granting affirmative relief to the respondent, particularly
the restitution of its excess payment.
Petitioners now come before this Court raising the following issues:
I.
WHETHER OR NOT ARTICLE 1250 OF THE NEW CIVIL CODE IS
APPLICABLE TO THE CASE AT BAR.

validity of provisions in an instrument or statute. Corollary is the general rule that such
an action must be justified, as no other adequate relief or remedy is available under
the circumstances. 15
Decisional law enumerates the requisites of an action for declaratory relief, as follows:
1) the subject matter of the controversy must be a deed, will, contract or other written
instrument, statute, executive order or regulation, or ordinance; 2) the terms of said
documents and the validity thereof are doubtful and require judicial construction; 3)
there must have been no breach of the documents in question; 4) there must be an
actual justiciable controversy or the "ripening seeds" of one between persons whose
interests are adverse; 5) the issue must be ripe for judicial determination; and 6)
adequate relief is not available through other means or other forms of action or
proceeding.16
It is beyond cavil that the foregoing requisites are present in the instant case, except
that petitioners insist that respondent was already in breach of the contract when the
petition was filed.
We do not agree.

III.

After petitioners demanded payment of adjusted rentals and in the months that
followed, respondent complied with the terms and conditions set forth in their contract
of lease by paying the rentals stipulated therein. Respondent religiously fulfilled its
obligations to petitioners even during the pendency of the present suit. There is no
showing that respondent committed an act constituting a breach of the subject
contract of lease. Thus, respondent is not barred from instituting before the trial court
the petition for declaratory relief.

WHETHER OR NOT IN NOT APPLYING THE DOCTRINE IN THE CASE

OF DEL ROSARIO VS. THE SHELL COMPANY OF THE PHILIPPINES,
164 SCRA 562, THE HONORABLE COURT OF APPEALS SERIOUSLY
ERRED ON A QUESTION OF LAW.

Petitioners claim that the instant petition is not proper because a separate action for
rescission, ejectment and damages had been commenced before another court; thus,
the construction of the subject contractual provisions should be ventilated in the same
forum.

IV.

We are not convinced.

WHETHER OR NOT THE FINDING OF THE HONORABLE COURT OF

APPEALS THAT RESPONDENT IS NOT LIABLE TO PAY THE 10%
VALUE ADDED TAX IS IN ACCORDANCE WITH THE MANDATE OF RA
7716.

It is true that in Panganiban v. Pilipinas Shell Petroleum Corporation we held that

the petition for declaratory relief should be dismissed in view of the pendency of a
separate action for unlawful detainer. However, we cannot apply the same ruling to
the instant case. In Panganiban, the unlawful detainer case had already been
resolved by the trial court before the dismissal of the declaratory relief case; and it
was petitioner in that case who insisted that the action for declaratory relief be
preferred over the action for unlawful detainer. Conversely, in the case at bench, the
trial court had not yet resolved the rescission/ejectment case during the pendency of
the declaratory relief petition. In fact, the trial court, where the rescission case was on
appeal, itself initiated the suspension of the proceedings pending the resolution of the
action for declaratory relief.

II.
WHETHER OR NOT THE DOCTRINE ENUNCIATED IN FILIPINO PIPE
AND FOUNDRY CORP. VS. NAWASA CASE, 161 SCRA 32 AND
COMPANION CASES ARE (sic) APPLICABLE IN THE CASE AT BAR.

V.
WHETHER OR NOT DECLARATORY RELIEF IS PROPER SINCE
PLAINTIFF-APPELLEE WAS IN BREACH WHEN THE PETITION FOR
DECLARATORY RELIEF WAS FILED BEFORE THE TRIAL COURT.
In fine, the issues for our resolution are as follows: 1) whether the action for
declaratory relief is proper; 2) whether respondent is liable to pay 10% VAT pursuant
to Republic Act (RA) 7716; and 3) whether the amount of rentals due the petitioners
should be adjusted by reason of extraordinary inflation or devaluation.
Declaratory relief is defined as an action by any person interested in a deed, will,
contract or other written instrument, executive order or resolution, to determine any
question of construction or validity arising from the instrument, executive order or
regulation, or statute, and for a declaration of his rights and duties thereunder. The
only issue that may be raised in such a petition is the question of construction or

17

We are not unmindful of the doctrine enunciated in Teodoro, Jr. v. Mirasol18 where the
declaratory relief action was dismissed because the issue therein could be threshed
out in the unlawful detainer suit. Yet, again, in that case, there was already a breach
of contract at the time of the filing of the declaratory relief petition. This dissimilar
factual milieu proscribes the Court from applying Teodoro to the instant case.
Given all these attendant circumstances, the Court is disposed to entertain the instant
declaratory relief action instead of dismissing it, notwithstanding the pendency of the

ejectment/rescission case before the trial court. The resolution of the present petition
would write finis to the parties' dispute, as it would settle once and for all the question
of the proper interpretation of the two contractual stipulations subject of this
controversy.

Essential to contract construction is the ascertainment of the intention of the

contracting parties, and such determination must take into account the
contemporaneous and subsequent acts of the parties. This intention, once
21
ascertained, is deemed an integral part of the contract.

Now, on the substantive law issues.

While, indeed, condition No. 7 of the contract speaks of "extraordinary inflation or

devaluation" as compared to Article 1250's "extraordinary inflation or deflation," we
find that when the parties used the term "devaluation," they really did not intend to
depart from Article 1250 of the Civil Code. Condition No. 7 of the contract should,
thus, be read in harmony with the Civil Code provision.

Petitioners repeatedly made a demand on respondent for the payment of VAT and for
rental adjustment allegedly brought about by extraordinary inflation or devaluation.
Both the trial court and the appellate court found no merit in petitioners' claim. We see
no reason to depart from such findings.
As to the liability of respondent for the payment of VAT, we cite with approval the
ratiocination of the appellate court, viz.:
Clearly, the person primarily liable for the payment of VAT is the lessor who
may choose to pass it on to the lessee or absorb the same. Beginning
January 1, 1996, the lease of real property in the ordinary course of
business, whether for commercial or residential use, when the gross annual
receipts exceed P500,000.00, is subject to 10% VAT. Notwithstanding the
mandatory payment of the 10% VAT by the lessor, the actual shifting of the
said tax burden upon the lessee is clearly optional on the part of the lessor,
under the terms of the statute. The word "may" in the statute, generally
speaking, denotes that it is directory in nature. It is generally permissive only
and operates to confer discretion. In this case, despite the applicability of the
rule under Sec. 99 of the NIRC, as amended by R.A. 7716, granting the
lessor the option to pass on to the lessee the 10% VAT, to existing contracts
of lease as of January 1, 1996, the original lessor, Ponciano L. Almeda did
not charge the lessee-appellee the 10% VAT nor provided for its additional
imposition when they renewed the contract of lease in May 1997. More
significantly, said lessor did not actually collect a 10% VAT on the monthly
rental due from the lessee-appellee after the execution of the May 1997
contract of lease. The inevitable implication is that the lessor intended not to
avail of the option granted him by law to shift the 10% VAT upon the lesseeappellee. x x x.19
In short, petitioners are estopped from shifting to respondent the burden of paying the
VAT.
Petitioners' reliance on the sixth condition of the contract is, likewise, unavailing. This
provision clearly states that respondent can only be held liable for new taxes imposed
after the effectivity of the contract of lease, that is, after May 1997, and only if they
pertain to the lot and the building where the leased premises are located. Considering
that RA 7716 took effect in 1994, the VAT cannot be considered as a "new tax" in
May 1997, as to fall within the coverage of the sixth stipulation.
Neither can petitioners legitimately demand rental adjustment because of
extraordinary inflation or devaluation.
Petitioners contend that Article 1250 of the Civil Code does not apply to this case
because the contract stipulation speaks of extraordinary inflation or devaluation while
the Code speaks of extraordinary inflation or deflation. They insist that the doctrine
pronounced in Del Rosario v. The Shell Company, Phils. Limited20 should apply.

22

That this is the intention of the parties is evident from petitioners' letter dated
January 26, 1998, where, in demanding rental adjustment ostensibly based on
condition No. 7, petitioners made explicit reference to Article 1250 of the Civil Code,
even quoting the law verbatim. Thus, the application of Del Rosario is not warranted.
Rather, jurisprudential rules on the application of Article 1250 should be considered.
Article 1250 of the Civil Code states:
In case an extraordinary inflation or deflation of the currency stipulated
should supervene, the value of the currency at the time of the establishment
of the obligation shall be the basis of payment, unless there is an agreement
to the contrary.
Inflation has been defined as the sharp increase of money or credit, or both, without a
corresponding increase in business transaction. There is inflation when there is an
increase in the volume of money and credit relative to available goods, resulting in a
substantial and continuing rise in the general price level. 23 In a number of cases, this
Court had provided a discourse on what constitutes extraordinary inflation, thus:
[E]xtraordinary inflation exists when there is a decrease or increase in the
purchasing power of the Philippine currency which is unusual or beyond the
common fluctuation in the value of said currency, and such increase or
decrease could not have been reasonably foreseen or was manifestly
beyond the contemplation of the parties at the time of the establishment of
the obligation.24
The factual circumstances obtaining in the present case do not make out a case of
extraordinary inflation or devaluation as would justify the application of Article 1250 of
the Civil Code. We would like to stress that the erosion of the value of the Philippine
peso in the past three or four decades, starting in the mid-sixties, is characteristic of
most currencies. And while the Court may take judicial notice of the decline in the
purchasing power of the Philippine currency in that span of time, such downward
trend of the peso cannot be considered as the extraordinary phenomenon
contemplated by Article 1250 of the Civil Code. Furthermore, absent an official
pronouncement or declaration by competent authorities of the existence of
extraordinary inflation during a given period, the effects of extraordinary inflation are
25
not to be applied.
WHEREFORE, premises considered, the petition is DENIED. The Decision of the
Court of Appeals in CA-G.R. CV No. 67784, dated September 3, 2001, and its
Resolution dated November 19, 2001, are AFFIRMED.
SO ORDERED.

G.R. No. 190375

February 8, 2012

TAN SHUY, Petitioner,

vs.
Spouses GUILLERMO MAULAWIN and PARING CARIOMAULAWIN, Respondents.
DECISION
SERENO, J.:
Before the Court is a Petition for Review on Certiorari filed under Rule 45 of the Rules
of Court, assailing the 31 July 2009 Decision and 13 November 2009 Resolution of
the Court of Appeals (CA).1
Facts
Petitioner Tan Shuy is engaged in the business of buying copra and corn in the
Fourth District of Quezon Province. According to Vicente Tan (Vicente), son of
petitioner, whenever they would buy copra or corn from crop sellers, they would
prepare and issue a pesada in their favor. A pesada is a document containing details
of the transaction, including the date of sale, the weight of the crop delivered, the
trucking cost, and the net price of the crop. He then explained that when a pesada
contained the annotation "pd" on the total amount of the purchase price, it meant that
2
the crop delivered had already been paid for by petitioner.
Guillermo Maulawin (Guillermo), respondent in this case, is a farmer-businessman
engaged in the buying and selling of copra and corn. On 10 July 1997, Tan Shuy
extended a loan to Guillermo in the amount of P 420,000. In consideration thereof,
Guillermo obligated himself to pay the loan and to sell lucad or copra to petitioner.
Below is a reproduction of the contract: 3
No2567

Lopez, Quezon July 10, 1997

Tinanggap
ko
kay
G.
TAN
SHUY
ang
halagang
. (P420,000.00) salaping Filipino.
Inaako ko na isusulit sa kanya ang aking LUCAD at babayaran ko ang nasabing
halaga. Kung hindi ako makasulit ng LUCAD o makabayad bago sumapit ang
., 19 maaari niya akong ibigay sa may kapangyarihan. Kung
ang pagsisingilan ay makakarating sa Juzgado ay sinasagutan ko ang lahat ng
kaniyang gugol.

P................

[Sgd.
by
respondent]
.
Lagda

customers (copra sellers). According to Vicente, part of their agreement with

Guillermo was that they would put the annotation "sulong" on the pesada when partial
payment for the loan was made.
Petitioner alleged that despite repeated demands, Guillermo remitted only P 23,000 in
4
August 1998 and P 5,500 in October 1998, or a total of P 28,500. He claimed that
respondent had an outstanding balance of P 391,500. Thus, convinced that Guillermo
no longer had the intention to pay the loan, petitioner brought the controversy to the
Lupon Tagapamayapa. When no settlement was reached, petitioner filed a Complaint
before the Regional Trial Court (RTC).
Respondent Guillermo countered that he had already paid the subject loan in full.
According to him, he continuously delivered and sold copra to petitioner from April
1998 to April 1999. Respondent said they had an oral arrangement that the net
proceeds thereof shall be applied as installment payments for the loan. He alleged
that his deliveries amounted to P 420,537.68 worth of copra. To bolster his claim, he
presented copies of pesadas issued by Elena and Vicente. He pointed out that the
pesadas did not contain the notation "pd," which meant that actual payment of the net
proceeds from copra deliveries was not given to him, but was instead applied as loan
payment. He averred that Tan Shuy filed a case against him, because petitioner got
mad at him for selling copra to other copra buyers.
On 27 July 2007, the trial court issued a Decision, ruling that the net proceeds from
Guillermos copra deliveries represented in the pesadas, which did not bear the
notation "pd" should be applied as installment payments for the loan. It gave weight
and credence to the pesadas, as their due execution and authenticity was established
by Elena and Vicente, children of petitioner. 5 However, the court did not credit the net
proceeds from 12 pesadas, as they were deliveries for corn and not copra. According
to the RTC, Guillermo himself testified that it was the net proceeds from the copra
deliveries that were to be applied as installment payments for the loan. Thus, it ruled
that the total amount of P 41,585.25, which corresponded to the net proceeds from
corn deliveries, should be deducted from the amount of P 420,537.68 claimed by
Guillermo to be the total value of his copra deliveries. Accordingly, the trial court
found that respondent had not made a full payment for the loan, as the total creditable
copra deliveries merely amounted to P 378,952.43, leaving a balance of P 41,047.57
in his loan.6
On 31 July 2009, the CA issued its assailed Decision, which affirmed the finding of
the trial court. According to the appellate court, petitioner could have easily belied the
existence of the pesadas and the purpose for which they were offered in evidence by
presenting his daughter Elena as witness; however, he failed to do so. Thus, it gave
credence to the testimony of respondent Guillermo in that the net proceeds from the
7
copra deliveries were applied as installment payments for the loan. On 13 November
2009, the CA issued its assailed Resolution, which denied the Motion for
Reconsideration of petitioner.
Petitioner now assails before this Court the aforementioned Decision and Resolution
of the CA and presents the following issues:
Issues

Most of the transactions involving Tan Shuy and Guillermo were coursed through
Elena Tan, daughter of petitioner. She served as cashier in the business of Tan Shuy,
who primarily prepared and issued the pesada. In case of her absence, Vicente would
issue the pesada. He also helped his father in buying copra and granting loans to

1. Whether the pesadas require authentication before they can be admitted

in evidence, and

2. Whether the delivery of copra amounted to installment payments for the

loan obtained by respondents from petitioner.
Discussion
As regards the first issue, petitioner asserts that the pesadas should not have been
admitted in evidence, since they were private documents that were not duly
authenticated.8 He further contends that the pesadas were fabricated in order to show
that the goods delivered were copra and not corn. Finally, he argues that five of the
pesadas mentioned in the Formal Offer of Evidence of respondent were not actually
9
offered.
With regard to the second issue, petitioner argues that respondent undertook two
separate obligations (1) to pay for the loan in cash and (2) to sell the latters lucad
or copra. Since their written agreement did not specifically provide for the application
of the net proceeds from the deliveries of copra for the loan, petitioner contends that
he cannot be compelled to accept copra as payment for the loan. He emphasizes that
the pesadas did not specifically indicate that the net proceeds from the copra
deliveries were to be used as installment payments for the loan. He also claims that
respondents copra deliveries were duly paid for in cash, and that the pesadas were
in fact documentary receipts for those payments.

copras appearing therein. Although said "pesadas" were private instrument their
execution and authenticity were established by the plaintiffs daughter Elena Tan and
sometimes by plaintiffs son Vicente Tan. x x x.14 (Emphasis supplied)
In affirming the finding of the RTC, the CA reasoned thus:
In his last assigned error, plaintiff-appellant herein impugns the conclusion arrived at
by the trial court, particularly with respect to the giving of evidentiary value to Exhs.
"3" to "64" by the latter in order to prove the claim of defendant-appellee Guillermo
that he had fully paid the subject loan already.
The foregoing deserves scant consideration.
Here, plaintiff-appellant could have easily belied the existence of Exhs. "3" to "64", the
pesadas or receipts, and the purposes for which they were offered in evidence by
simply presenting his daughter, Elena Tan Shuy, but no effort to do so was actually
done by the former given that scenario.15 (Emphasis supplied)
We found no clear showing that the trial court and the CA committed reversible errors
of law in giving credence and according weight to the pesadas presented by
respondents. According to Rule 132, Section 20 of the Rules of Court, there are two
ways of proving the due execution and authenticity of a private document, to wit:

We reiterate our ruling in a line of cases that the jurisdiction of this Court, in cases
brought before it from the CA, is limited to reviewing or revising errors of
law.10 Factual findings of courts, when adopted and confirmed by the CA, are final
and conclusive on this Court except if unsupported by the evidence on
record.11 There is a question of fact when doubt arises as to the truth or falsehood of
facts; or when there is a need to calibrate the whole evidence, considering mainly the
credibility of the witnesses and the probative weight thereof, the existence and
relevancy of specific surrounding circumstances, as well as their relation to one
another and to the whole, and the probability of the situation. 12

SEC. 20. Proof of private document. Before any private document offered as
authentic is received in evidence, its due execution and authenticity must be proved
either:

Here, a finding of fact is required in the ascertainment of the due execution and
authenticity of the pesadas, as well as the determination of the true intention behind
the parties oral agreement on the application of the net proceeds from the copra
13
deliveries as installment payments for the loan. This function was already exercised
by the trial court and affirmed by the CA. Below is a reproduction of the relevant
portion of the trial courts Decision:

As reproduced above, the trial court found that the due execution and authenticity of
the pesadas were "established by the plaintiffs daughter Elena Tan and sometimes
16
by plaintiffs son Vicente Tan." The RTC said:

x x x The defendant further averred that if in the receipts or "pesadas" issued by the
plaintiff to those who delivered copras to them there is a notation "pd" on the total
amount of purchase price of the copras, it means that said amount was actually paid
or given by the plaintiff or his daughter Elena Tan Shuy to the seller of the copras. To
prove his averments the defendant presented as evidence two (2) receipts or
pesadas issued by the plaintiff to a certain "Cario" (Exhibits "1" and "2" defendant)
showing the notation "pd" on the total amount of the purchase price for the copras.
Such claim of the defendant was further bolstered by the testimony of Apolinario
Cario which affirmed that he also sell copras to the plaintiff Tan Shuy. He also added
that he incurred indebtedness to the plaintiff and whenever he delivered copras the
amount of the copras sold were applied as payments to his loan. The witness also
pointed out that the plaintiff did not give any official receipts to those who transact
business with him (plaintiff). This Court gave weight and credence to the documents
receipts (pesadas) (Exhibits "3" to "64") offered as evidence by the defendant which
does not bear the notation "pd" or paid on the total amount of the purchase price of

(a) By anyone who saw the document executed or written; or

(b) By evidence of the genuineness of the signature or handwriting of the maker.
Any other private document need only be identified as that which it is claimed to be.
(21a)

On cross-examination, [Vicente] reiterated that he and her [sic] sister Elena Tan who
acted as their cashier are helping their father in their business of buying copras and
mais. That witness agreed that in the business of buying copra and mais of their
father, if a seller is selling copra, a pesada is being issued by his sister. The pesada
that she is preparing consists of the date when the copra is being sold to the seller.
Being familiar with the penmanship of Elena Tan, the witness was shown a sample of
the pesada issued by his sister Elena Tan. x x x
xxx

xxx

xxx

x x x. He clarified that in the "pesada" (Exh. "1") prepared by Elena and also in Exh
"2", there appears on the lower right hand portion of the said pesadas the letter "pd",
the meaning of which is to the effect that the seller of the copra has already been paid
during that day. He also confirmed the penmanship and handwriting of his sister Ate
Elena who acted as a cashier in the pesada being shown to him. He was even made
to compare the xerox copies of the pesadas with the original copies presented to him
17
and affirmed that they are faithful reproduction of the originals. (Emphasis supplied)
In any event, petitioner is already estopped from questioning the due execution and
authenticity of the pesadas.1wphi1As found by the CA, Tan Shuy "could have easily

belied the existence of x x x the pesadas or receipts, and the purposes for which they
were offered in evidence by simply presenting his daughter, Elena Tan Shuy, but no
effort to do so was actually done by the former given that scenario." The pesadas
having been admitted in evidence, with petitioner failing to timely object thereto, these
18
documents are already deemed sufficient proof of the facts contained therein. We
hereby uphold the factual findings of the RTC, as affirmed by the CA, in that the
pesadas served as proof that the net proceeds from the copra deliveries were used
as installment payments for the debts of respondents. 19
Indeed, pursuant to Article 1232 of the Civil Code, an obligation is extinguished by
payment or performance. There is payment when there is delivery of money or
performance of an obligation.20 Article 1245 of the Civil Code provides for a special
mode of payment called dation in payment (dacin en pago). There is dation in
payment when property is alienated to the creditor in satisfaction of a debt in
money.21 Here, the debtor delivers and transmits to the creditor the formers
ownership over a thing as an accepted equivalent of the payment or performance of
22
an outstanding debt. In such cases, Article 1245 provides that the law on sales shall
apply, since the undertaking really partakes in one sense of the nature of sale;
that is, the creditor is really buying the thing or property of the debtor, the payment for
which is to be charged against the debtors obligation. 23Dation in payment
extinguishes the obligation to the extent of the value of the thing delivered, either as
agreed upon by the parties or as may be proved, unless the parties by agreement
express or implied, or by their silence consider the thing as equivalent to the
obligation, in which case the obligation is totally extinguished.24
The trial court found thus:
x x x [T]he preponderance of evidence is on the side of the defendant. x x x The
defendant explained that for the receipts (pesadas) from April 1998 to April 1999 he
only gets the payments for trucking while the total amount which represent the total
purchase price for the copras that he delivered to the plaintiff were all given to Elena
Tan Shuy as installments for the loan he owed to plaintiff. The defendant further
averred that if in the receipts or "pesadas" issued by the plaintiff to those who
delivered copras to them there is a notation "pd" on the total amount of purchase
price of the copras, it means that said amount was actually paid or given by the
plaintiff or his daughter Elena Tan Shuy to the seller of the copras. To prove his
averments the defendant presented as evidence two (2) receipts or pesadas issued
by the plaintiff to a certain "Cario" (Exhibits "1" and "2" defendant) showing the
notation "pd" on the total amount of the purchase price for the copras. Such claim of
the defendant was further bolstered by the testimony of Apolinario Cario which
affirmed that he also sell [sic] copras to the plaintiff Tan Shuy. He also added that he
incurred indebtedness to the plaintiff and whenever he delivered copras the amount
of the copras sold were applied as payments to his loan. The witness also pointed out
that the plaintiff did not give any official receipts to those who transact business with
him (plaintiff). x x x
Be that it may, this Court cannot however subscribe to the averments of the
defendant that he has fully paid the amount of his loan to the plaintiff from the
proceeds of the copras he delivered to the plaintiff as shown in the "pesadas"
(Exhibits "3" to "64"). Defendant claimed that based on the said "pesadas" he has
paid the total amount of P420,537.68 to the plaintiff. However, this Court keenly noted
that some of the "pesadas" offered in evidence by the defendant were not for copras

that he delivered to the plaintiff but for "mais" (corn). The said pesadas for mais or
corn were the following, to wit:
xxx

xxx

xxx

To the mind of this Court the aforestated amount (P41,585.25) which the above listed
pesadas show as payment for mais or corn delivered by the defendant to the plaintiff
cannot be claimed by the defendant to have been applied also as payment to his loan
with the plaintiff because he does not testify on such fact. He even stressed during his
testimony that it was the proceeds from the copras that he delivered to the plaintiff
which will be applied as payments to his loan. x x x Thus, equity dictates that the total
amount of P41,585.25 which corresponds to the payment for "mais" (corn) delivered
by the plaintiff shall be deducted from the total amount of P420,537.68 which
according to the defendant based on the pesadas (Exhibits "3" to "64") that he
presented as evidence, is the total amount of the payment that he made for his loan
to the plaintiff. x x x
xxx

xxx

xxx

Clearly from the foregoing, since the total amount of defendants loan to the plaintiff is
P420,000.00 and the evidence on record shows that the actual amount of payment
made by the defendant from the proceeds of the copras he delivered to the plaintiff is
P378,952.43, the defendant is still indebted to the plaintiff in the amount of
P41,047.53 (sic) (P420,000.00-P378,952.43).25 (Emphasis supplied)
In affirming this finding of fact by the trial court, the CA cited the above-quoted portion
of the RTCs Decision and stated the following:
In fact, as borne by the records on hand, herein defendant-appellee Guillermo was
able to describe and spell out the contents of Exhs. "3" to "64" which were then
prepared by Elena Tan Shuy or sometimes by witness Vicente Tan. Herein
defendant-appellee Guillermo professed that since the release of the subject loan
was subject to the condition that he shall sell his copras to the plaintiff-appellant, the
former did not already receive any money for the copras he delivered to the latter
starting April 1998 to April 1999. Hence, this Court can only express its approval to
the apt observation of the trial court on this matter[.]
xxx

xxx

xxx

Notwithstanding the above, however, this Court fully agrees with the pronouncement
of the trial court that not all amounts indicated in Exhs. "3" to "64" should be applied
as payments to the subject loan since several of which clearly indicated "mais"
deliveries on the part of defendant-appellee Guillermo instead of
"copras"[.]26 (Emphasis supplied)
The subsequent arrangement between Tan Shuy and Guillermo can thus be
considered as one in the nature of dation in payment. There was partial payment
every time Guillermo delivered copra to petitioner, chose not to collect the net
proceeds of his copra deliveries, and instead applied the collectible as installment
payments for his loan from Tan Shuy. We therefore uphold the findings of the trial
court, as affirmed by the CA, that the net proceeds from Guillermos copra deliveries
amounted to P 378,952.43. With this partial payment, respondent remains liable for
27
the balance totaling P 41,047.57.

WHEREFORE the Petition is DENIED. The 31 July 2009 Decision and 13 November
2009 Resolution of the Court of Appeals in CA-G.R. CV No. 90070 are hereby
AFFIRMED.
SO ORDERED.

G.R. No. 168646

January 12, 2011

LUZON DEVELOPMENT BANK, Petitioner,

vs.
ANGELES CATHERINE ENRIQUEZ, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 168666
DELTA DEVELOPMENT and MANAGEMENT SERVICES, INC., Petitioner,
vs.
ANGELES CATHERINE ENRIQUEZ and LUZON DEVELOPMENT
BANK, Respondents.
DECISION
DEL CASTILLO, J.:
The protection afforded to a subdivision lot buyer under Presidential Decree (PD) No.
957 or The Subdivision and Condominium Buyers Protective Decree will not be
defeated by someone who is not an innocent purchaser for value. The lofty
aspirations of PD 957 should be read in every provision of the statute, in every
contract that undermines its objects, in every transaction which threatens its fruition.
"For a statute derives its vitality from the purpose for which it is enacted and to
construe it in a manner that disregards or defeats such purpose is to nullify or destroy
the law."1
These cases involve the separate appeals of Luzon Development Bank2 (BANK) and
3
Delta Development and Management Services, Inc. (DELTA) from the November 30,
2004 Decision of the Court of Appeals (CA), as well as its June 22, 2005 Resolution
in CA-G.R. SP No. 81280. The dispositive portion of the assailed Decision reads:
WHEREFORE, premises considered, the Decision dated June 17, 2003 and
Resolution dated November 24, 2003 are AFFIRMED with [m]odification in so far as
Delta Development and Management Services, Inc. is liable and directed to pay
petitioner Luzon Development Bank the value of the subject lot subject matter of the
Contract to Sell between Delta Development and Management Services, Inc. and the
private respondent [Catherine Angeles Enriquez].
SO ORDERED.4
Factual Antecedents
The BANK is a domestic financial corporation that extends loans to subdivision
developers/owners.5
Petitioner DELTA is a domestic corporation engaged in the business of developing
and selling real estate properties, particularly Delta Homes I in Cavite. DELTA is
6
owned by Ricardo De Leon (De Leon), who is the registered owner of a parcel of
7
land covered by Transfer Certificate of Title (TCT) No. T-637183 of the Registry of
Deeds of the Province of Cavite, which corresponds to Lot 4 of Delta Homes I. Said
Lot 4 is the subject matter of these cases.
On July 3, 1995, De Leon and his spouse obtained a P4 million loan from the BANK
8
for the express purpose of developing Delta Homes I. To secure the loan, the
spouses De Leon executed in favor of the BANK a real estate mortgage (REM) on
9
several of their properties, including Lot 4. Subsequently, this REM was

10

amended by increasing the amount of the secured loan from P4 million to P8

million. Both the REM and the amendment were annotated on TCT No. T-637183.11
DELTA then obtained a Certificate of Registration12 and a License to Sell13 from the
Housing and Land Use Regulatory Board (HLURB).
Sometime in 1997, DELTA executed a Contract to Sell with respondent Angeles
Catherine Enriquez (Enriquez)14over the house and lot in Lot 4 for the purchase price
of P614,950.00. Enriquez made a downpayment ofP114,950.00. The Contract to Sell
contained the following provisions:
That the vendee/s offered to buy and the Owner agreed to sell the above-described
property subject to the following terms and conditions to wit:
xxxx
6. That the (sic) warning shall be served upon the Vendee/s for failure to pay x x x
Provided, however, that for failure to pay three (3) successive monthly installment
payments, the Owner may consider this Contract to Sell null and void ab initio without
further proceedings or court action and all payments shall be forfeited in favor of the
Owner as liquidated damages and expenses for documentations. x x x
That upon full payment of the total consideration if payable in cash, the Owner shall
execute a final deed of sale in favor of the Vendee/s. However, if the term of the
contract is for a certain period of time, only upon full payment of the total
consideration that a final deed of sale shall be executed by the Owner in favor of the
Vendee/s.15
When DELTA defaulted on its loan obligation, the BANK, instead of foreclosing the
REM, agreed to a dation in payment or a dacion en pago. The Deed of Assignment in
Payment of Debt was executed on September 30, 1998 and stated that DELTA
"assigns, transfers, and conveys and sets over [to] the assignee that real estate with
the building and improvements existing thereon x x x in payment of the total obligation
owing to [the Bank] x x x."16 Unknown to Enriquez, among the properties assigned to
the BANK was the house and lot of Lot 4,17 which is the subject of her Contract to Sell
with DELTA. The records do not bear out and the parties are silent on whether the
BANK was able to transfer title to its name. It appears, however, that the dacion en
pago was not annotated on the TCT of Lot 4.18
On November 18, 1999, Enriquez filed a complaint against DELTA and the BANK
before the Region IV Office of the HLURB19 alleging that DELTA violated the terms of
its License to Sell by: (a) selling the house and lots for a price exceeding that
20
prescribed in Batas Pambansa (BP) Bilang 220; and (b) failing to get a clearance for
the mortgage from the HLURB. Enriquez sought a full refund of the P301,063.42 that
she had already paid to DELTA, award of damages, and the imposition of
administrative fines on DELTA and the BANK.
In his June 1, 2000 Decision,21 HLURB Arbiter Atty. Raymundo A. Foronda upheld
the validity of the purchase price, but ordered DELTA to accept payment of the
balance of P108,013.36 from Enriquez, and (upon such payment) to deliver to
Enriquez the title to the house and lot free from liens and encumbrances. The
dispositive portion reads:
WHEREFORE, premises considered, a decision is hereby rendered as follows:

1. Ordering [DELTA] to accept complainant[]s payments in the amount

of P108,013.36 representing her balance based on the maximum selling
price of P375,000.00;
2. Upon full payment, ordering Delta to deliver the title in favor of the
complainant free from any liens and encumbrances;
3. Ordering [DELTA] to pay complainant the amount of P50,000.00 as and
by way of moral damages;
4. Ordering [DELTA] to pay complainant the amount of P50,000.00 as and
by way of exemplary damages;
5. Ordering [DELTA] to pay complainant P10,000.00 as costs of suit; and
6. Respondent DELTA to pay administrative fine of P10,000.00[22] for
violation of Section 18 of P.D. 957[23]and another P10,000.00 for violation of
Section 22 of P.D. 957.[24
SO ORDERED.

25

DELTA appealed the arbiters Decision to the HLURB Board of

Commissioners.26 DELTA questioned the imposition of an administrative fine for its
alleged violation of Section 18 of PD 957. It argued that clearance was not required
for mortgages that were constituted on a subdivision project prior to registration.
According to DELTA, it did not violate the terms of its license because it did not obtain
a new mortgage over the subdivision project. It likewise assailed the award of moral
and exemplary damages to Enriquez on the ground that the latter has no cause of
27
action.
Ruling of the Board of Commissioners (Board)28
The Board held that all developers should obtain a clearance for mortgage from the
HLURB, regardless of the date when the mortgage was secured, because the law
does not distinguish. Having violated this legal requirement, DELTA was held liable to
pay the administrative fine.
The Board upheld the validity of the contract to sell between DELTA and Enriquez
despite the alleged violation of the price ceilings in BP 220. The Board held that
DELTA and Enriquez were presumed to have had a meeting of the minds on the
object of the sale and the purchase price. Absent any circumstance vitiating
Enriquezconsent, she was presumed to have willingly and voluntarily agreed to the
higher purchase price; hence, she was bound by the terms of the contract.
The Board, however, deleted the arbiters award of damages to Enriquez on the
ground that the latter was not free from liability herself, given that she was remiss in
her monthly amortizations to DELTA.
The dispositive portion of the Boards Decision reads:
Wherefore, in view of the foregoing, the Office belows decision dated June 01, 2000
is hereby modified to read as follows:
1. Ordering [Enriquez] to pay [DELTA] the amount due from the time she
suspended payment up to filing of the complaint with 12% interest thereon
per annum; thereafter the provisions of the Contract to Sell shall apply until
full payment is made;

2. Ordering [DELTA] to pay an [a]dministrative [f]ine of P10,000.00 for

violation of its license to sell and for violation of Section 18 of P.D. 957.
SO ORDERED. Quezon City.29
30

Enriquez moved for a reconsideration of the Boards Decision upholding the

contractual purchase price. She maintained that the price for Lot 4 should not exceed
the price ceiling provided in BP 220.31lawph!l
Finding Enriquezs arguments as having already been passed upon in the decision,
the Board denied reconsideration. The board, however, modified its decision, with
respect to the period for the imposition of interest payments. The Boards
resolution32 reads:
WHEREFORE, premises considered, to [sic] directive No. 1 of the dispositive portion
of the decision of our decision [sic] is MODIFIED as follows:
1. Ordering complainant to pay respondent DELTA the amount due from the
time she suspended (sic) at 12% interest per annum, reckoned from finality
of this decision[,] thereafter the provisions of the Contract to Sell shall apply
until full payment is made.
In all other respects, the decision is AFFIRMED.
SO ORDERED.33
34

Both Enriquez and the BANK appealed to the Office of the President (OP). The
BANK disagreed with the ruling upholding Enriquezs Contract to Sell; and insisted on
its ownership over Lot 4. It argued that it has become impossible for DELTA to
comply with the terms of the contract to sell and to deliver Lot 4s title to Enriquez
given that DELTA had already relinquished all its rights to Lot 4 in favor of the
BANK35 via the dation in payment.
Meanwhile, Enriquez insisted that the Board erred in not applying the ceiling price as
prescribed in BP 220.36
Ruling of the Office of the President

37

The OP adopted by reference the findings of fact and conclusions of law of the
HLURB Decisions, which it affirmed in toto.
Enriquez filed a motion for reconsideration, insisting that she was entitled to a
reduction of the purchase price, in order to conform to the provisions of BP 220.38 The
39
motion was denied for lack of merit.
Only the BANK appealed the OPs Decision to the CA.40 The BANK reiterated that
DELTA can no longer deliver Lot 4 to Enriquez because DELTA had sold the same to
the BANK by virtue of the dacion en pago.41 As an alternative argument, in case the
appellate court should find that DELTA retained ownership over Lot 4 and could
convey the same to Enriquez, the BANK prayed that its REM over Lot 4 be respected
such that DELTA would have to redeem it first before it could convey the same to
Enriquez in accordance with Section 2542 of PD 957.43
The BANK likewise sought an award of exemplary damages and attorneys fees in its
favor because of the baseless suit filed by Enriquez against it.44
Ruling of the Court of Appeals

45

The CA ruled against the validity of the dacion en pago executed in favor of the BANK
on the ground that DELTA had earlier relinquished its ownership over Lot 4 in favor of
Enriquez via the Contract to Sell. 46
Since the dacion en pago is invalid with respect to Lot 4, the appellate court held that
DELTA remained indebted to the BANK to the extent of Lot 4s value. Thus, the CA
ordered DELTA to pay the corresponding value of Lot 4 to the BANK.47

Enriquezs waiver
Enriquez did not file comments59 or memoranda in both cases; instead, she
manifested that she will just await the outcome of the case. 60
Issues
The following are the issues raised by the two petitions:

The CA also rejected the BANKs argument that, before DELTA can deliver the title to
Lot 4 to Enriquez, DELTA should first redeem the mortgaged property from the
BANK. The CA held that the BANK does not have a first lien on Lot 4 because its real
estate mortgage over the same had already been extinguished by the dacion en
pago. Without a mortgage, the BANK cannot require DELTA to redeem Lot 4 prior to
delivery of title to Enriquez.48

1. Whether the Contract to Sell conveys ownership;

The CA denied the BANKs prayer for the award of exemplary damages and
attorneys fees for lack of factual and legal basis. 49

4. What is the effect of Enriquezs failure to appeal the OPs Decision

regarding her obligation to pay the balance on the purchase price.

50

51

Both DELTA and the BANK moved for a reconsideration of the CAs Decision, but
both were denied.52
Hence, these separate petitions of the BANK and DELTA.
Petitioner Deltas arguments53
DELTA assails the CA Decision for holding that DELTA conveyed its ownership over
Lot 4 to Enriquez via the Contract to Sell. DELTA points out that the Contract to Sell
contained a condition that ownership shall only be transferred to Enriquez upon the
latters full payment of the purchase price to DELTA. Since Enriquez has yet to
comply with this suspensive condition, ownership is retained by DELTA.54 As the
owner of Lot 4, DELTA had every right to enter into a dation in payment to extinguish
its loan obligation to the BANK. The BANKs acceptance of the assignment, without
any reservation or exception, resulted in the extinguishment of the entire loan
obligation; hence, DELTA has no more obligation to pay the value of Enriquezs
house and lot to the BANK.55
DELTA prays for the reinstatement of the OP Decision.
The BANKs arguments56
Echoing the argument of DELTA, the BANK argues that the Contract to Sell did not
involve a conveyance of DELTAs ownership over Lot 4 to Enriquez. The Contract to
Sell expressly provides that DELTA retained ownership over Lot 4 until Enriquez paid
the full purchase price. Since Enriquez has not yet made such full payment, DELTA
retained ownership over Lot 4 and could validly convey the same to the BANK via
dacion en pago.57
Should the dacion en pago over Lot 4 be invalidated and the property ordered to be
delivered to Enriquez, the BANK contends that DELTA should pay the corresponding
value of Lot 4 to the BANK. It maintains that the loan obligation extinguished by the
dacion en pago only extends to the value of the properties delivered; if Lot 4 cannot
be delivered to the BANK, then the loan obligation of DELTA remains to the extent of
58
Lot 4s value.
The BANK prays to be declared the rightful owner of the subject house and lot and
asks for an award of exemplary damages and attorneys fees.

2. Whether the dacion en pago extinguished the loan obligation, such that
DELTA has no more obligations to the BANK;
3. Whether the BANK is entitled to damages and attorneys fees for being
compelled to litigate; and

Our Ruling
Mortgage contract void
As the HLURB Arbiter and Board of Commissioners both found, DELTA violated
Section 18 of PD 957 in mortgaging the properties in Delta Homes I (including Lot 4)
to the BANK without prior clearance from the HLURB. This point need not be
belabored since the parties have chosen not to appeal the administrative fine
imposed on DELTA for violation of Section 18.
This violation of Section 18 renders the mortgage executed by DELTA void. We have
held before that "a mortgage contract executed in breach of Section 18 of [PD 957] is
61
null and void." Considering that "PD 957 aims to protect innocent subdivision lot and
condominium unit buyers against fraudulent real estate practices," we have construed
Section 18 thereof as "prohibitory and acts committed contrary to it are void."62
Because of the nullity of the mortgage, neither DELTA nor the BANK could assert any
right arising therefrom. The BANKs loan of P8 million to DELTA has effectively
become unsecured due to the nullity of the mortgage. The said loan, however, was
eventually settled by the two contracting parties via a dation in payment. In the
appealed Decision, the CA invalidated this dation in payment on the ground that
DELTA, by previously entering into a Contract to Sell, had already conveyed its
ownership over Lot 4 to Enriquez and could no longer convey the same to the BANK.
This is error, prescinding from a wrong understanding of the nature of a contract to
sell.
Contract to sell does not transfer ownership
Both parties are correct in arguing that the Contract to Sell executed by DELTA in
favor of Enriquez did not transfer ownership over Lot 4 to Enriquez. A contract to sell
is one where the prospective seller reserves the transfer of title to the prospective
buyer until the happening of an event, such as full payment of the purchase price.
What the seller obliges himself to do is to sell the subject property only when the
entire amount of the purchase price has already been delivered to him. "In other
words, the full payment of the purchase price partakes of a suspensive condition, the
non-fulfillment of which prevents the obligation to sell from arising and thus,
ownership is retained by the prospective seller without further remedies by the
63
64
prospective buyer." It does not, by itself, transfer ownership to the buyer.

In the instant case, there is nothing in the provisions of the contract entered into by
DELTA and Enriquez that would exempt it from the general definition of a contract to
sell. The terms thereof provide for the reservation of DELTAs ownership until full
payment of the purchase price; such that DELTA even reserved the right to
unilaterally void the contract should Enriquez fail to pay three successive monthly
amortizations.
Since the Contract to Sell did not transfer ownership of Lot 4 to Enriquez, said
ownership remained with DELTA. DELTA could then validly transfer such ownership
(as it did) to another person (the BANK). However, the transferee BANK is bound by
the Contract to Sell and has to respect Enriquezs rights thereunder. This is because
the Contract to Sell, involving a subdivision lot, is covered and protected by PD 957.
One of the protections afforded by PD 957 to buyers such as Enriquez is the right to
have her contract to sell registered with the Register of Deeds in order to make it
binding on third parties. Thus, Section 17 of PD 957 provides:
Section 17. Registration. All contracts to sell, deeds of sale, and other similar
instruments relative to the sale or conveyance of the subdivision lots and
condominium units, whether or not the purchase price is paid in full, shall be
registered by the seller in the Office of the Register of Deeds of the province or city
where the property is situated.
x x x x (Emphasis supplied.)
The purpose of registration is to protect the buyers from any future unscrupulous
transactions involving the object of the sale or contract to sell, whether the purchase
price therefor has been fully paid or not. Registration of the sale or contract to sell
makes it binding on third parties; it serves as a notice to the whole world that the
property is subject to the prior right of the buyer of the property (under a contract to
sell or an absolute sale), and anyone who wishes to deal with the said property will be
held bound by such prior right.
While DELTA, in the instant case, failed to register Enriquezs Contract to Sell with
the Register of Deeds, this failure will not prejudice Enriquez or relieve the BANK
from its obligation to respect Enriquezs Contract to Sell. Despite the non-registration,
the BANK cannot be considered, under the circumstances, an innocent purchaser for
value of Lot 4 when it accepted the latter (together with other assigned properties) as
payment for DELTAs obligation. The BANK was well aware that the assigned
properties, including Lot 4, were subdivision lots and therefore within the purview of
PD 957. It knew that the loaned amounts were to be used for the development of
DELTAs subdivision project, for this was indicated in the corresponding promissory
notes. The technical description of Lot 4 indicates its location, which can easily be
determined as included within the subdivision development. Under these
circumstances, the BANK knew or should have known of the possibility and risk that
the assigned properties were already covered by existing contracts to sell in favor of
subdivision lot buyers. As observed by the Court in another case involving a bank
regarding a subdivision lot that was already subject of a contract to sell with a third
party:
[The Bank] should have considered that it was dealing with a property subject of a
real estate development project. A reasonable person, particularly a financial
institution x x x, should have been aware that, to finance the project, funds other than
those obtained from the loan could have been used to serve the purpose, albeit
partially. Hence, there was a need to verify whether any part of the property was

already intended to be the subject of any other contract involving buyers or potential
buyers. In granting the loan, [the Bank] should not have been content merely with a
clean title, considering the presence of circumstances indicating the need for a
thorough investigation of the existence of buyers x x x. Wanting in care and prudence,
65
the [Bank] cannot be deemed to be an innocent mortgagee. x x x
Further, as an entity engaged in the banking business, the BANK is required to
observe more care and prudence when dealing with registered properties. The Court
cannot accept that the BANK was unaware of the Contract to Sell existing in favor of
66
Enriquez. In Keppel Bank Philippines, Inc. v. Adao, we held that a bank dealing with
a property that is already subject of a contract to sell and is protected by the
provisions of PD 957, is bound by the contract to sell (even if the contract to sell in
that case was not registered). In the Courts words:
It is true that persons dealing with registered property can rely solely on the certificate
of title and need not go beyond it. However, x x x, this rule does not apply to banks.
Banks are required to exercise more care and prudence than private individuals in
dealing even with registered properties for their business is affected with public
interest. As master of its business, petitioner should have sent its representatives to
check the assigned properties before signing the compromise agreement and it would
have discovered that respondent was already occupying one of the condominium
units and that a contract to sell existed between [the vendee] and [the developer]. In
our view, petitioner was not a purchaser in good faith and we are constrained to rule
67
that petitioner is bound by the contract to sell.
Bound by the terms of the Contract to Sell, the BANK is obliged to respect the same
and honor the payments already made by Enriquez for the purchase price of Lot 4.
Thus, the BANK can only collect the balance of the purchase price from Enriquez and
has the obligation, upon full payment, to deliver to Enriquez a clean title over the
subject property.68
Dacion en pago extinguished the loan obligation
The BANK then posits that, if title to Lot 4 is ordered delivered to Enriquez, DELTA
has the obligation to pay the BANK the corresponding value of Lot 4. According to the
BANK, the dation in payment extinguished the loan only to the extent of the value of
the thing delivered. Since Lot 4 would have no value to the BANK if it will be delivered
to Enriquez, DELTA would remain indebted to that extent.
We are not persuaded. Like in all contracts, the intention of the parties to the dation in
payment is paramount and controlling. The contractual intention determines whether
the property subject of the dation will be considered as the full equivalent of the debt
and will therefore serve as full satisfaction for the debt. "The dation in payment
extinguishes the obligation to the extent of the value of the thing delivered, either as
agreed upon by the parties or as may be proved, unless the parties by agreement,
express or implied, or by their silence, consider the thing as equivalent to the
69
obligation, in which case the obligation is totally extinguished."
In the case at bar, the Dacion en Pago executed by DELTA and the BANK indicates a
clear intention by the parties that the assigned properties would serve as full payment
for DELTAs entire obligation:
KNOW ALL MEN BY THESE PRESENTS:
This instrument, made and executed by and between:

xxxx
THAT, the ASSIGNOR acknowledges to be justly indebted to the ASSIGNEE in the
sum of ELEVEN MILLION EIGHT HUNDRED SEVENTY-EIGHT THOUSAND EIGHT
HUNDRED PESOS (P11,878,800.00), Philippine Currency as of August 25, 1998.
Therefore, by virtue of this instrument, ASSIGNOR hereby ASSIGNS, TRANSFERS,
and CONVEYS AND SETS OVER [TO] the ASSIGNEE that real estate with the
building and improvements existing thereon, more particularly described as follows:
xxxx
of which the ASSIGNOR is the registered owner being evidenced by TCT No. x x x
issued by the Registry of Deeds of Trece Martires City.
THAT, the ASSIGNEE does hereby accept this ASSIGNMENT IN PAYMENT OF
THE TOTAL OBLIGATION owing to him by the ASSIGNOR as above-stated;70
Without any reservation or condition, the Dacion stated that the assigned properties
served as full payment of DELTAs "total obligation" to the BANK. The BANK
accepted said properties as equivalent of the loaned amount and as full satisfaction of
DELTAs debt. The BANK cannot complain if, as it turned out, some of those
assigned properties (such as Lot 4) are covered by existing contracts to sell. As noted
earlier, the BANK knew that the assigned properties were subdivision lots and
covered by PD 957. It was aware of the nature of DELTAs business, of the location
of the assigned properties within DELTAs subdivision development, and the
possibility that some of the properties may be subjects of existing contracts to sell
which enjoy protection under PD 957. Banks dealing with subdivision properties are
expected to conduct a thorough due diligence review to discover the status of the
properties they deal with. It may thus be said that the BANK, in accepting the
assigned properties as full payment of DELTAs "total obligation," has assumed the
risk that some of the assigned properties (such as Lot 4) are covered by contracts to
sell which it is bound to honor under PD 957.
A dacion en pago is governed by the law of sales. 71 Contracts of sale come with
warranties, either express (if explicitly stipulated by the parties) or implied (under
Article 1547 et seq. of the Civil Code). In this case, however, the BANK does not even
point to any breach of warranty by DELTA in connection with the Dation in Payment.
To be sure, the Dation in Payment has no express warranties relating to existing
contracts to sell over the assigned properties. As to the implied warranty in case of
eviction, it is waivable72 and cannot be invoked if the buyer knew of the risks or
danger of eviction and assumed its consequences.73 As we have noted earlier, the
BANK, in accepting the assigned properties as full payment of DELTAs "total
obligation," has assumed the risk that some of the assigned properties are covered by
contracts to sell which must be honored under PD 957.
Award of damages
There is nothing on record that warrants the award of exemplary damages 74 as well
75
as attorneys fees in favor of the BANK.
Balance to be paid by Enriquez
As already mentioned, the Contract to Sell in favor of Enriquez must be respected by
the BANK.1avvphi1 Upon Enriquezs full payment of the balance of the purchase
price, the BANK is bound to deliver the title over Lot 4 to her. As to the amount of the
balance which Enriquez must pay, we adopt the OPs ruling thereon which sustained

the amount stipulated in the Contract to Sell. We will not review Enriquezs initial
claims about the supposed violation of the price ceiling in BP 220, since this issue
was no longer pursued by the parties, not even by Enriquez, who chose not to file the
76
required pleadings before the Court. The parties were informed in the Courts
September 5, 2007 Resolution that issues that are not included in their memoranda
shall be deemed waived or abandoned. Since Enriquez did not file a memorandum in
either petition, she is deemed to have waived the said issue.
WHEREFORE, premises considered, the appealed November 30, 2004 Decision of
the Court of Appeals, as well as its June 22, 2005 Resolution in CA-G.R. SP No.
81280 are hereby AFFIRMED with the MODIFICATIONS that Delta Development and
Management Services, Inc. is NOT LIABLE TO PAY Luzon Development Bank the
value of the subject lot; and respondent Angeles Catherine Enriquez is ordered to
PAY the balance of the purchase price and the interests accruing thereon, as decreed
by the Court of Appeals, to the Luzon Development Bank, instead of Delta
Development and Management Services, Inc., within thirty (30) days from finality of
this Decision. The Luzon Development Bank is ordered to DELIVER a CLEAN TITLE
to Angeles Catherine Enriquez upon the latters full payment of the balance of the
purchase price and the accrued interests.
SO ORDERED.

G.R. No. 172825

October 11, 2012

SPOUSES MINIANO B. DELA CRUZ and LETA L. DELA CRUZ, Petitioners,

vs.
ANA MARIE CONCEPCION, Respondent.
DECISION
PERALTA, J.:
Assailed in this petition for review on certiorari under Rule 45 of the Rules of Court
filed by petitioners spouses Miniano B. Dela Cruz and Leta L. Dela Cruz against
1
respondent Ana Marie Concepcion are the Court of Appeals (CA) Decision dated
2
March 31, 2005 and Resolution dated May 24, 2006 in CA-G.R. CV No. 83030.

agreed with respondent and said "if P200,000.00 is the correct balance, it is okay with
us."7
Meanwhile, the title to the property was transferred to respondent. Petitioners later
8
reminded respondent to pay P209,000.00 within three months. They claimed that the
said amount remained unpaid, despite the transfer of the title to the property to
respondent. Several months later, petitioners made further demands stating the
supposed correct computation of respondents liabilities. 9 Despite repeated demands,
petitioners failed to collect the amounts they claimed from respondent. Hence, the
10
Complaint for Sum of Money With Damages filed with the Regional Trial Court
(RTC)11 of Antipolo, Rizal. The case was docketed as Civil Case No. 98-4716.

a) That an earnest money of P100,000.00 shall be paid immediately;

In her Answer with Compulsory Counterclaim,12 respondent claimed that her unpaid
obligation to petitioners is only P200,000.00 as earlier confirmed by petitioners and
not P487,384.15 as later alleged in the complaint. Respondent thus prayed for the
dismissal of the complaint. By way of counterclaim, respondent prayed for the
payment of moral damages and attorneys fees. During the presentation of the
parties evidence, in addition to documents showing the statement of her paid
obligations, respondent presented a receipt purportedly indicating payment of the
remaining balance of P200,000.00 to Adoracion Losloso (Losloso) who allegedly
received the same on behalf of petitioners.13

b) That a full down payment of Four Hundred Thousand Pesos

(P400,000.00) shall be paid on February 29, 1996;

On March 8, 2004, the RTC rendered a Decision14 in favor of respondent, the

dispositive portion of which reads:

c) That Five Hundred Thousand Pesos (P500,000.00) shall be paid on or

before May 5, 1996; and

WHEREFORE, premises considered, this case is hereby DISMISSED. The plaintiff is

hereby ordered to pay the defendants counterclaim, amounting to wit:

The facts of the case are as follows:

On March 25, 1996, petitioners (as vendors) entered into a Contract to Sell 3 with
respondent (as vendee) involving a house and lot in Cypress St., Phase I, Town and
Country Executive Village, Antipolo City for a consideration of P2,000,000.00 subject
to the following terms and conditions:

d) That the balance of One Million Pesos (P1,000,000.00) shall be paid on

installment with interest of Eighteen Percent (18%) per annum or One and a
half percent (1-1/2 %) interest per month, based on the diminishing balance,
compounded monthly, effective May 6, 1996. The interest shall continue to
run until the whole obligation shall have been fully paid. The whole One
Million Pesos shall be paid within three years from May 6, 1996;
e) That the agreed monthly amortization of Fifty Thousand Pesos
(P50,000.00), principal and interest included, must be paid to the Vendors,
without need of prior demand, on or before May 6, 1996, and every month
thereafter. Failure to pay the monthly amortization on time, a penalty equal
to Five Percent (5%) of the amount due shall be imposed, until the account
is updated. In addition, a penalty of One Hundred Pesos per day shall be
imposed until the account is updated;
f) That after receipt of the full payment, the Vendors shall execute the
necessary Absolute Deed of Sale covering the house and lot mentioned
above x x x4
Respondent made the following payments, to wit: (1) P500,000.00 by way of
downpayment; (2) P500,000.00 on May 30, 1996; (3) P500,000.00 paid on January
22, 1997; and (4) P500,000.00 bounced check dated June 30, 1997 which was
subsequently replaced by another check of the same amount, dated July 7, 1997.
Respondent was, therefore, able to pay a total of P2,000,000.00. 5
Before respondent issued the P500,000.00 replacement check, she told petitioners
that based on the computation of her accountant as of July 6, 1997, her unpaid
6
obligation which includes interests and penalties was only P200,000.00. Petitioners

a) P300,000 as moral damages; and

b) P100,000 plus P2,000 per court appearance as attorneys fees.
SO ORDERED.

15

The RTC noted that the evidence formally offered by petitioners have not actually
been marked as none of the markings were recorded. Thus, it found no basis to grant
their claims, especially since the amount claimed in the complaint is different from
that testified to. The court, on the other hand, granted respondents counterclaim.16
On appeal, the CA affirmed the decision with modification by deleting the award of
17
moral damages and attorneys fees in favor of respondent. It agreed with the RTC
that the evidence presented by petitioners cannot be given credence in determining
the correct liability of respondent.18 Considering that the purchase price had been fully
paid by respondent ahead of the scheduled date agreed upon by the parties,
petitioners were not awarded the excessive penalties and interests. 19 The CA thus
maintained that respondents liability is limited to P200,000.00 as claimed by
respondent and originally admitted by petitioners. 20 This amount, however, had
already
been
paid
by
respondent
and
received
by
petitioners
representative.21 Finally, the CA pointed out that the RTC did not explain in its
decision why moral damages and attorneys fees were awarded. Considering also
that bad faith cannot be attributed to petitioners when they instituted the collection
suit, the CA deleted the grant of their counterclaims. 22
Aggrieved, petitioners come before the Court in this petition for review on certiorari
under Rule 45 of the Rules of Court raising the following errors:

I.
"THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT ON THE
GROUND THAT PLAINTIFF FAILED TO FORMALLY OFFER THEIR
EVIDENCE AS DEFENDANT JUDICIALLY ADMITTED IN HER ANSWER
WITH
COMPULS[O]RY
COUNTERCLAIM
HER
OUTSTANDING
OBLIGATION STILL DUE TO PLAINTIFFS AND NEED NO PROOF.
II.
THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT FOR
ALLEGED FAILURE OF PLAINTIFFS TO PRESENT COMPUTATION OF
THE AMOUNT BEING CLAIMED AS DEFENDANT JUDICIALLY
ADMITTED HAVING RECEIVED THE DEMAND LETTER DATED
OCTOBER 22, 1997 WITH COMPUTATION OF THE BALANCE DUE.
III.
THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT ON THE
GROUND THAT THE DEFENDANT FULLY PAID THE CLAIMS OF
PLAINTIFFS BASED ON THE ALLEGED RECEIPT OF PAYMENT BY
ADORACION LOSLOSO FROM ANA MARIE CONCEPCION MAGLASANG
WHICH HAS NOTHING TO DO WITH THE JUDICIALLY ADMITTED
OBLIGATION OF APPELLEE."23
Invoking the rule on judicial admission, petitioners insist that respondent admitted in
her Answer with Compulsory Counterclaim that she had paid only a total amount of
24
P2 million and that her unpaid obligation amounts to P200,000.00. They thus
maintain that the RTC and the CA erred in concluding that said amount had already
been paid by respondent. Petitioners add that respondents total liability as shown in
the latters statement of account was erroneously computed for failure to compound
25
the monthly interest agreed upon. Petitioners also claim that the RTC and the CA
erred in giving credence to the receipt presented by respondent to show that her
unpaid obligation had already been paid having been allegedly given to a person who
26
was not armed with authority to receive payment.
The petition is without merit.
It is undisputed that the parties entered into a contract to sell a house and lot for a
total consideration of P2 million. Considering that the property was payable in
installment, they likewise agreed on the payment of interest as well as penalty in case
of default. It is likewise settled that respondent was able to pay the total purchase
price of P2 million ahead of the agreed term. Afterwhich, they agreed on the
remaining balance by way of interest and penalties which is P200,000.00.
Considering that the term of payment was not strictly followed and the purchase price
had already been fully paid by respondent, the latter presented to petitioners her
computation of her liabilities for interests and penalties which was agreed to by
petitioners. Petitioners also manifested their conformity to the statement of account
prepared by respondent.
In paragraph (9) of petitioners Complaint, they stated that:
9) That the Plaintiffs answered the Defendant as follows: "if P200,000 is the correct
27
balance, it is okay with us." x x x.

But in paragraph (17) thereof, petitioners claimed that defendants outstanding liability
as of November 6, 1997 was P487,384.15.28 Different amounts, however, were
claimed in their demand letter and in their testimony in court.
With the foregoing factual antecedents, petitioners cannot be permitted to assert a
different computation of the correct amount of respondents liability.
It is noteworthy that in answer to petitioners claim of her purported unpaid obligation,
respondent admitted in her Answer with Compulsory Counterclaim that she paid a
total amount of P2 million representing the purchase price of the subject house and
lot. She then manifested to petitioners and conformed to by respondent that her only
balance was P200,000.00. Nowhere in her Answer did she allege the defense of
payment. However, during the presentation of her evidence, respondent submitted a
receipt to prove that she had already paid the remaining balance. Both the RTC and
the CA concluded that respondent had already paid the remaining balance of
P200,000.00. Petitioners now assail this, insisting that the court should have
maintained the judicial admissions of respondent in her Answer with Compulsory
Counterclaim, especially as to their agreed stipulations on interests and penalties as
well as the existence of outstanding obligations.
It is, thus, necessary to discuss the effect of failure of respondent to plead payment of
its obligations.
Section 1, Rule 9 of the Rules of Court states that "defenses and objections not
pleaded either in a motion to dismiss or in the answer are deemed waived." Hence,
respondent should have been barred from raising the defense of payment of the
unpaid P200,000.00. However, Section 5, Rule 10 of the Rules of Court allows the
amendment to conform to or authorize presentation of evidence, to wit:
Section 5. Amendment to conform to or authorize presentation of evidence. When
issues not raised by the pleadings are tried with the express or implied consent of the
parties, they shall be treated in all respects as if they had been raised in the
pleadings. Such amendment of the pleadings as may be necessary to cause them to
conform to the evidence and to raise these issues may be made upon motion of any
party at any time, even after judgment; but failure to amend does not affect the result
of the trial of these issues. If evidence is objected to at the trial on the ground that it is
not within the issues made by the pleadings, the court may allow the pleadings to be
amended and shall do so with liberality if the presentation of the merits of the action
and the ends of substantial justice will be subserved thereby. The court may grant a
continuance to enable the amendment to be made.
The foregoing provision envisions two scenarios, namely, when evidence is
introduced in an issue not alleged in the pleadings and no objection was interjected;
and when evidence is offered on an issue not alleged in the pleadings but this time an
29
objection was raised. When the issue is tried without the objection of the parties, it
should be treated in all respects as if it had been raised in the pleadings. 30 On the
other hand, when there is an objection, the evidence may be admitted where its
31
admission will not prejudice him.
Thus, while respondent judicially admitted in her Answer that she only paid P2 million
and that she still owed petitioners P200,000.00, respondent claimed later and, in fact,
submitted an evidence to show that she already paid the whole amount of her unpaid
obligation. It is noteworthy that when respondent presented the evidence of payment,
petitioners did not object thereto. When the receipt was formally offered as evidence,
petitioners did not manifest their objection to the admissibility of said document on the

ground that payment was not an issue. Apparently, petitioners only denied receipt of
said payment and assailed the authority of Losloso to receive payment. Since there
was an implied consent on the part of petitioners to try the issue of payment, even if
32
no motion was filed and no amendment of the pleading has been ordered, the RTC
cannot be faulted for admitting respondents testimonial and documentary evidence to
33
prove payment.
As stressed by the Court in Royal Cargo Corporation v. DFS Sports Unlimited, Inc., 34
The failure of a party to amend a pleading to conform to the evidence adduced during
trial does not preclude adjudication by the court on the basis of such evidence which
may embody new issues not raised in the pleadings. x x x Although, the pleading may
not have been amended to conform to the evidence submitted during trial, judgment
may nonetheless be rendered, not simply on the basis of the issues alleged but also
on the issues discussed and the assertions of fact proved in the course of the trial.
The court may treat the pleading as if it had been amended to conform to the
evidence, although it had not been actually amended. x x x Clearly, a court may rule
and render judgment on the basis of the evidence before it even though the relevant
pleading had not been previously amended, so long as no surprise or prejudice is
thereby caused to the adverse party. Put a little differently, so long as the basic
requirements of fair play had been met, as where the litigants were given full
opportunity to support their respective contentions and to object to or refute each
other's evidence, the court may validly treat the pleadings as if they had been
amended to conform to the evidence and proceed to adjudicate on the basis of all the
evidence before it. (Emphasis supplied)35
To be sure, petitioners were given ample opportunity to refute the fact of and present
evidence to prove payment.
With the evidence presented by the contending parties, the more important question
to resolve is whether or not respondents obligation had already been extinguished by
payment.
We rule in the affirmative as aptly held by the RTC and the CA.
Respondents obligation consists of payment of a sum of money. In order to
extinguish said obligation, payment should be made to the proper person as set forth
in Article 1240 of the Civil Code, to wit:
Article 1240. Payment shall be made to the person in whose favor the obligation has
been constituted, or his successor in interest, or any person authorized to receive it.
(Emphasis supplied)
The Court explained in Cambroon v. City of Butuan, 36 cited in Republic v. De
37
Guzman, to whom payment should be made in order to extinguish an obligation:
Payment made by the debtor to the person of the creditor or to one authorized by him
or by the law to receive it extinguishes the obligation. When payment is made to the
wrong party, however, the obligation is not extinguished as to the creditor who is
without fault or negligence even if the debtor acted in utmost good faith and by
mistake as to the person of the creditor or through error induced by fraud of a third
person.
In general, a payment in order to be effective to discharge an obligation, must be
made to the proper person. Thus, payment must be made to the obligee himself or to
an agent having authority, express or implied, to receive the particular payment.

Payment made to one having apparent authority to receive the money will, as a rule,
be treated as though actual authority had been given for its receipt. Likewise, if
payment is made to one who by law is authorized to act for the creditor, it will work a
discharge. The receipt of money due on a judgment by an officer authorized by law to
38
accept it will, therefore, satisfy the debt.
Admittedly, payment of the remaining balance of P200,000.00 was not made to the
creditors themselves. Rather, it was allegedly made to a certain Losloso. Respondent
claims that Losloso was the authorized agent of petitioners, but the latter dispute it.
Loslosos authority to receive payment was embodied in petitioners
39
Letter addressed to respondent, dated August 7, 1997, where they informed
respondent of the amounts they advanced for the payment of the 1997 real estate
taxes. In said letter, petitioners reminded respondent of her remaining balance,
together with the amount of taxes paid. Taking into consideration the busy schedule
of respondent, petitioners advised the latter to leave the payment to a certain "Dori"
who admittedly is Losloso, or to her trusted helper. This is an express authority given
to Losloso to receive payment.
Moreover, as correctly held by the CA:
Furthermore, that Adoracion Losloso was indeed an agent of the appellant spouses is
borne out by the following admissions of plaintiff-appellant Atty. Miniano dela Cruz, to
wit:
Q: You would agree with me that you have authorized this Doiry Losloso to receive
payment of whatever balance is due you coming from Ana Marie Concepcion, that is
correct?
A: In one or two times but not total authority, sir.
Q: Yes, but you have authorized her to receive payment?
A: One or two times, yes x x x. (TSN, June 28, 1999, pp. 16-17)

40

Thus, as shown in the receipt signed by petitioners agent and pursuant to the
authority granted by petitioners to Losloso, payment made to the latter is deemed
payment to petitioners. We find no reason to depart from the RTC and the CA
conclusion that payment had already been made and that it extinguished
respondent's obligations.
WHEREFORE, premises considered, the petition is DENIED for lack of merit. The
Court of Appeals Decision dated March 31, 2005 and Resolution dated May 24, 2006
in CA-G.R. CV No. 83030, are AFFIRMED.
SO ORDERED.

G.R. No. 195640

December 4, 2012

SUGAR REGULATORY ADMINISTRATION, represented by its

Administrator, Petitioner,
vs.
ENCARNACION B. TORMON, EDGARDO B. ALISAJE, LOURDES M. DOBLE,
TERESITA Q. LIM, EDMUNDO R. JORNADAL, JIMMY C. VILLANUEVA , DEANNA
M. JANCE, HENRY G. DOBLE, REYNALDO D. LUZANA, MEDELYN P.
TOQUILLO, SEVERINO A. ORLIDO, RHODERICK V. ALIPOON, JONATHAN
CORDERO, DANILO B. BISCOCHO, BELLO C. LUCASAN, LUBERT V. TIVE, and
the COMMISSION ON AUDIT, Respondents.
DECISION
PERALTA, J.:
Assailed in this petition for certiorari under Rule 64, in relation to Rule 65 of the Rules
of Court, is Decision No. 2010-1461 dated December 30,2010 of the Commission on
Audit (COA).
The antecedent facts are as follows:
Private respondents, namely: Encarnacion B. Tormon, Edgardo B. Alisaje, Lourdes
M. Doble, Teresita Q. Lim, Edmundo R. Jornadal, Jimmy C. Villanueva , Deanna M.
Jance, Henry G. Doble, Reynaldo D. Luzana, Medelyn P. Toquillo, Severino A.
Orlido, Rhoderick V. Alipoon, Jonathan Cordero, Danilo B. Biscocho, Bello C.
Lucasan, Lubert V. Tive, were former employees of Philippine Sugar Institute
(PHILSUGIN) and the Sugar Quota Administration (SQA). On February 2, 1974,
Presidential Decree (P.D.) No. 388 was issued creating the Philippine Sugar
Commission (PHILSUCOM). Under the said decree, PHILSUGIN and SQA shall be
abolished upon the organization of PHILSUCOM and all the former's assets, liabilities
and records shall be transferred to the latter and the personnel of the abolished
agencies who may not be retained shall be entitled to retirement/gratuity and
incentive benefits.
In September 1977, PHILSUGIN and SQA were abolished and private respondents
were separated from the service; thus, they were paid their retirement/gratuity and
incentive benefits. In the same year, private respondents were reinstated by
PHILSUCOM subject to the condition that the former would refund in full the
retirement/gratuity and incentive benefits they received from PHILSUGIN or SQA.
PHILSUCOM Consultant, Eduardo F. Gamboa, wrote:
We have received orders from the Main Office to require you to refund in full the
unexpired portion of the money value of the retirement or lay-off gratuity you received
as called for in Office Memorandum No. 4, series of 1977, dated December 5, 1977,
in view of your reinstatement in the service.
xxxx
In connection herewith, you are therefore directed to make the necessary refund of
the above-mentioned amount to our Local Accounting Department and to inform the
Personnel Department, when refund is made. Failure on your part to make the
necessary refund will constrain us to recommend corrective measures. 2
On May 28, 1986, Executive Order (E.O.) No. 18, series of 1986 was issued wherein
the Sugar Regulatory Administration (petitioner SRA) replaced PHILSUCOM.

PHILSUCOM's assets and records were all transferred to petitioner SRA which also
retained some of the former's personnel which included the private respondents.
On July 29, 2004, E.O. No. 339 was issued, otherwise known as Mandating the
Rationalization of the Operations and Organization of the SRA, for the purpose of
strengthening its vital services and refocusing its resources to priority programs and
activities, and reducing its personnel with the payment of retirement gratuity and
incentives for those who opted to retire from the service. Among those separated
from the service were private respondents. Under the SRA Rationalization Program,
petitioner computed its employees' incentives and terminal leave benefits based on
their creditable years of service contained in their respective service records on file
with petitioner and validated by the Government Service and Insurance System
(GSIS). The computation was then submitted to the Department of Budget and
Management (DBM) for approval and request of funds. The DBM approved the same
and released the disbursement vouchers for processing of the incentive benefits.
However, in the course of the implementation of its rationalization plan, petitioner
found out that there was no showing that private respondents had refunded their
gratuity benefits received from PHILSUGIN or SQA. Hence, petitioner considered
private respondents' length of service as having been interrupted which commenced
only at the time they were re-employed by PHILSUCOM in 1977. Petitioner then
recomputed private respondents' retirement and incentive benefits and paid only the
75% equivalent of the originally computed benefits and withheld the remaining 25% in
view of the latter's inability to prove the refund.
Private respondents requested petitioner to compute their incentive benefits based on
their length of service to include their years of service with PHILSUGIN or SQA taking
into consideration their refund of gratuity benefits to PHILSUCOM at the time of their
re-employment in 1977. On January 4, 2007, then petitioner's Administrator, James
C. Ledesma, issued a memorandum 3 declaring the services of its employees affected
by the Rationalization Program, which included private respondents, terminated
effective on January 15, 2007. Under Board Resolution No. 2007-0554 dated June 14,
2007, petitioner denied private respondents' requests for the latter's failure to submit
proofs of refund of gratuity received from PHILSUGIN or SQA.
5

On September 6, 2007, private respondents wrote a letter addressed to then

Commission on Audit (COA) Chairman, Guillermo N. Carague, asking the COA to
order petitioner to pay the balance representing the 25% of their retirement and
incentive benefits withheld by petitioner. They claimed that they had already refunded
the full amount of the incentive benefits through salary deductions and since
petitioner could no longer find the PHILSUCOM payrolls reflecting those deductions,
private respondents submitted the affidavits of Messrs. Hilario T. Cordova6 and
7
Nicolas L. Meneses Jr., petitioner's Chief, Administrative Division, and Manager,
Administrative and Finance Department, respectively, both executed in March 2007,
attesting to the fact of refund.
Petitioner filed its Answer8 thereto contending among others that since private
respondents alleged payment, they were duty-bound to present evidence
substantiating the said refund; that no records of payments existed to clearly establish
their claim, thus, theirRESORT to secondary evidence which were the sworn
affidavits of petitioner's former officials were insufficient to prove the fact of the
alleged payment.

On October 14, 2009, the COA rendered Decision No. 2009 -100, with the following
dispositive portion, to wit:
WHEREFORE, foregoing premises considered, this Commission rules that the
affidavits presented by claimants are insufficient proofs that they have refunded to
PHILSUCOM the gratuity/incentive benefits they received from PHILSUGIN/SQA.
Evidence other than the affidavits must be presented to substantially prove their
claims. Also, all the benefits, gratuity, incentive and retirement they received upon
their separation from PHILSUGIN or SQA must be accounted for and refunded to
SRA before the requested incentive benefit is computed based on their length of
government service reckoned from the time they were employed with PHILSUGIN or
SQA.10
In so ruling, the COA found that since private respondents alleged payment, they had
the burden of proving the same by clear and positive evidence; that the affidavits of
Messrs. Cordova and Meneses, Jr. stating that private respondents had refunded to
PHILSUCOM the benefits they received from PHILSUGIN/SQA were not the best
evidence of such refunds; that an affidavit was made without notice to the adverse
party or opportunity to cross examine; and that the contents of these affidavits were
too general and did not state private respondents respective final payments.
Private respondents filed their motion for reconsideration which was opposed by
petitioner.
On December 30, 2010, the COA rendered Decision No. 2010-146 granting private
respondents' motion for reconsideration, the dispositive portion of which reads:
WHEREFORE, premises considered, the instant Motion for Reconsideration is
hereby GRANTED. Accordingly, COA Decision No. 2009-100 is hereby REVERSED
and [SET] ASIDE. The SRA is directed to release to movants the amount
11
representing the 25% balance of their incentive and terminal leave benefits.
In its decision, the COA observed that private respondents had filed a separate but
related complaint with the Civil Service Commission (CSC). It found that while their
complaint with the CSC was denominated as illegal termination/backwages and
entitlements, the main thrust of their complaint was to compel the payment of the 25%
balance of their total incentives and terminal leave benefits withheld by petitioner,
which was the same demand made in their letter to Chairman Carague whose
decision is the subject of the motion for reconsideration, thus, forum shopping
existed. The COA also noted that in their Supplement to Motion for
Reconsideration/Manifestation filed on November 24, 2009, private respondents
mentioned the ruling of the CSC12 in their favor and they now disputed the COAs
jurisdiction to rule on their demand contending that it is the CSC which has jurisdiction
over cases involving government reorganization; and that the CSC had issued a
Resolution granting private respondents' motion for execution of the CSC resolution.
Notwithstanding, however, the COA found that it did not lose jurisdiction over the
present case and went on to decide the claim on the merits and disregarded the CSC
Resolution.
The COA ruled that the affidavits submitted were not secondary evidence within the
context of Section 5, Rule 130 of the Rules of Court, hence, admissible in evidence,
since technical rules of procedure and evidence are not strictly applied in
administrative proceedings. The COA found in the records certain significant
circumstances which, when taken together with the affidavits, established that indeed

private respondents had refunded the incentives in question. Since private

respondents had discharged their burden of proof, it was incumbent on petitioner to
discharge the burden of evidence that respondents had not paid the said incentives;
that it was the PHILSUCOM, then petitioner, being the successor of PHILSUGIN and
SQA, that had been tasked with the official custody of all the records and books of
their predecessors, as mandated under Section 10 of Presidential Decree No. 388;
that if petitioner's Accounting Division cannot issue a certification because it has no
records, it is never an excuse to shift the burden to the employees.
Petitioner is now before us raising the following issues, to wit:
1. Whether or not respondent Commission erred and gravely abused its
discretion when it gave credence to the affidavits of Mr. Hilario T. Cordova,
then Chief, Administrative Division, SRA, and Mr. Nicolas L. Meneses, Jr.,
then Manager, Administrative and Finance Department plainly alleging that
the gratuity/incentives have been refunded by the private respondents.
2. Whether or not public respondent Commission on Audit erred and gravely
abused its discretion in making assumptions or suppositions out of certain
circumstances which were not even alleged by private respondents and in
arriving at a conclusion out of the same in favor of private respondents.
3. Whether or not public respondent Commission on Audit erred and gravely
abused its discretion in finding substantial evidence that private respondents
refunded the gratuity incentives in question. 13
The issue for resolution is whether the COA committed grave abuse of discretion
amounting to lack of jurisdiction in directing petitioner to pay the 25% balance of
private respondents' incentive and terminal leave benefits withheld from the submitted
computation of petitioner and duly funded by the DBM.
We find no merit in the petition.
Petitioner withheld 25% of private respondents' incentive and terminal leave benefits
because of their failure to present evidence of refund of the amounts of retirement
and incentive benefits earlier received from PHILSUGIN/SQA. On the other hand,
private respondents claim that they had already refunded these benefits through
salary deduction, therefore, they are entitled to the payment of the amounts withheld
by petitioner. The burden of proof is on private respondents to prove such refund.
One who pleads payment has the burden of proving it.14 Even where the creditor
alleges non-payment, the general rule is that the onus rests on the debtor to prove
payment, rather than on the creditor to prove non-payment.15 The debtor has the
burden of showing with legal certainty that the obligation has been discharged by
16
payment.
Well settled also is the rule that a receipt of payment is the best evidence of the fact
of payment.17 In Monfort v. Aguinaldo,18 the receipts of payment, although not
exclusive, were deemed to be the best evidence. Private respondents, however,
could not present any receipt since they alleged that their payments were made
through salary deductions and the payrolls which supposedly contained such
deductions were in petitioner's possession which had not been produced. In order to
prove their allegations of refund, private respondents submitted the affidavits of
Messrs. Cordova and Meneses, Jr., which we successively quote in part, to wit:
Mr. Cordova states:

That I was the Administrative Officer II of the defunct Philippine Sugar Institute when
it was abolished in 1977; that I hold the same position when the Philippine Sugar
Commission took over the functions of PHILSUGIN from that year up to 1986;
That I continued to be the head of Personnel Division when Sugar Regulatory
Administration replaced PHILSUCOM in 1986 and retired as Division Chief II of the
Administrative Division on July 31, 2003;
That during my incumbency in said positions, I have personal knowledge of the
paymen/refund of ex-PHILSUGIN employees separated from service but reinstated in
PHILSUCOM by way of salary deduction through payroll;
That Ms. Encarnacion Tormon, et al., upon return to service with PHILSUCOM,
refunded the amount of the gratuities they received from PHILSUGIN in the months
following/succeeding upon their appointment as reinstated employees of
PHILSUCOM;
That their status as reinstated employees are officially marked in their individual
service records duly authenticated by myself as Chief of Personnel Division and
validated by the Government Service Insurance System as proven by GSIS
computation of their creditable years. 19
On the other hand, Mr. Meneses Jr., states:
That I was the Chief Internal Auditor of the defunct Philippine Sugar Institute when it
was abolished in 1977; that I hold a key position in the Budget and Accounting
Division when the Philippine Sugar Commission took over the functions of
PHILSUGIN from that year up to 1986;
That I later became Division Chief I of [the] Budget Division in the Sugar Regulatory
Administration in 1988 and retired as Manager of the Administrative and Finance
Department on July 31, 2003;
That during my incumbency in said positions, I have personal knowledge of the
payment/refund of ex-PHILSUGIN employees separated from service and reinstated
in PHILSUCOM;
That Ms. Encarnacion Tormon et al., upon return to service with PHILSUCOM,
refunded the amount of the gratuities they received from PHILSUGIN;
That their status as reinstated employees are officially marked in their individual
service records duly authenticated by the Chief of Personnel Division and validated
by GSIS.20
Messrs. Cordova, being petitioner's head of the Personnel Department, and
Meneses, Jr., as petitioner's Chief of Budget Division, and later Manager of the
Administrative and Finance Department, were in the best positions to attest to the fact
of private respondents' refund through salary deductions of the amounts of retirement
and incentive benefits previously received, especially since these officials were in
those departments since PHILSUCOM took over in 1977 and later with petitioner until
their retirement in 2003. There was nothing on record to show that Messrs. Cordova
and Meneses, Jr. were actuated with any ill motive in the execution of their affidavits
attesting to the fact of refund.
The general rule is that administrative agencies are not bound by the technical rules
of evidence. It can accept documents which cannot be admitted in a judicial
proceeding where the Rules of Court are strictly observed. It can choose to give

21

weight or disregard such evidence, depending on its trustworthiness. Here, we find

no grave abuse of discretion committed by the COA when it admitted the affidavits of
Messrs. Cordova and Meneses, Jr. and gave weight to them in the light of the other
circumstances established by the records which will be shown later in the decision.
Petitioner claims that the affiants attested on a matter which happened 30 years ago;
thus, how could they recall that each of the 16 employees had actually refunded the
gratuity/incentives way back in 1977; that each of the private respondents held
different positions with salaries different from each other and the dates when they
respectively re-assumed service in the government differed from each other; that it
may not even be entirely correct that all 16 respondents refunded the gratuity
incentives in question by salary deduction.
We are not persuaded.
Significantly, Messrs. Cordova and Meneses, Jr. were petitioner's former officials who
held key positions in the two divisions, namely, Personnel and Accounting Divisions,
where private respondents were directed by then petitioner's Consultant Gamboa to
make the necessary refunds for their retirement and incentive pay. Thus, if no refunds
were made, these officials could have reported the same to Gamboa, who would
have taken corrective measures as he threatened to do so if private respondents
failed to make the necessary refunds. Notably, there is no showing that corrective
measures had been taken. Moreover, as we said, while the COA admitted the
affidavits, it did not rely solely on those affidavits to conclude that refunds were
already made by private respondents. The matter of refund was proven by several
circumstances which the COA found extant in the records of the case. We find
apropos to quote the COA findings in this wise:
First, movants were reemployed by PHILSUCOM with the condition that they must
return the benefits they had already received. In his 16 March 1978 letter, Mr.
Eduardo F. Gamboa, directed Ms. Tormon to refund the amount and to inform the
Personnel Department when the refund was made. He warned Ms. Tormon to make
the refund or they will be constrained to recommend corrective measures. The fact
was that claimants were reinstated. That management did not take any corrective
measures to compel the refund except perhaps, the enforced salary deduction
which claimants said was the mode of refund undertaken - is a point in favor of
claimants. It would be unbelievable that in all these years, from 1977 to 2007, the
SRA management, indubitably having the higher authority, just slept on its right to
enforce the refund and did nothing about it. The natural and expected action that SRA
ought to have taken was to enforce the refund through salary deduction, not through
voluntary direct payment since the latter option does not carry with it the mandatory
character of an automatic salary deduction.
Second, a certain Mr. Henry Doble, one of the movants, was promoted from
Emergency Employee, a temporary status, to senior machine cutting operator with
permanent status. If Mr. Doble had not refunded his gratuity, it was more reasonable
to suppose that SRA would not have promoted him.
Third, COA Directors Rosemarie L. Lerio and Divina M. Alagon, CGS and SRA
22
ATL Antonio M. Malit, to whom the case was coursed through for comments, did not
mention, even in passing, of any audit finding in the Annual Audit Reports (AARS)
regarding the unrefunded incentives received by claimants The silence of the AARs
for 30 years would only lend credence that theses refunds were made.

Fourth, under the SRA Rationalization program, the affected employees' incentive
and terminal leave benefits were computed based on their creditable years of
services as contained in their respective service records with the agency as validated
by the GSIS. Accordingly, SRA computed movants' incentive and terminal leave
benefits as of December 31, 2006 which was approved by the Department of Budget
and Management (DBM) Secretary Rolando Andaya. This only showed that even the
SRA was convinced that movants had no more financial accountability with the SRA
at the time.1wphi1
Fifth, then SRA Administrator James C. Ledesma informed movants that not one of
the records of the payments they claimed was available at the office; thus, the SRA
could not be definite as to the actual payments made by them and the equivalent
periods corresponding thereto, Also, Ms. Amelita A. Papasin, Accountant IV,
Accounting Unit, SRA, Bacolod, stated that they could not find any record showing
payments made as claimed by Ms. Tormon, et al., to refund the severance gratuities
paid to them during their termination on September 30, 1977. Indeed, the SRA could
not comply with the request of Mr. Antonio M. Malit, Audit Team leader (ATL), SRA, to
produce copies of payroll or index of payments, or any accounting records covering
the 32-year period which would have shown whether movants paid or did not pay the
required refund. These payrolls and other records would have conclusively
established the fact of payment or non-payment, But then all the SRA could say was
there is no record of such payment. Absence of record is different from saying there
23
was no payment.
Factual findings of administrative bodies charged with their specific field of expertise,
are afforded great weight by the courts, and in the absence of substantial showing
that such findings were made from an erroneous estimation of the evidence
presented, they are conclusive, and in the interest of stability of the governmental
structure, should not be disturbed.24
Petitioner's claim that the COA made its own assumptions which were not even
based on the allegations made by private respondents in any of their pleadings is
devoid of merit. In their Reply to petitioner's Supplemental Comment/Opposition to
private respondents' motion for reconsideration, private respondents had alleged
some of these above- mentioned circumstances to support their claim that refunds
had already been made. We also find that the records of the case support the abovequoted circumstances enumerated by the COA.
Considering that private respondents had introduced evidence that they had refunded
their retirement and incentive benefits through salary deduction, the burden of going
forward with the evidence- as distinct from the general burden of proof- shifts to the
petitioner, who is then under a duty of producing some evidence to show non25
payment. However, the payroll to establish whether or not deductions had been
made from the salary of private respondents were in petitioner's custody, but
petitioner failed to present the same due to the considerable lapse of time.
All told, we find no grave abuse of discretion amounting to lack or excess of
jurisdiction committed by the COA in rendering its assailed decision. There is grave
abuse of discretion when there is an evasion of a positive duty or a virtual refusal to
perform a duty enjoined by law or to act in contemplation of law as when the
judgment rendered is not based on law and evidence but on caprice, whim and
26
despotism, which is wanting in this case.

WHEREFORE, the petition is DISMISSED. Decision No. 2010-146 dated December

30, 2010 of the Commission on Audit is hereby AFFIRMED.
SO ORDERED.

G.R. No. 187425

March 28, 2011

DECISION

WHEREFORE, the instant petition is hereby DENIED DUE COURSE and

DISMISSED for lack of merit. Accordingly, the Commissioner of Customs is hereby
ordered to effect the immediate release of the shipment of AGFHA, Incorporated
described as "2 x 40" Cont. No. NYKU-6772906 and NYKU-6632117 STA 197 Bales
of Textile Grey Cloth" placed under Hold Order No. H/CI/01/2293/01 dated 22
January 1993.

MENDOZA, J.:

No costs.

This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing
the February 25, 2009 Decision1 of the Court of Tax Appeals En Banc (CTA-En
2
Banc), in CTA EB Case No. 136, which affirmed the October 18, 2005 Resolution of
its Second Division (CTA-Second Division), in CTA Case No. 5290, finding petitioner,
the Commissioner of Customs (Commissioner), liable to pay respondent AGFHA
Incorporated(AGFHA) the amount of US$160,348.08 for the value of the seized
shipment which was lost while in petitioners custody.

SO ORDERED.

On December 12, 1993, a shipment containing bales of textile grey cloth arrived at
the Manila International Container Port (MICP). The Commissioner, however, held the
subject shipment because its owner/consignee was allegedly fictitious. AGFHA
intervened and alleged that it was the owner and actual consignee of the subject
shipment.

On January 14, 2002, the Court denied with finality the Commissioners motion for
reconsideration of its October 2, 2001 Decision.

On September 5, 1994, after seizure and forfeiture proceedings took place, the
District Collector of Customs, MICP, rendered a decision3 ordering the forfeiture of the
subject shipment in favor of the government.

In view thereof, the CTA-Second Division issued the Writ of Execution, dated October
16, 2002, directing the Commissioner and his authorized subordinate or
representative to effect the immediate release of the subject shipment. It further
ordered the sheriff to see to it that the writ would be carried out by the Commissioner
and to make a report thereon within thirty (30) days after receipt of the writ. The writ,
however, was returned unsatisfied.

COMMISSIONER OF CUSTOMS, Petitioner,

vs.
AGFHA INCORPORATED, Respondent.

AGFHA filed an appeal. On August 25, 1995, the Commissioner rendered a

decision4 dismissing it.
On November 4, 1996, the CTA-Second Division reversed the Commissioners
August 25, 1995 Decision and ordered the immediate release of the subject shipment
5
to AGFHA. The dispositive portion of the CTA-Second Division Decision reads:
WHEREFORE, in view of the foregoing premises, the instant Petition for Review is
hereby GRANTED. Accordingly, the decision of the respondent in Customs Case No.
94-017, dated August 25, 1995, affirming the decision of the MICP Collector, dated
September 5, 1994, which decreed the forfeiture of the subject shipments in favor of
the government, is hereby REVERSED and SET ASIDE. Respondent is hereby
ORDERED to effect the immediate RELEASE of the subject shipment of goods in
favor of the petitioner. No costs.

Thereafter, the Commissioner elevated the aforesaid CA Decision to this Court via a
petition for review oncertiorari, docketed as G.R. No. 139050 and entitled "Republic of
the Philippines represented by the Commissioner of Customs v. The Court of Tax
Appeals and AGFHA, Inc."
On October 2, 2001, the Court dismissed the petition. 8

On March 18, 2002, the Entry of Judgment was issued by the Court declaring its
aforesaid decision final and executory as of February 5, 2002.

On July 23, 2003, the CTA-Second Division received a copy of AGFHAs Motion to
Show Cause dated July 21, 2003.
Acting on the motion, the CTA-Second Division issued a notice setting it for hearing
on August 1, 2003 at 9:00 oclock in the morning.
In its August 13, 2003 Resolution, the CTA-Second Division granted AGFHAs motion
and ordered the Commissioner to show cause within fifteen (15) days from receipt of
said resolution why he should not be disciplinary dealt with for his failure to comply
with the writ of execution.

Thereafter, on May 20, 1997, AGFHA filed a motion for execution.

On September 1, 2003, Commissioners counsel filed a Manifestation and Motion,

dated August 28, 2003, attaching therewith a copy of an Explanation (With Motion for
Clarification) dated August 11, 2003 stating, inter alia, that despite diligent efforts to
obtain the necessary information and considering the length of time that had elapsed
since the subject shipment arrived at the Bureau of Customs, the Chief of the Auction
and Cargo Disposal Division of the MICP could not determine the status,
whereabouts and disposition of said shipment.

In its June 4, 1997 Resolution, the CTA-Second Division held in abeyance its action
on AGFHAs motion for execution in view of the Commissioners appeal with the
Court of Appeals (CA), docketed as CA-G.R. SP No. 42590 and
entitled "Commissioner of Custom v. The Court of Tax Appeals and AGFHA,
Incorporated."

Consequently, AGFHA filed its Motion to Cite Petitioner in Contempt of Court dated
September 13, 2003. After a series of pleadings, on November 17, 2003, the CTASecond Division denied, among others, AGFHAs motion to cite petitioner in contempt
for lack of merit. It, however, stressed that the denial was without prejudice to other
legal remedies available to AGFHA.

SO ORDERED.
On November 27, 1996, the CTA-Second Division issued an entry of judgment
declaring the above-mentioned decision final and executory.6

On May 31, 1999, the CA denied due course to the Commissioners appeal for lack of
7
merit in a decision, the dispositive portion of which reads:

On August 13, 2004, the Commissioner received AGFHAs Motion to Set Case for
Hearing, dated April 12, 2004, allegedly to determine: (1) whether its shipment was
actually lost; (2) the cause and/or circumstances surrounding the loss; and (3) the
amount the Commissioner should pay or indemnify AGFHA should the latters
shipment be found to have been actually lost.
On May 17, 2005, after the parties had submitted their respective memoranda, the
CTA-Second Division adjudged the Commissioner liable to AGFHA. Specifically, the
dispositive portion of the resolution reads:
WHEREFORE, premises considered, the Bureau of Customs is adjudged liable to
petitioner AGFHA, INC. for the value of the subject shipment in the amount of ONE
HUNDERED SIXTY THOUSAND THREE HUNDRED FORTY EIGHT AND 08/100
US DOLLARS (US$160,348.08). The Bureau of Customs liability may be paid in
Philippine Currency, computed at the exchange rate prevailing at the time of actual
payment, with legal interests thereon at the rate of 6% per annum computed from
February 1993 up to the finality of this Resolution. In lieu of the 6% interest, the rate
of legal interest shall be 12% per annum upon finality of this Resolution until the value
of the subject shipment is fully paid.

actual payment, with legal interests thereon at the rate of 6% per annum computed
from February 1993 up to the finality of this Resolution. In lieu of the 6% interest, the
rate of legal interest shall be 12% per annum upon finality of this Resolution until the
value of the subject shipment is fully paid.
The payment shall be taken from the sale or sales of the goods or properties which
were seized or forfeited by the Bureau of Customs in other cases.
SO ORDERED.
Petitioner AGFHA, Inc.s "Motion for Partial Reconsideration" is hereby DENIED for
lack of merit.
SO ORDERED.10
Consequently, the Commissioner elevated the above-quoted resolution to the CTAEn Banc.
On February 25, 2009, the CTA-En Banc promulgated the subject decision dismissing
the petition for lack of merit and affirming in toto the decision of the CTA-Second
Division.

The payment shall be taken from the sale or sales of the goods or properties which
were seized or forfeited by the Bureau of Customs in other cases.

On March 18, 2009, the Commissioner filed his Motion for Reconsideration, but it was
denied by the CTA-En Banc in its April 13, 2009 Resolution.

SO ORDERED.9

Hence, this petition.

On June 10, 2005, the Commissioner filed his Motion for Partial Reconsideration
arguing that (a) the enforcement and satisfaction of respondents money claim must
be pursued and filed with the Commission on Audit pursuant to Presidential Decree
(P.D.) No. 1445; (b) respondent is entitled to recover only the value of the lost
shipment based on its acquisition cost at the time of importation; and (c) taxes and
duties on the subject shipment must be deducted from the amount recoverable by
respondent.
On the same day, the Commissioner received AGFHAs Motion for Partial
Reconsideration claiming that the 12% interest rate should be computed from the
time its shipment was lost on June 15, 1999 considering that from such date,
petitioners obligation to release their shipment was converted into a payment for a
sum of money.
On October 18, 2005, after the filing of several pleadings, the CTA-Second Division
promulgated a resolution which reads:
WHEREFORE, premises considered, respondent Commissioner of Customs "Motion
for Partial Reconsideration" is hereby PARTIALLY GRANTED. The Resolution dated
May 17, 2005 is hereby MODIFIED but only insofar as the Court did not impose the
payment of the proper duties and taxes on the subject shipment. Accordingly, the
dispositive portion of Our Resolution, dated May 17, 2005, is hereby MODIFIED to
read as follows:
WHEREFORE, premises considered, the Bureau of Customs is adjudged liable to
petitioner AGFHA, INC. for the value of the subject shipment in the amount of ONE
HUNDRED SIXTY THOUSAND THREE HUNDRED FORTY EIGHT AND 08/100 US
DOLLARS (US$160,348.08), subject however, to the payment of the prescribed taxes
and duties, at the time of the importation. The Bureau of Customs liability may be
paid in Philippine Currency, computed at the exchange rate prevailing at the time of

ISSUE
Whether or not the Court of Tax Appeals was correct in awarding the respondent the
amount of US$160,348.08, as payment for the value of the subject lost shipment that
was in the custody of the petitioner.
In his petition, the Commissioner basically argues two (2) points: 1] the respondent is
entitled to recover the value of the lost shipment based only on its acquisition cost at
the time of importation; and 2] the present action has been theoretically transformed
into a suit against the State, hence, the enforcement/satisfaction of petitioners claim
must be pursued in another proceeding consistent with the rule laid down in P.D. No.
1445.
He further argues that the basis for the exchange rate of its liability lacks basis. Based
on the Memorandum, dated August 27, 2002, of the Customs Operations Officers, the
true value of the subject shipment is US$160,340.00 based on its commercial
invoices which have been found to be spurious. The subject shipment arrived at the
MICP on December 12, 1992 and the peso-dollar exchange rate was P20.00 per
US$1.00. Thus, this conversion rate must be applied in the computation of the total
land cost of the subject shipment being claimed by AGFHA or P3,206,961.60 plus
interest.
The Commissioner further contends that based on Executive Order No. 688 (The
1999 Tariff and Customs Code of the Philippines), the proceeds from any legitimate
transaction, conveyance or sale of seized and/or forfeited items for importations or
exportations by the customs bureau cannot be lawfully disposed of by the petitioner to
satisfy respondents money judgment. EO 688 mandates that the unclaimed proceeds
from the sale of forfeited goods by the Bureau of Customs (BOC) will be considered
as customs receipts to be deposited with the Bureau of Treasury and shall form part
of the general funds of the government. Any disposition of the said unclaimed

proceeds from the sale of forfeited goods will be violative of the Constitution, which
provides that "No money shall be paid out of the Treasury except in pursuance of an
appropriation made by law."11
Thus, the Commissioner posits that this case has been transformed into a suit against
the State because the satisfaction of AGFHAs claim will have to be taken from the
national coffers. The State may not be sued without its consent. The BOC enjoys
immunity from suit since it is invested with an inherent power of sovereignty which is
taxation.
To recover the alleged loss of the subject shipment, AGFHAs remedy here is to file a
money claim with the Commission on Audit (COA) pursuant to Act No. 3083 (An Act
Defining the Condition under which the Government of the Philippine Island may be
Sued) and Commonwealth Act No. 327 (An Act Fixing the Time within which the
Auditor General shall render his Decisions and Prescribing the Manner of Appeal
therefrom, as amended by P.D. No. 1445). Upon the determination of State liability,
the prosecution, enforcement or satisfaction thereof must still be pursued in
accordance with the rules and procedures laid down in P.D. No. 1445, otherwise
known as the Government Auditing Code of the Philippines.
On the other hand, AGFHA counters that, in line with prevailing jurisprudence, the
applicable peso-dollar exchange rate should be the one prevailing at the time of
actual payment in order to preserve the real value of the subject shipment to the date
of its payment. The CTA-En Banc Decision does not constitute a money claim against
the State. The Commissioners obligation to return the subject shipment did not arise
from an import-export contract but from a quasi-contract particularly solutio
indebiti under Article 2154 of the Civil Code. The payment of the value of the subject
lost shipment was in accordance with Article 2159 of the Civil Code. The doctrine of
governmental immunity from suit cannot serve as an instrument for perpetrating an
injustice on a citizen. When the State violates its own laws, it cannot invoke the
doctrine of state immunity to evade liability. The commission of an unlawful or illegal
act on the part of the State is equivalent to implied consent.
THE COURTS RULING
The petition lacks merit.
The Court agrees with the ruling of the CTA that AGFHA is entitled to recover the
value of its lost shipment based on the acquisition cost at the time of payment.
In the case of C.F. Sharp and Co., Inc. v. Northwest Airlines, Inc. the Court ruled that
the rate of exchange for the conversion in the peso equivalent should be the
prevailing rate at the time of payment:
In ruling that the applicable conversion rate of petitioner's liability is the rate at the
time of payment, the Court of Appeals cited the case of Zagala v. Jimenez,
interpreting the provisions of Republic Act No. 529, as amended by R.A. No. 4100.
Under this law, stipulations on the satisfaction of obligations in foreign currency are
void. Payments of monetary obligations, subject to certain exceptions, shall be
discharged in the currency which is the legal tender in the Philippines. But since R.A.
No. 529 does not provide for the rate of exchange for the payment of foreign currency
obligations incurred after its enactment, the Court held in a number of cases that the
rate of exchange for the conversion in the peso equivalent should be the
prevailing rate at the time of payment.12 [Emphases supplied]

Likewise, in the case of Republic of the Philippines represented by the Commissioner

of Customs v. UNIMEX Micro-Electronics GmBH,13 which involved the seizure and
detention of a shipment of computer game items which disappeared while in the
custody of the Bureau of Customs, the Court upheld the decision of the CA holding
that petitioners liability may be paid in Philippine currency, computed at the exchange
rate prevailing at the time of actual payment.
On the issue regarding the state immunity doctrine, the Commissioner cannot escape
liability for the lost shipment of goods. This was clearly discussed in the UNIMEX
Micro-Electronics GmBH decision, where the Court wrote:
Finally, petitioner argues that a money judgment or any charge against the
government requires a corresponding appropriation and cannot be decreed by mere
judicial order.
Although it may be gainsaid that the satisfaction of respondent's demand will
ultimately fall on the government, and that, under the political doctrine of "state
immunity," it cannot be held liable for governmental acts (jus imperii), we still hold that
petitioner cannot escape its liability. The circumstances of this case warrant its
exclusion from the purview of the state immunity doctrine.
As previously discussed, the Court cannot turn a blind eye to BOC's ineptitude
and gross negligence in the safekeeping of respondent's goods. We are not
likewise unaware of its lackadaisical attitude in failing to provide a cogent
explanation on the goods' disappearance, considering that they were in its
custody and that they were in fact the subject of litigation. The situation does
not allow us to reject respondent's claim on the mere invocation of the doctrine
of state immunity. Succinctly, the doctrine must be fairly observed and the
State should not avail itself of this prerogative to take undue advantage of
parties that may have legitimate claims against it.
In Department of Health v. C.V. Canchela & Associates, we enunciated that this
Court, as the staunch guardian of the people's rights and welfare, cannot sanction an
injustice so patent in its face, and allow itself to be an instrument in the perpetration
thereof. Over time, courts have recognized with almost pedantic adherence that what
is inconvenient and contrary to reason is not allowed in law. Justice and equity now
demand that the State's cloak of invincibility against suit and liability be
shredded.1awphi1
Accordingly, we agree with the lower courts' directive that, upon payment of the
necessary customs duties by respondent, petitioner's "payment shall be taken from
the sale or sales of goods or properties seized or forfeited by the Bureau of Customs."
WHEREFORE, the assailed decisions of the Court of Appeals in CA-G.R. SP Nos.
75359 and 75366 are hereby AFFIRMED with MODIFICATION. Petitioner Republic of
the Philippines, represented by the Commissioner of the Bureau of Customs, upon
payment of the necessary customs duties by respondent Unimex Micro-Electronics
GmBH, is hereby ordered to pay respondent the value of the subject shipment in the
amount of Euro 669,982.565. Petitioner's liability may be paid in Philippine currency,
computed at the exchange rate prevailing at the time of actual payment.
SO ORDERED.

14

[Emphases supplied]

In line with the ruling in UNIMEX Micro-Electronics GmBH, the Commissioner of

Customs should pay AGFHA the value of the subject lost shipment in the amount of

US$160,348.08 which liability may be paid in Philippine currency computed at the

exchange rate prevailing at the time of the actual payment.
WHEREFORE, the February 25, 2009 Decision of the Court of Tax Appeals En Banc,
in CTA EB Case No. 136, isAFFIRMED. The Commissioner of Customs is hereby
ordered to pay, in accordance with law, the value of the subject lost shipment in the
amount of US$160,348.08, computed at the exchange rate prevailing at the time of
actual payment after payment of the necessary customs duties.
SO ORDERED.

G.R. No. L-18411

December 17, 1966

MAGDALENA ESTATES, INC., plaintiff-appellee,

vs.
ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, defendantsappellants.
Roxas and Sarmiento for plaintiff-appelle.
Somero, Baclig and Savello for defendants-appellants.
REGALA, J.:
Appeal from the decision of the Court of First Instance of Manila ordering the
defendants-appellants to pay jointly and severally to the plaintiff-appellee the sum of
P655.89, plus legal interest thereon from date of the judicial demand, the sum of
P100.00 as attorney's fees, and to pay the costs.
The appellants bought from the appellee a parcel of land in Quezon City known as
Lot 7-K-2-G, Psd-26193. In view of an unpaid balance of P5,000.00 on account of the
purchase price of the lot, the appellants executed on January 4, 1957, the following
promissory note representing the said account:
PROMISSORY NOTE
P5,000.00
Manila, January 4, 1957
We, the Spouses ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, jointly
and severally promise to pay the Magdalena Estates, Inc., or order, at its offices in
the City of Manila, without any demand the sum of FIVE THOUSAND PESOS
(P5,000.00), Philippine currency, with interest at the rate of Nine Per Cent 9% per
annum, within sixty (60) days from January 7, 1957. The sum of P5,000.00
represents the balance of the purchase price of the parcel of land known as Lot 7-K2-G, Psd. 26193, containing an area of 2,191 square meters, Quezon City.
(Sgd.) Antonio A. Rodriguez
( T ) ANTONIO A. RODRIGUEZ

(Sgd.) Herminia C. Rodriguez

( T ) HERMINIA C. RODRIGUEZ
Signed in the Presence of:
(Sgd.) ILLEGIBLE
(Sgd.) ILLEGIBLE
On the same date, the appellants and the Luzon Surety Co., Inc. executed a bond in
favor of the appellee, the undertaking thereof being embodied therein as follows:
. . . comply with the obligation to pay the amount of P5,000.00 representing balance
of the purchase price of a parcel of land known as Lot 7-K-2-G, Psd-26193, with an
area of 2191 square meters, Quezon City, covered by Transfer Certificate of Title No.

13 (6947), Quezon City, within a period of sixty (60) days from January 7, 1957; That
the Surety shall be notified in writing within Ten (10) days from moment of default
otherwise, this undertaking is automatically null and void.
On June 20, 1958, when the obligation of the appellants became due and
demandable, the Luzon Surety Co., Inc. paid to the appellee the sum of P5,000.00.
Subsequently, the appellee demanded from the appellants the payment of P655.89
corresponding to the alleged accumulated interests on the principal of P5,000.00.
Due to the refusal of the appellants to pay the said interest, the appellee started this
suit in the Municipal Court of Manila to enforce the collection thereof. The said court,
on February 5, 1959, rendered judgment in favor of the appellee and against the
appellants, ordering the latter to pay jointly and severally the appellee the sum of
P655.89 with interest thereon at the legal rate from November 10, 1958, the date of
the filing of the complaint, until the whole amount is fully paid. Not satisfied with that
judgment, appellants appealed to the Court of First Instance of Manila, where the
case was submitted for decision on the pleadings. The Court of First Instance of
Manila rendered the judgment stated at the outset of this decision.
On appeal directly to this Court, the following errors are assigned:
I. The lower court erred in concluding as a fact from the pleadings that the plaintiffappellee demanded, and the Luzon Surety Co., Inc. refused, the payment of interest
in the amount of P655.89, and in not finding and declaring that said plaintiff-appellee
waived or condoned the said interests.
II. The lower court erred in not finding and declaring that the obligation of the
defendants-appellants in favor of the plaintiff-appellee was totally extinguished by
payment and/or condonation.
III. The lower court erred in not finding and declaring that the promissory note
executed by the defendants-appellants in favor of the plaintiff-appellee was, insofar
as the said document provided for the payment of interests, novated when the
plaintiff-appellee unqualifiedly accepted the surety bond which merely guaranteed
payment of the principal in the sum of P5,000.00.
Appellants claim that the pleadings do not show that there was demand made by the
appellee for the payment of accrued interest and what could be deduced therefrom
was merely that the appellee demanded from the Luzon Surety Co., Inc., in the
capacity of the latter as surety, the payment of the obligation of the appellants, and
said appellee accepted unqualifiedly the amount of P5,000.00 as performance by the
obligor and/or obligors of the obligation in its favor. It is further claimed that the
unqualified acceptance of payment made by the Luzon Surety Co., Inc. of P5,000.00
or only the amount of the principal obligation and without exercising its (appellee's)
right to apply a portion of P655.89 thereof to the payment of the alleged interest due
despite its presumed knowledge of its right to do so, the appellee showed that it
waived or condoned the interests due, because Articles 1235 and 1253 of the Civil
Code provide:
ART. 1235. When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with.
ART. 1253. If the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been recovered.

We do not agree with the contention of the appellants. It is very clear in the
promissory note that the principal obligation is the balance of the purchase price of
the parcel of land known as Lot 7-K-2-G, Psd-26193, which is the sum of P5,000.00,
and in the surety bond, the Luzon Surety Co., Inc. undertook "to pay the amount of
P5,000.00 representing balance of the purchase price of a parcel of land known as
Lot 7-K-2-G, Psd-26193, . . . ." The appellee did not protest nor object when it
accepted the payment of P5,000.00 because it knew that that was the complete
amount undertaken by the surety as appearing in the contract. The liability of a surety
is not extended, by implication, beyond the terms of his contract.1 It is for the same
reason that the appellee cannot apply a part of the P5,000.00 as payment for the
accrued interest. Appellants are relying on Article 1253 of the Civil Code, but the rules
contained in Articles 1252 to 1254 of the Civil Code apply to a person owing several
debts of the same kind of a single creditor. They cannot be made applicable to a
person whose obligation as a mere surety is both contingent and singular; his liability
is confined to such obligation, and he is entitled to have all payments made applied
exclusively to said application and to no other.2 Besides, Article 1253 of the Civil
Code is merely directory, and not mandatory.3 Inasmuch as the appellee cannot
protest for non-payment of the interest when it accepted the amount of P5,000.00
from the Luzon Surety Co., Inc., nor apply a part of that amount as payment for the
interest, we cannot now say that there was a waiver or condonation on the interest
due.
It is claimed that there was a novation and/or modification of the obligation of the
appellants in favor of the appellee because the appellee accepted without reservation
the subsequent agreement set forth in the surety bond despite its failure to provide
that it also guaranteed payment of accruing interest.
The rule is settled that novation by presumption has never been favored. To be
sustained, it needs to be established that the old and new contracts are incompatible
in all points, or that the will to novate appears by express agreement of the parties or
in acts of similar import.4
An obligation to pay a sum of money is not novated, in a new instrument wherein the
old is ratified, by changing only the terms of payment and adding other obligations not
incompatible with the old one,5 or wherein the old contract is merely supplemented by
the new one.6 The mere fact that the creditor receives a guaranty or accepts
payments from a third person who has agreed to assume the obligation, when there
is no agreement that the first debtor shall be released from responsibility does not
constitute a novation, and the creditor can still enforce the obligation against the
original debtor. (Straight v. Haskel, 49 Phil. 614; Pacific Commercial Co. v. Sotto, 34
Phil. 237; Estate of Mota v. Serra, 47 Phil. 464; Dugo v. Lopena, supra ). In the
instant case, the surety bond is not a new and separate contract but an accessory of
the promissory note.
WHEREFORE, the judgment appealed from should be, as it is hereby, affirmed, with
costs against the appellants.

G.R. No. L-979

April 13, 1949

THE COMMONWEALTH OF THE PHILIPPINES, plaintiff-appellee,

vs.
THE FAR EASTERN SURETY & INSURANCE COMPANY, defendant-appellant.
Leodegario D. Castillo for appellant.
Assistant Solicitor General Ruperto Kapunan, Jr. and Solicitor Jesus A. Avancea for
appellee.
BENGZON, J.:
The Court of Appeals forwarded this case because the issues raised are questions of
law. Appellant itself admits the substantial correctness of the findings of the trial judge
as follows:
On August 20 and October 1, 1935, the Vda. de Tiu Seng and Tan Kiang,
a sociedad en comandita, as principal and the Far Eastern Surety &
Insurance Co., Inc., as surety executed two bonds (Exhibits A and A-1) by
which they bound themselves jointly and severally to pay the government
the sum of P10,000 which was the amount due from Tiu Seng (for the sake
of brevity we shall use the name Tiu Seng for the Vda. de Tiu Seng and Tan
Kiang) as internal revenue taxes and surcharge. These bonds were filed
before the indebtedness was accurately ascertained. It was afterwards found
by the Collector of Internal Revenue that the amount due from Tiu Seng was
P30,512.64. Demand for payment of this amount was made, but without
success. However, a compromise was effected on November 6, 1936, by
which the tax due was reduced to P12,874.17. Tui Seng proposed to the
Collector that said amount be paid on installments as follows: P2,874.17 on
January 30, 1937, and the balance of P10,000 on monthly payments of
P500 each, beginning February 17, 1937. Finally, it was agreed that the
payment be made as follows: P2,874.12 on January 20, 1937 and the
balance of P1,000 per month. Under this agreement, Tiu Seng has said the
Collector the total amount which the plaintiff now seeks to recover from the
defendant, the Far Eastern Surety & Insurance Co., Inc.
The issue in this case is whether said sum of P1,230.05 is covered by the
two above mentioned.
The issue in this case is whether said sum of P1,230.05 is covered by the
two bonds above mentioned.
Within the framework of the above statement of facts attorney for appellant vigorously
argues the proposition that it merely guaranteed the payment of P10,000 to the
Commonwealth of the Philippines (now the Republic), without undertaking to pay any
balance of the obligation of the principal debtor, and that after such sum had been
fully satisfied, as in this case, it had no further liability. It is an admitted circumstance
that Tiu Seng had delivered, after the execution of the bonds, the total amount of
P11,644.12 to the Bureau of Internal Revenue.
It must be observed, however, at this juncture that the trial judge upheld the plaintiff's
contention that the amounts paid should be applied first to the unsecured portion of
Tiu Seng's liability, thus leaving unpaid and covered by the bonds the sum of
P1,230.05, which may legally be collected from defendant as a solidary surety.

Appellant's proposition, which is the crux of this appeal, would undoubtedly be

unassailable had all the payments been made specifically on account of the debt
secured by the bond. But although it is agreed that the payments were made on
account of taxes there is no proof as to the imputation thereof. This point is decisive;
for, in effect Tiu Seng had two liabilities to the Commonwealth: one for the sum not
covered by the bonds and another for the sum secured thereby. Parenthetically it
should be observed that under the law (article 1826, Civil Code) the obligation of the
guarantor may be less than that of the principal.
The problem is, consequently, one concerning the application of payments. And the
rules to be invoked are:
A person owing several debts of the same kind to a single creditor may
declare, at the time of making a payment, to which of them it is to be applied.
If the debtor should accept from the creditor a receipt which rectifies the
application to be given the payment, he cannot contest it, unless there
should be ground for treating the contract as void. (Article 1172, Civil Code.)
When the payment cannot be applied in accordance with the preceding
rules, that which, among the matured debts, is the most burdensome to the
debtor shall be deemed paid.
If such debts should be equally burdensome, the payment shall be applied to
all of them pro rata. (Article 1174, Civil Code.)
Manresa, commenting on article 1174, says that when a person has two debts, one
as sole debtor and another as solidary co-debtor his more onerous obligation to which
first payments are to be applied is the debt as sole debtor. (Cod. Civil, Vol. VIII, 4th
Ed., p. 290). That view is exactly what this Court followed in Hongkong and Shanghai
Banking Corporation vs. Aldanese (48 Phil., 990) on perceivable between this
litigation and the Aldanese case. In both the problem of application of payments is
involved. This Court has held:
Where in a bond the debtor and surety have bound themselves solidarily,
but limiting the validity of the surety to a lesser amount than that due from
the principal debtor, any such payment as the latter may have made on
account of such obligation must be applied first to the unsecured portion of
the debt, for, as regards the principal debtor, the obligation is more
erroneous as to the amount not secured. (Hongkong & Shanghai Banking
Corporation vs. Aldanese, 48 Phil., 990)
No valid reason has been demonstrated to justify departure from the above ruling.
Judgment affirmed, with costs, provided that the money shall be turned over by
defendant-appellant to the Republic of the Philippines as the successor of the
Commonwealth. So ordered.

G.R. No. 118342 January 5, 1998

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and LYDIA CUBA, respondents.
G.R. No. 118367 January 5, 1998
LYDIA P. CUBA, petitioner,
vs.
COURT OF APPEALS, DEVELOPMENT BANK OF THE PHILIPPINES and
AGRIPINA P. CAPERAL,respondents.

DAVIDE, JR., J.:

These two consolidated cases stemmed from a complaint 1 filed against the
Development Bank of the Philippines (hereafter DBP) and Agripina Caperal filed by
Lydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional Trial Court of
Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity of
DBP's appropriation of CUBA's rights, title, and interests over a 44-hectares fishpond
located in Bolinao, Pangasinan, for being violative of Article 2088 of the Civil Code;
(2) the annulment of the Deed of Conditional Sale executed in her favor by DBP; (3)
the annulment of DBP's sale of the subject fishpond to Caperal; (4) the restoration of
her rights, title, and interests over the fishpond; and (5) the recovery of damages,
attorney's fees, and expenses of litigation.

7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed

two letters to the Manager DBP, Dagupan City dated November 6,
1979 and December 20, 1979. DBP thereafter accepted the offer to
repurchase in a letter addressed to plaintiff dated February 1, 1982;
8. After the Deed of Conditional Sale was executed in favor of
plaintiff Lydia Cuba, a new Fishpond Lease Agreement No. 2083-A
dated March 24, 1980 was issued by the Ministry of Agriculture and
Food in favor of plaintiff Lydia Cuba only, excluding her husband;
9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in
the Deed of Conditional Sale;
10. After plaintiff Lydia Cuba failed to pay the amortization as stated
in Deed of Conditional Sale, she entered with the DBP a temporary
arrangement whereby in consideration for the deferment of the
Notarial Rescission of Deed of Conditional Sale, plaintiff Lydia
Cuba promised to make certain payments as stated in temporary
Arrangement dated February 23, 1982;
11. Defendant DBP thereafter sent a Notice of Rescission thru
Notarial Act dated March 13, 1984, and which was received by
plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took possession
of the Leasehold Rights of the fishpond in question;

After the joinder of issues following the filing by the parties of their respective
pleadings, the trial court conducted a pre-trial where CUBA and DBP agreed on the
following facts, which were embodied in the pre-trial order: 2

13. That after defendant DBP took possession of the Leasehold

Rights over the fishpond in question, DBP advertised in the
SUNDAY PUNCH the public bidding dated June 24, 1984, to
dispose of the property;

1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease

Agreement No. 2083 (new) dated May 13, 1974 from the
Government;

14. That the DBP thereafter executed a Deed of Conditional Sale in

favor of defendant Agripina Caperal on August 16, 1984;

2. Plaintiff Lydia P. Cuba obtained loans from the Development

Bank of the Philippines in the amounts of P109,000.00;
P109,000.00; and P98,700.00 under the terms stated in the
Promissory Notes dated September 6, 1974; August 11, 1975; and
April 4, 1977;
3. As security for said loans, plaintiff Lydia P. Cuba executed two
Deeds of Assignment of her Leasehold Rights;
4. Plaintiff failed to pay her loan on the scheduled dates thereof in
accordance with the terms of the Promissory Notes;
5. Without foreclosure proceedings, whether judicial or extrajudicial, defendant DBP appropriated the Leasehold Rights of
plaintiff Lydia Cuba over the fishpond in question;
6. After defendant DBP has appropriated the Leasehold Rights of
plaintiff Lydia Cuba over the fishpond in question, defendant DBP,
in turn, executed a Deed of Conditional Sale of the Leasehold
Rights in favor of plaintiff Lydia Cuba over the same fishpond in
question;

15. Thereafter, defendant Caperal was awarded Fishpond Lease

Agreement No. 2083-A on December 28, 1984 by the Ministry of
Agriculture and Food.
Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the pre3
trial order.
Trial was thereafter had on other matters.
The principal issue presented was whether the act of DBP in appropriating to itself
CUBA's leasehold rights over the fishpond in question without foreclosure
proceedings was contrary to Article 2088 of the Civil Code and, therefore, invalid.
CUBA insisted on an affirmative resolution. DBP stressed that it merely exercised its
contractual right under the Assignments of Leasehold Rights, which was not a
contract of mortgage. Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by declaring that DBP's taking
possession and ownership of the property without foreclosure was plainly violative of
Article 2088 of the Civil Code which provides as follows:

Art. 2088. The creditor cannot appropriate the things given by way
of pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void.

plaintiff's leasehold rights and interest over the fishpond land in

question under her Fishpond Lease Agreement No. 2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21,
1980 by and between the defendant Development Bank of the
Philippines and plaintiff (Exh. E and Exh. 1) and the acts of notarial
rescission of the Development Bank of the Philippines relative to
said sale (Exhs. 16 and 26) as void and ineffective;

It disagreed with DBP's stand that the Assignments of Leasehold Rights were not
contracts of mortgage because (1) they were given as security for loans, (2) although
the "fishpond land" in question is still a public land, CUBA's leasehold rights and
interest thereon are alienable rights which can be the proper subject of a mortgage;
and (3) the intention of the contracting parties to treat the Assignment of Leasehold
Rights as a mortgage was obvious and unmistakable; hence, upon CUBA's default,
DBP's only right was to foreclose the Assignment in accordance with law.

3. DECLARING the Deed of Conditional Sale dated August 16,

1984 by and between the Development Bank of the Philippines and
defendant Agripina Caperal (Exh. F and Exh. 21), the Fishpond
Lease Agreement No. 2083-A dated December 28, 1984 of
defendant Agripina Caperal (Exh. 23) and the Assignment of
Leasehold Rights dated February 12, 1985 executed by defendant
Agripina Caperal in favor of the defendant Development Bank of
the Philippines (Exh. 24) as void ab initio;

The trial court also declared invalid condition no. 12 of the Assignment of Leasehold
Rights for being a clear case of pactum commissorium expressly prohibited and
declared null and void by Article 2088 of the Civil Code. It then concluded that since
DBP never acquired lawful ownership of CUBA's leasehold rights, all acts of
ownership and possession by the said bank were void. Accordingly, the Deed of
Conditional Sale in favor of CUBA, the notarial rescission of such sale, and the Deed
of Conditional Sale in favor of defendant Caperal, as well as the Assignment of
Leasehold Rights executed by Caperal in favor of DBP, were also void and
ineffective.

4. ORDERING defendant Development Bank of the Philippines and

defendant Agripina Caperal, jointly and severally, to restore to
plaintiff the latter's leasehold rights and interests and right of
possession over the fishpond land in question, without prejudice to
the right of defendant Development Bank of the Philippines to
foreclose the securities given by plaintiff;

As to damages, the trial court found "ample evidence on record" that in 1984 the
representatives of DBP ejected CUBA and her caretakers not only from the fishpond
area but also from the adjoining big house; and that when CUBA's son and caretaker
went there on 15 September 1985, they found the said house unoccupied and
destroyed and CUBA's personal belongings, machineries, equipment, tools, and other
articles used in fishpond operation which were kept in the house were missing. The
missing items were valued at about P550,000. It further found that when CUBA and
her men were ejected by DBP for the first time in 1979, CUBA had stocked the
fishpond with 250,000 pieces of bangus fish (milkfish), all of which died because the
DBP representatives prevented CUBA's men from feeding the fish. At the
conservative price of P3.00 per fish, the gross value would have been P690,000, and
after deducting 25% of said value as reasonable allowance for the cost of feeds,
CUBA suffered a loss of P517,500. It then set the aggregate of the actual damages
sustained by CUBA at P1,067,500.

5. ORDERING defendant Development Bank of the Philippines to

pay to plaintiff the following amounts:
a) The sum of ONE MILLION SIXTY-SEVEN
THOUSAND
FIVE
HUNDRED
PESOS
(P1,067,500.00), as and for actual damages;
b) The sum of ONE HUNDRED THOUSAND
(P100,000.00) PESOS as moral damages;
c) The sum of FIFTY THOUSAND (P50,000.00)
PESOS, as and for exemplary damages;
d) And the sum of ONE HUNDRED THOUSAND
(P100,000.00) PESOS, as and for attorney's
fees;

The trial court further found that DBP was guilty of gross bad faith in falsely
representing to the Bureau of Fisheries that it had foreclosed its mortgage on CUBA's
leasehold rights. Such representation induced the said Bureau to terminate CUBA's
leasehold rights and to approve the Deed of Conditional Sale in favor of CUBA. And
considering that by reason of her unlawful ejectment by DBP, CUBA "suffered moral
shock, degradation, social humiliation, and serious anxieties for which she became
sick and had to be hospitalized" the trial court found her entitled to moral and
exemplary damages. The trial court also held that CUBA was entitled to P100,000
attorney's fees in view of the considerable expenses she incurred for lawyers' fees
and in view of the finding that she was entitled to exemplary damages.
4

In its decision of 31 January 1990, the trial court disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff:
1. DECLARING null and void and without any legal effect the act of
defendant Development Bank of the Philippines in appropriating for
its own interest, without any judicial or extra-judicial foreclosure,

6. And ORDERING defendant Development Bank of the Philippines

to reimburse and pay to defendant Agripina Caperal the sum of
ONE MILLION FIVE HUNDRED THIRTY-TWO THOUSAND SIX
HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS
(P1,532,610.75) representing the amounts paid by defendant
Agripina Caperal to defendant Development Bank of the Philippines
under their Deed of Conditional Sale.
CUBA and DBP interposed separate appeals from the decision to the Court of
Appeals. The former sought an increase in the amount of damages, while the latter
questioned the findings of fact and law of the lower court.
5

In its decision of 25 May 1994, the Court of Appeals ruled that (1) the trial court
erred in declaring that the deed of assignment was null and void and that defendant

Caperal could not validly acquire the leasehold rights from DBP; (2) contrary to the
claim of DBP, the assignment was not a cession under Article 1255 of the Civil Code
because DBP appeared to be the sole creditor to CUBA cession presupposes
plurality of debts and creditors; (3) the deeds of assignment represented the voluntary
act of CUBA in assigning her property rights in payment of her debts, which
amounted to a novation of the promissory notes executed by CUBA in favor of DBP;
(4) CUBA was estopped from questioning the assignment of the leasehold rights,
since she agreed to repurchase the said rights under a deed of conditional sale; and
(5) condition no. 12 of the deed of assignment was an express authority from CUBA
for DBP to sell whatever right she had over the fishpond. It also ruled that CUBA was
not entitled to loss of profits for lack of evidence, but agreed with the trial court as to
the actual damages of P1,067,500. It, however, deleted the amount of exemplary
damages and reduced the award of moral damages from P100,000 to P50,000 and
attorney's fees, from P100,000 to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP in
appropriating Cuba's leasehold rights and interest under Fishpond Lease Agreement
No. 2083; (2) the deeds of assignment executed by Cuba in favor of DBP; (3) the
deed of conditional sale between CUBA and DBP; and (4) the deed of conditional
sale between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal,
and the assignment of leasehold rights executed by Caperal in favor of DBP. It then
ordered DBP to turn over possession of the property to Caperal as lawful holder of
the leasehold rights and to pay CUBA the following amounts: (a) P1,067,500 as
actual damages; P50,000 as moral damages; and P50,000 as attorney's fees.
Since their motions for reconsideration were denied, 6 DBP and CUBA filed separate
petitions for review.
In its petition (G.R. No. 118342), DBP assails the award of actual and moral damages
and attorney's fees in favor of CUBA.
Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the
Court of Appeals erred (1) in not holding that the questioned deed of assignment was
a pactum commissorium contrary to Article 2088 of the Civil Code; (b) in holding that
the deed of assignment effected a novation of the promissory notes; (c) in holding
that CUBA was estopped from questioning the validity of the deed of assignment
when she agreed to repurchase her leasehold rights under a deed of conditional sale;
and (d) in reducing the amounts of moral damages and attorney's fees, in deleting the
award of exemplary damages, and in not increasing the amount of damages.
We agree with CUBA that the assignment of leasehold rights was a mortgage
contract.
It is undisputed that CUBA obtained from DBP three separate loans totalling
P335,000, each of which was covered by a promissory note. In all of these notes,
there was a provision that: "In the event of foreclosure of themortgage securing this
notes, I/We further bind myself/ourselves, jointly and severally, to pay the deficiency,
7
if any."
Simultaneous with the execution of the notes was the execution of "Assignments of
8
Leasehold Rights" where CUBA assigned her leasehold rights and interest on a 44hectare fishpond, together with the improvements thereon. As pointed out by CUBA,
the deeds of assignment constantly referred to the assignor (CUBA) as "borrower";
the assigned rights, as mortgaged properties; and the instrument itself, as mortgage
contract. Moreover, under condition no. 22 of the deed, it was provided that "failure to

comply with the terms and condition of any of the loans shall cause all other loans to
become due and demandable and all mortgages shall be foreclosed." And, condition
no. 33 provided that if "foreclosure is actually accomplished, the usual 10% attorney's
fees and 10% liquidated damages of the total obligation shall be imposed." There is,
therefore, no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment was by
way of security for the payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two
Deeds of Assignment of her Leasehold Rights.
In People's Bank & Trust Co. vs. Odom, 9 this Court had the occasion to rule that an
assignment to guarantee an obligation is in effect a mortgage.
We find no merit in DBP's contention that the assignment novated the promissory
notes in that the obligation to pay a sum of money the loans (under the promissory
notes) was substituted by the assignment of the rights over the fishpond (under the
deed of assignment). As correctly pointed out by CUBA, the said assignment merely
complemented or supplemented the notes; both could stand together. The former
was only an accessory to the latter. Contrary to DBP's submission, the obligation to
pay a sum of money remained, and the assignment merely served as security for the
loans covered by the promissory notes. Significantly, both the deeds of assignment
and the promissory notes were executed on the same dates the loans were granted.
Also, the last paragraph of the assignment stated: "The assignor further reiterates and
states all terms, covenants, and conditions stipulated in the promissory note or
notes covering the proceeds of this loan, making said promissory note or notes, to all
intent and purposes, an integral part hereof."
Neither did the assignment amount to payment by cession under Article 1255 of the
Civil Code for the plain and simple reason that there was only one creditor, the DBP.
Article 1255 contemplates the existence of two or more creditors and involves the
assignment of all the debtor's property.
Nor did the assignment constitute dation in payment under Article 1245 of the civil
Code, which reads: "Dation in payment, whereby property is alienated to the creditor
in satisfaction of a debt in money, shall be governed by the law on sales." It bears
stressing that the assignment, being in its essence a mortgage, was but a security
and not a satisfaction of indebtedness. 10
We do not, however, buy CUBA's argument that condition no. 12 of the deed of
assignment constituted pactum commissorium. Said condition reads:
12. That effective upon the breach of any condition of this
assignment, the Assignor hereby appoints the Assignee his
Attorney-in-fact with full power and authority to take actual
possession of the property above-described, together with all
improvements thereon, subject to the approval of the Secretary of
Agriculture and Natural Resources, to lease the same or any
portion thereof and collect rentals, to make repairs or improvements
thereon and pay the same, to sell or otherwise dispose of whatever
rights the Assignor has or might have over said property and/or its
improvements and perform any other act which the Assignee may
deem convenient to protect its interest. All expenses advanced by
the Assignee in connection with purpose above indicated which

shall bear the same rate of interest aforementioned are also

guaranteed by this Assignment. Any amount received from rents,
administration, sale or disposal of said property may be supplied by
the Assignee to the payment of repairs, improvements, taxes,
assessments and other incidental expenses and obligations and
the balance, if any, to the payment of interest and then on the
capital of the indebtedness secured hereby. If after disposal or sale
of said property and upon application of total amounts received
there shall remain a deficiency, said Assignor hereby binds himself
to pay the same to the Assignee upon demand, together with all
interest thereon until fully paid. The power herein granted shall not
be revoked as long as the Assignor is indebted to the Assignee and
all acts that may be executed by the Assignee by virtue of said
power are hereby ratified.

provide that CUBA's default would operate to vest in DBP ownership of the said
rights. Besides, an assignment to guarantee an obligation, as in the present case, is
virtually a mortgage and not an absolute conveyance of title which confers ownership
12
on the assignee.

The elements of pactum commissorium are as follows: (1) there should be a property
mortgaged by way of security for the payment of the principal obligation, and (2) there
should be a stipulation for automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal obligation within the stipulated
period. 11

Instead of taking ownership of the questioned real rights upon default by CUBA, DBP
should have foreclosed the mortgage, as has been stipulated in condition no. 22 of
the deed of assignment. But, as admitted by DBP, there was no such foreclosure.
Yet, in its letter dated 26 October 1979, addressed to the Minister of Agriculture and
Natural Resources and coursed through the Director of the Bureau of Fisheries and
Aquatic Resources, DBP declared that it "had foreclosed the mortgage and enforced
the assignment of leasehold rights on March 21, 1979 for failure of said spouses
14
[Cuba spouces] to pay their loan amortizations." This only goes to show that DBP
was aware of the necessity of foreclosure proceedings.

Condition no. 12 did not provide that the ownership over the leasehold rights would
automatically pass to DBP upon CUBA's failure to pay the loan on time. It merely
provided for the appointment of DBP as attorney-in-fact with authority, among other
things, to sell or otherwise dispose of the said real rights, in case of default by CUBA,
and to apply the proceeds to the payment of the loan. This provision is a standard
condition in mortgage contracts and is in conformity with Article 2087 of the Civil
Code, which authorizes the mortgagee to foreclose the mortgage and alienate the
mortgaged property for the payment of the principal obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of
assignment. As admitted by it during the pre-trial, it had "[w]ithout foreclosure
proceedings, whether judicial or extrajudicial, . . . appropriated the [l]easehold [r]ights
of plaintiff Lydia Cuba over the fishpond in question." Its contention that it limited itself
to mere administration by posting caretakers is further belied by the deed of
conditional sale it executed in favor of CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of
assignment executed in its favor by the herein vendees [Cuba
spouses] the former acquired all the right and interest of the latter
over the above-described property;
xxx xxx xxx
The title to the real estate property [sic] and all improvements
thereon shall remain in the name of the Vendor until after the
purchase price, advances and interest shall have been fully paid.
(Emphasis supplied).
It is obvious from the above-quoted paragraphs that DBP had appropriated and taken
ownership of CUBA's leasehold rights merely on the strength of the deed of
assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act
of appropriating the leasehold rights. As stated earlier, condition no. 12 did not

At any rate, DBP's act of appropriating CUBA's leasehold rights was violative of
Article 2088 of the Civil Code, which forbids a credit or from appropriating, or
disposing of, the thing given as security for the payment of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP
did not estop her from questioning DBP's act of appropriation. Estoppel is unavailing
13
in this case. As held by this Court in some cases, estoppel cannot give validity to an
act that is prohibited by law or against public policy. Hence, the appropriation of the
leasehold rights, being contrary to Article 2088 of the Civil Code and to public policy,
cannot be deemed validated by estoppel.

In view of the false representation of DBP that it had already foreclosed the mortgage,
the Bureau of Fisheries cancelled CUBA's original lease permit, approved the deed of
conditional sale, and issued a new permit in favor of CUBA. Said acts which were
predicated on such false representation, as well as the subsequent acts emanating
from DBP's appropriation of the leasehold rights, should therefore be set aside. To
validate these acts would open the floodgates to circumvention of Article 2088 of the
Civil Code.
Even in cases where foreclosure proceedings were had, this Court had not hesitated
to nullify the consequent auction sale for failure to comply with the requirements laid
15
down by law, such as Act No. 3135, as amended. With more reason that the sale of
property given as security for the payment of a debt be set aside if there was no prior
fore closure proceeding.
Hence, DBP should render an accounting of the income derived from the operation of
the fishpond in question and apply the said income in accordance with condition no.
12 of the deed of assignment which provided: "Any amount received from rents,
administration, . . . may be applied to the payment of repairs, improvements, taxes,
assessment, and other incidental expenses and obligations and the balance, if any, to
the payment of interest and then on the capital of the indebtedness. . ."
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an
adequate compensation only for such pecuniary loss suffered by
him as he has duly proved. Such compensation is referred to as
actual or compensatory damages.

Actual or compensatory damages cannot be presumed, but must be proved with

reasonable degree of certainty.16 A court cannot rely on speculations, conjectures, or
guesswork as to the fact and amount of damages, but must depend upon competent
proof that they have been suffered by the injured party and on the best obtainable
17
evidence of the actual amount thereof. It must point out specific facts which could
18
afford a basis for measuring whatever compensatory or actual damages are borne.
In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual
damages consisting of P550,000 which represented the value of the alleged lost
articles of CUBA and P517,500 which represented the value of the 230,000 pieces of
bangus allegedly stocked in 1979 when DBP first ejected CUBA from the fishpond
and the adjoining house. This award was affirmed by the Court of Appeals.
We find that the alleged loss of personal belongings and equipment was not proved
by clear evidence. Other than the testimony of CUBA and her caretaker, there was no
proof as to the existence of those items before DBP took over the fishpond in
question. As pointed out by DBP, there was not "inventory of the alleged lost items
before the loss which is normal in a project which sometimes, if not most often, is left
to the care of other persons." Neither was a single receipt or record of acquisition
presented.
Curiously, in her complaint dated 17 May 1985, CUBA included "losses of property"
as among the damages resulting from DBP's take-over of the fishpond. Yet, it was
only in September 1985 when her son and a caretaker went to the fishpond and the
adjoining house that she came to know of the alleged loss of several articles. Such
claim for "losses of property," having been made before knowledge of the alleged
actual loss, was therefore speculative. The alleged loss could have been a mere
afterthought or subterfuge to justify her claim for actual damages.
With regard to the award of P517,000 representing the value of the alleged 230,000
pieces of bangus which died when DBP took possession of the fishpond in March
1979, the same was not called for. Such loss was not duly proved; besides, the claim
therefor was delayed unreasonably. From 1979 until after the filing of her complaint in
court in May 1985, CUBA did not bring to the attention of DBP the alleged loss. In
fact, in her letter dated 24 October 1979, 19 she declared:
1. That from February to May 1978, I was then seriously ill in
Manila and within the same period I neglected the management
and supervision of the cultivation and harvest of the produce of the
aforesaid fishpond thereby resulting to the irreparable loss in the
produce of the same in the amount of about P500,000.00 to my
great damage and prejudice due to fraudulent acts of some of my
fishpond workers.
Nowhere in the said letter, which was written seven months after DBP took
possession of the fishpond, did CUBA intimate that upon DBP's take-over there was a
total of 230,000 pieces of bangus, but all of which died because of DBP's
representatives prevented her men from feeding the fish.
The award of actual damages should, therefore, be struck down for lack of sufficient
basis.
In view, however, of DBP's act of appropriating CUBA's leasehold rights which was
contrary to law and public policy, as well as its false representation to the then
Ministry of Agriculture and Natural Resources that it had "foreclosed the mortgage,"

an award of moral damages in the amount of P50,000 is in order conformably with

Article 2219(10), in relation to Article 21, of the Civil Code. Exemplary or corrective
damages in the amount of P25,000 should likewise be awarded by way of example or
20
correction for the public good. There being an award of exemplary damages,
21
attorney's fees are also recoverable.
WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No.
26535 is hereby REVERSED, except as to the award of P50,000 as moral damages,
which is hereby sustained. The 31 January 1990 Decision of the Regional Trial Court
of Pangasinan, Branch 54, in Civil Case No. A-1574 is MODIFIED setting aside the
finding that condition no. 12 of the deed of assignment constituted pactum
commissorium and the award of actual damages; and by reducing the amounts of
moral damages from P100,000 to P50,000; the exemplary damages, from P50,000 to
P25,000; and the attorney's fees, from P100,000 to P20,000. The Development Bank
of the Philippines is hereby ordered to render an accounting of the income derived
from the operation of the fishpond in question.
Let this case be REMANDED to the trial court for the reception of the income
statement of DBP, as well as the statement of the account of Lydia P. Cuba, and for
the determination of each party's financial obligation to one another.
SO ORDERED.

G.R. No. 134219

June 08, 2005

SPOUSES MARIO AND ELIZABETH TORCUATOR, petitioners,

vs.
SPOUSES REMEGIO AND GLORIA BERNABE and SPOUSES DIOSDADO and
LOURDES SALVADOR,respondents.
DECISION
TINGA, J.:
In the instant Petition,1 spouses Mario and Elizabeth Torcuator assail the D E C I S I
2
O N of the Court of Appeals in C.A.-G.R. CV No. 36427, which affirmed the trial
courts dismissal of their complaint for specific performance, 3and its Resolution4 which
denied their motion for reconsideration.
The facts as summarized by the Court of Appeals are as follows:
The subject of this action is Lot 17, Block 5 of the Ayala Alabang Village, Muntinlupa,
Metro-Manila, with an area of 569 square meters and covered by TCT No. S-79773.
The lower court found that the above parcel of land was purchased by the spouses
Diosdado and Lourdes Salvador (Salvadors, for short) from the developers of Ayala
Alabang subject, among others, to the following conditions:-"It is part of the condition of buying a lot in Ayala Alabang Village (a) that the lot buyer
shall deposit with Ayala Corporation a cash bond (about P17,000.00 for the
Salvadors) which shall be refunded to him if he builds a residence thereon within two
(2) years of purchase, otherwise the deposit shall be forfeited, (b) architectural plans
for any improvement shall be approved by Ayala Corporation, and (c) no lot may be
resold by the buyer unless a residential house has been constructed thereon (Ayala
Corporation keeps the Torrens Title in their [sic] possession).
(p. 5, RTC Decision)
Evidences on record further reveal that on December 18, 1980, the Salvadors sold
the parcel of land to the spouses Remigio and Gloria Bernabe (Bernabes, for
expediency). Given the above restrictions, the Salvadors concomitantly executed a
special power of attorney authorizing the Bernabes to construct a residential house
on the lot and to transfer the title of the property in their names.
The Bernabes, on the other hand, without making any improvement, contracted to sell
the parcel of land to the spouses Mario and Elizabeth Torcuator (Torcuators, for
brevity) sometime in September of 1986. Then again, confronted by the Ayala
Alabang restrictions, the parties agreed to cause the sale between the Salvadors and
the Bernabes cancelled (Exhibit "D"), in favor of (a) a new deed of sale from the
Salvadors directly to the Torcuators; (b) a new Irrevocable Special Power of Attorney
(Exhibit F) executed by the Salvadors to the Torcuators in order for the latter to build
a house on the land in question; and (c) an Irrevocable Special Power of Attorney
(Exhibit E) from the Salvadors to the Bernabes authorizing the latter to sell, transfer
and convey, with power of substitution, the subject lot.
The Torcuators thereafter had the plans of their house prepared and offered to pay
the Bernabes for the land upon delivery of the sale contract. For one reason or
another, the deed of sale was never consummated nor was payment on the said sale
ever effected. Subseuqently, the Bernabes sold the subject land to Leonardo
Angeles, a brother-in-law (Exh. "7"). The document however is not notarized. As a

result, the Torcuators commenced the instant action against the Bernabes and
Salvadors for Specific Performance or Rescission with Damages.
After trial, the court a quo rendered its decision, the decretal portion reads:-"From all the foregoing disquisition, especially since the plaintiffs did not suffer any
real damage (by January, 1987 they could have purchased another lot in Ayala
Alabang, and the architectural plans they commissioned Arch. Selga to prepare could
then be used by the plaintiffs), the complaint filed by the plaintiff spouses is
dismissed. Since the plaintiff acted with sincerity and without delay in asserting what
they believed to be their prerogatives, i.e., without any malice or desire to take
advantage of another, the counter-claim interposed by the Bernabes against the
Torcuator spouses is similarly dismissed.
Makati, Metro-Manila, August 20, 1991.5
The Court of Appeals dismissed the appeal, ruling that the sale between the
Bernabes and the Torcuators was tainted with serious irregularities and bad faith. The
appellate court agreed with the trial courts conclusion that the parties entered into the
contract with the intention of reneging on the stipulation disallowing the sale or
transfer of vacant lots in Ayala Alabang Village.
It also ruled that the parties deprived the government of taxes when they made it
appear that the property was sold directly by the Salvadors to the Torcuators. Since
there were actually two sales, i.e., the first sale between the Salvadors and the
Bernabes and the second between the Bernabes and Torcuators, taxes should have
6
been paid for both transfers.
The Court of Appeals denied petitioners
its Resolution7 dated June 15, 1998.

motion

for

reconsideration

in

Petitioners then filed the instant petition, averring that the appellate court erred in
dismissing their appeal on the strength of issues which were neither pleaded nor
proved. The conditions allegedly imposed by Ayala Corporation on the sale of lots in
Ayala Alabang Village were: "(a) that the lot-buyer shall deposit with Ayala
Corporation a cash bond (about P17,000.00 for the Salvadors) which shall be
refunded to him if he builds a residence thereon within two (2) years of purchase,
otherwise the deposit shall be forfeited; (b) architectural plans for any improvement
shall be approved by Ayala Corporation; and (c) no lot may be resold by the buyer
unless a residential house has been constructed thereon (Ayala Corporation keeps
the Torrens title in their (sic) possession.)"8
According to petitioners, the stipulation prohibiting the sale of vacant lots in Ayala
Alabang Village, adverted to by the appellate court in its decision as evidence that the
sale between the Bernabes and the Torcuators was tainted with serious irregularities,
was never presented or offered in evidence by any of the parties. Without such
stipulation having been presented, marked and offered in evidence, the trial court and
the appellate court should not have considered the same.
The appellate court allegedly also erred in declaring that the contract of sale subject
of the case is void, as it was intended to deprive the government of revenue since the
matter of taxes was not even mentioned in the appealed decision of the trial court.
Further, petitioners assert that the contract was a perfected contract of sale not a
mere contract to sell. The trial court thus erred in declaring that the contract was void
due only to petitioners failure to deliver the agreed consideration. Likewise, the fact

that the contract calls for the payment of the agreed purchase price in United States
Dollars does not result in the contract being void. The most that could be demanded,
in accordance with jurisprudence, is to pay the obligation in Philippine currency.
Petitioners also dispute the trial courts finding that they did not suffer any real
damage as a result of the transaction. On the contrary, they claim that respondents
refusal to transfer the property caused them actual and moral damages.
Respondents filed their Comment/Opposition (To the Petition for Certiorari) 9 dated
November 4, 1998 countering that petitioners knew of the condition prohibiting the
sale of vacant lots in Ayala Alabang Village as the same was annotated on the title of
the property which was submitted and adopted by both parties as their evidence. The
fact that the agreement required petitioners to construct a house in the name of the
Salvadors shows that petitioners themselves knew of the condition and
acknowledged its validity.
As regards petitioners contention that the Court of Appeals should not have ruled on
the matter of taxes due the government, respondents assert that the appellate court
has the power to review the entire case to determine the validity of the judgment of
the lower court. Thus, it may review even matters which were not raised on appeal.
Respondents refer to the circumstances surrounding the transaction as proof that the
parties entered into a mere contract to sell and not a contract of sale. Allegedly, the
memorandum containing the agreement of the parties merely used the term "offer."
The payment of the purchase price was ostensibly a condition sine qua non to the
execution of the deed of sale in favor of petitioners, especially since the Bernabes
came to the Philippines with the express purpose of selling the property and were
leaving for the United States as soon as they were paid. Moreover, petitioners were
required to construct a residential house on the property before it could be sold to
them in accordance with the condition imposed by Ayala Corporation.
Further, respondents maintain that the transaction was not consummated due to the
fault of petitioners who failed not only to prepare the necessary documentation but
also to pay the purchase price for the property. They also argue that the special
power of attorney executed by the Salvadors in favor of petitioners merely granted the
latter the right to construct a residential house on the property in the name of the
Salvadors. The original document was not even given to the Torcuators precisely
because they have not paid the purchase price.
Petitioners filed a Reply10 dated January 20, 1999 in reiteration of their arguments.
In the Resolution11 dated February 10, 1999, the parties were required to file their
respective memoranda. Accordingly, petitioners filed their Memorandum12 on April 19,
1999. On the other hand, in view of respondents disappearance without notice, the
Court resolved to dispense with their memorandum.13
The trial court denied petitioners complaint on three (3) grounds, namely: (1) the
alleged nullity of the contract between the parties as it violated Ayala Corporations
condition that the construction of a house is a prerequisite to any sale of lots in Ayala
Alabang Village; (2) non-payment of the purchase price; and (3) the nullity of the
contract as it called for payment in United States Dollars. To these reasons, the Court
of Appeals added a fourth basis for denying petitioners appeal and that is the alleged
nullity of the agreement because it deprived the government of taxes.

An analysis of the facts obtaining in this case leads us to affirm the assailed decisions
although from a slightly different but related thrust.
Let us begin by characterizing the agreement entered into by the parties, i.e., whether
the agreement is a contract to sell as the trial court ruled, or a contract of sale as
petitioners insist.
The differences between a contract to sell and a contract of sale are well-settled in
jurisprudence. As early as 1951, we held that in a contract of sale, title passes to the
buyer upon delivery of the thing sold, while in a contract to sell, ownership is reserved
in the seller and is not to pass until the full payment of the purchase price is made. In
the first case, non-payment of the price is a negative resolutory condition; in the
second case, full payment is a positive suspensive condition. Being contraries, their
effect in law cannot be identical. In the first case, the vendor has lost and cannot
recover the ownership of the land sold until and unless the contract of sale is itself
resolved and set aside. In the second case, however, the title remains in the vendor if
the vendee does not comply with the condition precedent of making payment at the
14
time specified in the contract.
In other words, in a contract to sell, ownership is retained by the seller and is not to
pass to the buyer until full payment of the price or the fulfillment of some other
conditions either of which is a future and uncertain event the non-happening of which
is not a breach, casual or serious, but simply an event that prevents the obligation of
15
the vendor to convey title from acquiring binding force.
We have carefully examined the agreement between the parties and are far from
persuaded that it was a contract of sale.
Firstly, the agreement imposed upon petitioners the obligation to fully pay the agreed
purchase price for the property. That ownership shall not pass to petitioners until they
have fully paid the price is implicit in the agreement. Notably, respondent Remigio
Bernabe testified, without objection on the part of petitioners, that he specifically
informed petitioners that the transaction should be completed, i.e., that he should
receive the full payment for the property, before he left for the United States on
October 14, 1986.16
Moreover, the deed of sale would have been issued only upon full payment of the
purchase price, among other things. Petitioner Mario Torcuator acknowledged this
fact when he testified that the deed of sale and original special power of attorney
were only to be delivered upon full payment of the purchase price. 17
As correctly observed by the trial court, the Salvadors did not execute a deed of sale
in favor of petitioners, and instead executed a special power of attorney authorizing
the Bernabes to sell the property on their behalf, in order to afford the latter a
measure of protection that would guarantee full payment of the purchase price before
any deed of sale in favor of petitioners was executed.
Remarkably, the records are bereft of any indication that petitioners ever attempted to
tender payment or consign the purchase price as required by law.
18
The Complaint filed by petitioners makes no mention at all of a tender of payment or
consignation having been made, much less that petitioners are willing and ready to
pay the purchase price. Petitioners averments to the effect that they have sufficient
funds to pay for the property and have even applied for a telegraphic transfer from
their bank account to the Bernabes bank account, uncoupled with actual tender and
consignation, are utterly self- serving.

The trial court correctly noted that petitioners should have consigned the amount due
in court instead of merely sending respondents a letter expressing interest to push
through with the transaction. Mere sending of a letter by the vendee expressing the
intention to pay without the accompanying payment is not considered a valid tender of
payment. Consignation of the amount due in court is essential in order to extinguish
19
the obligation to pay and oblige the vendor to convey title.

by the party charged, or by his agent; evidence, therefore, of the agreement cannot
be received without the writing, or a secondary evidence of its contents:

On this score, even assuming that the agreement was a contract of sale, respondents
may not be compelled to deliver the property and execute the deed of absolute sale.
In cases such as the one before us, which involve the performance of an obligation
and not merely the exercise of a privilege or right, payment may be effected not by
mere tender alone but by both tender and consignation. The rule is different in cases
which involve an exercise of a right or privilege, such as in an option contract, legal
redemption or sale with right to repurchase, wherein mere tender of payment would
be sufficient to preserve the right or privilege. 20 Hence, absent a valid tender of
payment and consignation, petitioners are deemed to have failed to discharge their
obligation to pay.

....

Secondly, the parties clearly intended the construction of a residential house on the
property as another suspensive condition which had to be fulfilled. Ayala Corporation
retained title to the property and the Salvador spouses were precluded from selling it
unless a residence had been constructed thereon. The Ayala stipulation was a
pervasive, albeit unwritten, condition in light of which the transaction in this case was
negotiated. The parties undoubtedly understood that they had to contend with the
Ayala stipulation which is why they resorted to the execution of a special power of
attorney authorizing petitioners to construct a residential building on the property in
the name of the Salvadors. Had the agreement been a contract of sale as petitioners
would impress upon the Court, the special power of attorney would have been entirely
unnecessary as petitioners would have had the right to compel the Salvadors to
transfer ownership to them.21
Thirdly, there was neither actual nor constructive delivery of the property to
petitioners. Apart from the fact that no public document evidencing the sale was
executed, which would have been considered equivalent to delivery, petitioners did
not take actual, physical possession of the property. The special power of attorney,
which petitioners count on as evidence that they took possession of the property, can
by no means be interpreted as delivery or conveyance of ownership over the
property. Taken by itself, in fact, the special power of attorney can be interpreted as
tied up with any number of property arrangements, such as a contract of lease or a
joint venture. That is why respondents, especially the Salvadors, never intended to
deliver the title to petitioners and conformably with that they executed only a special
power of attorney. Indeed, continuously looming large as an essentiality in their
judgment to dispose of their valuable property is the prior or contemporaneous receipt
of the commensurate price therefor.
This brings us to the application of the Statute of Frauds. Article 1403 of the Civil
Code provides:
Art. 1403. The following contracts are unenforceable unless they are ratified:

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In
the following cases an agreement hereafter made shall be unenforceable by action,
unless the same, or some note or memorandum thereof, be in writing, and subscribed

(e) An agreement for the leasing for a longer period than one year, or for the sale of
real property or an interest therein;

The term "Statute of Frauds" is descriptive of statutes which require certain classes of
contracts, such as agreements for the sale of real property, to be in writing. It does
not deprive the parties the right to contract with respect to the matters therein
involved, but merely regulates the formalities of the contract necessary to render it
enforceable. The purpose of the statute is to prevent fraud and perjury in the
enforcement of obligations depending for their evidence on the unassisted memory of
witnesses by requiring certain enumerated contracts and transactions to be
evidenced by a writing signed by the party to be charged. 22 The written note or
memorandum, as contemplated by Article 1403 of the Civil Code, should embody the
essentials of the contract.23
In the instant case, petitioners present as written evidence of the agreement the
special power of attorney executed in their favor by the Salvadors and the summary
of agreement24 allegedly initialed by respondent Remigio Bernabe. These documents
do not suffice as notes or memoranda as contemplated by Article 1403 of the Civil
Code.
The special power of attorney does not contain the essential elements of the
purported contract and, more tellingly, does not even refer to any agreement for the
sale of the property. In any case, it was rendered virtually inoperable as a
consequence of the Salvadors adamant refusal to part with their title to the property.
The summary of agreement, on the other hand, is fatally deficient in the fundamentals
and ambiguous in the rest of its terms. For one, it does not mention when the alleged
consideration should be paid and transfer of ownership effected. The document does
not even refer to a particular property as the object thereof. For another, it is unclear
whether the supposed purchase price is P600.00, P590.00 or P570.00/square meter.
The other conditions, such as payment of documentary stamp taxes, capital gains tax
and other registration expenses, are likewise uncertain.
Conformably with Article 140525 of the Civil Code, however, respondents acceptance
of the agreement foisted by petitioners on them is deemed to have arisen from their
26
failure to object to the testimony of petitioner Mario Torcuator on the matter and
27
their cross-examination of said petitioner thereon.
Be that as it may, considering our ruling that the agreement was a contract to sell,
respondents were not obliged to convey title to the property before the happening of
two (2) suspensive conditions, namely: full payment of the purchase price and
construction of a residence on the property. They were acting perfectly within their
right when they considered the agreement cancelled after unsuccessfully demanding
payment from petitioners.
That said, the question of whether the transaction violated the Uniform Currency Act,
Republic Act No. 529, is already moot. The contract having been cancelled, any
resolution regarding the validity of the stipulation requiring payment of the purchase
price in foreign currency would not serve any further purpose.

Petitioners next insist that the condition requiring the construction of a house on any
residential lot located in Ayala Alabang Village before it can be sold was never
submitted in evidence and was never testified to by any of the witnesses presented
during the trial. Hence, the trial court and the Court of Appeals should not have used
this as basis for its denial of petitioners cause.

- And which for purpose of identification, your Honor, may we request that this letter
addressed to Ayala Corporation and signed by Diosdado Salvador and Lourdes
Salvador be marked as Exhibit "K" for the plaintiff, your Honor.

This assertion, however, is completely untrue. While the Formal Offer of Evidence28 of
petitioners, respondentsOffer of Exhibits,29 and the Formal Offer of Evidence (On
Rebuttal)30 of petitioners make no mention of any stipulation prohibiting the sale of
vacant lots in Ayala Alabang Village, respondents maintain that petitioners are fully
aware of the prohibition as the conditions imposed by Ayala Corporation on the sale
of Ayala Alabang lots are inscribed on the title of the property which was submitted in
evidence by both parties.

- Mark it.

Despite petitioners remonstration that the inscriptions on the title are "hardly
legible,"31 we are inclined to give credence to respondents account. It is quite
implausible that a lawyer such as petitioner Mario Torcuator would not take the
precaution of checking the original title of the property with the Registry of Deeds to
ascertain whether there are annotations therein that would prejudice his position.
More importantly, petitioner Mario Torcuator himself testified on the existence of the
condition prohibiting the sale of vacant lots in Ayala Alabang Village, viz:
ATTY. J. DE DIOS, JR.
Q -Mr. witness aside from this summary of agreement which has been marked as
Exhibit "J" do you still have a document relating to his transaction between you and
the defendant?
A -Yes, sir, as I indicated in my earlier testimony there was supposed to be a letter
addressed to Ayala Corporation which defendant Salvador should sign in order to
request Ayala to deliver to me the TCT covering the lot subject of the transaction.
Q -This letter that you are referring to do you still have a copy of that letter?
A -Yes, sir.
Q -I am showing to you a xerox copy of a letter addressed to Ayala Corporation and
signed by Diosdado and Lourdes Salvador, can you please explain to this Court what
is the relation of this document with what you are referring to executed by the
defendant Diosdado Salvador and Lourdes Salvador addressed to Ayala
Corporation?
A -This is the letter of Mr. Salvador, sir, signed in my presence.
Q -Can you tell the Court where is the original of this document?
A -All of the original copies of that letter are with the defendant Bernabe, sir.
Q -Can you tell the Court how did you come to have a xerox copy of this document?
A -Yes, because as soon as the copies of the documents for the transaction were
signed by Mrs. Salvador who was then in New York, they were sent by the spouses to
the daughter of Mr. Salvador who in turn told me that all the originals are supposed to
be delivered to Mr. Bernabe and I was given a xerox copy of the same.
ATTY. J. DE DIOS, JR.

COURT

...
ATTY. J. DE DIOS, JR.
- Mr. Witness, this letter appears to be, does it contain any date? Can you tell this
Court why this document does not contain the date?
ATTY. A. MAGNO
- Incompetent, your Honor, because he was not the one who made that document.
COURT
- Let him explain.
ATTY. MAGNO
- Yes, your Honor.
ATTY. J. DE DIOS, JR.
- Because, your Honor, there is a requirement by Ayala Corporation that no lot or
property may be transferred until there is a complete building or structure built
on the lot and so what I was supposed to get only from Mr. Salvador, aside
from the deed of absolute sale, is merely a special power of attorney to
authorize me to construct my house in the lot and upon completion of the
house that is the time that I would be allowed by Ayala Corporation to transfer
the property in my name. Therefore, the letter requesting Ayala Corporation to
release the title in the name of Mr. Salvador to was deliberately undated because it
would be only dated when I completed the house. 32 [Emphasis supplied]
The fact that petitioners agreed to construct a residential house on the property in the
name of the Salvadors further proves that they knew that a direct sale to them of a
vacant lot would contravene the condition imposed by Ayala Corporation on the
original buyers of lots in Ayala Alabang Village. Hence, they agreed on the elaborate
plan whereby the Salvador spouses, in whose names the property was registered,
would execute a special power of attorney in favor of petitioners authorizing the latter
to construct a residential house on the property in the name of the Salvadors. The
records even indicate that the documents to effectuate this plan were prepared by
petitioner Mario Torcuator himself.
In his testimony, for instance, petitioner Mario Torcuator stated that: "[B]ased on our
discussion, your Honor, from the P600 per square meter price, we agreed upon, they
agreed to give me a rebate of 5% in the form of discount because there was a
problem in the documentation which I tried to solve which are the papers in favor of
Bernabe missing. I suggested to Mr. Bernabe that we prepare a new set of document
which will be signed by Mr. Salvador as the previous owner and because of that I will
be getting in effect a 5% discount as my commission."33
This was confirmed by respondent Remigio Bernabe:

Q - Now, where there any documents presented to you during that

occasion?
A - Yes, sir.
Q - By whom?
A - Mr. Torcuator prepared some documents for me to sign.
Q - And do you recall what was that documents?
A - Yes, sir. Mr. Torcuator prepared a documents for cancellation
of the deed of sale of Mr. Salvador to Remigio Bernabe, and cancellation also of the
irrevocable power of attorney of Salvador to Bernabe, and power of attorney of
Salvador authorizing Remigio Bernabe to sell the property and power of attorney of
Salvador given to Mr. Torcuator.34
Petitioners therefore cannot feign ignorance of the condition imposed by Ayala
Corporation.
We do not agree, however, with the trial court and appellate courts ruling that the
transaction between the parties was void for being contrary to good customs and
morals.35
In order to declare the agreement void for being contrary to good customs and
morals, it must first be shown that the object, cause or purpose thereof contravenes
the generally accepted principles of morality which have received some kind of social
and practical confirmation.36
We are not inclined to rule that the transaction in this case offended good customs
and morals. It should be emphasized that the proscription imposed by Ayala
Corporation was on the resale of the property without a residential house having been
constructed thereon. The condition did not require that the original lot buyer should
himself construct a residential house on the property, only that the original buyer may
not resell a vacant lot. In view of our finding that the agreement between the parties
was a mere contract to sell, no violation of the condition may be inferred from the
transaction as no transfer of ownership was made. In fact, the agreement in this case
that petitioners will construct a residential house on the property in the name of the
Salvadors (who retained ownership of the property until the fulfillment of the twin
conditions of payment and construction of a residence) was actually in compliance
with or obeisance to the condition.
Finally, the issue of whether the agreement violated the law as it deprived the
government of capital gains tax is wholly irrelevant. Capital gains taxes, after all, are
only imposed on gains presumed to have been realized from sales, exchanges or
dispositions of property. Having declared that the contract to sell in this case was
aborted by petitioners failure to comply with the twin suspensive conditions of full
payment and construction of a residence, the obligation to pay taxes never arose.
Hence, any error the appellate court may have committed when it passed upon the
issue of taxes despite the fact that no evidence on the matter was pleaded, adduced
or proved is rather innocuous and does not warrant reversal of the decisions under
review.
WHEREFORE, the instant petition is DENIED. Costs against petitioners.
SO ORDERED.

G.R. No. 169501

June 8, 2007

B.E. SAN DIEGO, INC., petitioner,

vs.
ROSARIO T. ALZUL, respondent.

The trial court ruled in [respondents] favor in the rescission case. The decision was
even affirmed by this [appellate] Court. Yu brought his cause before the Supreme
Court in a Petition for Review, but this was likewise denied.
On February 17, 1989, [petitioner] notified [respondent] that Contract to Sell No. 867
was declared rescinded and cancelled. On April 28, 1989, the subject lots were sold
to spouses Carlos and Sandra Ventura who were allegedly surprised to find the
annotation of lis pendens in their owners duplicate title.

DECISION
VELASCO, JR., J.:
The Case
1

This Petition for Review on Certiorari under Rule 45 questions the February 18, 2005
Decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 81341, which granted
respondent Alzul the right to pay the balance of the purchase price within five (5) days
from receipt of the CA Decision despite the lapse of the original period given to said
party through the final Resolution of this Court in an earlier case. The CA ruling
reversed the September 18, 2003 Resolution3 and December 2, 2003 Order4 of the
Office of the President (OP) in O.P. Case No. 01-1-097, which upheld the dismissal of
respondent Alzuls complaint for consignation and specific performance before the
Housing and Land Use Regulatory Board (HLURB) in HLURB Case No. REM-A99097-0167. Likewise challenged is the August 31, 2005 CA Resolution5 rejecting
petitioners Motion for Reconsideration.

On May 8, 1990, the Ventura spouses filed an action for Quieting of Title with Prayer
for Cancellation of Annotation and Damages before the Regional Trial Court of
Malabon. The trial court ruled in favor of the Ventura spouses. On appeal before this
[appellate] Court, however, the decision was reversed on November 27, 1992, as
follows:

The Facts

"WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE, and
the complaint therein is ordered dismissed. Transfer Certificates of Title Nos. N-1922,
N-1923, N-1924, and N-1925, all of the Register of Deeds of Metro Manila, District III,
Malabon Branch, in the names of plaintiffs-appellees Carlos N. Ventura and Sandra
L. Ventura are hereby declared null and void, and the titles of ownership reinstated in
the name of B.E. San Diego, Inc. with the corresponding notices of lis pendens
therein annotated in favor of defendant-appellant until such time that ownership of the
subject parcels of land is transferred to herein defendant-appellant Rosario Alzul.
Costs against plaintiff-appellees.

The facts culled by the CA are as follows:

SO ORDERED."

On February 10, 1975, [respondent] Rosario T. Alzul purchased from [petitioner] B.E.
San Diego, Inc. four (4) subdivision lots with an aggregate area of 1,275 square
meters located at Aurora Subdivision, Maysilo, Malabon. These lots, which are now
subject of this petition, were bought through installment under Contract to Sell No.
867 at One Hundred Pesos (100.00) per square meter, with a downpayment [sic] of
Twelve Thousand Seven Hundred Fifty Pesos (12,750.00), and monthly
installments of One Thousand Two Hundred Forty-Nine Pesos (1,249.50). The
interest agreed upon was 12 percent (12%) per annum until fully paid, thus, the total
purchase price was Two Hundred Thirty Seven Thousand Six Hundred Sixty Pesos
(237,660.00).

Upon filing of an appeal to the Supreme Court docketed as GR No. 109078, the
above decision was affirmed on December 26, 1995. A motion for reconsideration
was filed, but this was denied by the Highest Tribunal on February 5, 1996.
On June 17, 1996, a resolution was issued by the Supreme Court, ordering, as
follows:

[Respondent] took immediate possession of the subject property, setting up a

perimeter fence and constructing a house thereon.

"We, however, agree with the observation made by movants that no time limit was set
by the respondent Court of Appeals in its assailed Decision for the private respondent
herein, Rosario Alzul, to pay B.E. San Diego, Inc. the original owner of the properties
in litigation. To rectify such oversight, private respondent Rosario T. Alzul is hereby
given a non-extendible period of thirty (30) days from entry of judgment, within which
to make full payment for the properties in question. xxx" (Emphasis supplied.)

On July 25, 1977, [respondent] signed a "Conditional Deed of Assignment and

Transfer of Rights" which assigned to a certain Wilson P. Yu her rights under the
Contract to Sell. [Petitioner] was notified of the execution of such deed. Later on, the
Contract to Sell in [respondents] name was cancelled, and [petitioner] issued a new
one in favor of Yu although it was also denominated as "Contract to Sell No. 867".

On July 12, 1996, an Entry of Judgment was issued. In an attempt to comply with the
Supreme Courts directive, herein [respondent] tried to serve payment upon
[petitioner] on August 29, 1996, August 30, 1996 and September 28, 1996. On all
these dates, however, [petitioner] allegedly refused to accept payment from
[respondent].

On July 4, 1979, [respondent] informed [petitioner] about Yus failure and refusal to
pay the amounts due under the conditional deed. She also manifested that she would
be the one to pay the installments due to respondent on account of Yus default.

On November 11, 1996, [respondent] filed a Manifestation in GR No. 109078

informing the Supreme Court that [petitioner], on three (3) occasions, refused to
accept [her] payment of the balance in the amount of 187,380.00. On January 29,
1997, a Resolution was issued by the Supreme Court referring the case to the court
of origin for appropriate action, on account of [respondents] manifestation.

On August 25, 1980, [respondent] commenced an action for rescission of the

conditional deed of assignment against Yu before the Regional Trial Court of
Caloocan City. Subsequently, on September 30, 1985, [respondent] caused the
annotation of notices of lis pendens on the titles covering the subject lots.

On October 21, 1997, [respondents] counsel wrote a letter to [petitioner] citing the
latters refusal to accept her payment on several occasions. It was also mentioned

therein that due to its refusal, [respondent] would just consign the balance due to
[petitioner] before the proper judicial authority.
On January 14, 1998, a reply was sent by [petitioner] through a certain Flora San
Diego. [Respondents] request was rejected on account of the following:
1. We have long legally rescinded the sale in her favor in view of her failure to pay the
monthly amortization as per contract.
2. She sold her rights to Mr. Wilson Yu who failed to pay his monthly amortizations,
too.
3. We are not and have never been a part of the case you are alluding to hence we
cannot be bound by the same.
4. The property in question is now under process to be reconveyed to us as ordered
by the court by virtue of a compromised (sic) agreement entered into in Civil Case No.
2655 MN of the Malabon RTC Branch entitled Spouses Carlos Ventura and Sandra
Ventura vs. B.E. San Diego, Inc. xxx
Thinking that an action for consignation alone would not be sufficient to allow for the
execution of a final judgment in her favor, [respondent] decided to file an action for
consignation and specific performance against [petitioner] before the Housing and
Land Use Regulatory Board on March 12, 1998. The complaint, docketed as REM031298-10039, prayed that a) [respondent] be considered to have fully paid the total
purchase price of the subject properties; b) TCT Nos. N-155545 to 48 which were
declared void in CA GR No. L-109078 be cancelled; c) new certificates of title over
the subject properties be issued in the name of [respondent]; and d) [petitioner] be
ordered to reimburse [respondent] the sum of Fifty Thousand Pesos (50,000.00) as
attorneys fees and litigation expenses.
On July 12, 1999, a decision was rendered by the HLURB through Housing and Land
Use Arbiter Dunstan T. San Vicente. It was held, thus:
"The purported "consignation" in this case is thus of no moment, inasmuch as the
amount allegedly due was not even deposited or placed at the disposal of this Office
by the complainant.
In any event, we agree with [petitioner] that even if the complainant had actually
made the consignation of the amount, such consignation is still ineffective and void
for having been done long after the expiration of the non-extendible period set forth in
the 17 June 1996 Supreme Court Resolution that expired on 20 September 1996.
WHEREFORE, Premises Considered, a judgment is hereby rendered DISMISSING
the complaint. Cost against complainant.
IT (sic) SO ORDERED."
Aggrieved by the above decision, [respondent] filed a Petition for Review before the
HLURBs First Division. On March 17, 2000, a decision was rendered dismissing the
petition for lack of merit, and affirming the decision dated July 12, 1999. [Respondent]
filed a Motion for Reconsideration, but this was denied on July 31, 2001.
[Respondent] then filed an appeal to the Office of the President. This was, however,
dismissed on June 2, 2003 for having been filed out of time. Again, [respondent]
moved for its reconsideration. On September 18, 2003, the Office of the President
gave due course to [respondents] motion, and resolved the motion according to its

merits. The single question resolved was whether or not [respondents] offer of
consignation was correctly denied by the HLURB. Said office ruled in the affirmative,
and We quote:
"From the foregoing, it is evident that there was no valid consignation of the balance
of the purchase price. The 30-day non-extendible period set forth in the 17 June 1996
resolution had already expired on 20 September 1996. The HLURB is therefore
justified in refusing the consignation, otherwise it would be accused of extending the
period beyond that provided by the Supreme Court. A valid consignation is effected
when there is an actual consignation of the amount due within the prescribed period
(St. Dominic Corporation vs. Intermediate Appellate Court, 138 SCRA 242). x x x
WHEREFORE, premises considered, the appeal is hereby DISMISSED for lack of
merit. x x x"
[Respondent] filed a Motion for Reconsideration [of] the above Resolution, but this
was denied with finality on December 2, 2003.6
The Ruling of the Court of Appeals
Respondent Alzul brought before the CA a petition for certiorari docketed as CA-G.R.
SP No. 67637, ascribing grave abuse of discretion to the OP in dismissing her appeal
in O.P. Case No. 01-1-097 and affirming the March 17, 2000 Decision7 and July 31,
2001 Resolution8 of the HLURB First Division in HLURB Case No. REM-A-9909070167.
On February 18, 2005, the CA rendered its assailed Decision reversing the
September 18, 2003 Resolution and December 2, 2003 Order of the OP, the fallo of
which reads:
WHEREFORE, in the higher interest of justice, the assailed Decision, Resolution and
Order dated March 17, 2000, September 18, 2003 and December 2, 2003,
respectively, are hereby REVERSED and SET ASIDE. Accordingly, [respondent
Alzul] is hereby ordered to pay [petitioner B.E. San Diego, Inc.] the balance due for
the sale of the subject four parcels of land within five (5) days from receipt of this
decision. [Petitioner B.E. San Diego, Inc.], on the other hand, is ordered to accept
such payment from [respondent Alzul], after which, the corresponding Deed of Sale
must be issued.
SO ORDERED.

The CA agreed with the HLURB that no valid consignation was made by respondent
but found that justice would be better served by allowing respondent Alzul to effect
the consignation, albeit belatedly. It cited the respondents right over the disputed lots
as confirmed by this Court in G.R. No. 109078, which, if taken away on account of the
delay in completing the payment, would amount to a grave injustice.
Moreover, the CA pointed out that respondents counsel concededly lacked the
vigilance and competence in defending his clients right when he failed to consign the
balance on time; nonetheless, such may be disregarded in the interest of justice. It
considered the failure of respondents counsel to avail of the remedy of consignation
as a procedural lapse, citing the principle that where a rigid application of the rules
will result in a manifest failure or miscarriage of justice, technicalities can be ignored.
A copy of the February 18, 2005 CA Decision was received by respondent Alzul
through her counsel on February 24, 2005.

On March 4, 2005, respondent filed a Compliance and Motion for Extension of Time
to Comply with the Decision of the [CA]10 praying that she be given an extension of
ten (10) days or from March 2 to 11, 2005 to comply with the CA Decision. On the
other hand, on March 8, 2005, petitioner filed its Motion for Reconsideration with
Opposition to Petitioners "Motion for Extension of Time to Comply with the Decision
11
of the [CA]."
Through its assailed August 31, 2005 Resolution, the CA denied petitioners Motion
for Reconsideration, and finding that respondent duly exerted efforts to comply with
its Decision and a valid consignation was made by respondent, it granted the
requested 10-day extension of time to comply with the February 18, 2005 Decision
and her motion for consignation. The fallo of said Resolution reads:
IN VIEW OF THE FOREGOING, the motion for extension to comply with the Decision
is hereby GRANTED, the motion for reconsideration is DENIED and the motion for
consignation is GRANTED. [Petitioner] B.E. San Diego, Inc. is hereby ordered to
receive the payment of [respondent] Rosario T. Alzul and to issue, in her favor, the
12
corresponding Deed of Sale.
The Issues
Hence, before us is the instant petition with the following issues:
1. Whether or not the Court of Appeals, in issuing the assailed 18 February 2005
Decision and 31 August 2005 Resolution in CA-G.R. SP No. 81341, has decided
questions of law in a way not in accord with law and with the applicable decisions of
the Honorable Court;
2. Whether or not the Court of Appeals committed patent grave abuse of discretion
and/or acted without or in excess of jurisdiction in granting respondent Alzuls
subsequent motion for extension of time to comply with the 18 February 2005
decision and motion for consignation; and
3. Whether or not the 18 February 2005 Decision and 31 August 2005 Resolution of
the Court of Appeals in CA-G.R. SP No. 81341 ought to be annulled and set aside,
13
for being contrary to law and jurisprudence.
The Courts Ruling
On the procedural issue, petitioner B.E. San Diego, Inc. assails the sufficiency of
respondent Alzuls CA petition as the latter, in violation of the rules, allegedly lacked
the essential and relevant pleadings filed with the HLURB and the OP.
Section 6 of Rule 43, 1997 Rules of Civil Procedure pertinently provides:
SEC. 6. Contents of the petition.The petition for review shall x x x (c) be
accompanied by a clearly legible duplicate original or a certified true copy of the
award, judgment, final order or resolution appealed from, together with certified true
copies of such material portions of the record referred to therein and other
supporting papers; x x x (Emphasis supplied.)
The above proviso explicitly requires the following to be appended to a petition: 1)
clearly legible duplicate original or a certified true copy of the award, judgment, final
order, or resolution appealed from; 2) certified true copies of such material portions of
the record referred to in the petition; and 3) other supporting papers.

Obviously, the main reason for the prescribed attachments is to facilitate the review
and evaluation of the petition by making readily available to the CA all the orders,
resolutions, decisions, pleadings, transcripts, documents, and pieces of evidence that
are material and relevant to the issues presented in the petition without relying on the
case records of the lower court. The rule is the reviewing court can determine the
14
merits of the petition solely on the basis of the submissions by the parties without
the use of the records of the court a quo. It is a fact that it takes several months
before the records are elevated to the higher court, thus the resulting delay in the
review of the petition. The attachment of all essential and necessary papers and
documents is mandatory; otherwise, the petition can be rejected outright under Sec. 7
of Rule 43 of the Rules of Court, which provides:
Effect of failure to comply with requirements.The failure of the petitioner to comply
with any of the foregoing requirements regarding the payment of the docket and other
lawful fees, the deposit for costs, proof of service of the petition, and the contents of
and the documents which should accompany the petition shall be sufficient ground for
the dismissal thereof.
To prevent premature dismissals, the requirements under Sec. 6 on the contents of
the petition have to be elucidated.
First, there can be no question that only the award, judgment, or final order or
resolution issued by the lower court or agency and appealed from has to be certified
as true.
The second set of attachments refers to the "certified true copies of such material
portions of the record referred to therein."
Material is defined as "important; more or less necessary; having influence or effect;
going to the merits; having to do with matter, as distinguished from form." 15 Thus,
material portions of the records are those parts of the records that are relevant and
directly bear on the issues and arguments raised and discussed in the petition. They
may include any of the pleadings that are subject of any issue, documentary
evidence, transcripts of testimonial evidence, and parts of the records pertinent and
relevant to the grounds supporting the petition. The attachment of the material
portions is subject to the qualification that these are referred to or cited in the petition.
Thus, only the material parts specified in the petition have to be appended and that
would be sufficient compliance with the rule as to form.
It would be prudent however for the petitioner to attach all parts of the records which
are relevant, necessary, or important in whatever way to be able to reach the
resolution of the issues of the petition. The availability of such documents to the
ponente and members of a Division can easily provide the substance and support to
the merits of the grounds put forward by the petitioner. Moreover, the processing time
for the review and resolution of the petition is greatly abbreviated, thereby obviating
intolerable delays.
Lastly, it has to be explained whether the material portions of the records have to be
certified as true by the clerk of court or his/her duly authorized representative as
provided in Sec. 6 of Rule 43. If strictly required, the rule to require attachment of
certified true copies of the material portions will surely make the preparation of the
petition more tedious, cumbersome, and expensive. It should therefore be construed
that merely clear and legible copies of the material portions will suffice. The rules on
the different modes of appeal from the lower courts or quasi-judicial agencies to the
CA reveal that it is only Rule 43 that specifically states that the material portions to be

appended to the petition should be certified true copies. Rule 41 of course does not
require attachment of the pertinent records since the entire records are elevated to
the CA. Rule 42 on petition for review from the trial court in aid of its appellate
jurisdiction to the CA speaks of plain copies of the material portions of the record as
16
would support the allegations of the petition. Even Rule 45 on appeal by certiorari
from the CA to this Court simply speaks of material portions of the records without
indicating that these should be certified true copies. Rule 46 on original cases to this
Court only requires plain copies of the material portions of the records. Finally, Rule
65 on special civil actions requires only copies of relevant and pertinent pleadings
and documents.
From the foregoing premises, the inescapable conclusion is that only plain and clear
copies of the material portions of the records are required under Sec. 3 of Rule 43.
This finding is buttressed by our ruling in Cadayona v. CA, where it was held that only
judgments or final orders of the lower courts are needed to be certified true copies or
duplicate originals.17 There is no plausible reason why a different treatment or stricter
requirement should be applied to petitions under Rule 43.
The last requirement is the attachment of "other supporting papers." Again, it is only
in Rule 43 that we encounter the requirement of annexing "supporting papers" to the
petition. This can be interpreted to mean other documents, pictures, and pieces of
evidence not forming parts of the records of the lower court or agency that can bolster
and shore up the petition. While not so specified in Sec. 3 of Rule 43, it is inarguable
that said papers must also be relevant and material to the petition; otherwise, the
attachments would be mere surplusages and devoid of use and value.
Petitioner claims respondents petition in CA-G.R. SP No. 81341 failed to attach
material documents of the records of the HLURB and the OP. They cry foul that none
of the pleadings filed with the HLURB and the OP found their way into the CA petition.
It prays that the CA petition should have been dismissed under Sec. 7 of Rule 43 due
to the lack of needed attachments.
Petitioners postulation must fail.
Sec. 7 of Rule 43 does not prescribe outright rejection of the petition if it is not
accompanied by the required documents but simply gives the discretion to the CA to
determine whether such breach constitutes a "sufficient ground" for dismissal.
Apparently, petitioner was not able to convince the CA that the alleged missing
attachments deprived said court of the full opportunity and facility in examining and
resolving the petition. It has not been satisfactorily shown that the pleadings filed by
petitioner with the quasi-judicial agencies have material bearing or importance to the
CA petition. Such pleadings could have been attached to the comment of respondent
and hence, no prejudice would be suffered. Thus, the CA did not exercise its
discretion in an arbitrary or oppressive manner by giving due course to the petition.
In addition, it was noted in Cusi-Hernandez v. Diaz that the CA Revised Internal
Rules provide certain flexibility in the submission of additional documents:
When a petition does not have the complete annexes or the required number of
copies, the Chief of the Judicial Records Division shall require the petitioner to
complete the annexes or file the necessary number of copies of the petition before
docketing the case. Pleadings improperly filed in court shall be returned to the sender
18
by the Chief of the Judicial Records Division.

In Rosa Yap Paras, et al. v. Judge Ismael O. Baldado, et al., the Court preferred the
determination of cases on the merits over technicality or procedural imperfections so
that the ends of justice would be served better, thus:
At the same time, the Rules of Court encourage a reading of the procedural
requirements in a manner that will help secure and not defeat justice. Thus:
Section 6. Construction.These Rules shall be liberally construed in order to
promote their objective of securing a just, speedy and inexpensive disposition of
every action and proceeding.
As expressed in Alberto vs. Court of Appeals, "(w)hat should guide judicial action is
the principle that a party-litigant is to be given the fullest opportunity to establish the
merits of his complaint or defense rather than for him to lose life, liberty, honor or
property on technicalities. x x x (T)he rules of procedure should be viewed as mere
tools designed to facilitate the attainment of justice. Their strict and rigid application,
which would result in technicalities that tend to frustrate rather than promote
19
substantial justice, must always be eschewed."
Now we will address the main issuewhether respondent Alzul is still entitled to
consignation despite the lapse of the period provided by the Court in G.R. No. 109078
entitled Yu v. Court of Appeals.
Petitioner stresses the fact that respondent Alzul did not comply with this Courts June
17, 1996 Resolution20which gave a non-extendible period of thirty (30) days from
entry of judgment within which to make full payment for the subject properties. The
21
entry of judgment shows that the December 26, 1995 Resolution in G.R. No.
109078 became final and executory on July 2, 1996. Respondent Alzul received
through counsel a copy of the entry of judgment on August 21, 1996. Thus,
respondent had until September 20, 1996 within which to make the full payment.
After three (3) unsuccessful tenders of payment, respondent Alzul made no
consignation of the amount to the court of origin. It was only on March 12, 1998 or
about a year and a half later that respondent offered to consign said amount in an
action for consignment before the HLURB. Relying on the case of St. Dominic
Corporation v. Intermediate Appellate Court,22 petitioner strongly asserts that upon its
refusal to accept the tendered payment, respondent ought to have consigned it with
the court of origin also within the 30-day period or within a reasonable time thereafter.
Respondent failed to do this as she waited for a year and a half before instituting the
instant action for specific performance and consignment before the HLURB.
Moreover, petitioner argues that respondents delay of a year and a half to pursue full
payment must be regarded as a waiver on her part to claim whatever residual
remedies she might still have for the enforcement of the June 17, 1996 Resolution in
G.R. No. 109078.
Petitioner further contends that even if the action before the HLURB was made on
time, that is, within the 30-day period, still it is fatally defective as respondent did not
deposit any amount with the HLURB which violated the rules for consignment which
require actual deposit of the amount allegedly due with the proper judicial authority.
Premised upon these considerations, petitioner faults the appellate court for its grant
of respondents petition for review which nullified the denial by the HLURB Arbiter,
HLURB First Division, and the OP of respondents action.

On the other hand, respondent contends that the June 17, 1996 Resolution of this
Court should not be construed against her inability to effect payment due to the
obstinate and unjust refusal by petitionera supervening circumstance beyond her
control. Respondent underscores that within the 30-day period, she repeatedly
attempted to effect the payment to no avail. Moreover, the much delayed response of
23
petitioner embodied in its January 14, 1998 letter confirming its refusal was based
on untenable, baseless, and contrived grounds.
Moreover, she argues that the December 26, 1995 Resolution in G.R. No. 109078
granting her proprietary rights over the subject lots has long become final and
executory.
Anent the issue of laches and estoppel, respondent strongly contends that such do
not apply in the instant case as incontrovertible circumstances show that she has
relentlessly pursued the protection and enforcement of her rights over the disputed
lots for over a quarter of a century.
After a careful study of the factual milieu, applicable laws, and jurisprudence, we find
the petition meritorious.
Respondent Alzul was accorded legal rights over subject properties
In G.R. No. 109078, finding no reversible error on the part of the CA, we denied
Wilson P. Yus petition and affirmed the appellate courts ruling that as between
Wilson P. Yu, the Ventura spouses, petitioner B.E. San Diego, Inc., and respondent
Alzul, respondent has inchoate proprietary rights over the disputed lots. We upheld
the CA ruling declaring as "null and void" the titles issued in the name of the Ventura
spouses and reinstating them in the name of B.E. San Diego, Inc., with the
corresponding notices of lis pendens annotated on them in favor of respondent until
such time that ownership of the subject parcels of land is transferred to respondent
Rosario Alzul.

It is clear as day that respondent did not attempt nor pursue consignation within the
30-day period given to her in accordance with the prescribed legal procedure. She
received a copy of the entry of judgment on August 21, 1996 and had 30 days or until
September 20, 1996 to pay the balance of the purchase price to petitioner. She made
a tender of payment on August 29, 1996, August 30, 1996, and September 28, 1996,
all of which were refused by petitioner possibly because the latter is of the view that it
is not bound by the November 27, 1992 Decision in CA-G.R. CV No. 33619 nor the
December 26, 1995 Resolution in G.R. No. 109078, and the fact that respondent has
forfeited her rights to the lots because of her failure to pay the monthly amortizations.
It must be borne in mind however that a mere tender of payment is not enough to
extinguish an obligation. In Meat Packing Corporation of the Philippines v.
Sandiganbayan, we distinguished consignation from tender of payment and reiterated
the rule that both must be validly done in order to effect the extinguishment of the
obligation, thus:
Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment, and it generally
requires a prior tender of payment. It should be distinguished from tender of payment.
Tender is the antecedent of consignation, that is, an act preparatory to the
consignation, which is the principal, and from which are derived the immediate
consequences which the debtor desires or seeks to obtain. Tender of payment may
be extrajudicial, while consignation is necessarily judicial, and the priority of the first is
the attempt to make a private settlement before proceeding to the solemnities of
consignation. Tender and consignation, where validly made, produces the effect of
payment and extinguishes the obligation.25 (Emphasis supplied.)
There is no dispute that a valid tender of payment had been made by respondent.
Absent however a valid consignation, mere tender will not suffice to extinguish her
obligation and consummate the acquisition of the subject properties.

It is thus clear that we accorded respondent Alzul expectant rights over the disputed
lots, but such is conditioned on the payment of the balance of the purchase price.
Having been conceded such rights, respondent had the obligation to pay the
remaining balance to vest absolute title and rights of ownership in his name over the
subject properties.

In St. Dominic Corporation involving the payment of the installment balance for the
purchase of a lot similar to the case at bar, where a period has been judicially
directed to effect the payment, the Court held that a valid consignation is made when
the amount is consigned with the court within the required period or within a
reasonable time thereafter. We ruled as follows:

In our June 17, 1996 Resolution, we clearly specified thirty (30) days from entry of
judgment for respondent to promptly effect the full payment of the balance of the
purchase price for the subject properties, thus:

First of all, the decision of the then Court of Appeals which was promulgated on
October 21, 1981, is quite clear when it ordered the payment of the balance of the
purchase price for the disputed lot within 60 days "from receipt hereof" meaning from
the receipt of the decision by the respondents. It is an admitted fact that the
respondents received a copy of the decision on October 30, 1981. Hence, they had
up to December 29, 1981 to make the payment. Upon refusal by the petitioner to
receive such payment, the proper procedure was for the respondent to consign the
same with the court also within the 60-day period or within a reasonable time
thereafter.26 (Emphasis supplied.)

We however agree with the observation made by movants that no time limit was set
by the respondent Court of Appeals in its assailed Decision for the private respondent
herein, Rosario Alzul, to pay B.E. San Diego, Inc., the original owner of the properties
in litigation. To rectify such oversight, private respondent Rosario T. Alzul is hereby
given a non-extendible period of thirty (30) days from entry of judgment, within which
to make full payment for the properties in question.24 (Emphasis supplied.)
The non-compliance with our June 17, 1996 Resolution is fatal to respondent Alzuls
action for consignation and specific performance
Unfortunately, respondent failed to effect such full payment of the balance of the
purchase price for the subject properties.
No consignation within the 30-day period or at a reasonable time thereafter

The records also reveal that respondent failed to effect consignation within a
reasonable time after the 30-day period which expired on September 20, 1996.
Instead of consigning the amount with the court of origin, respondent filed her
November 11, 1996 Manifestation informing this Court of petitioners unjust refusal of
the tender of payment. We acted favorably to it by issuing our January 28, 1997
Resolution which ordered, thus:

Considering the manifestation, dated November 11, 1996, filed by counsel for private
respondent Rosario T. Alzul, stating that private respondent tendered to B.E. San
Diego, Inc. the payment of the sum of P187,380.00 representing the balance of the
purchase price of the properties which are the subject of this litigation, but B.E. San
Diego, Inc., refused to accept the same, the Court resolved to REFER the case to the
27
court of origin, for appropriate action.
Respondent still failed to take the cue by her inaction to consign the amount with the
court of origin. Undoubtedly, pursuing the action for consignation on March 12, 1998
or over a year after the Court issued its January 28, 1997 Resolution is way beyond a
"reasonable time thereafter." Indeed, we have accorded respondent, through said
Resolution, all the opportunity to pursue consignation with the court of origin and yet,
respondent failed to make a valid consignation. This is already inexcusable neglect
on the part of respondent.
No valid consignation made
We agree with petitioners assertion that even granting arguendo that the instant case
for consignation was instituted within the 30-day period or within a reasonable time
thereafter, it would still not accord respondent relief as no valid consignation was
made. Certainly, the records show that there was no valid consignation made by
respondent before the HLURB as she did not deposit the amount with the quasijudicial body as required by law and the rules.
Pertinently, the first paragraph of Article 1258 of the Civil Code provides that
"[c]onsignation shall be made bydepositing the things due at the disposal of judicial
authority, before whom the tender of payment shall be proved, in a proper case, and
the announcement of the consignation in other cases (emphasis supplied)."
It is true enough that respondent tendered payment to petitioner three (3) times
28
through a Solidbank Managers Check No. 1146 in the amount of PhP 187,380 on
August 29 and 30, 1996 and September 28, 1996. It is true likewise that petitioner
refused to accept it but not without good reasons. Petitioner was not impleaded as a
party by the Ventura spouses in the Malabon City RTC case for quieting of title
against Wilson Yu nor in the appealed case to the CA nor in G.R. No. 109078.
Petitioner is of the view that there was no jurisdiction acquired over its person and
hence, it is not bound by the final judgment and June 17, 1996 Resolution in G.R. No.
109078. Secondly, petitioner believed that respondent Alzul has lost her rights over
the subject lot by the rescission of the sale in her favor due to the latters failure to
pay the installments and also as a result of her transferees failure to pay the agreed
amortizations. And even in the face of the refusal by petitioner to accept tender of
payment, respondent is not left without a remedy. It is basic that consignation is an
available remedy, and respondent, with the aid of her counsel, could have easily
availed of such course of action sanctioned under the Civil Code.
Considering the tenor of our June 17, 1996 Resolution, respondent ought to have
consigned the amount with the court of origin within the non-extendible period of 30
days that was accorded her or within a reasonable time thereafter.
As cited earlier, consignation is the act of depositing the thing due with the court or
judicial authorities whenever the creditor cannot accept or refuses to accept payment
and it generally requires a prior tender of payment. 29 It is of no moment if the refusal
to accept payment be reasonable or not. Indeed, consignation is the remedy for an
unjust refusal to accept payment. The first paragraph of Art. 1256 of the Civil Code

precisely provides that "[i]f the creditor to whom tender of payment has been
made refuses without just cause to accept it, the debtor shall be released from
responsibility by the consignation of the thing or sum due (emphasis supplied)."
The proper and valid consignation of the amount due with the court of origin, which
shall judicially pronounce the validity of the consignation and declare the debtor to be
released from his/her responsibility, shall extinguish the corresponding obligation.
Moreover, in order that consignation may be effective, the debtor must show that: (1)
there was a debt due; (2) the consignation of the obligation had been made because
the creditor to whom tender of payment was made refused to accept it, or because
s/he was absent or incapacitated, or because several persons claimed to be entitled
to receive the amount due or because the title to the obligation had been lost; (3)
previous notice of the consignation had been given to the person interested in the
performance of the obligation; (4) the amount due was placed at the disposal of the
court; and (5) after the consignation had been made, the person interested was
notified of the action.30
Respondent did not comply with the provisions of law particularly with the fourth and
fifth requirements specified above for a valid consignation. In her complaint for
consignation and specific performance, respondent only prayed that she be allowed
to make the consignation without placing or depositing the amount due at the disposal
of the court of origin. Verily, respondent made no valid consignation.
The rights of petitioner and respondent over the 1,275 square meter lot subject of this
petition will be determined by the significance and effects of the December 26, 1995
Resolution rendered in G.R. No. 109078 entitled Yu v. Court of Appeals. 31
The subject matter of G.R. No. 109078 is the November 27, 1992 Decision rendered
in CA-G.R. CV No. 33619 entitled Carlos N. Ventura and Sandra L. Ventura v.
Rosario T. Alzul, et al., the fallo of which reads:
WHEREFORE, the appealed decision is hereby REVERSED AND SET ASIDE, and
the complaint therein is ordered dismissed. Transfer Certificates of Title Nos. N-1922,
N-1923, N-1924, and N-1925, all of the Register of Deeds of Metro Manila, District III,
Malabon Branch, in the names of plaintiffs-appellees Carlos N. Ventura and Sandra
L. Ventura are hereby declared null and void, and the titles of ownership reinstated in
the name of B.E. San Diego, Inc., with the corresponding notices of lis pendens
therein annotated in favor of defendant-appellant until such time that ownership of the
subject parcels of land is transferred to herein defendant-appellant Rosario Alzul.
Costs against plaintiff-appellees.
SO ORDERED.32
On December 26, 1995, this Court issued the Resolution in G.R. No. 109078 wherein
it found no reversible error in the actions of the CA in its aforequoted disposition in
CA-G.R. CV No. 33619, and resolved to deny the petition for lack of merit. On
February 5, 1996, this Court denied with finality the Motion for Reconsideration filed
by petitioner Wilson Yu.
However, on June 17, 1996, this Court, in resolving the Motion for Reconsideration of
private respondents Spouses Carlos and Sandra Ventura, granted respondent Alzul
"a non-extendible period of thirty (30) days from entry of judgment, within which to
make full payment for the properties in question."33

The question iscan the Court, the CA, or the Malabon City RTC order petitioner
B.E. San Diego, Inc. to accept the tender of payment made by respondent Alzul?
Definitely, they cannot. The reason is that petitioner was not impleaded as a party in
the Malabon City RTC civil case, CA-G.R. CV No. 33619, nor in G.R. No. 109078 and
hence is not under the jurisdiction of said courts. What were determined and decided
in the CA Decision in CA-G.R. CV No. 33619 were the annulment of the titles of
spouses Carlos and Sandra Ventura, the reinstatement of said titles to the name of
petitioner, and the declaration that the ownership of the lots subject of said titles will
be transferred to respondent. There is no directive to respondent granting her the
right to pay the balance of the price to petitioner and, more importantly, there is no
order for petitioner to accept the payment. The dispositive or fallo of the decision is
what actually constitutes the judgment or resolution of the court that can be the
subject of execution. Where there is a conflict between the dispositive portion of the
decision and its body, the dispositive portion controls irrespective of what appears in
the body of the decision.34 Such being the case, petitioner is not duty bound to accept
any tender of payment from respondent precisely because such diktat is absent in the
fallo of the CA Decision which was affirmed by this Court in its December 26, 1995
Resolution in G.R. No. 109078.
The lacuna in the CA Decision was sought to be corrected in its June 17, 1996
Resolution in G.R. No. 109078 where respondent was given "a non-extendible period
of thirty (30) days from entry of judgment, within which to make full payment for the
properties in question." Pursuant to this Resolution, what was established was the
right of respondent to pay the balance of the purchase price within 30 days. Again,
the query iscan this Court, the CA, or the trial court compel petitioner to accept the
tender of payment from respondent?
The answer is no. The reason is obvious as jurisdiction was never acquired over the
person of petitioner. The action for quieting of title is characterized as quasi in rem. In
Realty Sales Enterprise, Inc. v. Intermediate Appellate Court, it was held that:
Suits to quiet title are not technically suits in rem, nor are they, strictly speaking, in
personam, but being against the person in respect of the res, these proceedings are
characterized as quasi in rem. (McDaniel v. McElvy, 108 So. 820 [1926].) The
judgment in such proceedings is conclusive only between the parties. (Emphasis
supplied.)35
Not being impleaded as a necessary or indispensable party, petitioner is not bound by
the dispositions in the CA Decision in CA-G.R. CV No. 33619 and the Resolutions of
this Court in G.R. No. 109078. Moreover, there is no explicit and clear directive for
petitioner to accept the payment of the balance of the price.
It is for this reason that respondent cannot ask for a writ of execution from the trial
court where the complaint was originally instituted as said court has no jurisdiction
over the person of petitioner. Even if a writ is issued, it should conform to the
judgment, and the fallo of the CA Decision does not impose the duty or obligation on
the part of petitioner to accept the payment from respondent. It is the settled doctrine
that a writ of execution must conform to the judgment and if it is different from or
36
exceeds the terms of the judgment, then it is a nullity.
In addition, Sec. 10, Rule 39 provides the procedure for execution of judgments for
specific acts, thus:

Sec. 10. Execution of judgments for specific act.(a) Conveyance, delivery of deeds,
or other specific acts; vesting title.If a judgment directs a party to execute a
conveyance of land or personal property, or to deliver deeds or other documents, or
to perform any other specific act in connection therewith, and the party fails to comply
within the time specified, the court may direct the act to be done at the cost of the
disobedient party by some other person appointed by the court and the act when so
done shall have like effect as if done by the party. If real or personal property is
situated within the Philippines, the court in lieu of directing a conveyance thereof may
by an order divest the title of any party and vest it in others, which shall have the force
and effect of a conveyance executed in due form of law.
The rule mentions the directive to a "party." It is therefore essential that the person
tasked to perform the specific act is impleaded as a party to the case. Otherwise, the
judgment cannot be executed. In the case at bar, petitioner should have been
impleaded as a party so as to compel it to accept payment and execute the deed of
sale over the disputed lots in favor of respondent. As petitioner was not impleaded as
a party, then the CA Decision in CA-G.R. CV No. 33619 as affirmed in G.R. No.
109078 cannot be enforced against it.
The cause of action available to respondent is to file an action for consignation
against petitioner which she did by registering a complaint for consignation before the
HLURB on March 12, 1998. Unfortunately, it was filed way beyond the 30-day period
which lapsed on September 20, 1996 or immediately thereafter. Because of the
failure of respondent to effect payment to petitioner within the 30-day period or soon
thereafter, her rights to buy the disputed lots have been forfeited, lost, and
extinguished.
In St. Dominic Corporation, which is substantially similar to the case at bar, we
explained the procedure when a party is directed to pay the balance of the purchase
price based on a court decision, thus:
First of all, the decision of the then Court of Appeals which was promulgated on
October 21, 1981, is quite clear when it ordered the payment of the balance of the
purchase price for the disputed lot within 60 days "from receipt hereof," meaning from
the receipt of the decision by the respondents. It is an admitted fact that the
respondents received a copy of the decision on October 30, 1981. Hence, they had
up to December 29, 1981 to make the payment. Upon refusal by the petitioner to
receive such payment, the proper procedure was for the respondent to consign the
same with the court also within the 60-day period or within a reasonable time
thereafter. The fact that efforts were made by the petitioner to reach an agreement
with the respondents after the promulgation of the decision did not in anyway affect
the finality of the judgment. This was clearly emphasized in the order of the appellate
court on May 6, 1982.
Secondly, even if we reckon the 60-day period from the date of the finality of the
decision as interpreted by the appellate court, such finality should be counted from
March 5, 1982, which was the date the decision became final as indicated in the entry
of judgment and not from August 26, 1982 which is the date the entry was made. The
date of a finality of a decision is entirely distinct from the date of its entry and the
delay in the latter does not affect the effectivity of the former as such is counted from
37
the expiration of the period to appeal. x x x
In the aforecited case, the lot owner was made a party to the case and the judgment
of the court was for the plaintiff to pay to the lot owner the balance of the purchase

price within 60 days from receipt of the Decision. Even assuming arguendo that
petitioner B.E. San Diego, Inc., though not a party in the complaint for quieting of title,
can be compelled to receive the purchase price, still, the refusal to receive the money
requires respondent Alzul to follow the procedure in St. Dominic Corporation and
consign the money with the court of origin. Having failed in this respect, respondents
rights to the property have been forfeited as a result of non-payment within the
prescribed time frame.
The CA relied on justice and equity in granting an additional period of five (5) days
from receipt of the February 18, 2005 Decision in CA-G.R. SP No. 81341 to pay the
balance due for the sale of the four lots. 38 While we commiserate with the plight of
respondent, the CA ruling will not prevail over the established axiom that equity is
applied only in the absence of and never against statutory law or judicial rules of
procedure.39 For all its conceded merits, equity is available only in the absence of law
and not as its replacement.40 Equity as an exceptional extenuating circumstance does
not favor, nor may it be used to reward, the indolent. This Court will not allow a party,
41
in guise of equity, to benefit from respondents own negligence.
In the light of the foregoing considerations, we find that the grant of respondents
petition in CA-G.R. SP No. 81341 and the recognition of the belated consignation of
the amount find no support nor basis in law, rule, or jurisprudence. The CAs holding
that the non-consignation of the amount due is merely a procedural lapse on the part
of respondents counsel is misplaced and is contrary to settled jurisprudence. Plainly,
respondents rights over the subject property are now lost and forfeited.
Having resolved the core issue on the validity of the consignation, the Court sees no
further need to discuss the remaining issues raised in the petition.
Petitioner to reimburse payments
However, respondent had made payments over the subject properties based on her
agreement with petitioner. So as not to enrich itself at the expense of respondent,
petitioner is obliged to reimburse respondent whatever amount was paid by her in
form of monthly amortizations. On the other hand, if respondent is in possession of
the subject properties, she and all persons claiming under her should surrender the
possession to petitioner.
WHEREFORE, the petition is GRANTED, the February 18, 2005 Decision and August
31, 2005 Resolution of the CA are REVERSED and SET ASIDE, and the September
18, 2003 Resolution and December 2, 2003 Order of the OP are hereby
REINSTATED. Petitioner is ORDERED to reimburse respondent whatever amount
the latter has paid for the subject properties per the Contract to Sell No. 867.
Petitioner is DECLARED to be the true and legal owner of Lots Nos. 5, 6, 7, and 8,
Block 18, Aurora Subdivision, Maysilo, Malabon City. The Register of Deeds of
Manila, District III, Malabon City Branch is ORDERED to cancel Transfer Certificates
of Title Nos. N-1922, N-1923, N-1924, and N-1925 in the names of spouses Carlos N.
Ventura and Sandra L. Ventura and register the same in the name of petitioner. The
lis pendens in favor of respondent annotated on the Transfer Certificates of Title over
the subject properties is hereby LIFTED, and the Register of Deeds for Metro Manila,
District III is DIRECTED to CANCEL said lis pendens. Respondent and all persons
claiming under her are ORDERED to vacate the subject properties and surrender
them to petitioner within sixty (60) days from finality of this judgment. No
pronouncement as to costs.
SO ORDERED.

G.R. No. 172259

December 5, 2006

SPS. JAIME BENOS and MARINA BENOS, petitioners,

vs.
SPS. GREGORIO LAWILAO and JANICE GAIL LAWILAO, respondents.
DECISION

YNARES-SANTIAGO, J.:
This petition for review under Rule 45 of the Rules of Court assails the December 5,
2005 Decision1 of the Court of Appeals in CA-G.R. SP No. 78845, affirming the
Judgment2 dated July 1, 2003 of the Regional Trial Court of Bontoc, Mountain
Province, Branch 35, in Civil Case No. 1091. The Regional Trial Court reversed the
Decision3dated November 14, 2002 of the Municipal Circuit Trial Court of Bauko,
Mountain Province in Civil Case No. 314, and ordered the consolidation of ownership
of subject property in the name of respondent-spouses Gregorio and Janice Gail
Lawilao. Also assailed is the March 17, 2006 Resolution4 denying petitioners motion
for reconsideration.
The antecedent facts are as follows:
On February 11, 1999, petitioner-spouses Jaime and Marina Benos ("the Benos
spouses") and respondent-spouses Gregorio and Janice Gail Lawilao ("the Lawilao
spouses") executed a Pacto de Retro Sale5 where the Benos spouses sold their lot
covered by Tax Declaration No. 25300 and the building erected thereon for
P300,000.00, one half of which was to be paid in cash to the Benos spouses and the
other half to be paid to the bank to pay off the loan of the Benos spouses which was
secured by the same lot and building. Under the contract, the Benos spouses could
redeem the property within 18 months from date of execution by returning the
contract price, otherwise, the sale would become irrevocable without necessity of a
final deed to consolidate ownership over the property in the name of the Lawilao
spouses.
After paying the P150,000.00, the Lawilao spouses immediately took possession of
the property and leased out the building thereon. However, instead of paying the loan
to the bank, Janice Lawilao restructured it twice. Eventually, the loan became due
and demandable.
On August 14, 2000, a son of the Benos spouses paid the bank P159,000.00
representing the principal and interest. On the same day, the Lawilao spouses also
went to the bank and offered to pay the loan, but the bank refused to accept the
payment. The Lawilao spouses then filed with the Municipal Circuit Trial Court a
petition6docketed as Civil Case No. 310 for consignation against the bank and
simultaneously deposited the amount of P159,000.00. Upon the banks motion, the
court dismissed the petition for lack of cause of action.
Subsequently, the Lawilao spouses filed with the Municipal Circuit Trial Court a
complaint docketed as Civil Case No. 314, for consolidation of ownership. This
complaint is the precursor of the instant petition. The Benos spouses moved to
dismiss on grounds of lack of jurisdiction and lack of cause of action but it was denied
and the parties went to trial.

On November 14, 2002, the Municipal Circuit Trial Court rendered judgment in favor
of the Benos spouses, the dispositive portion of which states:
IN THE LIGHT of all the foregoing considerations, for lack of legal and
factual basis to demand consolidation of ownership over the subject
property, the above-entitled case is hereby ordered dismissed.
No pronouncement as to damages on the ground that no premium should be
assessed on the right to litigate.
No costs.
SO ORDERED.

The Lawilao spouses appealed before the Regional Trial Court which reversed the
Municipal Circuit Trial Court and declared the ownership of the subject property
consolidated in favor of the Lawilao spouses.8
The Benos spouses appealed to the Court of Appeals which affirmed the Regional
Trial Court on December 5, 2005. The dispositive portion of the Decision reads:
WHEREFORE, the petition for review is DISMISSED for lack of sufficient
merit. The decision rendered by the Regional Trial Court, Branch 35, Bontoc,
Mountain Province in Civil Case No. 1091 on 1 July 2003, reversing the
decision of the Municipal Circuit Trial Court of Bauko-Sabangan, Mountain
Province in (Civil Case No.) 314, is AFFIRMED.
SO ORDERED.9
The appellate court denied petitioners motion for reconsideration, hence, the instant
petition on the following assignment of errors:
4.0. It was error for the Regional Trial Court and, subsequently, the Court of
Appeals to rule that respondents can consolidate ownership over the subject
property.
4.1. It was likewise error for said lower courts not to have ruled that the
10
contract between the parties is actually an equitable mortgage.
The Benos spouses argue that consolidation is not proper because the Lawilao
spouses violated the terms of the contract by not paying the bank loan; that having
breached the terms of the contract, the Lawilao spouses cannot insist on the
performance thereof by the Benos spouses; that the contract was actually an
equitable mortgage as shown by the inadequacy of the consideration for the subject
property; and that respondent-spouses remedy should have been for recovery of the
loan or foreclosure of mortgage.
The Lawilao spouses, on the other hand, assert that the Pacto de Retro Sale
reflected the parties true agreement; that the Benos spouses cannot vary its terms
and conditions because they did not put in issue in their pleadings its ambiguity,
mistake or imperfection as well as its failure to express the parties true intention; that
the Benos spouses admitted its genuineness and due execution; and that the delivery
of the property to the Lawilao spouses after the execution of the contract shows that
the agreement was a sale with a right of repurchase and not an equitable mortgage.
The Lawilao spouses also claim that they complied with their obligation when they
offered to pay the loan to the bank and filed a petition for consignation; and that

because of the failure of the Benos spouses to redeem the property, the title and
ownership thereof immediately vested in them (Lawilao spouses).
The issue for resolution is whether the Lawilao spouses can consolidate ownership
over the subject property.
The petition is impressed with merit.
In ruling for respondents, the Court of Appeals held that: (1) the pacto de retro sale
was perfected because the parties voluntarily agreed upon the object thereof and the
price; (2) the Lawilao spouses acquired possession over the property immediately
after execution of the pacto de retro sale; (3) the pacto de retro sale does not provide
for automatic rescission in case the Lawilao spouses fail to pay the full price; (4) the
Benos spouses did not rescind the contract after the Lawilao spouses failed to pay
the P150,000.00 loan; (5) Janice Lawilao offered to pay the loan and deposited
P150,000.00 to the bank although the period for payment had expired thus,
complying with Article 1592 of the Civil Code allowing payment even after expiration
of the period as long as no demand for rescission of the contract had been made
either judicially or by a notarial act; (6) the title and ownership of the Lawilao spouses
became absolute when the Benos spouses failed to repurchase the lot within the
redemption period; and (7) the payment by the Benos spouses son of P159,000.00 to
the bank does not amount to a repurchase as it violates Article 1616 of the Civil Code
requiring the vendor to return to the vendee the price of the sale, the expenses of the
11
contract and other necessary and useful expenses.
Contrary to the aforesaid findings, the evidence shows that the Lawilao spouses did
not make a valid tender of payment and consignation of the balance of the contract
price. As correctly found by the Regional Trial Court:
As matters stand, no valid tender of payment and/or consignation of the
P150,000.00 which the Appellant (Lawilaos) still owes the Appellee (Benos)
has been effected by the former. The amount of P159,000.00 deposited with
the MCTC is in relation to Civil Case No. 310 earlier dismissed by said court,
and not to the instant action. Hence, this Court cannot automatically apply
such sum in satisfaction of the aforesaid debt of the Appellant and order the
12
Appellee creditor to accept the same. (Emphasis supplied)
The Lawilao spouses did not appeal said finding, and it has become final and binding
on them. Although they had repeatedly alleged in their pleadings that the amount of
P159,000.00 was still with the trial court which the Benos spouses could withdraw
anytime, they never made any step to withdraw the amount and thereafter consign it.
Compliance with the requirements of tender and consignation to have the effect of
payment are mandatory. Thus
Tender of payment is the manifestation by debtors of their desire to comply
with or to pay their obligation. If the creditor refuses the tender of payment
without just cause, the debtors are discharged from the obligation by the
consignation of the sum due. Consignation is made by depositing the proper
amount to the judicial authority, before whom the tender of payment and the
announcement of the consignation shall be proved. All interested parties are
to be notified of the consignation. Compliance with these requisites is
mandatory.13 (Emphasis supplied)
In the instant case, records show that the Lawilao spouses filed the petition for
consignation against the bank in Civil Case No. 310 without notifying the Benos

spouses. The petition was dismissed for lack of cause of action against the bank.
Hence, the Lawilao spouses failed to prove their offer to pay the balance of the
purchase price and consignation. In fact, even before the filing of the consignation
case, the Lawilao spouses never notified the Benos spouses of their offer to pay.
Thus, as far as the Benos are concerned, there was no full and complete payment of
the contract price, which gives them the right to rescind the contract pursuant to
Articles 1191 in relation to Article 1592 of the Civil Code, which provide:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who
have acquired the thing, in accordance with Articles 1385 and 1388 of the
Mortgage Law.
Art. 1592. In the sale of immovable property, even though it may have been
stipulated that upon failure to pay the price at the time agreed upon the
rescission of the contract shall of right take place, the vendee may pay, even
after the expiration of the period, as long as no demand for rescission of the
contract has been made upon him either judicially or by a notarial act. After
the demand, the court may not grant him a new term.
In the instant case, while the Benos spouses did not rescind the Pacto de Retro Sale
through a notarial act, they nevertheless rescinded the same in their Answer with
Counterclaim where they stated that:
14. Plaintiffs did not perform their obligation as spelled out in the Pacto de
Retro Sale (ANNEX "A"), particularly the assumption of the obligation of
defendants to the Rural Bank of Bontoc. Defendants were the ones who paid
their loan through their son, ZALDY BENOS. As a result, ANNEX "A" is
rendered null and of no effect. Therefore, the VENDEE a retro who is one of
plaintiffs herein cannot consolidate her ownership over the property subject
of the null and ineffective instrument.
15. Since plaintiffs did not perform their corresponding obligation under
ANNEX "A", defendants have been all too willing to return the amount of
ON[E] HUNDRED FIFTY THOUSAND PESOS (P150,000.00) and
reasonable interest thereon to plaintiffs. But plaintiffs refused to accept the
same.
With the filing of this answer, defendants pray that this serves as a notice of
tender of payment, and they shall consign the amount with the proper court
14
as soon as it is legally feasible.
They also prayed that the Municipal Circuit Trial Court render judgment "[d]eclaring
the Pacto de Retro Sale rescinded or ineffective or void for lack of, or insufficient
15
consideration."

16

In Iringan v. Court of Appeals, we ruled that "even a crossclaim found in the Answer
could constitute a judicial demand for rescission that satisfies the requirement of the
law." Similarly, the counterclaim of the Benos spouses in their answer satisfied the
requisites for the judicial rescission of the subject Pacto de Retro Sale.
The Municipal Circuit Trial Court thus correctly dismissed the complaint for
consolidation of ownership filed by the Lawilao spouses for their failure to comply with
the conditions of the Pacto de Retro Sale. Nevertheless, it refused to declare the
rescission of the Pacto de Retro Sale as prayed for in the counterclaim of the Benos
spouses, stating that:
How about the other obligations and/or rights owing to either party by virtue
of the Pacto de Retro Sale? This, the court opines that it can not delve into
without overstepping the limits of his functions there being appropriate
remedies. It is hornbook in our jurisprudence that a right in law may be
enforced and a wrong way be remedied but always through the appropriate
action.17
The issue of rescission having been put in issue in the answer and the same having
been litigated upon without objections by the Lawilao spouses on grounds of
jurisdiction, the Municipal Circuit Trial Court should have ruled on the same and wrote
finis to the controversy.
Thus, as a necessary consequence of its ruling that the Lawilao spouses breached
the terms of the Pacto de Retro Sale, the Municipal Circuit Trial Court should have
rescinded the Pacto de Retro Sale and directed the Benos spouses to return
P150,000.00 to the Lawilao spouses, pursuant to our ruling in Cannu v. Galang, 18 to
wit:
Petitioners maintain that inasmuch as respondents-spouses Galang were
not granted the right to unilaterally rescind the sale under the Deed of Sale
with Assumption of Mortgage, they should have first asked the court for the
rescission thereof before they fully paid the outstanding balance of the
mortgage loan with the NHMFC. They claim that such payment is a
unilateral act of rescission which violates existing jurisprudence.
In Tan v. Court of Appeals, this court said:
. . . [T]he power to rescind obligations is implied in reciprocal ones
in case one of the obligors should not comply with what is
incumbent upon him is clear from a reading of the Civil Code
provisions. However, it is equally settled that, in the absence of a
stipulation to the contrary, this power must be invoked judicially; it
cannot be exercised solely on a partys own judgment that the other
has committed a breach of the obligation. Where there is nothing in
the contract empowering the petitioner to rescind it
withoutRESORT to the courts, the petitioners action in
unilaterally terminating the contract in this case is unjustified.
It is evident that the contract under consideration does not contain a
provision authorizing its extrajudicial rescission in case one of the parties
fails to comply with what is incumbent upon him. This being the case,
respondents-spouses should have asked for judicial intervention to obtain a
judicial declaration of rescission. Be that as it may, and considering that
respondents-spouses Answer (with affirmative defenses) with Counterclaim

seeks for the rescission of the Deed of Sale with Assumption of Mortgage, it
behooves the court to settle the matter once and for all than to have the
case re-litigated again on an issue already heard on the merits and which
this court has already taken cognizance of. Having found that petitioners
seriously breached the contract, we, therefore, declare the same is
rescinded in favor of respondents-spouses.
As a consequence of the rescission or, more accurately, resolution of the
Deed of Sale with Assumption of Mortgage, it is the duty of the court to
require the parties to surrender whatever they may have received from the
other. The parties should be restored to their original situation.
The record shows petitioners paid respondents-spouses the amount of
P75,000.00 out of the P120,000.00 agreed upon. They also made payments
to NHMFC amounting to P55,312.47. As to the petitioners alleged payment
to CERF Realty of P46,616.70, except for petitioner Leticia Cannus bare
allegation, we find the same not to be supported by competent evidence. As
a general rule, one who pleads payment has the burden of proving it.
However, since it has been admitted in respondents-spouses Answer that
petitioners shall assume the second mortgage with CERF Realty in the
amount of P35,000.00, and that Adelina Timbang, respondents-spouses
very own witness, testified that same has been paid, it is but proper to return
this amount to petitioners. The three amounts total P165,312.47 -- the sum
to be returned to petitioners.
WHEREFORE, the petition is GRANTED. The Decision dated December 5, 2005 and
Resolution dated March 17, 2006 of the Court of Appeals in CA-G.R. SP No. 78845,
affirming the Judgment dated July 1, 2003 of the Regional Trial Court of Bontoc,
Mountain Province, Branch 35, in Civil Case No. 1091, are REVERSED and SET
ASIDE. The Decision dated November 14, 2002 of the Municipal Circuit Trial Court of
Bauko, Mountain Province in Civil Case No. No. 314 dismissing respondents
complaint for consolidation of ownership and damages is REINSTATED WITH THE
MODIFICATION that the Pacto de Retro Sale dated February 11, 1999 is declared
rescinded and petitioners are ordered to return the amount of P150,000.00 to
respondents. No costs.
SO ORDERED.

[G.R. No. 113626. September 27, 2002]

JESPAJO REALTY CORPORATION, petitioner, vs. HON. COURT OF APPEALS,
TAN TE GUTIERREZ and CO TONG, respondents.
DECISION
AUSTRIA-MARTINEZ, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking to review and set aside the decision of the Court of Appeals promulgated on
January 26, 1994 in CA-G.R. SP No. 27312[1] which reversed the decision of the
Regional Trial Court in Civil Case No. 91-57757[2] and reinstated the Metropolitan
Trial Court rulings in Civil Case No. 134022-CV, entitled, Jespajo Realty Corp.,
Plaintiff, vs. Tan Te Gutierrez and Co Tong, Defendants.[3]

The uncontroverted facts of the case as found by the Court of Appeals are as follows:

The subject of this controversy is an APARTMENT building located at 619 Asuncion

Street, Binondo, Manila and owned by Jespajo Realty Corporation. On February 1,
1985, said corporation, represented by its President, Jesus L. Uy, entered into
separate contracts of lease with Tan Te Gutierrez and Co Tong.xxx Pursuant to the
contract, Tan Te occupied ROOM No. 217 of the subject building at a monthly rent of
P847.00 while Co Teng occupied the Penthouse at a monthly rent of P910.00xxx The
terms of the contract among others are the following:

PERIOD OF LEASE- The lease period shall be effective as of February 1, 1985 and
shall continue for an indefinite period provided the lessee is up-to-date in the payment
of his monthly rentals. The LESSEE may, at his option, terminate this contract any
time by giving sixty (60) days prior written notice of termination to the LESSOR.

However, violation of any of the terms and conditions of this contract shall be a
sufficient ground for termination thereof by the LESSOR.

monthly effective February 1, 1990. The lessees through its counsel in a letter dated
March 10, 1990 xxx manifested their opposition alleging that the same is in
contravention of the terms of the contract of lease as agreed upon. Due to the
opposition and the failure of the lessees to pay the increased monthly rentals in the
amount of P3,500.00, the lessor through its counsel in a letter dated April 10,1990 xxx
demanded that the lessees vacate the premises and pay the amount of P7,000.00
corresponding to the months of February and March, 1990.

The lessees exerted effort to pay the rentals due for the months of February and
March 1990 at the monthly rate stipulated in the contract but was refused by the
lessor so that on May 2, 1990, they instituted before the Metropolitan Trial Court of
Manila, Branch 16 a case for consignation xxx

In the said complaint, plaintiffs alleged that the amount of P2,107.60 and P2,264.40
are the monthly rental obligations of Tan Te and Co Tong respectively. They sought
to consign with the court their monthly rental obligations at the rate above mentioned
for the months of February up to April 1990. Additionally, they prayed that the court
issue an order directing the defendant to honor the terms and conditions of the lease.

It is to be noted that on February 6, 1991, the trial judge in the consignation case
issued an order allowing the plaintiffs therein to deposit with the City Treasurer of
Manila the amount of P33,480.28 for Co Tong and the amount of P32,710.32 for Tan
Te Gutierrez representing their respective rentals for thirteen (13) months from
February, 1990 to January, 1991. This order however is without prejudice to the final
outcome of the case. Plaintiffs duly complied with the order as evidenced by an
official receipts (sic) xxx in the name of Tan Te Gutierrez and Co Tong, respectively,
issued by the City Treasurer on February 11, 1991.

On November 15, 1990, or more than six (6) months from the filing of the case for
consignation, the lessor instituted an ejectment suit against the lessees before the
Metropolitan Trial Court of Manila Branch 20 xxx. The court in its decision dated May
10, 1991 rendered a decision dismissing the ejectment suit for lack of merit. xxx[4]

Portions of the MTC decision read:

xxx xxx xxx

RENT INCREASE - For the duration of this contract, the LESSEE agrees to an
automatic 20% yearly increase in the monthly rentals.

Since the effectivity of the lease agreement on February 1985, the lessees religiously
paid their respective monthly rentals together with the 20% yearly increased (sic) in
the monthly rentals as stipulated in the contract. On January 2, 1990, the lessor
corporation sent a written notice to the lessees informing them of the formers
intention to increase the monthly rentals on the occupied premises to P3,500.00

Furthermore, it appears that the plaintiff realizing that it had virtually surrendered
certain aspects of its rights of ownership over the subject premises in stipulating that
the lease shall continue for an indefinite period provided the LESSEE is up-to-date in
the payment of his monthly rentals, has raised the monthly rental to P3,500.00 which
is much higher than the correct rental in accordance with their stipulated 20%
automatic increase annually. This was done by the plaintiff apparently in order to
create an artificial cause of action, as when the LESSEES would refuse, as in fact
they refused, to pay the monthly rentals at the increase rate. This pretext of the
plaintiff cannot be countenanced by law.

Anent the final issue as to whether or not the defendants are already in arrears in the
payment of rentals on the premises, it is noteworthy that the instant case for Unlawful
Detainer was filed by the plaintiff-LESSOR herein only on November 15, 1990, while
the LESSEES consignation case against the LESSOR-plaintiff herein based on the
latters refusal to accept the rentals have been pending with Branch XVI of this Court
since May 2, 1990. And, in accordance with the consignation case, the LESSEES,
upon proper motion approved by the Court, deposited the amounts of P33,480.28
covered by O.R. No. B-578503 (for CO TONG) and P32,710.32 covered by O.R. B578502 (for TAN TE GUTIERREZ) both receipts dated February 11, 1991.

IN VIEW OF THE FOREGOING, and after careful scrutiny of the entire record
including all documentary evidence adduced by both parties, this Court is of the
opinion and so holds that the plaintiff (Jespajo Realty Corporation) has failed to
establish its claims by preponderance of evidence.

WHEREFORE, this case is hereby dismissed for utter lack of merit. The counterclaim
is likewise dismissed for lack of evidence to support the same. No pronouncement as
to costs.

2. Declaring the termination or revocation [of the] lease contracts Annexes A and A-1,
Complaint executed between appellant and appellees;

3. Ordering appellees, their heirs and all other persons acting for and in their behalf to
vacate and surrender immediately the lease premises to appellant;

4. Adjudging appellees to pay unto appellant their rental arrearages of P57,426.45 for
appellee (Tan Te Gutierrez) and P56,153.75 for appellee (Co Tong) as of April 30,
1991 and thereafter each appellee is ordered to pay also appellant the sum of
P3,500.00 every month starting May 1, 1991 until they shall have fully vacated and
surrendered the leased premises;

5. Appellees are likewise adjudged to pay the sum of P10,000.00 as and for attorneys
fees, and

6. The costs of suit.

SO ORDERED.[6]
SO ORDERED.[5]

Jespajo Realty Corporation then appealed to the Regional Trial Court which ruled in
its favor, thus:

The Court is fully convinced that the sum demanded by appellant as increase in
appellees monthly rentals to the premises which they are renting from appellant is
very reasonable considering that the leased premises are located in the commercial
and business section of Manila in Binondo. It is also undisputed that appellant has a
24-hour security unit over the property as well as parking spaces and provisions for
electricity, water and telephone services.

In the light of the foregoing, the Court is constrained to reverse the appealed decision
and hereby orders another judgment to be entered in favor of appellant.

WHEREFORE, PREMISES CONSIDERED, judgment is rendered as follows:

1. Reversing the decision of the court a quo insofar as it dismissed appellants

complaint;

However, said RTC decision was reversed by the Court of Appeals in the herein
assailed decision, portions of which read:

Be that as it may, We find that it was the private respondent who, in fact, violated the
lease agreement by charging petitioners a monthly rental of P3,500.00, well in excess
of the rental stipulated in the lease contract. We see in the refusal of private
respondent to accept the rental being offered by petitioners, a scheme to place
petitioners in default of their rental payments. However, said scheme was waylaid by
petitioners consignation of the rentals due from them.

In view of the foregoing discussion, We find no more necessity in discussing the last
two (2) errors raised in the petition. We likewise find that the respondent court
committed an error of fact and law in reversing the decision of the Metropolitan Trial
Court of Manila and in arriving at the decision under review.

WHEREFORE, the decision under review is hereby REVERSED and SET ASIDE.
The decision dated May 10, 1991 of the Metropolitan Trial Court of Manila, Branch XX
which dismissed Civil Case No. 134022 CV for lack of merit is hereby REINSTATED.
No pronouncement as to costs.

SO ORDERED.[7]

Petitioner comes before this Court with the following questions:

WHEN THE PARTIES TO A CONTRACT OF LEASE STIPULATED FOR AN

INDEFINITE PERIOD AND SHALL CONTINUE FOR AS LONG AS THE LESSEE IS
PAYING THE RENT, IS THE SAID CONTRACT INTERMINABLE EVEN BY THE
LESSOR?

As to the second issue, petitioner argues that the Court of Appeals erred in ruling that
their allegation of respondents non-payment of rentals in the complaint for ejectment
was false. Petitioner insists that when it filed the case of ejectment, private
respondents had failed and refused to pay the demanded P3,500.00 monthly rentals.
Thus, petitioner correctly alleged non-payment of this rental as another ground for
ejectment aside from the basic allegation of termination of the lease contract.
Petitioner also contends that the issue of whether or not the P3,500.00 monthly rental
should be the correct rental to be paid by the private respondents cannot properly be
determined in the consignation case earlier filed by private respondents since the
issue can be resolved only in the ejectment case.[12]

Crucial in the resolution of this case is the construction of the lease agreement,
particularly the portion on the period of lease, which reads:
II

WHEN THERE IS A DISAGREEMENT ON THE RENTALS TO BE PAID, SHOULD IT

BE RESOLVED IN A CONSIGNATION CASE OR IN AN EJECTMENT CASE?[8]

PERIOD OF LEASE- The lease period shall be effective as of February 1, 1985 and
shall continue for an indefinite period provided the lessee is up-to-date in the payment
of his monthly rentals. xxx

Petitioner claims that the contracts of lease entered into between the petitioner and
private respondents did not provide for a definite period, hence, Art. 1687 of the New
Civil Code applies. Said Article reads:

Petitioner insists that the subject contract of lease did not provide for a definite period
hence it falls under the ambit of Art. 1687 of the NCC, making the agreement effective
on a month-to-month basis since rental payments are made monthly.

Art. 1687. If the period for the lease has not been fixed, it is understood to be from
year to year, if the rent agreed upon is annual; from month to month, if it is monthly;
from week to week, if the rent is weekly; and from day to day, if the rent is to be paid
daily. However, even though a monthly rent is paid, and no period for the lease has
been set, the courts may fix a longer term for the lease after the lessee has occupied
the premises for over one year. If the rent is weekly, the courts may likewise
determine a longer period after the lessee has been in possession for over six
months. In case of daily rent, the courts may also fix a longer period after the lessee
has stayed in the place for over one month.

The Court of Appeals opined otherwise. It reasoned that the application of Art. 1687
in this case is misplaced because when there is a fixed period for the lease, whether
the period be definite or indefinite or when the period of the lease is expressly left to
the will of the lessee, Art. 1687 will not apply[13], citing Eleizagui vs. Manila Lawn
Tennis Club, 2 Phil 309.

Petitioner cited Yek Seng Co. vs. Court of Appeals,[9] where this Court held that:
[c]onformably, we hold that as the rental in the case at bar was paid monthly and the
term was not expressly agreed upon, the lease was understood under Article 1687 of
the Civil Code to be terminable from month to month.[10]

The lease contract between petitioner and respondents is with a period subject to a
resolutory condition. The wording of the agreement is unequivocal: The lease period
xxx shall continue for an indefinite period provided the lessee is up-to-date in the
payment of his monthly rentals. The condition imposed in order that the contract shall
remain effective is that the lessee is up-to-date in his monthly payments. It is
undisputed that the lessees Gutierrez and Co Tong religiously paid their rent at the
increasing rate of 20% annually. The agreement between the lessor and the lessees
are therefore still subsisting, with the original terms and conditions agreed upon,
when the petitioner unilaterally increased the rental payment to more than 20% or
P3,500.00 a month.

On the premise that the lease contract was effective on a monthly basis, petitioner
claims that the contract of lease with respondent has been terminated, without being
renewed, after respondents refused to comply with the increased monthly rate of
P3,500.00 and that this refusal even after receiving a notice of termination and a final
demand letter is a valid cause of action for unlawful detainer.[11]

We agree with the ruling of the Court of Appeals. Art. 1687 finds no application in the
case at bar.

Petitioner cites Puahay Lao vs. Suarez[14] where it said that the Court in the earlier
case of Singson v. Baldomar,[15] rejected the theory that a lease could continue for

an indefinite term so long as the lessee paid the rent, because then its continuance
and fulfillment would depend solely on the free and uncontrolled choice of the tenant
between continuing to pay rentals or not, thereby depriving the lessors of all say in
the matter as it would be contrary to the spirit of Article 1256 of the Old Civil Code,
now Article 1308 of the New Civil Code of the Philippines which provides that validity
or compliance of contracts can not be left to the will of one of the parties.[16]

A review of the Puahay and Singson cases shows that the factual backgrounds
therein are not the same as in the case at bar. In those cases, the lessees were
actually in arrears with their rental payments. The Court, in the Puahay case, ruled
that the lessor had the right to terminate the lease under par. 3, Art. 1673 of the Civil
Code, declaring that the lessor may judicially eject the lessee for violation of any of
the conditions agreed upon in the contract.[17] In the case of Singson, the lease
contract was expressly on a month-to-month basis.

The contention of the petitioner that a provision in a contract that the lease period
shall subsist for an indefinite period provided the lessee is up-to-date in the payment
of his monthly rentals is contrary to Art. 1308 of the Civil Code is not plausible. As
expounded by the Court in the case of Philippine Banking Corporation vs. Lui
She:[18]

We have had occasion to delineate the scope and application of article 1308 in the
early case of Taylor v. Uy Tieng Piao.[19] We said in that case:

Article 1256 [now art. 1308] of the Civil Code in our opinion creates no impediment to
the insertion in a contract for personal service of a resolutory condition permitting the
cancellation of the contract by one of the parties. Such a stipulation, as can be readily
seen, does not make either the validity or the fulfillment of the contract dependent
upon the will of the party to whom is conceded the privilege of cancellation; for where
the contracting parties have agreed that such option shall exist, the exercise of the
option is as much in the fulfillment of the contract as any other act which may have
been the subject of agreement. xxx.[20]

Also held in the recent case of Allied Banking Corp. vs. CA[21] where this Court
upheld the validity of a contract provision in favor of the lessee:

xxx Article 1308 of the Civil Code expresses what is known in law as the principle of
mutuality of contracts. xxx This binding effect of a contract on both parties is based on
the principle that the obligations arising from contracts have the force of law between
the contracting parties, and there must be mutuality between them based essentially
on their equality under which it is repugnant to have one party bound by the contract
while leaving the other free therefrom. The ultimate purpose is to render void a
contract containing a condition which makes its fulfillment dependent solely upon the
uncontrolled will of one of the contracting parties.

An express agreement which gives the lessee the sole option to renew the lease is
frequent and subject to statutory restrictions, valid and binding on the parties. This
option, which is provided in the same lease agreement, is fundamentally part of the
consideration in the contract and is no different from any other provision of the lease
carrying an undertaking on the part of the lessor to act conditioned on the
performance by the lessee. xxx

The fact that such option is binding only on the lessor and can be exercised only by
the lessee does not render it void for lack of mutuality. After all, the lessor is free to
give or not to give the option to the lessee. And while the lessee has a right to elect
whether to continue with the lease or not, once he exercises his option to continue
and the lessor accepts, both parties are thereafter bound by the new lease
agreement. Their rights and obligations become mutually fixed, and the lessee is
entitled to retain possession of the property for the duration of the new lease, and the
lessor may hold him liable for the rent therefor. The lessee cannot thereafter escape
liability even if he should subsequently decide to abandon the premises. Mutuality
obtains in such a contract and equality exists between the lessor and the lessee since
they remain with the same faculties in respect to fulfillment.[22] (Emphasis supplied)

As correctly ruled by the MTC in its decision, the grant of benefit of the period in favor
of the lessee was given in exchange for no less than an automatic 20% yearly
increase in monthly rentals. This additional condition was not present in the Puahay
and Singson cases.

Moreover, the express provision in the lease agreement of the parties that violation of
any of the terms and conditions of the contract shall be sufficient ground for
termination thereof by the lessor, removes the contract from the application of Article
1308.

Lastly, after having the lessees believe that their lease contract is one with an
indefinite period subject only to prompt payment of the monthly rentals by the
lessees, we agree with private respondents that the lessor is estopped from claiming
otherwise.[23]

In the case of Opulencia vs. Court of Appeals,[24] this Court held that petitioner is
estopped from backing out of her representations in the contract with respondent, that
is, she may not renege on her own acts and representations, to the prejudice of the
respondents who relied on them. We have held in a long line of cases that neither the
law nor the courts will extricate a party from an unwise or undesirable contract he or
she entered into with all the required formalities and will full awareness of its
consequences.[25]

Anent the second issue, we likewise hold that the contention of petitioner is without
merit. The Court of Appeals found that the petitioners allegation of respondents nonpayment is false. This is a finding of fact which we respect and uphold, absent any
showing of arbitrariness or grave abuse on the part of the court. Furthermore, the
statement of petitioner that the correct amount of rents cannot be considered in a
consignation case but only in the ejectment case is misleading because nowhere in
the decision of the appellate court did it state otherwise. This second issue is clearly
just a futile attempt to overthrow the appellate courts ruling.

Nevertheless, suffice it to be stated that under Article 1258 of the Civil Code which
provides:

Art. 1258. Consignation shall be made by depositing the things due at the disposal of
judicial authority, before whom to tender of payment shall be proved, in a proper
case, and the announcement of the consignation in other cases.

The consignation having been made, the interested parties shall also be notified
thereof.

the rationale for consignation is to avoid the performance of an obligation becoming

more onerous to the debtor by reason of causes not imputable to him.[26] Whether or
not petitioner has a cause of action to eject private respondents from the leased
premises due to refusal of the lessees to pay the increased monthly rentals had been
duly determined in the ejectment case by the Municipal Trial Court which was
correctly upheld by the Court of Appeals.

WHEREFORE, finding no error in the assailed decision, we DENY the petition for lack
of merit and AFFIRM the decision of the Court of Appeals.

Costs against petitioner.

SO ORDERED.

G.R. No. 142882

May 2, 2006

SPS. RICARDO AND LYDIA LLOBRERA, SPS. BENJAMIN AND ESTHER

LLOBRERA, SPS. MIKE AND RESIDA MALA, SPS. OTOR AND DOLINANG
BAGONTE, SPS. EDUARDO AND DAMIANA ICO, SPS. ANTONIO AND MERLY
SOLOMON, SPS. ANSELMO AND VICKY SOLOMON, SPS. ALEX AND
CARMELITA CALLEJO, SPS. DEMETRIO AND JOSEFINA FERRER, SPS.
BENJAMIN AND ANITA MISLANG, SPS. DOMINGO AND FELICIDAD SANCHEZ,
SPS. FERNANDO AND CARMELITA QUEBRAL, SPS. BERNARDO AND
PRISCILLA MOLINA, PRISCILLA BAGA AND BELEN SEMBRANO, Petitioners,
vs.
JOSEFINA V. FERNANDEZ, Respondent.
DECISION
GARCIA, J.:
Under consideration is this petition for review on certiorari under Rule 45 of the Rules
of Court to nullify and set aside the following issuances of the Court of Appeals (CA)
in CA-G.R. SP No. 48918, to wit:
1. Decision dated June 30, 1999,1 affirming the Decision dated August 7,
1998 of the Regional Trial Court (RTC) of Dagupan City, Branch 41, in Civil
Case No. 98-02353-D which affirmed an earlier decision of the Municipal
Trial Court in Cities (MTCC), Dagupan City, Branch 2, in Civil Case No.
10848, entitled "Josefina F. De Venecia Fernandez vs. Sps. Mariano and
Lourdes Melecio, et al.," an action for ejectment.
2

2. Resolution dated March 27, 2000, denying petitioners motion for

reconsideration.
Subject of the controversy is a 1,849 square-meter parcel of land, covered by
Transfer Certificate of Title No. 9042. Respondent Josefina V. Fernandez, as one of
the registered co-owners of the land, served a written demand letter upon petitioners
Spouses Llobrera, et al., to vacate the premises within fifteen (15) days from notice.
Receipt of the demand letter notwithstanding, petitioners refused to vacate,
necessitating the filing by the respondent of a formal complaint against them before
the Barangay Captain of Barangay 11, Dagupan City. Upon failure of the parties to
reach any settlement, the Barangay Captain issued the necessary certification to file
action.
Respondent then filed a verified Complaint for ejectment and damages against the
petitioners before the MTCC of Dagupan City, which complaint was raffled to Branch
2 thereof.
By way of defense, petitioners alleged in their Answer that they had been occupying
the property in question beginning the year 1945 onwards, when their predecessorsin-interest, with the permission of Gualberto de Venecia, one of the other co-owners
of said land, developed and occupied the same on condition that they will pay their
monthly rental of P20.00 each. From then on, they have continuously paid their
monthly rentals to Gualberto de Venecia or Rosita de Venecia or their
representatives, such payments being duly acknowledged by receipts. Beginning
sometime June 1996, however, the representative of Gualberto de Venecia refused to
accept their rentals, prompting them to consign the same to Banco San Juan, which

bank deposit they continued to maintain and update with their monthly rental
payments.
In a decision dated February 18, 1998, the MTCC rendered judgment for the
respondent as plaintiff, thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff and against the defendants as follows:
1. Ordering each of the defendants to vacate the portion of the land in
question they respectively occupy and to restore the possession thereof to
the plaintiff and her co-owners;
2. Ordering each of the defendants to pay to the plaintiff the amount
of P300.00 per month from January 17, 1997 until they vacate the land in
question as the reasonable compensation for the use and occupation of the
premises;
3. Ordering the defendants to pay proportionately the amount of P10,000.00
as attorneys fee andP2,000.00 as litigation expenses, and to pay the cost of
suit.
SO ORDERED.
On petitioners appeal to the RTC of Dagupan City, Branch 41 thereof, in its decision
of August 7, 1998, affirmed the foregoing judgment.
Therefrom, petitioners went to the CA whereat their recourse was docketed as CAG.R. SP. No. 48918. As stated at the threshold hereof, the CA, in its Decision of June
30, 1999, affirmed that of the RTC. With the CAs denial of their motion for
reconsideration, in its Resolution of March 27, 2000, petitioners are now before this
Court with the following assignment of errors:
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN:
A. HOLDING THAT THE OCCUPATION AND POSSESSION oF THE
PROPERTY in question is by mere tolerance of the respondent.
B. holding that the failure of the petitioners (defendants) to vacate the
premises after demands were made upon them is a valid ground for their
ejectment.
C. holding that the consignation made by petitioners in contemplation of
article 1256 of the new civil code is not legally tenable.1avvphil.net
D. affirming the decision of the regional trial court dated August 7, 1998
which, likewise affirmed the decision of the mtcc decision dated February 18,
1998 insofar as the order for the petitioners (defendants) to pay rental and
attorneys fees and litigation expenses.
At the heart of the controversy is the issue of whether petitioners possession of the
subject property is founded on contract or not. This factual issue was resolved by the
three (3) courts below in favor of respondent. As tersely put by the CA in its assailed
decision of June 30, 1999:
Petitioners failed to present any written memorandum of the alleged lease
arrangements between them and Gualberto De Venecia. The receipts claimed to
have been issued by the owner were not presented on the excuse that the March 19,

1996 fire burned the same. Simply put, there is a dearth of evidence to substantiate
the averred lessor-lessee relationship. x x x.3
Consistent with this Courts long-standing policy, when the three courts below have
consistently and unanimously ruled on a factual issue, such ruling is deemed final and
conclusive upon this Court, especially in the absence of any cogent reason to depart
therefrom.
From the absence of proof of any contractual basis for petitioners possession of the
subject premises, the only legal implication is that their possession thereof is by mere
4
tolerance. In Roxas vs. Court of Appeals, we ruled:
A person who occupies the land of another at the latters tolerance or permission,
without any contract between them, is necessarily bound by an implied promise that
he will vacate upon demand, failing which, a summary action for ejectment is the
proper remedy against him.
The judgment favoring the ejectment of petitioners being consistent with law and
jurisprudence can only be affirmed. The alleged consignation of the P20.00 monthly
rental to a bank account in respondents name cannot save the day for the petitioners
simply because of the absence of any contractual basis for their claim to rightful
possession of the subject property. Consignation based on Article 1256 of the Civil
Code indispensably requires a creditor-debtor relationship between the parties, in the
absence of which, the legal effects thereof cannot be availed of.
Article 1256 pertinently provides:
Art. 1256. If the creditor to whom tender of payment has been made refuses without
just cause to accept it, the debtor shall be released from responsibility by the
consignation of the thing or sum due.
Unless there is an unjust refusal by a creditor to accept payment from a debtor,
Article 1256 cannot apply. In the present case, the possession of the property by the
petitioners being by mere tolerance as they failed to establish through competent
evidence the existence of any contractual relations between them and the
respondent, the latter has no obligation to receive any payment from them. Since
respondent is not a creditor to petitioners as far as the alleged P20.00 monthly rental
payment is concerned, respondent cannot be compelled to receive such payment
even through consignation under Article 1256. The bank deposit made by the
petitioners intended as consignation has no legal effect insofar as the respondent is
concerned.
Finally, as regards the damages awarded by the MTCC in favor of the respondent, as
affirmed by both the RTC and the CA, petitioners failed to present any convincing
argument for the Court to modify the same. The facts of the case duly warrant
payment by the petitioners to respondent of actual and compensatory damages for
depriving the latter of the beneficial use and possession of the property. Also, the
unjustified refusal to surrender possession of the property by the petitioners who were
fully aware that they cannot present any competent evidence before the court to
prove their claim to rightful possession as against the true owners is a valid legal
basis to award attorneys fees as damages, as well as litigation expenses and cost of
suit.
Rule 70 of the Rules of Court relevantly reads:

Sec. 17. Judgment. If after trial the court finds that the allegations of the complaint
are true, it shall render judgment in favor of the plaintiff for the restitution of the
premises, the sum justly due as arrears of rent or as reasonable compensation for the
use and occupation of the premises, attorneys fees and costs. If it finds that said
allegations are not true, it shall render judgment for the defendant to recover his
costs. If a counterclaim is established, the court shall render judgment for the sum
found in arrears from either party and award costs as justice requires. (Emphasis
supplied).
There is no doubt whatsoever that it is within the MTCCs competence and jurisdiction
to award attorneys fees and costs in an ejectment case. After thoroughly considering
petitioners arguments in this respect, the Court cannot find any strong and
compelling reason to disturb the unanimous ruling of the three (3) courts below on the
matter of damages.
WHEREFORE, the petition is hereby DENIED for lack of merit, with costs against
petitioners.
SO ORDERED.

G.R. No. 137815

November 29, 2001

JUANITA T. SERING, petitioner,

vs.
COURT OF APPEALS and CLARITA L. GARCIA, respondents.
PARDO, J.:

The Case

not indicate the actual amount of her loan which was only one hundred thousand
(P100,000.00) pesos; that she already paid Clarita L. Garcia two hundred thousand
(P200,00.00) pesos more or less. Hence, the foreclosure of the real estate mortgage
was a nullity.1wphi1.nt
On August 1, 1996, the trial court rendered a decision dismissing the complaint and
the counterclaim of Clarita L. Garcia. 12
On August 13, 1996, Juanita T. Sering filed with the trial court a notice of appeal13 of
the decision to the Court of Appeals.14

The case under consideration is a petition for review1 to annul the decision2 of the
Court of Appeals involving the extra-judicial foreclosure of a real estate mortgage of a
parcel of land in Novaliches, Caloocan City.

On February 24, 1999, the Court of Appeals promulgated a decision affirming the
decision of the trial court.15

The Facts

The Issue

The facts, as found by the Court of Appeals,3 are as follows:

On August 6, 1988, spouses Democrito O. Sering and Juanita T. Sering executed a
4
deed of real estate mortgage in favor of Clarita L. Garcia of a parcel of land with an
area of three hundred square meters located in Novaliches, Caloocan City, as
security for a loan obtained from her in the amount of two hundred thousand
(P200,000.00) pesos.5
On March 10, 1990, Clarita L. Garcia sent a letter to Democrito O. Sering, husband of
Juanita, declaring that since August 6, 1988, Juanita has not paid a single monthly
installment on her loan and demanding payment of two hundred thousand
6
(P200,000.00) pesos on or before April 6, 1990.
On April 15, 1992, Clarita L. Garcia wrote another letter to Juanita T. Sering
demanding payment of the amount of two hundred thousand (P200,000.00) pesos
within ten days from notice, otherwise Clarita L. Garcia would cause the extra-judicial
foreclosure of the real estate mortgage. 7
On May 16, 1992, Juanita T. Sering wrote a letter to Clarita L. Garcia's lawyer
promising to pay the amount of two hundred thousand (P200,000.00) pesos on or
before May 23, 1992, and that if she failed to remit the said amount, Clarita L. Garcia
would be free to take appropriate action on the real estate mortgage.8 Juanita T.
Sering failed to pay any amount of the loan.
On January 6, 1993, Clarita L. Garcia filed with the city sheriff of Caloocan a petition
for the extra-judicial foreclosure of the real estate mortgage.9 The sheriff set the sale
at public auction on February 17, 1993, at 10:00 in the morning.
On February 9, 1993, Juanita T. Sering filed with the Regional Trial Court, Caloocan
City a complaint for injunction against Clarita L. Garcia and the sheriff, for a
10
temporary restraining order to enjoin the sale at public auction of her property. The
trial court did not take any action on the complaint and the sheriff sold the mortgaged
real estate at public auction with Clarita L. Garcia as the highest bidder.
On October 5, 1993, Juanita T. Sering filed with the trial court an amended complaint
praying that judgment be rendered in her favor and against Clarita L. Garcia; that the
mortgage contract and the foreclosure proceedings be declared void; and that
damages be awarded to her.11 Juanita Sering alleged that the mortgage contract did

Hence, this appeal.16

Whether petitioner has actually paid her loan to respondent as to preclude the
foreclosure of the real estate mortgage to secure the loan.

The Court's Ruling

The issue is factual.
17

18

A petition for review on certiorari is limited to questions of law. In such petitions,

factual issues are not reviewable by the Supreme Court.19 Only errors of law are
reviewable by the Supreme Court on petitions for review. 20 The exceptions to this rule
include instances, sans preclusion: (1) when the conclusion is grounded entirely on
speculations, surmises or conjectures; (2) when the inference made is manifestly
mistaken, absurd or impossible; (3) where there is a grave abuse of discretion; (4)
when the judgment is based on a misapprehension of facts; (5) when the findings of
fact are conflicting; (6) when the Court of Appeals, in making its findings, went beyond
the issues of the case and the same is contrary to the admissions of both appellant
and appellee; (7) when the findings of the Court of Appeals are contrary to those of
the trial courts; (8) when the findings of fact are conclusions without citation of specific
evidence on which they are based; (9) when the Court of Appeals overlooked certain
relevant facts not disputed by the parties, which, if properly considered, would justify
a different conclusion; and (10) when the findings of fact of the Court of Appeals are
premised on the absence of evidence and are contradicted by the evidence on
record.21
We find nothing in the case to warrant a review of the evidence based on any of the
exceptions.
Petitioner insists that she has paid her loan but respondent refused to sign the
receipts evidencing monthly installments paid. However, petitioner cannot entirely
fault respondent for refusing to issue a receipt. In case respondent refuses to issue a
receipt for payment allegedly made, petitioner may consign her payment to the court
in accordance with the Civil Code.22 "If the creditor to whom tender of payment has
been made refuses without just cause to accept it, the debtor shall be released from
responsibility by the consignation of the thing or sum due."23 Specifically, a debtor is

released from responsibility by the consignation of the sum due when, without just
cause, the creditor refuses to give a receipt. 24

The Judgment
WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals
No costs.
SO ORDERED.

25

in toto.

G.R. No. 156846

February 23, 2004

TEDDY G. PABUGAIS, petitioner

vs.
DAVE P. SAHIJWANI, respondent.
DECISION
YNARES-SANTIAGO, J.:
Assailed in this petition for review on certiorari is the January 16, 2003 Amended
Decision1 of the Court of Appeals2 in CA-G.R. CV No. 55740 which set aside the
3
November 29, 1996 Decision of the Regional Trial Court of Makati, Branch 64, in
Civil Case No. 94-2363.
Pursuant to an "Agreement And Undertaking"4 dated December 3, 1993, petitioner
Teddy G. Pabugais, in consideration of the amount of Fifteen Million Four Hundred
Eighty Seven Thousand Five Hundred Pesos (P15,487,500.00), agreed to sell to
respondent Dave P. Sahijwani a lot containing 1,239 square meters located at
Jacaranda Street, North Forbes Park, Makati, Metro Manila. Respondent paid
petitioner the amount of P600,000.00 as option/reservation fee and the balance of
P14,887,500.00 to be paid within 60 days from the execution of the contract,
simultaneous with delivery of the owners duplicate Transfer Certificate of Title in
respondents name the Deed of Absolute Sale; the Certificate of Non-Tax
Delinquency on real estate taxes and Clearance on Payment of Association Dues.
The parties further agreed that failure on the part of respondent to pay the balance of
the purchase price entitles petitioner to forfeit the P600,000.00 option/reservation fee;
while non-delivery by the latter of the necessary documents obliges him to return to
respondent the said option/reservation fee with interest at 18% per annum, thus
5. DEFAULT In case the FIRST PARTY [herein respondent] fails to pay the balance
of the purchase price within the stipulated due date, the sum of P600,000.00 shall be
deemed forfeited, on the other hand, should the SECOND PARTY [herein petitioner]
fail to deliver within the stipulated period the documents hereby undertaken, the
SECOND PARTY shall return the sum of P600,000.00 with interest at 18% per
annum.5
Petitioner failed to deliver the required documents. In compliance with their
agreement, he returned to respondent the latters P600,000.00 option/reservation fee
by way of Far East Bank & Trust Company Check No. 25AO54252P, which was,
however, dishonored.
What transpired thereafter is disputed by both parties. Petitioner claimed that he twice
tendered to respondent, through his counsel, the amount of P672,900.00
(representing the P600,000.00 option/reservation fee plus 18% interest per annum
computed from December 3, 1993 to August 3, 1994) in the form of Far East Bank &
Trust Company Managers Check No. 088498, dated August 3, 1994, but said
counsel refused to accept the same. His first attempt to tender payment was allegedly
6
made on August 3, 1994 through his messenger; while the second one was on
7
August 8, 1994, when he sent via DHL Worldwide Services, the managers check
attached to a letter dated August 5, 1994. 8 On August 11, 1994, petitioner wrote a
letter to respondent saying that he is consigning the amount tendered with the
Regional Trial Court of Makati City.9 On August 15, 1994, petitioner filed a complaint
for consignation.10

Respondents counsel, on the other hand, admitted that his office received petitioners
letter dated August 5, 1994, but claimed that no check was appended thereto.11 He
averred that there was no valid tender of payment because no check was tendered
12
and the computation of the amount to be tendered was insufficient, because
petitioner verbally promised to pay 3% monthly interest and 25% attorneys fees as
penalty for default, in addition to the interest of 18% per annum on the P600,000.00
option/reservation fee.13
On November 29, 1996, the trial court rendered a decision declaring the consignation
invalid for failure to prove that petitioner tendered payment to respondent and that the
latter refused to receive the same. It further held that even assuming that respondent
refused the tender, the same is justified because the managers check allegedly
offered by petitioner was not legal tender, hence, there was no valid tender of
payment. The trial court ordered petitioner to pay respondent the amount of
P600,000.00 with interest of 18% per annum from December 3, 1993 until fully paid,
plus moral damages and attorneys fees.14
Petitioner appealed the decision to the Court of Appeals. Meanwhile, his counsel,
Atty. Wilhelmina V. Joven, died and she was substituted by Atty. Salvador P. De
Guzman, Jr.15 On December 20, 2001, petitioner executed a "Deed of
Assignment"16 assigning in favor of Atty. De Guzman, Jr., part of the P672,900.00
consigned with the trial court as partial payment of the latters attorneys
fees.17 Thereafter, on January 7, 2002, petitioner filed an Ex Parte Motion to
18
Withdraw Consigned Money. This was followed by a "Motion to Intervene" filed by
Atty. De Guzman, Jr., praying that the amount consigned be released to him by virtue
of the Deed of Assignment.19
Petitioners motion to withdraw the amount consigned was denied by the Court of
Appeals and the decision of the trial court was affirmed with modification as to the
amount of moral damages and attorneys fees. 20
On a motion for reconsideration, the Court of Appeals declared the consignation as
valid in an Amended Decision dated January 16, 2003. It held that the validity of the
consignation had the effect of extinguishing petitioners obligation to return the
option/reservation fee to respondent. Hence, petitioner can no longer withdraw the
same. The decretal portion of the Amended Decision states:
WHEREFORE, premises considered, our decision dated April 26, 2002 is
RECONSIDERED. The trial courts decision is hereby REVERSED and SET ASIDE,
and a new one is entered (1) DECLARING as valid the consignation by the plaintiffappellant in favor of defendant-appellee of the amount of P672,900.00 with the Makati
City RTC Clerk of Court and deposited under Official Receipt No. 379061 dated 15
August 1994 and (2) DECLARING as extinguished appellants obligation in favor of
appellee under paragraph 5 of the parties "AGREEMENT AND UNDERTAKING".
Neither party shall recover costs from the other.
SO ORDERED.

21

Unfazed, petitioner filed the instant petition for review contending, inter alia, that he
can withdraw the amount deposited with the trial court as a matter of right because at
the time he moved for the withdrawal thereof, the Court of Appeals has yet to rule on
the consignations validity and the respondent had not yet accepted the same.

The resolution of the case at bar hinges on the following issues: (1) Was there a valid
consignation? and (2) Can petitioner withdraw the amount consigned as a matter of
right?

Before the creditor has accepted the consignation, or before a judicial confirmation
that the consignation has been properly made, the debtor may withdraw the thing or
the sum deposited, allowing the obligation to remain in force.

Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment and it generally
requires a prior tender of payment.22 In order that consignation may be effective, the
debtor must show that: (1) there was a debt due; (2) the consignation of the obligation
had been made because the creditor to whom tender of payment was made refused
to accept it, or because he was absent or incapacitated, or because several persons
claimed to be entitled to receive the amount due or because the title to the obligation
has been lost; (3) previous notice of the consignation had been given to the person
interested in the performance of the obligation; (4) the amount due was placed at the
disposal of the court; and (5) after the consignation had been made the person
interested was notified thereof. Failure in any of these requirements is enough ground
to render a consignation ineffective.23

The amount consigned with the trial court can no longer be withdrawn by petitioner
because respondents prayer in his answer that the amount consigned be awarded to
him is equivalent to an acceptance of the consignation, which has the effect of
extinguishing petitioners obligation.

The issues to be resolved in the instant case concerns one of the important requisites
of consignation, i.e, the existence of a valid tender of payment. As testified by the
counsel for respondent, the reasons why his client did not accept petitioners tender
of payment were (1) the check mentioned in the August 5, 1994 letter of petitioner
manifesting that he is settling the obligation was not attached to the said letter; and
(2) the amount tendered was insufficient to cover the obligation. It is obvious that the
reason for respondents non-acceptance of the tender of payment was the alleged
insufficiency thereof and not because the said check was not tendered to
respondent, or because it was in the form of managers check. While it is true that in
general, a managers check is not legal tender, the creditor has the option of refusing
or accepting it.24 Payment in check by the debtor may be acceptable as valid, if no
prompt objection to said payment is made. 25 Consequently, petitioners tender of
payment in the form of managers check is valid.
Anent the sufficiency of the amount tendered, it appears that only the interest of 18%
per annum on the P600,000.00 option/reservation fee stated in the default clause of
the "Agreement And Undertaking" was agreed upon by the parties, thus
5. DEFAULT In case the FIRST PARTY [herein respondent] fails to pay the balance
of the purchase price within the stipulated due date, the sum of P600,000.00 shall be
deemed forfeited, on the other hand, should the SECOND PARTY [herein petitioner]
fail to deliver within the stipulated period the documents hereby undertaken, the
SECOND PARTY shall return the sum of P600,000.00 with interest at 18% per
annum.26
The managers check in the amount of P672,900.00 (representing the P600,000.00
option/reservation fee plus 18% interest per annum computed from December 3,
1993 to August 3, 1994) which was tendered but refused by respondent, and
thereafter consigned with the court, was enough to satisfy the obligation.
There being a valid tender of payment in an amount sufficient to extinguish the
obligation, the consignation is valid.
As regards petitioners right to withdraw the amount consigned, reliance on Article
1260 of the Civil Code is misplaced. The said Article provides
Art. 1260. Once the consignation has been duly made, the debtor may ask the judge
to order the cancellation of the obligation.

Moreover, petitioner failed to manifest his intention to comply with the "Agreement
And Undertaking" by delivering the necessary documents and the lot subject of the
sale to respondent in exchange for the amount deposited. Withdrawal of the money
consigned would enrich petitioner and unjustly prejudice respondent.
The withdrawal of the amount deposited in order to pay attorneys fees to petitioners
counsel, Atty. De Guzman, Jr., violates Article 1491 of the Civil Code which forbids
lawyers from acquiring by assignment, property and rights which are the object of any
27
litigation in which they may take part by virtue of their profession. Furthermore, Rule
10 of the Canons of Professional Ethics provides that "the lawyer should not purchase
any interest in the subject matter of the litigation which he is conducting." The
assailed transaction falls within the prohibition because the Deed assigning the
amount of P672,900.00 to Atty. De Guzman, Jr., as part of his attorneys fees was
executed during the pendency of this case with the Court of Appeals. In his Motion to
Intervene, Atty. De Guzman, Jr., not only asserted ownership over said amount, but
likewise prayed that the same be released to him. That petitioner knowingly and
voluntarily assigned the subject amount to his counsel did not remove their
agreement within the ambit of the prohibitory provisions. 28 To grant the withdrawal
would be to sanction a void contract.29
WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED.
The January 16, 2003 Amended Decision of the Court of Appeals in CA-G.R. CV No.
55740, which declared the consignation by the petitioner in favor of respondent of the
amount of P672,900.00 with the Clerk of Court of the Regional Trial Court of Makati
City valid, and which declared petitioners obligation to respondent under paragraph 5
of the "Agreement And Undertaking" as having been extinguished, is AFFIRMED. No
costs.
SO ORDERED.

G.R. No. 153134

June 27, 2006

BANCO FILIPINO SAVINGS AND MORTGAGE BANK, Petitioner,

vs.
ANTONIO G. DIAZ and ELSIE B. DIAZ, Respondents.
DECISION
CALLEJO, SR., J.:
Before the Court is the Petition for Review on Certiorari filed by Banco Filipino
Savings and Mortgage Bank of the Decision1 dated November 12, 2001 of the Court
of Appeals (CA) in CA-G.R. SP No. 64475 allowing respondents spouses Antonio and
Elsie Diaz to withdraw their deposit on consignation in the amount
of P1,034,600.002 held by the Regional Trial Court (RTC) of Makati City, Branch 61.
The assailed decision reversed and set aside the orders of the said lower court which
had denied the respondents' motion to withdraw deposit. Likewise assailed is the
Resolution of April 12, 2002 of the appellate court denying the reconsideration of the
assailed decision.
The present case is an offshoot of the CA Decision3 of October 31, 1990 in CA-G.R.
SP No. 21089 and Decision4of November 14, 1997 in CA-G.R. CV No. 42899, both of
which had already become final and executory. As culled therefrom and from the
pleadings filed by the parties in the present case, the factual and procedural
antecedents are as follows:
On March 8, 1979, spouses Antonio and Elsie Diaz (the respondents) secured a loan
from Banco Filipino Savings and Mortgage Bank (petitioner bank) in the amount
of P400,000.00 bearing an interest rate of 16% per annum. In November 1982, the
said loan was restructured or consolidated in the increased amount of P3,163,000.00
payable within a period of 20 years at an interest rate of 21% per annum. The
obligation was to be paid in equal monthly amortization of P56,227.00, and secured
by a real estate mortgage over two commercial lots situated at Bolton and Bonifacio
Streets in Davao City. As additional collateral, the respondents assigned the rentals
on the mortgaged properties in favor of petitioner bank.
Despite repeated demands made on them, the respondents defaulted in the payment
of their obligation beginning October 1986. Before petitioner bank could institute the
proceedings to foreclose on the mortgaged properties, the respondents filed with the
RTC of Davao City a complaint for "Declaration of Interest Rates and Penalty
Charges as Unconscionable and Its Reduction, Reformation of Contract, Annulment
of Assignment of Rentals, Damages and Attorney's Fees with Injunction," docketed
as Civil Case No. 17840. The RTC of Davao City (Branch 12) denied the application
for the issuance of a writ of preliminary injunction. It held that, by respondent Antonio
Diaz' own admission, the respondents had been remiss in paying the amortization as
agreed upon in the contract; hence, the conditions in the real estate mortgage
contract had been violated. As such, petitioner bank could rightfully foreclose the
mortgaged properties. On appeal by the respondent spouses, the CA, in its Decision
of October 31, 1990 in CA-G.R. SP No. 21089, affirmed the said Order of the RTC of
Davao City.
Thereafter, the respondents filed another complaint with the RTC of Makati City for
"Consignation and Declaration of Cancellation of Obligation, with Prayer for Issuance
of a Preliminary Injunction and Temporary Restraining Order." The case was
docketed as Civil Case No. 91-3090, and raffled to Branch 61 of the said RTC. For

failure to file its answer, petitioner bank was declared in default. In addition to the
facts established in the previous case, the RTC of Makati City, based on the ex parte
evidence of the respondents, made the finding that during the period of January 3,
1983 and January 25, 1985, when petitioner bank was ordered closed by the Central
Bank, the respondents paid a total amount of P1,311,308.48. Further, as of January
25, 1985, the respondents' total obligation amounted to P3,391,501.99. The
respondents made additional payments from February 11, 1985 until September 1991
amounting to P2,356,910.00. If these additional payments were to be applied to the
principal, the remaining balance would only be P1,034,600.00 as of September 16,
1991. The respondents tried to settle their account by tendering the sum
of P1,034,600.00 as full payment of their loan obligation. However, petitioner bank,
through its then Liquidator Ricardo P. Lirio, refused to accept the said amount.
According to petitioner bank, the respondents' obligation at that time amounted
to P10,160,649.13.
The respondents then deposited by way of consignation with the RTC of Makati City,
a manager's check dated December 5, 1991, in the amount of P1,034,600.00 as full
payment of their loan obligation. Petitioner bank was duly informed of such
consignation.
In its Decision dated March 6, 1992, the RTC of Makati City ruled that the
respondents' total obligation to petitioner bank amounted only to P1,034,600.00
exclusive of interests, and the latter could not charge and/or collect any interest
during the time that it was closed by the Central Bank as, in fact, banks that were
ordered closed by the Central Bank ceased to be liable for the payment of interests
on deposits. It also considered the deposited check as consignation of the
respondents' entire debt and that there was a valid consignation. Accordingly, the
respondents' obligation to petitioner bank was declared as fully paid and/or cancelled.
On appeal by petitioner bank, the CA, in its Decision dated November 14, 1997 in
CA-G.R. CV No. 42899, reversed and set aside the decision of the RTC of Makati
City. On the procedural aspect, the CA found that the lower court erred in denying
petitioner bank's motion to lift order of default. Regarding the substantive issue, the
CA held that the lower court likewise erroneously declared that petitioner bank, during
the time that it was ordered closed by the Central Bank, could not charge or collect
interests on the respondents' loan obligation. Citing the principle of unjust enrichment,
the CA posited that it was with more reason that distressed banks, like petitioner
bank, should be allowed to collect interests on the loans that they had extended to
their borrowers. According to the CA, the fact that distressed banks were freed from
the obligation to pay any interest due on deposits when they were closed and ordered
to stop operations did not mean that their borrowers were similarly freed from their
contractual obligation to pay interests. It distinguished the contracts between the
banks and their depositors from those between the banks and their borrowers.
The CA declared that the deposited amount of P1,034,600.00 failed to effect a valid
consignation in law because it did not include all interests due. It ratiocinated that for
a valid consignation to exist, the tender of the principal must be accompanied with the
tender of interests which had accrued; otherwise, the said tender would not be
effective. The CA then reversed and set aside the decision of the RTC of Makati City
and entered a new one dismissing Civil Case No. 91-3090.
The subsequent facts pertain to the case now before the Court:

Upon finality of the decision of the CA in CA-G.R. CV No. 42899, declaring that there
was no valid consignation and dismissing Civil Case No. 91-3090, the respondents
filed with the RTC of Makati City a motion to withdraw deposit. They averred therein
that with the finality of the CA decision dismissing their complaint, they are now
withdrawing the amount of P1,034,600.00 which they had deposited by way of
consignation with the said lower court. In addition, they alleged that their loan
obligation was eventually settled with the payment of the amount ofP25,000,000.00
through negotiations made with petitioner bank by the brothers James and Francisco
Gaisano as attorneys-in-fact of the respondents. Upon such payment, Corazon L.
Costan, petitioner bank's 2nd Assistant Vice-President and Davao Main Branch
Manager, issued on February 10, 1999 the Cancellation of the Real Estate Mortgage
over the respondents' commercial lots. According to the respondents, there was no
longer any obstacle to the immediate release of their deposit. They prayed that they
be allowed to withdraw the money which they deposited on consignation with the said
court (RTC of Makati City).

The dismissal of the complaint for Consignation by the Appellate Court did not
absolve the obligation of plaintiff to apply the consignation to the outstanding
obligation to the defendant and thus, the deposited amount may still be applied for
payment of the obligation after due hearing on the deficiency claim of the defendant
against the plaintiff.

Petitioner bank opposed the respondents' motion. It alleged that as of December 31,
1998, the respondents' loan obligation stood at P28,810,330.51. Petitioner bank
asserted that the deposit in question should be released to it as part of the full
payment of the respondents' obligation. It maintained that it accepted the said
consignation; hence, the respondents could no longer withdraw the said amount.

Acting on the said petition, the CA rendered the Decision dated November 12, 2001
in CA-G.R. SP No. 64475 reversing and setting aside the Orders dated July 31, 2000
and December 14, 2000 of the RTC of Makati City. It declared that the respondents
had the statutory unilateral right to withdraw their deposit by way of consignation
because there was no acceptance of the same by petitioner bank. On this point, the
CA relied on Article 1260 of the Civil Code which provides, in part, that "[b]efore the
creditor has accepted the consignation, or before a judicial declaration that the
consignation has been properly made, the debtor may withdraw the thing or sum
deposited, allowing the obligation to remain in force."

Petitioner bank refuted the respondents' claim that there was already full payment of
their obligation with the payment by the Gaisanos of P25,000,000.00. Petitioner bank
stated that it negotiated with the Gaisanos on January 7, 1999 and the sum agreed
thereon was allegedly for the payment of the respondents' obligation as of December
31, 1998 which amounted to P28,810,330.51. Petitioner bank added that during this
negotiation, it took into account and deducted from the said total obligation the
amounts of P1,462,901.00, representing the payments made by the respondents in
1990 and 1991, and P1,034,600.00, representing the deposit made by the
respondents with the RTC of Makati City. The net obligation of the respondents after
deducting these amounts stood at P26,312,828.52 and it was this amount that
petitioner bank agreed to be settled with the payment by the Gaisanos
of P25,100,000.00, not P25,000,000.00 as alleged by the respondents.
Petitioner bank accused the respondents of being in bad faith in that while its
negotiation with the Gaisanos had not yet been finalized, the respondents sought to
withdraw the deposit in question - which was part of the consideration that induced
petitioner bank to agree to settle the respondents' obligation with the payment by the
Gaisanos of P25,100,000.00 Petitioner bank prayed that the deposit in question be
released to it in order that it could be applied to the respondents' total loan obligation.
After consideration of the parties' respective arguments, the RTC of Makati City
issued the Order dated July 31, 2000 stating as follows:
Acting on the Motion to Withdraw Deposit mailed by plaintiff[s], [the respondents
herein] on 26 January 1999 in Davao City with Opposition thereto filed by defendant
Banco Filipino Savings and Mortgage Bank on 08 February 1999.
It appears on record that the Complaint for Consignation filed by the plaintiff[s] before
this Court, dated 13 December 1991 and was dismissed by the Court of Appeals on
14 November 1997 which found that the deposited amount of P1,034,600.00 did not
include the interest due and was not in full satisfaction of the defendant's claim and
there was no valid tender of payment and consignation.

WHEREFORE, in view of the foregoing, the MOTION TO WITHDRAW DEPOSIT is

hereby DENIED for lack of merit.
SO ORDERED.5
The respondents sought the reconsideration thereof but the RTC of Makati City
denied their motion in its Order dated December 14, 2000. They then filed with the
CA a Petition for Certiorari alleging grave abuse of discretion on the part of the
presiding judge6 of the said lower court in promulgating the orders denying their
motion to withdraw deposit.

The CA stressed that petitioner bank had not "performed any prior unmistakable and
deliberate act denominating a preemptive acceptance of the deposit in partial
settlement of the loan obligation."7 The claim of "acceptance" was found to be an
afterthought on the part of petitioner bank and proffered for the sole purpose of
opposing the respondents' motion to withdraw deposit.
Even assuming that there was acceptance by petitioner bank, the CA opined that
such acceptance must retroact to December 5, 1991 when the deposit was judicially
made. In such a case, petitioner bank's computation of the respondents' outstanding
loan obligation would have to be modified and reduced accordingly because the
interest rate of 21% would then have to be applied to the reduced loan balance as of
December 5, 1991.
The CA strongly condemned the fact that the respondents' original loan
of P400,000.00 in 1972 ballooned toP28,810,330.51 as of December 31, 1998 based
on petitioner bank's statement of account. The principal amount plus interests,
surcharges, insurance premiums, sheriff's and attorney's fees, notarization fees, etc.,
all added up to the respondents' outstanding balance. According to the CA, the
surcharges for missed monthly payments that petitioner bank charged the
respondents amounted to twice as much as the 21% interest rate, resulting in an
effective interest rate of more than 60% per annum. Citing Medel v. Court of
Appeals,8 this rate was characterized by the CA as "excessive, iniquitous,
unconscionable and exorbitant" and likened petitioner bank to Shylock, the
moneylender in William Shakespeare's The Merchant of Venice, who asked for a
literal pound of flesh as payment for the money he lent.
The CA found as credible the respondents' claim that, on their behalf, the Gaisanos
had secured a compromise agreement with petitioner bank with the payment

of P25,100,000.00 and, consequently, the mortgage over the respondents'

commercial lots was cancelled. Further, the auction sale of these properties which
was scheduled on January 27, 1999 was cancelled by petitioner bank itself in its letter
to the Sheriff.
The dispositive portion of the assailed decision of the CA reads:
WHEREFORE, the foregoing premises considered, the petitioners' [the respondents
herein] petition for certiorari is GRANTED. The Orders dated July 31, 2000 and
December 14, 2000 of the public court in Civil Case No. 91-3090 are REVERSED
and SET ASIDE, and another one entered allowing the withdrawal by the petitioners
of their deposit of P1,034,600.00 held in custodia legis with said court. No costs.
SO ORDERED.9
Petitioner bank sought the reconsideration of the said decision but the CA, in its
Resolution dated April 12, 2002, denied its motion. Hence, petitioner bank's recourse
to the Court.
The basic contention of petitioner bank is that the CA erred in reversing the Orders
dated
July
31,
2000
and
December
14,
2000
of
the
RTC
of Makati City which had denied the respondents' motion to withdraw deposit.
Petitioner bank posits that the said lower court did not commit grave abuse of
discretion in issuing the said orders because, as stated in the CA Decision of
November 14, 1997 in CA-G.R. CV No. 42899, there was no valid consignation since
the amount tendered (P1,034,600.00) by the respondents did not include the interests
that accrued on the principal and, therefore, was not in full settlement of their
outstanding obligation. Petitioner bank maintains that the dismissal of the
respondents' complaint for consignation in Civil Case No. 91-3090 did not discharge
their obligation to petitioner bank. Hence, the deposited amount may still be applied to
the payment of such obligation.
Petitioner bank claims that it accepted the respondents' deposit on consignation as
partial payment of their obligation after the CA had declared the same to have been
improperly made and ineffective to discharge the respondents of their obligation to
petitioner bank. The RTC of Makati City thus did not allegedly commit grave abuse of
discretion in holding that the deposited amount of P1,034,600.00 may still be applied
to the payment of their outstanding obligation of P28,810,330.51 as of December 31,
1998.
It is likewise petitioner bank's view that respondents erroneously resorted to the
remedy of certiorari in assailing the orders of the RTC of Makati City. By filing their
motion to withdraw deposit with the said lower court, the respondents allegedly
recognized its jurisdiction and assuming arguendo that it committed an error in the
exercise thereof, the appropriate remedy to correct the same was by ordinary appeal,
not certiorari.
Petitioner bank emphasizes that it already accepted the deposit of P1,034,600.00
such that it could no longer be withdrawn by the respondents. It reiterated that as of
December 31, 1998, the respondents' total obligation wasP28,810,330.51 and when it
negotiated with the Gaisanos in January 1999, it deducted therefrom the sums
ofP1,462,901.00, representing previous payments of the respondents,
and P1,034,600.00, representing the deposit in question. After these deductions, the
respondents' net obligation stood at P26,312,828.52, and it was this amount that
petitioner bank agreed to be settled with the payment of P25,100,000.00 by the

Gaisanos. This allegedly showed its acceptance of the deposit in question as it was
part of the consideration for the settlement of the respondents' obligation
of P28,810,330.51.
Petitioner bank strongly takes exception to the portion of the assailed CA decision
comparing it to Shylock and characterizing the surcharges and interests as
"excessive, iniquitous, unconscionable and exorbitant." It faults the respondents for
being remiss in paying their amortization. Had they been religious in paying the same,
then their obligation would not have reached the amount of over P28,000,000.00.
Petitioner bank denies that it delayed the foreclosure of the respondents' mortgaged
properties in order to allow the loan arrearages to accumulate. Rather, the delay was
allegedly the respondents' doing as they filed with the RTC of Davao City a complaint
to enjoin the said foreclosure. Moreover, petitioner bank points out that in several
cases,10 the Court recognized that interests and surcharges are two entirely different
things that may be simultaneously collected in connection with loan agreements.
Petitioner bank, thus, prays for the reversal of the Decision dated November 12, 2001
and Resolution dated April 12, 2002 of the appellate court allowing the respondents to
withdraw their deposit on consignation ofP1,034,600.00 held by the RTC of Makati
City.
The petition is denied.
The Court shall first address the procedural issue on the propriety of respondents'
filing with the CA of a petition for certiorari in assailing the Orders of the RTC of
Makati City denying their motion to withdraw deposit. Petitioner bank submits that
such tack was erroneous, as they should have filed an appeal. Petitioner bank's
submission is not correct.
A special civil action for certiorari may be instituted when any tribunal, board or
officer, exercising judicial or quasi-judicial functions, has acted without or in excess of
jurisdiction, or with grave abuse of discretion amounting to lack or excess of
jurisdiction, and there is no appeal, nor any plain, speedy and adequate remedy in the
11
ordinary course of law. To recall, in the present case, the RTC of Makati City had
already rendered its original judgment in Civil Case No 91-3090 and the same was
appealed to the CA. Acting on the appeal, the CA reversed the judgment of the RTC
of Makati City and dismissed the respondents' complaint for consignation. The CA
decision became final and executory. Subsequently, the respondents filed the motion
to withdraw deposit with the RTC of Makati City and which the latter denied in the
Orders of July 31, 2000 and December 14, 2000. These orders, issued after the
original judgment had already been rendered, were interlocutory and, therefore, not
appealable. Since no appeal was available against such orders, the respondents
properly availed of the remedy of certiorari before the CA.
On the other hand, the only substantive issue for the Court's resolution is whether the
appellate court erred in reversing the Orders dated July 31, 2000 and December 14,
2000 of the RTC of Makati City which denied the respondents' motion to withdraw
deposit and, consequently, allowing them to withdraw their deposit ofP1,034,600.00
held on consignation by the said lower court.
Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment and it generally
12
requires a prior tender of payment. In order that consignation may be effective, the
debtor must show that: (1) there was a debt due; (2) the consignation of the obligation
had been made because the creditor to whom tender of payment was made refused

to accept it, or because he was absent or incapacitated, or because several persons

claimed to be entitled to receive the amount due or because the title to the obligation
has been lost; (3) previous notice of the consignation had been given to the person
interested in the performance of the obligation; (4) the amount due was placed at the
disposal of the court; and (5) after the consignation had been made, the person
13
interested was notified thereof. As earlier mentioned, the CA, in its Decision of
November 14, 1997 in CA-G.R. CV No. 42899, ruled that there was no valid
consignation because the amount tendered as payment was insufficient. In other
words, the element of a valid tender of payment was not satisfied. This decision
became final and executory.
The issue that now confronts the Court relates to the right of the respondents to
withdraw the amount deposited with the RTC of Makati City. Article 1260 of the Civil
Code of the Philippines pertinently provides:
Art. 1260. Once the consignation has been duly made, the debtor may ask the judge
to order the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial confirmation
that the consignation has been properly made, the debtor may withdraw the thing or
the sum deposited, allowing the obligation to remain in force.
This provision has been explained in this wise:
x x x The right of the debtor to withdraw the thing or amount deposited in court,
depends upon whether or not the consignation has already been accepted or
judicially declared proper. Before that time, the debtor is still the owner, and he may
withdraw it; in this case, the obligation will remain in full force as before the deposit.
But once the consignation has been accepted by the creditor or judicially declared as
properly made, the debtor loses his right over the thing or amount deposited, and he
cannot withdraw the same without the consent of the creditor; if the creditor consents
to the withdrawal in such case, the obligation is revived as against the debtor
personally, but all rights of preference of the creditor over the thing and all his actions
against co-debtors, guarantors and sureties are extinguished.
xxxx
x x x We believe, however, that the contrary view is more acceptable. Before the
consignation has been accepted by the creditor or judicially declared as properly
made, the debtor is still the owner of the thing or amount deposited, and, therefore,
the other parties liable for the obligation have no right to oppose his withdrawal of
such thing or amount. The debtor merely uses his right, and unless the law expressly
limits that use of his right, it cannot be prevented by the objections of anyone. Our law
grants to the debtor the right to withdraw, without any limitation, and we should not
read a non-existing limitation into the law. Although the other parties liable for the
obligation would have been benefited if the consignation had been allowed to become
effective, before that moment they have not acquired such an interest as would give
them a right to oppose the exercise of the right of the debtor to withdraw the
consignation.
Before the consignation has been judicially declared proper, the creditor may prevent
the withdrawal by the debtor, by accepting the consignation, even with reservations.
Thus, when the amount consigned does not cover the entire obligation, the creditor
may accept it, reserving his right to the balance. x x x14

Thus, under Article 1260 of the Civil Code, the debtor may withdraw, as a matter of
right, the thing or amount deposited on consignation in the following instances:
(1) Before the creditor has accepted the consignation; or
(2) Before a judicial declaration that the consignation has been properly
made.
Obviously, in this case, there was no judicial declaration that the consignation had
been properly made. On the contrary, the CA declared that there was no valid
consignation. What remains to be determined then is whether petitioner bank had
already accepted the deposit in question so as to prevent the respondents from
exercising their right to withdraw the same.
Petitioner bank insists that it had already done so. In fact, petitioner bank avers, it
took into account and deducted the deposit in question from the respondents'
outstanding obligation of P28,810,330.51 as of December 31, 1998 when it
negotiated with the Gaisanos. Deducting the deposit in question as well as the
payments made by the respondents during the period of 1990 and 1991, their net
obligation stood at P26,312,828.52. It was this amount that petitioner bank allegedly
agreed to be settled with the payment of P25,100,000.00 by the Gaisanos on behalf
of the respondents.
To prove this claim, petitioner bank relies on the statement of account 15 prepared by
its employees purportedly showing that the deposit in question was deducted from the
respondents' outstanding obligation as of December 31, 1998. This statement of
account, however, is self-serving and has no probative value especially considering
that the persons who prepared the same were not presented in court. Thus, other
than its bare allegation, petitioner bank has failed to establish by convincing evidence
that it had made such acceptance of the deposit in question prior to the respondents'
filing of their motion to withdraw deposit as to effectively prevent them from
withdrawing the sum of P1,034,600.00 held by the RTC of Makati City.
On the other hand, in the assailed decision, the CA categorically made the finding
that petitioner bank made no acceptance of the deposit in question, even if only as
partial payment of the respondents' outstanding obligation:
Nor could it be successfully argued with any modicum of persuasion, x x x, that the
bank had performed any prior unmistakable and deliberate act denominating a
preemptive acceptance of the deposit in partial settlement of the loan obligation.
Otherwise, it would not have waited until the petitioners [the respondents herein] filed
their motion to withdraw more than a year after this Court's aforecited decision. The
claimed "acceptance" was obviously an afterthought, and proffered for the sole
16
purpose of opposing the deposit withdrawal.
This finding of fact of the CA that petitioner bank had not accepted the deposit in
question, even with reservation, is accorded respect by this Court following the
salutary rule that findings of facts of the appellate court are generally conclusive on
17
the Supreme Court. It is significant to note that the RTC of Makati City never made
any factual finding on whether or not there had been acceptance of the deposit in
question by petitioner bank.18 The said lower court did not even apply Article 1260 of
the Civil Code when it denied the respondents' motion to withdraw deposit.
With the finding that petitioner bank had not made any prior acceptance of the deposit
in question, the CA accordingly did not commit reversible error in setting aside the

Orders of the RTC of Makati City which had denied the respondents' motion to
withdraw deposit. Indeed, absent this prior acceptance by petitioner bank or a judicial
declaration that the consignation had been properly made, the respondents remain
the owners of the sum ofP1,034,600.00 deposited with the RTC of Makati City. When
they filed their motion to withdraw the deposit, they did so in the exercise of their right.
At this point, it bears mentioning that it is not disputed that the Gaisano brothers, as
attorneys-in-fact of the respondents, eventually paid to petitioner bank some time in
January 1999 the sum of P25,100,000.00 as settlement of the respondents'
obligation. To the Court's mind, the payment of the said sum already constituted
substantial compliance by the respondents of their obligation considering that their
loan, as restructured or consolidated in November 1982, amounted to
only P3,163,000.00.
As noted by the CA, the surcharges imposed by petitioner bank on the respondents
as of November 15, 1998 reached P16,569,534.62.19 Article 122920 of the Civil Code
specifically empowers the judge to reduce the civil penalty equitably, when the
principal obligation has been partly or irregularly complied with. Upon this premise,
the Court holds that the said surcharges should be equitably reduced such that the
payment of P25,100,000.00 constituted substantial compliance by the respondents of
their obligation to petitioner bank.
The Court need not delve on the other issues raised, particularly relating to the
interests imposed by petitioner bank in connection with the respondents' loan, as
these were already passed upon in the other cases (CA-G.R. SP No. 21089 and CAG.R. CV No. 42899) involving the same parties.
WHEREFORE, premises considered, the petition is DENIED. The Decision dated
November 12, 2001 and Resolution of April 12, 2002 of the Court of Appeals in CAG.R. SP No. 64475 are AFFIRMED.
SO ORDERED.

G.R. No. 149756

February 11, 2005

MYRNA RAMOS, petitioner,

vs.
SUSANA S. SARAO and JONAS RAMOS, respondents.
DECISION
PANGANIBAN, J.:
Although the parties in the instant case denominated their contract as a "DEED OF
SALE UNDER PACTO DE RETRO," the "sellers" have continued to possess and to
reside at the subject house and lot up to the present. This evident factual
circumstance was plainly overlooked by the trial and the appellate courts, thereby
justifying a review of this case. This overlooked fact clearly shows that the petitioner
intended merely to secure a loan, not to sell the property. Thus, the contract should
be deemed an equitable mortgage.
The Case
1

Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the
August 31, 2001 Decision2of the Court of Appeals (CA) in CA-GR CV No. 50095,
which disposed as follows:
"WHEREFORE, the instant appeal is DISMISSED for lack of merit. The decision
dated January 19, 1995 of the Regional Trial Court, Branch 145, Makati City
is AFFIRMEDin toto."3
The Facts
On February 21, 1991, Spouses Jonas Ramos and Myrna Ramos executed a
contract over their conjugal house and lot in favor of Susana S. Sarao for and in
consideration of P1,310,430.4 Entitled "DEED OF SALE UNDER PACTO DE
RETRO," the contract, inter alia, granted the Ramos spouses the option to
repurchase the property within six months from February 21, 1991, for P1,310,430
5
plus an interest of 4.5 percent a month. It was further agreed that should the
spouses fail to pay the monthly interest or to exercise the right to repurchase within
6
the stipulated period, the conveyance would be deemed an absolute sale.
On July 30, 1991, Myrna Ramos tendered to Sarao the amount of P1,633,034.20 in
the form of two managers checks, which the latter refused to accept for being
7
allegedly insufficient. On August 8, 1991, Myrna filed a Complaint for the redemption
of the property and moral damages plus attorneys fees. 8 The suit was docketed as
Civil Case No. 91-2188 and raffled to Branch 145 of the Regional Trial Court (RTC) of
Makati City. On August 13, 1991, she deposited with the RTC two checks that Sarao
refused to accept.9
On December 21, 1991, Sarao filed against the Ramos spouses a Petition "for
consolidation of ownership in pacto de retro sale" docketed as Civil Case No. 91-3434
10
and raffled to Branch 61 of the RTC of Makati City. Civil Case Nos. 91-2188 and 913434 were later consolidated and jointly tried before Branch 145 of the said Makati
RTC.11
The two lower courts narrated the trial in this manner:
"x x x Myrna [Ramos] testified as follows: On February 21, 1991, she and her
husband borrowed from Sarao the amount of P1,234,000.00, payable within six (6)

months, with an interest thereon at 4.5% compounded monthly from said date until
August 21, 1991, in order for them to pay [the] mortgage on their house. For and in
consideration of the said amount, they executed a deed of sale under a [pacto de
retro] in favor of Sarao over their conjugal house and lot registered under TCT No.
151784 of the Registry of Deeds of Makati (Exhibit A). She further claimed that Sarao
will keep the torrens title until the lapse of the 6-month period, in which case she will
redeem [the] subject property and the torrens title covering it. When asked why it was
the amount of P1,310,430 instead of the aforestated amount which appeared in the
deed, she explained that upon signing of the deed in question, the sum of P20,000.00
representing attorneys fees was added, and its total amount was multiplied with 4.5%
interest rate, so that they could pay in advance the compounded interest. She also
stated that although the market value of the subject property as of February 1991
[was] calculated to [be] more or less P10 million, it was offered [for]
only P1,310,430.00 for the reason that they intended nothing but to redeem the same.
In May 1991, she wrote a letter to Atty. Mario Aguinaldo requesting him to give a
computation of the loan obligation, and [expressed] her intention to redeem the
subject property, but she received no reply to her letter. Instead, she, through her
husband, secured directly from Sarao a handwritten computation of their loan
obligation, the total of which amount[ed] to P1,562,712.14. Later, she sent several
letters to Sarao, [furnishing] Atty. Aguinaldo with copies, asking them for the updated
computation of their loan obligation as of July 1991, but [no reply was again received].
During the hearing of February 17, 1992, she admitted receiving a letter dated July
23, 1991 from Atty. Aguinaldo which show[ed] the computation of their loan obligation
[totaling] to P2,911,579.22 (Exhs. 6, 6-A). On July 30, 1991, she claimed that she
offered the redemption price in the form of two (2) managers checks amounting
to P1,633,034.20 (Exhs. H-1 & H-2) to Atty. Aguinaldo, but the latter refused to accept
them because they [were] not enough to pay the loan obligation. Having refused
acceptance of the said checks covering the redemption price, on August 13, 1991 she
came to Court to consign the checks (Exhs. L-4 and L-5). Subsequently, she
proceeded to the Register of Deeds to cause the annotation of lis pendens on TCT
No. 151784 (Exh. B-1-A). Hence, she filed the x x x civil case against Sarao.
"On the other hand, Sarao testified as follows: On February 21, 1991, spouses
Ramos together with a certain Linda Tolentino and her husband, Nestor Tolentino
approached her and offered transaction involv[ing a] sale of property[. S]he consulted
her lawyer, Atty. Aguinaldo, and on the same date a corresponding deed of sale
underpacto de retro was executed and signed (Exh. 1 ). Later on, she sent, through
her lawyer, a demand letter dated June 10, 1991 (Exh. 6) in view of Myrnas failure to
pay the monthly interest of 4.5% as agreed upon under the deed[. O]n June 14, 1991
Jonas replied to said demand letter (Exh. 8); in the reply Jonas admitted that he no
longer ha[d] the capacity to redeem the property and to pay the interest. In view of the
said reply of Jonas, [Sarao] filed the corresponding consolidation proceedings. She
[further claimed] that before filing said action she incurred expenses including
payment of real estate taxes in arrears, x x x transfer tax and capital [gains] tax, and
[expenses] for [the] consolidated proceedings, for which these expenses were
accordingly receipted (Exhs. 6, 6-1 to 6-0). She also presented a modified
computation of the expenses she had incurred in connection with the execution of the
subject deed (Exh. 9). She also testified that Myrna did not tender payment of the
correct and sufficient price for said real property within the 6-month period as
stipulated in the contract, despite her having been shown the computation of the loan
obligation, inclusive of capital gains tax, real estate tax, transfer tax and other
expenses. She admitted though that Myrna has tendered payment amounting

to P1,633,034.20 in the form of two managers checks, but these were refused
acceptance for being insufficient. She also claimed that several letters (Exhs. 2, 4 and
5) were sent to Myrna and her lawyer, informing them of the computation of the loan
obligation inclusive of said expenses. Finally, she denied the allegations made in the
complaint that she allied herself with Jonas, and claimed that she ha[d] no knowledge
12
about said allegation."
After trial, the RTC dismissed the Complaint and granted the prayer of Sarao to
consolidate the title of the property in her favor.13 Aggrieved, Myrna elevated the case
to the CA.
Ruling of the Court of Appeals
The appellate court sustained the RTCs finding that the disputed contract was a
bonafide pacto de retro sale, not a mortgage to secure a loan.14 It ruled that Myrna
Ramos had failed to exercise the right of repurchase, as the consignation of the two
managers checks was deemed invalid. She allegedly failed (1) to deposit the correct
15
repurchase price and (2) to comply with the required notice of consignation.
Hence, this Petition.16
The Issues
Petitioner raises the following issues for our consideration:
"1. Whether or not the honorable appellate court erred in ruling the subject Deed of
Sale under Pacto de Retro was, and is in reality and under the law an equitable
mortgage;
"2. Whether or not the honorable appellate court erred in affirming the ruling of the
court a quo that there was no valid tender of payment of the redemption price neither
[sic] a valid consignation in the instant case; and
"3. Whether or not [the] honorable appellate court erred in affirming the ruling of the
court a quo denying the claim of petitioner for damages and attorneys fees."17
The Courts Ruling
The Petition is meritorious in regard to Issues 1 and 2.
First Issue:
A Pacto de Retro Sale
or an Equitable Mortgage?
Respondent Sarao avers that the herein Petition should have been dismissed
outright, because petitioner (1) failed to show proof that she had served a copy of it to
the Court of Appeals and (2) raised questions of fact that were not proper issues in a
petition under Rule 45 of the Rules of Court. 18 This Court, however, disregarded the
first ground; otherwise, substantial injustice would have been inflicted on petitioner.
Since the Court of Appeals is not a party here, failure to serve it a copy of the Petition
would not violate any right of respondent. Service to the CA is indeed mentioned in
the Rules, but only to inform it of the pendency of the appeal before this Court.
As regards Item 2, there are exceptions to the general rule barring a review of
questions of fact.19 The Court reviewed the factual findings in the present case,

because the CA had manifestly overlooked certain relevant and undisputed facts
which, after being considered, justified a different conclusion.20
Pacto de Retro Sale Distinguished
from Equitable Mortgage
The pivotal issue in the instant case is whether the parties intended the contract to be
a bona fide pacto de retrosale or an equitable mortgage.
In a pacto de retro, ownership of the property sold is immediately transferred to the
vendee a retro, subject only to the repurchase by the vendor a retro within the
21
stipulated period. The vendor a retros failure to exercise the right of repurchase
within the agreed time vests upon the vendee a retro, by operation of law, absolute
title to the property.22 Such title is not impaired even if the vendee a retro fails to
consolidate title under Article 1607 of the Civil Code. 23
On the other hand, an equitable mortgage is a contract that -- although lacking the
formality, the form or words, or other requisites demanded by a statute -nevertheless reveals the intention of the parties to burden a piece or pieces of real
property as security for a debt.24 The essential requisites of such a contract are as
follows: (1) the parties enter into what appears to be a contract of sale, but (2) their
intention is to secure an existing debt by way of a mortgage.25 The nonpayment of the
debt when due gives the mortgagee the right to foreclose the mortgage, sell the
property, and apply the proceeds of the sale to the satisfaction of the loan
obligation.26
This Court has consistently decreed that the nomenclature used by the contracting
parties to describe a contract does not determine its nature.27 The decisive factor is
their intention -- as shown by their conduct, words, actions and deeds -- prior to,
28
during, and after executing the agreement. This juristic principle is supported by the
following provision of law:
Article 1371. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered. 29
Even if a contract is denominated as a pacto de retro, the owner of the property may
still disprove it by means of parol evidence, 30 provided that the nature of the
agreement is placed in issue by the pleadings filed with the trial court. 31
There is no single conclusive test to determine whether a deed absolute on its face is
really a simple loan accommodation secured by a mortgage. 32 However, the law
enumerates several instances that show when a contract is presumed to be an
equitable mortgage, as follows:
Article 1602. The contract shall be presumed to be an equitable mortgage, in any of
the following cases:
(1) When the price of a sale with right to repurchase is unusually inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;

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

insufficient. She also claimed that several letters (Exhs. 2, 4 and 5) were sent to
Myrna and her lawyer, informing them of the computation of the loan
obligation inclusive of said expenses. x x x."43

In any of the foregoing cases, any money, fruits, or other benefit to be received by the
vendee as rent or otherwise shall be considered as interest which shall be subject to
the usury laws.33

Respondent herself stressed that the pacto de retro had been entered into on the
44
very same day that the property was to be foreclosed by a commercial bank. Such
circumstance proves that the spouses direly needed funds to avert a foreclosure sale.
Had they intended to sell the property just to realize some profit, as Sarao
suggests,45 they would not have retained possession of the house and continued to
live there. Clearly, the spouses had entered into the alleged pacto de retro sale to
secure a loan obligation, not to transfer ownership of the property.

Furthermore, a contract purporting to be a pacto de retro is construed as an equitable

mortgage when the terms of the document and the surrounding circumstances so
34
require. The law discourages the use of a pacto de retro, because this scheme is
frequently used to circumvent a contract known as a pactum commissorium. The
Court has frequently noted that a pacto de retro is used to conceal a contract of loan
secured by a mortgage.35Such construction is consistent with the doctrine that the law
favors the least transmission of rights.36
Equitable Mortgage Presumed
to be Favored by Law
Jurisprudence has consistently declared that the presence of even just one of the
circumstances set forth in the forgoing Civil Code provision suffices to convert a
contract to an equitable mortgage.37 Article 1602 specifically states that the equitable
presumption applies to any of the cases therein enumerated.
In the present factual milieu, the vendor retained possession of the property allegedly
sold.38 Petitioner and her children continued to use it as their residence, even after
39
Jonas Ramos had abandoned them. In fact, it remained as her address for the
service of court orders and copies of Respondent Saraos pleadings. 40
The presumption of equitable mortgage imposes a burden on Sarao to present clear
evidence to rebut it. Corollary to this principle, the favored party need not introduce
proof to establish such presumption; the party challenging it must overthrow it, lest it
persist.41 To overturn that prima facie fact that operated against her, Sarao needed to
adduce substantial and credible evidence to prove that the contract was a bona
fide pacto de retro. This evidentiary burden she miserably failed to discharge.
Contrary to Saraos bare assertions, a meticulous review of the evidence reveals that
the alleged contract was executed merely as security for a loan.
The July 23, 1991 letter of Respondent Saraos lawyer had required petitioner to pay
a computed amount -- under the heading "House and Lot Loan"42 -- to enable the
latter to repurchase the property. In effect, respondent would resell the property to
petitioner, once the latters loan obligation would have been paid. This explicit
requirement was a clear indication that the property was to be used as security for a
loan.
The loan obligation was clear from Saraos evidence as found by the trial court, which
we quote:
"x x x [Sarao] also testified that Myrna did not tender payment of the correct and
sufficient price for said real property within the 6-month period as stipulated in the
contract, despite her having been shown the computation of the loan obligation,
inclusive of capital gains tax, real estate tax, transfer tax and other expenses. She
admitted though that Myrna has tendered payment amounting to P1,633,034.20 in the
form of two managers checks, but these were refused acceptance for being

Sarao contends that Jonas Ramos admitted in his June 14, 1991 letter to her lawyer
that the contract was a pacto de retro.46 That letter, however, cannot override the
finding that the pacto de retro was executed merely as security for a loan obligation.
Moreover, on May 17, 1991, prior to the transmittal of the letter, petitioner had already
sent a letter to Saraos lawyer expressing the formers desire to settle the mortgage
47
on the property. Considering that she had already denominated the transaction with
Sarao as a mortgage, petitioner cannot be prejudiced by her husbands alleged
admission, especially at a time when they were already estranged.48
Inasmuch as the contract between the parties was an equitable mortgage,
Respondent Saraos remedy was to recover the loan amount from petitioner by filing
49
an action for the amount due or by foreclosing the property.
Second Issue:
Propriety of Tender of
Payment and Consignation
Tender of payment is the manifestation by debtors of their desire to comply with or to
50
pay their obligation. If the creditor refuses the tender of payment without just cause,
the debtors are discharged from the obligation by the consignation of the sum
due.51 Consignation is made by depositing the proper amount to the judicial authority,
before whom the tender of payment and the announcement of the consignation shall
52
53
be proved. All interested parties are to be notified of the consignation. Compliance
54
with these requisites is mandatory.
The trial and the appellate courts held that there was no valid consignation, because
petitioner had failed to offer the correct amount and to provide ample consignation
notice to Sarao.55 This conclusion is incorrect.
Note that the principal loan was P1,310,430 plus 4.5 per cent monthly interest
compounded for six months. Expressing her desire to pay in the fifth month, petitioner
averred that the total amount due was P1,633,034.19, based on the computation of
Sarao herself.56 The amount of P2,911,579.22 that the latter demanded from her to
settle the loan obligation was plainly exorbitant, since this sum included other items
not covered by the agreement. The property had been used solely as secure ty for
the P1,310,430 loan; it was therefore improper to include in that amount payments for
gasoline and miscellaneous expenses, taxes, attorneys fees, and other alleged
loans. When Sarao unjustly refused the tender of payment in the amount
of P1,633,034.20, petitioner correctly filed suit and consigned the amount in order to
be released from the latters obligation.

The two lower courts cited Article 1257 of the Civil Code to justify their ruling that
petitioner had failed to notify Respondent Sarao of the consignation. This provision of
law states that the obligor may be released, provided the consignation is first
announced to the parties interested in the fulfillment of the obligation.
The facts show that the notice requirement was complied with. In her August 1, 1991
letter, petitioner said that should the respondent fail to accept payment, the former
would consign the amount.57 This statement was an unequivocal announcement of
consignation. Concededly, sending to the creditor a tender of payment and notice of
consignation -- which was precisely what petitioner did -- may be done in the same
act.58
Because petitioners consignation of the amount of P1,633,034.20 was valid, it
produced the effect of payment.59"The consignation, however, has a retroactive
effect, and the payment is deemed to have been made at the time of the deposit of
the thing in court or when it was placed at the disposal of the judicial authority."60 "The
rationale for consignation is to avoid making the performance of an obligation more
61
onerous to the debtor by reason of causes not imputable to him."
Third Issue:

WHEREFORE, the Petition is partly GRANTED and the assailed Decision SET
ASIDE. Judgment is hereby rendered:
(1) DECLARING (a) the disputed contract as an equitable mortgage, (b) petitioners
loan to Respondent Sarao to be in the amount of P1,633,034.19 as of July 30, 1991;
and (c) the mortgage on the property -- covered by TCT No. 151784 in the name of
the Ramos spouses and issued by the Register of Deeds of Makati City --as
discharged
(2) ORDERING the RTC to release to Sarao the consigned amount of P1,633,034.19
(3) COMMANDING Respondent Sarao to return to petitioner the owners copy of TCT
No. 151784 in the name of the Ramos spouses and issued by the Register of Deeds
of Makati City
(4) DIRECTING the Register of Deeds of Makati City to cancel Entry No. 24057, the
annotation appearing on TCT No. 151784
(5) ORDERING petitioner to pay Sarao
reimbursement for real property taxes
No pronouncement as to costs.

Moral Damages and Attorneys Fees

SO ORDERED.

Petitioner seeks moral damages in the amount of P500,000 for alleged sleepless
nights and anxiety over being homeless.62 Her bare assertions are insufficient to
prove the legal basis for granting any award under Article 2219 of the Civil
63
Code. Verily, an award of moral damages is uncalled for, considering that it was
Respondent SaraosACCOMMODATION that settled the earlier obligation of the
spouses with the commercial bank and allowed them to retain ownership of the
property.
64

Neither have attorneys fees been shown to be proper. As a general rule, in the
absence of a contractual or statutory liability therefor, sound public policy frowns on
penalizing the right to litigate.65 This policy applies especially to the present case,
because there is a need to determine whether the disputed contract was a pacto de
retro sale or an equitable mortgage.
Other Matters
In a belated Manifestation filed on October 19, 2004, Sarao declared that she was the
"owner of the one-half share of Jonas Ramos in the conjugal property," because of
his alleged failure to file a timely appeal with the CA. 66 Such declaration of ownership
has no basis in law, considering that the present suit being pursued by petitioner
pertains to a mortgage covering the whole property.
Besides, it is basic that defenses and issues not raised below cannot be considered
on appeal.67
The Court, however, observes that Respondent Sarao paid real property taxes
amounting to P67,567.10 to halt the auction sale scheduled for October 8, 2004, by
the City of Muntinlupa.68 Her payment was made in good faith and benefited
petitioner. Accordingly, Sarao should be reimbursed; otherwise, petitioner would be
unjustly enriched,69 under Article 2175 of the Civil Code which provides:
Art. 2175. Any person who is constrained to pay the taxes of another shall be entitled
to reimbursement from the latter.

in

the

amount

of P67,567.10

as

G.R. No. 116896 May 5, 1997

PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, petitioner,
vs.
COURT OF APPEALS, MA. TERESA S. RAYMUNDO-ABARRA, JOSE S.
RAYMUNDO, ANTONIO S. RAYMUNDO, RENE S. RAYMUNDO, and AMADOR S.
RAYMUNDO, respondents.

DAVIDE, JR., J.:

This petition for review on certiorari has its roots in Civil Case No. 53444, which was
sparked by petitioner's refusal to pay the rentals as stipulated in the contract of
lease 1 on an undivided portion of 30,000 square meters of a parcel of land owned by
private respondents.
The lease contract, executed on 18 November 1985, reads in part as follows:
1. TERM OF LEASE This lease shall be for a period of five (5) years,
commencing on the date of issuance of the industrial clearance by the
Ministry of Human Settlements, renewable for a like or other period at the
option of the LESSEE under the same terms and conditions.
2. RATE OF RENT LESSEE shall pay to the LESSOR rent at the monthly
rate of TWENTY THOUSAND PESOS (P20,000.00), Philippine Currency, in
the manner set forth in Paragraph 3 below. This rate shall be increased
yearly by Five Percent (5%) based on the agreed monthly rate of
P20,000.00 as follows:
Monthly Rate Period Applicable
P21,000.00 Starting on the 2nd year
P22,000.00 Starting on the 3rd year
P23,000.00 Starting on the 4th year
P24,000.00 Starting on the 5th year

period of lease without the same being renewed, the LESSEE shall vacate
the Leased Property at its expense.
On 7 January 1986, petitioner obtained from the Ministry of Human Settlements a
2
Temporary Use Permit for the proposed rock crushing project. The permit was to be
valid for two years unless sooner revoked by the Ministry.
On 16 January 1986, private respondents wrote petitioner requesting payment of the
first annual rental in the amount of P240,000 which was due and payable upon the
execution of the contract. They also assured the latter that they had already stopped
considering the proposals of other aggregates plants to lease the property because of
3
the existing contract with petitioner.
In its reply-letter, petitioner argued that under paragraph 1 of the lease contract,
payment of rental would commence on the date of the issuance of an industrial
clearance by the Ministry of Human Settlements, and not from the date of signing of
the contract. It then expressed its intention to terminate the contract, as it had decided
to cancel or discontinue with the rock crushing project "due to financial, as well as
technical, difficulties." 4
Private respondents refused to accede to petitioner's request for the pretermination of
the lease contract. They insisted on the performance of petitioner's obligation and
reiterated their demand for the payment of the first annual rental. 5
Petitioner objected to private respondents' claim and argued that it was "only
obligated to pay . . . the amount of P20,000.00 as rental payments for the one-month
period of lease, counted from 07 January 1986 when the Industrial Permit was issued
by the Ministry of Human Settlements up to 07 February 1986 when the Notice of
Termination was served" 6 on private respondents.
On 19 May 1986, private respondents instituted with the Regional Trial Court of Pasig
7
an action against petitioner for Specific Performance with Damages. The case was
docketed as Civil Case No. 53444 at Branch 160 of the said court. After the filing by
petitioner of its Answer with Counterclaim, the case was set for trial on the merits.
What transpired next was summarized by the trial court in this wise:

xxx xxx xxx

Plaintiffs rested their case on September 7, 1987 (p. 87 rec.). Defendant

asked for postponement of the reception of its evidence scheduled on
August 10, 1988 and as prayed for, was reset to August 25, 1988 (p. 91 rec.)
Counsel for defendant again asked for postponement, through
representative, as he was presently indisposed. The case was reset,
intransferable to September 15 and 26, 1988 (p. 94 rec.) On September 2,
1988, the office of the Government Corporate Counsel entered its
appearance for defendant (p. 95, rec.) and the original counsel later
withdrew his appearance. On September 15, 1988 the Government
Corporate Counsel asked for postponement, represented by Atty. Elpidio de
Vega, and with his conformity in open court, the hearing was reset,
intransferable to September 26 and October 17, 1988, (p. 98, rec.) On
September 26, 1988 during the hearing, defendant's counsel filed a motion
for postponement (urgent) as he had "sore eyes", a medical certificate
attached.

11. TERMINATION OF LEASE This Agreement may be terminated by

mutual agreement of the parties. Upon the termination or expiration of the

Counsel for plaintiffs objected to the postponement and the court considered
the evidence of the government terminated or waived. The case was

3. TERMS OF PAYMENT The rent stipulated in Paragraph 2 above shall

be paid yearly in advance by the LESSEE. The first annual rent in the
amount of TWO HUNDRED FORTY THOUSAND PESOS (P240,000.00),
Philippine currency, shall be due and payable upon the execution of this
Agreement and the succeeding annual rents shall be payable every twelve
(12) months thereafter during the effectivity of this Agreement.
4. USE OF LEASED PROPERTY It is understood that the Property shall
be used by the LESSEE as the site, grounds and premises of a rock
crushing plant and field office, sleeping quarters and canteen/mess hall. The
LESSORS hereby grant to the LESSEE the right to erect on the Leased
Property such structure(s) and/or improvement(s) necessary for or incidental
to the LESSEE's purposes.

deemed submitted for decision upon the filing of the memorandum. Plaintiffs
filed their memorandum on October 26, 1988. (p. 111, rec.).
On October 18, 1988 in the meantime, the defendant filed a motion for
reconsideration of the order of the court on September 26, 1988 (p. 107,
rec.) The motion was not asked to be set for hearing (p. 110 rec.) There was
also no proof of notice and service to counsel for plaintiff . The court in the
interest of justice set the hearing on the motion on November 29, 1988. (p.
120, rec.) but despite notice, again defendant's counsel was absent (p. 120A, dorsal side, rec.) without reason. The court reset the motion to December
16, 1988, in the interest of justice. The motion for reconsideration was
denied by the court. A second motion for reconsideration was filed and
counsel set for hearing the motion on January 19, 1989. During the hearing,
counsel for the government was absent. The motion was deemed
abandoned but the court at any rate, after a review of the incidents and the
grounds relied upon in the earlier motion of defendant, found no reason to
8
disturb its previous order.
On 12 April 1989, the trial court rendered a decision ordering petitioner to pay private
respondents the amount of P492,000 which represented the rentals for two years,
with legal interest from 7 January 1986 until the amount was fully paid, plus attorney's
fees in the amount of P20,000 and costs. 9
Petitioner then appealed to the Court of Appeals alleging that the trial court erred in
ordering it to pay private respondent the amount of P492,000 and in denying it the
right to be heard.
Upon the affirmance of the trial court's decision 10 and the denial of its motion for
reconsideration, petitioner came to this Court ascribing to respondent Court of
Appeals the same alleged errors and reiterating their arguments.
First. Petitioner invites the attention of this Court to paragraph 1 of the lease contract,
which reads: "This lease shall be for a period of five (5) years, commencing on the
date of issuance of the industrial clearance by the Ministry of Human Settlements. . .
." It then submits that the issuance of an industrial clearance is a suspensive
condition without which the rights under the contract would not be acquired. The
Temporary Use Permit is not the industrial clearance referred to in the contract; for
the said permit requires that a clearance from the National Production Control
Commission be first secured, and besides, there is a finding in the permit that the
proposed project does not conform to the Zoning Ordinance of Rodriguez, (formerly
Montalban), Rizal, where the leased property is located. Without the industrial
clearance the lease contract could not become effective and petitioner could not be
compelled to perform its obligation under the contract.
Petitioner is now estopped from claiming that the Temporary Use Permit was not the
industrial clearance contemplated in the contract. In its letter dated 24 April 1986,
petitioner states:
We wish to reiterate PNCC Management's previous stand that it is only
obligated to pay your clients the amount of P20,000.00 as rental payments
for the one-month period of the lease, counted from07 January 1986 when
the Industrial Permit was issued by the Ministry of Human Settlements up to
07 February 1986 when the Notice of Termination was served on your
11
clients. (Emphasis Supplied).

The "Industrial Permit" mentioned in the said letter could only refer to the Temporary
Use Permit issued by the Ministry of Human Settlements on 7 January 1986. And it
can be gleaned from this letter that petitioner has considered the permit as industrial
clearance; otherwise, petitioner could have simply told private respondents that its
obligation to pay rentals has not yet arisen because the Temporary Use Permit is not
the industrial clearance contemplated by them. Instead, petitioner recognized its
obligation to pay rentals counted from the date the permit was issued.
Also worth noting is petitioner's earlier letter, thus:
[P]lease be advised of PNCC Management's decision to cancel or
discontinue with the rock crushing project due to financial as well as
technical difficulties. In view thereof, we would like to terminate our Lease
Contract dated 18 November, 1985. Should you agree to the mutual
termination of our Lease Contract, kindly indicate your conformity hereto by
affixing your signature on the space provided below. May we likewise
request Messrs. Rene, Jose and Antonio, all surnamed Raymundo and Mrs.
Socorro A. Raymundo as Attorney-in-Fact of Amador S. Raymundo to sign
on the spaces indicated below. 12
It can be deduced from this letter that the suspensive condition issuance of
industrial clearance has already been fulfilled and that the lease contract has
become operative. Otherwise, petitioner did not have to solicit the conformity of
private respondents to the termination of the contract for the simple reason that no
juridical relation was created because of the non- fulfillment of the condition.
Moreover, the reason of petitioner in discontinuing with its project and in consequently
cancelling the lease contract was "financial as well as technical difficulties," not the
alleged insufficiency of the Temporary Use Permit.
Second. Invoking Article 1266 and the principle of rebus sic stantibus, petitioner
asserts that it should be released from the obligatory force of the contract of lease
because the purpose of the contract did not materialize due to unforeseen events and
causes beyond its control, i.e., due to the abrupt change in political climate after the
EDSA Revolution and financial difficulties.
It is a fundamental rule that contracts, once perfected, bind both contracting parties,
and obligations arising therefrom have the force of law between the parties and
should be complied with in good faith. 13 But the law recognizes exceptions to the
principle of the obligatory force of contracts. One exception is laid down in Article
1266 of the Civil Code, which reads: "The debtor in obligations to do shall also be
released when the prestation becomes legally or physically impossible without the
fault of the obligor."
Petitioner cannot, however, successfully take refuge in the said article, since it is
14
applicable only to obligations "to do," and not to obligations "to give." An obligation
"to do" includes all kinds of work or service; while an obligation "to give" is a
prestation which consists in the delivery of a movable or an immovable thing in order
to create a real right, or for the use of the recipient, or for its simple possession, or in
order to return it to its owner. 15
16

The obligation to pay rentals or deliver the thing in a contract of

lease 17 falls within the prestation "to give"; hence, it is not covered within the scope of
Article 1266. At any rate, the unforeseen event and causes mentioned by petitioner
are not the legal or physical impossibilities contemplated in the said article. Besides,

petitioner failed to state specifically the circumstances brought about by "the abrupt
change in the political climate in the country" except the alleged prevailing
uncertainties in government policies on infrastructure projects.
18

The principle of rebus sic stantibus neither fits in with the facts of the case. Under
this theory, the parties stipulate in the light of certain prevailing conditions, and once
these conditions cease to exist, the contract also ceases to exist. 19This theory is said
to be the basis of Article 1267 of the Civil Code, which provides:
Art. 1267. When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen events, is not, however, an
absolute application of the principle of rebus sic stantibus, which would endanger the
security of contractual relations. The parties to the contract must be presumed to
have assumed the risks of unfavorable developments. It is therefore only in absolutely
exceptional changes of circumstances that equity demands assistance for the
debtor. 20
In this case, petitioner wants this Court to believe that the abrupt change in the
political climate of the country after the EDSA Revolution and its poor financial
condition "rendered the performance of the lease contract impractical and inimical to
the corporate survival of the petitioner."
This Court cannot subscribe to this argument. As pointed out by private
21
respondents:

motive or particular purpose has been made a condition upon which the contract is
made to depend. 24 The exception does not apply here.
Third. According to petitioner, the award of P492,000.00 representing the rent for two
years is excessive, considering that it did not benefit from the property. Besides, the
temporary permit, conformably with the express provision therein, was deemed
automatically revoked for failure of petitioner to use the same within one year from the
issuance thereof. Hence, the rent payable should only be for one year.
Petitioner cannot be heard to complain that the award is excessive. The temporary
permit was valid for two years but was automatically revoked because of its non-use
within one year from its issuance. The non-use of the permit and the non-entry into
the property subject of the lease contract were both imputable to petitioner and
cannot, therefore, be taken advantage of in order to evade or lessen petitioner's
monetary obligation. The damage or prejudice to private respondents is beyond
dispute. They unquestionably suffered pecuniary losses because of their inability to
use the leased premises. Thus, in accordance with Article 1659 of the Civil
25
Code, they are entitled to indemnification for damages; and the award of
P492,000.00 is fair and just under the circumstances of the case.
Finally, petitioner submits that the trial court gravely abused its discretion in denying
petitioner the right to be heard.
We disagree. The trial court was in fact liberal in granting several postponements 26 to
petitioner before it deemed terminated and waived the presentation of evidence in
petitioner's behalf.

Anent petitioner's alleged poor financial condition, the same will neither release
petitioner from the binding effect of the contract of lease. As held in Central Bank
22
v. Court of Appeals, cited by private respondents, mere pecuniary inability to fulfill
an engagement does not discharge a contractual obligation, nor does it constitute a
defense to an action for specific performance.

It must be recalled that private respondents rested their case on 7 September 1987
yet. 27 Almost a year after, or on 10 August 1988 when it was petitioner's turn to
present evidence, petitioner's counsel asked for postponement of the hearing to 25
28
29
August 1988 due to conflict of schedules, and this was granted. At the
rescheduled hearing, petitioner's counsel, through a representative, moved anew for
postponement,
as
he
was
allegedly
30
indisposed. The case was then reset "intransferable" to September 15 and 26,
1988. 31 On 2 September 1988, the Office of the Government Corporate Counsel,
through
Atty.
Elpidio
J.
Vega,
entered
its appearance for
the
32
33
petitioner, and later the original counsel withdrew his appearance. On 15
September 1988, Atty. Vega requested for postponement to enable him to go over
the records of the case. 34 With his conformity, the hearing was reset "intransferable"
to September 26 and October 17, 1988. 35 In the morning of 26 September 1988, the
court received Atty. Vega's Urgent Motion for Postponement on the ground that he
36
was afflicted with conjunctivitis or sore eyes. This time, private respondents
objected; and upon their motion, the court deemed terminated and waived the
37
presentation of evidence for the petitioner. Nevertheless, before the court
considered the case submitted for decision, it required the parties to submit their
respective memoranda within thirty days. 38 But petitioner failed to comply.

With regard to the non-materialization of petitioner's particular purpose in entering into

the contract of lease, i.e., to use the leased premises as a site of a rock crushing
plant, the same will not invalidate the contract. The cause or essential purpose in a
contract of lease is the use or enjoyment of a thing. 23 As a general principle, the
motive or particular purpose of a party in entering into a contract does not affect the
validity nor existence of the contract; an exception is when the realization of such

Likewise, the court was liberal with respect to petitioner's motion for reconsideration.
Notwithstanding the lack of request for hearing and proof of notice and service to
private respondents, the court set the hearing of the said motion on 29 November
1988. 39 Upon the denial of the said motion for lack of merit, 40 petitioner filed a
second motion for reconsideration. But during the hearing of the motion on a date
41
selected by him, Atty. Vega was absent for no reason at all, despite due notice.

It is a matter of record that petitioner PNCC entered into a contract with

private respondents on November 18, 1985. Prior thereto, it is of judicial
notice that after the assassination of Senator Aquino on August 21, 1983,
the country has experienced political upheavals, turmoils, almost daily mass
demonstrations, unprecedented, inflation, peace and order deterioration, the
Aquino trial and many other things that brought about the hatred of people
even against crony corporations. On November 3, 1985, Pres. Marcos,
being interviewed live on U.S. television announced that there would be a
snap election scheduled for February 7, 1986.
On November 18, 1985, notwithstanding the above, petitioner PNCC
entered into the contract of lease with private respondents with open eyes of
the deteriorating conditions of the country.

From the foregoing narration of procedural antecedents, it cannot be said that

petitioner was deprived of its day in court. The essence of due process is simply an
opportunity to he heard. 42 To be heard does not only mean oral arguments in court;
one may be heard also through pleadings. Where opportunity to be heard, either
through oral arguments or pleadings, is accorded, there is no denial of procedural due
43
process.
WHEREFORE, the instant petition is DENIED and the challenge decision of the Court
of Appeals is AFFIRMED in toto.
No pronouncements as to costs.
SO ORDERED.

G.R. No. 107112 February 24, 1994

NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M.
MAGGAY, petitioners,
vs.
THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE,
INC. (CASURECO II),respondents.
Ernesto P. Pangalangan for petitioners.
Luis General, Jr. for private respondent.

NOCON, J.:
The case of Reyes v. Caltex (Philippines), Inc. 1 enunciated the doctrine that where a
person by his contract charges himself with an obligation possible to be performed,
he must perform it, unless its performance is rendered impossible by the act of God,
by the law, or by the other party, it being the rule that in case the party desires to be
excused from performance in the event of contingencies arising thereto, it is his duty
to provide the basis therefor in his contract.
With the enactment of the New Civil Code, a new provision was included therein,
namely, Article 1267 which provides:
When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in
whole or in part.
In the report of the Code Commission, the rationale behind this innovation was
explained, thus:
The general rule is that impossibility of performance releases the obligor.
However, it is submitted that when the service has become so difficult as to
be manifestly beyond the contemplation of the parties, the court should be
authorized to release the obligor in whole or in part. The intention of the
parties should govern and if it appears that the service turns out to be so
difficult as to have been beyond their contemplation, it would be doing
violence to that intention to hold their contemplation, it would be doing
violence to that intention to hold the obligor still responsible. 2
In other words, fair and square consideration underscores the legal precept therein.
Naga Telephone Co., Inc. remonstrates mainly against the application by the Court of
Appeals of Article 1267 in favor of Camarines Sur II Electric Cooperative, Inc. in the
case before us. Stated differently, the former insists that the complaint should have
been dismissed for failure to state a cause of action.
The antecedent facts, as narrated by respondent Court of Appeals are, as follows:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering
local as well as long distance telephone service in Naga City while private respondent
Camarines Sur II Electric Cooperative, Inc. (CASURECO II) is a private corporation
established for the purpose of operating an electric power service in the same city.
On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by
petitioners in the operation of its telephone service the electric light posts of private

respondent in Naga City. In consideration therefor, petitioners agreed to install, free of

charge, ten (10) telephone connections for the use by private respondent in the
following places:
(a) 3 units The Main Office of (private respondent);
(b) 2 Units The Warehouse of (private respondent);
(c) 1 Unit The Sub-Station of (private respondent) at Concepcion
Pequea;
(d) 1 Unit The Residence of (private respondent's) President;
(e) 1 Unit The Residence of (private respondent's) Acting General
Manager; &
(f) 2 Units To be determined by the General Manager. 3
Said contract also provided:
(a) That the term or period of this contract shall be as long as the party of the
first part has need for the electric light posts of the party of the second part it
being understood that this contract shall terminate when for any reason
whatsoever, the party of the second part is forced to stop, abandoned [sic]
its operation as a public service and it becomes necessary to remove the
4
electric lightpost; (sic)
It was prepared by or with the assistance of the other petitioner, Atty. Luciano M.
Maggay, then a member of the Board of Directors of private respondent and at the
same time the legal counsel of petitioner.
After the contract had been enforced for over ten (10) years, private respondent filed
on January 2, 1989 with the Regional Trial Court of Naga City (Br. 28) C.C. No. 891642 against petitioners for reformation of the contract with damages, on the ground
that it is too one-sided in favor of petitioners; that it is not in conformity with the
guidelines of the National Electrification Administration (NEA) which direct that the
reasonable compensation for the use of the posts is P10.00 per post, per month; that
after eleven (11) years of petitioners' use of the posts, the telephone cables strung by
them thereon have become much heavier with the increase in the volume of their
subscribers, worsened by the fact that their linemen bore holes through the posts at
which points those posts were broken during typhoons; that a post now costs as
much as P2,630.00; so that justice and equity demand that the contract be reformed
to abolish the inequities thereon.
As second cause of action, private respondent alleged that starting with the year
1981, petitioners have used 319 posts in the towns of Pili, Canaman, Magarao and
Milaor, Camarines Sur, all outside Naga City, without any contract with it; that at the
rate of P10.00 per post, petitioners should pay private respondent for the use thereof
the total amount of P267,960.00 from 1981 up to the filing of its complaint; and that
petitioners had refused to pay private respondent said amount despite demands.
And as third cause of action, private respondent complained about the poor servicing
by petitioners of the ten (10) telephone units which had caused it great inconvenience
and damages to the tune of not less than P100,000.00
In petitioners' answer to the first cause of action, they averred that it should be
dismissed because (1) it does not sufficiently state a cause of action for reformation

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

charging from P10.00 to P15.00 per post, which is what petitioners should pay for the
use of the posts.

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

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

And with respect to the third cause of action, petitioners claimed, inter alia, that their
telephone service had been categorized by the National Telecommunication
Corporation (NTC) as "very high" and of "superior quality."
During the trial, private respondent presented the following witnesses:
(1) Dioscoro Ragragio, one of the two officials who signed the contract in its behalf,
declared that it was petitioner Maggay who prepared the contract; that the
understanding between private respondent and petitioners was that the latter would
only use the posts in Naga City because at that time, petitioners' capability was very
limited and they had no expectation of expansion because of legal squabbles within
the company; that private respondent agreed to allow petitioners to use its posts in
Naga City because there were many subscribers therein who could not be served by
them because of lack of facilities; and that while the telephone lines strung to the
posts were very light in 1977, said posts have become heavily loaded in 1989.
(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and
Maintenance Department, declared that the posts being used by petitioners totalled
1,403 as of April 17, 1989, 192 of which were in the towns of Pili, Canaman, and
Magarao, all outside Naga City (Exhs. "B" and "B-1"); that petitioners' cables strung to
the posts in 1989 are much bigger than those in November, 1977; that in 1987,
almost 100 posts were destroyed by typhoon Sisang: around 20 posts were located
between Naga City and the town of Pili while the posts in barangay Concepcion,
Naga City were broken at the middle which had been bored by petitioner's linemen to
enable them to string bigger telephone lines; that while the cost per post in 1977 was
only from P700.00 to P1,000.00, their costs in 1989 went up from P1,500.00 to
P2,000.00, depending on the size; that some lines that were strung to the posts did
not follow the minimum vertical clearance required by the National Building Code, so
that there were cases in 1988 where, because of the low clearance of the cables,
passing trucks would accidentally touch said cables causing the posts to fall and
resulting in brown-outs until the electric lines were repaired.
(3) Dario Bernardez, Project Supervisor and Acting General Manager of private
respondent and Manager of Region V of NEA, declared that according to NEA
guidelines in 1985 (Exh. "C"), for the use by private telephone systems of electric
cooperatives' posts, they should pay a minimum monthly rental of P4.00 per post, and
considering the escalation of prices since 1985, electric cooperatives have been

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

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

(1) It is true that he was a member of the Board of Directors of private respondent and
at the same time the lawyer of petitioner when the contract was executed, but Atty.
Gaudioso Tena, who was also a member of the Board of Directors of private
respondent, was the one who saw to it that the contract was fair to both parties.
(2) With regard to the first cause of action:
(a) Private respondent has the right under the contract to use ten (10) telephone units
of petitioners for as long as it wishes without paying anything therefor except for long
distance calls through PLDT out of which the latter get only 10% of the charges.
(b) In most cases, only drop wires and not telephone cables have been strung to the
posts, which posts have remained erect up to the present;
(c) Petitioner's linemen have strung only small messenger wires to many of the posts
and they need only small holes to pass through; and
(d) Documents existing in the NTC show that the stringing of petitioners' cables in
Naga City are according to standard and comparable to those of PLDT. The
accidents mentioned by private respondent involved trucks that were either
overloaded or had loads that protruded upwards, causing them to hit the cables.
(3) Concerning the second cause of action, the intention of the parties when they
entered into the contract was that the coverage thereof would include the whole area
serviced by petitioners because at that time, they already had subscribers outside
Naga City. Private respondent, in fact, had asked for telephone connections outside
Naga City for its officers and employees residing there in addition to the ten (10)
telephone units mentioned in the contract. Petitioners have not been charging private
respondent for the installation, transfers and re-connections of said telephones so
that naturally, they use the posts for those telephone lines.
(4) With respect to the third cause of action, the NTC has found petitioners' cable
installations to be in accordance with engineering standards and practice and
comparable to the best in the country.

On the basis of the foregoing countervailing evidence of the parties, the trial court
found, as regards private respondent's first cause of action, that while the contract
appeared to be fair to both parties when it was entered into by them during the first
year of private respondent's operation and when its Board of Directors did not yet
have any experience in that business, it had become disadvantageous and unfair to
private respondent because of subsequent events and conditions, particularly the
increase in the volume of the subscribers of petitioners for more than ten (10) years
without the corresponding increase in the number of telephone connections to private
respondent free of charge. The trial court concluded that while in an action for
reformation of contract, it cannot make another contract for the parties, it can,
however, for reasons of justice and equity, order that the contract be reformed to
abolish the inequities therein. Thus, said court ruled that the contract should be
reformed by ordering petitioners to pay private respondent compensation for the use
of their posts in Naga City, while private respondent should also be ordered to pay the
monthly bills for the use of the telephones also in Naga City. And taking into
consideration the guidelines of the NEA on the rental of posts by telephone
companies and the increase in the costs of such posts, the trial court opined that a
monthly rental of P10.00 for each post of private respondent used by petitioners is
reasonable, which rental it should pay from the filing of the complaint in this case on
January 2, 1989. And in like manner, private respondent should pay petitioners from
the same date its monthly bills for the use and transfers of its telephones in Naga City
at the same rate that the public are paying.
On private respondent's second cause of action, the trial court found that the contract
does not mention anything about the use by petitioners of private respondent's posts
outside Naga City. Therefore, the trial court held that for reason of equity, the contract
should be reformed by including therein the provision that for the use of private
respondent's posts outside Naga City, petitioners should pay a monthly rental of
P10.00 per post, the payment to start on the date this case was filed, or on January 2,
1989, and private respondent should also pay petitioners the monthly dues on its
telephone connections located outside Naga City beginning January, 1989.
And with respect to private respondent's third cause of action, the trial court found the
claim not sufficiently proved.
Thus, the following decretal portion of the trial court's decision dated July 20, 1990:
WHEREFORE, in view of all the foregoing, decision is hereby rendered
ordering the reformation of the agreement (Exh. A); ordering the defendants
to pay plaintiff's electric poles in Naga City and in the towns of Milaor,
Canaman, Magarao and Pili, Camarines Sur and in other places where
defendant NATELCO uses plaintiff's electric poles, the sum of TEN (P10.00)
PESOS per plaintiff's pole, per month beginning January, 1989 and ordering
also the plaintiff to pay defendant NATELCO the monthly dues of all its
telephones including those installed at the residence of its officers, namely;
Engr. Joventino Cruz, Engr. Antonio Borja, Engr. Antonio Macandog, Mr.
Jesus Opiana and Atty. Luis General, Jr. beginning January, 1989. Plaintiff's
claim for attorney's fees and expenses of litigation and defendants'
counterclaim are both hereby ordered dismissed. Without pronouncement as
to costs.
Disagreeing with the foregoing judgment, petitioners appealed to respondent Court of
Appeals. In the decision dated May 28, 1992, respondent court affirmed the decision
5
of the trial court, but based on different grounds to wit: (1) that Article 1267 of the

New Civil Code is applicable and (2) that the contract was subject to a potestative
condition which rendered said condition void. The motion for reconsideration was
denied in the resolution dated September 10, 1992. 6Hence, the present petition.
Petitioners assign the following pertinent errors committed by respondent court:
1) in making a contract for the parties by invoking Article 1267 of the New
Civil Code;
2) in ruling that prescription of the action for reformation of the contract in
this case commenced from the time it became disadvantageous to private
respondent; and
3) in ruling that the contract was subject to a potestative condition in favor of
petitioners.
Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable
primarily because the contract does not involve the rendition of service or a personal
prestation and it is not for future service with future unusual change. Instead, the
7
ruling in the case of Occea, et al. v. Jabson, etc., et al., which interpreted the
article, should be followed in resolving this case. Besides, said article was never
raised by the parties in their pleadings and was never the subject of trial and
evidence.
In applying Article 1267, respondent court rationalized:
We agree with appellant that in order that an action for reformation of
contract would lie and may prosper, there must be sufficient allegations as
well as proof that the contract in question failed to express the true intention
of the parties due to error or mistake, accident, or fraud. Indeed, in
embodying the equitable remedy of reformation of instruments in the New
Civil Code, the Code Commission gave its reasons as follows:
Equity dictates the reformation of an instrument in order
that the true intention of the contracting parties may be
expressed. The courts by the reformation do not attempt
to make a new contract for the parties, but to make the
instrument express their real agreement. The rationale of
the doctrine is that it would be unjust and inequitable to
allow the enforcement of a written instrument which does
not reflect or disclose the real meeting of the minds of the
parties. The rigor of the legalistic rule that a written
instrument should be the final and inflexible criterion and
measure of the rights and obligations of the contracting
parties is thus tempered to forestall the effects of mistake,
fraud, inequitable conduct, or accident. (pp. 55-56, Report
of Code Commission)
Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code
provide in essence that where through mistake or accident on the part of
either or both of the parties or mistake or fraud on the part of the clerk or
typist who prepared the instrument, the true intention of the parties is not
expressed therein, then the instrument may be reformed at the instance of
either party if there was mutual mistake on their part, or by the injured party
if only he was mistaken.

Here, plaintiff-appellee did not allege in its complaint, nor does its evidence
prove, that there was a mistake on its part or mutual mistake on the part of
both parties when they entered into the agreement Exh. "A", and that
because of this mistake, said agreement failed to express their true
intention. Rather, plaintiff's evidence shows that said agreement was
prepared by Atty. Luciano Maggay, then a member of plaintiff's Board of
Directors and its legal counsel at that time, who was also the legal counsel
for defendant-appellant, so that as legal counsel for both companies and
presumably with the interests of both companies in mind when he prepared
the aforesaid agreement, Atty. Maggay must have considered the same fair
and equitable to both sides, and this was affirmed by the lower court when it
found said contract to have been fair to both parties at the time of its
execution. In fact, there were no complaints on the part of both sides at the
time of and after the execution of said contract, and according to 73-year old
Justino de Jesus, Vice President and General manager of appellant at the
time who signed the agreement Exh. "A" in its behalf and who was one of
the witnesses for the plaintiff (sic), both parties complied with said contract
"from the very beginning" (p. 5, tsn, April 17, 1989).
That the aforesaid contract has become inequitous or unfavorable or
disadvantageous to the plaintiff with the expansion of the business of
appellant and the increase in the volume of its subscribers in Naga City and
environs through the years, necessitating the stringing of more and bigger
telephone cable wires by appellant to plaintiff's electric posts without a
corresponding increase in the ten (10) telephone connections given by
appellant to plaintiff free of charge in the agreement Exh. "A" as
consideration for its use of the latter's electric posts in Naga City, appear,
however, undisputed from the totality of the evidence on record and the
lower court so found. And it was for this reason that in the later (sic) part of
1982 or 1983 (or five or six years after the subject agreement was entered
into by the parties), plaintiff's Board of Directors already asked Atty. Luis
General who had become their legal counsel in 1982, to study said
agreement which they believed had become disadvantageous to their
company and to make the proper recommendation, which study Atty.
General did, and thereafter, he already recommended to the Board the filing
of a court action to reform said contract, but no action was taken on Atty.
General's recommendation because the former general managers of plaintiff
wanted to adopt a soft approach in discussing the matter with appellant,
until, during the term of General Manager Henry Pascual, the latter, after
failing to settle the problem with Atty. Luciano Maggay who had become the
president and general manager of appellant, already agreed for Atty.
General's filing of the present action. The fact that said contract has become
inequitous or disadvantageous to plaintiff as the years went by did not,
however, give plaintiff a cause of action for reformation of said contract, for
the reasons already pointed out earlier. But this does not mean that plaintiff
is completely without a remedy, for we believe that the allegations of its
complaint herein and the evidence it has presented sufficiently make out a
cause of action under Art. 1267 of the New Civil Code for its release from
the agreement in question.
xxx xxx xxx

The understanding of the parties when they entered into the Agreement Exh.
"A" on November 1, 1977 and the prevailing circumstances and conditions at
the time, were described by Dioscoro Ragragio, the President of plaintiff in
1977 and one of its two officials who signed said agreement in its behalf, as
follows:
Our understanding at that time is that we will allow
NATELCO to utilize the posts of CASURECO II only in the
City of Naga because at that time the capability of
NATELCO was very limited, as a matter of fact we do [sic]
not expect to be able to expand because of the legal
squabbles going on in the NATELCO. So, even at that
time there were so many subscribers in Naga City that
cannot be served by the NATELCO, so as a mater of
public service we allowed them to sue (sic) our posts
within the Naga City. (p. 8, tsn April 3, 1989)
Ragragio also declared that while the telephone wires strung to the electric
posts of plaintiff were very light and that very few telephone lines were
attached to the posts of CASURECO II in 1977, said posts have become
"heavily loaded" in 1989 (tsn, id.).
In truth, as also correctly found by the lower court, despite the increase in
the volume of appellant's subscribers and the corresponding increase in the
telephone cables and wires strung by it to plaintiff's electric posts in Naga
City for the more 10 years that the agreement Exh. "A" of the parties has
been in effect, there has been no corresponding increase in the ten (10)
telephone units connected by appellant free of charge to plaintiff's offices
and other places chosen by plaintiff's general manager which was the only
consideration provided for in said agreement for appellant's use of plaintiffs
electric posts. Not only that, appellant even started using plaintiff's electric
posts outside Naga City although this was not provided for in the agreement
Exh. "A" as it extended and expanded its telephone services to towns
outside said city. Hence, while very few of plaintiff's electric posts were being
used by appellant in 1977 and they were all in the City of Naga, the number
of plaintiff's electric posts that appellant was using in 1989 had jumped to
1,403,192 of which are outside Naga City (Exh. "B"). Add to this the
destruction of some of plaintiff's poles during typhoons like the strong
typhoon Sisang in 1987 because of the heavy telephone cables attached
thereto, and the escalation of the costs of electric poles from 1977 to 1989,
and the conclusion is indeed ineluctable that the agreement Exh. "A" has
already become too one-sided in favor of appellant to the great
disadvantage of plaintiff, in short, the continued enforcement of said contract
has manifestly gone far beyond the contemplation of plaintiff, so much so
that it should now be released therefrom under Art. 1267 of the New Civil
Code to avoid appellant's unjust enrichment at its (plaintiff's) expense. As
stated by Tolentino in his commentaries on the Civil Code citing foreign
civilist Ruggiero, "equity demands a certain economic equilibrium between
the prestation and the counter-prestation, and does not permit the unlimited
impoverishment of one party for the benefit of the other by the excessive
rigidity of the principle of the obligatory force of contracts (IV Tolentino, Civil
Code
of
the
Philippines,
1986
ed.,
pp. 247-248).

We therefore, find nothing wrong with the ruling of the trial court, although
based on a different and wrong premise (i.e., reformation of contract), that
from the date of the filing of this case, appellant must pay for the use of
plaintiff's electric posts in Naga City at the reasonable monthly rental of
P10.00 per post, while plaintiff should pay appellant for the telephones in the
same City that it was formerly using free of charge under the terms of the
agreement Exh. "A" at the same rate being paid by the general public. In
affirming said ruling, we are not making a new contract for the parties herein,
but we find it necessary to do so in order not to disrupt the basic and
essential services being rendered by both parties herein to the public and to
avoid unjust enrichment by appellant at the expense of plaintiff, said
arrangement to continue only until such time as said parties can re-negotiate
another
agreement
over
the
same
subject-matter covered by the agreement Exh. "A". Once said agreement is
reached and executed by the parties, the aforesaid ruling of the lower court
and affirmed by us shall cease to exist and shall be substituted and
8
superseded by their new agreement. . . ..
Article 1267 speaks of "service" which has become so difficult. Taking into
consideration the rationale behind this provision, 9 the term "service" should be
understood as referring to the "performance" of the obligation. In the present case,
the obligation of private respondent consists in allowing petitioners to use its posts in
Naga City, which is the service contemplated in said article. Furthermore, a bare
reading of this article reveals that it is not a requirement thereunder that the contract
be for future service with future unusual change. According to Senator Arturo M.
Tolentino, 10 Article 1267 states in our law the doctrine of unforseen events. This is
said to be based on the discredited theory of rebus sic stantibusin public international
law; under this theory, the parties stipulate in the light of certain prevailing conditions,
and once these conditions cease to exist the contract also ceases to exist.
Considering practical needs and the demands of equity and good faith, the
disappearance of the basis of a contract gives rise to a right to relief in favor of the
party prejudiced.
In a nutshell, private respondent in the Occea case filed a complaint against
petitioner before the trial court praying for modification of the terms and conditions of
the contract that they entered into by fixing the proper shares that should pertain to
them out of the gross proceeds from the sales of subdivided lots. We ordered the
dismissal of the complaint therein for failure to state a sufficient cause of action. We
rationalized that the Court of Appeals misapplied Article 1267 because:
. . . respondent's complaint seeks not release from the subdivision contract
but that the court "render judgment modifying the terms and conditions of the
contract . . . by fixing the proper shares that should pertain to the herein
parties out of the gross proceeds from the sales of subdivided lots of subject
subdivision". The cited article (Article 1267) does not grant the courts (the)
authority to remake, modify or revise the contract or to fix the division of
shares between the parties as contractually stipulated with the force of law
between the parties, so as to substitute its own terms for those covenanted
by the parties themselves. Respondent's complaint for modification of
contract manifestly has no basis in law and therefore states no cause of
action. Under the particular allegations of respondent's complaint and the
circumstances therein averred, the courts cannot even in equity grant the
relief sought. 11

The ruling in the Occea case is not applicable because we agree with respondent
court that the allegations in private respondent's complaint and the evidence it has
presented sufficiently made out a cause of action under Article 1267. We, therefore,
release the parties from their correlative obligations under the contract. However, our
disposition of the present controversy does not end here. We have to take into
account the possible consequences of merely releasing the parties therefrom:
petitioners will remove the telephone wires/cables in the posts of private respondent,
resulting in disruption of their service to the public; while private respondent, in
12
consonance with the contract will return all the telephone units to petitioners,
causing prejudice to its business. We shall not allow such eventuality. Rather, we
require, as ordered by the trial court: 1) petitioners to pay private respondent for the
use of its posts in Naga City and in the towns of Milaor, Canaman, Magarao and Pili,
Camarines Sur and in other places where petitioners use private respondent's posts,
the sum of ten (P10.00) pesos per post, per month, beginning January, 1989; and 2)
private respondent to pay petitioner the monthly dues of all its telephones at the same
rate being paid by the public beginning January, 1989. The peculiar circumstances of
the present case, as distinguished further from the Occea case, necessitates
exercise of our equity jurisdiction. 13 By way of emphasis, we reiterate the
rationalization of respondent court that:
. . . In affirming said ruling, we are not making a new contract for the parties
herein, but we find it necessary to do so in order not to disrupt the basic and
essential services being rendered by both parties herein to the public and to
avoid unjust enrichment by appellant at the expense of plaintiff . . . . 14
Petitioners' assertion that Article 1267 was never raised by the parties in their
pleadings and was never the subject of trial and evidence has been passed upon by
respondent court in its well reasoned resolution, which we hereunder quote as our
own:
First, we do not agree with defendant-appellant that in applying Art. 1267 of
the New Civil Code to this case, we have changed its theory and decided the
same on an issue not invoked by plaintiff in the lower court. For basically,
the main and pivotal issue in this case is whether the continued enforcement
of the contract Exh. "A" between the parties has, through the years (since
1977), become too inequitous or disadvantageous to the plaintiff and too
one-sided in favor of defendant-appellant, so that a solution must be found
to relieve plaintiff from the continued operation of said agreement and to
prevent defendant-appellant from further unjustly enriching itself at plaintiff's
expense. It is indeed unfortunate that defendant had turned deaf ears to
plaintiffs requests for renegotiation, constraining the latter to go to court. But
although plaintiff cannot, as we have held, correctly invoke reformation of
contract as a proper remedy (there having been no showing of a mistake or
error in said contract on the part of any of the parties so as to result in its
failure to express their true intent), this does not mean that plaintiff is
absolutely without a remedy in order to relieve itself from a contract that has
gone far beyond its contemplation and has become so highly inequitous and
disadvantageous to it through the years because of the expansion of
defendant-appellant's business and the increase in the volume of its
subscribers. And as it is the duty of the Court to administer justice, it must do
so in this case in the best way and manner it can in the light of the proven
facts and the law or laws applicable thereto.

It is settled that when the trial court decides a case in favor of a party on a
certain ground, the appellant court may uphold the decision below upon
some other point which was ignored or erroneously decided by the trial court
(Garcia Valdez v. Tuazon, 40 Phil. 943; Relativo v. Castro, 76 Phil. 563;
Carillo v. Salak de Paz, 18 SCRA 467). Furthermore, the appellate court has
the discretion to consider an unassigned error that is closely related to an
error properly assigned (Paterno v. Jao Yan, 1 SCRA 631; Hernandez v.
Andal, 78 Phil. 196). It has also been held that the Supreme Court (and this
Court as well) has the authority to review matters, even if they are not
assigned as errors in the appeal, if it is found that their consideration is
necessary in arriving at a just decision of the case (Saura Import & Export
Co., Inc. v. Phil. International Surety Co. and PNB, 8 SCRA 143). For it is
the material allegations of fact in the complaint, not the legal conclusion
made therein or the prayer, that determines the relief to which the plaintiff is
entitled, and the plaintiff is entitled to as much relief as the facts warrant
although that relief is not specifically prayed for in the complaint (Rosales v.
Reyes and Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844; Baguioro v.
Barrios, 77 Phil. 120). To quote an old but very illuminating decision of our
Supreme Court through the pen of American jurist Adam C. Carson:
"Under our system of pleading it is the duty of the courts to
grant the relief to which the parties are shown to be
entitled by the allegations in their pleadings and the facts
proven at the trial, and the mere fact that they themselves
misconstrue the legal effect of the facts thus alleged and
proven will not prevent the court from placing the just
construction thereon and adjudicating the issues
accordingly." (Alzua v. Johnson, 21 Phil. 308)
And in the fairly recent case of Caltex Phil., Inc. v IAC, 176 SCRA 741, the
Honorable Supreme Court also held:
We rule that the respondent court did not commit any error
in taking cognizance of the aforesaid issues, although not
raised before the trial court. The presence of strong
consideration of substantial justice has led this Court to
relax the well-entrenched rule that, except questions on
jurisdiction, no question will be entertained on appeal
unless it has been raised in the court below and it is within
the issues made by the parties in their pleadings (Cordero
v. Cabral, L-36789, July 25, 1983, 123 SCRA 532). . . .
We believe that the above authorities suffice to show that this Court did not
err in applying Art. 1267 of the New Civil Code to this case. Defendantappellant stresses that the applicability of said provision is a question of fact,
and that it should have been given the opportunity to present evidence on
said question. But defendant-appellant cannot honestly and truthfully claim
that it (did) not (have) the opportunity to present evidence on the issue of
whether the continued operation of the contract Exh. "A" has now become
too one-sided in its favor and too inequitous, unfair, and disadvantageous to
plaintiff. As held in our decision, the abundant and copious evidence
presented by both parties in this case and summarized in said decision

established the following essential and vital facts which led us to apply Art.
1267 of the New Civil Code to this case:
xxx xxx xxx 15
On the issue of prescription of private respondent's action for reformation of contract,
petitioners allege that respondent court's ruling that the right of action "arose only
after said contract had already become disadvantageous and unfair to it due to
subsequent events and conditions, which must be sometime during the latter part of
1982 or in 1983 . . ." 16 is erroneous. In reformation of contracts, what is reformed is
not the contract itself, but the instrument embodying the contract. It follows that
whether the contract is disadvantageous or not is irrelevant to reformation and
therefore, cannot be an element in the determination of the period for prescription of
the action to reform.
Article 1144 of the New Civil Code provides, inter alia, that an action upon a written
contract must be brought within ten (10) years from the time the right of action
accrues. Clearly, the ten (10) year period is to be reckonedfrom the time the right of
action accrues which is not necessarily the date of execution of the contract. As
correctly ruled by respondent court, private respondent's right of action arose
"sometime during the latter part of 1982 or in 1983 when according to Atty. Luis
General, Jr. . . ., he was asked by (private respondent's) Board of Directors to study
said contract as it already appeared disadvantageous to (private respondent) (p. 31,
tsn, May 8, 1989). (Private respondent's) cause of action to ask for reformation of said
contract should thus be considered to have arisen only in 1982 or 1983, and from
1982 to January 2, 1989 when the complaint in this case was filed, ten (10) years had
not yet elapsed." 17
Regarding the last issue, petitioners allege that there is nothing purely potestative
about the prestations of either party because petitioner's permission for free use of
telephones is not made to depend purely on their will, neither is private respondent's
permission for free use of its posts dependent purely on its will.
Apart from applying Article 1267, respondent court cited another legal remedy
available to private respondent under the allegations of its complaint and the
preponderant evidence presented by it:
. . . we believe that the provision in said agreement
(a) That the term or period of this contract shall be as long
as the party of the first part[herein appellant] has need for
the electric light posts of the party of the second part
[herein plaintiff] it being understood that this contract shall
terminate when for any reason whatsoever, the party of
the second part is forced to stop, abandoned [sic] its
operation as a public service and it becomes necessary to
remove the electric light post [sic]"; (Emphasis supplied)
is invalid for being purely potestative on the part of appellant as it leaves the
continued effectivity of the aforesaid agreement to the latter's sole and
exclusive will as long as plaintiff is in operation. A similar provision in a
contract of lease wherein the parties agreed that the lessee could stay on
the leased premises "for as long as the defendant needed the premises and
can meet and pay said increases" was recently held by the Supreme Court
in Lim v. C.A., 191 SCRA 150, citing the much earlier case of Encarnacion v.

Baldomar, 77 Phil. 470, as invalid for being "a purely potestative condition
because it leaves the effectivity and enjoyment of leasehold rights to the sole
and exclusive will of the lessee." Further held the High Court in the Lim case:
The continuance, effectivity and fulfillment of a contract of lease
cannot be made to depend exclusively upon the free and
uncontrolled choice of the lessee between continuing the payment
of the rentals or not, completely depriving the owner of any say in
the matter. Mutuality does not obtain in such a contract of lease of
no equality exists between the lessor and the lessee since the life
of the contract is dictated solely by the lessee.
The above can also be said of the agreement Exh. "A" between the parties
in this case. There is no mutuality and equality between them under the
afore-quoted provision thereof since the life and continuity of said agreement
is made to depend as long as appellant needs plaintiff's electric posts. And
this is precisely why, since 1977 when said agreement was executed and up
to 1989 when this case was finally filed by plaintiff, it could do nothing to be
released from or terminate said agreement notwithstanding that its continued
effectivity has become very disadvantageous and inequitous to it due to the
expansion and increase of appellant's telephone services within Naga City
and even outside the same, without a corresponding increase in the ten (10)
telephone units being used by plaintiff free of charge, as well as the bad and
inefficient service of said telephones to the prejudice and inconvenience of
plaintiff and its customers. . . . 18
Petitioners' allegations must be upheld in this regard. A potestative condition is a
condition, the fulfillment of which depends upon the sole will of the debtor, in which
case, the conditional obligation is void. 19 Based on this definition, respondent court's
finding that the provision in the contract, to wit:
(a) That the term or period of this contract shall be as long as the party of the
first part (petitioner) has need for the electric light posts of the party of the
second part (private respondent) . . ..
is a potestative condition, is correct. However, it must have overlooked the other
conditions in the same provision, to wit:
. . . it being understood that this contract shall terminate when for any reason
whatsoever, the party of the second part (private respondent) is forced to
stop, abandoned (sic) its operation as a public service and it becomes
necessary to remove the electric light post (sic);
which are casual conditions since they depend on chance, hazard, or the will of a
third person. 20 In sum, the contract is subject to mixed conditions, that is, they
depend partly on the will of the debtor and partly on chance, hazard or the will of a
third person, which do not invalidate the aforementioned provision. 21 Nevertheless, in
view of our discussions under the first and second issues raised by petitioners, there
is no reason to set aside the questioned decision and resolution of respondent court.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals
dated May 28, 1992 and its resolution dated September 10, 1992 are AFFIRMED.
SO ORDERED.

G.R. No. 124221

August 4, 2000

VICTORINO MAGAT, JR. substituted by heirs, OLIVIA D. MAGAT, and minors

MA. DULCE MAGAT, MA. MAGNOLIA MAGAT, RONALD MAGAT and DENNIS
MAGAT, petitioners,
vs.
COURT OF APPEALS and SANTIAGO A. GUERRERO, respondents.
PARDO, J.:
The case is an appeal1 from the decision of the Court of Appeals2 reversing the
3
decision of the Regional Trial Court of Makati, Metro Manila, ruling in favor of
respondent Santiago A. Guerrero and dismissing petitioners' complaint.
First, the facts.
Private respondent Santiago A. Guerrero (hereinafter referred to as "Guerrero") was
President and Chairman of4"Guerrero Transport Services", a single proprietorship. 5
Sometime in 1972, Guerrero Transport Services won a bid for the operation of a fleet
of taxicabs within the Subic Naval Base, in Olongapo. As highest bidder, Guerrero
was to "provide radio-controlled taxi service within the U.S. Naval Base, Subic Bay,
utilizing as demand requires . . . 160 operational taxis consisting of four wheel, fourdoor, four passenger, radio controlled, meter controlled, sedans, not more than one
6
year . . . "
On September 22, 1972, with the advent of martial law, President Ferdinand E.
Marcos issued Letter of Instruction No. 1 (hereinafter referred to as "the LOI"). We
reproduce the text, as follows:
"Letter of Instruction No. 1
"SUBJECT: SEIZURE AND CONTROL OF ALL PRIVATELY OWNED
NEWSPAPERS, MAGAZINES, RADIO AND TELEVISION FACILITIES AND
ALL OTHER MEDIA OF COMMUNICATION.
"To: 1. The Press Secretary Office of the President
Manila
"2. The Secretary Department of National
Defense
Camp E. Aguinaldo, Q.C.
"In view of the present national emergency which has been brought about by
the activities of those who are actively engaged in a criminal conspiracy to
seize political and state power in the Philippines and to take over the
Government by force and violence the extent of which has now assumed the
proportion of an actual war against our people and their legitimate
Government, and pursuant to Proclamation No. 1081 dated September 21,
1972, and in my capacity as commander in chief of all the armed forces of
the Philippines and in order to prevent the use of privately owned
newspapers, magazines, radio and television facilities and all other media of
communications, for propaganda purposes against the government and its
duly constituted authorities or for any purpose that tend to undermine the
faith and confidence of the people in our government and aggravate the

present national emergency, you are hereby ordered forthwith to take over
and control or cause the taking over and control of all such newspapers,
magazines, radio and television facilities and all other media of
communications, wherever they are, for the duration of the present national
emergency, or until otherwise ordered by me or by my duly designated
representative.1wphi1.nt
"In carrying out the foregoing order you are hereby also directed to see to it
that reasonable means are employed by you and your men and that injury to
persons and property must be carefully avoided."
On September 25, 1972, pursuant to the aforequoted Letter of Instruction, the Radio
Control Office issued Administrative Circular No. 4 (hereinafter referred to as "the
Admin. Circular"), herein quoted in full:
"SUBJECT: SUSPENDING THE ACCEPTANCE AND PROCESSING OF
APPLICATIONS FOR RADIO STATION CONSTRUCTION PERMITS AND
FOR PERMITS TO OWN AND/OR POSSESS RADIO TRANSMITTERS OR
TRANSCEIVERS.
"In view of the existence of a state of emergency and the declaration by the
President of martial law in the entire country under Proclamation No. 1081
dated September 21, 1972, effective immediately the acceptance and
processing by the radio control office of applications for radio stations
constructions permits and for permits to possess, own, transfer, purchase
and sale of radio transmitters and transreceivers as well as manufacturers
and dealer's permits of said equipment is hereby suspended.
"Exempted from this circular are applications for radio station construction
permits and for permits to possess, own, transfer, purchase and sell radio
transmitters and transceivers for the following radio stations:
"1. Aeronautical Stations;
"2. Aeronautical Fixed Stations;
"3. Aircraft Stations;
"4. Coastal Stations; and
"5. Ship Stations.
"This circular shall be strictly observed until lifted upon proper instructions
from higher authorities."
On September 25, 1972, Guerrero and Victorino D. Magat (hereinafter referred to as
Victorino), as General Manager of Spectrum Electronic Laboratories, a single
proprietorship, executed a letter-contract for the purchase of transceivers at a quoted
price of US$77,620.59, FOB Yokohoma. Victorino was to deliver the transceivers
within 60 to 90 days after receiving notice from Guerrero of the assigned radio
frequency,7 "taking note of Government Regulations."8
The contract was signed and Victorino contacted his Japanese supplier, Koide & Co.,
Ltd. and placed an order for the transceivers.
On September 29, 1972, Navy Exchange Officer, A. G. Mason confirmed that
9
Guerrero won the bid for the commercial transportation contract.

10

On October 4, 1972, middle man and broker Isidro Q. Aligada of Reliance Group
Engineers, Inc. (hereinafter referred to as "Aligada"), wrote Victorino, informing him
that a radio frequency was not yet assigned to Guerrero and that government
regulations might complicate the importation of the transceivers. However, in the
same letter, Victorino was advised to advise his supplier "to proceed (with) production
pending frequency information." Victorino was also assured of Guerrero's financial
capability to comply with the contract.11

to substitute Victorino in its prosecution. Apparently, Victorino died on February 18,

1985.30

On October 6, 1972, Guerrero informed Aligada of the frequency number 12 assigned

by Subic Naval Base authorities. Aligada was instructed to "proceed with the order
thru Spectrum Electronics Laboratories."13

"WHEREFORE, judgment is rendered for the substituted plaintiffs and

against the defendant

On October 7, 1972, Aligada informed Magat of the assigned frequency number.

Aligada also advised Victorino to "proceed with the order upon receipt of letter of
credit."14
On January 10, 1973, Guerrero applied for a letter of credit with the Metropolitan
15
16
Bank and Trust Company. This application was not pursued.
On March 27, 1973, Victorino, represented by his lawyer, Atty. Sinesio S. Vergara,
informed Guererro that the order with the Japanese supplier has not been canceled.
Should the contract be canceled, the Japanese firm would forfeit 30% of the deposit
and charge a cancellation fee in an amount not yet known, Guerrero to bear the loss.
Further, should the contract be canceled, Victorino would demand an additional
amount equivalent to 10% of the contract price. 17
Unable to get a letter of credit from the Central Bank due to the refusal of the
Philippine government18 to issue a permit to import the transceivers, 19 Guerrero
commenced operation of the taxi cabs within Subic Naval Base, using radio units
borrowed from the U.S. government (through the Subic Naval Base
20
authorities). Victorino thus canceled his order with his Japanese supplier.
On May 22, 1973, Victorino filed with the Regional Trial Court, Makati a complaint for
damages arising from breach of contract against Guerrero. 21
On June 7, 1973, Guerrero moved to dismiss the complaint on the ground that it did
22
not state a cause of action.
On June 16, 1973, the trial court

23

granted the motion and dismissed the complaint.

24

On July 11, 1973, Victorino filed a petition for review on certiorari with this Court
assailing the dismissal of the complaint.25
2

On April 20, 1983, this Court 6 ruled that the complaint sufficiently averred a cause
of action. We set aside the order of dismissal and remanded the case to the trial court
for further proceedings, to wit:27

On April 29, 1985, the trial court granted the motion. 31

On July 12, 1991, the trial court decided in favor of the heirs of Victorino and ordered
Guerrero to pay temperate, moral and exemplary damages, and attorney's fees,
disposing of the case in this wise: 32

"1. Ordering defendant to pay substituted plaintiffs the sum of P25,000.00 for
temperate damages for injury to plaintiff's business dealings with foreign and
local businessmen;
"2. P50,000.00 as moral damages;
"3. P25,000.00 as exemplary
damages; and
"4. P20,000.00 as attorney's fees.
"SO ORDERED."
On August 21, 1991, Guerrero appealed to the Court of Appeals.

33

On October 4, 1995, the Court of Appeals rendered the decision appealed from,
34
disposing as follows:
"WHEREFORE, judgment is hereby rendered DISMISSING the complaint.
"No pronouncements as to costs.
" SO ORDERED."
On October 26, 1995, the heirs of Victorino filed with the Court of Appeals a motion
for reconsideration.35
On March 12, 1996, the Court of Appeals denied the motion for reconsideration.

36

Hence, this appeal.37

The issue is whether the contract between Victorino and Guerrero for the purchase of
radio transceivers was void. Stated differently, whether the transceivers subject of the
contract were banned contraband items prohibited by the LOI and the Administrative
Circular to import.
The contract was valid; the radio transceivers were not contraband.

"ACCORDINGLY, the questioned order of dismissal is hereby set aside and

the case ordered remanded to the court of origin for further proceedings. No
costs.

"Contraband" generally refers to "any property which is unlawful to produce or

possess." It refers to goods which are exported and imported into a country against its
38
laws.

"SO ORDERED."

In declaring the contract void ab initio, the Court of Appeals ruled that the importation
of the transceivers meant the inevitable passing of such goods through Philippine
Ports, where the LOI and the Administrative Circular have to be observed and applied
39
with full force and effect. The Court of Appeals declared that the proposed
40
importation of such goods was contrary to law, hence, the nullity of the contract.

On November 27, 1984, the trial court

29
of Victorino to prosecute.

28

ordered that the case be archived for failure

On March 11, 1985, petitioners, Olivia, Dulce, Ma. Magnolia, Ronald and Dennis
Magat (hereinafter referred to as "heirs of Victorino"), moved to reinstate the case and

We do not agree. The contract was not void ab initio. Nowhere in the LOI and Admin.
Circular is there an express ban on the importation of transceivers.
The LOI and Administrative Circular did not render "radios and transceivers"
illegal per se. The Administrative Circular merely ordered the Radio Control Office to
suspend the "acceptance and processing . . . . of applications . . . for permits to
possess, own, transfer, purchase and sell radio transmitters and transceivers . . .
"41 Therefore, possession and importation of the radio transmitters and transceivers
was legal provided one had the necessary license for it.42 Transceivers were not
prohibited but merely regulated goods. The LOI and Administrative Circular did not
render the transceivers outside the commerce of man. They were valid objects of the
contract.43
Affirming the validity of the contract, we next discuss whether the contract was
breached.
Guerrero testified that a permit to import the transceivers from Japan was denied by
the Radio Control Board. He stated that he, together with Aligada, Victorino and a
certain John Dauden personally went to the Radio Control Office, and were denied a
permit to import. They also went to the Office of the President, where Secretary
Ronaldo B. Zamora explained that radios were "banned like guns because of martial
law."44 Guerrero testified that this prevented him from securing a letter of credit from
the Central Bank.45 This testimony was not rebutted.
The law provides that "[w]hen the service (required by the contract) has become so
manifestly beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part."46 Here, Guerrero's inability to secure a letter of credit
and to comply with his obligation was a direct consequence of the denial of the permit
to import. For this, he cannot be faulted.
Even if we assume that there was a breach of contract, damages cannot be
awarded. Damnum absque injuria.
There was no bad faith.47 Bad faith does not simply connote bad judgment or
negligence. It imports a dishonest purpose or some moral obliquity and conscious
doing of wrong. It means a breach of a known duty through some motive or interest or
ill will that partakes of the nature of fraud. 48 Guerrero honestly relied on the
representations of the Radio Control Office and the Office of the President.
True, Guerrero borrowed equipment from the Subic Naval Base authorities at zero
cost.49 This does not automatically translate to bad faith. Guerrero was faced with the
danger of the cancellation of his contract with Subic Naval Base. He borrowed
equipment as a prudent and swift alternative. There was no proof that he resorted to
this option with a deliberate and malicious intent to dishonor his contract with
Victorino. An award of damages surely cannot be based on mere hypotheses,
conjectures and surmises. Good faith is presumed, the burden of proving bad faith
rests on the one alleging it.50 Petitioners did not effectively discharge the burden in
this case.
To recover moral damages in an action for breach of contract, the breach must be
palpably wanton, reckless, malicious, in bad faith, oppressive or abusive. 51 This is not
the case here.
Exemplary damages also cannot be awarded. Guerrero did not act in a wanton,
52
fraudulent, reckless, oppressive or malevolent manner.

Neither can actual damages be awarded. True, indemnification for damages

contemplates not only actual loss suffered (damnum emergens) but unrealized profits
(lucrum cessans) as well.53 However, to be entitled to adequate compensation for
54
pecuniary loss, the loss must be actually suffered and duly proved. To recover
actual damages, the amount of loss must not only be capable of proof, but must be
proven with a reasonable degree of certainty. The claim must be premised upon
competent proof or upon the best evidence obtainable, 55such as receipts56 or other
documentary proof.
Only the testimony of Aligada was presented to substantiate petitioners' claim for
unrealized profits.57 Aligada testified that as a result of the cancellation of the
contract, Victorino had to suspend transactions with his Japanese supplier for six (6)
months. Aligada stated that the volume of Victorino's business with Subic Naval Base
also diminished significantly. Aligada approximated that Victorino's unrealized
business opportunities amounted to P400,000.00.58 Being a witness for Victorino's
heirs and standing to gain from the contract's fulfillment, Aligada's testimony is selfserving. It is also hearsay. We fail to see how this "evidence" proves actual damages
with a "reasonable degree of certainty."59 If proof is "flimsy", we cannot award actual
damages.60
WHEREFORE, we AFFIRM the decision of the Court of Appeals promulgated on
October 11, 1995, in CA-G. R. CV No. 34952, dismissing the complaint.1wphi1.nt
No costs.
SO ORDERED.

G.R. No. L-22493 July 31, 1975

ISLAND SALES, INC., plaintiff-appellee,
vs.
UNITED PIONEERS GENERAL CONSTRUCTION COMPANY, ET. AL defendants.
BENJAMIN C. DACO,defendant-appellant.
Grey, Buenaventura and Santiago for plaintiff-appellee.
Anacleto D. Badoy, Jr. for defendant-appellant.

CONCEPCION JR., J.:

This is an appeal interposed by the defendant Benjamin C. Daco from the decision of
the Court of First Instance of Manila, Branch XVI, in Civil Case No. 50682, the
dispositive portion of which reads:
WHEREFORE, the Court sentences defendant United Pioneer General
Construction Company to pay plaintiff the sum of P7,119.07 with interest at
the rate of 12% per annum until it is fully paid, plus attorney's fees which the
Court fixes in the sum of Eight Hundred Pesos (P800.00) and costs.
The defendants Benjamin C. Daco, Daniel A. Guizona, Noel C. Sim and
Augusto Palisoc are sentenced to pay the plaintiff in this case with the
understanding that the judgment against these individual defendants shall be
enforced only if the defendant company has no more leviable properties with
which to satisfy the judgment against it. .
The individual defendants shall also pay the costs.
On April 22, 1961, the defendant company, a general partnership duly registered
under the laws of the Philippines, purchased from the plaintiff a motor vehicle on the
installment basis and for this purpose executed a promissory note for P9,440.00,
payable in twelve (12) equal monthly installments of P786.63, the first installment
payable on or before May 22, 1961 and the subsequent installments on the 22nd day
of every month thereafter, until fully paid, with the condition that failure to pay any of
said installments as they fall due would render the whole unpaid balance immediately
due and demandable.
Having failed to receive the installment due on July 22, 1961, the plaintiff sued the
defendant company for the unpaid balance amounting to P7,119.07. Benjamin C.
Daco, Daniel A. Guizona, Noel C. Sim, Romulo B. Lumauig, and Augusto Palisoc
were included as co-defendants in their capacity as general partners of the defendant
company.
Daniel A. Guizona failed to file an answer and was consequently declared in default. 1
Subsequently, on motion of the plaintiff, the complaint was dismissed insofar as the
2
defendant Romulo B. Lumauig is concerned.
When the case was called for hearing, the defendants and their counsels failed to
appear notwithstanding the notices sent to them. Consequently, the trial court
authorized the plaintiff to present its evidence ex-parte 3 , after which the trial court
rendered the decision appealed from.

The defendants Benjamin C. Daco and Noel C. Sim moved to reconsider the decision
claiming that since there are five (5) general partners, the joint and subsidiary liability
of each partner should not exceed one-fifth ( 1/ 5 ) of the obligations of the defendant
company. But the trial court denied the said motion notwithstanding the conformity of
1 5
the plaintiff to limit the liability of the defendants Daco and Sim to only one-fifth ( / )
4
of the obligations of the defendant company. Hence, this appeal.
The only issue for resolution is whether or not the dismissal of the complaint to favor
one of the general partners of a partnership increases the joint and subsidiary liability
of each of the remaining partners for the obligations of the partnership.
Article 1816 of the Civil Code provides:
Art. 1816. All partners including industrial ones, shall be liable pro rata with
all their property and after all the partnership assets have been exhausted,
for the contracts which may be entered into in the name and for the account
of the partnership, under its signature and by a person authorized to act for
the partnership. However, any partner may enter into a separate obligation
to perform a partnership contract.
In the case of Co-Pitco vs. Yulo (8 Phil. 544) this Court held:
The partnership of Yulo and Palacios was engaged in the operation of a
sugar estate in Negros. It was, therefore, a civil partnership as distinguished
from a mercantile partnership. Being a civil partnership, by the express
provisions of articles l698 and 1137 of the Civil Code, the partners are not
liable each for the whole debt of the partnership. The liability is pro rata and
in this case Pedro Yulo is responsible to plaintiff for only one-half of the debt.
The fact that the other partner, Jaime Palacios, had left the country cannot
increase the liability of Pedro Yulo.
In the instant case, there were five (5) general partners when the promissory note in
question was executed for and in behalf of the partnership. Since the liability of the
partners is pro rata, the liability of the appellant Benjamin C. Daco shall be limited to
1 5
only one-fifth ( / ) of the obligations of the defendant company. The fact that the
complaint against the defendant Romulo B. Lumauig was dismissed, upon motion of
the plaintiff, does not unmake the said Lumauig as a general partner in the defendant
company. In so moving to dismiss the complaint, the plaintiff merely condoned
Lumauig's individual liability to the plaintiff.
WHEREFORE, the appealed decision as thus clarified is hereby AFFIRMED, without
pronouncement as to costs.
SO ORDERED.

G.R. No. 109172 August 19, 1994

Gancayco Law Offices for petitioners.

Initially, Trans-Pacific expressed its willingness to pay the amount demanded by

respondent bank. Later, it had a change of heart and instead initiated an action before
the Regional Trial Court of Makati, Br. 146, for specific performance and damages.
There it prayed that the mortgage over the two parcels of land be released and its
stock inventory be lifted and that its obligation to the bank be declared as having been
fully paid.

Jose A. Soluta, Jr. & Associates for private respondent.

After trial, the court a quo rendered judgment in favor of Trans-Pacific, to wit:

TRANS-PACIFIC INDUSTRIAL SUPPLIES, INC., petitioner,

vs.
The COURT OF APPEALS and ASSOCIATED BANK, respondents.

BIDIN, J.:

WHEREFORE, premises considered and upon a clear preponderance of

evidence in support of the stated causes of action, the Court finds for the
plaintiffs and against defendant, and

In this petition for review on certiorari, petitioner Trans-Pacific Industrial Supplies, Inc.
seeks the reversal of the decision of respondent court, the decretal portion of which
reads:

(a) declares plaintiff's obligations to defendant to have been already

fully paid;

WHEREFORE, the decision of June 11, 1991 is SET ASIDE and

NULLIFIED; the complaint is dismissed, and on the counterclaim,
Transpacific is ordered to pay Associated attorney's fees of P15,000.00.

(b) orders defendant to execute and deliver to plaintiffs a release on

the i September 11, 1981 mortgage over TCT (50858)
S-10086 and TCT (50859) S-109087, and ii December 20, 1983
chattel mortgage, within fifteen (15) days from the finality hereof;

Costs against Transpacific.

(c) orders defendant to pay plaintiffs Romeo Javier and Romana

Bataclan-Javier the sum of P50,000.00 as and for moral damages;
and

SO ORDERED. (Rollo, p. 47)

Sometime in 1979, petitioner applied for and was granted several
financialACCOMMODATIONS amounting to P1,300,000.00 by respondent
Associated Bank. The loans were evidenced and secured by four (4) promissory
notes, a real estate mortgage covering three parcels of land and a chattel mortgage
over petitioner's stock and inventories.
Unable to settle its obligation in full, petitioner requested for, and was granted by
respondent bank, a restructuring of the remaining indebtedness which then amounted
to P1,057,500.00, as all the previous payments made were applied to penalties and
interests.
To secure the re-structured loan of P1,213,400.00, three new promissory notes were
executed by Trans-Pacific as follows: (1) Promissory Note No. TL-9077-82 for the
amount of P1,050,000.00 denominated as working capital; (2) Promissory Note No.
TL-9078-82 for the amount of P121,166.00 denominated as restructured interest; (3)
Promissory Note No. TL-9079-82 for the amount of P42,234.00 denominated similarly
as restructured interest (Rollo. pp. 113-115).
The mortgaged parcels of land were substituted by another mortgage covering two
other parcels of land and a chattel mortgage on petitioner's stock inventory. The
released parcels of land were then sold and the proceeds amounting to
P1,386,614.20, according to petitioner, were turned over to the bank and applied to
Trans-Pacific's restructured loan. Subsequently, respondent bank returned the
duplicate original copies of the three promissory notes to Trans-Pacific with the word
"PAID" stamped thereon.
Despite the return of the notes, or on December 12, 1985, Associated Bank
demanded from Trans-Pacific payment of the amount of P492,100.00 representing
accrued interest on PN No. TL-9077-82. According to the bank, the promissory notes
were erroneously released.

(d) orders defendant to pay plaintiffs the sum of P30,000.00 as

attorney's fees, plus expenses of the suit.
Defendant's counterclaims are dismissed for lack of merit.
With costs against defendant.
SO ORDERED. (Rollo, p. 101)
Respondent bank elevated the case to the appellate court which, as aforesaid,
reversed the decision of the trial court. In this appeal, petitioner raises four errors
allegedly committed by the respondent court, namely:
I
RESPONDENT APPELLATE COURT ERRED IN HOLDING THAT THE
ACCRUED INTEREST IN THE AMOUNT OF 492,100.00 HAS NOT BEEN
PAID WHEN ARTICLE 1176 OF THE CIVIL CODE PROVIDES THAT
SUCH CLAIM FOR INTEREST UPON RECEIPT OF PAYMENT OF THE
PRINCIPAL MUST BE RESERVED OTHERWISE IT IS DEEMED PAID.
II
RESPONDENT APPELLATE COURT ERRED IN HOLDING THAT WITH
THE DELIVERY OF THE DOCUMENTS EVIDENCING THE PRINCIPAL
OBLIGATION, THE ANCILLARY OBLIGATION OF PAYING INTEREST
WAS NOT RENOUNCED CONTRARY TO THE PROVISIONS OF ART.
1273 OF THE CIVIL CODE AND THE UNDISPUTED EVIDENCE ON
RECORD.
III

RESPONDENT APPELLATE COURT ERRED IN NOT HOLDING THAT

PETITIONER HAS FULLY PAID ITS OBLIGATION CONFORMABLY WITH
ARTICLE 1234 OF THE CIVIL CODE.
IV
RESPONDENT
APPELLATE
COURT
ERRED
IN AWARDING
ATTORNEY'S FEES IN FAVOR OF ASSOCIATED BANK (Rollo, p. 15).
The first three assigned errors will be treated jointly since their resolution border on
the common issue, i.e., whether or not petitioner has indeed paid in full its obligation
to respondent bank.
Applying the legal presumption provided by Art. 1271 of the Civil Code, the trial court
ruled that petitioner has fully discharged its obligation by virtue of its possession of
the documents (stamped "PAID") evidencing its indebtedness. Respondent court
disagreed and held, among others, that the documents found in possession of TransPacific are mere duplicates and cannot be the basis of petitioner's claim that its
obligation has been fully paid. Accordingly, since the promissory notes submitted by
petitioner were duplicates and not the originals, the delivery thereof by respondent
bank to the petitioner does not merit the application of Article 1271 (1st par.) of the
Civil Code which reads:
Art. 1271. The delivery of a private document evidencing a credit, made
voluntarily by the creditor to the debtor, implies the renunciation of the action
which the former had against the latter.
Respondent court is of the view that the above provision must be construed to mean
the original copy of the document evidencing the credit and not its duplicate, thus:
. . . [W]hen the law speaks of the delivery of the private document
evidencing a credit, it must be construed as referring to the original. In this
case, appellees (Trans-Pacific) presented, not the originals but the
duplicates of the three promissory notes." (Rollo, p. 42)
The above pronouncement of respondent court is manifestly groundless. It is
undisputed that the documents presented were duplicate originals and are therefore
admissible as evidence. Further, it must be noted that respondent bank itself did not
bother to challenge the authenticity of the duplicate copies submitted by petitioner. In
People vs. Tan, (105 Phil. 1242 [1959]), we said:
When carbon sheets are inserted between two or more sheets of writing
paper so that the writing of a contract upon the outside sheet, including the
signature of the party to be charged thereby, produces a facsimile upon the
sheets beneath, such signature being thus reproduced by the same stroke of
pen which made the surface or exposed impression, all of the sheets so
written on are regarded as duplicate originals and either of them may be
introduced in evidence as such without accounting for the nonproduction of
the others.
A duplicate copy of the original may be admitted in evidence when the original is in
the possession of the party against whom the evidence is offered, and the latter fails
to produce it after reasonable notice (Sec. 2[b], Rule 130), as in the case of
respondent bank.

This notwithstanding, we find no reversible error committed by the respondent court in

disposing of the appealed decision. As gleaned from the decision of the court a quo,
judgment was rendered in favor of petitioner on the basis of presumptions, to wit:
The surrender and return to plaintiffs of the promissory notes evidencing the
consolidated obligation as restructured, produces a legal presumption that
Associated had thereby renounced its actionable claim against plaintiffs (Art.
1271, NCC). The presumption is fortified by a showing that said promissory
notes all bear the stamp "PAID", and has not been otherwise overcome.
Upon a clear perception that Associated's record keeping has been less than
exemplary . . ., a proffer of bank copies of the promissory notes without the
"PAID" stamps thereon does not impress the Court as sufficient to overcome
presumed remission of the obligation vis-a-vis the return of said promissory
notes. Indeed, applicable law is supportive of a finding that in interest
bearing obligations-as is the case here, payment of principal (sic) shall not
be deemed to have been made until the interests have been covered (Art.
1253, NCC). Conversely, competent showing that the principal has been
paid, militates against postured entitlement to unpaid interests.
In fine. the Court is satisfied that plaintiffs must be found to have settled their
obligations in full.
As corollary, a finding is accordingly compelled that plaintiffs (sic) accessory
obligations under the real estate mortgage over two (2) substituted lots as
well as the chattel mortgage, have been extinguished by the renunciation of
the principal debt (Art. 1273, NCC), following the time-honored axiom that
the accessory follows the principal. There is, therefore, compelling warrant
(sic) to find in favor of plaintiffs insofar as specific performance for the
release of the mortgages on the substituted lots and chattel is concerned.
(Rollo, p. 100)
premised by:
Records show that Associated's Salvador M. Mesina is on record as having
testified that all three (3) December 8, 1990 promissory notes for the
consolidated principal obligation, interest and penalties had been fully paid
(TSN, July 18, 1990, p. 18). It is, moreover, admitted that said promissory
notes were accordingly returned to Romeo Javier. (Ibid.)
The above disquisition finds no factual support, however, per review of the records.
The presumption created by the Art. 1271 of the Civil Code is not conclusive but
merely prima facie. If there be no evidence to the contrary, the presumption stands.
Conversely, the presumption loses its legal efficacy in the face of proof or evidence to
the contrary. In the case before us, we find sufficient justification to overthrow the
presumption of payment generated by the delivery of the documents evidencing
petitioners indebtedness.
It may not be amiss to add that Article 1271 of the Civil Code raises a presumption,
not of payment, but of the renunciation of the credit where more convincing evidence
would be required than what normally would be called for to prove payment. The
rationale for allowing the presumption of renunciation in the delivery of a private
instrument is that, unlike that of a public instrument, there could be just one copy of
the evidence of credit. Where several originals are made out of a private document,
the intendment of the law would thus be to refer to the delivery only of the
original original rather than to the original duplicate of which the debtor would

normally retain a copy. It would thus be absurd if Article 1271 were to be applied
differently.
While it has been consistently held that findings of facts are not reviewable by this
Court, this rule does not find application where both the trial and the appellate courts
differ thereon (Asia Brewery, Inc. v. CA, 224 SCRA 437 [1993]).
Petitioner maintains that the findings of the trial court should be sustained because of
its advantage in observing the demeanor of the witnesses while testifying (citing
Crisostomo v. Court of Appeals, 197 SCRA 833) more so where it is supported by the
records (Roman Catholic Bishop of Malolos v. Court of Appeals, 192 SCRA 169).
This case, however, does not concern itself with the demeanor of witnesses. As for
the records, there is actually none submitted by petitioner to prove that the contested
amount, i.e., the interest, has been paid in full. In civil cases, the party that alleges a
fact has the burden of proving it (Imperial Victory Shipping Agency v. NLRC 200
SCRA 178 [1991]). Petitioner could have easily adduced the receipts corresponding
to the amounts paid inclusive of the interest to prove that it has fully discharged its
obligation but it did not.
There is likewise nothing on the records relied upon by the trial court to support its
claim, by empirical evidence, that the amount corresponding to the interest has
indeed been paid. The trial court totally relied on a disputable presumption that the
obligation of petitioner as regards interest has been fully liquidated by the
respondent's act of delivering the instrument evidencing the principal obligation.
Rebuttable as they are, the court a quo chose to ignore an earlier testimony of Mr.
Mesina anent the outstanding balance pertaining to interest, as follows:
Court:
Q Notwithstanding, let us go now specifically to promissory note
No. 9077-82 in the amount of consolidated principal of
P1,050,000.00. Does the Court get it correctly that this consolidated
balance has been fully paid?
A Yes, the principal, yes, sir.
Q Fully settled?
A Fully settled, but the interest of that promissory note has not been
paid, Your Honor.
Q In other words, you are saying, fully settled but not truly fully
settled?
A The interest was not paid.
Q Not fully settled?
A The interest was not paid, but the principal obligation was
removed from our books, Your Honor.
Q And you returned the promissory note?
A We returned the promissory note. (TSN, July 18, 1990, p. 22)

That petitioner has not fully liquidated its financial obligation to the Associated Bank
finds more than ample confirmation and self-defeating posture in its letter dated
December 16, 1985, addressed to respondent bank,viz.:
. . . that because of the prevailing unhealthy economic conditions, the
business is unable to generate sufficient resources for debt servicing.
Fundamentally on account of this, we propose that you permit us to fully
liquidate the remaining obligations to you of P492,100 through a payment in
kind (dacion en pago) arrangement by way of the equipments (sic) and
spare parts under chattel mortgage to you to the extent of their latest
appraised values." (Rollo, pp. 153-154; Emphasis supplied)
Followed by its August 20, 1986 letter which reads:
We have had a series of communications with your bank regarding our
proposal for the eventual settlement of our remaining obligations . . .
As you may be able to glean from these letters and from your credit files, we
have always been conscious of our obligation to you which had not been
faithfully serviced on account of unfortunate business reverses.
Notwithstanding these however, total payments thus far remitted to you
already exceede (sic) the original principal amount of our obligation. But
because of interest and other charges, we find ourselves still obligated to
you by P492,100.00. . . .
. . . We continue to find ourselves in a very fluid (sic) situation in as much as
the overall outlook of the industry has not substantially improved. Principally
for this reason, we had proposed to settle our remaining obligations to you
by way of dacion en pago of the equipments (sic) and spare parts
mortgaged to you to (the) extent of their applicable loan values. (Rollo, p.
155; Emphasis supplied)
Petitioner claims that the above offer of settlement or compromise is not an admission
that anything is due and is inadmissible against the party making the offer (Sec. 24,
Rule 130, Rules of Court). Unfortunately, this is not an iron-clad rule.
To determine the admissibility or non-admissibility of an offer to compromise, the
circumstances of the case and the intent of the party making the offer should be
considered. Thus, if a party denies the existence of a debt but offers to pay the same
for the purpose of buying peace and avoiding litigation, the offer of settlement is
inadmissible. If in the course thereof, the party making the offer admits the existence
of an indebtedness combined with a proposal to settle the claim amicably, then, the
admission is admissible to prove such indebtedness (Moran, Comments on the Rules
of Court, Vol. 5, p. 233 [1980 ed.); Francisco, Rules of Court, Vol. VII, p. 325 [1973
ed.] citing McNiel v. Holbrook, 12 Pac. (US) 84, 9 L.ed. 1009). Indeed, an offer of
settlement is an effective admission of a borrower's loan balance (L.M. Handicraft
Manufacturing Corp. v. Court of Appeals, 186 SCRA 640 [1990]). Exactly, this is what
petitioner did in the case before us for review.
Finally, respondent court is faulted in awarding attorney's fees in favor of Associated
Bank. True, attorney's fees may be awarded in a case of clearly unfounded civil
action (Art. 2208 [4], CC). However, petitioner claims that it was compelled to file the
suit for damages in the honest belief that it has fully discharged its obligations in favor
of respondent bank and therefore not unfounded.

We believe otherwise. As petitioner would rather vehemently deny, undisputed is the

fact of its admission regarding the unpaid balance of P492,100.00 representing
interests. It cannot also be denied that petitioner opted to sue for specific
performance and damages after consultation with a lawyer (Rollo, p. 99) who advised
that not even the claim for interests could be recovered; hence, petitioner's attempt to
seek refuge under Art. 1271 (CC). As previously discussed, the presumption
generated by Art. 1271 is not conclusive and was successfully rebutted by private
respondent. Under the circumstances, i.e., outright and honest letters of
admission vis-a-vis counsel-induced recalcitrance, there could hardly be honest
belief. In this regard, we quote with approval respondent court's observation:
The countervailing evidence against the claim of full payment emanated
from Transpacific itself. It cannot profess ignorance of the existence of the
two letters, Exhs. 3 & 4, or of the import of what they contain.
Notwithstanding the letters, Transpacific opted to file suit and insist(ed) that
its liabilities had already been paid. There was thus an
ill-advised attempt on the part of Transpacific to capitalize on the delivery of
the duplicates of the promissory notes, in complete disregard of what its own
records show. In the circumstances, Art. 2208 (4) and (11) justify the award
of attorney's fees. The sum of P15,000.00 is fair and equitable. (Rollo, pp.
46-47)
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner.
SO ORDERED.

G.R. No. 43503 October 31, 1990

LEONOR J. BIALA, petitioner,
vs.
COURT OF APPEALS (Fourth Division) and MARIA P. LEE, respondents.
Guillermo U. Gonzales and Antonio M. Reyes for petitioner.
Manuel D. Ancheta for private respondent.

(11) Promissory note dated July 18, 1961, in the amount of P200.00 to be paid on or
before December 30, 1961;
(12) Promissory note executed on July 31, 1961 for P2,193.46 payable on or before
December 31, 1961;
(13) Promissory note dated August 18, 1961 in the sum of P565.00 payable on or
before December 30, 1961;
(14) Promissory note executed on August 21, 1961 for P100.00 to be paid on or
before December 21, 1961;

MEDIALDEA, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals
reversing the decision of the Court of First Instance (now Regional Trial Court) of
Pangasinan, in Civil Case No. D-2610 entitled "Maria P. Lee v. Leonor Biala" which
dismissed the complaint for sum of money in favor of petitioner, who is the defendant
in the trial court.
The antecedent facts of this case are as follows:
On November 3, 1970, respondent Lee filed an action for collection of sum of money
against petitioner Biala, in the amount of P31,338.76, based on several causes of
action, evidenced by documents of real estate mortgages and promissory notes
executed by petitioner in favor of private respondent, as follows:
(1) Deed of Real Estate Mortgage on August 15, 1956 over two residential houses on
Lot 374-C of the cadastral survey of Dagupan in the amount of P12,000.00,
redeemable within a period of five (5) years from the date of execution of the deed;
(2) Deed of Real Estate Mortgage on April 8, 1958 over Lot 374-C on which the two
residential houses previously mortgaged stand, in the amount of P2,000.00 payable
within two (2) years from April 8, 1958;
(3) Deed of Second Real Estate Mortgage over the same lot 374-C in the amount of
P4,857.00 payable within one (1) year from the date of the contract;
(4) Promissory note dated March 28, 1960, in the amount of P2,330.00 payable on or
before April 8, 1960;
(5) Promissory notes dated May 27, 1960, in the amount of P500. 00 payable on or
before April 8, 1961;
(6) Promissory note dated December 15, 1960, in the amount of P4,790.00 to be paid
on or before January 1, 1961;
(7) Promissory note dated April 14, 1961, in the amount of P300.00 to be paid on or
before May 8, 1961;
(8) Promissory note executed on May 5, 1961, for P100.00 payable on or before June
30, 1961;
(9) Promissory note dated May 23, 1961, for P700.00 payable on or before August
31, 1961;
(10) Promissory note signed on June 30, 1961 for P310.00 to be paid on or before
September 30, 1961;

(15) Promissory note dated April 24, 1963 in the amount o f P100.00, with the
following statement: his account of mine will be paid if I will pay all my accounts to her
and all conditions will follow my previous accounts with her.
Respondent Lee also claimed the additional amount of P295.00 which the former
allegedly paid Atty. Rivera, counsel for petitioner.
Petitioner denied all respondent's allegations in her answer and contended that
although she signed for the amount of P12,000.00 as stated in the first cause of
action, the real amount she actually received from respondent was only P2,000.00 as
shown in the latter's affidavit dated May 27, 1958; that the claims of respondent in the
second, third, fourth, fifth and ninth causes of action had already been settled, and
even if not settled, the action has already prescribed; and that the amounts stated
under the other causes of action were never received by her.
On December 5, 1972, the trial court rendered a decision dismissing the complaint on
the ground of prescription of all claims prayed for therein. Thedispositive portion of
the decision states:
WHEREFORE, in view of all the foregoing, the Court hereby renders
judgment in favor of the defendant. The plaintiff is ordered to pay the
defendant the following: (1) The amount of Five Thousand Pesos
(P5,000.00) as the actual, moral and exemplary damage(s) suffered by the
defendant (2) The sum of Two Thousand Pesos (P2,000.00) as attorney's
fees and (3) To pay the costs of suit.
SO ORDERED. (p. 58, Records)
Not satisfied with the decision, respondent Lee appealed the decision to the Court of
Appeals. On January 15, 1976, respondent appellate court rendered judgment
reversing the decision of the trial court in favor of respondent Lee, the dispositive
portion of which reads as follows:
WHEREFORE, the decision appealed from is REVERSED, and a new one
shall be entered, ordering defendant-appellee to pay plaintiff-appellant the
amount of P28,215.46, plus 12% interest on the amount from the date the
instant suit was initiated in the lower court; to pay attorney's fees in the
amount of P3,000.00; and to pay the costs.
SO ORDERED. (p. 37, Rollo)
Hence, the petition is filed with the petitioner assigning the following errors:
I

THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING

THAT THE ACTION IS BARRED BY LACHES.
II
THE RESPONDENT COURT OF APPEALS ERRED IN DISCARDING THE
AFFIDAVIT OF PRIVATE RESPONDENT DATED MAY 27, 1958 (EXHIBIT
I) AND GIVING MORE WEIGHT AND CREDENCE TO HER ORAL
TESTIMONY IN COURT.
III
THE RESPONDENT COURT OF APPEALS ERRED IN DISREGARDING
THE
TESTIMONY
OF
PETITIONER
THAT
THE
ALLEGED
INDEBTEDNESS HAS ALREADY BEEN PAID AND GIVING MORE FORCE
AND CREDIT TO HER ALLEGATIONS IN HER ANSWER.
IV
THE RESPONDENT COURT OF APPEALS ERRED IN NOT AFFORDING
PETITIONER JUDICIAL PROTECTION UNDER ARTICLE 24 OF THE NEW
CIVIL CODE.
We find the petition devoid of merit.
Anent the first assigned error, petitioner alleges that the action brought by respondent
Lee before the trial court is barred by laches on the ground of unreasonable delay of
nine (9) years before the filing of the action.
Laches is the failure or neglect, for an unreasonable length of time to do that which,
by exercising due diligence could or should have been done earlier; it is negligence or
omission to assert a right within a reasonable time warranting a presumption that the
party entitled to assert it either has abandoned it or declined to assert it. (Tijam, et al.
vs. Sibonghanoy, G.R. 21450, April 15, 1968, 23 SCRA 29; Tejido v. Zamacoma, No.
63048, August 7, 1985, 138 SCRA 78).
The four basic elements of laches are: 1) conduct on the part of the defendant, or of
one under whom he claims, giving rise to the situation of which complaint is made
and for which the complainant seeks a remedy; 2) delay in asserting the
complainant's rights, the complainant having had knowledge or notice of the
defendant's conduct and having been afforded an opportunity to institute suit; 3) lack
of knowledge or notice on the part of the defendant that the complainant would assert
the right on which he bases his suit; and 4) injury or prejudice to the defendant in the
event relief is accorded to the complainant, or the suit is not held to be barred.
While the first element is present in this case, all the other elements are missing. The
lapse of nine (9) years within which respondent Lee had not instituted her suit cannot
be considered as unreasonable delay to warrant the application of laches. In the first
place, the action filed by respondent has not yet prescribed, since it was instituted
well within the period of ten (10) years from the time the cause of action accrued as
provided by law. The doctrine of laches, being an equitable principle, should not be
applied to supplant what is clearly stated in the law, especially if it would defeat and
not promote justice.
Moreover, the petitioner, in invoking laches, has not sufficiently shown that she has
no knowledge that respondent Lee would assert her right for the collection of the
obligations which the former owes the latter. On the contrary, petitioner admits the

existence of the real estate mortgages on the properties and the promissory notes
signed by her in favor of respondent Lee. Although she raised the defense of
payment of all her debts in her answer before the trial court, there was no proof
presented evidencing payment thereof as correctly found by the appellate court.
Hence, there was more truth to the allegations of respondent, which were not refuted
by petitioner, that several demands had been made to the latter for the payment of all
her debts, and that petitioner had merely given her word and promises to settle such
obligations (p. 13, Brief for Private Respondent). Thus, the doctrine of laches cannot
be taken against respondent where petitioner is shown to have promised from time to
time the relief sought for (Cristobal v. Melchor, et al., G.R. No. L-43203, July 29,
1977, 78 SCRA 175)
As to the last element of laches, there is no showing that the petitioner would be the
party injured or prejudiced if the suit is not held to be barred. There was satisfactory
proof that petitioner owed the respondent several amounts of money and that
payment had not been made thereof. If the suit is allowed to prosper against
petitioner and the latter adjudged liable, her liability would be confined merely to the
settlement of her due and demandable obligations and the payment of proper interest
to respondent for the default incurred. Laches, being an equitable defense, he who
invokes it must come to court with clean hands. (Bailon Casilao v. Court of Appeals,
G.R. 78178, April 15, 1988, 160 SCRA 738).
Anent the second assigned error, petitioner submits that the affidavit executed by
respondent Lee dated May 27, 1958 which states that the real indebtedness of
petitioner is only P2,000.00 with respect to the deed of real estate mortgage should
be given more weight than respondent's oral testimony in court which states that the
petitioner's obligation is P12,000.00.
Said the respondent appellate court on this matter:
In her answer to the first cause of action of the complaint, defendantappellee claimed that "the real amount she received from ... plaintiff is only
P2,000.00, and not P12,000.00." But when she testified before the lower
court, defendant-appellee stated that she did not receive even the P2,000.00
xxx xxx xxx
Defendant-appellee cited the affidavit of plaintiff-appellant, dated May 27,
1958 (Exhibit "I"), in which she stated that there is of only one document so
far executed ... in the amount of P2,000.00 ... and not P12,000.00. The
execution of that affidavit was explained by plaintiff-appellant, as follows:
Q . . . Is it not a fact that you executed this affidavit as appearing in
Exhibit T ?
A I executed this affidavit because this Leonor Biala got a fire
insurance of P10,000.00 and she told me that she is going to put in
my name because in case the house will get burn (sic), the public
will not have any question on my name. So, she put the fire
insurance of P10,000.00 just to cover this affidavit.
COURT:
Q Did you put that arrangement about that fire insurance?

A It was not put in the arrangement but the truth is that they put my
name as beneficiary in the fire insurance in order that I may get the
proceeds of fire insurance and thus was made to guarantee the
amount.
Q Did you have any document or policy to this fact that you would
be the beneficiary?
A Yes, sir.
Q And that P2,000.00 is not really the P12,000.00 which is now the
amount of the loan?
A No, it is P12,000.00 because she put the fire insurance in my
name that is why she made me sign the affidavit.
Q So you are now claiming the amount of P12,000.00.
A I will claim the whole amount.
Q But the P12,000.00 is considered as fire insurance in your favor?
A Yes, sir. But I didn't receive any fire insurance money.
Q Why?
A She got the money when the house was burned.
(t.s.n, pp. 52-54, Hearing on October 7, 1971).
xxx xxx xxx
It is said that the insurance company would not insure the two houses unless
there is a document to the effect that the mortgage lien thereon was only
P2,000.00, to justify the insurance of the two houses for P10,000.00. (pp.
31-34, Rollo)
We agree with the findings of the appellate court. Respondent's testimony
satisfactorily explained the details behind the declaration she previously made in an
affidavit. Taken along with the documentary evidence consisting of the deed of real
mortgage for the amount of P12,000.00 and with the other facts and circumstances
surrounding the case, testimony is worthy of belief. Contradictions between an
affidavit and testimony may be explained by the fact that an affidavit will not always
disclose the whole facts and will oftentimes and without design incorrectly describe
without the deponent detecting it, some of the occurrences narrated. Being taken (ex
parte,) the affidavit is almost always incomplete and inaccurate, sometimes from
partial suggestions and sometimes from the want of suggestions and inquiries,
without the aid of which the witness may be unable to recall the connected collateral
circumstances necessary for the correction of the first suggestions of his memory,
and for his accurate recollection of all that belongs to the subject (People v. Andaya,
G.R. 63862, July 31, 1987,152 SCRA 570).
In support of his third assigned error, petitioner submits that her testimony in court
wherein she stated that she had paid all her indebtedness to respondent Lee should
be considered as having amended the allegations in her answer stating that she
never received the amounts claimed in the sixth to eighth and tenth to fifteenth
causes of action under the complaint.

The respondent appellate court found petitioner's testimony unreliable, for being
inconsistent with the allegations in her answer that she never received the amounts
stated in the promissory notes. It also arrived at the conclusion that petitioner's claim
of payment of all her obligations which were covered by the documents was not
proved by evidence sufficient to overcome the presumption which arises from private
respondent's possession of the documents.
No compelling reasons exist herein to justify the reversal by this Court of the findings
of the appellate court. When the existence of a debt is fully established by the
evidence contained in the record, the burden of proving that it has been extinguished
by payment devolves upon the debtor who offers such a defense to the claim of the
creditor (Chua Cuenco v. Vargas, 11 Phil. 219 cited in Servicewide Specialists Inc. v.
Hon. Intermediate Appellate Court, et al., G.R. No. 74553, June 8, 1989, 174 SCRA
80). In the case at bar, all the documents evidencing petitioner's debts are still in the
possession of respondent Lee. No receipts or other satisfactory evidence was
presented by the petitioner to prove the alleged payment to respondent. Promissory
notes in the hands of the creditor are proofs of indebtedness rather than proofs of
payment (First Integrated Bonding and Insurance Company v. Isnani G.R. 70246,
July 31, 1989, 175 SCRA 753). Further, it is settled in our jurisprudence that findings
of facts of the Court of Appeals are final and conclusive and cannot be generally
disturbed on appeal by certiorari before this Court.
Anent the fourth assigned error, petitioner contends that courts of justice must be
vigilant to protect persons like her who are poor and illiterate unlike the respondent,
who is a prosperous business woman.
Petitioner's contention must fail. Justice must be done according to law. Emotional
appeals for justice while they may wring the heart of the court, cannot justify disregard
of the mandate of the law as long as it remains in force (Aguila v. CFI, G.R. 48335,
April 15, 1988,160 SCRA 352).
ACCORDINGLY, the petition is hereby DENIED and the assailed decision of the
respondent appellate court dated January 15, 1976 is AFFIRMED.
SO ORDERED.

G.R. No. L-25350 October 4, 1988

WILLIAM
A.
CHITTICK, petitioner,
vs.
HONORABLE COURT OF APPEALS and LAURENCE F. DE PRIDA PATRICIA
CHITTICK, LANE, WILLIAM A. CHITTICK, JR., DAGMAR CHITTICK
GILDERSLEEVE and MARY CHITTICK LYMAN, as alleged substituted parties
for MURIEL M. CHITTICK original party plaintiff, respondents.
Gonzalo W. Gonzales & Associates for petitioner.
David Guevarra for respondent Laurence F. de Prida.

BIDIN, J.:
This is a petition for review on certiorari of the decision * of respondent Court of
Appeals promulgated on July 31, 1965 in CA-G.R. No. 31327-R, affirming in all
respect the decision ** of the Court of First Instance of Manila, Branch II in Civil Case
No. 6405 entitled Muriel M. Chittick vs. William A. Chittick.
The dispositive portion of the decision which was affirmed by respondent Court, reads
as follows:
In view of the foregoing, judgment is hereby rendered in favor of the plaintiff
and against the defendant by way of support in arrears for the sum of
P21,145.42 or its present equivalent in dollar at the option of the plaintiff,
with interest at the legal rate from January 12, 1951; and under the second
cause of action for the sum of P9,000.00 with interest at the rate of 6% from
April 29, 1940, plus attorney's fees in the amount of P900.00, and the costs
of the suit. (R.A. p. 110)
The facts of the case, taken from the decision of the trial court is as follows:
The plaintiff and the defendant, both American citizens, were married in
Washington, U.S.A. on February 12, 1923. They came to the Philippines in
1924 and made the City of Manila their permanent residence. Four children
were born of the marriage, namely, Patricia, who was born, on September
12, 1924; William, Jr., on January 8, 1926; Dagmar, on October 6, 1931, and
Mary, on January 12, 1933. According to the defendant, due to plaintiffs
infidelity, their marital relation became strained and they entered into an
agreement of separation, Exhibit A, on May 8, 1937. The document, Exhibit
A, was drawn by Atty. Benjamin S. Ohmick, an American lawyer, and was
duly acknowledged before a notary public. The pertinent stipulations which
are the bases of plaintiffs two causes of action are found in paragraphs 2
and 3, and read as follows:
2. The husband agrees that he will pay or cause to be paid to said
wife monthly the sum of FIVE HUNDRED FIFTY PESOS
(P550.00), Philippine Currency, or its present equivalent in United
States Currency, at the election of the wife, for the care,
maintainance and support of the said wife and the said minor
children. Said payment shall continue until such time as the
youngest of said minor children arrives at the age of eighteen (18)
years, provided however, that the said wife in the meantime does

not remarry. Should such marriage take place, it is understood and

agreed that payments aforesaid shall be reduced by twenty percent
(20%).
3. It is mutually agreed that the community or conjugal assets of the
parties, consisting of share of stock in various corporations,
together with cash, have a net realizable value of P22,500.00 which
the husband agrees to divide equally with the wife and deliver same
to her whenever the said wife secures a final decree of divorce as
is contemplated by her it being understood that the husband, at his
option, may deliver to the wife the sum of P11,250.00 in full and
complete discharge.
The plaintiff thereafter went to Nevada, U.S.A., and alleging desertion on the
part of her husband, the defendant herein, the plaintiff obtained a divorce,
Exhibit B, on August 30, 1937. Plaintiff stayed in the United States until
December 1937, after which she returned to the Philippines. The defendant
complied faithfully with the payment of the monthly support of P550.00 until
the war broke out in December 1941. With the outbreak of the war, the
spouses and their children were interred in the Sto. Tomas University
concentration camp by the Japanese from January 1942 to March 3, 1944.
Nevertheless, the defendant during the period of interment, paid to the
plaintiff a total of P4,716.00 which according to the defendant, was extended
as a loan to the plaintiff and which was obtained by borrowing from his
friends. After the liberation in March 1945, plaintiff and defendant and their
children were among the first to be sent back to the United States for
medical treatment, arriving in San Francisco on May 9, 1945. From the
arrival of the parties in San Francisco in May 9, 1945 to January 12, 1951
when Mary, the youngest, reached the age of 18, and when according to
paragraph 2 of Exhibit A, the payment of support should cease, the
defendant paid a total of $8,145.00. The total amount due to the plaintiff by
way of support, in accordance with paragraph 2 of Exhibit A, from May 9,
1945 to January 12, 1951 is $18,717.71, thereby, leaving a balance in favor
of the plaintiff in the amount of $10,572.7l. (Record on Appeal, pp. 84-88).
On October 2, 1948, private respondent commenced an action to recover from
petitioner support in arrears and her share in the conjugal partnership, in Civil Case
No. 6405 of the Court of First Instance of Manila, Branch II, praying that judgment be
rendered in her favor and against defendant, under the first cause of action, for the
sum of $3,442.90, United States currency, or P6,885.80, Philippine Currency, and the
further sum of $110.00 or P220.00 per month from March 1, 1948, both with legal
interest from the date of filing of the complaint until paid and, under the second cause
of action, for the sum of P11,250.00, with legal interest from the date of the filing of
this complaint, until paid, plus the sum of P1,000.00 for attorney's fees, with costs
against defendant. (Record on Appeal, pp. 1-11).
As aforesaid, the trial court rendered a decision in favor of the plaintiff.
On appeal, respondent Court of Appeals on July 31, 1965, affirmed the decision of
the trial court in all respects (Rollo, pp. 82-116). August 5, 1965, counsel for plaintiffappellee, private respondent herein, filed a motion with respondent court for
substitution of party plaintiff-appellee, who died in Los Angeles, California, United
States of America on April 25, 1964, by her heirs, her surviving spouse, Laurence F.
de Prida and the legitimate children of the parties (Rollo, p. 143). The motion was

opposed by petitioner herein on the ground that since the relation between attorney
and client ceased with the death of plaintiff-appellee, counsel cannot present any
motion for and in behalf of the children of the deceased client, unless authorized by
the said children and/or heirs. (Rollo, p. 144). On November 3, 1965, the respondent
Court issued its resolution granting the motion for substitution (Rollo, p. 209).
A motion for reconsideration of the decision of respondent court dated July 31, 1965
was filed by petitioner on August 20, 1965 (Rollo, pp. 154-199.) It was denied by
respondent court in another resolution also dated November 3, 1965 (Rollo, p. 210.)
Hence, this petition filed with this Court on November 26, 1965 (Rollo, p.1.) In a
resolution dated January 7, 1966, the Court resolved to dismiss the petition for lack of
merit (Rollo, p. 215-A.)
On January 27, 1966, petitioner tiled a motion for reconsideration of the Court's
resolution of January 7, 1966 (Rollo, p. 217) in view of which the Court required
respondents to answer within ten days from notice, in its resolution of February 17,
1966 (Rollo, p. 242.) Private respondent Laurence F. de Prida filed his answer on
April 4,1966 (Rollo, p. 247.)
On April 18, 1966, the Court resolved to give due course to the petition (Rollo, p.
276.) The brief for the petitioner was filed on June 14, 1966 (Reno, p. 279); the brief
for the respondent was filed on August 25, 1966 (Rollo, p. 288.) The reply brief was
filed on November 3, 1966 (Rollo, p. 308.)
On January 18, 1967, petitioner filed a manifestation that the Court take cognizance
of two letters of his son William, Jr. stating that the case will filed by Larry de Prida
(his mother's alleged second husband), without his consent and expressing a desire
not to be made a party to the case against his father (Rollo, p. 309.). Acting on the
manifestation the Court required private respondent to comment thereon, (Rollo, p.
315) which was filed on February 16, 1967 (Rollo, p. 316). A counter manifestation
with reference to the comment of private respondent was filed by petitioner on
February 2&, 1967 (Rollo, p. 318.)
Petitioner raised several assignments of errors but the principal conflict in this case
centers on whether or not the decision of respondent Court was rendered nugatory by
the death of plaintiff-appellee Muziel M. Chittick (private respondent herein) more
than one year before its issuance and before a substitution of heirs could be effected.
The answer is in the affirmative.
Section 16, Rule 3 of the Rules of Court states:
Duty of attorney upon death, incapacity, or incompetency of party.
Whenever a party to a pending case dies, becomes incapacitated or
incompetent, it shall be the duty of his attorney to inform the court promptly
of such death, incapacity or incompetency, and to give the name and
residence of his executor, administrator, guardian on other legal
representative.
Section 17 of the same Rule likewise, states:
Death of a party.After a party dies and the claim is not thereby
extinguished, the court shall order, upon proper notice, the legal
representative of the deceased to appear and to be substituted for the
deceased, within a period of thirty (30) days, or within such time as may be

granted. If the legal representative fails to appear within said time, the court
may order the opposing party to procure the appointment of a legal
representative of the deceased within a time to be specified by the court,
and the representative shall immediately appear for and on behalf of the
interest of the deceased. The court charges involved in procuring such
appointment, if defrayed by the opposing party, may be recovered as costs.
The heirs of the deceased may be allowed to be substituted for the
deceased, without requiring the appointment of an executor or administrator
and the court may appoint guardian ad litem for the minor heirs.
Private respondent Muriel M. Chittick died in Los Angeles, California, United States of
America, on April 25,1964 while the case was pending with respondent Court of
Appeals. It was only on August 5, 1965, however, that counsel for private respondent
filed a motion for substitution of party plaintiff-appellee (Rollo, p. 143) five days after
respondent court promulgated its decision of July 31, 1965, despite Section 16, Rule
3 of the Rules of Court which clearly provides for a prompt notice of such death to be
given to the Court by the attorney of the deceased. In fact said counsel himself
admitted his lapse in memory, alleging however, that he thought all the while that he
had already complied with the aforementioned sections of Rule 3 and that he
discovered his neglect when he went over the records of the case upon receipt of the
decision promulgated by the Court of Appeals (Rollo, p. 148). There is no question
that this duty applies in this case where a party dies after filing of the complaint and
during the pendency of the case (Doel v. Teves, 136 SCRA 196 [1985], nor is there
any argument against the rule that counsel's inexcusable negligence is binding on his
client. (Llantero v. Court of Appeals, 105 SCRA 609 [1981], Pulido v. Court of
Appeals, 122 SCRA 63 [1983]).
More than that,APART from the fact that there appears to be no compliance with
the procedure laid down in Rule 3, Sections 16 and 17 of the Rules of Court, in order
that a valid substitution maybe effected, all of the Chittick children who claim that they
have no knowledge of such substitution, expressly and vehemently objected to their
being included as plaintiffs against petitioner, their father (Brief for Petitioner, pp. 3336).
Consequently, it is evident that the motion for substitution filed by the counsel for the
deceased and which was subsequently approved by the Court of Appeals is null and
void because the party in whose name it was presented was dead, and therefore, the
authority of the attorney to represent her had ceased (Moran, Vol. I, p. 218,1979 ed.).
Furthermore, the said motion was unauthorized by the plaintiffs in question (private
respondents herein) with the exception of Laurence F. de Prida, the alleged second
husband of the deceased, whose heirship is however also in question. As correctly
stated by petitioner, there should first be a prior determination as to whether or not de
Prida is an heir of the deceased before he can be properly substituted as such (Brief
for Petitioner, pp. 3640).
Under similar circumstances, this Court ruled as follows:
In the present case, there had been no court order for the legal
representative of the deceased to appear, nor had any such legal
representative ever appeared in court to be substituted for the deceased;
neither had the complainant ever procured the appointment of such legal
representative of the deceased, nor had the heirs of the deceased, including
appellant, ever asked to be allowed to be substituted for the deceased. As a
result, no valid substitution was effected, consequently, the court never

acquired jurisdiction over appellant for the purpose of making her a party to
the case and making the decision binding upon her, either personally or as
legal representative of the estate of her deceased mother. (Ferreria, et al. v.
Vda. de Gonzales, et al., 104 Phil. 143).
Going back to the case at bar, it is without question that there was no valid
substitution made and as a consequence, the Court of Appeals never acquired
jurisdiction over the Chittick children nor over the alleged second husband whose
status as heir has still to be determined.
Still further, on November 29, 1977, counsel for petitioner filed with this Court a
Notice of Death of the latter on April 13, 1977 in Makati, Metro Manila (Rollo, p. 322).
Accordingly, even assuming that there was a valid substitution still this case as a
money claim against the defendant petitioner cannot survive under Sec. 5, Rule 86 of
the Rules of Court and should have been filed against the decedent's estate which is
mandatory (De Bautista v. De Guzman, 125 SCRA 682 [1983]). Nevertheless, since
the Chittick children as heirs of respondent-creditor are also the heirs of petitionerdebtor, the obligation sued upon had been extinguished by the merger in their
persons of the character of creditor and debtor of the same obligation (Art. 1275, Civil
Code).
WHEREFORE, the appealed decision of the Court of Appeals is hereby Reversed
and Set Aside and the complaint filed against defendant-petitioner is Dismissed. No
costs.
SO ORDERED.

G.R. No. L-23494 December 19, 1980

ALFREDO CATOLICO and SATURNINA K. CATOLICO, plaintiffs-appellants,
vs.
FLORENCIO DEUDOR, J.M. TUASON & CO., INC., and GREGORIO ARANETA,
INC., defendants-appellees.

CONCEPCION JR., J.:

Appeal from the order of the Court of First Instance of Rizal, Quezon City Branch,
dated January 8, 1963, dismissing he appellant's complaint in Civil Case No. Q-5978.
In the said complaint, filed on August 26, 1961, the appellant spouses Alfredo and
Saturnina Catolico seek to compel he defendant corporations to sell to them a parcel
of land situated in Barrio Tatalon, Quezon City, with an area of 1,675 square meters,
which the said appellants allegedly bought ..from Milagros Araulio who, in turn
acquired it from the ant Florencio Deudor with whom the defendant ad made a
Compromise Agreement in Civil Can No. Q-135 of the Court of First Instance of Rizal
Quezon City Branch, concerning the Tatalon Estate. 1
After hearing the affirmative defenses and the motion to dismiss, the trial court
dismissed the complaint on January 8, 1963 upon the grounds that the action is
barred by a prior judgment and that the complaint states no cause of
action. 2 Whereupon, the plaintiffs appealed.
On April 2, 1964, however, the appellant spouses sold their rights and interests over
the house and lot involved in this litigation to the spouses Benjamin and Emilia Lapuz,
the same persons to whom the defendant corporations have sold the property such
that there is now a merger of rights and interests, disputed by the parties in this case,
in the persons of the spouses Benjamin and Emilia Lapuz, 3 thus rendering the
present appeal moot and academic.
Anyhow, the Tatalon Estate of which the property in question forms part, has been
expropriated by the government for the sale, at cost, of the lots therein to their bona
4
fide occupants, and on September 9, 1980, the President personally distributed the
title to each lot to its bona fide applicant. The condemnation proceedings of the
Tatalon Estate rendered continuance of the action unnecessary since a judgment in
favor of the appellants cannot be enforced.
WHEREFORE, the appeal should be, as it is hereby dismissed. No costs.
SO ORDERED.

G.R. No. 129598

August 15, 2001

"2. PNEI has not been paying its rentals from October 1990 to March 24,
1994 when it (PNEI) vacated the property. As of the latter date, PNB
MADECOR's receivables against PNEI amounted to P8,784,227.48,
representing accumulated rentals, inclusive of interest;

PNB MADECOR, petitioner,

vs.
GERARDO C. UY, respondent.
QUISUMBING,J.:
This is a petition for review on certiorari filed by petitioner PNB Management and
Development Corporation (PNB MADECOR) seeking to annul the decision of the
Court of Appeals dated February 19, 1997, and its resolution dated June 19, 1997 in
CA-G.R. CV No. 49693, affirming the order of the Regional Trial Court of Manila,
Branch 38, dated August 21, 1995 in Civil Case No. 95-72685. In said order, the RTC
directed the garnishment of the credits and receivables of Pantranco North Express,
Inc. (PNEI), also known as Philippine National Express, Inc., in the possession of
PNB MADECOR, and if these were insufficient to cover the debt of PNB MADECOR
to PNEI, to levy upon the assets of PNB MADECOR.
1

The facts of this case, culled from the decision of the CA, are as follows:
Guillermo Uy, doing business under the name G.U. Enterprises, assigned to
respondent Gerardo Uy his receivables due from Pantranco North Express Inc.
(PNEI) amounting to P4,660,558.00. The deed of assignment included sales invoices
containing stipulations regarding payment of interest and attorney's fees.
On January 23, 1995, Gerardo Uy filed with the RTC a collection suit with an
application for the issuance of a writ of preliminary attachment against PNEI. He
sought to collect from PNEI the amount of P8,397,440.00. He alleged that PNEI was
guilty of fraud in contracting the obligation sued upon, hence his prayer for a writ of
preliminary attachment.
A writ of preliminary attachment was issued on January 26, 1995, commanding the
sheriff "to attach the properties of the defendant, real or personal, and/or (of) any
person representing the defendant"2 in such amount as to cover Gerardo Uy's
demand.
On January 27, 1995, the sheriff issued a notice of garnishment addressed to the
Philippine National Bank (PNB) attaching the "goods, effects, credits, monies and all
other personal properties"3 of PNEI in the possession of the bank, and requesting a
reply within five days. PNB MADECOR received a similar notice.
On March 1995, the RTC, through the application of Gerardo Uy, issued a subpoena
duces tecum for the production of certain documents in the possession of PNB and
PNB MADECOR: (1) from PNB, books of account of PNEI regarding trust account
nos. T-8461-I, 8461-II, and T-8565; and (2) from PNB MADECOR, contracts showing
PNEI's receivables from the National Real Estate Development Corporation
(NAREDECO), now PNB MADECOR, from 1981 up to the period when the
documents were requested.
At the hearing in connection with the subpoena, PNB moved to be allowed to submit
a position paper on its behalf and/or on behalf of PNB MADECOR. In its position
paper dated April 3, 1995, PNB MADECOR alleged that it was the owner of the parcel
of land located in Quezon City that was leased to PNEI for use as bus terminal.
Moreover, PNB MADECOR claimed:

3. On the other hand, PNB MADECOR has payables to PNEI in the amount
of P7,884,000.00 as evidenced by a promissory note executed on October
31, 1982 by then NAREDECO in favor of PNEI;
4. Considering that PNB MADECOR is a creditor of PNEI with respect to the
P8,784,227.48 and at the same time its debtor with respect to the
P7,884,000.00, PNB MADECOR and PNEI are therefore creditors and
debtors of each other; and
5. By force of the law on compensation, both obligations of PNB MADECOR
and PNEI are already considered extinguished to the concurrent amount or
up to P7,884,000.00 so that PNEI is still obligated to pay PNB MADECOR
4
the amount of P900,227.48. x x x ."
On the other hand, Gerardo Uy filed an omnibus motion controverting PNB
MADECOR's claim of compensation. Even if compensation were possible, according
to him, PNEI would still have sufficient funds in the hands of PNB MADECOR to fully
satisfy his claim. He explained' that:
"The allegation of PNB MADECOR that it owes PNEI only . . .
(P7,884,000.00) is not accurate. Apparently, PNB MADECOR only
considered the principal amount. In the first place, to be precise, the
principal debt amounts to exactly . . . (P7,884,921.10) as clearly indicated in
the Promissory Note dated 31 October 1982 . . . In accordance with the
stipulations contained in the promissory note, notice of demand was sent by
PNEI to PNB MADECOR (then NAREDECO) through a letter dated 28
September 1984 and received by the latter on 1 October 1984 . . . The
second paragraph of the subject promissory note states that '[F]ailure to pay
the above amount by NAREDECO after due notice has been made by PNEI
would entitle PNEI to collect an 18% [interest] per annum from date of notice
of demand'. Hence, interest should be computed and start to run from
November 1984 until the present in order to come up with the outstanding
debt of PNB MADECOR to PNEI. And to be more precise, the outstanding
debt of PNB MADECOR to PNEI as of April 1995 amounts to . . .
(P75,813,508.26). Hence, even if the alleged debt of PNEI to PNB
MADECOR amounting to . . . (P8,784,227.48) shall be compensated and
deducted from PNB MADECOR's debt to PNEI, there shall still be a
remainder of . . . (P67,029,380.78), largely sufficient enough to cover
5
complainant's claim."
Also in his omnibus motion, he prayed for an order directing that levy be made upon
all goods, credits, deposits, and other personal properties of PNEI under the control
of PNB MADECOR, to the extent of his demand.
PNB MADECOR opposed his omnibus motion, particularly the claim that its obligation
to PNEI earned an interest of 18 percent annually. It argued that PNEI's letter dated
September 28, 1984 was not a demand letter but merely a request for the
implementation of the arrangement for set-off of receivables between PNEI and PNB,
6
as provided in adacion en pago executed on July 28, 1983. Gerardo Uy again
controverted PNB MADECOR's arguments.

Meanwhile, in the main case, the RTC rendered judgment on July 26, 1995 against
PNEI. The corresponding writ of execution was issued on August 18, 1995.

THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR IN THE

INTERPRETATION OF THE APPLICABLE LAW HEREIN WHEN IT RULED
THAT THE REQUISITES FOR LEGAL COMPENSATION AS SET FORTH
UNDER ARTICLES 1278 AND 1279 OF THE CIVIL CODE DO NOT
CONCUR IN THE CASE AT BAR.

As regards the issue between PNEI and PNB MADECOR, the RTC issued the
assailed order on August 21, 1995, the decretal portion of which provided:
"WHEREFORE, the Sheriff of this Court is hereby directed to garnish/levy or
cause to be garnished/levied the amount stated in the writ of attachment
issued by this Court from the credits and receivables/collectibles of PNEI
from PNB MADECOR (NAREDECO) and to levy and/or cause to levy upon
the assets of the debtor PNB MADECOR should its personal assets be
insufficient to cover its debt with PNEI.

II
THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR IN
INTERPRETING THE PROVISIONS OF SECTION 45, RULE 39 OF THE
RULES OF COURT, NOW SECTION 43, RULE 39 OF THE REVISED
RULES OF COURT, AS AMENDED ON 1 JULY 1997, BY RULING THAT
PETITIONER PNB-MADECOR, UPON BEING CITED FOR AND SERVED
WITH A NOTICE OF GARNISHMENT BECAME A FORCED INTERVENOR,
HENCE, DENYING THE RIGHT OF HEREIN PETITIONER TO VENTILATE
ITS POSITION IN A FULL-BLOWN TRIAL AS PROVIDED FOR UNDER
SEC. 10, RULE 57, WHICH REMAINS THE SAME RULE UNDER THE
REVISED RULES OF COURT AS AMENDED ON 1 JULY 1997.

Furthermore, Mr. Roger L. Venarosa, Vice-President, Trust Department,

Philippine National Bank, and other concerned officials of said bank, is/are
hereby directed to submit the books of accounts of Pantranco North
Express, Inc./Philippine National Express, Inc. under Trust Account Nos. T8461-I, T-8461-II, T-8565 with its position paper within five (5) days from
notice hereof.
SO ORDERED."
Petitioner appealed said order to the CA which, however, affirmed the RTC in a
decision dated February 19, 1997. Petitioner's motion for reconsideration was denied
in a resolution dated June 19, 1997.
According to the CA, there could not be any compensation between PNEI's
receivables from PNB MADECOR and the latter's obligation to the former because
PNB MADECOR's supposed debt to PNEI is the subject of attachment proceedings
initiated by a third party, herein respondent Gerardo Uy. This is a controversy that
would prevent legal compensation from taking place, per the requirements set forth in
Article 1279 of the Civil Code. Moreover, the CA stressed that it was not clear
whether, at the time compensation was supposed to have taken place, the rentals
being claimed by petitioner were indeed still unpaid. The CA pointed out that
petitioner did not present evidence in this regard, apart from a statement of account.
The CA also questioned petitioner's inaction in claiming the unpaid rentals from PNEI,
when the latter started defaulting in its payment as early as 1994. This, according to
the CA, indicates that the debt was either already settled or not yet demandable and
liquidated.
The CA rejected petitioner's contention that Rule 39, Section 43 of the Revised Rules
of Court applies to the present case. Said rule sets forth the procedure to follow when
a person alleged to have property or to be indebted to a judgment obligor claims an
interest in the property or denies the debt. In such a situation, under said Rule the
judgment obligee is required to institute a separate action against such person. The
CA held that there was no need for a separate action here since petitioner had
already become a forced intervenor in the case by virtue of the notice of garnishment
served upon it.
Hence, this petition. Petitioner now assigns the following alleged errors for our
consideration:
I

III
THE [COURT OF APPEALS] COMMITTED AN ERROR IN FINDING THAT
A DEMAND WAS MADE BY PANTRANCO NORTH EXPRESS, INC. TO
PNB MADECOR FOR THE PAYMENT OF THE PROMISSORY NOTE
DATED 31 OCTOBER 1982.7
After considering these assigned errors carefully insofar as they raise issues of law,
we find that the petition lacks merit. We shall now discuss the reasons for our
conclusion.
Petitioner admits its indebtedness to PNEI, in the principal sum of P7,884,921.10, per
a promissory note dated October 31, 1982 executed by its precursor NAREDECO in
favor of PNEI. It also admits that the principal amount should earn an interest of 18
percent per annum under the promissory note, in case NAREDECO fails to pay the
principal amount after notice. Petitioner adds that the receivables of PNEI were
thereafter conveyed to PNB in payment of PNEI's loan obligation to the latter, in
accordance with a dacion en pago agreement executed between PNEI and PNB.
Petitioner, however, maintains that there is nothing now that could be subject of
attachment or execution in favor of respondent since compensation had already taken
place as between its debt to PNEI and the latter's obligation to it, consistent with
Articles 1278, 1279, and 1290 of the Civil Code. Petitioner assails the CA's
ratiocination that compensation could not have taken place because the receivables
in question were the subject of attachment proceedings commenced by a third party
(respondent). This reasoning is contrary to law, according to petitioner.
Petitioner insists that even the Asset Privatization Trust (APT), which now has control
over PNEI, recognized the set-off between the subject receivables as indicated in its
8
reply to petitioner's demand for payment of PNEI's unpaid rentals. The APT stated in
its letter:
"xxx

xxx

xxx

While we have long considered the amount of SEVEN MILLION EIGHT

HUNDRED EIGHTY FIVE THOUSAND PESOS (P7,885,000.00) which
PNEI had earlier transmitted to you as its share in an aborted project as

partial payment for PNEI's unpaid rentals in favor of PNB-Madecor, being a

creditor like your goodself of PNEI, we are unable to be of assistance to you
regarding your claim for the balance thereof. We trust that you will
understand our common predicament.
xxx

xxx

xxx"

Petitioner argues that PNEI's letter dated September 28, 1984 did not contain a
demand for payment but only notice of the implementation of thedacion en
pago agreement between PNB and PNEI.
Petitioner contends that the CA's statement that PNEI's obligation to petitioner had
either been settled or was not yet demandable is highly speculative and conjectural.
On the contrary, petitioner asserts that its failure to institute a judicial action against
PNEI proved that the receivables of petitioner and PNEI had already been subject to
legal compensation.
Petitioner submits that Rule 39, Section 43 of the Revised Rules of Court applies to
the present case. It asserts that it stands to lose more than P7 million if not given the
opportunity to present its side in a formal proceeding such as that provided under the
cited rule. According to petitioner, it was not an original party to this case but only
became involved when it was issued a subpoenaduces tecum by the trial court.
For his part, respondent claims that the requisites for legal compensation are not
present in this case, contrary to petitioner's assertion. He argues that the better rule
should be that compensation cannot take place where one of the obligations sought
to be compensated is the subject of a suit between a third party and a party interested
in the compensation, as in this case.
Moreover, respondent points out that, while the alleged demand letter sent by PNEI to
petitioner was dated September 28, 1984, the unpaid rentals due petitioner from
PNEI accrued during the period October 1990 to March 1994, or before petitioner's
obligation to PNEI became due. This being so, respondent argues that there can be
no compensation since there was as yet no compensable debt in 1984 when PNEI
demanded payment from petitioner.
Even granting that there had been compensation, according to respondent, PNEI
would still have sufficient funds with petitioner since the PNB MADECOR's obligation
to PNEI earned interest.
Respondent echoes the observation of the CA that petitioner failed to file a suit
against PNEI at the time when it should have. This failure gave rise to the
presumption that PNEI's obligation might have already been settled, waived, or
otherwise extinguished, according to him. He contends that petitioner's explanation
that it did not sue PNEI because there had been legal compensation is only an
afterthought and contrary to logic and reason.
On petitioner's claim that it had been denied due process, respondent avers that he
did not have to file a separate action against petitioner since this would only result in
multiplicity of suits. Furthermore, he points out that the order of attachment is an
interlocutory order that may not be the subject of appeal.
Finally, respondent calls the attention of this Court to the sale by PNB of its shares in
PNB MADECOR to the "Dy Group", which in turn assigned its majority interest to the
"Atlanta Group". Respondent claims that the Dy Group set aside some P30 million for
expenses to be incurred in litigating PNB MADECOR's pending cases, and asks that

his "claim over this amount, arising from the instant case," be given preference in
case the PNEI properties already garnished prove insufficient to satisfy his claim.
The first and third errors assigned by petitioner are obviously interrelated and must be
resolved together.
Worth stressing, compensation is a mode of extinguishing to the concurrent amount
the obligations of persons who in their own right and as principals
arereciprocally debtors and creditors of each other.10 Legal compensation takes place
by operation of law when all the requisites are present, 11 as opposed to conventional
compensation which takes place when the parties agree to compensate their mutual
12
obligations even in the absence of some requisites.
Legal compensation requires the concurrence of the following conditions:
(1) that each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) that both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) that the two debts be due;
(4) that they be liquidated and demandable;
(5) that over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.13
Petitioner insists that legal compensation had taken place such that no amount of
money belonging to PNEI remains in its hands, and, consequently, there is nothing
that could be garnished by respondent.
We find, however, that legal compensation could not have occurred because of the
absence of one requisite in this case: that both debts must be due and demandable.
The CA observed:
"Under the terms of the promissory note, failure on the part of NAREDECO
(PNB MADECOR) to pay their value of the instrument 'after due notice has
been made by PNEI would entitle PNEI to collect an 18% [interest] per
annum from date of notice of demand'."14
Petitioner makes a similar assertion in its petition, that
"x x x It has been stipulated that the promissory note shall earn an interest of
18% per annum in case NAREDECO, after notice, fails to pay the amount
stated therein."15
Petitioner's obligation to PNEI appears to be payable on demand, following the above
observation made by the CA and the assertion made by petitioner. Petitioner is
obligated to pay the amount stated in the promissory note upon receipt of a notice to
pay from PNEI. If petitioner fails to pay after such notice, the obligation will earn an
interest of 18 percent per annum.
Respondent alleges that PNEI had already demanded payment. The alleged demand
letter reads in part:

"We wish to inform you that as of August 31, 1984 your outstanding
accounts amounted to P10,376,078.67, inclusive of interest.
In accordance with our previous arrangement, we have conveyed in favor of
the Philippine National Bank P7,884,921.10 of said receivables from you.
With this conveyance, the unpaid balance of your account will be
P2,491,157.57.16
To forestall further accrual of interest, we request that you take up with PNB
the implementation of said arrangement. x x x."17
We agree with petitioner that this letter was not one demanding payment, but one that
merely informed petitioner of (1) the conveyance of a certain portion of its obligation
to PNEI per adacion en pago arrangement between PNEI and PNB, and (2) the
unpaid balance of its obligation after deducting the amount conveyed to PNB. The
import of this letter is not that PNEI was demanding payment, but that PNEI was
advising petitioner to settle the matter of implementing the earlier arrangement with
PNB.
Apart from the aforecited letter, no other demand letter appears on record, nor has
any of the parties adverted to another demand letter.
Since petitioner's obligation to PNEI is payable on demand, and there being no
demand made, it follows that the obligation is not yet due. Therefore, this obligation
may not be subject to compensation for lack of a requisite under the law. Without
compensation having taken place, petitioner remains obligated to PNEI to the extent
stated in the promissory note. This obligation may undoubtedly be garnished in favor
of respondent to satisfy PNEI's judgment debt. 18
As to respondent's claim that legal compensation could not have taken place due to
the existence of a controversy involving one of the mutual obligations, we find this
matter no longer controlling. Said controversy was not seasonably communicated to
petitioner as required under Article 1279 of the Civil Code.
The controversy,i.e., the action instituted by respondent against PNEI, must have
been communicated to PNB MADECOR in due time to prevent compensation from
taking place. By "in due time" should be meant the period before legal compensation
was supposed to take place, considering that legal compensation operates so long as
19
the requisites concur, even without any conscious intent on the part of the parties. A
controversy that is communicated to the parties after that time may no longer undo
the compensation that had taken place by force of law, lest the law concerning legal
compensation be for naught.
Petitioner had notice of the present controversy when it received the subpoenaduces
tecum issued by the trial court. The exact date when petitioner received the subpoena
is not on record, but petitioner was allowed to submit a position paper regarding said
subpoena per order of the trial court dated March 27, 1995. 20 We assume that
petitioner had notice of the pending litigation at least no later than this date. Now, was
this date before that period when legal compensation would have occurred, assuming
all other requisites to be present?
Clearly, it is not. PNB MADECOR's obligation to PNEI was contracted in 1982 and the
alleged demand letter was sent by PNEI to petitioner on September 1984. On the
other hand, PNEI's obligation to petitioner, the payment of monthly rentals, accrued
during the period October 1990 to March 1994 and a demand to pay was sent in

1993. Assuming the other requisites to be present, legal compensation of the mutual
obligations would have taken place on March 1994 at the latest. Obviously, this was
before petitioner received notice of the pendency of this litigation in 1995. The
controversy communicated to petitioner in 1995 could not have affected the legal
compensation that would have taken place in 1994.
As regards respondent's averment that there was as yet no compensable debt when
PNEI sent petitioner a demand letter on September 1984, since PNEI was not yet
indebted to petitioner at that time, the law does not require that the parties' obligations
be incurred at the same time. What the law requires only is that the obligations be
due and demandable at the same time.
Coming now to the second assigned error, which we reserved as the last for our
discussion, petitioner contends that it did not become a forced intervenor in the
present case even after being served with a notice of garnishment. Petitioner argues
that the correct procedure would have been for respondent to file a separate action
against PNB MADECOR, per Section 43 of Rule 39 of the Rules of Court. 21 Petitioner
insists it was denied its right to ventilate its claims in a separate, full-blown trial when
the courtsa quo ruled that the abovementioned rule was inapplicable to the present
case.
On this score, we had occasion to rule as early as 1921 inTayabas Land Co. v.
Sharruf ,22 as follows:
". . . garnishment . . . consists in the citation of some stranger to the
litigation, who is debtor to one of the parties to the action. By this means
such debtor stranger becomes a forced intervenor; and the court, having
acquired jurisdiction over his person by means of the citation, requires him to
pay his debt, not to his former creditor, but to the new creditor, who is
creditor in the main litigation. It is merely a case of involuntary novation by
the substitution of one creditor for another. Upon principle the remedy is a
species of attachment or execution for reaching any property pertaining to a
judgment debtor which may be found owing to such debtor by a third
person."
Again, inPerla Compania de Seguros, Inc. v. Ramolete,

23

we declared:

"Through service of the writ of garnishment, the garnishee becomes a

"virtual party" to, or a "forced intervenor" in, the case and the trial court
thereby acquires jurisdiction to bind him to compliance with all orders and
processes of the trial court with a view to the complete satisfaction of the
judgment of the court."
Petitioner here became a forced intervenor by virtue of the notice of garnishment
served upon him. It could have presented evidence on its behalf. The CA, in fact,
noted that petitioner presented a statement of account purportedly showing that PNEI
had not yet settled its obligation to petitioner. 24 That petitioner failed to present any
more proof of its claim, as observed by the CA, is no longer the fault of the courts.
There is no need for the institution of a separate action under Rule 39, Section 43,
contrary to petitioner's claim. This provision contemplates a situation where the
person allegedly holding property of (or indebted to) the judgment debtor claims an
adverse interest in the property (or denies the debt). In this case, petitioner expressly
admits its obligation to PNEI.25

WHEREFORE, the petition is DENIED. The assailed decision and resolution of the
Court of Appeals are AFFIRMED. Costs against petitioner.
SO ORDERED.

G. R. No. L-74027 December 7, 1989

SILAHIS MARKETING CORPORATION, petitioner
vs.
INTERMEDIATE APPELLATE COURT and GREGORIO DE LEON, doing
business under the name and style of "MARK INDUSTRIAL
SALES", respondents.
Jaime V. Villanueva for petitioner.
Tinga, Fuentes, Tagle & Malate for private respondent.

FERNAN, C.J.
Petitioner Silahis Marketing Corporation seeks in this petition for review on certiorari a
reversal of the decision of the then Intermediate Appellate Court (IAC) in AC-G.R. CV
No. 67162 entitled "De Leon, etc. v. Silahis Marketing Corporation", disallowing
petitioner's counterclaim for commission to partially offset the claim against it of
private respondent Gregorio de Leon for the purchase price of certain merchandise.
A review of the record shows that on various dates in October, November and
December, 1975, Gregorio de Leon (De Leon for short) doing business under the
name and style of Mark Industrial Sales sold and delivered to Silahis Marketing
Corporation (Silahis for short) various items of merchandise covered by several
invoices in the aggregate amount of P 22,213.75 payable within thirty (30) days from
date of the covering invoices. Allegedly due to Silahis' failure to pay its account upon
maturity despite repeated demands, de Leon filed before the then Court of First
Instance of Manila a complaint for the collection of the said accounts including
accrued interest thereon in the amount of P 661.03 and attorney's fees of P 5,000.00
plus costs of litigation.

unpaid invoices set forth in the complaint. However, the Court also believes
that the plaintiff is also properly chargeable for the debit memo of P
22,200.00, Exh. '1'. This is because it was proven by the defendant from the
testimonies of Isaias Fernando, Jr. and Jose Joel Tamon that contrary to the
agreement between plaintiff and defendant that the latter was to serve the
account of Dole Philippines in Davao, the plaintiff made a direct sale of
sprockets for P 111,000.00 which therreby deprives the defendant of its
corresponding commission for P 22,200.00 which the defendant would have
otherwise made if the plaintiff had followed its previous arrangement with the
defendant. However, as to the counterclaim of the defendant for a
cancellation of the amount of P 6,000.00 for defective stainless screen wire
purchased and intended for Borden International, Davao City, the Court
believes that it is much too late now to present said claim because the
purchase was made and delivered as early as December 22,1975 and the
proposed return to the defendant by Borden was made on April 1, 1976 only.
The Court is not ready to award damages to any of the parties. After
deducting the amount of P 22,200.00, which is the unpaid commission of the
defendant from the principal total amount of the unpaid invoices of the
plaintiff of P 22,213.75, the unpaid balance in favor of the plaintiff is P 13.75.
The claim for interest and attorney's fees of the plaintiff may be offset
against the interest and attorney's fees of the defendant.
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendant ordering the defendant to pay to the plaintiff the
amount of P 13.75, with interest at 12% per annum from the date of the filing
of the action on July 1, 1976 until fully paid, without pronouncement as to
costs.
SO ORDERED. 2

The answer admitted the allegations of the complaint insofar as the invoices were
concerned but presented as affirmative defenses; [al a debit memo for P 22,200.00
as unrealized profit for a supposed commission that Silahis should have received
from de Leon for the sale of sprockets in the amount of P 111,000.00 made directly to
Dole Philippines, Incorporated by the latter sometime in August 1975 without coursing
the same through the former allegedly in violation of the usual practice concerning
sale of merchandise to Dole Philippines, Inc.; and [b] Silahis' claim that it is entitled to
return the stainless steel screen covered by Exhibits '6-A' and '6-B' which was found
defective by its client, Borden International, Davao City, and to have the
corresponding amount cancelled from its account with de Leon.

De Leon appealed from the said decision insofar as it directed partial compensation
and its failure to award interest on his principal claim as well as attomey's fees in his
favor. In a decision dated March 1 7, 1986, 3respondent Intermediate Appellate
Court 4 set aside the decision of the lower court and dismissed herein petitioner's
(therein defendant- appellee's) counterclaim for lack of factual or legal basis. The
appellate court found that there was no agreement, verbal or otherwise, nor was there
any contractual obligation between De Leon and Silahis prohibiting any direct sales to
Dole Philippines, Inc. by de Leon; nor was there anything in the debit memo
obligating de Leon to pay a commission to Silahis for the sale of P 111,000.00 worth
of sprockets to Dole Philippines although in the past, the former did supply certain
items to the latter for delivery to Dole Philippines, Incorporated.

In a decision dated August 25, 1978, 1 the lower court confirmed the liability of Silahis
for the claim of de Leon but at the same time ordered that it be partially offset by
Silahis' counterclaim as contained in the debit memo for unrealized profit and
commission. Judge Bienvenido C. Ejercito of said court held:

Hence, in this petition for review on certiorari, the central issue is whether or not
private respondent is liable to the petitioner for the commission or margin for the
direct sale which the former concluded and consummated with Dole Philippines,
Incorporated without coursing the same through herein petitioner.

There is no question that the defendant received from the plaintiff the items
contained in Exhs. 'A' to 'F'. The only question is whether or not the
defendant is entitled to set off against the claim of the plaintiff the amount
contained in the debit memo of the defendant, Exh. '1', and whether or not
the defendant is entitled to return the steel wire mesh which was returned to
them by Borden Philippines, as shown by Exhs. '6-A' and '6-B'. The Court
believes that the defendant is properly chargeable for the amounts of the

We have carefully gone over the record of this case particularly the debit memo upon
which petitioner's counterclaim rests and found nothing contained therein to show that
private respondent obligated himself to set-off or compensate petitioner's outstanding
accounts with the alleged unrealized commission from the assailed sale of sprockets
in the amount of P 111,000.00 to Dole Philippines, Inc.

It must be remembered that compensation takes place when two persons, in their
own right, are creditors and debtors to each other. Article 1279 of the Civil Code
provides that: "In order that compensation may be proper, it is necessary: [1] that
each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other; [2] that both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind, and also of the same quality if
the latter has been stated; [3] that the two debts be due; [4] that they be liquidated
and demandable; [5] that over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
When all the requisites mentioned in Art. 1279 of the Civil Code are present,
compensation takes effect by operation of law, even without the consent or
knowledge of the creditors and debtors. 5 Article 1279 requires, among others, that in
order that legal compensation shall take place, "the two debts be due" and "they be
liquidated and demandable." Compensation is not proper where the claim of the
person asserting the set-off against the other is not clear nor liquidated;
compensation cannot extend to unliquidated, disputed claim existing from breach of
contract. 6
Undoubtedly, petitioner admits the validity of its outstanding accounts with private
respondent in the amount of P 22,213.75 as contained in its answer. But whether
private respondent is liable to pay the petitioner a 20% margin or commission on the
subject sale to Dole Philippines, Inc. is vigorously disputed. This circumstance
prevents legal compensation from taking place.
The Court agrees with respondent appellate court that there is no evidence on record
from which it can be inferred that there was any agreement between the petitioner
and private respondent prohibiting the latter from selling directly to Dole Philippines,
Incorporated. Definitely, it cannot be asserted that the debit memo was a contract
binding between the parties considering that the same, as correctly found by the
appellate court, was not signed by private respondent nor was there any mention
therein of any commitment by the latter to pay any commission to the former involving
the sale of sprockets to Dole Philippines, Inc. in the amount of P 111,000.00. Indeed,
such document can be taken as self-serving with no probative value absent a
showing or at the very least an inference, that the party sought to be bound assented
to its contents or showed conformity thereto.
In fact the letter written by private respondent's lawyer dated March 5,1975 7 in reply
to petitioner's letter dated February 19, 1976 transmitting its Debit Memo No.
1695 8 further strengthens private respondent's stand that it never agreed to give
petitioner any commission on the direct sale to Dole Philippines, Inc. by its company
because said letter denied any utilization of petitioners personnel and facilities at its
Davao Branch in the transaction with Dole Philippines, Inc. which would otherwise
lend a basis for petitioner's monetary claim.
WHEREFORE, in view of the foregoing, the questioned decision of respondent
appellate court is hereby AFFIRMED.
SO ORDERED.

G.R. No. L-67649 June 28, 1988

whatever encumbrances appearing at the back of TCT No. 4739

(37795) and ordering the same TCT No. 4739 (37795) cancelled.

ENGRACIO FRANCIA, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

(b) The plaintiff to pay defendant Ho Fernandez the sum of

P1,000.00 as attorney's fees. (p. 30, Record on Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court in toto.

GUTIERREZ, JR., J.:

Hence, this petition for review.

The petitioner invokes legal and equitable grounds to reverse the questioned decision
of the Intermediate Appellate Court, to set aside the auction sale of his property which
took place on December 5, 1977, and to allow him to recover a 203 square meter lot
which was, sold at public auction to Ho Fernandez and ordered titled in the latter's
name.

Francia prefaced his arguments with the following assignments of grave errors of law:

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house
built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro
Manila. The lot, with an area of about 328 square meters, is described and covered
by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay
City.
On October 15, 1977, a 125 square meter portion of Francia's property was
expropriated by the Republic of the Philippines for the sum of P4,116.00 representing
the estimated amount equivalent to the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on
December 5, 1977, his property was sold at public auction by the City Treasurer of
Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real
Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez
was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that
time helping his uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In
re: Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the
cancellation of TCT No. 4739 (37795) and the issuance in his name of a new
certificate of title. Upon verification through his lawyer, Francia discovered that a Final
Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on
December 11, 1978. The auction sale and the final bill of sale were both annotated at
the back of TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later
amended his complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of
which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered
dismissing the amended complaint and ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer
Certificate of Title in favor of the defendant Ho Fernandez over the
parcel of land including the improvements thereon, subject to

I
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE
ERROR OF LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY
P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE
AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE
FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND
SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY
AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO
TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX
DELINQUENCY OF P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A
SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT
THE PRICE OF P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS
GROSSLY INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO
FRAUD AND A DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF
LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID.
(pp. 10, 17, 20-21, Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioner's
allegations that his property was sold at public auction without notice to him and that
the price paid for the property was shockingly inadequate, amounting to fraud and
deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the
problems raised in his petition upon himself. While we commiserate with him at the
loss of his property, the law and the facts militate against the grant of his petition. We
are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by
legal compensation. He claims that the government owed him P4,116.00 when a
portion of his land was expropriated on October 15, 1977. Hence, his tax obligation
had been set-off by operation of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and creditors of each other,
are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy
the requirements provided by Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the
same time a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled
that there can be no off-setting of taxes against the claims that the taxpayer may have
against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that
Internal Revenue Taxes can not be the subject of set-off or compensation. We stated
that:
A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action or
any indebtedness of the state or municipality to one who is liable to the state
or municipality for taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction sued on. ... (80
C.J.S., 7374). "The general rule based on grounds of public policy is wellsettled that no set-off admissible against demands for taxes levied for
general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the
party and party but grow out of duty to, and are the positive acts of the
government to the making and enforcing of which, the personal consent of
individual taxpayers is not required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the
collector because he has a claim against the governmental body not included in the
tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we
stated that: "... internal revenue taxes can not be the subject of compensation:
Reason: government and taxpayer are not mutually creditors and debtors of each
other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was
due to the city government while the expropriation was effected by the national
government. Moreover, the amount of P4,116.00 paid by the national government for
the 125 square meter portion of his lot was deposited with the Philippine National
Bank long before the sale at public auction of his remaining property. Notice of the
deposit dated September 28, 1977 was received by the petitioner on September 30,
1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter
to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus
aborting the sale at public auction.

Petitioner had one year within which to redeem his property although, as well be
shown later, he claimed that he pocketed the notice of the auction sale without
reading it.
Petitioner contends that "the auction sale in question was made without complying
with the mandatory provisions of the statute governing tax sale. No evidence, oral or
otherwise, was presented that the procedure outlined by law on sales of property for
tax delinquency was followed. ... Since defendant Ho Fernandez has the affirmative
of this issue, the burden of proof therefore rests upon him to show that plaintiff was
duly and properly notified ... .(Petition for Review, Rollo p. 18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction
sale, has the burden of proof to show that there was compliance with all the
prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be followed in tax proceedings must be
established by proof and thegeneral rule is that the purchaser of a tax title is
bound to take upon himself the burden of showing the regularity of all
proceedings leading up to the sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action which results in
depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29
Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This is actually an exception
to the rule that administrative proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal
prerequisites have been complied with, the petitioner can not, however, deny that he
did receive the notice for the auction sale. The records sustain the lower court's
finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was
not properly notified of the auction sale. Surprisingly, however, he admitted
in his testimony that he received the letter dated November 21, 1977 (Exhibit
"I") as shown by his signature (Exhibit "I-A") thereof. He claimed further that
he was not present on December 5, 1977 the date of the auction sale
because he went to Iligan City. As long as there was substantial compliance
with the requirements of the notice, the validity of the auction sale can not be
assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for Ho Fernandez
notified you that the property in question shall be sold at public auction to the
highest bidder on December 5, 1977 pursuant to Sec. 74 of PD 464. Will you
tell the Court whether you received the original of this letter?
A. I just signed it because I was not able to read the same. It was just sent
by mail carrier.
Q. So you admit that you received the original of Exhibit I and you signed
upon receipt thereof but you did not read the contents of it?
A. Yes, sir, as I was in a hurry.

Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his part
when he ignored such notice. By his very own admission that he received the notice,
his now coming to court assailing the validity of the auction sale loses its force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule,
gross inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce
de Leon v. Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili,
91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109
SCRA 388) we held that "alleged gross inadequacy of price is not material when the
law gives the owner the right to redeem as when a sale is made at public auction,
upon the theory that the lesser the price, the easier it is for the owner to effect
redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:
... [R]espondent treasurer now claims that the prices for which the lands
were sold are unconscionable considering the wide divergence between
their assessed values and the amounts for which they had been actually
sold. However, while in ordinary sales for reasons of equity a transaction
may be invalidated on the ground of inadequacy of price, or when such
inadequacy shocks one's conscience as to justify the courts to interfere,
such does not follow when the law gives to the owner the right to redeem, as
when a sale is made at public auction, upon the theory that the lesser the
price the easier it is for the owner to effect the redemption. And so it was
aptly said: "When there is the right to redeem, inadequacy of price should
not be material, because the judgment debtor may reacquire the property or
also sell his right to redeem and thus recover the loss he claims to have
suffered by reason of the price obtained at the auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v.
De Long, et al. (188 Wash. 162, 61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for taxes,
the collection of taxes in this manner would be greatly embarrassed, if not
rendered altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the
correct rule is stated as follows: "where land is sold for taxes, the
inadequacy of the price given is not a valid objection to the sale." This rule
arises from necessity, for, if a fair price for the land were essential to the
sale, it would be useless to offer the property. Indeed, it is notorious that the
prices habitually paid by purchasers at tax sales are grossly out of proportion
to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P.
367, 369).
In this case now before us, we can aptly use the language of McGuire, et al. v. Bean,
et al. (267 P. 555):
Like most cases of this character there is here a certain element of hardship
from which we would be glad to relieve, but do so would unsettle longestablished rules and lead to uncertainty and difficulty in the collection of
taxes which are the life blood of the state. We are convinced that the present
rules are just, and that they bring hardship only to those who have invited it
by their own neglect.

We are inclined to believe the petitioner's claim that the value of the lot has greatly
appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay
City, which necessitated the expropriation of adjoining areas, real estate values have
gone up in the area. However, the price quoted by the petitioner for a 203 square
meter lot appears quite exaggerated. At any rate, the foregoing reasons which
answer the petitioner's claims lead us to deny the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable grounds,
there are no strong considerations of substantial justice in his favor. Mr. Francia failed
to pay his taxes for 14 years from 1963 up to the date of the auction sale. He claims
to have pocketed the notice of sale without reading it which, if true, is still an act of
inexplicable negligence. He did not withdraw from the expropriation payment
deposited with the Philippine National Bank an amount sufficient to pay for the back
taxes. The petitioner did not pay attention to another notice sent by the City Treasurer
on November 3, 1978, during the period of redemption, regarding his tax delinquency.
There is furthermore no showing of bad faith or collusion in the purchase of the
property by Mr. Fernandez. The petitioner has no standing to invoke equity in his
attempt to regain the property by belatedly asking for the annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is
DISMISSED. The decision of the respondent court is affirmed.
SO ORDERED.

G.R. No. 142731

June 8, 2006

BANK OF THE PHILIPPINE ISLANDS (formerly FAR EAST BANK AND TRUST
COMPANY), Petitioner,
vs.
COURT OF APPEALS and JIMMY T. GO, Respondents.

Private-respondent then filed a bond as required by the order. Petitioner moved for a
reconsideration of the aforementioned order which motion was denied in the Order
dated 30 July 1998 on the ground that the extrajudicial foreclosure was premature as
to four (4) promissory notes. The dispositive portion read:

DECISION

"WHEREFORE, premises considered, the motion for reconsideration is hereby

denied and the other pending incident pertaining thereto are noted and this case be
set for pre-trial.

AZCUNA, J.:

LET THEREFORE, a notice of pre-trial be sent to the parties.

This is a petition for review on certiorari filed by Bank of the Philippine Islands of the
decision and resolution of the Court of Appeals, which in turn partially denied a
petition for certiorari questioning the temporary restraining order (TRO) and
preliminary injunction issued by Judge Urbano C. Victorio, Sr. 1

SO ORDERED." (Rollo, p. 219)

The facts as narrated in the Court of Appeals decision are as follows:

Petitioner, Far East Bank and Trust Company, granted a total of eight (8) loans to
Noahs Arc Merchandising (Noahs Ark, for brevity). Per Certificate of Registration
issued by the Department of Trade and Industry (Rollo, p. 40), Noahs Ark is a single
proprietorship owned by Mr. Albert T. Looyuko. The said loans were evidenced by
identical Promissory Notes all signed by Albert T. Looyuko, private respondent Jimmy
T. Go and one Wilson Go. Likewise, all loans were secured by real estate mortgage
constituted over a parcel of land covered by Transfer Certificate of Title [No.] 160277
registered in the names of Mr. Looyuko and herein private respondent. Petitioner,
claiming that Noahs Ark defaulted in its obligations, extrajudicially foreclosed the
mortgage. The auction sale was set on 14 April 1998 but on 8 April 1998 private
respondent filed a complaint for damages with prayer [for] issuance of TRO and/or
writ of preliminary injunction seeking [to] enjoin the auction sale. [I]n the Order dated
14 April 1998 a temporary restraining order was issued and in the same order the
application for Preliminary Injunction was set for hearing [i]n the afternoon of the
same day (Rollo, p. 142).2

After petitioners motion for reconsideration was denied in an order dated July 30,
1998, petitioner filed a petition for certiorari with the Court of Appeals, praying that the
orders dated May 7, 1998 and July 30, 1998, granting the writ of preliminary
injunction and denying the motion for reconsideration, respectively, be annulled and
set aside and the writ of preliminary injunction be dissolved. Furthermore, petitioner
asked to be allowed to proceed with the auction sale of the property.
The Court of Appeals promulgated its decision dated August 26, 1999 which partially
denied the petition for certiorari, stating as follows:
The issue in this case is: "Whether the trial court erred in the issuance of the Writ of
Preliminary Injunction or not."
Petitioner averred that private respondent had not shown any right which should be
protected by an injunction. Private respondent naturally claimed otherwise and
asserted that since four (4) of the promissory notes have not yet matured there was
no basis to foreclose the mortgage (Comment, p 15). He also claimed that his right to
due process entitles him to legal demand prior to the filing of the foreclosure
proceedings against the subject property (Comment, p. 16).

In an order dated April 15, 1998, Judge Victorio extended the TRO for another 15
days, for a total of 20 days. The Court of Appeals decision continues thus:

It has been held that an injunction may be issued in order to preserve the status quo.
Thus, in Cagayan de Oro City Landless Residents Association, Inc., v. Court of
Appeals (254 SCRA 220 [1996]) it was held:

After hearing, the 7 May 1998 Order granted the application for preliminary injunction
which shall take effect upon posting of a bond in the amount of Two Hundred
Thousand Pesos (P200,000.00). The dispositive portion read:

As an extraordinary remedy, injunction is calculated to preserve the status quo of

things and is generally availed of to prevent actual or threatened acts, until the merits
of the case can be heard. x x x. (254 SCRA 228).

"WHEREFORE, it appearing that the acts complained of would be in violation of

plaintiffs right and would work injustice to the plaintiff and so as not to render
ineffectual whatever judgment may be issued in this case, the application [for]
preliminary injunction is hereby granted and the defendants and all persons acting in
their behalf are hereby ordered to cease, desist, and refrain from proceeding with the
scheduled foreclosure and public auction sale of the mortgaged property covered by
TCT No. 160277 until further orders from this Court.
This Order shall be effective upon petitioners filing of a bond in the amount of Two
Hundred Thousand Pesos (P200,000.00) to answer for any and all damages that
defendants may suffer by reason of the issuance of the writ of preliminary injunction.
As prayed for, defendants are hereby directed to file their answer on or before May
14, 1998. Copy furnished plaintiff.
SO ORDERED." (Rollo p. 175)

In the case at bar, there is a need to first settle the question of whether the demand
made by petitioner was sufficient to render private respondent in default or not.
In Rose Packing Co., Inc. v. Court of Appeals (167 SCRA 309 [1988]) it was held that
the question of whether the debtor is in default should first be settled to determine if
the foreclosure was proper. In the same case it was also held that said question
should be resolved by the trial court, to wit:
While petitioner corporation does not deny, in fact, it admits its indebtedness to
respondent bank (Brief for Petitioner, pp. 7-11), there were matters that needed the
preservation of the status quo between the parties. The foreclosure sale was
premature.
First was the question of whether or not petitioner corporation was already in default.
xxx

Petitioner corporation alleges that there had been no demand on the part of
respondent bank previous to its filing a complaint against petitioner and Rene Knecht
personally for collection on petitioners indebtedness (Brief for Petitioner, p.13). For
an obligation to become due there must generally be a demand. Default generally
begins from the moment the creditor demands the performance of the obligation.
Without such demand, judicial or extrajudicial, the effects of default will not arise.
(Namarco v. Federation of United Namarco Distributors, Inc. 49 SCRA 238
[1973]; Borje v. CFI of Misamis Occidental, 88 SCRA 576 [1979]. Whether petitioner
corporation is already in default or not and whether demand had been properly made
or not had to be determined in the lower court. (167 SCRA 317-318).
We now come to the matter of sufficiency of the bond filed by private respondent.
Petitioner claims that theP200,000.00 bond is grossly insufficient. It argued, thus:
By enjoining petitioner from conducting the auction sale of the mortgaged property,
petitioner has already suffered damages in the amount of P715,077.78 representing
filing and publication fees. Yet damages to be incurred by petitioner by reason of the
injunction are not limited to filing and publication fees, granting that the case will drag
on for more tha[n] a year, which is usually the case. The injunction would deprive
petitioner FEBTC of its own income from the foreclosed property or from the proceeds
of the foreclosure sale. Obviously it is easily more than P200,000.00 (Rollo, p. 31).
The Court agrees with petitioner that the amount of the bond is insufficient.
In Valencia v. Court of Appeals, (263 SCRA 275 [1996]) the Supreme Court explained
that the bond is for the protection against loss or damage by reason of the injunction,
to wit:
The said bond was supposed to answer only for damages which may be sustained by
private respondents, against whom the mandatory injunction was issued, by reason of
the issuance thereof, and not to answer for damages caused by the actuations of
petitioner, which may or may not be related at all to the implementation of the
mandatory injunction. The purpose of the injunction bond is to protect the defendant
against loss or damage by reason of the injunction in case the court finally decides
that the plaintiff was not entitled to it, and the bond is usually conditioned accordingly.
Thus, the bondsmen are obligated to account to the defendant in the injunction suit
for all damages, or costs and reasonable counsels fees incurred or sustained by the
latter in case it is determined that the injunction was wrongfully issued. (263 SCRA
288-289)

WHEREFORE, considering the foregoing premises the petition for certiorari is

DENIED; however, private respondent is ordered to file an injunctive bond in the
amount of P5,000,000.00.
SO ORDERED.

Petitioner filed a motion for reconsideration which was denied in a resolution dated
April 3, 2000 by the Court of Appeals on the ground that all the matters raised in the
motion for reconsideration had already been passed upon in the decision.6
Petitioner filed the instant petition for review on certiorari questioning the August 26,
1999 decision and the April 3, 2000 resolution. The following issues were raised by
petitioner:
3.1 Whether the Honorable Court of Appeals can resolve the issue of the
sufficiency of demand.
3.2 Whether private respondent Go is entitled to a temporary restraining
order and a writ of preliminary injunction.
3.3 Whether the Complaint of private respondent Go has been rendered
moot and academic.
For the purpose of clarity, the issues are restated thus:
1. Whether or not the private respondent was entitled to the TRO and writ of
preliminary injunction.
2. Whether or not the TRO and writ of preliminary injunction were properly
issued by Judge Victorio.
On the first issue, this Court finds that private respondent was not entitled to the TRO
and the writ of preliminary injunction. Section 3 of Rule 58 of the Rules of Court
provides the grounds for the issuance of a preliminary injunction, to wit:
A preliminary injunction may be granted when it is established:
(a) That the applicant is entitled to the relief demanded, and the whole or
part of such relief consists in restraining the commission or continuance of
the act or acts complained of, or in requiring the performance of an act or
acts, either for a limited period or perpetually;

Private respondents contention that considering the market value of the property, the
bond is reasonable and proper (Rollo, p. 240) cannot be upheld considering that no
proof of the value of the property was even presented to buttress this assertion.

(b) That the commission, continuance or non-performance of the act or acts

complained of during the litigation would probably work injustice to the
applicant; or

However, the insufficiency of the amount of the bond prescribed by the trial court
does not warrant the lifting of the writ of injunction. The Court notes that under
Section 7, Rule 58 of the 1997 Rules of Civil Procedure the applicant, in case the
bond is insufficient, may still file one sufficient in amount, to wit:

(c) That a party, court, agency or person is doing, threatening, or is

attempting to do, or is procuring or suffering to be done, some act or acts
probably in violation of the rights of the applicant respecting the subject of
the action or proceeding, and tending to render the judgment ineffectual.

Sec. 7. Service of copies of bond; effect of disapproval of same. - - x x x. If the

applicants bond is found to be insufficient in amount, or if the surety or sureties
thereon fail to justify, and a bond sufficient in amount with sufficient sureties approved
after justification is not filed forthwith, the injunction shall be dissolved. x x x.

As will be discussed below, private respondent is not entitled to the relief of injunction
against the extrajudicial foreclosure and auction sale. Neither are the extrajudicial
foreclosure and auction sale violative of private respondents rights.

The Court considers a bond of Five Million Pesos (P5,000,000.00) to be more

appropriate in the present case.

Private respondent claimed that demand was not made upon him, in spite of the fact
that he co-signed the promissory notes. He also argues that only four of the eight
promissory notes secured by the mortgage had become due. A reading of the

promissory notes discloses that as co-signor, private respondent waived demand.

Furthermore, the promissory notes contain an acceleration clause, to wit:
Upon the happening of any of the following events, FAR EAST BANK AND TRUST
COMPANY or the holder, may at its option, forthwith accelerate maturity and
the unpaid balance of the principal, as well as interest and other charges which
have accrued, shall become due and payable without demand or notice[:](1)
default in payment or performance of any obligation of any of the undersigned to FAR
EAST BANK AND TRUST COMPANY or its affiliated companies;
xxx
I/We hereby waive any diligence, presentment, demand, protest or notice of nonpayment o[r] dishonor with respect to this note or any extension thereof. 7 (Emphasis
added)
The Civil Code in Article 11698 provides that one incurs in delay or is in default from
the time the obligor demands the fulfillment of the obligation from the obligee.
However, the law expressly provides that demand is not necessary under certain
circumstances, and one of these circumstances is when the parties expressly waive
demand. Hence, since the co-signors expressly waived demand in the promissory
notes, demand was unnecessary for them to be in default.
Private respondent further argues that by withholding the lease payments Far East
Bank and Trust Company (FEBTC) owed Noahs Ark for the space FEBTC was
leasing from Noahs Ark and applying said amounts to the outstanding obligation of
9
Noahs Ark, as expressed in a letter from FEBTC dated May 19, 1998, FEBTC has
waived default, novated the contract of loan as embodied in the promissory notes and
is therefore estopped from foreclosing on the mortgaged property.
This Court disagrees. FEBTCs act of withholding the lease payments and applying
them to the outstanding obligation of Noahs Ark is merely an acknowledgement of
the legal compensation that occurred by operation of law between the parties. The
Court has expounded on compensation and more specifically on legal compensation
as follows:
x x x compensation is a mode of extinguishing to the concurrent amount the
obligations of persons who in their own right and as principals are reciprocally debtors
and creditors of each other. Legal compensation takes place by operation of law
when all the requisites are present, as opposed to conventional compensation which
takes place when the parties agree to compensate their mutual obligations even in
the absence of some requisites.10
The Civil Code enumerates the requisites of legal compensation, thus:
Art. 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
It is clear from the facts that FEBTC and Noahs Ark are both principal obligors and
creditors of each other. Their debts to each other both consist in a sum of money. As
discussed above, the eight promissory notes of Noahs Ark are all due; and the lease
payments owed by FEBTC become due each month. Noahs Arks debt is liquidated
and demandable; and FEBTCs lease payments are liquidated and are demandable
every month as they fall due. Lastly, there is no retention or controversy commenced
by third persons over either of the debts.
Novation did not occur as private respondent argued. The Court has declared that a
contract cannot be novated in the absence of a new contract executed between the
parties.11 The legal compensation, which was acknowledged by FEBTC in its May 19,
1998 letter, occurred by operation of law, as discussed above. As a consequence, it
cannot be considered a new contract between the parties. Hence, the loan
agreement, as embodied in the promissory notes and the real estate mortgage,
subsists.
Since the compensation between the parties occurred by operation of law, FEBTC did
not waive Noahs Arks default.
As a result of the absence of novation or waiver of default, FEBTC is therefore not
estopped from proceeding with the foreclosure.
Private respondent further argues in his memorandum that FEBTC was in bad faith
when it initiated the foreclosure proceedings because Noahs Ark had been
requesting for accounting and reconciliation of its account and the application of
interest payment, and that there were on-going negotiations with FEBTC for the
settlement and restructuring of the loan obligation. From the evidence on hand, it is
clear that FEBTC was acting within its rights. Private respondent did not present any
other agreement signed by the parties subsequent to the promissory notes and
mortgage contract which can be considered as replacing, altering, or novating the
contractual rights between the parties. Even if Noahs Ark was trying to seek an
accounting and reconciliation of its account and even if it was trying to negotiate a
restructuring of its loan obligation, it cannot deny the fact that it had already defaulted
on the entire loan obligation. This gave FEBTC the right to exercise its contractual
rights to foreclose on the security of the debt, which in this case was the real estate
mortgage subject of this case. FEBTC was therefore just exercising its contractual
rights when it initiated foreclosure proceedings and cannot be considered to have
acted in bad faith.
With regard to the second issue, this Court finds that the TRO and the writ of
preliminary injunction were improperly issued by Judge Victorio. First of all, on
substantive grounds, as discussed above, private respondent was not entitled to the
TRO and the writ of preliminary injunction.
Second, the issuance of the TRO was, on procedural grounds, irregular. Section 5,
Rule 58 of the Rules of Civil Procedure provides:
Preliminary injunction not granted without notice; exception. No preliminary
injunction shall be granted without hearing and prior notice to the party or person

sought to be enjoined. If it shall appear from facts shown by affidavits or by the

verified application that great or irreparable injury would result to the applicant before
the matter can be heard on notice, the court to which the application for preliminary
injunction was made, may issue a temporary restraining order to be effective only for
a period of twenty (20) days from notice to the party or person sought to be enjoined.
Within the said twenty-day period, the court must order said party or person to show
cause, at a specified time and place, why the injunction should not be granted,
determine within the same period whether or not the preliminary injunction shall be
granted, and accordingly issue the corresponding order.
Judge Victorio, in an order dated April 14, 1998, issued a TRO for five days, then, in
an order dated April 15, 1998, extended it for fifteen more days, totaling twenty days.
However, in the first order, Judge Victorio excluded Saturdays and Sundays; and in
the latter order he added legal holidays to the exclusions. As quoted above, a TRO is
effective only for a period of twenty days from notice to the party sought to be
enjoined. The rule does not specify that the counting of the twenty-day period is only
limited to working days or that Saturdays, Sundays and legal holidays are excluded
from the twenty-day period. The law simply states twenty days from notice. Section 1,
Rule 22 of the Rules of Court is pertinent, to wit:
How to compute time. In computing any period of time prescribed or allowed by
these Rules, or by order of the court, or by any applicable statute, the day of the act
or event from which the designated period of time begins to run is to be excluded and
the date of performance included. If the last day of the period, as thus computed, falls
on a Saturday, a Sunday, or a legal holiday in the place where the court sits, the time
shall not run until the next working day.
It is clear from the last sentence of this section that non-working days (Saturdays,
Sundays and legal holidays) are excluded from the counting of the period only when
the last day of the period falls on such days. The Rule does not provide for any other
circumstance in which non-working days would affect the counting of a prescribed
period. Hence, Judge Victorio exceeded the authority granted to lower courts, in
Section 5, Rule 58 of the Rules of Court, when he excluded non-working days from
the counting of the twenty-day period.
In sum, private respondent was not entitled to the TRO nor to the preliminary
injunction, and the period granted in the TRO issued by Judge Victorio exceeded that
prescribed in the Rules of Court.
WHEREFORE, the petition is GRANTED and the decision12 and resolution13 of the
Court of Appeals dated August 26, 1999 and April 3, 2000, respectively,
are PARTIALLY REVERSED and SET ASIDE, retaining only the portion which
increases the amount of the injunctive bond to Five Million Pesos (P5,000,000). The
writ of preliminary injunction issued by Judge Urbano C. Victorio, Sr., in an
order14 dated May 7, 1998 in Civil Case No. 98-88266, is hereby DISSOLVED. No
costs.
SO ORDERED.

G.R. No. 156132

February 6, 2007

CITIBANK, N.A. (Formerly First National City Bank) and INVESTORS FINANCE
CORPORATION, doing business under the name and style of FNCB
Finance, Petitioners,
vs.
MODESTA R. SABENIANO, Respondent.
RESOLUTION
CHICO-NAZARIO, J.:
1

On 16 October 2006, this Court promulgated its Decision in the above-entitled case,
the dispositive portion of which reads
IN VIEW OF THE FOREGOING, the instant Petition is PARTLY GRANTED. The
assailed Decision of the Court of Appeals in CA-G.R. No. 51930, dated 26 March
2002, as already modified by its Resolution, dated 20 November 2002, is
hereby AFFIRMED WITH MODIFICATION, as follows
1. PNs No. 23356 and 23357 are DECLARED subsisting and outstanding.
Petitioner Citibank is ORDEREDto return to respondent the principal
amounts of the said PNs, amounting to Three Hundred Eighteen Thousand
Eight Hundred Ninety-Seven Pesos and Thirty-Four Centavos (P318,897.34)
and Two Hundred Three Thousand One Hundred Fifty Pesos (P203,150.00),
respectively, plus the stipulated interest of Fourteen and a half percent
(14.5%) per annum, beginning 17 March 1977;
2. The remittance of One Hundred Forty-Nine Thousand Six Hundred Thirty
Two US Dollars and Ninety-Nine Cents (US$149,632.99) from respondents
Citibank-Geneva accounts to petitioner Citibank in Manila, and the
application of the same against respondents outstanding loans with the
latter, is DECLAREDillegal, null and void. Petitioner Citibank
is ORDERED to refund to respondent the said amount, or its equivalent in
Philippine currency using the exchange rate at the time of payment, plus the
stipulated interest for each of the fiduciary placements and current accounts
involved, beginning 26 October 1979;
3. Petitioner Citibank is ORDERED to pay respondent moral damages in the
amount of Three Hundred Thousand Pesos (P300,000.00); exemplary
damages in the amount of Two Hundred Fifty Thousand Pesos
(P250,000.00); and attorneys fees in the amount of Two Hundred Thousand
Pesos (P200,000.00); and
4. Respondent is ORDERED to pay petitioner Citibank the balance of her
outstanding loans, which, from the respective dates of their maturity to 5
September 1979, was computed to be in the sum of One Million Sixty-Nine
Thousand Eight Hundred Forty-Seven Pesos and Forty Centavos
(P1,069,847.40), inclusive of interest. These outstanding loans shall
continue to earn interest, at the rates stipulated in the corresponding PNs,
from 5 September 1979 until payment thereof.
Subsequent thereto, respondent Modesta R. Sabeniano filed an Urgent Motion to
Clarify and/or Confirm Decision with Notice of Judgment on 20 October 2006; while,
petitioners Citibank, N.A. and FNCB Finance2 filed their Motion for Partial
Reconsideration of the foregoing Decision on 6 November 2006.

The facts of the case, as determined by this Court in its Decision, may be
summarized as follows.
Respondent was a client of petitioners. She had several deposits and market
placements with petitioners, among which were her savings account with the local
3
branch of petitioner Citibank (Citibank-Manila ); money market placements with
petitioner FNCB Finance; and dollar accounts with the Geneva branch of petitioner
Citibank (Citibank-Geneva). At the same time, respondent had outstanding loans with
petitioner Citibank, incurred at Citibank-Manila, the principal amounts aggregating
to P1,920,000.00, all of which had become due and demandable by May 1979.
Despite repeated demands by petitioner Citibank, respondent failed to pay her
outstanding loans. Thus, petitioner Citibank used respondents deposits and money
market placements to off-set and liquidate her outstanding obligations, as follows
Respondents outstanding obligation (principal and interest
as of 26 October 1979)
P 2,156,940.58
Less: Proceeds from respondents money market
placements with petitioner FNCB Finance (principal
and interest as of 5 September 1979)
(1,022,916.66)
Deposits in respondents bank accounts with
petitioner Citibank
(31,079.14)
Proceeds
of
respondents
money
market
placements and dollar accounts with CitibankGeneva (peso equivalent as of 26 October 1979)
(1,102,944.78)
Balance of respondents obligation

P 0.00

Respondent, however, denied having any outstanding loans with petitioner Citibank.
She likewise denied that she was duly informed of the off-setting or compensation
thereof made by petitioner Citibank using her deposits and money market placements
with petitioners. Hence, respondent sought to recover her deposits and money market
placements.
Respondent instituted a complaint for "Accounting, Sum of Money and Damages"
against petitioners, docketed as Civil Case No. 11336, before the Regional Trial Court
(RTC) of Makati City. After trial proper, which lasted for a decade, the RTC rendered
a Decision4 on 24 August 1995, the dispositive portion of which reads
WHEREFORE, in view of all the foregoing, decision is hereby rendered as follows:
(1) Declaring as illegal, null and void the setoff effected by the defendant
Bank [petitioner Citibank] of plaintiffs [respondent Sabeniano] dollar deposit
with Citibank, Switzerland, in the amount of US$149,632.99, and ordering
the said defendant [petitioner Citibank] to refund the said amount to the
plaintiff with legal interest at the rate of twelve percent (12%) per annum,

compounded yearly, from 31 October 1979 until fully paid, or its peso
equivalent at the time of payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted to the defendant
Bank [petitioner Citibank] in the amount of P1,069,847.40 as of 5 September
1979 and ordering the plaintiff [respondent Sabeniano] to pay said amount,
however, there shall be no interest and penalty charges from the time the
illegal setoff was effected on 31 October 1979;
(3) Dismissing all other claims and counterclaims interposed by the parties
against each other.
Costs against the defendant Bank.
All the parties appealed the afore-mentioned RTC Decision to the Court of Appeals,
docketed as CA-G.R. CV No. 51930. On 26 March 2002, the appellate court
promulgated its Decision,5 ruling entirely in favor of respondent, to wit
Wherefore, premises considered, the assailed 24 August 1995 Decision of the court a
quo is hereby AFFIRMED with MODIFICATION, as follows:
1. Declaring as illegal, null and void the set-off effected by the defendantappellant Bank of the plaintiff-appellants dollar deposit with Citibank,
Switzerland, in the amount of US$149,632.99, and ordering defendantappellant Citibank to refund the said amount to the plaintiff-appellant with
legal interest at the rate of twelve percent (12%) per annum, compounded
yearly, from 31 October 1979 until fully paid, or its peso equivalent at the
time of payment;
2. As defendant-appellant Citibank failed to establish by competent evidence
the alleged indebtedness of plaintiff-appellant, the set-off of P1,069,847.40
in the account of Ms. Sabeniano is hereby declared as without legal and
factual basis;
3. As defendants-appellants failed to account the following plaintiffappellants money market placements, savings account and current
accounts, the former is hereby ordered to return the same, in accordance
with the terms and conditions agreed upon by the contending parties as
evidenced by the certificates of investments, to wit:
(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes
NNPN No. 22526) issued on 17 March 1977, P318,897.34 with
14.50% interest p.a.;
(ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes
NNPN No. 22528) issued on 17 March 1977, P203,150.00 with
14.50 interest p.a.;
(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes
NNPN No. 04952), issued on 02 June 1977, P500,000.00 with 17%
interest p.a.;
(iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes
NNPN No. 04962), issued on 02 June 1977, P500,000.00 with 17%
interest per annum;

(v) The Two Million (P2,000,000.00) money market placements of

Ms. Sabeniano with the Ayala Investment & Development
Corporation (AIDC) with legal interest at the rate of twelve percent
(12%) per annum compounded yearly, from 30 September 1976
until fully paid;
4. Ordering defendants-appellants to jointly and severally pay the plaintiffappellant the sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00)
by way of moral damages, FIVE HUNDRED THOUSAND PESOS
(P500,000.00) as exemplary damages, and ONE HUNDRED THOUSAND
PESOS (P100,000.00) as attorneys fees.
Acting on petitioners Motion for Partial Reconsideration, the Court of Appeals issued
a Resolution,6 dated 20 November 2002, modifying its earlier Decision, thus
WHEREFORE, premises considered, the instant Motion for
Reconsideration is PARTIALLY GRANTED as Sub-paragraph (V)
paragraph 3 of the assailed Decisions dispositive portion is hereby
ordered DELETED.
The challenged 26 March 2002 Decision of the Court
is AFFIRMED with MODIFICATION.
Since the Court of Appeals Decision, dated 26 March 2002, as modified by the
Resolution of the same court, dated 20 November 2002, was still principally in favor
of respondent, petitioners filed the instant Petition for Review on Certiorari under Rule
45 of the Revised Rules of Court. After giving due course to the instant Petition, this
Court promulgated on 16 October 2006 its Decision, now subject of petitioners
Motion for Partial Reconsideration.1awphi1.net
Among the numerous grounds raised by petitioners in their Motion for Partial
Reconsideration, this Court shall address and discuss herein only particular points
that had not been considered or discussed in its Decision. Even in consideration of
these points though, this Court remains unconvinced that it should modify or reverse
in any way its disposition of the case in its earlier Decision.
As to the off-setting or compensation of respondents outstanding loan balance with
her dollar deposits in Citibank-Geneva
Petitioners take exception to the following findings made by this Court in its Decision,
dated 16 October 2006, disallowing the off-setting or compensation of the balance of
respondents outstanding loans using her dollar deposits in Citibank-Geneva
Without the Declaration of Pledge, petitioner Citibank had no authority to demand the
remittance of respondents dollar accounts with Citibank-Geneva and to apply them to
her outstanding loans. It cannot effect legal compensation under Article 1278 of the
Civil Code since, petitioner Citibank itself admitted that Citibank-Geneva is a distinct
and separate entity. As for the dollar accounts, respondent was the creditor and
Citibank-Geneva is the debtor; and as for the outstanding loans, petitioner Citibank
was the creditor and respondent was the debtor. The parties in these transactions
were evidently not the principal creditor of each other.
Petitioners maintain that respondents Declaration of Pledge, by virtue of which she
supposedly assigned her dollar accounts with Citibank-Geneva as security for her
loans with petitioner Citibank, is authentic and, thus, valid and binding upon
respondent. Alternatively, petitioners aver that even without said Declaration of

Pledge, the off-setting or compensation made by petitioner Citibank using

respondents dollar accounts with Citibank-Geneva to liquidate the balance of her
outstanding loans with Citibank-Manila was expressly authorized by respondent
herself in the promissory notes (PNs) she signed for her loans, as well as sanctioned
by Articles 1278 to 1290 of the Civil Code. This alternative argument is anchored on
the premise that all branches of petitioner Citibank in the Philippines and abroad are
part of a single worldwide corporate entity and share the same juridical personality. In
connection therewith, petitioners deny that they ever admitted that Citibank-Manila
and Citibank-Geneva are distinct and separate entities.
Petitioners call the attention of this Court to the following provision found in all of the
PNs7 executed by respondent for her loans
At or after the maturity of this note, or when same becomes due under any of the
provisions hereof, any money, stocks, bonds, or other property of any kind
whatsoever, on deposit or otherwise, to the credit of the undersigned on the books of
CITIBANK, N.A. in transit or in their possession, may without notice be applied at the
discretion of the said bank to the full or partial payment of this note.
It is the petitioners contention that the term "Citibank, N.A." used therein should be
deemed to refer to all branches of petitioner Citibank in the Philippines and abroad;
thus, giving petitioner Citibank the authority to apply as payment for the PNs even
respondents dollar accounts with Citibank-Geneva. Still proceeding from the premise
that all branches of petitioner Citibank should be considered as a single entity, then it
should not matter that the respondent obtained the loans from Citibank-Manila and
her deposits were with Citibank-Geneva. Respondent should be considered the
debtor (for the loans) and creditor (for her deposits) of the same entity, petitioner
Citibank. Since petitioner Citibank and respondent were principal creditors of each
other, in compliance with the requirements under Article 1279 of the Civil Code,8 then
the former could have very well used off-setting or compensation to extinguish the
parties obligations to one another. And even without the PNs, off-setting or
compensation was still authorized because according to Article 1286 of the Civil
Code, "Compensation takes place by operation of law, even though the debts may be
payable at different places, but there shall be an indemnity for expenses of exchange
or transportation to the place of payment."
Pertinent provisions of Republic Act No. 8791, otherwise known as the General
Banking Law of 2000, governing bank branches are reproduced below
SEC. 20. Bank Branches. Universal or commercial banks may open branches or
other offices within or outside the Philippines upon prior approval of the Bangko
Sentral.
Branching by all other banks shall be governed by pertinent laws.
A bank may, subject to prior approval of the Monetary Board, use any or all of its
branches as outlets for the presentation and/or sale of the financial products of its
allied undertaking or its investment house units.
A bank authorized to establish branches or other offices shall be responsible for all
business conducted in such branches and offices to the same extent and in the same
manner as though such business had all been conducted in the head office. A bank
and its branches and offices shall be treated as one unit.
xxxx

SEC. 72. Transacting Business in the Philippines. The entry of foreign banks in the
Philippines through the establishment of branches shall be governed by the
provisions of the Foreign Banks Liberalization Act.
The conduct of offshore banking business in the Philippines shall be governed by the
provisions of Presidential Decree No. 1034, otherwise known as the "Offshore
Banking System Decree."
xxxx
SEC. 74. Local Branches of Foreign Banks. In case of a foreign bank which has
more than one (1) branch in the Philippines, all such branches shall be treated as one
(1) unit for the purpose of this Act, and all references to the Philippine branches of
foreign banks shall be held to refer to such units.
SEC. 75. Head Office Guarantee. In order to provide effective protection of the
interests of the depositors and other creditors of Philippine branches of a foreign
bank, the head office of such branches shall fully guarantee the prompt payment of all
liabilities of its Philippine branch.
Residents and citizens of the Philippines who are creditors of a branch in the
Philippines of a foreign bank shall have preferential rights to the assets of such
branch in accordance with existing laws.
Republic Act No. 7721, otherwise known as the Foreign Banks Liberalization Law,
lays down the policies and regulations specifically concerning the establishment and
operation of local branches of foreign banks. Relevant provisions of the said statute
read
Sec. 2. Modes of Entry. - The Monetary Board may authorize foreign banks to
operate in the Philippine banking system through any of the following modes of entry:
(i) by acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of
an existing bank; (ii) by investing in up to sixty percent (60%) of the voting stock of a
new banking subsidiary incorporated under the laws of the Philippines; or (iii) by
establishing branches with full banking authority: Provided, That a foreign bank may
avail itself of only one (1) mode of entry: Provided, further, That a foreign bank or a
Philippine corporation may own up to a sixty percent (60%) of the voting stock of only
one (1) domestic bank or new banking subsidiary.
Sec. 5. Head Office Guarantee. - The head office of foreign bank branches shall
guarantee prompt payment of all liabilities of its Philippine branches.
It is true that the afore-quoted Section 20 of the General Banking Law of 2000
expressly states that the bank and its branches shall be treated as one unit. It should
be pointed out, however, that the said provision applies to a universal 9 or commercial
10
bank, duly established and organized as a Philippine corporation in accordance with
Section 8 of the same statute, 11 and authorized to establish branches within or
outside the Philippines.
The General Banking Law of 2000, however, does not make the same categorical
statement as regards to foreign banks and their branches in the Philippines. What
Section 74 of the said law provides is that in case of a foreign bank with several
branches in the country, all such branches shall be treated as one unit. As to the
relations between the local branches of a foreign bank and its head office, Section 75
of the General Banking Law of 2000 and Section 5 of the Foreign Banks
Liberalization Law provide for a "Home Office Guarantee," in which the head office of

the foreign bank shall guarantee prompt payment of all liabilities of its Philippine
branches. While the Home Office Guarantee is in accord with the principle that these
local branches, together with its head office, constitute but one legal entity, it does not
necessarily support the view that said principle is true and applicable in all
circumstances.
The Home Office Guarantee is included in Philippine statutes clearly for the protection
of the interests of the depositors and other creditors of the local branches of a foreign
bank.12 Since the head office of the bank is located in another country or state, such a
guarantee is necessary so as to bring the head office within Philippine jurisdiction,
and to hold the same answerable for the liabilities of its Philippine branches. Hence,
the principle of the singular identity of that the local branches and the head office of a
foreign bank are more often invoked by the clients in order to establish the
accountability of the head office for the liabilities of its local branches. It is under such
attendant circumstances in which the American authorities and jurisprudence
presented by petitioners in their Motion for Partial Reconsideration were rendered.
Now the question that remains to be answered is whether the foreign bank can use
the principle for a reverse purpose, in order to extend the liability of a client to the
foreign banks Philippine branch to its head office, as well as to its branches in other
countries. Thus, if a client obtains a loan from the foreign banks Philippine branch,
does it absolutely and automatically make the client a debtor, not just of the Philippine
branch, but also of the head office and all other branches of the foreign bank around
the world? This Court rules in the negative.
There being a dearth of Philippine authorities and jurisprudence on the matter, this
Court, just as what petitioners have done, turns to American authorities and
jurisprudence. American authorities and jurisprudence are significant herein
considering that the head office of petitioner Citibank is located in New York, United
States of America (U.S.A.).
Unlike Philippine statutes, the American legislation explicitly defines the relations
among foreign branches of an American bank. Section 25 of the United States
Federal Reserve Act13 states that
Every national banking association operating foreign branches shall conduct the
accounts of each foreign branch independently of the accounts of other foreign
branches established by it and of its home office, and shall at the end of each fiscal
period transfer to its general ledger the profit or loss accrued at each branch as a
separate item.
Contrary to petitioners assertion that the accounts of Citibank-Manila and CitibankGeneva should be deemed as a single account under its head office, the foregoing
provision mandates that the accounts of foreign branches of an American bank shall
be conducted independently of each other. Since the head office of petitioner Citibank
is in the U.S.A., then it is bound to treat its foreign branches in accordance with the
said provision. It is only at the end of its fiscal period that the bank is required to
transfer to its general ledger the profit or loss accrued at each branch, but still
reporting it as a separate item. It is by virtue of this provision that the Circuit Court of
Appeals of New York declared in Pan-American Bank and Trust Co. v. National City
Bank of New York14 that a branch is not merely a tellers window; it is a separate
business entity.
The circumstances in the case of McGrath v. Agency of Chartered Bank of India,
Australia & China15 are closest to the one at bar. In said case, the Chartered Bank

had branches in several countries, including one in Hamburg, Germany and another
in New York, U.S.A., and yet another in London, United Kingdom. The New York
branch entered in its books credit in favor of four German firms. Said credit
represents collections made from bills of exchange delivered by the four German
firms. The same four German firms subsequently became indebted to the Hamburg
branch. The London branch then requested for the transfer of the credit in the name
of the German firms from the New York branch so as to be applied or setoff against
the indebtedness of the same firms to the Hamburg branch. One of the question
brought before the U.S. District Court of New York was "whether or not the debts and
the alleged setoffs thereto are mutual," which could be answered by determining first
whether the New York and Hamburg branches of Chartered Bank are individual
business entities or are one and the same entity. In denying the right of the Hamburg
branch to setoff, the U.S. District Court ratiocinated that
The structure of international banking houses such as Chartered bank defies one
rigorous description. Suffice it to say for present analysis, branches or agencies of
an international bank have been held to be independent entities for a variety of
purposes (a) deposits payable only at branch where made; Mutaugh v. Yokohama
Specie Bank, Ltd., 1933, 149 Misc. 693, 269 N.Y.S. 65; Bluebird Undergarment Corp.
v. Gomez, 1931, 139 Misc. 742, 249 N.Y.S. 319; (b) checks need be honored only
when drawn on branch where deposited; Chrzanowska v. Corn Exchange Bank,
1916, 173 App. Div. 285, 159 N.Y.S. 385, affirmed 1919, 225 N.Y. 728, 122 N.E. 877;
subpoena duces tecum on foreign banks record barred; In re Harris, D.C.S.D.N.Y.
1939, 27 F. Supp. 480; (d) a foreign branch separate for collection of forwarded
paper; Pan-American Bank and Trust Company v. National City Bank of New York, 2
Cir., 1925, 6 F. 2d 762, certiorari denied 1925, 269 U.S. 554, 46 S. Ct. 18, 70 L. Ed.
408. Thus in law there is nothing innately unitary about the organization of
international banking institutions.
Defendant, upon its oral argument and in its brief, relies heavily on Sokoloff v.
National City Bank of New York,1928, 250 N.Y. 69, 164 N.E. 745, as authority for the
proposition that Chartered Bank, not the Hamburg or New York Agency, is ultimately
responsible for the amounts owing its German customers and, conversely, it is to
Chartered Bank that the German firms owe their obligations. The Sokoloff case, aside
from its violently different fact situation, is centered on the legal problem of default of
payment and consequent breach of contract by a branch bank. It does not stand for
the principle that in every instance an international bank with branches is but
one legal entity for all purposes. The defendant concedes in its brief (p. 15) that
there are purposes for which the various agencies and branches of Chartered Bank
may be treated in law as separate entities. I fail to see the applicability
of Sokoloff either as a guide to or authority for the resolution of this problem. The
facts before me and the cases catalogued supra lend weight to the view that we are
dealing here with Agencies independent of one another.
xxxx
I hold that for instant purposes the Hamburg Agency and defendant were
independent business entities, and the attempted setoff may not be utilized by
defendant against its debt to the German firms obligated to the Hamburg Agency.
Going back to the instant Petition, although this Court concedes that all the Philippine
branches of petitioner Citibank should be treated as one unit with its head office, it
cannot be persuaded to declare that these Philippine branches are likewise a single

unit with the Geneva branch. It would be stretching the principle way beyond its
intended purpose.
Therefore, this Court maintains its original position in the Decision that the off-setting
or compensation of respondents loans with Citibank-Manila using her dollar accounts
with Citibank-Geneva cannot be effected. The parties cannot be considered principal
creditor of the other. As for the dollar accounts, respondent was the creditor and
Citibank-Geneva was the debtor; and as for the outstanding loans, petitioner Citibank,
particularly Citibank-Manila, was the creditor and respondent was the debtor. Since
legal compensation was not possible, petitioner Citibank could only use respondents
dollar accounts with Citibank-Geneva to liquidate her loans if she had expressly
authorized it to do so by contract.
Respondent cannot be deemed to have authorized the use of her dollar deposits with
Citibank-Geneva to liquidate her loans with petitioner Citibank when she signed the
PNs16 for her loans which all contained the provision that
At or after the maturity of this note, or when same becomes due under any of the
provisions hereof, any money, stocks, bonds, or other property of any kind
whatsoever, on deposit or otherwise, to the credit of the undersigned on the books of
CITIBANK, N.A. in transit or in their possession, may without notice be applied at the
discretion of the said bank to the full or partial payment of this note.
As has been established in the preceding discussion, "Citibank, N.A." can only refer
to the local branches of petitioner Citibank together with its head office. Unless there
is any showing that respondent understood and expressly agreed to a more farreaching interpretation, the reference to Citibank, N.A. cannot be extended to all other
branches of petitioner Citibank all over the world. Although theoretically, books of the
branches form part of the books of the head office, operationally and practically, each
branch maintains its own books which shall only be later integrated and balanced with
the books of the head office. Thus, it is very possible to identify and segregate the
books of the Philippine branches of petitioner Citibank from those of Citibank-Geneva,
and to limit the authority granted for application as payment of the PNs to
respondents deposits in the books of the former.
Moreover, the PNs can be considered a contract of adhesion, the PNs being in
standard printed form prepared by petitioner Citibank. Generally, stipulations in a
contract come about after deliberate drafting by the parties thereto, there are certain
contracts almost all the provisions of which have been drafted only by one party,
usually a corporation. Such contracts are called contracts of adhesion, because the
only participation of the party is the affixing of his signature or his "adhesion" thereto.
This being the case, the terms of such contract are to be construed strictly against the
party which prepared it.17
As for the supposed Declaration of Pledge of respondents dollar accounts with
Citibank-Geneva as security for the loans, this Court stands firm on its ruling that the
non-production thereof is fatal to petitioners cause in light of respondents claim that
her signature on such document was a forgery. It bears to note that the original of the
Declaration of Pledge is with Citibank-Geneva, a branch of petitioner Citibank. As
between respondent and petitioner Citibank, the latter has better access to the
document. The constant excuse forwarded by petitioner Citibank that CitibankGeneva refused to return possession of the original Declaration of Pledge to CitibankManila only supports this Courts finding in the preceding paragraphs that the two
branches are actually operating separately and independently of each other.

Further, petitioners keep playing up the fact that respondent, at the beginning of the
trial, refused to give her specimen signatures to help establish whether her signature
on the Declaration of Pledge was indeed forged. Petitioners seem to forget that
subsequently, respondent, on advice of her new counsel, already offered to
cooperate in whatever manner so as to bring the original Declaration of Pledge before
the RTC for inspection. The exchange of the counsels for the opposing sides during
the hearing on 24 July 1991 before the RTC reveals the apparent willingness of
respondents counsel to undertake whatever course of action necessary for the
production of the contested document, and the evasive, non-committal, and
uncooperative attitude of petitioners counsel.18
Lastly, this Courts ruling striking down the Declaration of Pledge is not entirely based
on respondents allegation of forgery. In its Decision, this Court already extensively
discussed why it found the said Declaration of Pledge highly suspicious and irregular,
to wit
First of all, it escapes this Court why petitioner Citibank took care to have the Deeds
of Assignment of the PNs notarized, yet left the Declaration of Pledge unnotarized.
This Court would think that petitioner Citibank would take greater cautionary
measures with the preparation and execution of the Declaration of Pledge because it
involved respondents "all present and future fiduciary placements" with a Citibank
branch in another country, specifically, in Geneva, Switzerland. While there is no
express legal requirement that the Declaration of Pledge had to be notarized to be
effective, even so, it could not enjoy the same prima facie presumption of due
execution that is extended to notarized documents, and petitioner Citibank must
discharge the burden of proving due execution and authenticity of the Declaration of
Pledge.
Second, petitioner Citibank was unable to establish the date when the Declaration of
Pledge was actually executed. The photocopy of the Declaration of Pledge submitted
by petitioner Citibank before the RTC was undated. It presented only a photocopy of
the pledge because it already forwarded the original copy thereof to Citibank-Geneva
when it requested for the remittance of respondents dollar accounts pursuant thereto.
Respondent, on the other hand, was able to secure a copy of the Declaration of
Pledge, certified by an officer of Citibank-Geneva, which bore the date 24 September
1979. Respondent, however, presented her passport and plane tickets to prove that
she was out of the country on the said date and could not have signed the pledge.
Petitioner Citibank insisted that the pledge was signed before 24 September 1979,
but could not provide an explanation as to how and why the said date was written on
the pledge. Although Mr. Tan testified that the Declaration of Pledge was signed by
respondent personally before him, he could not give the exact date when the said
signing took place. It is important to note that the copy of the Declaration of Pledge
submitted by the respondent to the RTC was certified by an officer of CitibankGeneva, which had possession of the original copy of the pledge. It is dated 24
September 1979, and this Court shall abide by the presumption that the written
document is truly dated. Since it is undeniable that respondent was out of the country
on 24 September 1979, then she could not have executed the pledge on the said
date.
Third, the Declaration of Pledge was irregularly filled-out. The pledge was in a
standard printed form. It was constituted in favor of Citibank, N.A., otherwise referred
to therein as the Bank. It should be noted, however, that in the space which should
have named the pledgor, the name of petitioner Citibank was typewritten, to wit

The pledge right herewith constituted shall secure all claims which the Bank now has
or in the future acquires against Citibank, N.A., Manila (full name and address of the
Debtor), regardless of the legal cause or the transaction (for example current account,
securities transactions, collections, credits, payments, documentary credits and
collections) which gives rise thereto, and including principal, all contractual and
penalty interest, commissions, charges, and costs.
The pledge, therefore, made no sense, the pledgor and pledgee being the same
entity. Was a mistake made by whoever filled-out the form? Yes, it could be a
possibility. Nonetheless, considering the value of such a document, the mistake as to
a significant detail in the pledge could only be committed with gross carelessness on
the part of petitioner Citibank, and raised serious doubts as to the authenticity and
due execution of the same. The Declaration of Pledge had passed through the hands
of several bank officers in the country and abroad, yet, surprisingly and implausibly,
no one noticed such a glaring mistake.
Lastly, respondent denied that it was her signature on the Declaration of Pledge. She
claimed that the signature was a forgery. When a document is assailed on the basis
of forgery, the best evidence rule applies
Basic is the rule of evidence that when the subject of inquiry is the contents of a
document, no evidence is admissible other than the original document itself except in
the instances mentioned in Section 3, Rule 130 of the Revised Rules of Court. Mere
photocopies of documents are inadmissible pursuant to the best evidence rule.This is
especially true when the issue is that of forgery.
As a rule, forgery cannot be presumed and must be proved by clear, positive and
convincing evidence and the burden of proof lies on the party alleging forgery. The
best evidence of a forged signature in an instrument is the instrument itself reflecting
the alleged forged signature. The fact of forgery can only be established by a
comparison between the alleged forged signature and the authentic and genuine
signature of the person whose signature is theorized upon to have been forged.
Without the original document containing the alleged forged signature, one cannot
make a definitive comparison which would establish forgery. A comparison based on
a mere xerox copy or reproduction of the document under controversy cannot
produce reliable results.
Respondent made several attempts to have the original copy of the pledge produced
before the RTC so as to have it examined by experts. Yet, despite several Orders by
the RTC, petitioner Citibank failed to comply with the production of the original
Declaration of Pledge. It is admitted that Citibank-Geneva had possession of the
original copy of the pledge. While petitioner Citibank in Manila and its branch in
Geneva may be separate and distinct entities, they are still incontestably related, and
between petitioner Citibank and respondent, the former had more influence and
resources to convince Citibank-Geneva to return, albeit temporarily, the original
Declaration of Pledge. Petitioner Citibank did not present any evidence to convince
this Court that it had exerted diligent efforts to secure the original copy of the pledge,
nor did it proffer the reason why Citibank-Geneva obstinately refused to give it back,
when such document would have been very vital to the case of petitioner Citibank.
There is thus no justification to allow the presentation of a mere photocopy of the
Declaration of Pledge in lieu of the original, and the photocopy of the pledge
presented by petitioner Citibank has nil probative value. In addition, even if this Court
cannot make a categorical finding that respondents signature on the original copy of
the pledge was forged, it is persuaded that petitioner Citibank willfully suppressed the

presentation of the original document, and takes into consideration the presumption
that the evidence willfully suppressed would be adverse to petitioner Citibank if
produced.
As far as the Declaration of Pledge is concerned, petitioners failed to submit any new
evidence or argument that was not already considered by this Court when it rendered
its Decision.
As to the value of the dollar deposits in Citibank-Geneva ordered refunded to
respondent
In case petitioners are still ordered to refund to respondent the amount of her dollar
accounts with Citibank-Geneva, petitioners beseech this Court to adjust the nominal
values of respondents dollar accounts and/or her overdue peso loans by using the
values of the currencies stipulated at the time the obligations were established in
1979, to address the alleged inequitable consequences resulting from the extreme
and extraordinary devaluation of the Philippine currency that occurred in the course of
the Asian crisis of 1997. Petitioners base their request on Article 1250 of the Civil
Code which reads, "In case an extraordinary inflation or deflation of the currency
stipulated should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is an
agreement to the contrary."
It is well-settled that Article 1250 of the Civil Code becomes applicable only when
there is extraordinary inflation or deflation of the currency. Inflation has been defined
as the sharp increase of money or credit or both without a corresponding increase in
business transaction. There is inflation when there is an increase in the volume of
money and credit relative to available goods resulting in a substantial and continuing
rise in the general price level. 19 In Singson v. Caltex (Philippines), Inc.,20 this Court
already provided a discourse as to what constitutes as extraordinary inflation or
deflation of currency, thus
We have held extraordinary inflation to exist when there is a decrease or increase in
the purchasing power of the Philippine currency which is unusual or beyond the
common fluctuation in the value of said currency, and such increase or decrease
could not have been reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the establishment of the obligation.
An example of extraordinary inflation, as cited by the Court in Filipino Pipe and
Foundry Corporation vs. NAWASA,supra, is that which happened to
the deutschmark in 1920. Thus:
"More recently, in the 1920s, Germany experienced a case of hyperinflation. In early
1921, the value of the German mark was 4.2 to the U.S. dollar. By May of the same
year, it had stumbled to 62 to the U.S. dollar. And as prices went up rapidly, so that
by October 1923, it had reached 4.2 trillion to the U.S. dollar!" (Bernardo M. Villegas
& Victor R. Abola, Economics, An Introduction [Third Edition]).
As reported, "prices were going up every week, then every day, then every hour.
Women were paid several times a day so that they could rush out and exchange their
money for something of value before what little purchasing power was left dissolved
in their hands. Some workers tried to beat the constantly rising prices by throwing
their money out of the windows to their waiting wives, who would rush to unload the
nearly worthless paper. A postage stamp cost millions of marks and a loaf of bread,

billions." (Sidney Rutberg, "The Money Balloon", New York: Simon and Schuster,
1975, p. 19, cited in "Economics, An Introduction" by Villegas & Abola, 3rd ed.)
The supervening of extraordinary inflation is never assumed. The party alleging it
must lay down the factual basis for the application of Article 1250.
Thus, in the Filipino Pipe case, the Court acknowledged that the voluminous records
and statistics submitted by plaintiff-appellant proved that there has been a decline in
the purchasing power of the Philippine peso, but this downward fall cannot be
considered "extraordinary" but was simply a universal trend that has not spared our
country. Similarly, in Huibonhoa vs. Court of Appeals, the Court dismissed plaintiffappellant's unsubstantiated allegation that the Aquino assassination in 1983 caused
building and construction costs to double during the period July 1983 to February
1984. In Serra vs. Court of Appeals, the Court again did not consider the decline in
the peso's purchasing power from 1983 to 1985 to be so great as to result in an
extraordinary inflation.
Like the Serra and Huibonhoa cases, the instant case also raises as basis for the
application of Article 1250 the Philippine economic crisis in the early 1980s --- when,
based on petitioner's evidence, the inflation rate rose to 50.34% in 1984. We hold that
there is no legal or factual basis to support petitioner's allegation of the existence of
extraordinary inflation during this period, or, for that matter, the entire time frame of
1968 to 1983, to merit the adjustment of the rentals in the lease contract dated July
16, 1968. Although by petitioner's evidence there was a decided decline in the
purchasing power of the Philippine peso throughout this period, we are hard put to
treat this as an "extraordinary inflation" within the meaning and intent of Article 1250.
Rather, we adopt with approval the following observations of the Court of Appeals on
petitioner's evidence, especially the NEDA certification of inflation rates based on
consumer price index:
xxx (a) from the period 1966 to 1986, the official inflation rate never exceeded 100%
in any single year; (b) the highest official inflation rate recorded was in 1984 which
reached only 50.34%; (c) over a twenty one (21) year period, the Philippines
experienced a single-digit inflation in ten (10) years (i.e., 1966, 1967, 1968, 1969,
1975, 1976, 1977, 1978, 1983 and 1986); (d) in other years (i.e., 1970, 1971, 1972,
1973, 1974, 1979, 1980, 1981, 1982, 1984 and 1989) when the Philippines
experienced double-digit inflation rates, the average of those rates was only 20.88%;
(e) while there was a decline in the purchasing power of the Philippine currency from
the period 1966 to 1986, such cannot be considered as extraordinary; rather, it is a
normal erosion of the value of the Philippine peso which is a characteristic of most
currencies.
"Erosion" is indeed an accurate description of the trend of decline in the value of the
peso in the past three to four decades. Unfortunate as this trend may be, it is certainly
distinct from the phenomenon contemplated by Article 1250.
Moreover, this Court has held that the effects of extraordinary inflation are not to be
applied without an official declaration thereof by competent authorities.
The burden of proving that there had been extraordinary inflation or deflation of the
currency is upon the party that alleges it. Such circumstance must be proven by
competent evidence, and it cannot be merely assumed. In this case, petitioners
presented no proof as to how much, for instance, the price index of goods and
services had risen during the intervening period. 21 All the information petitioners

provided was the drop of the U.S. dollar-Philippine peso exchange rate by 17 points
from June 1997 to January 1998. While the said figure was based on the statistics of
the Bangko Sentral ng Pilipinas (BSP), it is also significant to note that the BSP did
not categorically declare that the same constitute as an extraordinary inflation. The
existence of extraordinary inflation must be officially proclaimed by competent
authorities, and the only competent authority so far recognized by this Court to make
such an official proclamation is the BSP.22
Neither can this Court, by merely taking judicial notice of the Asian currency crisis in
1997, already declare that there had been extraordinary inflation. It should be recalled
that the Philippines likewise experienced economic crisis in the 1980s, yet this Court
did not find that extraordinary inflation took place during the said period so as to
warrant the application of Article 1250 of the Civil Code.
Furthermore, it is incontrovertible that Article 1250 of the Civil Code is based on
equitable considerations. Among the maxims of equity are (1) he who seeks equity
must do equity, and (2) he who comes into equity must come with clean hands. The
latter is a frequently stated maxim which is also expressed in the principle that he who
has done inequity shall not have equity.23 Petitioner Citibank, hence, cannot invoke
Article 1250 of the Civil Code because it does not come to court with clean hands.
The delay in the recovery24 by respondent of her dollar accounts with CitibankGeneva was due to the unlawful act of petitioner Citibank in using the same to
liquidate respondents loans. Petitioner Citibank even attempted to justify the offsetting or compensation of respondents loans using her dollar accounts with
Citibank-Geneva by the presentation of a highly suspicious and irregular, and even
possibly forged, Declaration of Pledge.
The damage caused to respondent of the deprivation of her dollar accounts for more
than two decades is unquestionably relatively more extensive and devastating, as
compared to whatever damage petitioner Citibank, an international banking
corporation with undoubtedly substantial capital, may have suffered for respondents
non-payment of her loans. It must also be remembered that petitioner Citibank had
already considered respondents loans paid or liquidated by 26 October 1979 after it
had fully effected compensation thereof using respondents deposits and money
market placements. All this time, respondents dollar accounts are unlawfully in the
possession of and are being used by petitioner Citibank for its business transactions.
In the meantime, respondents businesses failed and her properties were foreclosed
because she was denied access to her funds when she needed them most. Taking
these into consideration, respondents dollar accounts with Citibank-Geneva must be
deemed to be subsisting and continuously deposited with petitioner Citibank all this
while, and will only be presently withdrawn by respondent. Therefore, petitioner
Citibank should refund to respondent the U.S. $149,632.99 taken from her CitibankGeneva accounts, or its equivalent in Philippine currency using the exchange rate at
the time of payment, plus the stipulated interest for each of the fiduciary placements
and current accounts involved, beginning 26 October 1979.
As to respondents Motion to Clarify and/or Confirm Decision with Notice of Judgment
Respondent, in her Motion, is of the mistaken notion that the Court of Appeals
Decision, dated 26 March 2002, as modified by the Resolution of the same court,
dated 20 November 2002, would be implemented or executed together with this
Courts Decision.

This Court clarifies that its affirmation of the Decision of the Court of Appeals, as
modified, is only to the extent that it recognizes that petitioners had liabilities to the
respondent. However, this Courts Decision modified that of the appellate courts by
making its own determination of the specific liabilities of the petitioners to respondent
and the amounts thereof; as well as by recognizing that respondent also had liabilities
to petitioner Citibank and the amount thereof.
Thus, for purposes of execution, the parties need only refer to the dispositive portion
of this Courts Decision, dated 16 October 2006, should it already become final and
executory, without any further modifications.
As the last point, there is no merit in respondents Motion for this Court to already
declare its Decision, dated 16 October 2006, final and executory. A judgment
becomes final and executory by operation of law and, accordingly, the finality of the
judgment becomes a fact upon the lapse of the reglementary period without an
appeal or a motion for new trial or reconsideration being filed. 25 This Court cannot
arbitrarily disregard the reglementary period and declare a judgment final and
executory upon the mere motion of one party, for to do so will be a culpable violation
of the right of the other parties to due process.
IN VIEW OF THE FOREGOING, petitioners Motion for Partial Reconsideration of this
Courts Decision, dated 16 October 2006, and respondents Motion for this Court to
declare the same Decision already final and executory, are both DENIED for lack of
merit.
SO ORDERED.

G.R. No. 167434 February 19, 2007

SPOUSES RAMON M. NISCE and A. NATIVIDAD PARAS-NISCE, Petitioners,
vs.
EQUITABLE PCI BANK, INC., Respondent.

(a) x x x [I]t was executed without the knowledge and consent of plaintiff
Ramon M. Nisce, who is by law the administrator of the conjugal partnership;
(b) The suretyship agreement did not redound to the benefit of the conjugal
partnership and therefore did not bind the same;
(c) Assuming, arguendo, that the suretyship contract was valid and binding,
any obligation arising therefrom is not covered by plaintiffs real estate
mortgages which were constituted to secure the payment of certain specific
obligations only.8

DECISION
CALLEJO, SR., J.:
On November 26, 2002, Equitable PCI Bank1 (Bank) as creditor-mortgagee filed a
petition for extrajudicial foreclosure before the Office of the Clerk of Court as ExOfficio Sheriff of the Regional Trial Court (RTC) of Makati City. It sought to foreclose
the following real estate mortgage contracts executed by the spouses Ramon and
Natividad Nisce over two parcels of land covered by Transfer Certificate of Title (TCT)
Nos. S-83466 and S-83467 of the Registry of Deeds of Rizal: one dated February 26,
1974; two (2) sets of "Additional Real Estate Mortgage" dated September 27, 1978
and June 3, 1996; and an "Amendment to Real Estate Mortgage" dated February 28,
2000. The mortgage contracts were executed by the spouses Nisce to secure their
obligation under Promissory Note Nos. 1042793 and BD-150369, including a
Suretyship Agreement executed by Natividad. The obligation of the Nisce spouses
totaled P34,087,725.76 broken down as follows:

The spouses Nisce likewise alleged that since they and the Bank were creditors and
debtors with respect to each other, their obligations should have been offset by legal
compensation to the extent of their account with the Bank.
To support their plea for a writ of preliminary and prohibitory injunction, the spouses
Nisce alleged that the amount for which their property was being sold at public
auction (P34,087,725.76) was grossly excessive; the US dollar deposit of Natividad
with PCI Capital Asia Ltd. (Hong Kong), and the obligation covered by the suretyship
agreement had not been deducted. They insisted that their property rights would be
violated if the sale at public auction would push through. Thus, the spouses Nisce
prayed that they be granted the following reliefs:

and - - - - - - - - - - - - P16,665,439.77

(1) that upon the filing of this Complaint and/or after due notice and
summary hearing, the Honorable Court immediately issue a temporary
restraining order (TRO) restraining defendants, their representatives and/or
deputies, and other persons acting for and on their behalf from proceeding
with the extrajudicial foreclosure sale of plaintiffs mortgaged properties on
30 January 2003 or on any other dates subsequent thereto;

On December 2, 2002, the Ex-Officio Sheriff set the sale at public auction at 10:00
a.m. on January 14, 2003,3 or on January 30, 2003 in the event the public auction
would not take place on the earlier setting.

(2) that after due notice and hearing and posting of the appropriate bond, the
Honorable Court convert the TRO to a writ of preliminary prohibitory
injunction;

On January 28, 2003, the Nisce spouses filed before the RTC of Makati City a
complaint for "nullity of the Suretyship Agreement, damages and legal compensation"
with prayer for injunctive relief against the Bank and the Ex-Officio Sheriff. They
alleged the following: in a letter 4 dated December 7, 2000 they had requested the
bank (through their lawyer-son Atty. Rosanno P. Nisce) to setoff the peso equivalent
of their obligation against their US dollar account with PCI Capital Asia Limited (Hong
5
Kong), a subsidiary of the Bank, under Certificate Deposit No. 01612 and Account
No. 090-0104 (Passbook No. 83-3041);6 the Bank accepted their offer and requested
for an estimate of the balance of their account; they complied with the Banks request
and in a letter dated February 11, 2002, informed it that the estimated balance of their
account as of December 1991 (including the 11.875% per annum interest) was
7
US$51,000.42, and that as of December 2002, Natividads US dollar deposit with it
amounted to at least P9,000,000.00; they were surprised when they received a letter
from the Bank demanding payment of their loan account, and later a petition for
extrajudicial foreclosure.

(3) that after trial on the merits, the Honorable Court render judgment

Spouses Ramon & Natividad Nisce - - - - - P17,422,285.99

Natividad P. Nisce (surety) - - - - - - - - - - US$57,306.59
2

The spouses Nisce also pointed out that the petition for foreclosure filed by the Bank
included the alleged obligation of Natividad as surety for the loan of Vista Norte
Trading Corporation, a company owned and managed by their son Dino Giovanni P.
Nisce (P16,665,439.77 and US$57,306.59). They insisted, however, that the
suretyship agreement was null and void for the following reasons:

(a) making the preliminary injunction final and permanent;

(b) ordering defendant Bank to set off the present peso value of
Mrs. Nisces US dollar time deposit, inclusive of stipulated interest,
against plaintiffs loan obligations with defendant Bank;
(c) declaring the Deed of Suretyship dated 25 May 1998 null and
valid and without any binding effect as to plaintiff spouses, and
ordering defendant Bank to exclude the amounts covered by said
suretyship contract from plaintiffs obligations with defendant Bank;
(d) ordering defendant Bank to pay plaintiffs the following sums:
(i) at least P3,000,000.00 as moral damages;
(ii) at least P1,500,000.00 as exemplary damages; and
(iii) at least P500,000.00 as attorneys fees and for other
expenses of litigation.
Plaintiffs further pray for costs of suit and such other reliefs as may be deemed just
and equitable.9

On same day, the Bank filed an "Amended Petition" with the Office of the Executive
Judge for extrajudicial foreclosure of the Real Estate Mortgage to satisfy the spouses
loan account of P30,533,552.24, exclusive of interests, penalties and other charges;
and the amounts of P16,665,439.77 and US$57,306.59 covered by the suretyship
10
agreement executed by Natividad Nisce.
In the meantime, the parties agreed to have the sale at public auction reset to
January 30, 2003.
In its Answer to the complaint, the Bank alleged that the spouses had no cause of
action for legal compensation since PCI Capital was a different corporation with a
separate and distinct personality; if at all, offsetting may occur only with respect to the
spouses US$500.00 deposit account in its Paseo de Roxas branch.
In the meantime, the Ex-Officio Sheriff set the sale at public auction at 10:00 a.m. on
March 5 and 27, 2003.11The spouses Nisce then filed a Supplemental Complaint with
plea for a temporary restraining order to enjoin the sale at public
12
auction. Thereafter, the RTC conducted hearings on the plaintiffs plea for a
temporary restraining order, and the parties adduced testimonial and documentary
evidence on their respective arguments.
The Case for the Spouses Nisce
Natividad frequently traveled abroad and needed a facility with easy access to foreign
exchange. She inquired from E.P. Nery, the Bank Manager for PCI Bank Paseo de
Roxas Branch, about opening an account. He assured her that she would be able to
access it from anywhere in the world. She and Nery also agreed that any balance of
account remaining at maturity date would be rolled over until further instructions, or
until she terminated the facility.13 Convinced, Natividad deposited US$20,500.00 on
July 19, 1984, and was issued Passbook No. 83-3041.14 Upon her request, the bank
15
transferred the US$20,000.00 to PCI Capital Asia Ltd. in Hong Kong via cable order.
On July 11, 1996, the spouses Nisce secured a P20,000,000.00 loan from the Bank
under Promissory Note No. BD-150369.16 The maturity date of the loan was July 11,
2001, payable in monthly installments at 16.731% interest per annum. To secure the
payment of the loan account, they executed an Amendment to the Real Estate
Mortgage over the properties17 located in Makati City covered by TCT Nos. S-83466
18
and S-83467. They later secured another loan of P13,089,936.90 on March 1, 2000
(to mature on March 1, 2005) payable quarterly at 13.9869% interest per annum; this
loan agreement is evidenced by Promissory Note (PN) No. 104279319 and covered by
a Real Estate Mortgage20 executed on February 28, 2000. They made a partial
payment ofP13,866,666.50 on the principal of their loan account covered by PN No.
21
BD-150369, and P5,348,239.82 on the interests. These payments are evidenced by
receipts and checks.22 However, there were payments totalingP4,600,000.00
23
received by the Bank but were not covered by checks or receipts. As of September
2000, the balance of their loan account under PN No. BD-150369 was
24
only P4,333,333.46. They also made partial payment on their loan account under
25
PN No. 1042793 which, as of May 30, 2001, amounted to P2,218,793.61.
On July 20, 1984, PCI Capital issued Certificate of Deposit No. CD-01612;26 proof of
receipt of the US$20,000.00 transferred to it by PCI Bank Paseo de Roxas Branch as
requested by Natividad. The deposit account was to earn interest at the rate of
11.875% per annum, and would mature on October 22, 1984, thereafter to be
payable at the office of the depositary in Hong Kong upon presentation of the
Certificate of Deposit.

In June 1991, two sons of the Nisce spouses were stranded in Hong Kong. Natividad
called the Bank and requested for a partial release of her dollar deposit to her sons.
However, she was informed that according to its computer records, no such dollar
account existed. Sometime in November 1991, she submitted her US dollar passbook
with a xerox copy of the Certificate of Deposit for the PCIB to determine the
27
whereabouts of the account. She reiterated her request to the Bank on January 27,
28
1992 and September 11, 2000.29
In the meantime, in 1994, the Equitable Banking Corporation and the PCIB were
merged under the corporate name Equitable PCI Bank.
In a letter dated December 7, 2000, Natividad confirmed to the Bank, through Ms.
Shellane R. Casaysayan, her offer to settle their loan account by offsetting the peso
equivalent of her dollar account with PCI Capital under Account No. 090-0104.30 Their
son, Atty. Rosanno Nisce, later wrote the Bank, declaring that the estimated balance
of the US dollar account with PCI Capital as of December 1991 was
US$51,000.42.31 Atty. Nisce corroborated this in his testimony, and stated that Ms.
32
Casaysayan had declared that she would refer the matter to her superiors. A certain
Rene Esteven also told him that another offer to setoff his parents account had been
accepted, and he was assured that its implementation was being processed. 33 On
cross examination, Atty. Nisce declared that there was no response to his request for
setoff,34 and that Esteven assured him that the Bank would look for the records of his
mothers US dollar savings deposit.35 He was later told that the Bank had accepted
36
the offer to setoff the account.
The Case for the Bank
The Bank adduced evidence that, as of January 31, 2003, the balance of the
spouses account under the two promissory notes, including interest and penalties,
37
was P30,533,552.24. It had agreed to restructure their loans on March 31, 1998, but
they nevertheless failed to pay despite repeated demands. 38 The spouses had also
been furnished with a statement of their account as of June 2001. Thus, under the
terms of the Real Estate Mortgage and Promissory Notes, it had the right to the
remedy of foreclosure. It insisted that there is no showing in its records that the
spouses had delivered checks amounting to P4,600,000.00.39
According to the Bank, Natividads US$20,000.00 deposit with the PCIB Paseo de
Roxas branch was transferred to PCI Capital via cable order,40 and that it later issued
Certificate of Deposit No. 01612 (Non-transferrable).41 In a letter dated May 9, 2001, it
informed Natividad that it had acted merely as a conduit in facilitating the transfer of
the funds, and that her deposit was made with PCI Capital and not with PCIB. PCI
Capital had a separate and distinct personality from the PCIB, and a claim against the
former cannot be made against the latter. It was later advised that PCI Capital had
42
already ceased operations.
The spouses Nisce presented rebuttal documentary evidence to show that PCI
Capital was registered in Hong Kong as a corporation under Registration No. 84555
43
on February 27, 1989 with an authorized capital stock of 50,000,000 (with par value
of HKD1.00); the PCIB subscribed to 29,039,993 issued shares at the par value of
44
HKD1.00 per share; on October 25, 2004, the corporate name of PCI Capital was
changed to PCI Express Padala (HK) Ltd.;45 and the stockholdings of PCIB remained
46
at 29,039,999 shares.

47

On March 24, 2003, the RTC issued an Order granting the spouses Nisces plea for
a writ of preliminary injunction on a bond of P10,000,000.00. The dispositive portion
of the Order reads:
WHEREFORE, in order not to render the judgment ineffectual, upon filing by the
plaintiffs and the approval thereof by the court of a bond in the amount of
Php10,000,000.00, which shall answer for any damage should the court finally decide
that plaintiffs are not entitled thereto, let a writ of preliminary injunction issue enjoining
defendants Equitable-PCI Bank, Atty. Engracio M. Escasinas, Jr., and any person or
entity acting for and in their behalf from proceeding with the extrajudicial foreclosure
sale of TCT Nos. 437678 and 437679 registered in the names of the plaintiffs. 48
After weighing the parties arguments along with their documentary evidence, the
RTC declared that justice would be best served if a writ of preliminary injunction
would be issued to preserve the status quo. It had yet to resolve the issue of setoff
since only Natividad dealt with the Bank regarding her dollar account. It also had to
resolve the issue of whether the Bank had failed to credit the amount
of P4,600,000.00 to the spouses Nisces account under PN No. BD-150369, and their
claim that the Bank had effectively accelerated the respective maturity dates of their
loan.49 The spouses Nisce posted the requisite bond which was approved by the
RTC.1awphi1.net
The Bank opted not to file a motion for reconsideration of the order, and instead
assailed the trial courts order before the CA via petition for certiorari under Rule 65 of
the Rules of Court. The Bank alleged that the RTC had acted without or in excess of
its jurisdiction, or with grave abuse of its discretion amounting to lack or excess of
jurisdiction when it issued the assailed order;50 the spouses Nisce had failed to prove
the requisites for the issuance of a writ of preliminary injunction; respondents claim
that their account with petitioner had been extinguished by legal compensation has no
factual and legal basis. It further asserted that according to the evidence, Natividad
made the US$20,000.00 deposit with PCI Capital before it merged with Equitable
Bank hence, the Bank was not the debtor of Natividad relative to the dollar account.
The Bank cited the ruling of this Court in Escao v. Heirs of Escao and Navarro 51 to
support its arguments. It insisted that the spouses Nisce had failed to establish
"irreparable injury" in case of denial of their plea for injunctive relief.
The spouses, for their part, pointed out that the Bank failed to file a motion for
reconsideration of the trial courts order, a condition sine qua non to the filing of a
petition for certiorari under Rule 65 of the Rules of Court. Moreover, the error
committed by the trial court is a mere error of judgment not correctible by certiorari;
hence, the petition should have been dismissed outright by the CA. They reiterated
their claim that they had made a partial payment of P4,600,000.00 on their loan
account which petitioner failed to credit in their favor. The Bank had agreed to debit
their US dollar savings deposit in the PCI Capital as payment of their loan account.
They insisted that they had never deposited their US dollar account with PCI Capital
but with the Bank, and that they had never defaulted on their loan account. Contrary
to the Banks claim, they would have suffered irreparable injury had the trial court not
enjoined the extrajudicial foreclosure of the real estate mortgage.
On December 22, 2004, the CA rendered judgment granting the petition and nullifying
52
the assailed Order of the RTC. The appellate court declared that a petition for
certiorari under Rule 65 of the Rules of Court may be filed despite the failure to file a
motion for reconsideration, particularly in instances where the issue raised is one of
law; where the error is patent; the assailed order is void, or the questions raised are

the same as those already ruled upon by the lower court. According to the appellate
court, the issue raised before it was purely one of law: whether the loan account of
the spouses was extinguished by legal compensation. Thus, a motion for the
reconsideration of the assailed order was not a prerequisite to a petition for certiorari
under Rule 65.
The appellate court further declared that the trial court committed grave abuse of its
discretion in issuing the assailed order, since no plausible reason was given by the
spouses Nisce to justify the injunction of the extrajudicial foreclosure of the real estate
mortgage. Given their admission that they had not settled the obligations secured by
the mortgage, the Bank had a clear right to seek the remedy of foreclosure.
The CA further declared as devoid of factual basis the spouses Nisces argument that
the Bank should have applied, by way of legal compensation, the peso equivalent of
their time deposit with PCI Capital as partial settlement of their obligations. It held that
for compensation to take place, the requirements set forth in Articles 1278 and 1279
of the Civil Code of the Philippines must be present; in this case, the parties are not
mutually creditors and debtors of each other. It pointed out that the time deposit which
the spouses Nisce sought to offset against their obligations to the Bank is maintained
with PCI Capital. Even if PCI Capital is a subsidiary of the Bank, compensation
cannot validly take place because the Bank and PCI Capital are two separate and
distinct corporations. It pointed out the settled principle "that a corporation has a
personality separate and distinct from its stockholders and from other corporations to
which it may be connected."
The CA further declared that the alleged P4,600,000.00 payment on PN No. BD150369 was not pleaded in the spouses complaint and supplemental complaint
before the court a quo. What they alleged, aside from legal compensation, was that
the mortgage is not liable for the obligation of Natividad Nisce as surety for the loans
obtained by a trading firm owned and managed by their son. The CA further pointed
out that the Bank precisely amended the petition for foreclosure sale by deleting the
claim for Natividads obligation as surety. The appellate court concluded that the
injunctive writ was issued by the RTC without factual and legal basis.53
The spouses Nisce moved to have the decision reconsidered, but the appellate court
denied the motion. They thus filed the instant petition for review on the following
grounds:
5.1. THE HONORABLE COURT OF APPEALS ERRED IN TAKING
COGNIZANCE OF THE PETITION FOR CERTIORARI DESPITE THE
BANKS FAILURE TO FILE A MOTION FOR RECONSIDERATION WITH
THE TRIAL COURT.
5.2. THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE
ERROR WHEN IT PREMATURELY RULED ON THE MERITS OF THE
MAIN CASE.
5.3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
RESPONDENT JUDGE HAD COMMITTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
ISSUING A TEMPORARY RESTRAINING ORDER AND A WRIT OF
PRELIMINARY INJUNCTION IN FAVOR OF THE SPOUSES NISCE. 54
Petitioners aver that the CA erred in not dismissing respondent Banks petition for
certiorari outright because of the absence of a condition precedent: the filing of a

motion for reconsideration of the assailed Order of the RTC before filing the petition
for certiorari in the CA. They insist that respondent banks failure to file a motion for
reconsideration of the assailed Order deprived the RTC of its option to resolve the
issue of whether it erred in issuing the writ of preliminary injunction in their favor.

factual and legal issue of whether the loan account of petitioners had been paid in full
before it filed its petition for extrajudicial foreclosure of the real estate mortgage.

Petitioners insist that in resolving whether a petition for a writ of preliminary injunction
should be granted, the trial court and the appellate court are not to resolve the merits
of the main case. In this case, however, the CA resolved the bone of contention of the
parties in the trial court: whether the loan account of petitioners with respondent bank
had been extinguished by legal compensation against petitioner Natividad Nisces US
dollar savings account with PCI Capital in Hong Kong. The CA reversed the assailed
order of the trial court by resolving the main issue in the trial court on its merits, and
declaring that the US dollar savings deposit of the petitioner Natividad Nisce with the
PCI Capital cannot be used to offset the loan account of petitioners with respondent
bank. In fine, according to petitioners, the CA preempted the ruling of the RTC on the
main issue even before the parties could be given an opportunity to complete the
presentation of their respective evidences. Petitioners point out that in the assailed
Order, the RTC declared that to determine whether respondent had credited
petitioners for the amount of P4,600,000.00 under PN No. BD-150369 and whether
respondent as mortgagee-creditor accelerated the maturities of the two (2)
promissory notes executed by petitioner, there was a need for a full-blown trial and an
exhaustive consideration of the evidence of the parties.

The Petition in the

Court of Appeals
Not Premature

Petitioners further insist that a petition for a writ of certiorari is designed solely to
correct errors of jurisdiction and not errors of judgment, such as errors in the findings
and conclusions of the trial court. Petitioners maintain that the trial courts erroneous
findings and conclusions (according to respondent bank) are not the proper subjects
for a petition for certiorari. Contrary to the findings of the CA, they did not admit in the
trial court that they were in default in the payment of their loan obligations. They had
always maintained that they had no outstanding obligation to respondent bank
precisely because their loan account had been offset by the US dollar deposit of
petitioner Natividad Nisce, and that they had made check payments of P4,600,000.00
which respondent bank had not credited in their favor. Likewise erroneous is the CA
ruling that they would not suffer irreparable damage or injury if their properties would
be sold at public auction following the extrajudicial foreclosure of the mortgage.
Petitioners point out that their conjugal home stands on the subject properties and
would be lost if sold at public auction. Besides, petitioners aver, the injury to
respondent bank resulting from the issuance of a writ of preliminary injunction is
amply secured by the P10,000,000.00 injunction bond which they had posted.
For its part, respondent avers that, as held by the CA, the requirement of the filing of
a motion for reconsideration of the assailed Order admits of exceptions, such as
where the issue presented in the appellate court is the same issue presented and
resolved by the trial court. It insists that petitioners failed to prove a clear legal right to
injunctive relief; hence, the trial court committed grave abuse of discretion in issuing a
writ of preliminary injunction.
Respondent maintains that the sole issue involved in the petition for certiorari of
respondent in the CA was whether or not the trial court committed grave abuse of its
discretion in issuing the writ of preliminary injunction. Necessarily, the CA would have
to delve into the circumstances behind such issuance. In so doing, the CA had to
consider and calibrate the testimonial and documentary evidence adduced by the
parties. However, the RTC and the CA did not resolve with finality the threshold

The Ruling of the Court

The general rule is that before filing a petition for certiorari under Rule 65 of the Rules
of Court, the petitioner is mandated to comply with a condition precedent: the filing of
a motion for reconsideration of the assailed order, and the subsequent denial of the
court a quo. It must be stressed that a petition for certiorari is an extraordinary
remedy and should be filed only as a last resort. The filing of a motion for
reconsideration is intended to afford the public respondent an opportunity to correct
any actual error attributed to it by way of re-examination of the legal and factual
issues.55 However, the rule is subject to the following recognized exceptions:
(a) where the order is a patent nullity, as where the court a quo has no jurisdiction; (b)
where the questions raised in the certiorari proceeding have been duly raised and
passed upon by the lower court, or are the same as those raised and passed upon in
the lower court; (c) where there is an urgent necessity for the resolution of the
question and any further delay would prejudice the interests of the Government or of
the petitioner or the subject matter of the action is perishable; (d) where, under the
circumstances, a motion for reconsideration would be useless; (e) where petitioner
was deprived of due process and there is extreme urgency for relief; (f) where, in a
criminal case, relief from an order of arrest is urgent and the granting of such relief by
the trial court is improbable; (g) where the proceedings in the lower court are a nullity
for lack of due process; (h) where the proceedings was ex parte or in which the
petitioner had no opportunity to object; and (i) where the issue raised is one purely of
law or public interest is involved.56
As will be shown later, the March 24, 2003 Order of the trial court granting petitioners
plea for a writ of preliminary injunction was issued with grave abuse of discretion
amounting to excess or lack of jurisdiction and thus a nullity. If the trial court issues a
writ of preliminary injunction despite the absence of proof of a legal right and the
57
injury sustained by the plaintiff, the writ is a nullity.
Petitioners Are Not
Entitled to a Writ of
Preliminary Prohibitory
Injunction
Section 3, Rule 58 of the Rules of Court provides that a preliminary injunction may be
granted when the following have been established:
(a) That the applicant is entitled to the relief demanded, and the whole or
part of such relief consists in restraining the commission or continuance of
the act or acts complained of, or in requiring the performance of an act or
acts, either for a limited period or perpetually;
(b) That the commission, continuance or nonperformance of the act or acts
complained of during the litigation would probably work injustice to the
applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is

attempting to do, or is procuring or suffering to be done, some act or acts
probably in violation of the rights of the applicant respecting the subject of
the action or proceeding, and tendering to render the judgment ineffectual.
The grant of a preliminary injunction in a case rests on the sound discretion of the
court with the caveat that it should be made with great caution. The exercise of sound
judicial discretion by the lower court should not be interfered with except in cases of
manifest abuse. Injunction is a preservative remedy for the protection of the parties
substantive rights and interests. The sole aim of a preliminary injunction is to preserve
the status quo within the last actual status that preceded the pending controversy until
the merits of the case can be heard fully. Moreover, a petition for a preliminary
injunction is an equitable remedy, and one who comes to claim for equity must do so
with clean hands. It is to be resorted to by a litigant to prevent or preserve a right or
interest where there is a pressing necessity to avoid injurious consequences which
cannot be remedied under any standard of compensation. A petition for a writ of
preliminary injunction rests upon an alleged existence of an emergency or of a special
reason for such a writ before the case can be regularly tried. By issuing a writ of
preliminary injunction, the court can thereby prevent a threatened or continued
irreparable injury to the plaintiff before a judgment can be rendered on the claim. 58
The plaintiff praying for a writ of preliminary injunction must further establish that he or
she has a present and unmistakable right to be protected; that the facts against which
59
injunction is directed violate such right; and there is a special and paramount
necessity for the writ to prevent serious damages. In the absence of proof of a legal
right and the injury sustained by the plaintiff, an order for the issuance of a writ of
preliminary injunction will be nullified. Thus, where the plaintiffs right is doubtful or
disputed, a preliminary injunction is not proper. The possibility of irreparable damage
without proof of an actual existing right is not a ground for a preliminary injunction.60
However, to establish the essential requisites for a preliminary injunction, the
evidence to be submitted by the plaintiff need not be conclusive and complete.61 The
plaintiffs are only required to show that they have an ostensible right to the final relief
prayed for in their complaint.62 A writ of preliminary injunction is generally based
solely on initial or incomplete evidence. 63 Such evidence need only be a sampling
intended merely to give the court an evidence of justification for a preliminary
injunction pending the decision on the merits of the case, and is not conclusive of the
principal action which has yet to be decided.64
It bears stressing that findings of the trial court granting or denying a petition for a writ
of preliminary injunction based on the evidence on record are merely provisional until
after the trial on the merits of the case shall have been concluded. 65
The trial court, in granting or dismissing an application for a writ of preliminary
injunction based on the pleadings of the parties and their respective evidence must
state in its order the findings and conclusions based on the evidence and the law.
This is to enable the appellate court to determine whether the trial court committed
grave abuse of its discretion amounting to excess or lack of jurisdiction in resolving,
one way or the other, the plea for injunctive relief. The trial courts exercise of its
judicial discretion whether to grant or deny an application for a writ of preliminary
injunction involves the assessment and evaluation of the evidence, and its findings of
66
facts are ordinarily binding and conclusive on the appellate court and this Court.

We agree with respondents contention that as creditor-mortgagee, it has the right

under the real estate mortgage contract and the amendment thereto to foreclose
extrajudicially, the real estate mortgage and sell the property at public auction,
considering that petitioners had failed to pay their loans, plus interests and other
incremental amounts as provided for in the deeds. Petitioners contend, however, that
if respondent bank extrajudicially forecloses the real estate mortgage and has
petitioners property sold at public auction for an amount in excess of the balance of
their loan account, petitioners contractual and substantive rights under the real estate
mortgage would be violated; in such a case, the extrajudicial foreclosure sale may be
enjoined by a writ of preliminary injunction.
Respondent bank sought the extrajudicial foreclosure of the real estate mortgage and
was to sell the property at public auction for P30,533,552.24. The amount is based on
Promissory Notes No. 1042793 and BD-150369, interests, penalty charges, and
attorneys fees, as of January 31, 2003, exclusive of all interests, penalties, other
charges, and foreclosure costs accruing thereafter. 67 Petitioners asserted before the
trial court that respondents sought the extrajudicial foreclosure of the mortgaged deed
for an amount far in excess of what they owed, because the latter failed to
credit P4,600,000.00 paid in checks but without any receipts having been issued
therefor; and the P9,000,000.00 peso equivalent of the US$20,000.00 deposit of
petitioner Natividad Nisce with PCIB under Passbook No. 83-3041 and Certificate of
Deposit No. CD-01612 issued by PCI Capital on July 23, 1984. Petitioners maintain
that the US$20,000.00 dollar deposit should be setoff against their account with
respondent against their loan account, on their claim that respondent is their debtor
insofar as said deposit is concerned.
It was the burden of petitioners, as plaintiffs below, to adduce preponderant evidence
to prove their claim that respondent bank was the debtor of petitioner Natividad Nisce
relative to her dollar deposit with PCIB, and later transferred to PCI Capital in Hong
Kong, a subsidiary of respondent Bank. Petitioners, however, failed to discharge their
burden.
Under Article 1278 of the New Civil Code, compensation shall take place when two
persons, in their own right, are creditors and debtors of each other. In order that
compensation may be proper, petitioners were burdened to establish the following:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
68
commenced by third persons and communicated in due time to the debtor.
Compensation takes effect by operation of law when all the requisites mentioned in
Article 1279 of the New Civil Code are present and extinguishes both debts to the
concurrent amount even though the creditors and debtors are not aware of the
compensation. Legal compensation operates even against the will of the interested

69

parties and even without their consent. Such compensation takes place ipso jure; its
effects arise on the very day on which all requisites concur. 70
As its minimum, compensation presupposes two persons who, in their own right and
as principals, are mutually indebted to each other respecting equally demandable and
liquidated obligations over any of which no retention or controversy commenced and
communicated in due time to the debtor exists. Compensation, be it legal or
conventional, requires confluence in the parties of the characters of mutual debtors
and creditors, although their rights as such creditors or their obligations as such
71
debtors need not spring from one and the same contract or transaction.
Article 1980 of the New Civil Code provides that fixed, savings and current deposits of
money in banks and similar institutions shall be governed by the provisions
concerning simple loans. Under Article 1953, of the same Code, a person who
secures a loan of money or any other fungible thing acquires the ownership thereof,
and is bound to pay the creditor an equal amount of the same kind and quality. The
relationship of the depositors and the Bank or similar institution is that of creditordebtor. Such deposit may be setoff against the obligation of the depositor with the
bank or similar institution.
When petitioner Natividad Nisce deposited her US$20,500.00 with the PCIB on July
19, 1984, PCIB became the debtor of petitioner. However, when upon petitioners
request, the amount of US$20,000.00 was transferred to PCI Capital (which forthwith
issued Certificate of Deposit No. 01612), PCI Capital, in turn, became the debtor of
Natividad Nisce. Indeed, a certificate of deposit is a written acknowledgment by a
bank or borrower of the receipt of a sum of money or deposit which the Bank or
borrower promises to pay to the depositor, to the order of the depositor; or to some
other person; or to his order whereby the relation of debtor and creditor between the
bank and the depositor is created.72 The issuance of a certificate of deposit in
exchange for currency creates a debtor-creditor relationship.73
Admittedly, PCI Capital is a subsidiary of respondent Bank. Even then, PCI Capital
[PCI Express Padala (HK) Ltd.] has an independent and separate juridical personality
from that of the respondent Bank, its parent company; hence, any claim against the
subsidiary is not a claim against the parent company and vice versa. 74 The evidence
on record shows that PCIB, which had been merged with Equitable Bank, owns
almost all of the stocks of PCI Capital. However, the fact that a corporation owns all of
the stocks of another corporation, taken alone, is not sufficient to justify their being
treated as one entity. If used to perform legitimate functions, a subsidiarys separate
existence shall be respected, and the liability of the parent corporation, as well as the
subsidiary shall be confined to those arising in their respective business.75 A
corporation has a separate personality distinct from its stockholders and from other
corporations to which it may be conducted. This separate and distinct personality of a
corporation is a fiction created by law for convenience and to prevent injustice.
This Court, in Martinez v. Court of Appeals76 held that, being a mere fiction of law,
peculiar situations or valid grounds can exist to warrant, albeit sparingly, the disregard
of its independent being and the piercing of the corporate veil. The veil of separate
corporate personality may be lifted when, inter alia, the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation or where the
corporation is so organized and controlled and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit or adjunct of another corporation; or
when the corporation is used as a cloak or cover for fraud or illegality; or to work
injustice; or where necessary to achieve equity or for the protection of the creditors. In

those cases where valid grounds exist for piercing the veil of corporate entity, the
corporation will be considered as a mere association of persons. The liability will
directly attach to them.77
The Court likewise declared in the same case that the test in determining the
application of the instrumentality or alter ego doctrine is as follows:
1. Control, not mere majority or complete stock control, but complete
dominion, not only of finances but of policy and business practice in respect
to the transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty,
or dishonest and unjust act in contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complaint of.
The Court emphasized that the absence of any one of these elements prevents
"piercing the corporate veil." In applying the "instrumentality" or "alter ego" doctrine,
the courts are concerned with reality and not form, with how the corporation operated
and the individual defendants relationship to that operation.78
Petitioners failed to adduce sufficient evidence to justify the piercing of the veil of
corporate entity and render respondent Bank liable for the US$20,000.00 deposit of
petitioner Natividad Nisce as debtor.
On hindsight, petitioners could have spared themselves the expenses and tribulation
of a litigation had they just withdrawn their deposit from the PCI Capital and remitted
the same to respondent. However, petitioner insisted on their contention of setoff.
On the P4,600,000.00 paid in checks allegedly remitted by petitioners to respondent
in partial payment of their loan account, petitioners failed to adduce in evidence the
checks to show that, indeed, the checks were drawn by petitioners and delivered to
respondent, and that respondent was able to cash the checks. The only evidence
adduced by petitioners is a piece of paper listing the serial numbers of the checks and
the amount of each check:
PAYMENTS MADE & RECEIVED BY EBC BUT W/O RECEIPTS

1. Dec. 29, 1997 - EBC-0000039462 -

P2,000,000.0
0

2. Jan. 22, 1998 - EBC-213016118C -

1,000,000.00

3. Feb. 24, 1998 - UB -0000074619 -

800,000.00

4. Mar. 23, 1998 - EBC-213016121C - 800,000.00

P4,600,000.00

79

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. The
Decision of the Court of Appeals is AFFIRMED. Costs against petitioners.
SO ORDERED.

G.R. No. 142731

June 8, 2006

BANK OF THE PHILIPPINE ISLANDS (formerly FAR EAST BANK AND TRUST
COMPANY), Petitioner,
vs.
COURT OF APPEALS and JIMMY T. GO, Respondents.

Private-respondent then filed a bond as required by the order. Petitioner moved for a
reconsideration of the aforementioned order which motion was denied in the Order
dated 30 July 1998 on the ground that the extrajudicial foreclosure was premature as
to four (4) promissory notes. The dispositive portion read:

DECISION

"WHEREFORE, premises considered, the motion for reconsideration is hereby

denied and the other pending incident pertaining thereto are noted and this case be
set for pre-trial.

AZCUNA, J.:

LET THEREFORE, a notice of pre-trial be sent to the parties.

This is a petition for review on certiorari filed by Bank of the Philippine Islands of the
decision and resolution of the Court of Appeals, which in turn partially denied a
petition for certiorari questioning the temporary restraining order (TRO) and
preliminary injunction issued by Judge Urbano C. Victorio, Sr. 1

SO ORDERED." (Rollo, p. 219)

The facts as narrated in the Court of Appeals decision are as follows:

Petitioner, Far East Bank and Trust Company, granted a total of eight (8) loans to
Noahs Arc Merchandising (Noahs Ark, for brevity). Per Certificate of Registration
issued by the Department of Trade and Industry (Rollo, p. 40), Noahs Ark is a single
proprietorship owned by Mr. Albert T. Looyuko. The said loans were evidenced by
identical Promissory Notes all signed by Albert T. Looyuko, private respondent Jimmy
T. Go and one Wilson Go. Likewise, all loans were secured by real estate mortgage
constituted over a parcel of land covered by Transfer Certificate of Title [No.] 160277
registered in the names of Mr. Looyuko and herein private respondent. Petitioner,
claiming that Noahs Ark defaulted in its obligations, extrajudicially foreclosed the
mortgage. The auction sale was set on 14 April 1998 but on 8 April 1998 private
respondent filed a complaint for damages with prayer [for] issuance of TRO and/or
writ of preliminary injunction seeking [to] enjoin the auction sale. [I]n the Order dated
14 April 1998 a temporary restraining order was issued and in the same order the
application for Preliminary Injunction was set for hearing [i]n the afternoon of the
same day (Rollo, p. 142).2

After petitioners motion for reconsideration was denied in an order dated July 30,
1998, petitioner filed a petition for certiorari with the Court of Appeals, praying that the
orders dated May 7, 1998 and July 30, 1998, granting the writ of preliminary
injunction and denying the motion for reconsideration, respectively, be annulled and
set aside and the writ of preliminary injunction be dissolved. Furthermore, petitioner
asked to be allowed to proceed with the auction sale of the property.
The Court of Appeals promulgated its decision dated August 26, 1999 which partially
denied the petition for certiorari, stating as follows:
The issue in this case is: "Whether the trial court erred in the issuance of the Writ of
Preliminary Injunction or not."
Petitioner averred that private respondent had not shown any right which should be
protected by an injunction. Private respondent naturally claimed otherwise and
asserted that since four (4) of the promissory notes have not yet matured there was
no basis to foreclose the mortgage (Comment, p 15). He also claimed that his right to
due process entitles him to legal demand prior to the filing of the foreclosure
proceedings against the subject property (Comment, p. 16).

In an order dated April 15, 1998, Judge Victorio extended the TRO for another 15
days, for a total of 20 days. The Court of Appeals decision continues thus:

It has been held that an injunction may be issued in order to preserve the status quo.
Thus, in Cagayan de Oro City Landless Residents Association, Inc., v. Court of
Appeals (254 SCRA 220 [1996]) it was held:

After hearing, the 7 May 1998 Order granted the application for preliminary injunction
which shall take effect upon posting of a bond in the amount of Two Hundred
Thousand Pesos (P200,000.00). The dispositive portion read:

As an extraordinary remedy, injunction is calculated to preserve the status quo of

things and is generally availed of to prevent actual or threatened acts, until the merits
of the case can be heard. x x x. (254 SCRA 228).

"WHEREFORE, it appearing that the acts complained of would be in violation of

plaintiffs right and would work injustice to the plaintiff and so as not to render
ineffectual whatever judgment may be issued in this case, the application [for]
preliminary injunction is hereby granted and the defendants and all persons acting in
their behalf are hereby ordered to cease, desist, and refrain from proceeding with the
scheduled foreclosure and public auction sale of the mortgaged property covered by
TCT No. 160277 until further orders from this Court.
This Order shall be effective upon petitioners filing of a bond in the amount of Two
Hundred Thousand Pesos (P200,000.00) to answer for any and all damages that
defendants may suffer by reason of the issuance of the writ of preliminary injunction.
As prayed for, defendants are hereby directed to file their answer on or before May
14, 1998. Copy furnished plaintiff.
SO ORDERED." (Rollo p. 175)

In the case at bar, there is a need to first settle the question of whether the demand
made by petitioner was sufficient to render private respondent in default or not.
In Rose Packing Co., Inc. v. Court of Appeals (167 SCRA 309 [1988]) it was held that
the question of whether the debtor is in default should first be settled to determine if
the foreclosure was proper. In the same case it was also held that said question
should be resolved by the trial court, to wit:
While petitioner corporation does not deny, in fact, it admits its indebtedness to
respondent bank (Brief for Petitioner, pp. 7-11), there were matters that needed the
preservation of the status quo between the parties. The foreclosure sale was
premature.
First was the question of whether or not petitioner corporation was already in default.
xxx

Petitioner corporation alleges that there had been no demand on the part of
respondent bank previous to its filing a complaint against petitioner and Rene Knecht
personally for collection on petitioners indebtedness (Brief for Petitioner, p.13). For
an obligation to become due there must generally be a demand. Default generally
begins from the moment the creditor demands the performance of the obligation.
Without such demand, judicial or extrajudicial, the effects of default will not arise.
(Namarco v. Federation of United Namarco Distributors, Inc. 49 SCRA 238
[1973]; Borje v. CFI of Misamis Occidental, 88 SCRA 576 [1979]. Whether petitioner
corporation is already in default or not and whether demand had been properly made
or not had to be determined in the lower court. (167 SCRA 317-318).
We now come to the matter of sufficiency of the bond filed by private respondent.
Petitioner claims that theP200,000.00 bond is grossly insufficient. It argued, thus:
By enjoining petitioner from conducting the auction sale of the mortgaged property,
petitioner has already suffered damages in the amount of P715,077.78 representing
filing and publication fees. Yet damages to be incurred by petitioner by reason of the
injunction are not limited to filing and publication fees, granting that the case will drag
on for more tha[n] a year, which is usually the case. The injunction would deprive
petitioner FEBTC of its own income from the foreclosed property or from the proceeds
of the foreclosure sale. Obviously it is easily more than P200,000.00 (Rollo, p. 31).
The Court agrees with petitioner that the amount of the bond is insufficient.
In Valencia v. Court of Appeals, (263 SCRA 275 [1996]) the Supreme Court explained
that the bond is for the protection against loss or damage by reason of the injunction,
to wit:
The said bond was supposed to answer only for damages which may be sustained by
private respondents, against whom the mandatory injunction was issued, by reason of
the issuance thereof, and not to answer for damages caused by the actuations of
petitioner, which may or may not be related at all to the implementation of the
mandatory injunction. The purpose of the injunction bond is to protect the defendant
against loss or damage by reason of the injunction in case the court finally decides
that the plaintiff was not entitled to it, and the bond is usually conditioned accordingly.
Thus, the bondsmen are obligated to account to the defendant in the injunction suit
for all damages, or costs and reasonable counsels fees incurred or sustained by the
latter in case it is determined that the injunction was wrongfully issued. (263 SCRA
288-289)

WHEREFORE, considering the foregoing premises the petition for certiorari is

DENIED; however, private respondent is ordered to file an injunctive bond in the
amount of P5,000,000.00.
SO ORDERED.

Petitioner filed a motion for reconsideration which was denied in a resolution dated
April 3, 2000 by the Court of Appeals on the ground that all the matters raised in the
motion for reconsideration had already been passed upon in the decision. 6
Petitioner filed the instant petition for review on certiorari questioning the August 26,
1999 decision and the April 3, 2000 resolution. The following issues were raised by
petitioner:
3.1 Whether the Honorable Court of Appeals can resolve the issue of the
sufficiency of demand.
3.2 Whether private respondent Go is entitled to a temporary restraining
order and a writ of preliminary injunction.
3.3 Whether the Complaint of private respondent Go has been rendered
moot and academic.
For the purpose of clarity, the issues are restated thus:
1. Whether or not the private respondent was entitled to the TRO and writ of
preliminary injunction.
2. Whether or not the TRO and writ of preliminary injunction were properly
issued by Judge Victorio.
On the first issue, this Court finds that private respondent was not entitled to the TRO
and the writ of preliminary injunction. Section 3 of Rule 58 of the Rules of Court
provides the grounds for the issuance of a preliminary injunction, to wit:
A preliminary injunction may be granted when it is established:
(a) That the applicant is entitled to the relief demanded, and the whole or
part of such relief consists in restraining the commission or continuance of
the act or acts complained of, or in requiring the performance of an act or
acts, either for a limited period or perpetually;

Private respondents contention that considering the market value of the property, the
bond is reasonable and proper (Rollo, p. 240) cannot be upheld considering that no
proof of the value of the property was even presented to buttress this assertion.

(b) That the commission, continuance or non-performance of the act or acts

complained of during the litigation would probably work injustice to the
applicant; or

However, the insufficiency of the amount of the bond prescribed by the trial court
does not warrant the lifting of the writ of injunction. The Court notes that under
Section 7, Rule 58 of the 1997 Rules of Civil Procedure the applicant, in case the
bond is insufficient, may still file one sufficient in amount, to wit:

(c) That a party, court, agency or person is doing, threatening, or is

attempting to do, or is procuring or suffering to be done, some act or acts
probably in violation of the rights of the applicant respecting the subject of
the action or proceeding, and tending to render the judgment ineffectual.

Sec. 7. Service of copies of bond; effect of disapproval of same. - - x x x. If the

applicants bond is found to be insufficient in amount, or if the surety or sureties
thereon fail to justify, and a bond sufficient in amount with sufficient sureties approved
after justification is not filed forthwith, the injunction shall be dissolved. x x x.

As will be discussed below, private respondent is not entitled to the relief of injunction
against the extrajudicial foreclosure and auction sale. Neither are the extrajudicial
foreclosure and auction sale violative of private respondents rights.

The Court considers a bond of Five Million Pesos (P5,000,000.00) to be more

appropriate in the present case.

Private respondent claimed that demand was not made upon him, in spite of the fact
that he co-signed the promissory notes. He also argues that only four of the eight
promissory notes secured by the mortgage had become due. A reading of the

promissory notes discloses that as co-signor, private respondent waived demand.

Furthermore, the promissory notes contain an acceleration clause, to wit:
Upon the happening of any of the following events, FAR EAST BANK AND TRUST
COMPANY or the holder, may at its option, forthwith accelerate maturity and
the unpaid balance of the principal, as well as interest and other charges which
have accrued, shall become due and payable without demand or notice[:](1)
default in payment or performance of any obligation of any of the undersigned to FAR
EAST BANK AND TRUST COMPANY or its affiliated companies;
xxx
I/We hereby waive any diligence, presentment, demand, protest or notice of nonpayment o[r] dishonor with respect to this note or any extension thereof. 7 (Emphasis
added)
The Civil Code in Article 11698 provides that one incurs in delay or is in default from
the time the obligor demands the fulfillment of the obligation from the obligee.
However, the law expressly provides that demand is not necessary under certain
circumstances, and one of these circumstances is when the parties expressly waive
demand. Hence, since the co-signors expressly waived demand in the promissory
notes, demand was unnecessary for them to be in default.
Private respondent further argues that by withholding the lease payments Far East
Bank and Trust Company (FEBTC) owed Noahs Ark for the space FEBTC was
leasing from Noahs Ark and applying said amounts to the outstanding obligation of
9
Noahs Ark, as expressed in a letter from FEBTC dated May 19, 1998, FEBTC has
waived default, novated the contract of loan as embodied in the promissory notes and
is therefore estopped from foreclosing on the mortgaged property.
This Court disagrees. FEBTCs act of withholding the lease payments and applying
them to the outstanding obligation of Noahs Ark is merely an acknowledgement of
the legal compensation that occurred by operation of law between the parties. The
Court has expounded on compensation and more specifically on legal compensation
as follows:
x x x compensation is a mode of extinguishing to the concurrent amount the
obligations of persons who in their own right and as principals are reciprocally debtors
and creditors of each other. Legal compensation takes place by operation of law
when all the requisites are present, as opposed to conventional compensation which
takes place when the parties agree to compensate their mutual obligations even in
the absence of some requisites.10
The Civil Code enumerates the requisites of legal compensation, thus:
Art. 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
It is clear from the facts that FEBTC and Noahs Ark are both principal obligors and
creditors of each other. Their debts to each other both consist in a sum of money. As
discussed above, the eight promissory notes of Noahs Ark are all due; and the lease
payments owed by FEBTC become due each month. Noahs Arks debt is liquidated
and demandable; and FEBTCs lease payments are liquidated and are demandable
every month as they fall due. Lastly, there is no retention or controversy commenced
by third persons over either of the debts.
Novation did not occur as private respondent argued. The Court has declared that a
contract cannot be novated in the absence of a new contract executed between the
parties.11 The legal compensation, which was acknowledged by FEBTC in its May 19,
1998 letter, occurred by operation of law, as discussed above. As a consequence, it
cannot be considered a new contract between the parties. Hence, the loan
agreement, as embodied in the promissory notes and the real estate mortgage,
subsists.
Since the compensation between the parties occurred by operation of law, FEBTC did
not waive Noahs Arks default.
As a result of the absence of novation or waiver of default, FEBTC is therefore not
estopped from proceeding with the foreclosure.
Private respondent further argues in his memorandum that FEBTC was in bad faith
when it initiated the foreclosure proceedings because Noahs Ark had been
requesting for accounting and reconciliation of its account and the application of
interest payment, and that there were on-going negotiations with FEBTC for the
settlement and restructuring of the loan obligation. From the evidence on hand, it is
clear that FEBTC was acting within its rights. Private respondent did not present any
other agreement signed by the parties subsequent to the promissory notes and
mortgage contract which can be considered as replacing, altering, or novating the
contractual rights between the parties. Even if Noahs Ark was trying to seek an
accounting and reconciliation of its account and even if it was trying to negotiate a
restructuring of its loan obligation, it cannot deny the fact that it had already defaulted
on the entire loan obligation. This gave FEBTC the right to exercise its contractual
rights to foreclose on the security of the debt, which in this case was the real estate
mortgage subject of this case. FEBTC was therefore just exercising its contractual
rights when it initiated foreclosure proceedings and cannot be considered to have
acted in bad faith.
With regard to the second issue, this Court finds that the TRO and the writ of
preliminary injunction were improperly issued by Judge Victorio. First of all, on
substantive grounds, as discussed above, private respondent was not entitled to the
TRO and the writ of preliminary injunction.
Second, the issuance of the TRO was, on procedural grounds, irregular. Section 5,
Rule 58 of the Rules of Civil Procedure provides:
Preliminary injunction not granted without notice; exception. No preliminary
injunction shall be granted without hearing and prior notice to the party or person

sought to be enjoined. If it shall appear from facts shown by affidavits or by the

verified application that great or irreparable injury would result to the applicant before
the matter can be heard on notice, the court to which the application for preliminary
injunction was made, may issue a temporary restraining order to be effective only for
a period of twenty (20) days from notice to the party or person sought to be enjoined.
Within the said twenty-day period, the court must order said party or person to show
cause, at a specified time and place, why the injunction should not be granted,
determine within the same period whether or not the preliminary injunction shall be
granted, and accordingly issue the corresponding order.
Judge Victorio, in an order dated April 14, 1998, issued a TRO for five days, then, in
an order dated April 15, 1998, extended it for fifteen more days, totaling twenty days.
However, in the first order, Judge Victorio excluded Saturdays and Sundays; and in
the latter order he added legal holidays to the exclusions. As quoted above, a TRO is
effective only for a period of twenty days from notice to the party sought to be
enjoined. The rule does not specify that the counting of the twenty-day period is only
limited to working days or that Saturdays, Sundays and legal holidays are excluded
from the twenty-day period. The law simply states twenty days from notice. Section 1,
Rule 22 of the Rules of Court is pertinent, to wit:
How to compute time. In computing any period of time prescribed or allowed by
these Rules, or by order of the court, or by any applicable statute, the day of the act
or event from which the designated period of time begins to run is to be excluded and
the date of performance included. If the last day of the period, as thus computed, falls
on a Saturday, a Sunday, or a legal holiday in the place where the court sits, the time
shall not run until the next working day.
It is clear from the last sentence of this section that non-working days (Saturdays,
Sundays and legal holidays) are excluded from the counting of the period only when
the last day of the period falls on such days. The Rule does not provide for any other
circumstance in which non-working days would affect the counting of a prescribed
period. Hence, Judge Victorio exceeded the authority granted to lower courts, in
Section 5, Rule 58 of the Rules of Court, when he excluded non-working days from
the counting of the twenty-day period.
In sum, private respondent was not entitled to the TRO nor to the preliminary
injunction, and the period granted in the TRO issued by Judge Victorio exceeded that
prescribed in the Rules of Court.
WHEREFORE, the petition is GRANTED and the decision12 and resolution13 of the
Court of Appeals dated August 26, 1999 and April 3, 2000, respectively,
are PARTIALLY REVERSED and SET ASIDE, retaining only the portion which
increases the amount of the injunctive bond to Five Million Pesos (P5,000,000). The
writ of preliminary injunction issued by Judge Urbano C. Victorio, Sr., in an
order14 dated May 7, 1998 in Civil Case No. 98-88266, is hereby DISSOLVED. No
costs.
SO ORDERED.

G.R. No. 134436

August 16, 2000

METROPOLITAN BANK and TRUST COMPANY, petitioner,

vs.
JOAQUIN TONDA and MA. CRISTINA TONDA, respondents.
DECISION

GONZAGA REYES, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking
to set aside the Decision1 of the Court of Appeals2 dated June 29, 1998 in CA-G.R.
SP No. 38113 which: (1) reversed Resolution No. 417, s. 1994, 3 dated June 1, 1994
of the Department of Justice4 directing to file the appropriate Information against
herein respondents Joaquin P. Tonda and Ma. Cristina V. Tonda for violation of P.D.
115 in relation to Article 315 (1) (b) of the Revised Penal Code; and (2) effectively set
5
6
aside the Resolutions dated April 7, 1995 and July 12 1995 of the Department of
Justice denying the motions for reconsideration.
Spouses Joaquin G. Tonda and Ma. Cristina U. Tonda, hereinafter referred to as the
TONDAS, applied for and were granted commercial letters of credit by petitioner
Metropolitan Bank and Trust Company, hereinafter referred to as METROBANK for a
period of eight (8) months beginning June 14, 1990 to February 1, 1991 in connection
with the importation of raw textile materials to be used in the manufacturing of
garments. The TONDAS acting both in their capacity as officers of Honey Tree
Apparel Corporation (HTAC) and in their personal capacities, executed eleven (11)
trust receipts to secure the release of the raw materials to HTAC. The imported
fabrics with a principal value of P2,803,000.00 were withdrawn by HTAC under the 11
trust receipts executed by the TONDAS. Due to their failure to settle their obligations
under the trust receipts upon maturity, METROBANK through counsel, sent a letter
dated August 10, 1992, making its final demand upon the TONDAS to settle their past
due TR/LC accounts on or before August 15, 1992. They were informed that by said
date, the obligations would amount to P4,870,499.13. Despite repeated demands
therefor, the TONDAS failed to comply with their obligations stated in the trust
receipts agreements, i.e. the TONDAS failed to account to METROBANK the goods
and/or proceeds of sale of the merchandise, subject of the trust receipts.
Consequently, on November 9, 1992, Metrobank, through its account officer Eligio
Labog, Jr., filed with the Provincial Prosecutor of Rizal a complaint/affidavit against
the TONDAS for violation of P.D. No. 115 (Trust Receipts Law) in relation to Article
315 (1) (b) of the Revised Penal Code. On February 12, 1993, the assigned Assistant
Prosecutor of Rizal submitted a Memorandum to the Provincial Prosecutor
recommending that the complaint in I.S. No. 92-8703 be dismissed on the ground that
the complainants had failed to establish "the existence of the essential elements of
Estafa as charged." The recommendation was approved by Rizal Provincial
Prosecutor Mauro Castro on May 18, 1993.
METROBANK then appealed to the Department of Justice (DOJ). On June 1, 1994,
Undersecretary Ramon. S. Esguerra reversed the findings of the Provincial
Prosecutor of Rizal and ordered the latter to file the appropriate information against
the TONDAS as charged in the complaint.

The TONDAS immediately sought a reconsideration of the DOJ Resolution but their
motion was denied by the then acting Justice Secretary Demetrio G. Demetria in a
Letter-Resolution dated April 7, 1995. A second motion for reconsideration by the
TONDAS was likewise denied by then Justice Secretary Teofisto Guingona on July
12, 1995.
Subsequently, the TONDAS filed with the Court of Appeals a special civil action
for certiorari and prohibition with application for a temporary restraining order or a writ
of preliminary injunction,7 which was docketed as CA-G.R. SP No. 38113. They
contended therein that the Secretary of Justice acted without or in excess of
jurisdiction in issuing the aforementioned Resolution dated July 12, 1995 denying with
finality their motion for the reconsideration of the Resolution dated April 7, 1995 of the
Acting Secretary of Justice, which in turn denied their motion for the reconsideration
of Resolution No. 417, s. 94, dated June 1, 1994, directing to file the appropriate
Information against the TONDAS.
The Court of Appeals granted the TONDAS' petition and ordered the criminal
complaint against them dismissed. The Court of Appeals held that METROBANK had
failed to show a prima facie case that the TONDAS violated the Trust Receipts Law in
relation to Art. 315 (1) (b) of the Revised Penal Code in the face of convincing proof
that "that the amount of P2.8 Million representing the outstanding obligation of the
TONDAS under the trust receipts account had already been settled by them in
compliance with the loan restructuring proposal; and that in the absence of a loan
restructuring agreement, METROBANK could still validly apply the amount as
payment thereof." The relevant portions of the Court of Appeals decision are quoted
as follows:
"Petitioners admitted that in 1991 their company, the Honey Tree Apparel Corporation
(HTAC), had some financial reversals making it difficult for them to comply with their
loan obligations with Metrobank. They were then constrained to propose a loan
restructuring agreement with the private respondent to enable them to finally settle all
outstanding obligations with the latter. In a letter dated 23 September 1991, petitioner
Joaquin Tonda submitted a proposed Loan Restructuring Scheme to Metrobank. In
said letter, petitioner Tonda proposed to immediately pay in full the outstanding
principal charges under the trust receipts account and the remaining obligations
under a separate schedule of payment. Petitioners attached with said letter an
itemized proposal (Attachment "A"), part of which reads:
1. Trust Receipts - The new management and. Mr. Joaquin G. Tonda will pay
immediately the entire principal of the outstanding Trust Receipts amounting
to P2,803,097.14. While the interest accrued up to September 13, 1991 amounting
to P409,601.57 plus the additional interest shall be re-structured together with item
no. 2 below. A joint sharing account in the name of Joaquin G. Tonda and Wang Tien
En equal to Trust Receipt amount of 1.8 Million will be opened at Metrobank Makati.
(emphasis supplied)
It would appear that the aforestated amount of 1.8 Million was erroneously written
since the intention of the petitioners was to open an account of P2.8 Million to pay the
entire principal of the outstanding trust receipts account. In fact, also on 23
September 1991, petitioner Joaquin Tonda and Wang Tien En deposited four
different checks with a total amount of P2,800,000.00 with Metrobank. The checks
were received by a certain Flor C. Naanep. Notably, the petitioners had obtained a
written acknowledgement of receipt of the checks totaling P2.8 Million from the
Metrobank officer in order to show proof of compliance with the loan restructuring

proposal. If the petitioners had intended it to be a simple deposit, then a deposit slip
with a machine validation by the private respondent bank would have otherwise been
sufficient.
In a letter dated 22 October 1991, Metrobank wrote to the petitioners informing them
that the bank had accepted their proposal subject to certain conditions, the first of
which referred to the immediate payment of the amount of P2.8 Million, representing
the outstanding trust receipts account. The petitioners appeared to have offered a
counter proposal such that no final agreement had yet been reached.
However, the succeeding negotiations between petitioners and Metrobank, after the
initial offer of 23 September 1991 was made, dealt with the other outstanding
obligations while the matter regarding the trust receipts account remained
unchanged; therefore, it was settled between the parties that the amount of P2.8
Million should be paid to cover all outstanding obligations under the trust receipts
account. Despite the inability of both parties to reach a mutually agreeable loan
restructured agreement, the amount of P2.8 Million which was deposited on 23
September 1991 by the petitioners appears to remain intact and untouched as
Metrobank had failed to show evidence that the money has been withdrawn from the
savings account of the petitioners.
Moreover, the deposit made by the petitioners was made known to Metrobank clearly
as a compliance with the proposed loan restructuring agreement. As shown in the
correspondence made by the petitioners on 28 February 1992 to Metrobank, after the
latter had made a formal demand for payment of all outstanding obligations, the
deposit was mentioned, to wit:
"May we emphasize that to show sincerity and financial capability, soon after we
received your letter dated October 22, 1991 informing us of your approval of the
restructuring and consolidation of our firm's obligations, a personal account was
opened by two (2) of our stockholders in the amount equivalent to the TR/LC,
Account of about P2.8 Million which deposit is still maintained with your bank, free
from any lien or encumbrance, and may be applied anytime to the payment of the
TR/LC Account upon the implementation by the parties of the terms of
restructuring.""(emphasis supplied)
The contention of Metrobank that the money had not been actually applied as
payment for petitioners' outstanding obligation under the trust receipts account is
absolutely devoid of merit, considering that the petitioners were still in the process of
negotiating for a reasonable loan restructuring arrangement with Metrobank when the
latter abruptly abandoned all efforts to negotiate and instantly demanded from the
petitioners the fulfillment of all their outstanding obligations.
In the case of Tan Tiong Tick vs. American Apothecaries, 65 Phil. 414, the Supreme
Court had held that:
"When a depositor is indebted to a bank, and the debts are mutual - that is, between
the same parties and in the, same right - the bank may apply the deposit, or such
portion thereof as may be necessary, to the payment of the debt due it by the
depositor, provided there is no express agreement to the contrary and the deposit is
not specifically applicable to some other particular purpose."
Applying the above-mentioned ruling in this case, if the parties therefore fail to reach
an agreement regarding the restructuring of HTAC's loan, Metrobank can validly

apply the amount deposited by the petitioners as payment of the principal obligation
under the trust receipts account.
On the basis of all the evidence before Us, this Court is convinced that the amount of
P2.8 Million representing the outstanding obligation of the petitioners under the trust
receipts account had already been settled by the petitioners. The money remains
deposited under the savings account of the petitioners awaiting a final agreement with
Metrobank regarding the loan restructuring arrangement. Meanwhile, Metrobank has
the right to use the deposited amount in connection with any of its banking business.
With convincing proof that the amount of P2.8 Million deposited under petitioners'
savings account with Metrobank was indeed intended to be applied as payment for
the outstanding obligations of HTAC under the trust receipts, Metrobank, therefore,
had failed to show a prima facie case that the petitioners had violated the Trust
Receipts Law (P.D. No. 115) in relation to Art. 315 of the Revised Penal Code.
Besides, there is absolutely no evidence suggesting that Metrobank has been
damaged by the proposal and the deposit made by the petitioners. As noted by the
prosecutor:
"It is clear from the evidence that complainant bank had, all the while, been informed
of the steps undertaken by the respondents relative to the trust receipts and other
financial obligations vis-a-vis HTAC's financial difficulties. Hardly therefore, could it be
said that respondents were unfaithfully, deceptively, deceitfully and fraudulently
8
dealing with complainant bank to warrant an indictment for Estafa."
Hence, this recourse to this Court where petitioner submits for the consideration of
this Court the following issues:
I.
WHETHER METROBANK HAS SHOWN A PRIMA FACIE
VIOLATION OF THE TRUST RECEIPTS LAW IN RELATION TO
ART. 315 OF THE REVISED PENAL CODE
II.
WHETHER AN AGREEMENT WAS FORGED BETWEEN THE
PARTIES THAT THE 2.8 MILLION DEPOSITED IN THE JOINT
ACCOUNT OF JOAGUIN G. TONDA AND WANG TIEN EN
WOULD BE CONSIDERED AS PAYMENT FOR THE
OUTSTANDING OBLIGATIONS OF THE SPOUSES TONDA
UNDER THE TRUST RECEIPTS
III.
WHETHER INSPITE OF THE FAILURE OF THE PARTIES TO
AGREE
UPON
A
RESTRUCTURING
AGREEMENT,
METROBANK CAN STILL APPLY THE P2.8 MILLION DEPOSIT
AS PAYMENT TO THE PRINCIPAL AMOUNT COVERED BY THE
TRUST RECEIPTS
IV.
WHETHER DAMAGE HAS BEEN CAUSED TO METROBANK
BECAUSE OF THE PROPOSAL AND OF THE DEPOSIT
V.

WHETHER METROBANK HAS THE STANDING TO PROSECUTE

THE CASE A QUO
VI.
WHETHER THE ASSIGNED ERRORS IN THE PETITION FOR
CERTIORARI FILED WITH THIS HONORABLE COURT RAISES
PURELY QUESTIONS OF FACTS9

punishable under the provisions of Article Three Hundred and Fifteen, Paragraph One
(b), of Act Numbered Three Thousand Eight Hundred and Fifteen, as amended,
otherwise known as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other judicial entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers, employees
or other officials or persons therein responsible for the offense, without prejudice to
the civil liabilities arising from the criminal offense.

In response to the foregoing, the TONDAS maintain that METROBANK has no legal
standing to file the present petition without the conformity or authority of the
prosecutor as it deals solely with the criminal aspect of the case, a separate action to
recover civil liability having already been instituted; that the issues raised in the
present petition are purely factual; and that the subject trust receipts obligations have
been extinguished by payment or legal compensation.

Section 1 (b), Article 315 of the Revised Penal Code under which the violation is
made to fall, states:

We find for petitioner bank.

b. By misappropriating or converting, to the prejudice of another, money, goods, or

any other personal property received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to make delivery of or
to return the same, even though such obligation be totally or partially guaranteed by a
bond; or by denying having received such money, goods, or other property."

Preliminarily, we shall resolve the issues raised by the TONDAS regarding the
standing of METROBANK to file the instant petition and whether the same raises
questions of law.
The general rule is that it is only the Solicitor General who is authorized to bring or
defend actions on behalf of the People or the Republic of the Philippines once the
case is brought before this Court or the Court of Appeals. However, an exception has
been made that "if there appears to be grave error committed by the judge or lack of
due process, the petition will be deemed filed by the private complainants therein as if
10
it were filed by the Solicitor General." In that case, the Court gave due course to the
petition and allowed the petitioners to argue their case in lieu of the Solicitor General.
We accord the same treatment to the instant petition on account of the grave errors
committed by the Court of Appeals. We add that no information having been filed yet
in court, there is, strictly speaking, no case yet for the People or the Republic of the
Philippines. In answer to the second issue raised by the TONDAS, while the
jurisdiction of the Supreme Court in a petition for review on certiorari under Rule 45 of
the Revised Rules of Court is limited to reviewing only errors of law, not of fact, one
exception to the rule is when the factual findings complained of are devoid of support
by the evidence on record or the assailed judgment is based on misappreciation of
11
facts , as will be shown to have happened in the instant case.
In the main, the issue is whether or not the dismissal by the Court of Appeals of the
charge for violation of the Trust Receipts Law in relation to Art. 315(1) (b) of the
Revised Penal Code against the TONDAS is warranted by the evidence at hand and
by law.
The Court of Appeals gravely erred in reversing the Department of Justice on the
finding of probable cause to hold the TONDAS for trial. The documentary evidence
presented during the preliminary investigation clearly show that there was probable
cause to warrant a criminal prosecution for violation of the Trust Receipts Law.
The relevant penal provision of P.D. 115 provides:
SEC. 13. Penalty Clause. - The failure of an entrustee to turn over the proceeds of
the sale of the goods, documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in the trust receipt or to
return said goods, documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime of estafa,

"x x x Swindling (estafa). - Any person who shall defraud another by any of the mans
mentioned herein below x x x:
xxx

xxx

xxx

Based on the foregoing, it is plain to see that the Trust Receipts Law declares the
failure to turn over the goods or the proceeds realized from the sale thereof, as a
criminal offense punishable under Article 315 (1) (b) of the Revised Penal Code. The
law is violated whenever the entrustee or the person to whom the trust receipts were
issued in favor of fails to: (1) return the goods covered by the trust receipts; or (2)
return the proceeds of the sale of the said goods. The foregoing acts constitute estafa
punishable under Article 315 (1) (b) of the Revised Penal Code. Given that various
trust receipts were executed by the TONDAS and that as entrustees, they did not
return the proceeds from the goods sold nor the goods themselves to METROBANK,
there is no dispute that that the TONDAS failed to comply with the obligations under
the trust receipts despite several demands from METROBANK.
Finding favorably for the TONDAS, however, and ordering the dismissal of the
complaint against them, the Court of Appeals held that: (1) the TONDAS opened a
savings account of P2.8 Million to pay the entire principal of the outstanding trust
12
receipts account; (2) the TONDAS obtained from a METROBANK officer a written
acknowledgement of receipt of checks totaling P2.8 Million in order to show proof of
compliance with the loan restructuring proposal; (3) it was settled between the parties
that the amount of 2.8 Million should be paid to cover all outstanding obligations
under the trust receipts account; (4) the money remains deposited under the savings
account of petitioners awaiting a final agreement with METROBANK regarding the
loan restructuring arrangement; and that (5) there is no evidence suggesting that
METROBANK has been damaged by the proposal and the deposit or that the
TONDAS employed fraud and deceit in their dealings with the bank.
The foregoing findings and conclusions are palpably erroneous.
First, the amount of P2.8 million was not directly paid to METROBANK to settle the
trust receipt accounts, but deposited in a joint account of Joaquin G. Tonda and a
certain Wang Tien En. In a letter dated February 28, 1992, signed by HTAC's Vice
President for Finance, METROBANK was informed that the amount "may be applied
anytime to the payment of the trust receipts account upon implementation of the
parties of the terms of the restructuring."13 The parties failed to agree on the terms of

the loan restructuring agreement as the offer by the TONDAS to restructure the loan
was followed by a series of counter-offers which yielded nothing. It is axiomatic that
acceptance of an offer must be unqualified and absolute14 to perfect a contract. The
alleged payment of the trust receipts accounts never became effectual on account of
the failure of the parties to finalize a loan restructuring arrangement.
Second, the handwritten note by the METROBANK officer acknowledging receipt of
the checks amounting to P2.8 Million made no reference to the TONDAS' trust receipt
obligations, and we cannot presume that it was anything more than an ordinary bank
deposit. The Court of Appeals citing the case of Tan Tiong Tick vs. American
Apothecories15 implied that in making the deposit, the TONDAS are entitled to set off,
by way of compensation, their obligations to METROBANK. However, Article 1288 of
the Civil Code provides that "compensation shall not be proper when one of the debts
consists in civil liability arising from a penal offense" as in the case at bar. Theraison
d'etre for this is that, "if one of the debts consists in civil liability arising from a penal
offense, compensation would be improper and inadvisable because the satisfaction of
16
such obligation is imperative."
Third, reliance on the negotiations for the settlement of the trust receipts obligations
between the TONDAS and METROBANK is simply misplaced. The negotiations
pertain and affect only the civil aspect of the case but does not preclude prosecution
for the offense already committed. It has been held that "[a]ny compromise relating to
the civil liability arising from an offense does not automatically terminate the criminal
17
proceeding against or extinguish the criminal liability of the malefactor." All told, the
P2.8 Million deposit could not be considered as having settled the trust receipts
obligations of the TONDAS to the end of extinguishing any incipient criminal
culpability arising therefrom.
Hence, it has been held in Office of the Court Administrator vs. Soriano18 that:
"xxx it is too well-settled for any serious argument that whether in malversation of
public funds or estafa, payment, indemnification, or reimbursement of, or compromise
as to, the amounts or funds malversed or misappropriated, after the commission of
the crime, affects only the civil liability of the offender but does not extinguish his
criminal liability or relieve him from the penalty prescribed by law for the offense
committed, because both crimes are public offenses against the people that must be
prosecuted and penalized by the Government on its own motion, though complete
reparation should have been made of the damage suffered by the offended parties.
xxx."
As to the statement of the Court of Appeals that there is no evidence that
METROBANK has been damaged by the proposal and the deposit, it must be
clarified that the damage can be traced from the non-fulfillment of an entrustee's
obligation under the trust receipts. The nature of trust receipt agreements and the
damage caused to trade circles and the banking community in case of violation
thereof was explained in Vintola vs. IBAA19 and echoed in People vs. Nitafan20 , as
follows:
"[t]rust receipt arrangements do not involve a simple loan transaction between a
creditor and a debtor-importer.APART from a loan feature, the trust receipt
arrangement has a security feature that is covered by the trust receipt itself. The
second feature is what provides the much needed financial assistance to traders in
the importation or purchase of goods or merchandise through the use of those goods
or merchandise as collateral for the advancements made by the bank. The title of the

bank to the security is the one sought to be protected and not the loan which is a
separate and distinct agreement."
xxx

xxx

xxx

"Trust receipts are indispensable contracts in international and domestic business

transactions.1wphi1 The prevalent use of trust receipts, the danger of their misuse
and/or misappropriation of the goods or proceeds realized from the sale of goods,
documents or instruments held in trust for entruster-banks, and the need for
regulation of trust receipt transactions to safeguard the rights and enforce the
obligations of the parties involved are the main thrusts of P.D. 115. As correctly
observed by the Solicitor General, P.D. 115, like Bata Pambansa Blg. 22, punishes
the act "not as an offense against property, but as an offense against public order. x x
x The misuse of trust receipts therefore should be deterred to prevent any possible
havoc in trade circles and the banking community. (citing Lozano vs. Martinez, 146
SCRA 323 [1986]; Rollo, p. 57) It is in the context of upholding public interest that the
law now specifically designates a breach of a trust receipt agreement to be an act that
"shall" make one liable foe estafa."
The finding that there was no fraud and deceit is likewise misplaced Considering that
the offense is punished as amalum prohibitum regardless of the existence of intent or
malice. A mere failure to deliver the proceeds of the sale or the goods if not sold,
constitutes a criminal offense that causes prejudice not only to another, but more to
21
the public interest.
Finally, it is worthy of mention that a preliminary investigation proper - whether or not
there is reasonable ground to believe that the accused is guilty of the offense and
therefore, whether or not he should be subjected to the expense, rigors and
embarrassment of trial - is the function of the prosecutor.22 Preliminary investigation is
23
an executive, not a judicial function. Such investigation is not part of the trial, hence,
a full and exhaustive presentation of the parties' evidence is not required, but only
such as may engender a well-grounded belief that an offense has been committed
and that the accused is probably guilty thereof. 24
Section 4, Rule 112 of the Rules of Court recognizes the authority of the Secretary of
Justice to reverse the resolution of the provincial or city prosecutor or chief state
25
prosecutor upon petition by a proper party. Judicial review of the resolution of the
Secretary of Justice is limited to a determination of whether there has been a grave
abuse of discretion amounting to lack or excess of jurisdiction considering that the full
discretionary authority has been delegated to the executive branch in the
determination of probable cause during a preliminary investigation. Courts are not
empowered to substitute their judgment for that of the executive branch; it may,
however, look into the question of whether such exercise has been made in grave
26
abuse of discretion.
Verily, there was no grave abuse of discretion on the part of the Secretary of Justice
in directing the filing of the Information against the TONDAS, end the Court of
Appeals overstepped its boundaries in reversing the same without basis in law and in
evidence. We emphasize that for purposes of preliminary investigation, it is enough
that there is evidence showing that a crime has been committed and that the accused
is probably guilty thereof.27By reason of the abbreviated nature of preliminary
investigations, a dismissal of the charges as a result thereof is not equivalent to a
28
judicial pronouncement of acquittal, a converso, the finding of a prima facie case to
hold the accused for trial is not equivalent to a finding of guilt.

WHEREFORE, the petition is hereby GRANTED. The assailed Decision is

REVERSED and SET ASIDE.
SO ORDERED.

G.R. No. 89252 May 24, 1993

RAUL SESBREO, petitioner,

MATURITY DATE

vs.

NO. 10805

HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS

BANK, respondents.

DENOMINATED CUSTODIAN RECEIPT

Salva, Villanueva & Associates for Delta Motors Corporation.

Reyes, Salazar & Associates for Pilipinas Bank.

This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE
UNDERWRITES FINANCE CORPORATION, we have in our custody the following
securities to you [sic] the extent herein indicated.
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT

FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreo made a money market placement in
the amount of P300,000.00 with the Philippine Underwriters Finance Corporation
("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days,
would mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the
following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1)
Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32
days at 17.0% per annum;
(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC
PN No. 2731 to petitioner, with the notation that the said security was in
custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No.
10805 dated 9 February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's
investment), with petitioner as payee, Philfinance as drawer, and Insular Bank of Asia
and America as drawee, in the total amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated checks issued by
Philfinance. However, the checks were dishonored for having been drawn against
insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by
private respondent Pilipinas Bank ("Pilipinas"). It reads as follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
February 9, 1981

VALUE DATE
TO Raul Sesbreo
April 6, 1981

NUMBER DATE VALUE BY HOLDER PAYEE

2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be inspected by you or your duly
authorized representative at any time during regular banking hours.
Upon your written instructions we shall undertake physical delivery of the above
securities fully assigned to you should this Denominated Custodianship Receipt
remain outstanding in your favor thirty (30) days after its maturity.
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature) 1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent
Pilipinas, Makati Branch, and handed her a demand letter informing the bank that his
placement with Philfinance in the amount reflected in the DCR No. 10805 had
remained unpaid and outstanding, and that he in effect was asking for the physical
delivery of the underlying promissory note. Petitioner then examined the original of
the DMC PN No. 2731 and found: that the security had been issued on 10 April 1980;
that it would mature on 6 April 1981; that it had a face value of P2,300,833.33, with
the Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta")
as "maker;" and that on face of the promissory note was stamped "NON
NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of participation in
respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2
again asking private respondent Pilipinas for physical delivery of the original of DMC
PN No. 2731. Pilipinas allegedly referred all of petitioner's demand letters to
Philfinance for written instructions, as has been supposedly agreed upon in
"Securities Custodianship Agreement" between Pilipinas and Philfinance. Philfinance
did not provide the appropriate instructions; Pilipinas never released DMC PN No.
2731, nor any other instrument in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 1981 3 upon private respondent
Delta for the partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as
payee thereof, had assigned to him said Note to the extent of P307,933.33. Delta,
however, denied any liability to petitioner on the promissory note, and explained in

turn that it had previously agreed with Philfinance to offset its DMC PN No. 2731
(along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor of
Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint
management of the Securities and exchange commission ("SEC") and the Central
Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date apparently
remains in the custody of the SEC. 4
As petitioner had failed to collect his investment and interest thereon, he filed on 28
September 1982 an action for damages with the Regional Trial Court ("RTC") of Cebu
City, Branch 21, against private respondents Delta and Pilipinas. 5 The trial court, in a
decision dated 5 August 1987, dismissed the complaint and counterclaims for lack of
merit and for lack of cause of action, with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a
Decision dated 21 March 1989, the Court of Appeals denied the appeal and held: 6
Be that as it may, from the evidence on record, if there is anyone that appears liable
for the travails of plaintiff-appellant, it is Philfinance. As correctly observed by the trial
court:
This act of Philfinance in accepting the investment of plaintiff and charging it against
DMC PN No. 2731 when its entire face value was already obligated or earmarked for
set-off or compensation is difficult to comprehend and may have been motivated with
bad faith. Philfinance, therefore, is solely and legally obligated to return the
investment of plaintiff, together with its earnings, and to answer all the damages
plaintiff has suffered incident thereto. Unfortunately for plaintiff, Philfinance was not
impleaded as one of the defendants in this case at bar; hence, this Court is without
jurisdiction to pronounce judgement against it. (p. 11, Decision)
WHEREFORE, finding no reversible error in the decision appealed from, the same is
hereby affirmed in toto. Cost against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the pleadings,
the Court resolved to give due course to the petition and required the parties to file
their respective memoranda. 7
Petitioner reiterates the assignment of errors he directed at the trial court decision,
and contends that respondent court of Appeals gravely erred: (i) in concluding that he
cannot recover from private respondent Delta his assigned portion of DMC PN No.
2731; (ii) in failing to hold private respondent Pilipinas solidarily liable on the DMC PN
No. 2731 in view of the provisions stipulated in DCR No. 10805 issued in favor r of
petitioner, and (iii) in refusing to pierce the veil of corporate entity between
Philfinance, and private respondents Delta and Pilipinas, considering that the three
(3) entities belong to the "Silverio Group of Companies" under the leadership of Mr.
Ricardo Silverio, Sr. 8
There are at least two (2) sets of relationships which we need to address: firstly, the
relationship of petitioner vis-a-visDelta; secondly, the relationship of petitioner in
respect of Pilipinas. Actually, of course, there is a third relationship that is of critical
importance: the relationship of petitioner and Philfinance. However, since Philfinance

has not been impleaded in this case, neither the trial court nor the Court of Appeals
acquired jurisdiction over the person of Philfinance. It is, consequently, not necessary
for present purposes to deal with this third relationship, except to the extent it
necessarily impinges upon or intersects the first and second relationships.
I.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in
respect of the Delta promissory note (DMC PN No. 2731) which Philfinance sold
"without recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals
said on this point:
Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the
same is "non-negotiable" as stamped on its face (Exhibit "6"), negotiation being
defined as the transfer of an instrument from one person to another so as to
constitute the transferee the holder of the instrument (Sec. 30, Negotiable
Instruments Law). A person not a holder cannot sue on the instrument in his own
name and cannot demand or receive payment (Section 51, id.) 9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the
Note had been validly transferred, in part to him by assignment and that as a result of
such transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner the
portion of that Note assigned to him by the payee Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred
by Philfinance as manifested by the word "non-negotiable" stamp across the face of
the Note 10 and because maker Delta and payee Philfinance intended that this Note
would be offset against the outstanding obligation of Philfinance represented by
Philfinance PN No. 143-A issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's
consent, if not against its instructions; and
(3) assuming (arguendo only) that the partial assignment in favor of petitioner was
valid, petitioner took the Note subject to the defenses available to Delta, in particular,
the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A. 11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument
must be distinguished from theassignment or transfer of an instrument whether that
be negotiable or non-negotiable. Only an instrument qualifying as a negotiable
instrument under the relevant statute may be negotiated either by indorsement
thereof coupled with delivery, or by delivery alone where the negotiable instrument is
in bearer form. A negotiable instrument may, however, instead of being negotiated,
also be assigned or transferred. The legal consequences of negotiation as
distinguished from assignment of a negotiable instrument are, of course, different. A
non-negotiable instrument may, obviously, not be negotiated; but it may be assigned
or transferred, absent an express prohibition against assignment or transfer written in
the face of the instrument:
The words "not negotiable," stamped on the face of the bill of lading, did not destroy
its assignability, but the sole effect was to exempt the bill from the statutory provisions

relative thereto, and a bill, though not negotiable, may be transferred by assignment;
the assignee taking subject to the equities between the original parties. 12 (Emphasis
added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time
stamped "non-transferable" or "non-assignable." It contained no stipulation which
prohibited Philfinance from assigning or transferring, in whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with Philfinance
and which should be quoted in full:
April 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by your
Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731
for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN
No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.
Very Truly Yours,
(Sgd.)
Florencio B. Biagan
Senior Vice President 13
We find nothing in his "Letter of Agreement" which can be reasonably construed as a
prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731,
before the maturity thereof. It is scarcely necessary to add that, even had this "Letter
of Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a
prohibition cannot be invoked against an assignee or transferee of the Note who
parted with valuable consideration in good faith and without notice of such prohibition.
It is not disputed that petitioner was such an assignee or transferee. Our conclusion
on this point is reinforced by the fact that what Philfinance and Delta were doing by
their exchange of their promissory notes was this: Delta invested, by making a money
market placement with Philfinance, approximately P4,600,000.00 on 10 April 1980;
but promptly, on the same day, borrowed back the bulk of that placement, i.e.,
P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC
PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with not
P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No.
2731 had been effected without the consent of Delta, we note that such consent was

not necessary for the validity and enforceability of the assignment in favor of
petitioner. 14 Delta's argument that Philfinance's sale or assignment of part of its
rights to DMC PN No. 2731 constituted conventional subrogation, which required its
(Delta's) consent, is quite mistaken. Conventional subrogation, which in the first place
is never lightly inferred, 15 must be clearly established by the unequivocal terms of
the substituting obligation or by the evident incompatibility of the new and old
obligations on every point. 16 Nothing of the sort is present in the instant case.
It is in fact difficult to be impressed with Delta's complaint, since it released its DMC
PN No. 2731 to Philfinance, an entity engaged in the business of buying and selling
debt instruments and other securities, and more generally, in money market
transactions. In Perez v. Court of Appeals, 17 the Court, speaking through Mme.
Justice Herrera, made the following important statement:
There is another aspect to this case. What is involved here is a money market
transaction. As defined by Lawrence Smith "the money market is a market dealing in
standardized short-term credit instruments (involving large amounts) where lenders
and borrowers do not deal directly with each other but through a middle manor a
dealer in the open market." It involves "commercial papers" which are instruments
"evidencing indebtness of any person or entity. . ., which are issued, endorsed, sold
or transferred or in any manner conveyed to another person or entity, with or without
recourse". The fundamental function of the money market device in its operation is to
match and bring together in a most impersonal manner both the "fund users" and the
"fund suppliers." The money market is an "impersonal market", free from personal
considerations. "The market mechanism is intended to provide quick mobility of
money and securities."
The impersonal character of the money market device overlooks the individuals or
entities concerned. The issuer of a commercial paper in the money market
necessarily knows in advance that it would be expenditiously transacted and
transferred to any investor/lender without need of notice to said issuer. In practice, no
notification is given to the borrower or issuer of commercial paper of the sale or
transfer to the investor.
xxx xxx xxx
There is need to individuate a money market transaction, a
in the Philippine commercial scene. It has been intended
acquisition of capital on an impersonal basis. And as
Presidential Decree No. 678, the investing public must
effective protection in availing of the credit of a borrower
market.18 (Citations omitted; emphasis supplied)

relatively novel institution

to facilitate the flow and
specifically required by
be given adequate and
in the commercial paper

We turn to Delta's arguments concerning alleged compensation or offsetting between

DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note that at the
time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9
February 1981, no compensation had as yet taken place and indeed none could have
taken place. The essential requirements of compensation are listed in the Civil Code
as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;

(2) That both debts consists in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor. (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was
due. This was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement"
with Philfinance, where Delta acknowledged that the relevant promissory notes were
"to be offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from fortynine (49) days before the "co-terminal maturity" date, that is to say, before any
compensation had taken place. Further, the assignment to petitioner would have
prevented compensation had taken place between Philfinance and Delta, to the
extent of P304,533.33, because upon execution of the assignment in favor of
petitioner, Philfinance and Delta would have ceased to be creditors and debtors of
each other in their own right to the extent of the amount assigned by Philfinance to
petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of
petitioner was a valid one and that petitioner accordingly became owner of DMC PN
No. 2731 to the extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment
to him only on 14 July 1981, 19that is, after the maturity not only of the money market
placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN
No. 143-A. In other words, petitioner notified Delta of his rights as assignee after
compensation had taken place by operation of law because the offsetting instruments
had both reached maturity. It is a firmly settled doctrine that the rights of an assignee
are not any greater that the rights of the assignor, since the assignee is merely
substituted in the place of the assignor 20 and that the assignee acquires his rights
subject to the equities i.e., the defenses which the debtor could have set up
against the original assignor before notice of the assignment was given to the debtor.
Article 1285 of the Civil Code provides that:
Art. 1285. The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the assignor
was notified by the debtor at the time he gave his consent, that he reserved his right
to the compensation.
If the creditor communicated the cession to him but the debtor did not consent
thereto, the latter may set up the compensation of debts previous to the cession, but
not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same and also later ones until he had
knowledge of the assignment. (Emphasis supplied)
Article 1626 of the same code states that: "the debtor who, before having knowledge
of the assignment, pays his creditor shall be released from the obligation." In Sison v.
Yap-Tico, 21 the Court explained that:

[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to
pay; and if he pay before notice that his debt has been assigned, the law holds him
exonerated, for the reason that it is the duty of the person who has acquired a title by
transfer to demand payment of the debt, to give his debt or notice. 22
At the time that Delta was first put to notice of the assignment in petitioner's favor on
14 July 1981, DMC PN No. 2731 had already been discharged by compensation.
Since the assignor Philfinance could not have then compelled payment anew by Delta
of DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from
collecting from Delta the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment or
sale was effected on 9 February 1981. He could have notified Delta as soon as his
money market placement matured on 13 March 1981 without payment thereof being
made by Philfinance; at that time, compensation had yet to set in and discharge DMC
PN No. 2731. Again petitioner could have notified Delta on 26 March 1981 when
petitioner received from Philfinance the Denominated Custodianship Receipt ("DCR")
No. 10805 issued by private respondent Pilipinas in favor of petitioner. Petitioner
could, in fine, have notified Delta at any time before the maturity date of DMC PN No.
2731. Because petitioner failed to do so, and because the record is bare of any
indication that Philfinance had itself notified Delta of the assignment to petitioner, the
Court is compelled to uphold the defense of compensation raised by private
respondent Delta. Of course, Philfinance remains liable to petitioner under the terms
of the assignment made by Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and private respondent Pilipinas.
Petitioner contends that Pilipinas became solidarily liable with Philfinance and Delta
when Pilipinas issued DCR No. 10805 with the following words:
Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the
above securities fully assigned to you . 23
The Court is not persuaded. We find nothing in the DCR that establishes an obligation
on the part of Pilipinas to pay petitioner the amount of P307,933.33 nor any
assumption of liability in solidum with Philfinance and Delta under DMC PN No. 2731.
We read the DCR as a confirmation on the part of Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a
certain face value, to mature on 6 April 1981 and payable to the order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by Philfinance to
petitioner (9 February 1981), holding that Note on behalf and for the benefit of
petitioner, at least to the extent it had been assigned to petitioner by payee
Philfinance; 24
(3) petitioner may inspect the Note either "personally or by authorized representative",
at any time during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC
PN No. 2731 (or a participation therein to the extent of P307,933.33) "should this
Denominated Custodianship receipt remain outstanding in [petitioner's] favor thirty
(30) days after its maturity."

Thus, we find nothing written in printers ink on the DCR which could reasonably be
read as converting Pilipinas into an obligor under the terms of DMC PN No. 2731
assigned to petitioner, either upon maturity thereof or any other time. We note that
both in his complaint and in his testimony before the trial court, petitioner referred
merely to the obligation of private respondent Pilipinas to effect the physical delivery
to him of DMC PN No. 2731. 25 Accordingly, petitioner's theory that Pilipinas had
assumed a solidary obligation to pay the amount represented by a portion of the Note
assigned to him by Philfinance, appears to be a new theory constructed only after the
trial court had ruled against him. The solidary liability that petitioner seeks to impute
Pilipinas cannot, however, be lightly inferred. Under article 1207 of the Civil Code,
"there is a solidary liability only when the law or the nature of the obligation requires
solidarity," The record here exhibits no express assumption of solidary liability vis-avis petitioner, on the part of Pilipinas. Petitioner has not pointed to us to any law
which imposed such liability upon Pilipinas nor has petitioner argued that the very
nature of the custodianship assumed by private respondent Pilipinas necessarily
implies solidary liability under the securities, custody of which was taken by Pilipinas.
Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and
private respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and liability
in respect of petitioner under the terms of the DCR. To the contrary, we find, after
prolonged analysis and deliberation, that private respondent Pilipinas had breached
its undertaking under the DCR to petitioner Sesbreo.
We believe and so hold that a contract of deposit was constituted by the act of
Philfinance in designating Pilipinas as custodian or depositary bank. The depositor
was initially Philfinance; the obligation of the depository was owed, however, to
petitioner Sesbreo as beneficiary of the custodianship or depository agreement. We
do not consider that this is a simple case of a stipulation pour autri. The custodianship
or depositary agreement was established as an integral part of the money market
transaction entered into by petitioner with Philfinance. Petitioner bought a portion of
DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas
in order that the thing sold would be placed outside the control of the vendor. Indeed,
the constituting of the depositary or custodianship agreement was equivalent to
constructive delivery of the Note (to the extent it had been sold or assigned to
petitioner) to petitioner. It will be seen that custodianship agreements are designed to
facilitate transactions in the money market by providing a basis for confidence on the
part of the investors or placers that the instruments bought by them are effectively
taken out of the pocket, as it were, of the vendors and placed safely beyond their
reach, that those instruments will be there available to the placers of funds should
they have need of them. The depositary in a contract of deposit is obliged to return
the security or the thing deposited upon demand of the depositor (or, in the presented
case, of the beneficiary) of the contract, even though a term for such return may have
been established in the said contract. 26 Accordingly, any stipulation in the contract of
deposit or custodianship that runs counter to the fundamental purpose of that
agreement or which was not brought to the notice of and accepted by the placerbeneficiary, cannot be enforced as against such beneficiary-placer.
We believe that the position taken above is supported by considerations of public
policy. If there is any party that needs the equalizing protection of the law in money
market transactions, it is the members of the general public whom place their savings
in such market for the purpose of generating interest revenues. 27 The custodian
bank, if it is not related either in terms of equity ownership or management control to

the borrower of the funds, or the commercial paper dealer, is normally a preferred or
traditional banker of such borrower or dealer (here, Philfinance). The custodian bank
would have every incentive to protect the interest of its client the borrower or dealer
as against the placer of funds. The providers of such funds must be safeguarded from
the impact of stipulations privately made between the borrowers or dealers and the
custodian banks, and disclosed to fund-providers only after trouble has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the
security deposited with it when petitioner first demanded physical delivery thereof on
2 April 1981. We must again note, in this connection, that on 2 April 1981, DMC PN
No. 2731 had not yet matured and therefore, compensation or offsetting against
Philfinance PN No. 143-A had not yet taken place. Instead of complying with the
demand of the petitioner, Pilipinas purported to require and await the instructions of
Philfinance, in obvious contravention of its undertaking under the DCR to effect
physical delivery of the Note upon receipt of "written instructions" from petitioner
Sesbreo. The ostensible term written into the DCR (i.e., "should this [DCR] remain
outstanding in your favor thirty [30] days after its maturity") was not a defense against
petitioner's demand for physical surrender of the Note on at least three grounds:
firstly, such term was never brought to the attention of petitioner Sesbreo at the time
the money market placement with Philfinance was made; secondly, such term runs
counter to the very purpose of the custodianship or depositary agreement as an
integral part of a money market transaction; and thirdly, it is inconsistent with the
provisions of Article 1988 of the Civil Code noted above. Indeed, in principle,
petitioner became entitled to demand physical delivery of the Note held by Pilipinas
as soon as petitioner's money market placement matured on 13 March 1981 without
payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner
for damages sustained by arising out of its breach of duty. By failing to deliver the
Note to the petitioner as depositor-beneficiary of the thing deposited, Pilipinas
effectively and unlawfully deprived petitioner of the Note deposited with it. Whether or
not Pilipinas itself benefitted from such conversion or unlawful deprivation inflicted
upon petitioner, is of no moment for present purposes.Prima facie, the damages
suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731
assigned to petitioner but lost by him by reason of discharge of the Note by
compensation, plus legal interest of six percent (6%) per annum containing from 14
March 1981.
The conclusion we have reached is, of course, without prejudice to such right of
reimbursement as Pilipinas may havevis-a-vis Philfinance.
III.
The third principal contention of petitioner that Philfinance and private respondents
Delta and Pilipinas should be treated as one corporate entity need not detain us for
long.
In the first place, as already noted, jurisdiction over the person of Philfinance was
never acquired either by the trial court nor by the respondent Court of Appeals.
Petitioner similarly did not seek to implead Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and
Pilipinas have been organized as separate corporate entities. Petitioner asks us to
pierce their separate corporate entities, but has been able only to cite the presence of
a common Director Mr. Ricardo Silverio, Sr., sitting on the Board of Directors of all

three (3) companies. Petitioner has neither alleged nor proved that one or another of
the three (3) concededly related companies used the other two (2) as mere alter egos
or that the corporate affairs of the other two (2) were administered and managed for
the benefit of one. There is simply not enough evidence of record to justify
disregarding the separate corporate personalities of delta and Pilipinas and to hold
them liable for any assumed or undetermined liability of Philfinance to petitioner. 28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of
Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989,
respectively, are hereby MODIFIED and SET ASIDE, to the extent that such Decision
and Resolution had dismissed petitioner's complaint against Pilipinas Bank. Private
respondent Pilipinas bank is hereby ORDERED to indemnify petitioner for damages
in the amount of P304,533.33, plus legal interest thereon at the rate of six percent
(6%) per annum counted from 2 April 1981. As so modified, the Decision and
Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to
costs.
SO ORDERED.

G.R. No. 147477

June 27, 2006

HERMENEGILDO M. TRINIDAD, Petitioner,

vs.
ESTRELLA ACAPULCO, Respondent
DECISION
AUSTRIA-MARTINEZ, J.:
Before this Court is a Petition for Review under Rule 45 of the Rules of Court
assailing the Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 42518
2
promulgated on February 16, 2001, which affirmed the Decision of the Regional Trial
Court (RTC) Cebu City, Branch 6 dated March 23, 1992.
The facts are as follows:
On May 6, 1991, respondent Estrella Acapulco filed a Complaint before the RTC
seeking the nullification of a sale she made in favor of petitioner Hermenegildo M.
Trinidad. She alleged: Sometime in February 1991, a certain Primitivo Caete
requested her to sell a Mercedes Benz for P580,000.00. Caete also said that if
respondent herself will buy the car, Caete was willing to sell it for P500,000.00.
Petitioner borrowed the car from respondent for two days but instead of returning the
car as promised, petitioner told respondent to buy the car from Caete
for P500,000.00 and that petitioner would pay respondent after petitioner returns from
Davao. Following petitioners instructions, respondent requested Caete to execute a
deed of sale covering the car in respondents favor for P500,000.00 for which
respondent issued three checks in favor of Caete. Respondent thereafter executed a
deed of sale in favor of petitioner even though petitioner did not pay her any
consideration for the sale. When petitioner returned from Davao, he refused to pay
respondent the amount of P500,000.00 saying that said amount would just be
deducted from whatever outstanding obligation respondent had with petitioner. Due to
petitioners failure to pay respondent, the checks that respondent issued in favor of
Caete bounced, thus criminal charges were filed against her. 3 Respondent then
prayed that the deed of sale between her and petitioner be declared null and void;
that the car be returned to her; and that petitioner be ordered to pay damages. 4
In his Answer petitioner contended that: it is not true that he borrowed the car and
that any demand was made to return it; he also did not give any instructions to
respondent to buy the car from Caete because as early as September 28, 1990,
Caete has already sold the car to respondent for P500,000.00; at the time
respondent executed the deed of sale in his favor on March 4, 1991, respondent was
already in possession of the deed of sale from Caete; the amount of P500,000.00
was fully paid by way of dation in payment to partially extinguish respondents
obligation with petitioner; the contract entered into was a true sale of a motor vehicle
and the mode of payment was that of dation in payment agreed upon at the time of
the sale.5
The parties filed their respective pre-trial briefs. Petitioner raised as issue: whether or
6
not there is valid dation in payment; while respondent put forth the questions:
whether or not she is indebted to petitioner in the amount ofP566,000.00, and
whether the car was ceded by her to petitioner in order to partially pay off her
obligation ofP566,000.00 to petitioner as dation in payment. 7

On September 6, 1991, the trial court came out with its Pre-Trial Order limiting the
issue to whether there is dacion en pago between petitioner and respondent. 8
Trial ensued and on March 23, 1992, the RTC rendered its Decision finding that no
9
dacion en pago is present in this case as common consent was not proven. The fallo
of said decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff (Acapulco) and
against the defendant (Trinidad), to wit:
1. Declaring the deed of sale executed by plaintiff in favor of defendant as
null and void for being fictitious and/or simulated;
2. The defendant is ordered to return the Mercedes Benz car in question to
plaintiff in the same condition when it was delivered to him by plaintiff;
3. Defendant is ordered to pay plaintiff the amount of P100,000.00 as moral
damages; P20,000.00 as exemplary damages and attorneys fees
of P20,000.00 as well as litigation expenses in the amount ofP5,000.00 and
costs.
SO ORDERED.10
Petitioner filed a Motion for Reconsideration arguing that contrary to the findings of
the trial court that there was no common consent, the offer to deliver the car to him
actually came from respondent after petitioner told her that he was going to file estafa
cases against her for her failure to pay her debt to petitioner.11
Petitioner also filed a Supplemental Motion and for the first time averred that
assuming that respondent did not agree to having the purchase price charged against
the P566,000.00 she owed petitioner, nonetheless, with or without her consent and/or
knowledge, the obligations parties owed to each other were extinguished by operation
of law or through legal compensation in the amount of P500,000.00.12
The RTC issued an Order dated October 18, 1992 denying the Motion for
Reconsideration and Supplemental Motion of petitioner stating that the claim of
dacion en pago is inexistent in this case and the defense of legal compensation was
13
not alleged or pleaded in petitioners Answer.
Petitioner appealed to the CA which affirmed the Decision of the trial court, finding
that the issue of legal compensation was filed too late as it was brought up only in the
supplemental motion for reconsideration; that the parties agreed that the issue to be
tried was whether or not there was dacion en pago; that dacion en pago however is
not present in this case as the parties did not give their consent thereto; that there
can also be no legal compensation as one of the obligations of this case did not entail
payment of a monetary debt but the delivery of a car; and that the admission of
petitioner that the sale price of the car was not paid entitled respondent to file the
action for rescission of sale.14
Petitioner now comes before this Court claiming that:
>1. THE HONORABLE APPELLATE COURT ERRED IN HOLDING THAT THE
ANSWER DID NOT ALLEGE FACTS AMOUNTING TO EXTINGUISHMENT OF
OBLIGATION BY LEGAL COMPENSATION;
>2. THE HONORABLE APPELLATE COURT ERRED IN GIVING UNDUE
RELIANCE TO PETITIONERS CONCLUSION IN HIS ANSWER THAT HIS

OBLIGATION WAS DEEMED EXTINGUISHED BECAUSE OF DATION IN

PAYMENT INSTEAD OF DISREGARDING SAID CONCLUSION AND SIMPLY
APPRECIATING THE FACTS ALLEGED AND PROVED AND DRAWING FOR
ITSELF THE JURIDICAL IMPLICATION OF SAID FACTS;
>3. ASSUMING THAT LEGAL COMPENSATION HAD NOT BEEN ALLEGED IN
THE ANSWER, STILL THE HONORABLE APPELLATE COURT ERRED IN
HOLDING THAT LEGAL COMPENSATION AS A MANNER OF EFFECTING
PAYMENT HAD TO BE SPECIFICALLY ALLEGED, THE SAME BEING ONLY
EVIDENTIARY;
>4. ASSUMING THAT LEGAL COMPENSATION HAD TO BE ALLEGED AND THAT
THE ANSWER FAILED TO DO SO, NEVERTHELESS THE HONORABLE
APPELLATE COURT ERRED IN IGNORING THE EVIDENCE PRESENTED
WITHOUT OBJECTION FROM RESPONDENT SHOWING THAT PARITES(SIC)
MUTUAL MONETARY OBLIGATIONS TO EACH OTHER HAD BEEN
EXTINGUISHED TO THE CONCURRENT AMOUNT OF P500,00.00;
>5. THE HONORABLE APPELLATE COURT ERRED IN HOLDING THAT LEGAL
COMPENSATION COULD BE EFFECTED ONLY THROUGH THE CONSENT OF
THE PARTIES;
>6. THE HONORABLE APPELLATE COURT ERRED IN HOLDING THAT NONPAYMENT OF THE PURCHASE PRICE MADE THE CONTRACT OF SALE
FICTITIOUS, HENCE NULL AND VOID;
>7. IN VIEW OF THE RESPONDENTS ADMISSION THAT SHE OWED
PETITIONER P566,000.00, THE HONORABLE APPELLATE COURT ERRED IN
NOT ORDERING RESPONDENT TO PAY THE SAME WITH LEGAL INTEREST;
>8. THE HONORABLE APPELLATE COURT ERRED IN ASSESSING DAMAGES
15
AGAINST THE PETITIONER.
Petitioner argues that: the purchase price of the car had been automatically offset by
respondents own monetary obligation of P566,000.00, even if he and respondent had
16
not agreed to offsetting following Article 1290 of the Civil Code; Bank of the
17
Philippine Islands v. Court of Appeals also held that compensation shall take place
when two persons, in their own right, are creditors and debtors of each other; legal
compensation takes place by operation of law and may be taken up even though it is
not raised in the pleadings or during trial; it is the duty of courts to grant the relief to
which the parties are entitled as shown by the allegations and the facts proven at the
trial; here, while petitioner claimed dation in payment, there was more than enough
testimony and admissions to prove elements of legal compensation; failure to pay the
agreed purchase price does not make the contract of sale fictitious and null and void;
the CA erred in not ordering respondent to pay petitioner the balance of her partially
extinguished indebtedness and in assessing damages against him as there was no
basis therefor.18
In her Comment, respondent counters that: it was only in the Supplemental Motion for
Reconsideration of the decision of the trial court that petitioner changed his theory
and started claiming legal compensation as a defense; the CA did not commit any
error in rejecting the belated new defense of petitioner as it would be offensive to the
basic rule of fair play, justice and due process; Article 1279 of the Civil Code also
states that for legal compensation to be proper both debts should consist of sum of

money; in this case, one of the obligations does not entail payment of money but
delivery of a car.19
Petitioner merely reiterated his arguments in his Memorandum, 20 while respondent in
hers, further averred that: she is not the owner of the car, but was only in possession
thereof in order to sell it at a price of P580,000.00 withP80,000.00 going to her; both
the trial court and the CA failed to make a finding as to the exact amount respondent
owed petitioners.21
Stripped to its basics, what petitioner is contending is that legal compensation should
be appreciated, though not expressly stated in his Answer to the Complaint before the
trial court, as his allegations therein and the facts proven at the trial show the
presence of legal compensation. He further argues that, in any case, legal
compensation takes place by operation of law even without the consent of the
interested parties.
The Court resolves to grant the petition.
Our rules recognize the broad discretionary power of an appellate court to waive the
lack of proper assignment of errors and to consider errors not assigned. 22 The interest
of justice dictates that the Court consider and resolve issues even though not
particularly raised if it is necessary for the complete adjudication of the rights and
obligations of the parties and it falls within the issues already found by them. 23 While it
is true that petitioner failed to raise the issue of legal compensation at the earliest
opportunity, this should not preclude the courts from appreciating the same especially
in this case, where ignoring the same would only result to unnecessary and circuitous
filing of cases.
Indeed, the doctrine that higher courts are precluded from entertaining matters neither
alleged in the pleadings nor raised during the proceedings below but ventilated for the
first time only in a motion for reconsideration or on appeal, is subject to exceptions,
such as when:
(a) grounds not assigned as errors but affecting jurisdiction over the subject matter;
(b) matters not assigned as errors on appeal but are evidently plain or clerical errors
within contemplation of law; (c) matters not assigned as errors on appeal but
consideration of which is necessary in arriving at a just decision and complete
resolution of the case or to serve the interests of justice or to avoid dispensing
piecemeal justice; (d) matters not specifically assigned as errors on appeal but raised
in the trial court and are matters of record having some bearing on the issue
submitted which the parties failed to raise or which the lower court ignored; (e)
matters not assigned as errors on appeal but closely related to an error assigned; and
(f) matters not assigned as errors on appeal but upon which the determination of a
question properly assigned, is dependent.24
In this case, petitioner raised the issue of dacion en pago in his Answer to
respondents Complaint. The trial court thus focused on ascertaining whether the
elements of dacion en pago are present in the case at bar, i.e.: whether there is
consent, object certain and cause or consideration, with common consent as an
essential prerequisite to have the effect of totally extinguishing the debt or
25
obligation. As respondents consent was not adequately proven by petitioner, the
trial court held that there could be no dacion en pago. Petitioner thereafter filed a
Motion for Reconsideration and a Supplemental Motion for Reconsideration where,
for the first time, he raised the issue of legal compensation. In striking down

petitioners claim of legal compensation, the trial court reasoned that it was raised too
late. This was affirmed by the CA.

Q And in fact the total amount of money that you have borrowed from Mr. Trinidad
reaches to P566,000.00, right?

This Court holds otherwise.

A Yes.

Compensation takes effect by operation of law even without the consent or

knowledge of the parties concerned when all the requisites mentioned in Article 1279
of the Civil Code are present.26 This is in consonance with Article 1290 of the Civil
Code which provides that:

Q And in fact you have issued checks to cover for this account?

Article 1290. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguishes both debts to the
concurrent amount, even though the creditors and debtors are not aware of the
compensation.

A Yes.

Since it takes place ipso jure,

all its requisites are fulfilled.28

27

when used as a defense, it retroacts to the date when

Article 1279 provides that in order that compensation may be proper, it is necessary:
(1) that each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) that both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) that the two debts be due;
(4) that they be liquidated and demandable;
(5) that over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
Here, petitioners stance is that legal compensation has taken place and operates
even against the will of the parties because: (a) respondent and petitioner were
personally both creditor and debtor of each other; (b) the monetary obligation of
respondent was P566,000.00 and that of the petitioner was P500,000.00 showing that
both indebtedness were monetary obligations the amount of which were also both
known and liquidated; (c) both monetary obligations had become due and
demandablepetitioners obligation as shown in the deed of sale and respondents
indebtedness as shown in the dishonored checks; and (d) neither of the debts or
obligations are subject of a controversy commenced by a third person.
While the proceedings in the RTC focused on ascertaining the presence of the
elements of dacion en pago, it was likewise proven that petitioner owed respondent
the amount of P500,000.00 while respondent owed petitionerP566,000.00; that both
debts are due, liquidated and demandable, and; that neither of the debts or
obligations are subject of a controversy commenced by a third person.
Respondent in her cross-examination categorically admitted that she is indebted to
petitioner as follows:
Q But you will admit that you have borrowed several times from Mr. Trinidad some
money?
A Yes.

A Yes.
Q There were several checks you have issued, right?

Q And all of these checks bounced?

A Yes.29
xxxx
Q x x x It is now very clear, Mrs. Acapulco, that at the time you executed a deed of
absolute sale of the car in favor of Hermenegildo Trinidad you have an outstanding
account with him in the amount of P566,000.00?
A Yes.30
Ignoring this admission would only result in added burden to petitioner as well as the
courts as petitioner will be forced to file a separate case for collection of sum of
money just so he could enforce his right to collect from respondent. This is precisely
what compensation seeks to avoid as its aim is to prevent unnecessary suits and
31
payments through the mutual extinction of concurring debts by operation of law.
The claim of respondent that there could be no legal compensation in this case as
one of the obligations consists of delivery of a car and not a sum of money must also
fail. Respondent sold the car to petitioner on March 4, 1991 for P500,000.00 while
she filed her complaint for nullification of the sale only on May 6, 1991. As legal
compensation takes place ipso jure, and retroacts to the date when its requisites are
fulfilled, legal compensation has already taken place at the time of the sale. At such
time, petitioner owed respondent the sum of P500,000.00 which is the price of the
vehicle.
Consequently, by operation of law, the P500,000.00 which petitioner owed
respondent is off-set against theP566,000.00 owed by respondent to petitioner,
leaving a balance of P66,000.00, which respondent should pay with 12% interest per
annum from date of judicial or extrajudicial deed. 32 Since there was no extrajudicial
deed in this case, the interest shall be resolved from the date petitioner filed its
Supplemental Motion for Reconsideration invoking for the first time legal
compensation, that is, May 20, 1992.33
Finally, the Court agrees with petitioner that the trial court erred in awarding damages
in favor of respondent.
In order that moral damages may be awarded, there must be pleading and proof of
moral suffering, mental anguish, fright and the like, and while no proof of pecuniary
loss is necessary in order that moral damages may be awarded, it is nevertheless
essential that the claimant should satisfactorily show the existence of the factual basis
of damages and its causal connection to defendants acts.34 Claims must be
35
substantiated by clear and convincing proof and there must be clear testimony on
the anguish and other forms of mental sufferings as mere allegations will not

36

suffice. Allegations of besmirched reputation, embarrassment and sleepless nights

are insufficient for it must be shown that the proximate cause thereof was the unlawful
act or omission of the opposing party.37
Indeed, for a court to arrive upon a judicious approximation of emotional or moral
injury, competent and substantial proof of the suffering experienced must be laid
before it.38 There must be definite findings as to what the supposed moral damages
suffered consisted of.39 The award of moral damages must be solidly anchored on a
definite showing that the claiming party actually experienced emotional and mental
40
sufferings.
In this case, respondent merely testified that after petitioner refused the payment of
the car as well as its return, she was very much worried, which if converted into
monetary amount is equivalent to P200,000.00.41 We deem such testimony
insufficient to warrant the award of moral damages.
Similarly, in order that exemplary damages may be awarded, it must be shown that
the wrongful act was accompanied by bad faith or done in a wanton, fraudulent,
reckless or malevolent manner. 42 Exemplary damages are also allowed only in
addition to moral damages such that no exemplary damage can be awarded unless
the claimant first establishes his clear right to moral damages. 43 As moral damages
are improper in the present case, so is the award of exemplary damages.
The decision of the trial court also does not mention the reason for the award of
attorneys fees and the award was simply contained in the dispositive portion of the
decision. Again, the trial court erred on this score as it must explicitly state in the body
of its decision and not only in the dispositive portion thereof the legal reason for the
award of attorneys fees.44
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated
February 16, 2001 is REVERSED and SET ASIDE. The P500,000.00 which
Hermenegildo M. Trinidad owed Estrella Acapulco is offset against the P566,000.00
which Acapulco owed Trinidad. Acapulco is ordered to pay Trinidad the amount
ofP66,000.00 plus interest at 12% per annum from May 20, 1992 until full payment.
SO ORDERED.

G.R. No. 164791

June 29, 2010

SELWYN F. LAO and EDGAR MANANSALA, Petitioners,

vs.
SPECIAL PLANS, INC., Respondent.
DECISION
DEL CASTILLO, J.:
In Roman Law, compensation was the reciprocal extinction of claims between mutual
debtors. In the earlier stages of that system the practice did not exist as a matter of
right but its application was discretionary with thejudex. Later the praetor applied it by
incorporating into the formula, which he prepared for the judex, an exceptiondoli, that
is, an authorization to take into account any circumstances which would render
inequitable the enforcement of the claim. The effect was to cause a dismissal of the
claim, however large, if a counterclaim, however small, was proven and the indirect
result was to compel the actor (plaintiff) to deduct the counterclaim in advance. 1
Factual Antecedents
Petitioners Selwyn F. Lao (Lao) and Edgar Manansala (Manansala), together with
Benjamin Jim (Jim), entered into a Contract of Lease2 with respondent Special Plans,
Inc. (SPI) for the period January 16, 1993 to January 15, 1995 over SPIs building at
No. 354 Quezon Avenue, Quezon City. Petitioners intended to use the premises for
their karaoke and restaurant business known as "Saporro Restaurant".
Upon expiration of the lease contract, it was renewed for a period of eight months at a
rental rate of P23,000.00 per month.
On June 3, 1996, SPI sent a Demand Letter 3 to the petitioners asking for full payment
of rentals in arrears.
Receiving no payment, SPI filed on July 23, 1996 a Complaint 4 for sum of money with
the Metropolitan Trial Court (MeTC) of Quezon City, claiming that Jim and petitioners
have accumulated unpaid rentals of P118,000.00 covering the period March 16, 1996
to August 16, 1996.
After service of summons, petitioners filed their Verified Answer 5 faulting SPI for
making them believe that it owns the leased property. They likewise asserted that SPI
did not deliver the leased premises in a condition fit for petitioners intended use.
Thus, petitioners claimed that they were constrained to incur expenses for necessary
repairs as well as expenses for the repair of structural defects, which SPI failed and
refused to reimburse. Petitioners prayed that the complaint be dismissed and
judgment on their counterclaims be rendered ordering SPI to pay them the sum
of P422,920.40 as actual damages, as well as moral damages, attorneys fees and
exemplary damages.
After the issues were joined, trial on the merits ensued. As culled from the MeTC
Decision, the following account was presented by SPI:
Delfin Cruz, president of Special Plans, Inc. testified that on January 7, 1993, plaintiffcorporation and herein defendants entered into a two-year Contract of Lease (Exhibit
"A" inclusive, with sub-markings) starting January 16, 1993 until January 15, 1995,
involving a portion of said plaintiff-corporations office building which used to be the
Bahay Namin Food and Drinks at 354 Quezon Avenue, Quezon City. Defendants
used the leased premises for their karaoke and restaurant business known as

Saporro Restaurant. Upon [expiration of the lease], defendants, through defendant

Lao requested in writing (Exhibit "B") for a renewal of the contract of lease, but
plaintiff-corporation agreed only for an eight-month extension of [the] contract with all
its terms and conditions on a month-to-month basis at a monthly rental of P23,000.00.
This witness further testified that while defendants paid the sum of P23,000.00 in
August 1996 they nevertheless failed to pay the agreed rental since March 16, 1996,
thus the accumulated unpaid rentals shot up toP118,000.00. Plaintiff-corporation
demanded upon defendants payment therefor in a letter dated June 3, 1996 (Exhibit
"D" inclusive with sub-markings).
On cross, Delfin Cruz admitted that plaintiff-corporation did not inform defendants that
it was not the owner of the leased premises during the signing of the contract of lease
and that said defendants did not inform him of the structural defects of the subject
premises, including the repair works conducted thereon.
Antonio San Mateo, vice-president for legal affairs of plaintiff-corporation, averred that
he made the demand to pay upon defendants for their failure to settle their agreed
monthly rentals starting March 16, 1996 to August 15, 1996; and that for the period
covering September 16, 1995 to October 15, 1995, defendants paid onlyP20,000.00,
hence, the balance of P3,000.00 (Exhibit "E").6
In their defense, Jim and petitioners proffered the following:
Meanwhile, defendant Benjamin Jim testified that he was one of the signatories [to]
the original contract of lease involving the subject premises whose facilities, including
the roof, were already dilapidated: thus prompting the group to renovate the same.
After a year of operation, Saporro lost so he decided to back out but defendant Lao
convinced him to stay with the group for another x x x year. But the business lost
even more so he finally called it quits with the consent of the group. He pulled out his
audio-video equipment, refrigerator, and air-conditioning unit on January 2, 1995,
thirteen (13) days before the expiration of the contract of lease. He further denied
having signed the request for the extension of the contract.1avvphi1
On cross, he stated that he did not sign documents for and in behalf of Saporro; and,
that he allowed defendant Lao and Victor San Luis to sign for the group.
Testifying for defendant Jim, Atty. Maria Rosario Carmela Nova declared that
defendant Jim sought her services on August 30, 1996 for the recovery of his money
invested at Mount Fuji and Saporro but Atty. Cesa, who acted as counsel for
defendants Lao and Manansala, refused to return the same in a letter-reply dated
September 23, 1996 (Exhibit "1-Jim" inclusive with sub-markings).
Defendant Selwyn Lao testified that the group was not able to inspect the leased
premises since Delfin Cruz had no key thereon during the signing of the contract of
lease on January 7, 1993. He stated that paragraph 6 of the said contract provides
that the LESSEE shall maintain the leased premises, including the parking lot, in
good, clean and sanitary condition and shall make all necessary repairs thereon at his
own expense except repairs of structural defects which shall be the responsibility of
the LESSOR (Exhibit "1-Lao and Manansala"). When the group took possession of
the leased premises on January 16, 1993, the equipment and furniture, among
others, were found to be not in good condition. The trusses, roof and ceiling of the
premises were already dilapidated. Rain seeped through the floor. When the group
talked with Delfin Cruz about the condition of the leased property, the latter would just
tell the former not to worry about it.

The group conducted structural and necessary repairs thereon, thus incurring the
sum of P545,000.00 (Exhibit "2-Lao and Manansala" inclusive, with submarkings), P125,000.00 of which was spent on structural defects, as follows:
Roofing repair - P 45,000.00 (Exhibit "2-A")

FROM THE GOING MILLIEU, premises considered, the lower courts (Branch 38)
decision dated December 15, 1999 is modified to the effect that Defendants Selwyn
Lao and Edgar Manansala are ordered to pay to the plaintiff-corporation the amount
of Ninety Five Thousand (P95,000.00) pesos for unpaid rentals. With respect to the
other aspect of the decision, there being no cogent reason to disturb the lower courts
ruling, the same stands.

Ceiling repair - 50,000.00 (Exhibit "2-B")

Flooring repair - 20,000.00 (Exhibit "2-C")
Waterproofing - 10,000.00 (Exhibit "2-D")
Defendant Lao further testified that Delfin Cruz told him to proceed with the repair
work without informing him (Lao) that plaintiff-corporation was not the owner of the
leased premises. The witness added that the group paid the sum of P23,000.00 on
July 21, 1996 for the period March 16, 1996 to April 15, 1996.
On cross, he averred that he sought the expertise of Gregorio Tamayo to repair the
premises for P545,000.00; and that he had a verbal authority to sign for and in behalf
of defendant Jim who took his audio-video equipment on January 2, 1996.
Presented at the witness stand to testify for defendant Lao and Manansala, Gregorio
Tamayo admitted that defendant Lao sought his services to undertake both structural
and finishing works on the subject property at a cost of P545,00.00.
On cross, he declared that he was the subcontractor of defendant Lao.

Ruling of the Metropolitan Trial Court

8

On December 15, 1999,the MeTC rendered its Decision finding that the unpaid
rentals stood at only P95,000.00. It also found that SPI is solely responsible for
repairing the structural defects of the leased premises, for which the petitioners
spent P125,000.00. It held that even assuming that petitioners did not notify SPI
about the structural defects and the urgency to repair the same, Article 1663 of the
Civil Code allows the lessee to make urgent repairs in order to avoid an imminent
danger at the lessors cost. Hence, the MeTC dismissed the complaint for lack of
cause of action. The dispositive portion of the Decision reads:
Wherefore, in view of the foregoing considerations, let this case be, as it is, hereby
ordered DISMISSED for lack of cause of action. No costs.
The counterclaim and cross-claim of the defendants are likewise DENIED for lack of
merit.
SO ORDERED.

14

On March 12, 2001, the RTC rendered a Decision affirming with modification the
MeTC Decision by ordering petitioners to pay SPI the amount of P95,000.00 for
unpaid rentals.15 The RTC disagreed with the MeTC on the aspect of off-setting the
amount allegedly spent by petitioners for the repairs of the structural defects of
subject property with their unpaid rentals. The dispositive portion of the RTC Decision
reads:

Ruling of the Regional Trial Court

Aggrieved, SPI filed an appeal before the RTC of Quezon City. Both parties filed their
10
respective memoranda. However, on November 24, 2000, counsel for SPI filed his
Withdrawal of Appearance11 with the conformity of SPI, through its Vice President
Antonio L. San Mateo.12 In an Order13 dated January 5, 2001, the RTC granted the
Withdrawal of Appearance and ordered that all notices, orders and other court
processes in the case be forwarded to SPI at its address at 354 Quezon Avenue,
Quezon City.

SO ORDERED.16
Ruling of the Court of Appeals
On April 25, 2003, petitioners Lao and Manansala filed a Petition for Review with the
CA.17 Jim did not join them. Hence, the appealed Decision of the RTC had become
final insofar as Jim is concerned.
On June 30, 2003, the CA rendered a Decision18 affirming in toto the RTC Decision.
Petitioners moved for reconsideration, but it was denied in a Resolution 19 dated
August 9, 2004.
Issues
Petitioners do not take issue that the unpaid rentals amount to P95,000.00.

20

Nonetheless, they assert that the amount of P545,000.00 they spent for
repairs, P125,000.00 of which was spent on structural repairs, should be judicially
compensated against the said unpaid rentals amounting toP95,000.00.21 On the other
hand, SPI avers that petitioners have not shown proof that they spent these
22
amounts.
Our Ruling
The petition is without merit.
The Civil Code provides that compensation shall take place when two persons, in
their own right, are creditors and debtors of each other. 23 In order for compensation to
be proper, it is necessary that:
1. Each one of the obligors be bound principally and that he be at the same
time a principal creditor of the other;
2. Both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
3. The two debts are due:
4. The debts are liquidated and demandable;
5. Over neither of them be any retention or controversy, commenced by third
parties and communicated in due time to the debtor. 24

Petitioners failed to properly discharge their burden to show that the debts are
liquidated and demandable. Consequently, legal compensation is inapplicable.
A claim is liquidated when the amount and time of payment is fixed. 25 If
acknowledged by the debtor, although not in writing, the claim must be treated as
26
liquidated. When the defendant, who has an unliquidated claim, sets it up by way of
counterclaim, and a judgment is rendered liquidating such claim, it can be
compensated against the plaintiffs claim from the moment it is liquidated by
judgment.27 We have restated this in Solinap v. Hon. Del Rosario28 where we held
that compensation takes place only if both obligations are liquidated.

A: I was able to repair the defects but it caused me a lot of time and money
because usually repairs cannot be controlled and my expenses reached
more than P500,000.00.
Q: I am showing to you a document can you please go over it and identify it
if this is the document?
A: This is the contract signed by me and the sub-contractor who was
assigned to renovate and prepare the whole structure.
Q: According to this document you submitted a quotation?

In addition, paragraph 6 of the contract of lease between the petitioners and the
respondent reads:

A: Yes, sir.

The lessee shall maintain the leased premises including the parking lot in good, clean
and sanitary condition andshall make all the necessary repairs thereon at their own
expense except repairs of the structural defects which shall be the responsibility of
the lessor. x x x (Emphasis supplied)

A: The signature of an engineer/contractor, sir.

As the contract contrastingly treats necessary repairs, which are on the account of the
lessee, and repairs of structural defects, which are the responsibility of the lessor,
the onus of the petitioners is two-fold: (1) to establish the existence, amount and
demandability of their claim; and (2) to show that these expenses were incurred in the
repair of structural defects.

A: It was indicated here that the roofing repair works costs

around P45,000.00; the ceiling repair works isP50,000.00; the floor repair
works is P50,000.00; and the water proofing works is P10,000.00.

Respecting these issues, petitioner Lao testified as follows:29

Q: When you took possession of the premises on January 16, 1993, were
you able to notice or discover anything about the structure of the premises, if
any?
A: Being an engineer, when I took possession of the premises I have noticed
the structure of the premises specially the trusses and the roof and the
ceiling were already dilapidated.
Q: What else if any were you able to discover?
A: We discovered that when it is raining, water [seeped] through the floor
and it caused a lot of mess especially the carpet getting wet.
Q: What did you do next after having discovered the defects in the
premises?
A: I tried to talk to Mr. Cruz regarding our position because based on our
agreement the rental is high because according to him we can move in
immediately without so much cost to our company thats why the 3 of us
came up only with P120,000.00 for the immediate operation of the Karaoke
but Mr. Cruz told us never mind, pag-usapan na natin sa ibang araw yan.
Q: What happened next after you were [able] to talk to Mr. Cruz?
A: The group decided not to waste time because our rental expenses are
already running so, we decided that I will [be] the one to shoulder first the
construction and repair of the premises.
Q: How much did you spend and were you able to repair the defects?

Q: And whose signature appears above the name Gregorio Tamayo?

Q: Among the list of scope of work can you please specify the repairs done x
x x.

Q: And what happened to the repairs?

A: It was completed, sir.
xxxx
Q: All in all how much did it cost you in Exh. "2"?
A: More than P500,00.00 sir.
xxxx
Q: With respect to the roofing repair works, the ceiling repair works, the
flooring repair works and the water proofing works, all in all how much is
total amount you incurred in these repairs?
A: P 140,000.00 sir
xxxx
Q: And, what happened next after informing the lessor.
A: He told me that I being an engineer/contractor, just proceed with the
repair works and then he said, saka na lang pag-usapan yan maliit lang
naman na bagay yan.
Q: Were you able to talk to him some other day with respect to these
repairs?
A: Yes, sir.
Q: What happened when you were able to talk to Mr. Cruz?
A: He is shy on us sometime but dont talk to us, sir.

On the basis of Laos testimony, the MeTC found that "the group conducted structural
and necessary repairs thereon, incurring the sum of P545,000.00, P125,000.00 of
which was spent on structural defects."

In its Memorandum, SPI prays that petitioners be ordered to pay 3% interest monthly
as stipulated in the Contract for Lease, plus attorneys fees. However, as SPI did not
appeal the RTC Decision before the appellate court, we cannot act on the same.

We are not persuaded. The evidence presented by the petitioners failed to establish
by preponderant evidence that they have indeed spent the amounts they claim.
Based on the arguments presented by both parties, we agree with the observation of
the CA that:

It is well-settled that a party who has not appealed from a Decision cannot seek any
32
relief other than what is provided in the judgment appealed from. SPI did not appeal,
thus it cannot obtain from the appellate court any affirmative relief other than those
granted in the Decision of the court below.33 It can only advance any argument that it
may deem necessary to defeat petitioners claim or to uphold the Decision that is
being disputed, and it can assign errors in its brief if such is required to strengthen the
views expressed by the court a quo.34 These assigned errors, in turn, may be
considered by the appellate court solely to maintain the appealed decision on other
grounds, but not for the purpose of reversing or modifying the judgment in SPI's favor
and giving it other reliefs.351avvphi1

Petitioners did not present any convincing evidence of proof which could support their
allegation on structural defects and the subsequent repairs made on the leased
premises, i.e. documentary evidence (receipts of payments made to subcontractor
Tamayo for the repairs made on the building) except for the self-serving testimony of
petitioner Lao. They (petitioners) merely submitted an estimated statement of account
which did not show that there were actual expenses made for the alleged structural
defects. Neither were they able to submit proofs of actual expenses made on the
alleged structural defects. Besides, it is contrary to human experience that a lessee
would continually renew the lease contract if the subject property were not in good
condition free from structural defects.
Further, the testimony of Tamayo, the alleged subcontractor who made the repairs on
the leased premises did not convince Us that there were repairs made thereat since
he failed to present any receipts of acknowledgments of payments which was
30
allegedly made to him.
Further manifesting the present appeals lack of merit, petitioner Lao, as shown above
in his testimony, did not define the lessors and the lessees understanding of the
demarcation between "repairs of structural defects" and "necessary repairs." Even
petitioners second witness, Gregorio Tamayo, the contractor who supposedly
performed the repair work on the leased premises, did not credibly and categorically
testify on classification of structural repairs:
Q: Insofar as you are concerned, what do you mean by structural?
A: Because when I inspect the building
Q: In this room, what is the structural defect?
A: Rocks on the wall.
Q: It has something to do with the foundation?
A: Maybe, sir.31 (Emphasis supplied)
The petitioners attempted to prove that they spent for the repair of the roofing, ceiling
and flooring, as well as for waterproofing. However, they failed to appreciate that, as
per their lease contract, only structural repairs are for the account of the lessor, herein
respondent SPI. In which case, they overlooked the need to establish that aforesaid
repairs are structural in nature, in the context of their earlier agreement. It would have
been an altogether different matter if the lessor was informed of the said structural
repairs and he implicitly or expressly consented and agreed to take responsibility for
the said expenses. Such want of evidence on this respect is fatal to this appeal.
Consequently, their claim remains unliquidated and, legal compensation is
inapplicable.
For failure to timely appeal the RTC Decision before the CA and subsequently the
latters Decision before this Court, SPI can no longer ask for affirmative reliefs.

We find on record that SPIs counsel, with the concurrence of its Vice President,
withdrew his appearance on November 24, 2000. The RTC granted said withdrawal in
its Order dated January 5, 2001. Subsequently, the case was decided by the RTC
and appealed by the petitioners to the CA. In due time, the CA rendered judgment on
the same and petitioners filed this Petition for Review on Certiorari. SPI did not
interpose an appeal from the RTC Decision nor from the CA Decision. After more
than six years, on September 13, 2007, a new law firm entered its appearance as
counsel of SPI.36 SPI now claims that it was not able to appeal the Decision of the
RTC and subsequently of the CA which failed to impose 3% monthly interest as
provided in the Contract of Lease because it never received said Decisions,
considering that its counsel has migrated to another country and that petitioners
misled the courts about SPIs address.37
We are not persuaded. SPI failed to exercise due diligence in keeping itself updated
on the developments of the case. That its erstwhile counsel has not communicated
for a long period of time and has migrated abroad, should have cautioned it that
something was amiss with the case. By that time, SPI should have initiated moves to
locate its counsel or to inquire from the court on the progress of the case. It should
have ensured that its address on record with the court is updated and current. Thus, it
has been equally stressed that litigants represented by counsel should not expect that
all they need to do is sit back, relax and await the outcome of the case.38 Instead,
they should give the necessary assistance to their counsel and exercise due diligence
to monitor the status of the case for what is at stake is ultimately their interest.
WHEREFORE, the instant petition is DENIED. The June 30, 2003 Decision of the
Court of Appeals in CA-G.R. SP No. 76631 ordering the petitioners to pay P95,000.00
as unpaid rentals and the August 9, 2004 Resolution denying the motion for
reconsideration are AFFIRMED.
SO ORDERED.

G.R. No. 172020

December 6, 2010

TRADERS ROYAL BANK, Petitioner,

vs.
NORBERTO CASTAARES and MILAGROS CASTAARES, Respondents.
DECISION
VILLARAMA, JR., J.:
Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil Procedure,
as amended, is the Decision1 dated January 11, 2006 of the Court of Appeals (CA) in
2
CA-G.R. CV No. 67257 which reversed the Joint Decision dated August 26, 1998 of
the Regional Trial Court (RTC) of Cebu City, Branch 13 in Civil Case Nos. R-22608
and CEB-112.
The Facts
Respondent-spouses Norberto and Milagros Castaares are engaged in the business
of exporting shell crafts and other handicrafts. Between 1977 and 1978, respondents
obtained
from
petitioner
Traders
Royal
Bank
various
loans
and
creditACCOMMODATIONS . Respondents executed two real estate mortgages
(REMs) dated April 18, 1977 and January 25, 1978 covering their properties (TCT
Nos. T-38346, T-37536, T-37535, T-37192 and T-37191). As evidenced by
Promissory Note No. BD-77-113 dated May 10, 1977, petitioner released only the
amount of P35,000.00 although the mortgage deeds indicated the principal amounts
as P86,000.00 andP60,000.00.3
Respondents were further granted additional funds on various dates under
promissory notes4 they executed in favor of the petitioner:
Type of Loan

Date Granted

Amount

the second quarter of 1978, the loans began to mature and the letters of credit
against which the packing advances were granted started to expire. Meanwhile, on
December 7, 1979, petitioner, without notifying the respondents, applied to the
payment of respondents outstanding obligations the sum of $4,220.00 or P30,930.49
which was remitted to the respondents thru telegraphic transfer from AMROBANK,
Amsterdam by one Richard Wagner. The aforesaid entries in the passbook of
respondents and the $4,220.00 telegraphic transfer were the subject of respondents
letter-complaint5 dated September 20, 1982 addressed to the Manager of the
Regional Office of the Central Bank of the Philippines.
For failure of the respondents to pay their outstanding loans with petitioner, the latter
proceeded with the extrajudicial foreclosure of the real estate mortgages. 6 Thereafter,
a Certificate of Sale7 covering all the mortgaged properties was issued by Deputy
Sheriff Wilfredo P. Borces in favor of petitioner as the lone bidder forP117,000.00
during the auction sale conducted on November 24, 1981. Said certificate of sale was
registered with the Office of the Register of Deeds on February 4, 1982.
On November 24, 1982, petitioner instituted Civil Case No. R-22608 for deficiency
judgment, claiming that after applying the proceeds of foreclosure sale to the total
unpaid obligations of respondents (P200,397.78), respondents were still indebted to
petitioner for the sum of P83,397.68.8 Respondents filed their Answer With
Counterclaim on December 27, 1982.9
On February 10, 1983, respondents filed Civil Case No. CEB-112 for the recovery of
the sums of P2,584.27 debited from their savings account passbook and the
equivalent amount of $4,220.00 telegraphic transfer, and in addition, $55,258.85
representing the damage suffered by the respondents from letters of credit left unnegotiated because of petitioners refusal to pay the $4,220.00 demanded by the
respondents.10
The cases were consolidated before Branch 13, RTC of Cebu City.
Ruling of the RTC
11

Packing Credit May 10, 1977

P19,000.00

In a Joint Decision
as follows:

Packing Credit May 18, 1977

P25,000.00

Packing Credit June 23, 1977

P12,500.00

WHEREFORE, in view of the foregoing, judgment is hereby rendered in Civil Case

No. R-22608 in favor of the plaintiff and against the defendants directing the
defendants jointly and solidarily to pay plaintiff the sum ofP83,397.68 with legal rate of
interest to be computed from November 24, 1981 (the date of the auction sale) until
full payment thereof. They are likewise directed to pay plaintiff attorneys fees in the
sum of P10,000.00 plus litigation expenses in the amount of P2,500.00.

Packing Credit August 19, 1977 P 2,900.00

Packing Credit April 4, 1978

P18,000.00

Packing Credit April 19, 1978

P23,000.00

On June 22, 1977, petitioner transferred the amount of P1,150.00 from respondents
current account to their savings account, which was erroneously posted as P1,500.00
but later corrected to reflect the figure P1,150.00 in the savings account passbook. By

dated August 26, 1998, the RTC ruled in favor of the petitioner,

With cost against defendants.

In CEB-112, judgment is hereby rendered dismissing the complaint.
With cost against the plaintiff.
SO ORDERED.12
The trial court found that despite respondents insistence that the REM covered only a
separate loan forP86,000.00 which they believed petitioner committed to lend them,
the evidence clearly shows that said REM was constituted as security for all the
promissory notes. No separate demand was made for the amount of P86,000.00
stated in the REM, as the demand was limited to the amounts of the promissory

notes. The trial court further noted that respondents never questioned the judgment
for extrajudicial foreclosure, the certificate of sale and the deficiency in that case. 13
With respect to the passbook entries, the trial court stated that no objection thereto
was made by the respondents until five years later when in a letter dated August 10,
1982, respondents counsel asked petitioner to be enlightened on the matter. Neither
did respondents protest the application of the balance (P1,150.00) in the passbook to
his account with petitioner. More important, respondent Norberto Castaares in his
testimony admitted that the matter was already clarified to him by petitioner and that
the latter had the right to apply his deposit to his loan accounts. Admittedly, his
complaint has to do more with the lack of consent on his part and the non-issuance of
official receipt. However, he did not follow up his request for official receipt as he did
not want to be going back and forth to the bank. 14
CA Ruling
With the trial courts denial of their motion for reconsideration, respondents appealed
to the CA. Finding merit in respondents arguments, the appellate court set aside the
trial courts judgment under its Decision15 dated January 11, 2006, thus:
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us
GRANTING the appeal filed in this case and REVERSING AND SETTING ASIDE the
Joint Decision dated August 26, 1998, Regional Trial Court, 7th Judicial Region,
Branch 13, in Civil Case No. R-22608 and Civil Case No. CEB-112. With regard to
Civil Case No. R-22608, the real estate mortgage dated April 18, 1977 is hereby
DECLARED as valid in part as to the amount of P35,000.00 actually released in favor
of appellants, while the real estate mortgage dated January 26, 1978 is hereby
declared as null and void. Furthermore, in Civil Case No. CEB-112, TRB is hereby
ordered to release the amount of US$4,220.90 to the appellants at its current rate of
exchange. No pronouncement as to costs.
SO ORDERED.16
The CA held that the RTC overlooked the fact that there were no adequate evidence
presented to prove that petitioner released in full to the respondents the proceeds of
the REM loan. Citing Filipinas Marble Corporation v. Intermediate Appellate
Court17 and Naguiat v. Court of Appeals,18 the appellate court declared that where
there was failure of the mortgagee bank to deliver the consideration for which the
mortgage was executed, the contract of loan was invalid and consequently the
accessory contract of mortgage is likewise null and void. In this case,
only P35,000.00 out of the P86,000.00 stated in the REM dated April 18, 1977 was
released to respondents, and hence the REM was valid only to that extent. For the
same reason, the second REM was null and void since no actual loan proceeds were
released to the respondents-mortgagors. The REMs are not connected to the
subsequent promissory notes because these were signed by respondents for the sole
purpose of securing packing credits and export advances. Further citing Acme Shoe,
19
Rubber and Plastic Corp. v. Court of Appeals, the CA stated that the rule is that a
pledge, real estate mortgage or antichresis may exceptionally secure after-incurred
obligations only as long as these debts are accurately described therein. In this case,
neither of the two REMs accurately described or even mentioned the securing of
future debts or obligations.20
The CA thus held that petitioners remedy would be to file a collection case on the
unpaid promissory notes which were not secured by the REMs.

As to the $4,220.00 telegraphic transfer, the CA ruled that petitioner had no basis for
withholding and applying the said amount to respondents loan account. Said
transaction was separate and distinct from the contract of loan between petitioner and
respondents. Petitioner had no authority to convert the said telegraphic transfer into
cash since the participation of respondents was necessary to sign and indorse the
disbursement voucher and check. Moreover, petitioner was not transparent in its
actions as it did not inform the respondents of its intention to apply the proceeds of
the telegraphic transfer to their loan account and worse, it did not even present an
official receipt to prove payment. Section 5 of Republic Act No. 6426, otherwise
known as the Foreign Currency Deposit Act, provides that there shall be no restriction
on the withdrawability by the depositor of his deposit or the transferability of the same
abroad except those arising from contract between the depositor and the bank. 21
The Petition
Petitioner raised the following grounds in the review of the CA decision:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE REAL
ESTATE MORTGAGE DATED 18 APRIL 1977 IS VALID ONLY IN PART
TO THE EXTENT OF PHP35,000.00 WHICH IS ALLEGEDLY THE
AMOUNT PROVED TO HAVE BEEN ACTUALLY RELEASED TO
RESPONDENTS OUT OF THE SUM OF PHP86,000.00.
II. THE COURT OF APPEALS ERRED IN DECLARING AS NULL AND
VOID THE REAL ESTATE MORTGAGE DATED 26 JANUARY 1978 IN
THAT NO ACTUAL LOAN PROCEEDS WERE RELEASED IN FAVOR OF
THE RESPONDENTS.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER
HAD NO BASIS IN WITHHOLDING AND SUBSEQUENTLY APPLYING IN
PAYMENT OF RESPONDENTS OVERDUE ACCOUNT IN THE
TELEGRAPHIC TRANSFER IN THE AMOUNT OF U.S.$4,220.00. 22
Petitioner contends that the CA overlooked the specific stipulation in the REMs that
the mortgage extends not only to the amounts specified therein but also to loans or
credits subsequently granted, which include the packing credits and export advances
obtained by the respondents. Moreover, the amounts indicated on the REMs need not
exactly be the same amounts that should be released and covered by checks or
credit memos, the same being only the maximum sum or "ceiling" which the REM
secures, as explained by petitioners witness, Ms. Blesy Nemeo. Her testimony does
not prove that the proceeds of the loans were not released in full, as no credit memos
in the specific amounts received by the respondents can be presented.
Petitioner argues that the rulings cited by the CA do not at all support its conclusion
that the promissory notes were totally unrelated to the REMs. In the Acme case, the
pronouncement was that the after-incurred obligations must, at the time they are
contracted, only be accurately described in a proper instrument as in the case of a
promissory note. The confusion was brought by the use in the CA decision of the
word "therein" which is not found in the text of the Acme ruling. Besides, it is way too
impossible that future loans can be accurately described, as the CA opined, at the
time that a deed of real estate mortgage is executed. The CAs reliance on the case
of Filipinas Marble Corporation, is likewise misplaced as it finds no application under
the facts obtaining in the present case. The misappropriation by some individuals of
the loan proceeds secured by petitioner was the consideration which compelled this
Court to rule that there was failure on the part of DBP to deliver the consideration for

which the mortgage was executed. Similarly, the case of Naguiat is inapplicable in
that there was evidence that an agent of the creditor withheld from the debtor the
checks representing the proceeds of the loan pending delivery of additional collateral.
Finally, petitioner reiterates that it had the right by way of set-off the telegraphic
transfer in the sum of $4,220.00 against the unpaid loan account of respondents.
Citing Bank of the Philippine Islands v. Court of Appeals, 23petitioner asserts that they
are bound principally as both creditors and debtors of each other, the debts consisting
of a sum of money, both due, liquidated and demandable, and are not claimed by a
third person. Hence, the RTC did not err in holding that petitioner validly applied the
amount of P30,930.20 (peso equivalent of $4,220.00) to the loan account of the
respondents.
Our Ruling
We rule for the petitioner.
The subject REMs contain the following provision:
That, for and in consideration of certain loans, overdrafts and other credit
accommodations obtained, from the Mortgagee by the Mortgagor and/or SPS.
NORBERTO V. CASTAARES & MILAGROS M. CASTAARES and to secure the
payment of the same, the principal of all of which is hereby fixed at EIGHTY-SIX
THOUSAND PESOS ONLY (P86,000.00) Pesos, Philippine Currency, as well as
those that the Mortgagee may hereafter extend to the Mortgagor x x x, including
interest and expenses or any other obligation owing to the Mortgagee, whether direct
or indirect, principal or secondary, as appears in the accounts, books and records of
the Mortgagee x x x.24(Emphasis supplied.)
The above stipulation is also known as "dragnet clause" or "blanket mortgage clause"
in American jurisprudence that would subsume all debts of past and future origins. It
has been held as a valid and legal undertaking, the amounts specified as
consideration in the contracts do not limit the amount for which the pledge or
mortgage stands as security, if from the four corners of the instrument, the intent to
secure future and other indebtedness can be gathered. A pledge or mortgage given
to secure future advancements is a continuing security and is not discharged by the
repayment of the amount named in the mortgage until the full amount of all
25
advancements shall have been paid.
A "dragnet clause" operates as a convenience and accommodation to the borrowers
as it makes available additional funds without their having to execute additional
security documents, thereby saving time, travel, loan closing costs, costs of extra
legal services, recording fees, et cetera. 26 While a real estate mortgage may
exceptionally secure future loans or advancements, these future debts must be
sufficiently described in the mortgage contract. An obligation is not secured by a
27
mortgage unless it comes fairly within the terms of the mortgage contract.
In holding that the REMs were null and void, the CA opined that the full amount of the
principal loan stated in the deed should have been released in full, sustaining the
position of the respondents that the promissory notes were not secured by the
mortgage and unrelated to it. However, a reading of the afore-quoted provision of the
REMs shows that its terms are broad enough to cover packing credits and export
advances granted by the petitioner to respondents. That the respondents
subsequently availed of letters of credit and export advances in various amounts as
reflected in the promissory notes, buttressed the claim of petitioner that the amounts

of P86,000.00 and P60,000.00 stated in the REMs merely represent the maximum
total loans which will be secured by the mortgage. This must be so as respondents
confirmed that the mortgage was constituted for the purpose of obtaining additional
capital as dictated by the needs of their export business. Significantly, no complaint
was made by the respondents as to the non-release of P86,000.00 and P60,000.00,
in full, simultaneous or immediately following the execution of the REMs -- under a
single promissory note each equivalent to the said sums -- and no demand for the
said specific amounts was ever made by the petitioner. Even the letter-complaint sent
by respondents to the Central Bank almost a year after the extrajudicial foreclosure
sale mentioned only the questioned entries in their passbook and the $4,220.00
telegraphic transfer. Considering that respondents deemed it a serious "banking
malpractice" for petitioner not to release in full the loan amount stated in the REMs, it
can only be inferred that respondents themselves understood that the P86,000.00
and P60,000.00 indicated in the REMs was intended merely to fix a ceiling for the
loan accommodations which will be secured thereby and not the actual principal loan
to be released at one time. Thus, the RTC did not err in upholding the validity of the
REMs and ordering the respondents to pay the deficiency in the foreclosure sale to
satisfy the remaining mortgage indebtedness.
The cases relied upon by the CA are all inapplicable to the present
controversy.lawph!1 In Filipinas Marble Corporation, we held that pending the
outcome of litigation between DBP which together with Bancom officers were alleged
by the petitioner-mortgagor to have misspent and misappropriated the $5 million loan
granted by DBP, the provisions of P.D. No. 385 prohibiting injunctions against
foreclosures by government financial institutions, cannot be automatically applied.
Foreclosure of the mortgaged properties for the whole amount of the loan was
deemed prejudicial to the petitioner, its employees and their families since the true
amount of the loan which was applied for the benefit of the petitioner can be
28
determined only after a trial on the merits. No such act of misappropriation by
corporate officers appointed by the mortgagee is involved in this case. Besides, the
respondents never denied receiving the amounts under the promissory notes which
were all covered by the REMs and the very obligations subject of the extrajudicial
foreclosure.
As to the ruling in Naguiat, we found therein no compelling reason to disturb the lower
courts finding that the lender did not remit and the borrower did not receive the
proceeds of the loan. Hence, we held the mortgage contract, being just an accessory
contract, as null and void for absence of consideration. 29 In this case, however,
respondents admitted they received all the amounts under the promissory notes
presented by the petitioner. The consideration in the execution of the REMs consist of
those creditACCOMMODATIONS to fund their export transactions. Respondents
as an afterthought raised issue on the nature of the amounts of principal loan
indicated in the REMs long after these obligations have matured and the mortgage
foreclosed due to their failure to fully settle their outstanding accounts with petitioner.
Having expressly agreed to the terms of the REMs which are phrased to secure all
such loans and advancements to be obtained from petitioner, although the principal
amount stated therein were not released at one time and under several, not just one,
subsequently issued promissory notes, respondents may not be allowed to complain
later that the amounts they received were unrelated to the REMs.
On the issue of the $4,220.00 telegraphic transfer which was applied by the petitioner
to the loan account of respondents, we hold that the CA erred in holding that
petitioner had no authority to do so by way of compensation or set off. In this case,

the parties stipulated on the manner of such set off in case of non-payment of the
amount due under each promissory note.
The subject promissory notes thus provide:
In case of non-payment of this note or any installments thereof at maturity, I/We
jointly and severally, agree to pay an additional amount equivalent to two per cent
(2%) per annum of the amount due and demandable as penalty and collection
charges, in the form of liquidated damages, until fully paid; and the further sum of ten
per cent (10%) thereof in full, without any deduction, as and for attorneys fees
whether actually incurred or not, exclusive of costs and judicial/extrajudicial
expenses; moreover, I/We, jointly and severally, further empower and authorize the
TRADERS ROYAL BANK, at its option, and without notice, to set-off or to apply to the
payment of this note any and all funds, which may be in its hands on deposit or
otherwise belonging to anyone or all of us, and to hold as security therefor any real or
personal property, which may be in its possession or control by virtue of any other
contract.30 (Emphasis supplied.)
Agreements for compensation of debts or any obligations when the parties are
mutually creditors and debtors are allowed under Art. 1282 of the Civil Code even
though not all the legal requisites for legal compensation are present. Voluntary or
conventional compensation is not limited to obligations which are not yet due. 31 The
only requirements for conventional compensation are (1) that each of the parties can
fully dispose of the credit he seeks to compensate, and (2) that they agree to the
32
extinguishment of their mutual credits. Consequently, no error was committed by the
trial court in holding that petitioner validly applied, by way of compensation, the
$4,220.00 telegraphic transfer remitted by respondents foreign client through the
petitioner.
WHEREFORE, the petition is GRANTED. The Decision dated January 11, 2006 of
the Court of Appeals in CA-G.R. CV No. 67257 is REVERSED and SET ASIDE. The
Joint Decision dated August 26, 1998 of the Regional Trial Court of Cebu City,
Branch 13 in Civil Case Nos. R-22608 and CEB-112 is REINSTATED and UPHELD.
No pronouncement as to costs.
SO ORDERED.

G.R. No. L-29280 August 11, 1988

PEOPLE'S BANK AND TRUST COMPANY, plaintiff-appellee,
vs.
SYVEL'S INCORPORATED, ANTONIO Y. SYYAP and ANGEL Y
SYYAP, defendants-appellants.
Araneta, Mendoza & Papa for plaintiff-appellee.
Quasha, Asperilia, Zafra, Tayag & Ancheta for defendants-appellants.

PARAS, J.:
This is an appeal from the decision dated May 16, 1968 rendered by the Court of First
Instance of Manila, Branch XII in Civil Case No. 68095, the decretal portion of which
states:
IN VIEW OF THE FOREGOING, judgment is rendered sentencing all the
defendants to pay the plaintiff jointly and severally the sum of P601,633.01
with interest thereon at the rate of 11% per annum from June 17, 1967, until
the whole amount is paid, plus 10% of the total amount due for attorney's
fees and the costs of suit. Should the defendants fail to pay the same to the
plaintiff, then it is ordered that all the effects, materials and stocks covered
by the chattel mortgages be sold at public auction in conformity with the
Provisions of Sec. 14 of the Chattel Mortgage Law, and the proceeds thereof
applied to satisfy the judgment herein rendered. The counterclaim of the
defendants, upon the evidence presented and in the light of the authorities
above cited, is dismissed for lack of merit.
SO ORDERED
(pp. 89-90, Record on Appeal; p. 15, Rollo)
The facts of the case based on the statement of facts, made by the trial court in its
decision as cited in the briefs of both parties are as follows:
This is an action for foreclosure of chattel mortgage executed in favor of the
plaintiff by the defendant Syvel's Incorporated on its stocks of goods,
personal properties and other materials owned by it and located at its stores
or warehouses at No. 406, Escolta, Manila; Nos. 764-766 Rizal Avenue,
Manila; Nos. 10-11 Cartimar Avenue, Pasay City; No. 886 Nicanor Reyes,
Sr. (formerly Morayta), Manila; as evidenced by Annex"A."The chattel
mortgage was duly registered in the corresponding registry of deeds of
Manila and Pasay City. The chattel mortgage was in connection with a credit
commercial line in the amount of P900,000.00 granted the said defendant
corporation, the expiry date of which was May 20, 1966. On May 20, 1965,
defendants Antonio V. Syyap and Angel Y. Syyap executed an undertaking
in favor of the plaintiff whereby they both agreed to guarantee absolutely and
unconditionally and without the benefit of excussion the full and prompt
payment of any indebtedness to be incurred on account of the said credit
line. Against the credit line granted the defendant Syvel's Incorporated the
latter drew advances in the form of promissory notes which are attached to
the complaint as Annexes "C" to "l." In view of the failure of the defendant
corporation to make payment in accordance with the terms and conditions

agreed upon in the Commercial Credit Agreement the plaintiff started to

foreclose extrajudicially the chattel mortgage. However, because of an
attempt to have the matter settled, the extra-judicial foreclosure was not
pushed thru. As no payment had been paid, this case was even tually filed in
this Court.
On petition of the plaintiff based on the affidavits executed by Mr.
Leopoldo R. Rivera, Assistant Vice President of the plaintiff bank
and Atty. Eduardo J. Berenguer on January 12, 1967, to the effect,
among others, that the defendants are disposing of their properties
with intent to defraud their creditors, particularly the plaintiff herein,
a preliminary writ of attachment was issued. As a consequence of
the issuance of the writ of attachment, the defendants, in their
answer to the complaint set up a compulsory counterclaim for
damages.
After the filing of this case in this court and during its pendency
defendant Antonio v. Syyap proposed to have the case settled
amicably and to that end a conference was held in which Mr.
Antonio de las Alas, Jr., Vice President of the Bank, plaintiff,
defendant Antonio V. Syyap and Atty. Mendoza were present. Mr.
Syyap requested that the plaintiff dismiss this case because he did
not want to have the goodwill of Syvel's Incorporated impaired, and
offered to execute a real estate mortgage on his real property
located in Bacoor, Cavite. Mr. De las Alas consented, and so the
Real Estate Mortgage, marked as Exhibit A, was executed by the
defendant Antonio V. Syyap and his wife Margarita Bengco Syyap
on June 22, 1967. In that deed of mortgage, defendant Syyap
admitted that as of June 16, 1967, the indebtedness of Syvel's
Incorporated was P601,633.01, the breakdown of which is as
follows: P568,577.76 as principal and P33,055.25 as interest.
Complying with the promise of the plaintiff thru its Vice President to
ask for the dismissal of this case, a motion to dismiss this case
without prejudice was prepared, Exhibit C, but the defendants did
not want to agree if the dismissal would mean also the dismissal of
their counterclaim Against the plaintiff. Hence, trial proceeded.
As regards the liabilities of the defendants, there is no dispute that
a credit line to the maximum amount of P900,000.00 was granted
to the defendant corporation on the guaranty of the merchandise or
stocks in goods of the said corporation which were covered by
chattel mortgage duly registered as required by law. There is
likewise no dispute that the defendants Syyap guaranteed
absolutely and unconditionally and without the benefit of excussion
the full and prompt payment of any indebtedness incurred by the
defendant corporation under the credit line granted it by the plaintiff.
As of June 16, 1967, its indebtedness was in the total amount of
P601,633.01. This was admitted by defendant Antonio V. Syyap in
the deed of real estate mortgage executed by him. No part of the
amount has been paid by either of the defendants. Hence their
liabilities cannot be questioned. (pp. 3-6, Brief for Appellee; p. 26,
Rollo)

In their brief, appellants assign the following errors:

I
The lower court erred in not holding that the obligation secured by the
Chattel Mortgage sought to be foreclosed in the above-entitled case was
novated by the subsequent execution between appellee and appellant
Antonio V, Syyap of a real estate mortgage as additional collateral to the
obligation secured by said chattel mortgage.
II
The lower court erred in not dismissing the above-entitled case and in
finding appellants liable under the complaint.
III
The lower court erred in not holding that the writ of preliminary attachment is
devoid of any legal and factual basis whatsoever.
IV
The lower court erred in dismissing appellants'counterclaim and in not
holding appellee liable to appellants for the consequent damages arising out
of a wrongful attachment. (pp. 1-2, Brief for the Appellants, p. 25, Rollo)
Appellants admit that they are indebted to the appellee bank in the amount of
P601,633.01, breakdown of which is as follows: P568,577.76 as principal and
P33,055.25 as interest. After the filing of the case and during its pendency, defendant
Antonio V. Syyap proposed to have the case amicably settled and for that purpose a
conference was held in which Mr. Antonio de las Alas, Jr., Vice President of plaintiff
People's Bank and Trust Company, defendant Antonio V. Syyap and Atty. Mendoza
were present. Mr. Syyap requested that the plaintiff dismiss this case as he did not
want to have the goodwill of Syvel's Incorporated impaired, and offered to execute a
real estate mortgage on his real property located in Bacoor, Cavite. Mr. de las Alas
consented, and so the Real Estate Mortgage (Exhibit "A") was executed by defendant
Antonio Syyap and his wife Margarita Bengco Syyap on June 22, 1967. Defendants
did not agree with plaintiffs motion to dismiss which included the dismissal of their
counterclaim and filed instead their own motion to dismiss (Record on Appeal, pp. 6872) on the ground that by the execution of said real estate mortgage, the obligation
secured by the chattel mortgage subject of this case was novated, and therefore,
appellee's cause of action thereon was extinguished.
In an Order dated September 23, 1967, the motion was denied for not being well
founded (record on Appeal, p. 78).
Appellants contention is without merit.
Novation takes place when the object or principal condition of an obligation is
changed or altered. It is elementary that novation is never presumed; it must be
explicitly stated or there must be manifest incompatibility between the old and the
new obligations in every aspect (Goni v. CA, 144 SCRA 223 [1986]; National Power
Corp. v. Dayrit, 125 SCRA 849 [1983]).
In the case at bar, there is nothing in the Real Estate Mortgage which supports
appellants'submission. The contract on its face does not show the existence of an
explicit novation nor incompatibility on every point between the "old and the "new"

agreements as the second contract evidently indicates that the same was executed
as new additional security to the chattel mortgage previously entered into by the
parties.
Moreover, records show that in the real estate mortgage, appellants agreed that the
chattel mortgage "shall remain in full force and shall not be impaired by this (real
estate) mortgage."
The pertinent provision of the contract is quoted as follows:
That the chattel mortgage executed by Syvel's Inc. (Doc. No. 439, Book No.
I, Series of 1965, Notary Public Jose C. Merris, Manila); real estate
mortgage executed by Angel V. Syyap and Rita V. Syyap (Doc. No. 441,
Page No. 90, Book No. I, Series of 1965, Notary Public Jose C. Merris,
Manila) shall remain in full force and shall not be impaired by this mortgage
(par. 5, Exhibit"A," Emphasis ours).
It is clear, therefore, that a novation was not intended. The real estate mortgage was
evidently taken as additional security for the performance of the contract (Bank of P.I.
v. Herrige, 47 Phil. 57).
In the determination of the legality of the writ of attachment by the Court of First
Instance of Manila, it is a well established rule that the grant or denial of a writ of
attachment rests upon the sound discretion of the court. Records are bereft of any
evidence that grave abuse of discretion was committed by respondent judge in the
issuance of the writ of attachment.
Appellants contend that the affidavits of Messrs. Rivera and Berenguer on which the
lower court based the issuance of the writ of preliminary attachment relied on the
reports of credit investigators sent to the field and not on the personal knowledge of
the affiants. Such contention deserves scant consideration. Evidence adduced during
the trial strongly shows that the witnesses have personal knowledge of the facts
stated in their affidavits in support of the application for the writ. They testified that
Syvel's Inc. had disposed of all the articles covered by the chattel mortgage but had
not remitted the proceeds to appellee bank; that the Syvel's Stores at the Escolta,
Rizal Avenue and Morayta Street were no longer operated by appellants and that the
latter were disposing of their properties to defraud appellee bank. Such testimonies
and circumstances were given full credit by the trial court in its decision (Brief for
Appellee, p. 14). Hence, the attachment sought on the ground of actual removal of
property is justified where there is physical removal thereof by the debtor, as shown
by the records (McTaggert v. Putnam Corset Co., 8 N.Y. S 800 cited in Moran,
Comments on the Rules of Court, 1970 Ed., Vol. 3, p. 7).
Besides, the actuations of appellants were clearly seen by the witnesses who "saw a
Fiat Bantam Car-Fiat Car, a small car and about three or four persons hurrying; they
were carrying goods coming from the back portion of this store of Syvels at the
Escolta, between 5:30 and 6:00 o'clock in the evening." (Record on Appeal, pp. 4546). Therefore, "the act of debtor (appellant) in taking his stock of goods from the rear
of his store at night, is sufficient to support an attachment upon the ground of the
fraudulent concealment of property for the purpose of delaying and defrauding
creditors." (4 Am. Jur., 841 cited in Francisco, Revised Rules of Court, Second
Edition, 1985, p. 24).
In any case, intent to defraud may be and usually is inferred from the facts and
circumstances of the case; it can rarely be proved by direct evidence. It may be

gleaned also from the statements and conduct of the debtor, and in this connection,
the principle may be applied that every person is presumed to intend the natural
consequences of his acts (Francisco, Revised Rules of Court, supra, pp. 24-25), In
fact the trial court is impressed "that not only has the plaintiff acted in perfect good
faith but also on facts sufficient in themselves to convince an ordinary man that the
defendants were obviously trying to spirit away a port;.on of the stocks of Syvel's
Incorporated in order to render ineffectual at least partially anyjudgment that may be
rendered in favor of the plaintiff." (Decision; Civil Case No. 68095; Record on Appeal,
pp. 88-89).
Appellants having failed to adduce evidence of bad faith or malice on the part of
appellee in the procurement of the writ of preliminary attachment, the claim of the
former for damages is evidently negated. In fact, the allegations in the appellee's
complaint more than justify the issuance of the writ of attachment.
PREMISES CONSIDERED, this appeal is DISMISSED for lack of merit and the
judgment appealed from is AFFIRMED.
SO ORDERED.

G.R. No. 83271

May 8, 1991

VICTOR D. YOUNG and JOHNNY YOUNG, petitioners,

vs.
COURT OF APPEALS, as nominal party respondent, and FAUSTA B. JAGDON,
AMPARO R. CASAFRANCA and MIGUELA R. JARIOL, respondents.
Ramires, Corro & Associates for petitioners.
Navarro Law Office collaborating counsel for petitioners.
Manuel V Trinidad and Efren V. Ramirez for private respondents.

CRUZ, J.:
On November 7, 1961, the estates of Humiliano Rodriguez and Timoteo Rodriguez
leased to Victor D. Young a parcel of land consisting of 840 square meters and
located at Colon Street, Cebu City, on which the latter's building, then known as Liza
Theater (later renamed Nation Theater), was standing. The contract of lease
contained the following stipulation:
(8) That at the end of this lease contract or after the twenty-first (21st) year,
the LESSORS may purchase the LIZA THEATRE building (excluding movie
projectors, equipment, and other movables of the business of the LESSEE)
at their option from the LESSEE by paying the market value thereof if
acceptable to the LESSEE; provided, however, that if the LESSORS do not
exercise this option to buy, the LESSEE shall continue for another period of
TWENTY-ONE (21) YEARS and the rental will be agreed upon by the
parties with the prevailing rental of properties near the premises as the
basis.
On December 18, 1961, exactly the same contract was again executed by the same
parties, except that the estate of Humiliano Rodriguez was this time represented by
Antolin A. Jariol, instead of Miguela Rodriguez, as one of the signatories.
During the period of the lease, the two estates were finally settled, and the land
leased to Victor Young was distributed among Fausta R. Jagdon, Amparo R.
Casafranca, Miguela R. Jariol, the herein private respondents, and Teresita R.
Natividad. Natividad later sold her share, consisting of 223 square meters, to Johnny
Young, son of Victor D. Young.
On November 5, 1982, or two days before the expiration of the first contract, the heirs
(except Natividad) filed a suit for specific performance against Victor D. Young to
compel him to sell to them his theater-building for P 135,000.00. They tendered this
amount with the clerk of court by way of consignation. They also sued Victor Young's
son, Johnny, as an unwilling co-plaintiff.
The defendants contended that the plaintiffs had no cause of action because the
complaint was premature. The lease contract of November 7, 1961, had been
novated by the second lease contract dated December 18, 1961; hence, the lease
was terminated on December 18, 1982, and not November 7, 1982. Moreover, even if
the lease ended on November 7, 1982, the action brought by the respondent on
November 5, 1982, was still premature because the plaintiffs had not yet then notified
Victor Young of the exercise of their option. The lease expired without a valid exercise
of the option and the lease contract was thus renewed for another 21 years.

In his decision dated May 28, 1986, Judge Ramon Am. Torres of the Regional Trial
Court of Cebu found in favor of the plaintiffs and held that there was no novation. The
second contract was executed merely to substitute the correct signatory. As there
was no express stipulation therein that it superseded and replaced the first contract,
the complaint was not prematurely filed.
The dispositive portion of the decision read:
WHEREFORE, judgment is hereby rendered:
(a) declaring the sum of P250,000.00 as the fair market value of the building
known as the Liza Theatre (Nation Theatre);
(b) declaring the plaintiffs as the legal owners of the said building when they
shall have paid the defendant Victor Young the sum of P250,000.00;
(c) ordering the defendant Victor Young to pay the plaintiffs the sum of
P50,000.00 as moral damages, Pl0,000.00 as attorney's fees for Fausta R.
Jagdon and another P 10,000.00 as attorney's fees for the other plaintiffs
and costs of the suit;
(d) ordering the defendant Johnny Young to pay his proportionate share of
the sum of P250,000.00 as well as in the sum of P20,000.00 incurred by the
plaintiffs as attorney's fees.
SO ORDERED.
On appeal, the decision was modified by the respondent court 1 which, while agreeing
that there was no novation of the first contract, declared that the original period of the
lease was extended by the second contract. It did not find that the complaint was
premature because although the action below had been filed a month early, the
question became moot and academic when Victor D. Young declared in his letter
dated November 9, 1982, his refusal to sell the building in question. This stand was
confirmed in the answer he filed on December 7, 1982, in which he rejected the
plaintiffs' offer of P135,000.00.
The respondent court also held that the plaintiffs' complaint could be considered
originally as an action for declaratory relief, which was later converted into an ordinary
action for specific performance.
It is this decision that is now questioned in this petition for review.
Law and jurisprudence on the concept and effects of novation are well settled in this
jurisdiction. In Caneda, Jr. v. Court of Appeals, 2 we held:
Novation has been defined as the extinguishment of an obligation by a
subsequent one which terminates it, either by changing its object or principal
conditions, referred to as objective or real novation or by substituting a new
debtor in place of the old one, or by subrogating a third person to the rights
of the creditor, also called as subjective or personal novation. But as
explained by this Court, novation is never presumed; it must be explicitly
stated or there must be a manifest incompatibility between the old and the
new obligations in every aspect. The test of incompatibility between two
obligations or contracts, is whether or not they can stand together, each one
having an independent existence. If they cannot, they are incompatible, and
the later obligation novates the first. (Emphasis supplied.)

A careful examination of the text of the two contracts will show that the only change
introduced in the second contract was the substitution by Antolin A. Jariol of his wife
Miguela as signatory for the estate of Humiliano Rodriguez. There was no express
declaration in the second contract that it was novating the first.
To determine if there was at least an implied novation because of a clear
incompatibility between the old and new contracts, we apply the rule that
In order that there may be implied novation arising from incompatibility of the
old and new obligations, the change must refer to the object, the cause, or
the principal conditions of the obligation. In other words, there must be an
essential change.
There was clearly no implied novation for lack of an essential change in the object,
cause, or principal conditions of the obligation. At most, the substitution of a signatory
in the second contract can be considered only an accidental modification which,
according to Tolentino, "does not extinguish an existing obligation. When the changes
refer to secondary agreements, and not to the object or principal conditions of the
contract, there is no novation; such changes will produce modifications of incidental
facts, but will not extinguish the original obligation." 3
Hence, he concludes, "it is not proper to consider an obligation novated by
unimportant modifications which do not alter its essence." 4
There being no novation, the lease is properly deemed to have commenced on
November 7, 1961, and so ended 21 years later on November 7, 1982. It is significant
that it was in fact from this first date that Victor Young effectively started as lessee.
We do not agree with the respondent court that there was an extension of the period
of lease in the second contract. As earlier explained, the only reason for the execution
of the second contract was to change the signatory. There is no clear showing from
the language of that contract that the parties intended to extend the lease for one
month.
According to Article 1370 of the new Civil Code:
If the terms of a contract are clear and leave no doubt upon the intention of
the contracting parties, the literal meaning of its stipulation shall control.
But although the lease contract was not novated or extended, the action for specific
performance was still premature because it was filed before the petitioner was given a
chance to refuse the option. The complaint was filed on November 5, 1982, and it
was only on the following day, or on November 6, 1982, that the plaintiffs informed
Victor Young of their decision to buy the theater-building. The tender of the purchase
price is further proof of the fact that Victor Young was informed of that decision only
on November 6, 1982.
The action was premature not because the option was exercised prior to the
expiration of the lease but because the complaint was filed before the defendant
could reject the lessors' offer. No right of the plaintiffs had as yet been violated when
they filed their complaint on November 5, 1982.
Since a "cause of action" requires, as essential elements, not only a legal
right of the plaintiff and a correlative obligation of the defendant but also "an
act or omission of the defendant in violation of said legal right," the cause of

action does not accrue until the party obligated refuses, expressly or
impliedly, to comply with its duty. 5
Therefore unless the plaintiff has a valid and subsisting cause of action at
the time his action is commenced, the defect cannot be cured or remedied
by the acquisition or accrual of one while the action is pending, and a
supplemental complaint or an amendment setting up such after-accrued
cause of action is not permissible.6 (Emphasis supplied.)
The Court adds that even if the case was prematurely filed, it did not follow that the
option was not properly exercised.1wphi1 An option may be exercised at any
time before the expiration of the period agreed upon. An "option" is defined as a
contract granting a person the privilege to buy or not to buy certain objects at any
time within the agreed period at a fixed price. 7 It is settled that when the offer has
stated a fixed period for acceptance, the offeree may accept at any time until such
period expires.8
The ruling of the respondent court that the complaint for specific performance could
be originally regarded as a petition for declaratory relief is not acceptable. The Rules
of Court provide that an action for declaratory relief may be filed by "any
person" 9 and does not say it may be initiated by the court itself motu proprio. More
importantly, there was as yet no refusal or denial by the defendants of the plaintiffs'
claimed right to buy the theater-building when the complaint was filed on November 5,
1986. In fact, as previously noted, it was only the following day that the defendants
were informed of the plaintiffs' decision to exercise their option under the contract.
Before that date, there was no uncertainty about the said option to justify the filing of
a petition for declaratory relief. Hence, there was no cause of action to support a
declaratory relief proceeding.
We dismiss out of hand the argument that the merger of the character of the lessor
and the lessee in Johnny Young resulted in the extinguishment of the right to the
option to buy. It is utterly fallacious. Victor Young did not purchase any portion of the
land covered by the lease; it was his son, Johnny Young, who did. The sale to the son
of part of the land under lease to the father did not extinguish the plaintiffs' option to
buy, which was enforceable against Victor D. Young and no other.
The respondent court rejected the petitioner's contention that the case has become
moot and academic because the theater subject of the option was no longer existing,
having been gutted by fire. Its reason was that there was no adequate evidence of
such destruction. On the contrary, the record contains a certificate from the Deputy
Chief of Constabulary that the building was indeed burned to the ground on January
10
31, 1987. This fact indeed rendered the action for specific performance no longer
viable.
Since the action filed by the private respondents was premature, they are not entitled
to any award of damages. Neither may the petitioners recover on their counterclaim
because the private respondents filed their complaint in the honest belief that they
had a right to the relief they were seeking. Attorney's fees are also not due to either of
the parties because it has not been shown that any of them acted "in a wanton,
fraudulent, reckless, oppressive, or malevolent manner." The parties must therefore
bear their own costs.
WHEREFORE, the challenged decision is SET ASIDE and a new judgment is
rendered: (a) DISMISSING the complaint for specific performance; (b) DECLARING

the lease terminated as of November 7, 1982; and (c) ORDERING petitioner Victor D.
Young to vacate the leased premises. It is so ordered.

G.R. No. 145441. April 26, 2005

PHILIPPINE SAVINGS BANK, Petitioners,
vs.
SPS. RODOLFO C. MAALAC, JR. and ROSITA P. MAALAC, Respondents.
DECISION
YNARES-SANTIAGO, J.:
This appeal by certiorari1 assails the decision of the Court of Appeals dated October
12, 2000 in CA-G.R. CV No. 502922 which affirmed with modifications the decision of
3
the Regional Trial Court of Pasig, Branch 161 dated April 27, 1993 in Civil Case No.
53967 which ordered the annulment of the Certificate of Sale involving TCT Nos. N1347, N-1348 and N-3267 issued in favor of petitioner Philippine Savings Bank
(PSBank) and dismissing Land Registration Case No. R-3951.
The facts as culled from the records are as follows:
On October 8, 1976, respondent-spouses Rodolfo and Rosita Maalac (Maalac)
obtained a P1,300,000.00 loan from PSBank covered by promissory note L.C. No.
76-269. As security for the loan, Maalac executed a Real Estate Mortgage in favor of
the bank over 8 parcels of land covered by TCT Nos. 417012, N-1348, N-1347, N3267, N-8552, N-6162, 469843 and 343593.
In view of Maalacs inability to pay the loan installments as they fell due, their loan
obligation was restructured on October 13, 1977. Accordingly, Maalac signed
another promissory note denominated as LC No. 77-232 for P1,550,000.00 payable
4
to the order of PSBank with interest rate of 19% annum. To secure the payment of
the restructured loan, Maalac executed a Real Estate Mortgage dated October 13,
1977 in favor of PSBank over the same aforementioned 8 real properties.
On March 5, 1979, Maalac and spouses Igmidio and Dolores Galicia, with the prior
5
consent of PSBank, entered into a Deed of Sale with Assumption of Mortgage
involving 3 of the mortgaged properties covered by TCT Nos. N-6162 (now N-36192),
N-8552 (now TCT No. N-36193), and 469843 (now TCT No. N-36194). The Deed of
Sale with Assumption of Mortgage contained the following stipulations:
1. The VENDEES shall assume as they hereby assume as part of the purchase price,
the amount of P550,000.00, representing the portion of the mortgaged obligation of
the VENDORS in favor of the Philippine Savings Bank, which is secured by that Real
Estate Mortgage contract mentioned in the Second Whereas Clause hereof covering
among others the above-described parcels of land under the same terms and
conditions as originally constituted.
2. The VENDORS hereby warrant valid title to, and peaceful possession of the
property herein sold subject to the encumbrance hereinbefore mentioned.
3. This instrument shall be subject to the Consent of the Philippine Savings Bank.
4. All expenses relative to this instrument including documentary stamps, registration
6
fees, transfer taxes and other charges shall be for the account of the VENDEES.
Thereafter, the 3 parcels of land purchased by the Galicias, together with another
property, were in turn mortgaged by them to secure a P2,600,000.00 loan which they
obtained from PSBank. Specifically, the mortgaged properties include TCT Nos. N-

36192, N-36193, N-36194, (formerly TCT Nos. N-6162, N-8552 and 469843,
respectively) and 75584.7 This loan is evidenced by Promissory Note LC-79-36.8
On March 12, 1979, Maalac paid PSBank P919,698.11 which corresponds to the
value of the parcels of land covered by TCT Nos. N-36192, N-36193, and N-36194,
now registered in the name of the spouses Galicia. Accordingly, PSBank executed a
partial release of the real estate mortgage covered by the aforesaid properties.9
On August 25, 1981, the spouses Galicia obtained a second loan from PSBank in the
amount of P3,250,000.00 for which they executed Promissory Note LC No. 81-108.
They also executed a Real Estate Mortgage in favor of the bank covering TCT Nos.
10
N-36192, N-36193, N-36194, 75584 and 87690.
Since Maalac defaulted again in the payment of their loan installments and despite
repeated demands still failed to pay their past due obligation which now amounted to
P1,804,241.76, PSBank filed with the Office of the Provincial Sheriff of Rizal a petition
for extrajudicial foreclosure of their 5 remaining mortgaged properties, specifically
those covered by TCT Nos. 417012, N-1347, N-1348, N-3267, and 343593.
Despite several postponements of the public auction sale, Maalac still failed to pay
their mortgage obligation. Thus, on May 3, 1982, the foreclosure sale of the subject
real properties proceeded with PSBank as the highest bidder in the amount of
P2,185,225.76.11 On the same date, the Certificate of Sale was issued by the
Acting Ex-Oficio Provincial Sheriff for Rizal province.12
Maalac failed to redeem the properties hence titles thereto were consolidated in the
name of PSBank and new certificates of title were issued in favor of the bank,
namely, TCT No. N-79995 in lieu of TCT No. 343593; TCT No. 79996 in lieu of TCT
No. 417012; TCT No. 79997 in lieu of TCT No. N-3267; TCT No. N-79998 in lieu of
TCT No. N-1347; and TCT No. N-79999 in lieu of TCT No. N-1348.
On December 16, 1983, Maalac wrote the Chairman of the Board of PSBank asking
information on their request for the partial release of the mortgage covered by TCT
Nos. N-36192, N-36193, N-36194, and 417012 (now TCT No. 79996). TCT Nos.
36192, 36193, and 36194 were registered in the name of the Galicias, and mortgaged
to partially secure their outstanding loan from the bank. Enclosed in the same letter is
a Cashiers Check for P1,200,000.00 with a notation which reads:
Re: Payment to effect release of TCT Nos. N-36192, 36193, and 36194 under loan
account of Spouses Igmedio and Dolores Galicia; and TCT No. 417012 under Loan
Account of Spouses Rodolfo and Rosita Maalac.
Upon receipt of the check, PSBanks Acting Manager Lino L. Macasaet issued a
typewritten receipt with the inscription:13
Received from Sps. Rodolfo and Rosita Maalac and Sps. Igmidio and Dolores
Galicia PCIB Check No. 002133 in the amount of One Million Two Hundred Thousand
Pesos Only (P1,200,000.00).
It is understood however, that receipt of said check is not a commitment on the part of
the Bank to release the Four (4) TCTs requested to be released on your letter dated
19 December 1983.
On December 19, 1983, the bank applied P1,000,000.00 of the P1,200,000.00 to the
loan account of the Galicias as payment for the arrearages in interest and the

remaining P200,000.00 thereof was applied to the expenses relative to the account of
Maalac.14
On May 23, 1985, the bank sold the property covered by TCT No. 79996 (previously
TCT No. 343593) to Ester Villanueva who thereafter sold it to Maalac. On October
30, 1985, the land covered by TCT No. 79995 was sold by the bank to Teresita
Jalbuena.
Thereafter, or on October 20, 1986, Maalac instituted an action for damages,
docketed as Civil Case No. 53967, before the Regional Trial Court of Pasig, Branch
161, against PSBank and its officers namely Cezar Valenzuela, Alfredo Barretto and
Antonio Viray, and spouses Alejandro and Teresita Jalbuena.
The bank also filed a petition, docketed as LRC Case No. R-3951, before the
Regional Trial Court of Pasig, Branch 159, for the issuance of a writ of possession
against the properties covered by TCT Nos. N-79997, N-79998, and N-79999
(formerly TCT Nos. N-3267, N-1347, and N-1348) and the ejectment of the
respondents.
In an order dated January 2, 1989, the trial court consolidated LRC Case No. R-3951
with Civil Case No. 53967. On April 27, 1993, a judgment was rendered the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered ordering:
For Civil Case No. 53967
1. The annulment of the Certificate of Sale issued by the acting Ex-Oficio Provincial
Sheriff of Rizal on May 3, 1982 involving Transfer Certificate of Title Nos. N-1347Rizal, N-1348-Rizal and N-3267-Rizal and the Contract to Sell executed by defendant
PSB in favor of defendants spouses Alejandro Jalbuena and Teresita Jalbuena
involving the real property covered by Transfer Certificate of Title No. N-79995; and,
2. The dismissal of counterclaims for lack of merit.
For Land Registration Case No. R-3951
3. The dismissal of the petition for lack of merit.
No costs.
SO ORDERED.15
The Court of Appeals affirmed with modification the decision of the trial court, the
decretal portion of which reads:
WHEREFORE, the decision appealed from is AFFIRMED with the
modification that the defendant-appellant Philippine Savings Bank is directed
to indemnify the plaintiffs-appellants in the amount of Two Hundred
Thousand Pesos (200,000.00) each as moral damages. Costs against the
defendant-appellant bank.
SO ORDERED.

16

Hence the instant petition which raises the following issues:

THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY
PROBABLY NOT IN ACCORD WITH LAW AND WITH APPLICABLE DECISIONS
OF THIS HONORABLE COURT WHEN IT:

a.] HELD THAT THE GENERAL RULE WITH RESPECT TO THE ISSUANCE OF
WRITS OF POSSESSION SHOULD NOT BE APPLIED IN THIS CASE, AND WHAT
SHOULD INSTEAD BE APPLIED IS THE EXCEPTION ENUNCIATED IN VACA VS.
COURT OF APPEALS, 234 SCRA 146;
b.] UPHELD THE CONSOLIDATION OF CIVIL CASE NO. 53967 WITH LRC CASE
NO. 3951 WHEN PROCEDURALLY THOSE TWO PROCEEDINGS COULD
SCARCELY BE CONSOLIDATED;
c.] HELD THAT SUPPOSEDLY THERE WAS A NOVATION "OF THE PREVIOUS
MORTGAGE OF THE PROPERTIES" WHEN IN TRUTH AND IN FACT THE
MORTGAGE HAD ALREADY CEASED TO EXIST, THAT IS, THE MORTGAGE HAD
BECOME NULL AND VOID AS THE SAME HAD BEEN FORECLOSED BY
PETITIONER;
d.] AWARDED MORAL DAMAGES IN FAVOR OF RESPONDENTS. 17
Petitioner claims that the Court of Appeals erred in sustaining the trial courts order
consolidating Civil Case No. 53967 with LRC Case No. R-3951, arguing that
consolidation is proper only when it involves actions, which means an ordinary suit in
a court of justice by which one party prosecutes another for the enforcement or
protection of a right, or a prevention of a wrong. Citing A.G. Development Corp. v.
Court of Appeals,18 petitioner posits that LRC Case No. R-3951, being summary in
nature and not being an action within the contemplation of the Rules of Court, should
not have been consolidated with Civil Case No. 53967.
19

We do not agree. In Active Wood Products Co., Inc. v. Court of Appeals, this Court
also deemed it proper to consolidate Civil Case No. 6518-M, which was an ordinary
civil action, with LRC Case No. P-39-84, which was a petition for the issuance of a
writ of possession. The Court held that while a petition for a writ of possession is anex
parte proceeding, being made on a presumed right of ownership, when such
presumed right of ownership is contested and is made the basis of another action,
then the proceedings for writ of possession would also become groundless. The
entire case must be litigated and if need be must be consolidated with a related case
so as to thresh out thoroughly all related issues.
In the same case, the Court likewise rejected the contention that under the Rules of
Court only actions can be consolidated. The Court held that the technical difference
between an action and a proceeding, which involve the same parties and subject
matter, becomes insignificant and consolidation becomes a logical conclusion in order
to avoid confusion and unnecessary expenses with the multiplicity of suits.
In the instant case, the consolidation of Civil Case No. 53967 with LRC Case No. R3951 is more in consonance with the rationale behind the consolidation of cases
which is to promote a more expeditious and less expensive resolution of the
controversy than if they were heard independently by separate branches of the trial
court. Hence, the technical difference between Civil Case No. 53967 and LRC Case
No. R-3951 must be disregarded in order to promote the ends of justice.
Petitioner also contends that the Court of Appeals committed reversible error in
applying the doctrine laid down inBarican v. Intermediate Appellate Court.20 It insists
on the application of the general rule that it is ministerial upon the court to issue a writ
of possession on the part of the purchaser in a foreclosure sale. It argues that
the Baricandoctrine is inapplicable because the sale with assumption of mortgage in
the present case involves properties different from those which are the subject of the

writ of possession while in Barican, the assumption of mortgage refers to the same
property subject of the writ of possession. We recall that the Court of Appeals applied
the Barican doctrine based on the following factual similarities between the two
21
cases, thus:
"In Civil Case No. C-11232, the petitioner-spouses claim ownership of the foreclosed
property against the respondent bank and Nicanor Reyes to whom the former sold
the property by negotiated sale; the complaint alleged that the DBP knew the
assumption of mortgage between the mortgagors and the petitioner-spouses and the
latter have paid to the respondent bank certain amounts to update the loan balances
of the mortgagors and transfer and restructuring fees which payments are duly
receipted; the petitioner-spouses were already in possession of the property since
September 28, 1979 and long before the respondent bank sold the same property to
respondent Nicanor Reyes on October 28, 1984; and the respondent bank never took
physical possession of the property." In a similar manner, the following facts were
duly established in the case at bench: 1. The petition for issuance of the writ of
possession was only filed sometime in May 1988 although the right of redemption
lapsed as early as May 7, 1983; 2. Appellant bank neither obtained physical
possession of the properties nor did they file any action for ejectment against the
plaintiffs-appellants; 3. On December 16, 1983, the plaintiffs-appellants issued a
check in favor of the appellant bank to effect the release of TCT Nos. 36192, 36193,
36194 and 417012 which was applied by appellant bank to the plaintiffs-appellants
account and that of the Galicias and; 4. Appellant bank executed a Deed of Absolute
Sale over TCT No. 79996 (formerly TCT No. 417012) on May 23, 1985 in favor of a
certain Elsa Calusa Villanueva who thereafter sold it back to the plaintiffs-appellants.
Hence, the same ruling in the Barican case should be applied, that is, "the obligation
of a court to issue a writ of possession in favor of the purchaser in a foreclosure of
mortgage case ceases to be ministerial.
We agree with the petitioner. While indeed the two cases demonstrate palpable
similarities, the Court of Appeals overlooked essential differences that would render
the Barican doctrine inapplicable to the instant case. In Barican, the issuance of the
writ of possession was deferred because a pending action for the declaration of
ownership over the foreclosed property was made by an adverse claimant who was in
possession of the subject property. Clearly, the rights of the third parties, who are
plaintiffs in the pending civil case, would be adversely affected with the
implementation of the writ.
In the instant case, the petitioner bank became the absolute owner of the properties
subject of the writ of possession, after they were foreclosed, and titles thereto were
consolidated in the name of the bank. It sufficiently established its ownership over the
parcels of land subject of the writ of possession, by presenting in evidence the
Certificate of Sale,22 Affidavit of Consolidation of Ownership, 23 and copies of new
TCTs of the foreclosed properties in the name of the petitioner. 24 Unlike in Barican,
the ownership of the foreclosed properties are not open to question the ownership
thereof being established by competent evidence.
Moreover, as earlier pointed out by the petitioner, the parcels of land subject of the
writ of possession are different from those sold by the petitioner bank to Jalbuena and
Villanueva. Hence, unlike in the Barican case, the implementation of the writ will not
affect the rights of innocent third persons.
On the issue of novation, the Court of Appeals held that novation occurred when
PSBank applied P1,000,000.00 of the P1,200,000.00 PCIB Check No. 002133

tendered by Maalac to the loan account of the Galicias and the remaining
P200,000.00 thereof to Maalacs account. It held that when the bank applied the
amount of the check in accordance with the instructions contained therein, there was
novation of the previous mortgage of the properties. It further observed that the bank
was fully aware that the issuance of the check was conditional hence, when it made
the application thereof, it agreed to be bound by the conditions imposed by
Maalac.25
Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object or principal conditions, or, by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor. In order for
novation to take place, the concurrence of the following requisites is indispensable:
1. There must be a previous valid obligation,
2. There must be an agreement of the parties concerned to a new contract,
3. There must be the extinguishment of the old contract, and
4. There must be the validity of the new contract.26
The elements of novation are patently lacking in the instant case. Maalac tendered a
check for P1,200,000.00 to PSBank for the release of 4 parcels of land covered by
TCT Nos. N-36192, 36193, and 36194, under the loan account of the Galicias and
417012 (now TCT No. 79996) under the loan account of Maalac. However, while the
bank applied the tendered amount to the accounts as specified by Maalac, it
nevertheless refused to release the subject properties. Instead, it issued a receipt
with a notation that the acceptance of the check is not a commitment on the part of
the bank to release the 4 TCTs as requested by Maalac.
From the foregoing, it is obvious that there was no agreement to form a new contract
by novating the mortgage contracts of the Maalacs and the Galicias. In accepting
the check, the bank only acceded to Maalacs instruction on whose loan accounts
the proceeds shall be applied but rejected the other condition that the 4 parcels of
land be released from mortgage. Clearly, there is no mutual consent to replace the
old mortgage contract with a new obligation. The conflicting intention and acts of the
parties underscore the absence of any express disclosure or circumstances with
which to deduce a clear and unequivocal intent by the parties to novate the old
agreement.
Novation is never presumed, and the animus novandi, whether totally or partially,
must appear by express agreement of the parties, or by their acts that are too clear
and unmistakable. The extinguishment of the old obligation by the new one is a
necessary element of novation, which may be effected either expressly or impliedly.
The term "expressly" means that the contracting parties incontrovertibly disclose that
their object in executing the new contract is to extinguish the old one. Upon the other
hand, no specific form is required for an implied novation, and all that is prescribed by
law would be an incompatibility between the two contracts. While there is really no
hard and fast rule to determine what might constitute to be a sufficient change that
can bring about novation, the touchstone for contrariety, however, would be an
27
irreconcilable incompatibility between the old and the new obligations.
A fortiori, 3 of the 4 properties sought to be released from mortgage, namely, TCT
Nos. N-36192, N-36193, and N-36194, have already been sold by Maalac to Galicia

and are now registered in the name of the latter who thereafter mortgaged the same
as security to a separate loan they obtained from the bank. Thus, without the consent
of PSBank as the mortgagee bank, Maalac, not being a party to the mortgage
contract between the Galicias and the bank, cannot demand much less impose upon
the bank the release of the subject properties. Unless there is a stipulation to the
contrary, the release of the mortgaged property can only be made upon the full
satisfaction of the loan obligation upon which the mortgage attaches. Unfortunately,
Maalac has not shown that the P1,000,000.00 was sufficient to cover not only the
accrued interests but also the entire indebtedness of the Galicias to the bank.
Neither can Maalac be deemed substitute debtor within the contemplation of Article
1293 of the Civil Code, which states that:
Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made without the knowledge or against the will of the latter, but
not without the consent of the creditor. Payment by the new debtor gives him the
rights mentioned in articles 1236 and 1237. 28
In order to change the person of the debtor, the old one must be expressly released
from the obligation, and the third person or new debtor must assume the formers
place in the relation. Novation is never presumed. Consequently, that which arises
from a purported change in the person of the debtor must be clear and express. It is
thus incumbent on Maalac to show clearly and unequivocally that novation has
29
30
indeed taken place. InMagdalena Estates Inc. v. Rodriguez, we held that "the
mere fact that the creditor receives a guaranty or accepts payments from a third
person who has agreed to assume the obligation, when there is no agreement that
the first debtor shall be released from responsibility, does not constitute a novation,
and the creditor can still enforce the obligation against the original debtor."
Maalac has not shown by competent evidence that they were expressly taking the
place of Galicia as debtor, or that the latter were being released from their solidary
obligation. Nor was it shown that the obligation of the Galicias was being extinguished
and replaced by a new one. The existence of novation must be shown in clear and
unmistakable terms.
Likewise, we hold that Maalac cannot demand to repurchase the foreclosed piece of
land covered by TCT No. 417012 (now TCT No. 79996) from the bank. Its foreclosure
and the consolidation of ownership in favor of the bank and the resultant cancellation
of mortgage effectively cancelled the mortgage contract between Maalac and the
bank. Insofar as TCT No. 417012 is concerned, there is no more existing mortgage to
speak of. As the absolute owner of the foreclosed property, the petitioner has the
discretion to reject or accept any offer to repurchase.
Granting arguendo that a new obligation was established with the acceptance by the
bank of the PCIB Check and its application to the loan account of Maalac on the
condition that TCT No. 417012 would be released, this new obligation however could
not supplant the October 13, 1977 real estate mortgage executed by Maalac, which,
by all intents and purposes, is now a defunct and non-existent contract. As mentioned
earlier, novation cannot be presumed.
We however sustain the award of moral damages. While the bank had the legal basis
to withhold the release of the mortgaged properties, nevertheless, it was not forthright
and was lacking in candor in dealing with Maalac. In accepting the PCIB Check, the
bank knew fully well that the payment was conditioned on its commitment to release
the specified properties. At the first instance, the bank should not have accepted the

check or returned the same had it intended beforehand not to honor the request of
Maalac. In accepting the check and applying the proceeds thereof to the loan
accounts of Maalac and Galicia, the former were led to believe that the bank was
favorably acting on their request. In justifying the award of moral damages, the Court
of Appeals correctly observed that "there is the unjustified refusal of the appellant
bank to make a definite commitment while profiting from the proceeds of the check by
applying it to the principal and the interest of the Galicias and plaintiff-appellants."31
Moral damages are meant to compensate the claimant for any physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation and similar injuries unjustly caused. Although
incapable of pecuniary estimation, the amount must somehow be proportional to and
in approximation of the suffering inflicted. Moral damages are not punitive in nature
and were never intended to enrich the claimant at the expense of the defendant.
There is no hard-and-fast rule in determining what would be a fair and reasonable
amount of moral damages, since each case must be governed by its own peculiar
facts. Trial courts are given discretion in determining the amount, with the limitation
that it "should not be palpably and scandalously excessive." Indeed, it must be
commensurate to the loss or injury suffered. 32
Respondent Rosita Maalac has adequately established the factual basis for the
award of moral damages when she testified that she suffered mental anguish and
social humiliation as a result of the failure of the bank to release the subject
properties or its failure to return the check despite its refusal to make a definite
commitment to comply with the clearly-stated object of the payment.
Respondent Rodolfo Maalac however is not similarly entitled to moral damages. The
award of moral damages must be anchored on a clear showing that he actually
experienced mental anguish, besmirched reputation, sleepless nights, wounded
feelings or similar injury. There was no better witness to this experience than
respondent himself. Since respondent Rodolfo Maalac failed to testify on the witness
stand, the trial court did not have any factual basis to award moral damages to
him.33 Indeed, respondent Rodolfo Maalac should have taken the witness stand and
should have testified on the mental anguish, serious anxiety, wounded feelings and
other emotional and mental suffering he purportedly suffered to sustain his claim for
moral damages. Mere allegations do not suffice; they must be substantiated by clear
and convincing proof.
Nevertheless, we find the award of P200,000.00 excessive and unconscionable. As
we said, moral damages are not intended to enrich the complainant at the expense of
the defendant. Rather, these are awarded only to enable the injured party to obtain
"means, diversions or amusements" that will serve to alleviate the moral suffering that
resulted by reason of the defendants culpable action. The purpose of such damages
is essentially indemnity or reparation, not punishment or correction. In other words,
the award thereof is aimed at a restoration within the limits of the possible, of the
spiritual status quo ante; therefore, it must always reasonably approximate the extent
34
of injury and be proportional to the wrong committed. The award of P50,000.00 as
moral damages is reasonable under the circumstances. 35
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated
October 12, 2000 in CA-G.R. CV No. 50292 is REVERSED and SET ASIDE. The
petitioner Philippine Savings Bank is DIRECTED to indemnify respondent Rosita P.
Maalac in the amount of P50,000.00 as moral damages. The Regional Trial Court of

the City of Pasig, Branch 161 is ORDERED to issue a writ of possession in favor of
Philippine Savings Bank. No costs.
SO ORDERED.

[G.R. No. 136729. September 23 ,2003]

ASTRO ELECTRONICS CORP. and PETER ROXAS, petitioner, vs. PHILIPPINE

EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, respondent.
DECISION
AUSTRIA-MARTINEZ, J.:

Assailed in this petition for review on certiorari under Rule 45 of the Rules of Court is
the decision of the Court of Appeals in CA-G.R. CV No. 41274,[1] affirming the
decision of the Regional Trial Court (Branch 147) of Makati, then Metro Manila,
whereby petitioners Peter Roxas and Astro Electronics Corp. (Astro for brevity) were
ordered to pay respondent Philippine Export and Foreign Loan Guarantee
Corporation (Philguarantee), jointly and severally, the amount of P3,621,187.52 with
interests and costs.

The antecedent facts are undisputed.

Astro was granted several loans by the Philippine Trust Company (Philtrust)
amounting to P3,000,000.00 with interest and secured by three promissory notes: PN
NO. PFX-254 dated December 14, 1981 for P600,000.00, PN No. PFX-258 also
dated December 14, 1981 for P400,000.00 and PN No. 15477 dated August 27, 1981
for P2,000,000.00. In each of these promissory notes, it appears that petitioner Roxas
signed twice, as President of Astro and in his personal capacity.[2] Roxas also signed
a Continuing Surety ship Agreement in favor of Philtrust Bank, as President of Astro
and as surety.[3]

Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust

the payment of 70% of Astros loan,[4] subject to the condition that upon payment by
Philguanrantee of said amount, it shall be proportionally subrogated to the rights of
Philtrust against Astro.[5]

As a result of Astros failure to pay its loan obligations, despite demands,

Philguarantee paid 70% of the guaranteed loan to Philtrust. Subsequently,
Philguarantee filed against Astro and Roxas a complaint for sum of money with the
RTC of Makati.

In his Answer, Roxas disclaims any liability on the instruments, alleging, inter alia,
that he merely signed the same in blank and the phrases in his personal capacity and
in his official capacity were fraudulently inserted without his knowledge.[6]

After trial, the RTC rendered its decision in favor of Philguarantee with the following
dispositive portion:

WHEREFORE, in view of all the foregoing, the Court hereby renders

judgment in favor or (sic) the plaintiff and against the defendants Astro
Electronics Corporation and Peter T. Roxas, ordering the then (sic) to pay,
jointly and severally, the plaintiff the sum of P3,621.187.52 representing the
total obligation of defendants in favor of plaintiff Philguarantee as of
December 31, 1984 with interest at the stipulated rate of 16% per annum
and stipulated penalty charges of 16% per annum computed from January 1,
1985 until the amount is fully paid. With costs.

SO ORDERED.[7]

The trial court observed that if Roxas really intended to sign the instruments merely in
his capacity as President of Astro, then he should have signed only once in the
promissory note.[8]

On appeal, the Court of Appeals affirmed the RTC decision agreeing with the trial
court that Roxas failed to explain satisfactorily why he had to sign twice in the
contract and therefore the presumption that private transactions have been fair and
regular must be sustained.[9]

In the present petition, the principal issue to be resolved is whether or not Roxas
should be jointly and severally liable (solidary) with Astro for the sum awarded by the
RTC.

The answer is in the affirmative.

Astros loan with Philtrust Bank is secured by three promissory notes. These
promissory notes are valid and binding against Astro and Roxas. As it appears on the
notes, Roxas signed twice: first, as president of Astro and second, in his personal
capacity. In signing his name aside from being the President of Asro, Roxas became
a co-maker of the promissory notes and cannot escape any liability arising from it.
Under the Negotiable Instruments Law, persons who write their names on the face of
promissory notes are makers,[10] promising that they will pay to the order of the
payee or any holder according to its tenor.[11] Thus, even without the phrase
personal capacity, Roxas will still be primarily liable as a joint and several debtor
under the notes considering that his intention to be liable as such is manifested by the
fact that he affixed his signature on each of the promissory notes twice which
necessarily would imply that he is undertaking the obligation in two different
capacities, official and personal.

Unnoticed by both the trial court and the Court of Appeals, a closer examination of the
signatures affixed by Roxas on the promissory notes, Exhibits A-4 and 3-A and B-4
and 4-A readily reveals that portions of his signatures covered portions of the
typewritten words personal capacity indicating with certainty that the typewritten
words were already existing at the time Roxas affixed his signatures thus demolishing
his claim that the typewritten words were just inserted after he signed the promissory
notes. If what he claims is true, then portions of the typewritten words would have
covered portions of his signatures, and not vice versa.

As to the third promissory note, Exhibit C-4 and 5-A, the copy submitted is not clear
so that this Court could not discern the same observations on the notes, Exhibits A-4
and 3-A and B-4 and 4-A.

Nevertheless, the following discussions equally apply to all three promissory notes.

The three promissory notes uniformly provide: FOR VALUE RECEIVED, I/We jointly,
severally and solidarily, promise to pay to PHILTRUST BANK or order...[12] An
instrument which begins with I, We, or Either of us promise to pay, when signed by
two or more persons, makes them solidarily liable.[13] Also, the phrase joint and
several binds the makers jointly and individually to the payee so that all may be sued
together for its enforcement, or the creditor may select one or more as the object of
the suit.[14] Having signed under such terms, Roxas assumed the solidary liability of
a debtor and Philtrust Bank may choose to enforce the notes against him alone or
jointly with Astro.

Roxas claim that the phrases in his personal capacity and in his official capacity were
inserted on the notes without his knowledge was correctly disregarded by the RTC
and the Court of Appeals. It is not disputed that Roxas does not deny that he signed
the notes twice. As aptly found by both the trial and appellate court, Roxas did not
offer any explanation why he did so. It devolves upon him to overcome the
presumptions that private transactions are presumed to be fair and regular[15] and
that a person takes ordinary care of his concerns.[16] Aside from his self-serving
allegations, Roxas failed to prove the truth of such allegations. Thus, said
presumptions prevail over his claims. Bare allegations, when unsubstantiated by
evidence, documentary or otherwise, are not equivalent to proof under our Rules of
Court.[17]

Roxas is the President of Astro and reasonably, a businessman who is presumed to

take ordinary care of his concerns. Absent any countervailing evidence, it cannot be
gainsaid that he will not sign document without first informing himself of its contents
and consequences. Clearly, he knew the nature of the transactions and documents
involved as he not only executed these notes on two different dates but he also
executed, and again, signed twice, a continuing Surety ship Agreement notarized on
July 31, 1981, wherein he guaranteed, jointly and severally with Astro the repayment
of P3,000,000.00 due to Philtrust. Such continuing suretyship agreement even reenforced his solidary liability Philtrust because as a surety, he bound himself jointly

and severally with Astros obligation.[18] Roxas cannot now avoid liability by hiding
under the convenient excuse that he merely signed the notes in blank and the
phrases in personal capacity and in his official capacity were fraudulently inserted
without his knowledge.

Lastly, Philguarantee has all the right to proceed against petitioner, it is subrogated to
the rights of Philtrust to demand for and collect payment from both Roxas and Astro
since it already paid the value of 70% of roxas and Astro Electronics Corp.s loan
obligation. In compliance with its contract of Guarantee in favor of Philtrust.

Subrogation is the transfer of all the rights of the creditor to a third person, who
substitutes him in all his rights.[19] It may either be legal or conventional. Legal
subrogation is that which takes place without agreement but by operation of law
because of certain acts.[20] Instances of legal subrogation are those provided in
Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is that
which takes place by agreement of the parties.[21]

Roxas acquiescence is not necessary for subrogation to take place because the
instant case is one of the legal subrogation that occurs by operation of law, and
without need of the debtors knowledge.[22] Further, Philguarantee, as guarantor,
became the transferee of all the rights of Philtrust as against Roxas and Astro
because the guarantor who pays is subrogated by virtue thereof to all the rights which
the creditor had against the debtor.[23]

WHEREFORE, finding no error with the decision of the Court of Appeals dated
December 10, 1998, the same is hereby AFFIRMED in toto.

SO ORDERED.

G.R. Nos. 149840-41

The Manila RTC dismissed petitioners actions for mandamus and prohibition. Their
appeal to the Court of Appeals was likewise dismissed:

March 31, 2006

SPS. FRANCISCO AND RUBY REYES, Petitioners,

vs.
BPI FAMILY SAVINGS BANK, INC., and MAGDALENA L. LOMETILLO, in her
capacity as ex-officio Provincial Sheriff for Iloilo, Respondents.
DECISION
CORONA,J.:
Via this petition for review under Rule 45 of the Rules of Court, petitioners assail the
1
decision of the Court of Appeals (CA) in CA-G.R. SP Nos. 45629 and 45877 and its
resolution denying their motion for reconsideration.
The facts are simple.
On March 24, 1995, the Reyes spouses executed a real estate mortgage on their
property in Iloilo City in favor of respondent BPI Family Savings Bank, Inc. (BPI-FSB)
to secure a P15,000,000 loan of Transbuilders Resources and Development
Corporation (Transbuilders). The mortgage contract between petitioners and BPI-FSB
provided, among others:
That for and in consideration of the above-mentioned sum received by way of a loan,
and other creditACCOMMODATIONS of whatever nature obtained by the
Borrower/Mortgagor, the Borrower/Mortgagor by this Agreement, hereby constitutes a
first mortgage, special and voluntary over the property/ies specifically described in
Annex "A", together with all existing improvements as well as those that may
hereafter be made to exist or constructed thereon, inclusive of all fruits and rents, in
favor of the Bank, its successors and assigns. 2
When Transbuilders failed to pay its P15M loan within the stipulated period of one
year, the bank restructured the loan through a promissory note executed by
3
Transbuilders in its favor. The pertinent provisions of the promissory note stated that:
4

1. The proceeds of the Note shall be applied to loan account no. 21108336 ;
and
2. The new obligation of Transbuilders to respondent Bank for fifteen million
(P15,000,000.00) shall be paid in twenty (20) quarterly installments
commencing on September 28, 1996 and at an interest rate of eighteen
(18%) per annum.
Petitioners aver that they were not informed about the restructuring of Transbuilders
loan. In fact, when they learned of the new loan agreement sometime in December
1996, they wrote BPI-FSB requesting the cancellation of their mortgage and the
return of their certificate of title to the mortgaged property. They claimed that the new
loan novated the loan agreement of March 24, 1995. Because the novation was
without their knowledge and consent, they were allegedly released from their
obligation under the mortgage.
When BPI-FSB refused to cancel the mortgage, petitioners filed separate petitions for
mandamus and prohibition with the Regional Trial Court (RTC) of Manila to compel
the bank to return their certificate of title and cancel the mortgage. BPI-FSB, on the
other hand, instituted extrajudicial foreclosure proceedings against petitioners in Iloilo
City after Transbuilders defaulted in its payments. Consequently, a sheriffs notice of
sale of petitioners property at public auction was issued.

The mortgage contract between the petitioners and the respondent BPI does not limit
the obligation or loan for which it may stand to the loan agreement between
Transbuilders and BPI, dated March 24, 1995, considering that under the terms of
that contract, the intent of all the parties, including the petitioners, to secure future
indebtedness is apparent. On the whole, the contract of loan/mortgage dated
March 24, 1995, appears to include even the new loan agreement between
Transbuilders and BPI, entered into on June 28, 1996.
xxx xxx xxx
There is likewise no merit to the petitioners submission that there was a novation of
the March 24, 1995 contract. There is no clear intent of the parties to make the new
contract completely supersede and abolish the old loan/mortgage contract. The
established rule is that novation is never presumed. Novation will not be allowed
unless it is clearly shown by express agreement, or by acts of equal import. Thus, to
effect an objective novation it is imperative that the new obligation expressly declares
that the old obligation is thereby extinguished or that the new obligation be on every
point incompatible with the new one. (Ajax Marketing & Development Corporation v.
Court of Appeals, 248 SCRA 222 [1995]) Without such clear intent to abolish the old
contract, there is no merit to affirm the existence of a novation.
There is no basis therefore, to the charge that respondent BPI had gravely erred in
not surrendering the petitioners certificate of title, as the mortgage undertaking of the
petitioners has not been cancelled. For the same reason, the respondent BPI acted
within its prerogative when it initiated extra-judicial foreclosure proceedings over the
petitioners property.
WHEREFORE, premises considered, the instant appeals from the Decision of the
Regional Trial Court of Iloilo City in CA-G.R. SP No. 45887 and the Order of dismissal
of the Regional Trial Court of Manila in CA-G.R. SP No. 45629 are hereby
DISMISSED.
SO ORDERED.5 (emphasis ours)
Petitioners moved for a reconsideration of the decision but were unsuccessful.
Hence, this appeal.
The only issue for our consideration is whether there was a novation of the mortgage
loan contract between petitioners and BPI-FSB that would result in the
extinguishment of petitioners liability to the bank.
We agree with the CA that there was none.
Novation is defined as the extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which terminates the first, either by
changing the object or principal conditions, or by substituting the person of the debtor,
or subrogating a third person in the rights of the creditor. 6
Article 1292 of the Civil Code on novation further provides:
Article 1292. In order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point incompatible with each other.

The cancellation of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. While there is really no
hard and fast rule to determine what might constitute sufficient change resulting in
novation, the touchstone, however, is irreconcilable incompatibility between the old
7
and the new obligations.
In Garcia, Jr. v. Court of Appeals,8 we held that:
In every novation there are four essential requisites:(1) a previous valid obligation; (2)
the agreement of all the parties to the new contract; (3) the extinguishment of the old
contract; and (4) validity of the new one. There must be consent of all the parties to
the substitution, resulting in the extinction of the old obligation and the creation of a
valid new one. The acceptance of the promissory note by the plaintiff is not novation
of the contract. The legal doctrine is that an obligation to pay a sum of money is not
novated in a new instrument by changing the term of payment and adding other
obligations not incompatible with the old one. It is not proper to consider an obligation
novated as in the case at bar by the mere granting of extension of payment which did
not even alter its essence. To sustain novation necessitates that the same be
declared in unequivocal terms or that there is complete and substantial incompatibility
between the two obligations. An obligation to pay a sum of money is not novated in a
new instrument wherein the old is ratified by changing only the terms of payment and
adding other obligations not incompatible with the old one or wherein the old contract
is merely supplementing the old one.
Thus, the well-settled rule is that, with respect to obligations to pay a sum of money,
the obligation is not novated by an instrument that expressly recognizes the old,
changes only the terms of payment, adds other obligations not incompatible with the
old ones, or the new contract merely supplements the old one. 9
BPI-FSB and Transbuilders only extended the repayment term of the loan from one
year to twenty quarterly installments at 18% interest per annum. There was absolutely
no intention by the parties to supersede or abrogate the old loan contract secured by
the real estate mortgage executed by petitioners in favor of BPI-FSB. In fact, the
intention of the new agreement was precisely to revive the old obligation after the
original period expired and the loan remained unpaid. The novation of a contract
cannot be presumed. In the absence of an express agreement, novation takes place
only when the old and the new obligations are incompatible on every point. 10
Moreover, under the real estate mortgage executed by them in favor of BPI-FSB,
petitioners undertook to secure the P15M loan of Transbuilders to BPI-FSB "and
other creditACCOMMODATIONS of whatever nature obtained by the
Borrower/Mortgagor." While this stipulation proved to be onerous to petitioners,
neither the law nor the courts will extricate a party from an unwise or undesirable
contract entered into with all the required formalities and with full awareness of its
consequences. 11 Petitioners voluntarily executed the real estate mortgage on their
property in favor of BPI-FSB to secure the P15M loan of Transbuilders. They cannot
now be allowed to repudiate their obligation to the bank after Transbuilders default.
While petitioners liability was written in fine print and in a contract prepared by BPIFSB, it has been the consistent holding of this Court that contracts of adhesion are
not invalid per se. On numerous occasions, we have upheld the binding effects of
12
such contracts.
WHEREFORE, the petition is hereby DENIED for lack of merit.
SO ORDERED.

G.R. No. 133176

August 8, 2002

PILIPINAS BANK, petitioner,

vs.
ALFREDO T. ONG and LEONCIA LIM, respondents.

On July 7, 1994, 3rd Assistant Prosecutor Edgardo E. Bautista issued a

Resolution10 recommending the dismissal of the complaint. On July 11, 1994, the
Resolution was approved by Provincial Prosecutor of Rizal Herminio T. Ubana,
11
Sr. The bank filed a motion for reconsideration but was denied.

SANDOVAL-GUTIERREZ, J.:

Upon appeal by the bank, the Department of Justice (DOJ) rendered

judgment12 denying the same for lack of merit. Its motion for reconsideration was
likewise denied.13

Petition for review on certiorari 1 of the Resolutions2 dated January 9, 1998 and March
25, 1998 of the Court of Appeals in CA-G.R. SP No. 42005, "Pilipinas Bank vs. The
Honorable Secretary of Justice, the City Prosecutor of Makati City, Alfredo T. Ong
and Leoncia Lim," reversing its Decision dated August 29, 1997.

On July 5, 1996, the bank filed with this Court a petition for certiorari and mandamus
seeking to annul the resolution of the DOJ. In a Resolution dated August 21, 1996,
this Court referred the petition to the Court of Appeals for proper determination and
disposition.14

On April 1991, Baliwag Mahogany Corporation (BMC), through its president,

respondent Alfredo T. Ong, applied for a domestic commercial letter of credit with
petitioner Pilipinas Bank (hereinafter referred to as the bank) to finance the purchase
of about 100,000 board feet of "Air Dried, Dark Red Lauan" sawn lumber.

On August 29, 1997, the Court of Appeals rendered judgment, the dispositive portion
of which reads:

DECISION

The bank approved the application and issued Letter of Credit No. 91/725-HO in the
amount of P3,500,000.00. To secure payment of the amount, BMC, through
respondent Ong, executed two (2) trust receipts 3 providing inter alia that it shall turn
over the proceeds of the goods to the bank, if sold, or return the goods, if unsold,
upon maturity on July 28, 1991 and August 4, 1991.
On due dates, BMC failed to comply with the trust receipt agreement. On November
22, 1991, it filed with the Securities and Exchange Commission (SEC) a Petition for
Rehabilitation and for a Declaration in a State of Suspension of Payments under
Section 6 (c) of P.D. No. 902-A,4 as amended, docketed as SEC Case No. 4109.
After BMC informed its creditors (including the bank) of the filing of the petition, a
Creditors' Meeting was held to:
(a) inform all creditor banks of the present status of BMC to avert any action which
would affect the company's operations, and (b) reach an accord on a common course
of action to restore the company to sound financial footing.

"WHEREFORE, in view of all the foregoing, the assailed resolutions of the public
respondents are hereby SET ASIDE and in lieu thereof a new one rendered directing
the public respondents to file the appropriate criminal charges for violation of P.D. No.
115, otherwise known as The Trust Receipts Law, against private respondents."15
However, upon respondents motion for reconsideration, the Court of Appeals
reversed itself, holding that the execution of the MOA constitutes novation which
"places petitioner Bank in estoppel to insist on the original trust relation and
constitutes a bar to the filing of any criminal information for violation of the trust
16
receipts law."
The bank filed a motion for reconsideration but was denied.17 Hence this petition.
Petitioner bank contends that the MOA did not novate, much less extinguish, the
existing obligations of BMC under the trust receipt agreement. The bank, through the
execution of the MOA, merely assisted BMC to settle its obligations by rescheduling
the same. Hence, when BMC defaulted in its payment, all its rights, including the right
to charge respondents for violation of the Trust Receipts Law, were revived.

On January 8, 1992, the SEC issued an order creating a Management Committee

wherein the bank is represented. The Committee shall, among others, undertake the
management of BMC, take custody and control of all its existing assets and liabilities,
study, review and evaluate its operation and/or the feasibility of its being restructured.

Respondents Ong and Lim maintain that the MOA, which has the effect of a
compromise agreement, novated BMCs existing obligations under the trust receipt
agreement. The novation converted the parties relationship into one of an ordinary
creditor and debtor. Moreover, the execution of the MOA precludes any criminal
liability on their part which may arise in case they violate any provision thereof.

On October 13, 1992, BMC and a consortium of 14 of its creditor banks entered into a
6
Memorandum of Agreement (MOA) rescheduling the payment of BMCs existing
debts.

The only issue for our determination is whether respondents can be held liable for
violation of the Trust Receipts Law.

On November 27, 1992, the SEC rendered a Decision7 approving the Rehabilitation
Plan of BMC as contained in the MOA and declaring it in a state of suspension of
payments.

Section 4 of PD No. 115 (The Trust Receipts Law) defines a trust receipt as any
transaction by and between a person referred to as the entruster, and another person
referred to as the entrustee, whereby the entruster who owns or holds absolute title or
security interest over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latter's execution and delivery to
the entruster of a signed document called a "trust receipt" wherein the entrustee binds
himself to hold the designated goods, documents or instruments with the obligation to
turn over to the entruster the proceeds thereof to the extent of the amount owing to
the entruster or as appears in the trust receipt, or the goods, documents or
instruments themselves if they are unsold or not otherwise disposed of, in accordance
with the terms and conditions specified in the trust receipt. 18

However, BMC and respondent Ong defaulted in the payment of their obligations
under the rescheduled payment scheme provided in the MOA. Thus, on April 1994,
the bank filed with the Makati City Prosecutors Office a complaint 8 charging
respondents Ong and Leoncia Lim (as president and treasurer of BMC, respectively)
with violation of the Trust Receipts Law (PD No. 115), docketed as I.S. No. 94-3324.
The bank alleged that both respondents failed to pay their obligations under the trust
receipts despite demand.9

Failure of the entrustee to turn over the proceeds of the sale of the goods covered by
a trust receipt to the entruster or to return the goods, if they were not disposed of,
shall constitute the crime of estafa under Article 315, par. 1(b) of the Revised Penal
19
Code. If the violation or offense is committed by a corporation, the penalty shall be
imposed upon the directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense.20 It is on this premise that petitioner bank charged respondents with
violation of the Trust Receipts Law.1wphi1
Mere failure to deliver the proceeds of the sale or the goods, if not sold, constitutes
violation of PD No. 115.21However, what is being punished by the law is the
dishonesty and abuse of confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is the owner. 22

3) Status of obligation Matured Payable within 7 years

27

4) Governing law Criminal Civil & Commercial 28

5) Security offered Trust Receipts Real estate/chattel mortgages 29
6) Interest rate per annum (Unspecified) 14%

30

7) Default charges 24% 14%31

8) No. of parties 3 16
Hence, applying the pronouncement in Quinto, we can safely conclude that the MOA
novated and effectively extinguished BMC's obligations under the trust receipt
agreement.

In this case, no dishonesty nor abuse of confidence can be attributed to respondents.

Record shows that BMC failed to comply with its obligations upon maturity of the trust
receipts due to serious liquidity problems, prompting it to file a Petition for
Rehabilitation and Declaration in a State of Suspension of Payments. It bears
emphasis that when petitioner bank made a demand upon BMC on February 11,
1994 to comply with its obligations under the trust receipts, the latter was already
under the control of the Management Committee created by the SEC in its Order
dated January 8, 1992.23 The Management Committee took custody of all BMCs
assets and liabilities, including the red lauan lumber subject of the trust receipts, and
authorized their use in the ordinary course of business operations. Clearly, it was the
Management Committee which could settle BMCs obligations. Moreover, it has not
escaped this Courts observation that respondent Ong paid P21,000,000.00 in
compliance with the equity infusion required by the MOA. The mala prohibita nature
of the offense notwithstanding, respondents intent to misuse or misappropriate the
goods or their proceeds has not been established by the records.24

Petitioner bank's argument that BMC's non-compliance with the MOA revived
respondents original liabilities under the trust receipt agreement is completely
misplaced. Section 8.4 of the MOA on termination reads:

Did the MOA novate the trust agreement between the parties?

Indeed, what is automatically terminated in case BMC failed to comply with the
conditions under the MOA is not the MOA itself but merely the obligation of the lender
(the bank) to reschedule the existing credits. Moreover, it is erroneous to assume that
the revesting of "all the rights of lenders against the borrower" means that petitioner
can charge respondents for violation of the Trust Receipts Law under the original trust
receipt agreement. As explained earlier, the execution of the MOA extinguished
respondents obligation under the trust receipts. Respondents liability, if any, would
only be civil in nature since the trust receipts were transformed into mere loan
documents after the execution of the MOA. This is reinforced by the fact that the
mortgage contracts executed by the BMC survive despite its non-compliance with the
conditions set forth in the MOA.

In Quinto vs. People,25 this Court held that there are two ways which could indicate
the presence of novation, thereby producing the effect of extinguishing an obligation
by another which substitutes the same. The first is when novation has been stated
and declared in unequivocal terms. The second is when the old and the new
obligations are incompatible on every point. The test of incompatibility is whether or
not the two obligations can stand together. If they cannot, they are incompatible and
the latter obligation novates the first. Corollarily, changes that breed incompatibility
must be essential in nature and not merely accidental. The incompatibility must take
place in any of the essential elements of the obligation, such as its object, cause or
principal conditions, otherwise, the change is merely modificatory in nature and
insufficient to extinguish the original obligation.
Contrary to petitioner's contention, the MOA did not only reschedule BMCs debts, but
more importantly, it provided principal conditions which are incompatible with the
trust agreement. The undisputed points of incompatibility between the two
agreements are:
Points of incompatibility Trust Receipt MOA
1) Nature of contract Trust Receipt Loan

"8.4 Termination. Any provision of this Agreement to the contrary notwithstanding, if

the conditions for rescheduling specified in Section 7 shall not be complied with on
such later date as the Qualified Majority Lenders in their sole and absolute discretion
may agree in writing, then
(i) the obligation of the Lenders to reschedule the Existing Credits as
contemplated hereby shall automatically terminate on such date:
(ii) the Existing Agreements shall continue in full force and effect on the
remaining loan balances as if this Agreement had not been entered into;
(iii) all the rights of the lenders against the borrower and Spouses Ong prior
to the agreement shall revest to the lenders."

All told, we find no reversible error committed by the Court of Appeals in rendering the
assailed Resolutions.
WHEREFORE, the petition is DENIED. The assailed Resolutions of the Court of
Appeals dated January 9, 1998 and March 25, 1998 in CA-G.R. SP No. 42005 are
hereby AFFIRMED.
SO ORDERED.

26

2) Juridical relationship Trustor-Trustee Lender-Borrower

G.R. No. 118585 September 14, 1995

AJAX MARKETING & DEVELOPMENT CORPORATION, ANTONIO TAN, ELISA
TAN, TAN YEE, and SPS. MARCIAL SEE and LILIAN TAN, petitioners,
vs.
HON. COURT OF APPEALS, METROPOLITAN BANK AND TRUST COMPANY,
and THE SHERIFF OF MANILA, respondents.

FRANCISCO, J.:
In its March 30, 1994 decision, public respondent Court of Appeals affirmed the trial
court's judgment upholding the validity of the extra-judicial foreclosure of the real
estate property of petitioners spouses Marcial See and Lilian Tan, located at Paco
District, Manila covered by TCT 105233, by private respondent Metropolitan Bank
and Trust Company (Metrobank). 1 Petitioners' motion for reconsideration was denied;
hence, this petition for review oncertiorari raising the following assignments of errors:
FIRST: The Honorable Court of Appeals erred in holding that the
consolidation of the three (3) loans granted separately to three
entities into a single loan of P1.0 Million was a mere restructuring
and did not effect a novation of the loan as to extinguish the
accessory mortgage contracts.
SECOND: The Honorable Court of Appeals erred in not holding that
the consolidated loan of P1.0 Million was not accompanied by the
execution of a new REM, as was done by the Bank in the earlier
three (3) loans, and hence, was, to all legal intents/purposes,
unsecured.
THIRD: The Honorable Court of Appeals erred in holding that the
inclusion in the extra-judicial foreclosure of the admittedly
unsecured loan of P970,000.00 is a mere error that does not
invalidated said foreclosure, contrary to the pronouncement in C &
C Commercial Corp. vs. PNB, 175 SCRA 1.
FOURTH: The Honorable Court of Appeals erred in not declaring
as null and void the extra-judicial foreclosure undertaken by
2
Metrobank on the property of Sps. Marcial See and Lilian Tan.
The facts as found by public respondent Court of Appeals are as follows:
It is not disputed that Ylang-Ylang Merchandising Company, a
partnership between Angelita Rodriguez and Antonio Tan, obtained
a loan in the amount of P250,000.00 from the Metropolitan Bank
and Trust Company, and to secure payment of the same, spouses
Marcial See and Lilian Tan constituted a real estate mortgage in
favor of said bank over their property in the District of Paco, Manila,
covered by TCT No. 105233 of the Registry of Deeds of Manila.
The mortgage was annotated at the back of the title.
Subsequently, after the partnership had changed its name to Ajax
Marketing Company albeit without changing its composition, it
obtained a loan in the sum of P150,000.00 from Metropolitan Bank
and Trust Company. Again to secure the loan, spouses Marcial See

and Lilian Tan executed in favor of said bank a second real estate
mortgage over the same property. As in the first instance, the
mortgage was duly annotated at the back of TCT No. 105233.
On February 19, 1979, the partnership (Ajax Marketing Company)
was converted into a corporation denominated as Ajax Marketing
and Development Corporation, with the original partners (Angelita
Rodriguez and Antonio Tan) as incorporators and three (3)
additional incorporators, namely, Elisa Tan, the wife of Antonio Tan,
and Jose San Diego and Tessie San Diego. Ajax Marketing and
Development Corporation obtained from Metropolitan Bank and
Trust Company a loan of P600,000.00, the payment of which was
secured by another real estate mortgage executed by spouses
Marcial See and Lilian Tan in favor of said bank over the same
realty located in the District of Paco, Manila. Again, the third real
estate mortgage was annotated at the back of TCT No. 105233.
In December 1980, the three (3) loans with an aggregate amount of
P1,000,000.00 were re-structured and consolidated into one (1)
loan and Ajax Marketing and Development Corporation,
represented by Antonio Tan as Board Chairman/President and in
his personal capacity as solidary co-obligor, and Elisa Tan as VicePresident/Treasurer and in her personal capacity as solidary co3
obligor, executed a Promissory Note (PN) No. BDS-3605.
In their interrelated first and second assignment of errors, petitioners argue that a
novation occurred when their three (3) loans, which are all secured by the same real
estate property covered by TCT No. 105233 were consolidated into a single loan of
P1 million under Promissory Note No. BDS-3605, thereby extinguishing their
monetary obligations and releasing the mortgaged property from liability.
Basic principles on novation need to be stressed at the outset. Novation is the
extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first, either by changing the object
or principal conditions, or by substituting another in place of the debtor, or by
4
subrogating a third person in the rights of the creditor. Novation, unlike other modes
of extinction of obligations, is a juridical act with a dual function, namely, it
extinguishes an obligation and creates a new one in lieu of the old. It can be
objective, subjective, or mixed. Objective novation occurs when there is a change of
the object or principal conditions of an existing obligation while subjective novation
occurs when there is a change of either the person of the debtor, or of the creditor in
an existing obligation. 5 When the change of the object or principal conditions of an
obligation occurs at the same time with the change of either in the person of the
debtor or creditor a mixed novation occurs. 6
The well settled rule is that novation is never presumed. 7 Novation will not be allowed
unless it is clearly shown by express agreement, or by acts of equal import. Thus, to
effect an objective novation it is imperative that the new obligation expressly declare
that the old obligation is thereby extinguished, or that the new obligation be on every
point incompatible with the new one. 8 In the same vein, to effect a subjective
novation by a change in the person of the debtor it is necessary that the old debtor be
released expressly from the obligation, and the third person or new debtor assumes
his place in the relation. 9 There is no novation without such release as the third

person who has assumed the debtor's obligation becomes merely a co-debtor or
surety. 10
The attendant facts herein do not make a case of novation. There is nothing in the
records to show the unequivocal intent of the parties to novate the three loan
agreements through the execution of PN No. BDS-3065. The provisions of PN No.
BDS-3065 yield no indication of the extinguishment of, or an incompatibility with, the
three loan agreements secured by the real estate mortgages over TCT No. 105233.
On its face, PN No. BDS-3065 has these words typewritten: "secured by REM" and
11
"9. COLLATERAL. This is wholly/partly secured by: (x) "real estate", which strongly
negate petitioners' asseveration that the consolidation of the three loans effected the
discharge of the mortgaged real estate property. Otherwise, there would be no sense
placing these material provisions. Moreover; the real estate mortgages contained this
common provision, to wit:
That for and in consideration of credit accommodations obtained
from the MORTGAGEE (Metropolitan Bank and Trust Company),
by the MORTGAGOR and/or AJAX MKTG. DEV. CORP./AJAX
MARKETING
COMPANY/YLANG-YLANG
MERCHANDISING
COMPANY detailed as follows:
Nature Date Granted Due Date Amount or Line
Loans and/or P 600,000.00
Advances in 150,000.00
current account 250,000.00
and to secure the payment of the same and those that may
hereafter be obtained including the renewals or extension thereof.
xxx xxx xxx
the principal of all of which is hereby fixed at (P600,000.00/
P150,000.00/ P250,000.00) . . .as well as those that the
MORTGAGEE may have previously extended or may later extend
to the MORTGAGOR, including interest and expenses or any other
obligation owing to the MORTGAGEE, whether direct or indirect,
principal or secondary, as appears in the accounts, books and
records of the MORTGAGEE, the MORTGAGOR hereby transfer
and convey by way of mortgage unto the MORTGAGEE, its
successors or assigns, the parcels of land which are described in
the list inserted on page three of this document and/or appended
hereto, together with all the buildings and improvements now
existing or which may hereafter be erected or constructed thereon,
of which the MORTGAGOR declares that he/it is the absolute
owner free from all liens and encumbrances. However, if the
MORTGAGOR shall pay to the MORTGAGEE, its successors or
assigns, the obligation secured by this mortgage when due,
together with interest, and shall keep and perform all and singular
the covenants and agreements herein contained for the
MORTGAGOR to keep and perform, then the mortgage shall be
void; otherwise, it shall remain in full force and effect. 12

The foregoing shows that petitioners agreed to apply the real estate property
to secure obligations that they may thereafter obtain including their renewals
or extensions with the principals fixed at P600,000.00, P150,000.00, and
P250,000.00 which when added have an aggregate sum of P1.0 million. PN
No. BDS-3605 merely restructured and renewed the three previous loans to
expediently make the loans current. There was no change in the object of
the prior obligations. The consolidation of the three loans, contrary to
petitioners' contention, did not release the mortgaged real estate property
from any liability because the mortgage annotations at the back of TCT No.
105233, in fact, all remained uncancelled, thus indicating the continuing
subsistence of the real estate mortgages.
Neither can it be validly contended that there was a change, or substitution in the
persons of either the creditor (Metrobank) or more specifically the debtors
(petitioners) upon the consolidation of the loans in PN No. BDS 3605. The bare fact of
petitioners' conversion from a partnership to a corporation, without sufficient
evidence, either testimonial or documentary, that they were expressly released from
their obligations, did not make petitioner AJAX, with its new corporate personality, a
third person or new debtor within the context of a subjective novation. If at all,
petitioner AJAX only became a co-debtor or surety. Without express release of the
debtor from the obligation, any third party who may thereafter assume the obligation
shall be considered merely as co-debtor or surety. Novation arising from a purported
change in the person of the debtor must be clear and express because, to repeat, it is
never presumed. Clearly then, from the aforediscussed points, neither objective nor
subjective novation occurred here.
Anent the third assigned error, petitioners posit that the extra-judicial foreclosure is
invalid as it included two unsecured loans: one, the consolidated loan of P1.0 million
under PN BDS No. 3605, and two, the P970,000.00 loan under PN BDS No. 3583
subsequently extended by Metrobank.
An action to foreclose a mortgage is usually limited to the amount mentioned in the
mortgage, but where on the four corners of the mortgage contracts, as in this case,
the intent of the contracting parties is manifest that the mortgaged property shall also
answer for future loans or advancements then the same is not improper as it is valid
and binding between the parties. 13 For merely consolidating and expediently making
current the three previous loans, the loan of P1.0 million under PN BDS No. 3605,
secured by the real estate property, was correctly included in the foreclosure's bid
price. The inclusion of the unsecured loan of P970,000.00 under PN BDS NO. 3583,
however, was found to be improper by public respondent which ruling we shall not
disturb for Metrobank's failure to appeal therefrom. Nonetheless, the inclusion of PN
BDS No. 3583 in the bid price did not invalidate the foreclosure proceedings. As
correctly pointed out by the Court of Appeals, the proceeds of the auction sale should
be applied to the obligation pertaining to PN BDS No. 3605 only, plus interests,
expenses and other charges accruing thereto. It is Metrobank's duty as mortgagee to
return the surplus in the selling price to the mortgagors. 14
Lastly, petitioners cite as supporting authority C & C Commercial Corp. v. Philippine
National Bank 15 where this Court enjoined the foreclosure proceedings for including
unsecured obligations. Petitioners' reliance on the C & C Commercial
Corp. v. Philippine National Bank case is misplaced. In that case, the foreclosure sale
included previously incurred unsecured obligations in favor of PNB which were not in
the contemplation of the mortgage contract, whereas in the instant case, the

mortgages were one in providing that the mortgaged real estate property shall also
secure future advancements or loans, as well as renewals or extensions of the same.
Prescinding from the above discussions, the fourth assignment of error obviously
needs no further discussion.
WHEREFORE, the decision appealed from is hereby AFFIRMED in toto.

G.R. No. 149683

June 16, 2003

ILOILO TRADERS FINANCE INC., Petitioner,

vs.
HEIRS OF OSCAR SORIANO JR., and MARTA L. SORIANO, Respondents.
DECISION
VITUG, J.:
On 23 October 1979 and 29 February 1980, the spouses Oscar Soriano and Marta
Soriano executed two promissory notes, secured by real property mortgages, in favor
of petitioner Iloilo Traders Finance, Inc. (ITF). When the Sorianos defaulted on the
notes, ITF, on 23 June 1981, moved for the extrajudicial foreclosure of the
mortgages. Evidently, in order to forestall the foreclosure, respondent spouses filed,
on 27 August 1981, a complaint for "Declaration of a Void Contract, Injunction and
Damages." On 06 January 1982, the trial court issued a writ of preliminary injunction
to suspend the public sale of the hypothecated property. On 16 August 1983, the
parties entered into an "Amicable Settlement" and, after affixing their signatures
thereon, submitted the agreement before the court. Instead of approving forthwith the
amicable settlement, the trial court required the parties to first give some clarifications
on a number of items. The order read in part "Paragraph 4 of the compromise agreement dated August 16, 1983 states: That the
plaintiffs waive any claims, counterclaims, attorneys fees or damages that they may
have against herein defendants.
"Plaintiffs and defendant Iloilo Traders Finance, Inc., are directed to clarify whether
the words herein defendants include defendants Bernadette Castellano and the
provincial sheriff of Iloilo.
"If the plaintiffs desire to dismiss the complaint against defendants Castellano and the
provincial sheriff of Iloilo, they should state it categorically and in writing.
"Furthermore, the Court wants to know from the plaintiffs and defendant Iloilo Traders
Finance, Inc., if the writ of preliminary injunction issued on January 6, 1982 should be
lifted as to all three defendants.
"The clarification herein sought after by the Court shall be made in writing and signed
by the parties concerned, assisted by their respective attorneys.
"This Order shall be complied with within a period of ten (10) days from notice
hereof."1
The parties failed to comply with the court order. Resultantly, the trial court
disapproved the amicable settlement and set the case for pre-trial. Nothing much
could be gleaned from the records about what might have transpired next not until
seven years later when the Soriano couple filed a motion to submit anew the
amicable settlement. The motion was opposed by ITF on the ground that the amount
expressed in the settlement would no longer be accurate considering the lapse of
seven years, implying in a way that it could be amendable thereto if the computation
were to be revised. The trial court denied the Soriano motion. Significantly, while the
order of denial was made on the thesis that the debtor spouses, without the consent
of ITF, could not unilaterally resurrect the amicable settlement, the trial court,
nevertheless, made the following observations -

"x x x (T)hat in relation to the disapproved Amicable Settlement, the intention of ITF to
agree and abide by the provisions thereof, as evidenced by the signatures thereto of
its President and counsels, cannot be ignored. That intention pervades to the present
time since the disapproval by the court pertains only to a technicality which in no way
intruded into the substance of the agreement reached by the parties. Such being the
case, the Amicable Settlement had novated the original agreement of that parties as
embodied in the promissory note. The rights and obligations of the parties, therefore,
at this time should be based on the provisions of the amicable settlement, these
should pertain to the principal amount as of that date which the parties pegged at
P431,200.00 and the legal rate of interest thereon.
"The foregoing should however be a good issue in another forum, not in the present
case."2
Taking cue from the court order, the Sorianos withdrew their complaint and, on 16
October 1991, filed a case for novation and specific performance, docketed Civil
Case No. 20047, before the Regional Trial Court, Branch 37, of Iloilo City. The case
ultimately concluded with a finding made by the trial court in favor of herein
respondents. On appeal to it, the Court of Appeals affirmed the judgment of the
court a quo.
The parties have submitted that the issue focuses on whether or not the amicable
settlement entered into between the parties has novated the original obligation and
also, as they would correctly suggest in their argument, on whether the proposed
terms of the amicable settlement were carried out or have been rendered
inefficacious.
The "amicable settlement" read "COME NOW plaintiffs and defendant Iloilo Traders Finance, Inc., assisted by their
respective undersigned counsels and to this Honorable Court most respectfully
submit the following Amicable Settlement, thus:
"1. That the total of the two (2) accounts of plaintiff to herein defendant as of
June 30, 1983 is Two Hundred Ninety Thousand Six Hundred Ninety One
Pesos (P290,691.00) of which amount P10,691.00 shall be paid by plaintiffs
to herein defendant at the time of the signing of this Amicable Settlement;
"2. That to this amount of P290,691.00 shall be added P151,200.00 by way
of interest for 36 months thus making a total of Four Hundred Thirty One
Thousand Two Hundred Pesos (P431,200.00);
"3. That this amount of P431,200.00 shall be paid by plaintiffs to herein
defendant in 36 monthly installments as follows, the first installment at
P12,005.00 shall be paid on or before August 16, 1983 and the 2nd to 36th
installments at P11,977.00 shall be paid on the 15th day of each month
thereafter until fully paid;
"4. That the plaintiffs waive any claims, counterclaims, attorneys fees or
damages that they may have against herein defendants;
"5. That should plaintiffs fail to comply with the terms of this Amicable
Settlement the preliminary injunction issued in the case shall be immediately
dissolved and the foreclosure and public auction sale of the properties of the
plaintiffs subject of the mortgage to defendant shall immediately take place
and the corresponding writ of execution shall issue from this Court;

"6. That this Amicable Settlement is submitted as the basis for decision in
this case.

intend to be bound by the compromise settlement, and its non-materialization

negated the very purpose for which it was executed.

"WHEREFORE, it is respectfully prayed of this Honorable Court that the foregoing

3
Amicable Settlement be approved."

Given the circumstances, the provisions of Article 2041 of the Civil Code come in
point -

Novation may either be extinctiv or modificatory, much being dependent on the

nature of the change and the intention of the parties. Extinctive novation is never
presumed; there must be an express intention to novate; 4 in cases where it is implied,
the acts of the parties must clearly demonstrate their intent to dissolve the old
5
obligation as the moving consideration for the emergence of the new one. Implied
novation necessitates that the incompatibility between the old and new obligation be
total on every point such that the old obligation is completely superseded by the new
one. The test of incompatibility is whether they can stand together, each one having
an independent existence; if they cannot and are irreconcilable, the subsequent
obligation would also extinguish the first.

"If one of the parties fails or refuses to abide by the compromise, the other party may
either enforce the compromise or regard it as rescinded and insist upon his original
demand."

An extinctive novation would thus have the twin effects of, first, extinguishing an
existing obligation and, second, creating a new one in its stead. This kind of novation
presupposes a confluence of four essential requisites: (1) a previous valid obligation,
(2) an agreement of all parties concerned to a new contract, (3) the extinguishment of
the old obligation, and (4) the birth of a valid new obligation. 6 Novation is merely
modificatory where the change brought about by any subsequent agreement is
7
merely incidental to the main obligation (e.g., a change in interest rates or an
8
extension of time to pay ); in this instance, the new agreement will not have the effect
of extinguishing the first but would merely supplement it or supplant some but not all
of its provisions.1wphi1
An amicable settlement or a compromise is a contract whereby the parties, by making
9
reciprocal concessions, avoid a litigation or put an end to one already commenced. It
10
may be judicial or extrajudicial; the absence of court approval notwithstanding, the
agreement can become the source of rights and obligations of the parties.
It would appear that the arrangement reached by the Soriano spouses and ITF would
have the original obligation of respondent spouses on two promissory notes for the
sums of P150,000.00 and P80,000.00, both secured by real estate mortgages,
impliedly modified. The amicable settlement contained modificatory changes. Thus,
(1) it increased the indebtedness of the Soriano spouses, merely due to accruing
interest, from P290,691.00 to P431,200.00; (2) it extended the period of payment and
provided for new terms of payment; and (3) it provided for a waiver of claims,
counterclaims, attorneys fees or damages that the debtor-spouses might have
against their creditor, but the settlement neither cancelled, nor materially altered the
usual clauses in, the real estate mortgages, e.g., the foreclosure of the mortgaged
property in case of default.
Verily, the parties entered into the agreement basically to put an end to Civil Case No.
11
14007 then pending before the Regional Trial Court. Concededly, the provisions of
the settlement were beneficial to the respondent couple. The compromise extended
the terms of payment and implicitly deferred the extrajudicial foreclosure of the
mortgaged property. It was well to the interest of respondent spouses to ensure its
judicial approval; instead, they went to ignore the order of the trial court and virtually
failed to make any further appearance in court. This conduct on the part of
respondent spouses gave petitioner the correct impression that the Sorianos did not

As so well put in Diongzon vs. Court of Appeals,12 a "supposed new agreement is

deemed not to have taken effect where a debtor never complied with his
undertaking." In such a case, the other party is given the option to enforce the
provisions of the amicable settlement or to rescind it 13 and may insist upon the
original demand without the necessity for a prior judicial declaration of rescission.14
WHEREFORE, the decision of the Court of Appeals in C.A. G.R. CV No. 46910,
affirming that of the court a quo,is REVERSED and SET ASIDE, and another is
entered dismissing the complaint in Civil Case No. 20047 before the Regional Trial
Court, Branch 37, of Iloilo City. No costs.
SO ORDERED.

G.R. No. 166704

December 20, 2006

AGRIFINA AQUINTEY, petitioner,

vs.
SPOUSES FELICIDAD AND RICO TIBONG, respondents.

DECISION

CALLEJO, SR., J.:

Before us is a petition for review under Rule 45 of the Revised Rules on Civil
Procedure of the Decision1 of the Court of Appeals in CA-G.R. CV No. 78075, which
affirmed with modification the Decision2 of the Regional Trial Court (RTC), Branch 61,
Baguio City, and the Resolution3 of the appellate court denying reconsideration
thereof.
The Antecedents
On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC of Baguio City, a
complaint for sum of money and damages against the respondents, spouses
Felicidad and Rico Tibong. Agrifina alleged that Felicidad had secured loans from her
on several occasions, at monthly interest rates of 6% to 7%. Despite demands, the
spouses Tibong failed to pay their outstanding loan, amounting to P773,000.00
exclusive of interests. The complaint contained the following prayer:
WHEREFORE, premises considered, it is most respectfully prayed of this
Honorable Court, after due notice and hearing, to render judgment ordering
defendants to pay plaintiff the following:
a). SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS
(P773,000.00) representing the principal obligation of the
defendants with the stipulated interests of six (6%) percent per
month from May 11, 1999 to date and or those that are stipulated
on the contracts as mentioned from paragraph two (2) of the
complaint.

original obligation to Agrifina. They insisted that by virtue of these documents, Agrifina
became the new collector of their debtors; and the obligation to pay the balance of
their loans had been extinguished.
The spouses Tibong specifically denied the material averments in paragraphs 2 and
2.1 of the complaint. While they did not state the total amount of their loans, they
declared that they did not receive anything from Agrifina without any written
receipt.7 They prayed for that the complaint be dismissed.
In their Pre-Trial Brief, the spouses Tibong maintained that they have never obtained
8
any loan from Agrifina without the benefit of a written document.
On August 17, 2000, the trial court issued a Pre-Trial Order where the following
issues of the case were defined:
Whether or not plaintiff is entitled to her claim of P773,000.00;
Whether or not plaintiff is entitled to stipulated interests in the promissory
notes; and
Whether or not the parties are entitled to their claim for damages.
The Case for Petitioner
Agrifina and Felicidad were classmates at the University of Pangasinan. Felicidad's
husband, Rico, also happened to be a distant relative of Agrifina. Upon Felicidad's
prodding, Agrifina agreed to lend money to Felicidad. According to Felicidad, Agrifina
would be earning interests higher than those given by the bank for her money.
Felicidad told Agrifina that since she (Felicidad) was engaged in the sale of dry goods
at the GP Shopping Arcade, she would use the money to buy bonnels and
thread.10 Thus, Agrifina lent a total sum of P773,000.00 to Felicidad, and each loan
transaction was covered by either a promissory note or an acknowledgment
receipt.11Agrifina stated that she had lost the receipts signed by Felicidad for the
12
following amounts: P100,000.00,P34,000.00 and P2,000.00. The particulars of the
transactions are as follows:
Amount

Date Obtained Interest Per Mo. Due Date

b). FIFTEEN PERCENT (15%) of the total accumulated obligations

as attorney's fees.

P 100,000.00 May 11, 1989 6%

August 11, 1989

c). Actual expenses representing the filing fee and other charges
and expenses to be incurred during the prosecution of this case.

4,000.00

June 8, 1989

Further prays for such other relief and remedies just and equitable under the
premises.4

50,000.00

June 13, 1989 6%

On demand

Agrifina appended a copy of the Counter-Affidavit executed by Felicidad in I.S. No.

93-334, as well as copies of the promissory notes and acknowledgment receipts
executed by Felicidad covering the loaned amounts. 5

60,000.00

Aug. 16, 1989 7%

January 1990

205,000.00

Oct. 13, 1989 7%

January 1990

128,000.00

Oct. 19, 1989 7%

January 1990

In their Answer with Counterclaim,6 spouses Tibong admitted that they had secured
loans from Agrifina. The proceeds of the loan were then re-lent to other borrowers at
higher interest rates. They, likewise, alleged that they had executed deeds of
assignment in favor of Agrifina, and that their debtors had executed promissory notes
in Agrifina's favor. According to the spouses Tibong, this resulted in a novation of the

2,000.00

Nov. 12, 1989 6%

April 28, 1990

Rita Chomacog

4,480.00

August 8, 1990 September 23, 1990

10,000.00

June 13, 1990 -

Antoinette
Manuel

12,000.00

October
1990

80,000.00

Jan. 4, 1990

Rosemarie
Bandas

8,000.00

August 8, 1990 February 3, 1991

34,000.00

6%

October 19, 1989

Fely Cirilo

63,600.00

100,000.00

July 14, 1989 5%

September 13, No date

1990

According to Agrifina, Felicidad was able to pay only her loans amounting
to P122,600.00.14

Virginia Morada

62,379.00

August 9, 1990 February 9, 1991

In July 1990, Felicidad gave to Agrifina City Trust Bank Check No. 126804 dated
August 25, 1990 in the amount of P50,000.00 as partial payment.15 However, the
check was dishonored for having been drawn against insufficient funds. 16 Agrifina
then filed a criminal case against Felicidad in the Office of the City Prosecutor. An
Information for violation of Batas Pambansa Bilang 22 was filed against Felicidad,
docketed as Criminal Case No. 11181-R. After trial, the court ordered Felicidad to
pay P50,000.00. Felicidad complied and paid the face value of the check. 17

Carmelita
Casuga

59,000.00

August
1990

28, February 28, 1991

Merlinda Gelacio 17,200.00

August
1990

29, November 29, 199026

October 198913

In the meantime, Agrifina learned that Felicidad had re-loaned the amounts to other
borrowers.18 Agrifina sought the assistance of Atty. Torres G. A-ayo who advised her
to require Felicidad to execute deeds of assignment over Felicidad's debtors. The
lawyer also suggested that Felicidad's debtors execute promissory notes in Agrifina's
favor, to "turn over" their loans from Felicidad. This arrangement would facilitate
collection of Felicidad's account. Agrifina agreed to the proposal. 19 Agrifina, Felicidad,
and the latter's debtors had a conference20 where Atty. A-ayo explained that Agrifina
could apply her collections as payments of Felicidad's account. 21
From August 7, 1990 to October, 1990, Felicidad executed deeds of assignment of
22
credits (obligations) duly notarized by Atty. A-ayo, in which Felicidad transferred and
assigned to Agrifina the total amount of P546,459.00 due from her debtors.23 In the
said deeds, Felicidad confirmed that her debtors were no longer indebted to her for
their respective loans. For her part, Agrifina conformed to the deeds of assignment
24
relative to the loans of Virginia Morada and Corazon Dalisay. She was furnished
25
copies of the deeds as well as the promissory notes.
The following debtors of Felicidad executed promissory notes where they obliged
themselves to pay directly to Agrifina:
Debtors

Account

Date
Instrument

of Date Payable

Juliet & Tommy P50,000.00 August 7, 1990 November 4, 1990 and

Tibong
February 4, 1991
Corazon Dalisay 8,000.00

August 7, 1990 No date

Total

19, March 30, 1991

P284,659.00

Agrifina narrated that Felicidad showed to her the way to the debtors' houses to
enable her to collect from them. One of the debtors, Helen Cabang, did not execute
any promissory note but conformed to the Deed of Assignment of Credit which
27
Felicidad executed in favor of Agrifina. Eliza Abance conformed to the deed of
28
assignment for and in behalf of her sister, Fely Cirilo. Edna Papat-iw was not able to
affix her signature on the deed of assignment nor sign the promissory note because
she was in Taipei, Taiwan.29
Following the execution of the deeds of assignment and promissory notes, Agrifina
30
was able to collect the total amount of P301,000.00 from Felicidad's debtors. In April
1990, she tried to collect the balance of Felicidad's account, but the latter told her to
wait until her debtors had money.31 When Felicidad reneged on her promise, Agrifina
filed a complaint in the Office of the Barangay Captain for the collection
of P773,000.00. However, no settlement was arrived at. 32
The Case for Respondents
Felicidad testified that she and her friend Agrifina had been engaged in the moneylending business.33 Agrifina would lend her money with monthly interest,34 and she, in
turn, would re-lend the money to borrowers at a higher interest rate. Their business
relationship turned sour when Agrifina started complaining that she (Felicidad) was
35
actually earning more than Agrifina. Before the respective maturity dates of her
debtors' loans, Agrifina asked her to pay her account since Agrifina needed money to
buy a house and lot in Manila. However, she told Agrifina that she could not pay yet,
36
as her debtors' loan payments were not yet due. Agrifina then came to her store
every afternoon to collect from her, and persuaded her to go to Atty. Torres G. A-ayo
for legal advice.37 The lawyer suggested that she indorse the accounts of her debtors
to Agrifina so that the latter would be the one to collect from her debtors and she

38

would no longer have any obligation to Agrifina. She then executed deeds of
assignment in favor of Agrifina covering the sums of money due from her debtors.
She signed the deeds prepared by Atty. A-ayo in the presence of Agrifina.39 Some of
the debtors signed the promissory notes which were likewise prepared by the lawyer.
40
Thereafter, Agrifina personally collected from Felicidad's debtors. Felicidad further
narrated that she received P250,000.00 from one of her debtors, Rey Rivera, and
remitted the payment to Agrifina. 41
Agrifina testified, on rebuttal, that she did not enter into a re-lending business with
Felicidad. When she asked Felicidad to consolidate her loans in one document, the
latter told her to seek the assistance of Atty. A-ayo.42 The lawyer suggested that
Felicidad assign her credits in order to help her collect her loans. 43 She agreed to the
deeds of assignment to help Felicidad collect from the debtors. 44
On January 20, 2003, the trial court rendered its Decision45 in favor of Agrifina. The
fallo of the decision reads:
WHEREFORE, judgment is rendered in favor of the plaintiff and against the
defendants ordering the latter to pay the plaintiffs (sic) the following
amounts:
1. P472,000 as actual obligation with the stipulated interest of 6% per month
from May 11, 1999 until the said obligation is fully paid. However, the
amount of P50,000 shall be deducted from the total accumulated interest for
the same was already paid by the defendant as admitted by the plaintiff in
her complaint,
2. P25,000 as attorney's fees,
3. [T]o pay the costs.
SO ORDERED.46
The trial court ruled that Felicidad's obligation had not been novated by the deeds of
assignment and the promissory notes executed by Felicidad's borrowers. It explained
that the documents did not contain any express agreement to novate and extinguish
Felicidad's obligation. It declared that the deeds and notes were separate contracts
which could stand alone from the original indebtedness of Felicidad. Considering,
however, Agrifina's admission that she was able to collect from Felicidad's debtors
the total amount of P301,000.00, this should be deducted from the latter's
accountability.47 Hence, the balance, exclusive of interests, amounted
to P472,000.00.
On appeal, the CA affirmed with modification the decision of the RTC and stated that,
based on the promissory notes and acknowledgment receipts signed by Felicidad, the
appellants secured loans from the appellee in the total principal amount of
only P637,000.00, not P773,000.00 as declared by the trial court. The CA found that,
other than Agrifina's bare testimony that she had lost the promissory notes and
acknowledgment receipts, she failed to present competent documentary evidence to
substantiate her claim that Felicidad had, likewise, borrowed the amounts
of P100,000.00, P34,000.00,
and P2,000.00.
Of
the P637,000.00
total
account,P585,659.00 was covered by the deeds of assignment and promissory notes;
hence, the balance of Felicidad's account amounted to only P51,341.00. The fallo of
the decision reads:

WHEREFORE, in view of the foregoing, the decision dated January 20,

2003 of the RTC, Baguio City, Branch 61 in Civil Case No. 4370-R is
hereby MODIFIED. Defendants-appellants are hereby ordered to pay the
balance of the total indebtedness in the amount of P51,341.00 plus the
stipulated interest of 6% per month from May 11, 1999 until the finality of this
decision.
SO ORDERED.48
The appellate court sustained the trial court's ruling that Felicidad's obligation to
Agrifina had not been novated by the deeds of assignment and promissory notes
executed in the latter's favor. Although Agrifina was subrogated as a new creditor in
lieu of Felicidad, Felicidad's obligation to Agrifina under the loan transaction
remained; there was no intention on their part to novate the original obligation.
Nonetheless, the appellate court held that the legal effects of the deeds of
assignment could not be totally disregarded. The assignments of credits were
onerous, hence, had the effect of payment, pro tanto, of the outstanding obligation.
The fact that Agrifina never repudiated or rescinded such assignments only shows
that she had accepted and conformed to it. Consequently, she cannot collect both
from Felicidad and her individual debtors without running afoul to the principle of
unjust enrichment. Agrifina's primary recourse then is against Felicidad's individual
debtors on the basis of the deeds of assignment and promissory notes.
The CA further declared that the deeds of assignment executed by Felicidad had the
effect of payment of her outstanding obligation to Agrifina in the amount
of P585,659.00. It ruled that, since an assignment of credit is in the nature of a sale,
the assignors remained liable for the warranties as they are responsible for the
existence and legality of the credit at the time of the assignment.
Both parties moved to have the decision reconsidered,
denied both motions on December 21, 2004.50

49

but the appellate court

Agrifina, now petitioner, filed the instant petition, contending that

1. The Honorable Court of Appeals erred in ruling that the deeds of
assignment in favor of petitioner has the effect of payment of the original
obligation even as it ruled out that the original obligation and the assigned
credit are distinct and separate and can stand independently from each
other;
2. The Honorable Court of Appeals erred in passing upon issues raised for
the first time on appeal; and
3. The Honorable Court of Appeals erred in resolving fact not in issue. 51
Petitioner avers that the appellate court erred in ruling that respondents' original
obligation amounted to onlyP637,000.00 (instead of P773,000.00) simply because
she lost the promissory notes/receipts which evidenced the loans executed by
respondent Felicidad Tibong. She insists that the issue of whether Felicidad owed her
less than P773,000.00 was not raised by respondents during pre-trial and in their
appellate brief; the appellate court was thus proscribed from taking cognizance of the
issue.
Petitioner avers that respondents failed to deny, in their verified answer, that they had
secured the P773,000.00 loan; hence, respondents are deemed to have admitted the
allegation in the complaint that the loans secured by respondent from her amounted

to P773,000.00. As gleaned from the trial court's pre-trial order, the main issue is
whether or not she should be made to pay this amount.
Petitioner further maintains that the CA erred in deducting the total amount
of P585,659.00 covered by the deeds of assignment executed by Felicidad and the
promissory notes executed by the latter's debtors, and that the balance of
respondents' account was only P51,341.00. Moreover, the appellate court's ruling that
there was no novation runs counter to its holding that the primary recourse was
against Felicidad's debtors. Petitioner avers that of the 11 deeds of assignment and
52
promissory notes, only two bore her signature. She insists that she is not bound by
the deeds which she did not sign. By assigning the obligation to pay petitioner their
loan accounts, Felicidad's debtors merely assumed the latter's obligation and became
co-debtors to petitioner. Respondents were not released from their obligation under
their loan transactions, and she had the option to demand payment from them or their
debtors. Citing the ruling of this Court in Magdalena Estates, Inc. v.
Rodriguez,53 petitioner insists that the first debtor is not released from responsibility
upon reaching an agreement with the creditor. The payment by a third person of the
first debtor's obligation does not constitute novation, and the creditor can still enforce
the obligation against the original debtor. Petitioner also cites the ruling of this Court
in Guerrero v. Court of Appeals.54
In their Comment on the petition, respondents aver that by virtue of respondent
Felicidad's execution of the deeds of assignment, and the original debtors' execution
of the promissory notes (along with their conformity to the deeds of assignment with
petitioner's consent), their loan accounts with petitioner amounting to P585,659.00
had been effectively extinguished. Respondents point out that this is in accordance
with Article 1291, paragraph 2, of the Civil Code. Thus, the original debtors of
respondents had been substituted as petitioner's new debtors.
Respondents counter that petitioner had been subrogated to their right to collect the
loan accounts of their debtors. In fact, petitioner, as the new creditor of respondents'
former debtors had been able to collect the latter's loan accounts which amounted
to P301,000.00. The sums received by respondents' debtors were the same loans
which they obliged to pay to petitioner under the promissory notes executed in
petitioner's favor.
Respondents aver that their obligation to petitioner cannot stand or exist separately
from the original debtors' obligation to petitioner as the new creditor. If allowed to
collect from them as well as from their original debtors, petitioner would be enriching
herself at the expense of respondents. Thus, despite the fact that petitioner had
collected P172,600.00 from respondents and P301,000.00 from the original debtors,
petitioner still sought to collect P773,000.00 from them in the RTC. Under the deeds
of assignment executed by Felicidad and the original debtors' promissory notes, the
original debtors' accounts were assigned to petitioner who would be the new creditor.
In fine, respondents are no longer liable to petitioner for the balance of their loan
account inclusive of interests. Respondents also insist that petitioner failed to prove
that she (petitioner) was merely authorized to collect the accounts of the original
debtors so as to to facilitate the payment of respondents' loan obligation.

execution of the deeds of assignment in favor of petitioner, relative to the loans of

Edna Papat-iw, Helen Cabang, Antoinette Manuel, and Fely Cirilo in the total amount
of P371,000.00.
The Ruling of the Court
We have carefully reviewed the brief of respondents as appellants in the CA, and find
that, indeed, they had raised the issue of whether they received P773,000.00 by way
of loans from petitioner. They averred that, as gleaned from the documentary
evidence of petitioner in the RTC, the total amount they borrowed was
onlyP673,000.00. They asserted that petitioner failed to adduce concrete evidence
55
that they received P773,000.00 from her.
We agree, however, with petitioner that the appellate court erred in reversing the
finding of the RTC simply because petitioner failed to present any document or
receipt signed by Felicidad.
Section 10, Rule 8 of the Rules of Civil Procedure requires a defendant to "specify
each material allegation of fact the truth of which he does not admit and, whenever
practicable, x x x set forth the substance of the matters upon which he relies to
support his denial.56
Section 11, Rule 8 of the same Rules provides that allegations of the complaint not
specifically denied are deemed admitted. 57
The purpose of requiring the defendant to make a specific denial is to make him
disclose the matters alleged in the complaint which he succinctly intends to disprove
at the trial, together with the matter which he relied upon to support the denial. The
parties are compelled to lay their cards on the table. 58
A denial is not made specific simply because it is so qualified by the defendant. A
general denial does not become specific by the use of the word "specifically." When
matters of whether the defendant alleges having no knowledge or information
sufficient to form a belief are plainly and necessarily within the defendant's
knowledge, an alleged "ignorance or lack of information" will not be considered as a
specific denial. Section 11, Rule 8 of the Rules also provides that material averments
in the complaint other than those as to the amount of unliquidated damages shall be
deemed admitted when not specifically denied. 59 Thus, the answer should be so
definite and certain in its allegations that the pleader's adversary should not be left in
doubt as to what is admitted, what is denied, and what is covered by denials of
knowledge as sufficient to form a belief.60
In the present case, petitioner alleged the following in her complaint:
2. That defendants are indebted to the plaintiff in the principal amount of
SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS (P773,000.00)
Philippine Currency with a stipulated interest which are broken down as
follows. The said principal amounts was admitted by the defendants in their
counter-affidavit submitted before the court. Such affidavit is hereby
attached as Annex "A;"61

The Issues

xxxx

The threshold issues are: (1) whether respondent Felicidad Tibong

borrowed P773,000.00 from petitioner; and (2) whether the obligation of respondents
to pay the balance of their loans, including interest, was partially extinguished by the

H) The sum of THIRTY FOUR THOUSAND PESOS (P34,000.00) with

interest at six (6%) per cent per month and payable on October 19, 1989,
however[,] the receipt for the meantime cannot be recovered as it was

misplaced by the plaintiff but the letter of defendant FELICIDAD TIBONG is

hereby attached as Annex "H" for the appreciation of the Honorable court;
I) The sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) with
interest at five (5%) percent per month, obtained on July 14, 1989 and
payable on October 14, 1989. Such receipt was lost but admitted by the
defendants in their counter-affidavit as attached [to] this complaint and
marked as Annex "A" mentioned in paragraph one (1); x x x62
In their Answer, respondents admitted that they had secured loans from petitioner.
While the allegations in paragraph 2 of the complaint were specifically denied,
respondents merely averred that petitioner and respondent Felicidad entered into an
agreement for the lending of money to interested borrowers at a higher interest rate.
Respondents failed to declare the exact amount of the loans they had secured from
petitioner. They also failed to deny the allegation in paragraph 2 of the complaint that
respondent Felicidad signed and submitted a counter-affidavit in I.S. No. 93-334
where she admitted having secured loans from petitioner in the amount
ofP773,000.00. Respondents, likewise, failed to deny the allegation in paragraph 2(h)
of the complaint that respondents had secured a P34,000.00 loan payable on October
19, 1989, evidenced by a receipt which petitioner had misplaced. Although
respondents specifically denied in paragraph 2.11 of their Answer the allegations in
paragraph 2(I) of the complaint, they merely alleged that "they have not received
sums of money from the plaintiff without any receipt therefor."
Respondents, likewise, failed to specifically deny another allegation in the complaint
that they had secured aP100,000.00 loan from petitioner on July 14, 1989; that the
loan was payable on October 14, 1989; and evidenced by a receipt which petitioner
claimed to have lost. Neither did respondents deny the allegation that respondents
admitted their loan of P100,000.00 in the counter-affidavit of respondent Felicidad,
which was appended to the complaint as Annex "A." In fine, respondents had
admitted the existence of their P773,000.00 loan from petitioner.
We agree with the finding of the CA that petitioner had no right to collect from
respondents the total amount ofP301,000.00, which includes more than P178,980.00
which respondent Felicidad collected from Tibong, Dalisay, Morada, Chomacog,
Cabang, Casuga, Gelacio, and Manuel. Petitioner cannot again collect the same
amount from respondents; otherwise, she would be enriching herself at their expense.
Neither can petitioner collect from respondents more than P103,500.00 which she
had already collected from Nimo, Cantas, Rivera, Donguis, Fernandez and Ramirez.
There is no longer a need for the Court to still resolve the issue of whether
respondents' obligation to pay the balance of their loan account to petitioner was
partially extinguished by the promissory notes executed by Juliet Tibong, Corazon
Dalisay, Rita Chomacog, Carmelita Casuga, Merlinda Gelacio and Antoinette Manuel
because, as admitted by petitioner, she was able to collect the amounts under the
notes from said debtors and applied them to respondents' accounts.
Under Article 1231(b) of the New Civil Code, novation is enumerated as one of the
ways by which obligations are extinguished. Obligations may be modified by changing
63
their object or principal creditor or by substituting the person of the debtor. The
burden to prove the defense that an obligation has been extinguished by novation
64
falls on the debtor. The nature of novation was extensively explained in Iloilo
65
Traders Finance, Inc. v. Heirs of Sps. Oscar Soriano, Jr., as follows:

Novation may either be extinctive or modificatory, much being dependent on

the nature of the change and the intention of the parties. Extinctive novation
is never presumed; there must be an express intention to novate; in cases
where it is implied, the acts of the parties must clearly demonstrate their
intent to dissolve the old obligation as the moving consideration for the
emergence of the new one. Implied novation necessitates that the
incompatibility between the old and new obligation be total on every point
such that the old obligation is completely superseded by the new one. The
test of incompatibility is whether they can stand together, each one having
an independent existence; if they cannot and are irreconciliable, the
subsequent obligation would also extinguish the first.
An extinctive novation would thus have the twin effects of, first, extinguishing
an existing obligation and, second, creating a new one in its stead. This kind
of novation presupposes a confluence of four essential requisites: (1) a
previous valid obligation; (2) an agreement of all parties concerned to a new
contract; (3) the extinguishment of the old obligation; and (4) the birth of a
valid new obligation. Novation is merely modificatory where the change
brought about by any subsequent agreement is merely incidental to the main
obligation (e.g., a change in interest rates or an extension of time to pay); in
this instance, the new agreement will not have the effect of extinguishing the
first but would merely supplement it or supplant some but not all of its
66
provisions. (Citations Omitted)
Novation which consists in substituting a new debtor (delegado) in the place of the
original one (delegante) may be made even without the knowledge or against the will
of the latter but not without the consent of the creditor. Substitution of the person of
the debtor may be effected by delegacion, meaning, the debtor offers, and the
creditor (delegatario), accepts a third person who consents to the substitution and
assumes the obligation. Thus, the consent of those three persons is necessary. 67 In
this kind of novation, it is not enough to extend the juridical relation to a third person;
it is necessary that the old debtor be released from the obligation, and the third
person or new debtor take his place in the relation. 68 Without such release, there is no
novation; the third person who has assumed the obligation of the debtor merely
becomes a co-debtor or a surety. If there is no agreement as to solidarity, the first and
the new debtor are considered obligated jointly. 69
In Di Franco v. Steinbaum,70 the appellate court ruled that as to the consideration
necessary to support a contract of novation, the rule is the same as in other contracts.
The consideration need not be pecuniary or even beneficial to the person promising.
It is sufficient if it be a loss of an inconvenience, such as the relinquishment of a right
or the discharge of a debt, the postponement of a remedy, the discontinuance of a
suit, or forbearance to sue.
In City National Bank of Huron, S.D. v. Fuller,71 the Circuit Court of Appeals ruled
that the theory of novation is that the new debtor contracts with the old debtor
that he will pay the debt, and also to the same effect with the creditor, while the
latter agrees to accept the new debtor for the old. A novation is not made by
showing that the substituted debtor agreed to pay the debt; it must appear that he
agreed with the creditor to do so. Moreover, the agreement must be based on the
consideration of the creditor's agreement to look to the new debtor instead of
the old. It is not essential that acceptance of the terms of the novation and release of
the debtor be shown by express agreement. Facts and circumstances surrounding

the transaction and the subsequent conduct of the parties may show acceptance as
clearly as an express agreement, albeit implied. 72
We find in this case that the CA correctly found that respondents' obligation to pay the
balance of their account with petitioner was extinguished, pro tanto, by the deeds of
assignment of credit executed by respondent Felicidad in favor of petitioner.
An assignment of credit is an agreement by virtue of which the owner of a credit,
known as the assignor, by a legal cause, such as sale, dation in payment, exchange
or donation, and without the consent of the debtor, transfers his credit and accessory
rights to another, known as the assignee, who acquires the power to enforce it to the
73
same extent as the assignor could enforce it against the debtor. It may be in the
form of sale, but at times it may constitute a dation in payment, such as when a
debtor, in order to obtain a release from his debt, assigns to his creditor a credit he
has against a third person.74
In Vda. de Jayme v. Court of Appeals,75 the Court held that dacion en pago is the
delivery and transmission of ownership of a thing by the debtor to the creditor as an
accepted equivalent of the performance of the obligation. It is a special mode of
payment where the debtor offers another thing to the creditor who accepts it as
equivalent of payment of an outstanding debt. The undertaking really partakes in one
sense of the nature of sale, that is, the creditor is really buying the thing or property of
the debtor, payment for which is to be charged against the debtor's obligation. As
such, the essential elements of a contract of sale, namely, consent, object certain,
and cause or consideration must be present. In its modern concept, what actually
takes place in dacion en pago is an objective novation of the obligation where the
thing offered as an accepted equivalent of the performance of an obligation is
considered as the object of the contract of sale, while the debt is considered as the
purchase price. In any case, common consent is an essential prerequisite, be it sale
or novation, to have the effect of totally extinguishing the debt or obligation. 76
The requisites for dacion en pago are: (1) there must be a performance of the
prestation in lieu of payment (animo solvendi) which may consist in the delivery of a
corporeal thing or a real right or a credit against the third person; (2) there must be
some difference between the prestation due and that which is given in substitution
(aliud pro alio); and (3) there must be an agreement between the creditor and debtor
that the obligation is immediately extinguished by reason of the performance of a
prestation different from that due. 77
All the requisites for a valid dation in payment are present in this case. As gleaned
from the deeds, respondent Felicidad assigned to petitioner her credits "to make
good" the balance of her obligation. Felicidad testified that she executed the deeds to
enable her to make partial payments of her account, since she could not comply with
petitioner's frenetic demands to pay the account in cash. Petitioner and respondent
Felicidad agreed to relieve the latter of her obligation to pay the balance of her
account, and for petitioner to collect the same from respondent's debtors.
Admittedly, some of respondents' debtors, like Edna Papat-iw, were not able to affix
their conformity to the deeds. In an assignment of credit, however, the consent of the
debtor is not essential for its perfection; the knowledge thereof or lack of it affecting
only the efficaciousness or inefficaciousness of any payment that might have been
made. The assignment binds the debtor upon acquiring knowledge of the assignment
but he is entitled, even then, to raise against the assignee the same defenses he
could set up against the assignor78 necessary in order that assignment may fully

produce legal effects. Thus, the duty to pay does not depend on the consent of the
debtor. The purpose of the notice is only to inform that debtor from the date of the
assignment. Payment should be made to the assignee and not to the original creditor.
The transfer of rights takes place upon perfection of the contract, and ownership of
the right, including all appurtenant accessory rights, is acquired by the
assignee79 who steps into the shoes of the original creditor as subrogee of the
latter80 from that amount, the ownership of the right is acquired by the assignee. The
law does not require any formal notice to bind the debtor to the assignee, all that the
law requires is knowledge of the assignment. Even if the debtor had not been notified,
but came to know of the assignment by whatever means, the debtor is bound by it. If
the document of assignment is public, it is evidence even against a third person of the
facts which gave rise to its execution and of the date of the latter. The transfer of the
credit must therefore be held valid and effective from the moment it is made to appear
in such instrument, and third persons must recognize it as such, in view of the
authenticity of the document, which precludes all suspicion of fraud with respect to
81
the date of the transfer or assignment of the credit.
As gleaned from the deeds executed by respondent Felicidad relative to the accounts
of her other debtors, petitioner was authorized to collect the amounts of P6,000.00
from Cabang, and P63,600.00 from Cirilo. They obliged themselves to pay petitioner.
Respondent Felicidad, likewise, unequivocably declared that Cabang and Cirilo no
longer had any obligation to her.
Equally significant is the fact that, since 1990, when respondent Felicidad executed
the deeds, petitioner no longer attempted to collect from respondents the balance of
their accounts. It was only in 1999, or after nine (9) years had elapsed that petitioner
attempted to collect from respondents. In the meantime, petitioner had collected from
respondents' debtors the amount of P301,000.00.
While it is true that respondent Felicidad likewise authorized petitioner in the deeds to
collect the debtors' accounts, and for the latter to pay the same directly, it cannot
thereby be considered that respondent merely authorized petitioner to collect the
accounts of respondents' debtors and for her to apply her collections in partial
payments of their accounts. It bears stressing that petitioner, as assignee, acquired
all the rights and remedies passed by Felicidad, as assignee, at the time of the
assignment.82 Such rights and remedies include the right to collect her debtors'
obligations to her.
Petitioner cannot find solace in the Court's ruling in Magdalena Estates. In that case,
the Court ruled that the mere fact that novation does not follow as a matter of course
when the creditor receives a guaranty or accepts payments from a third person who
has agreed to assume the obligation when there is no agreement that the first debtor
would be released from responsibility. Thus, the creditor can still enforce the
obligation against the original debtor.
In the present case, petitioner and respondent Felicidad agreed that the amounts due
from respondents' debtors were intended to "make good in part" the account of
respondents. Case law is that, an assignment will, ordinarily, be interpreted or
construed in accordance with the rules of construction governing contracts generally,
the primary object being always to ascertain and carry out the intention of the parties.
This intention is to be derived from a consideration of the whole instrument, all parts
of which should be given effect, and is to be sought in the words and language
employed.83

Indeed, the Court must not go beyond the rational scope of the words used in
construing an assignment, words should be construed according to their ordinary
meaning, unless something in the assignment indicates that they are being used in a
special sense. So, if the words are free from ambiguity and expressed plainly the
purpose of the instrument, there is no occasion for interpretation; but where
necessary, words must be interpreted in the light of the particular subject
matter.84 And surrounding circumstances may be considered in order to understand
more perfectly the intention of the parties. Thus, the object to be accomplished
through the assignment, and the relations and conduct of the parties may be
considered in construing the document.
Although it has been said that an ambiguous or uncertain assignment should be
construed most strictly against the assignor, the general rule is that any ambiguity or
uncertainty in the meaning of an assignment will be resolved against the party who
prepared it; hence, if the assignment was prepared by the assignee, it will be
construed most strictly against him or her. 85 One who chooses the words by which a
right is given ought to be held to the strict interpretation of them, rather than the other
who only accepts them.86
Considering all the foregoing, we find that respondents still have a balance on their
account to petitioner in the principal amount of P33,841.00, the difference between
their loan of P773,000.00 less P585,659.00, the payment of respondents' other
debtors amounting to P103,500.00, and the P50,000.00 payment made by
respondents.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The Decision and
Resolution of the Court of Appeals are AFFIRMED with MODIFICATION in that the
balance of the principal account of the respondents to the petitioner is P33,841.00.
No costs.
SO ORDERED.

G.R. No. 147950

December 11, 2003

CALIFORNIA BUS LINES, INC., petitioner,

vs.
STATE INVESTMENT HOUSE, INC., respondent.
DECISION
QUISUMBING, J.:
In this petition for review, California Bus Lines, Inc., assails the decision, 1 dated April
17, 2001, of the Court of Appeals in CA-G.R. CV No. 52667, reversing the judgment 2,
dated June 3, 1993, of the Regional Trial Court of Manila, Branch 13, in Civil Case
No. 84-28505 entitled State Investment House, Inc. v. California Bus Lines, Inc., for
collection of a sum of money. The Court of Appeals held petitioner California Bus
Lines, Inc., liable for the value of five promissory notes assigned to respondent State
Investment House, Inc.
The facts, as culled from the records, are as follows:
Sometime in 1979, Delta Motors CorporationM.A.N. Division (Delta) applied for
financial assistance from respondent State Investment House, Inc. (hereafter SIHI), a
domestic corporation engaged in the business of quasi-banking. SIHI agreed to
extend a credit line to Delta for P25,000,000.00 in three separate credit agreements
3
dated May 11, June 19, and August 22, 1979. On several occasions, Delta availed of
the credit line by discounting with SIHI some of its receivables, which evidence actual
sales of Deltas vehicles. Delta eventually became indebted to SIHI to the tune
4
of P24,010,269.32.
Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc.
(hereafter CBLI), purchased on installment basis 35 units of M.A.N. Diesel Buses and
two (2) units of M.A.N. Diesel Conversion Engines from Delta. To secure the payment
of the purchase price of the 35 buses, CBLI and its president, Mr. Dionisio O. Llamas,
executed sixteen (16) promissory notes in favor of Delta on January 23 and April 25,
1980.5 In each promissory note, CBLI promised to pay Delta or order, P2,314,000
payable in 60 monthly installments starting August 31, 1980, with interest at 14% per
annum. CBLI further promised to pay the holder of the said notes 25% of the amount
due on the same as attorneys fees and expenses of collection, whether actually
incurred or not, in case of judicial proceedings to enforce collection. In addition to the
notes, CBLI executed chattel mortgages over the 35 buses in Deltas favor.
When CBLI defaulted on all payments due, it entered into a restructuring agreement
with Delta on October 7, 1981, to cover its overdue obligations under the promissory
notes.6 The restructuring agreement provided for a new schedule of payments of
CBLIs past due installments, extending the period to pay, and stipulating daily
remittance instead of the previously agreed monthly remittance of payments. In case
of default, Delta would have the authority to take over the management and
operations of CBLI until CBLI and/or its president, Mr. Dionisio Llamas, remitted
and/or updated CBLIs past due account. CBLI and Delta also increased the interest
rate to 16% p.a. and added a documentation fee of 2% p.a. and a 4% p.a.
restructuring fee.
On December 23, 1981, Delta executed a Continuing Deed of Assignment of
Receivables7 in favor of SIHI as security for the payment of its obligations to SIHI per
the credit agreements. In view of Deltas failure to pay, the loan agreements were

restructured under a Memorandum of Agreement dated March 31, 1982. Delta

obligated itself to pay a fixed monthly amortization of P400,000 to SIHI and to
discount with SIHI P8,000,000 worth of receivables with the understanding that SIHI
shall apply the proceeds against Deltas overdue accounts.
CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to
threaten CBLI with the enforcement of the management takeover clause. To pre-empt
the take-over, CBLI filed on May 3, 1982, a complaint for injunction9, docketed as
Civil Case No. 0023-P, with the Court of First Instance of Rizal, Pasay City, (now
Regional Trial Court of Pasay City). In due time, Delta filed its amended answer with
applications for the issuance of a writ of preliminary mandatory injunction to enforce
the management takeover clause and a writ of preliminary attachment over the buses
it sold to CBLI.10 On December 27, 1982,11 the trial court granted Deltas prayer for
issuance of a writ of preliminary mandatory injunction and preliminary attachment on
account of the fraudulent disposition by CBLI of its assets.
On September 15, 1983, pursuant to the Memorandum of Agreement, Delta executed
12
13
a Deed of Sale assigning to SIHI five (5) of the sixteen (16) promissory notes from
California Bus Lines, Inc. At the time of assignment, these five promissory notes,
identified and numbered as 80-53, 80-54, 80-55, 80-56, and 80-57, had a total value
of P16,152,819.80 inclusive of interest at 14% per annum.
SIHI subsequently sent a demand letter dated December 13, 1983,14 to CBLI
requiring CBLI to remit the payments due on the five promissory notes directly to it.
CBLI replied informing SIHI of Civil Case No. 0023-P and of the fact that Delta had
taken over its management and operations.15
As regards Deltas remaining obligation to SIHI, Delta offered its available bus units,
valued at P27,067,162.22, as payment in kind.16 On December 29, 1983, SIHI
accepted Deltas offer, and Delta transferred the ownership of its available buses to
SIHI, which in turn acknowledged full payment of Deltas remaining
obligation.17 When SIHI was unable to take possession of the buses, SIHI filed a
petition for recovery of possession with prayer for issuance of a writ of replevin before
the RTC of Manila, Branch 6, docketed as Civil Case No. 84-23019. The Manila RTC
issued a writ of replevin and SIHI was able to take possession of 17 bus units
belonging to Delta. SIHI applied the proceeds from the sale of the said 17 buses
amounting to P12,870,526.98 to Deltas outstanding obligation. Deltas obligation to
SIHI was thus reduced to P20,061,898.97. On December 5, 1984, Branch 6 of the
RTC of Manila rendered judgment in Civil Case No. 84-23019 ordering Delta to pay
SIHI this amount.
Thereafter, Delta and CBLI entered into a compromise agreement on July 24,
1984,18 in Civil Case No. 0023-P, the injunction case before the RTC of Pasay. CBLI
agreed that Delta would exercise its right to extrajudicially foreclose on the chattel
mortgages over the 35 bus units. The RTC of Pasay approved this compromise
agreement the following day, July 25, 1984.19 Following this, CBLI vehemently
refused to pay SIHI the value of the five promissory notes, contending that the
compromise agreement was in full settlement of all its obligations to Delta including
its obligations under the promissory notes.
On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No. 84-28505,
against CBLI in the Regional Trial Court of Manila, Branch 34, to collect on the five (5)
promissory notes with interest at 14% p.a. SIHI also prayed for the issuance of a writ
of preliminary attachment against the properties of CBLI. 20

On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of chattel
mortgages pursuant to its compromise agreement with CBLI. On January 2, 1985,
Delta filed in the RTC of Pasay a motion for execution of the judgment based on the
21
22
compromise agreement. The RTC of Pasay granted this motion the following day.
In view of Deltas petition and motion for execution per the judgment of compromise,
the RTC of Manila granted in Civil Case No. 84-28505 SIHIs application for
preliminary attachment on January 4, 1985. 23 Consequently, SIHI was able to attach
and physically take possession of thirty-two (32) buses belonging to CBLI.24 However,
acting on CBLIs motion to quash the writ of preliminary attachment, the same court
resolved on January 15, 1986,25 to discharge the writ of preliminary attachment. SIHI
assailed the discharge of the writ before the Intermediate Appellate Court (now Court
of Appeals) in a petition for certiorari and prohibition, docketed as CA-G.R. SP No.
08378. On July 31, 1987, the Court of Appeals granted SIHIs petition in CA-GR SP
No. 08378 and ruled that the writ of preliminary attachment issued by Branch 34 of
the RTC Manila in Civil Case No. 84-28505 should stay.26The decision of the Court of
27
Appeals attained finality on August 22, 1987.
Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the sheriff of
Pasay City conducted a public auction and issued a certificate of sheriffs sale to
Delta on April 2, 1987, attesting to the fact that Delta bought 14 of the 35 buses
for P3,920,000.28 On April 7, 1987, the sheriff of Manila, by virtue of the writ of
execution dated March 27, 1987, issued by Branch 6 of the RTC of Manila in Civil
Case No. 84-23019, sold the same 14 buses at public auction in partial satisfaction of
the judgment SIHI obtained against Delta in Civil Case No. 84-23019.
Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of the RTC
of Manila in view of the retirement of the presiding judge of Branch 34. Subsequently,
SIHI moved to sell the sixteen (16) buses of CBLI which had previously been
attached by the sheriff in Civil Case No. 84-28505 pursuant to the January 4, 1985,
Order of the RTC of Manila.29 SIHIs motion was granted on December 16,
1987.30 On November 29, 1988, however, SIHI filed an urgent ex-parte motion to
amend this order claiming that through inadvertence and excusable negligence of its
new counsel, it made a mistake in the list of buses in the Motion to Sell Attached
Properties it had earlier filed.31 SIHI explained that 14 of the buses listed had already
been sold to Delta on April 2, 1987, by virtue of the January 3, 1985 Order of the RTC
of Pasay, and that two of the buses listed had been released to third party, claimant
Pilipinas Bank, by Order dated September 16, 198732 of Branch 13 of the RTC of
Manila.
CBLI opposed SIHIs motion to allow the sale of the 16 buses. On May 3,
1989,33 Branch 13 of the RTC of Manila denied SIHIs urgent motion to allow the sale
of the 16 buses listed in its motion to amend. The trial court ruled that the best
interest of the parties might be better served by denying further sales of the buses
and to go direct to the trial of the case on the merits. 34
After trial, judgment was rendered in Civil Case No. 84-28505 on June 3, 1993,
discharging CBLI from liability on the five promissory notes. The trial court likewise
favorably ruled on CBLIs compulsory counterclaim. The trial court directed SIHI to
return the 16 buses or to pay CBLI P4,000,000 representing the value of the seized
buses, with interest at 12% p.a. to begin from January 11, 1985, the date SIHI seized
the buses, until payment is made. In ruling against SIHI, the trial court held that the
restructuring agreement dated October 7, 1981, between Delta and CBLI novated the
five promissory notes; hence, at the time Delta assigned the five promissory notes to

SIHI, the notes were already merged in the restructuring agreement and cannot be
enforced against CBLI.
SIHI appealed the decision to the Court of Appeals. The case was docketed as CAG.R. CV No. 52667. On April 17, 2001, the Court of Appeals decided CA-G.R. CV No.
52667 in this manner:
WHEREFORE, based on the foregoing premises and finding the appeal to be
meritorious, We find defendant-appellee CBLI liable for the value of the five (5)
promissory notes subject of the complaint a quo less the proceeds from the attached
sixteen (16) buses. The award of attorneys fees and costs is eliminated. The
appealed decision is hereby REVERSED. No costs.
SO ORDERED.35
Hence, this appeal where CBLI contends that
I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE
RESTRUCTURING AGREEMENT BETWEEN DELTA AND THE
PETITIONER DID NOT SUBSTANTIALLY NOVATE THE TERMS OF THE
FIVE PROMISSORY NOTES.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE
COMPROMISE AGREEMENT BETWEEN DELTA AND THE PETITIONER
IN THE PASAY CITY CASE DID NOT SUPERSEDE AND DISCHARGE
THE PROMISSORY NOTES.
III. THE COURT OF APPEALS ERRED IN UPHOLDING THE CONTINUING
VALIDITY OF THE PRELIMINARY ATTACHMENT AND EXONERATING
THE RESPONDENT OF MALEFACTIONS IN PRESERVING AND
ASSERTING ITS RIGHTS THEREUNDER.36
Essentially, the issues are (1) whether the Restructuring Agreement dated October 7,
1981, between petitioner CBLI and Delta Motors, Corp. novated the five promissory
notes Delta Motors, Corp. assigned to respondent SIHI, and (2) whether the
compromise agreement in Civil Case No. 0023-P superseded and/or discharged the
subject five promissory notes. The issues being interrelated, they shall be jointly
discussed.
CBLI first contends that the Restructuring Agreement did not merely change the
incidental elements of the obligation under all sixteen (16) promissory notes, but it
also increased the obligations of CBLI with the addition of new obligations that were
incompatible with the old obligations in the said notes.37 CBLI adds that even if the
restructuring agreement did not totally extinguish the obligations under the sixteen
(16) promissory notes, the July 24, 1984, compromise agreement executed in Civil
38
Case No. 0023-P did. CBLI cites paragraph 5 of the compromise agreement which
states that the agreement between it and CBLI was in "full and final settlement,
adjudication and termination of all their rights and obligations as of the date of (the)
agreement, and of the issues in (the) case." According to CBLI, inasmuch as the five
promissory notes were subject matters of the Civil Case No. 0023-P, the decision
39
approving the compromise agreement operated as res judicata in the present case.
Novation has been defined as the extinguishment of an obligation by the substitution
or change of the obligation by a subsequent one which terminates the first, either by
changing the object or principal conditions, or by substituting the person of the debtor,
or subrogating a third person in the rights of the creditor.40

41

Novation, in its broad concept, may either be extinctive or modificatory. It is

extinctive when an old obligation is terminated by the creation of a new obligation that
takes the place of the former; it is merely modificatory when the old obligation
42
subsists to the extent it remains compatible with the amendatory agreement. An
extinctive novation results either by changing the object or principal conditions
(objective or real), or by substituting the person of the debtor or subrogating a third
person in the rights of the creditor (subjective or personal). 43 Novation has two
functions: one to extinguish an existing obligation, the other to substitute a new one in
44
its place. For novation to take place, four essential requisites have to be met,
namely, (1) a previous valid obligation; (2) an agreement of all parties concerned to a
new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid
new obligation.45
46

Novation is never presumed, and the animus novandi, whether totally or partially,
must appear by express agreement of the parties, or by their acts that are too clear
and unequivocal to be mistaken.47
The extinguishment of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. 48 The term "expressly"
means that the contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. 49 Upon the other hand, no
specific form is required for an implied novation, and all that is prescribed by law
would be an incompatibility between the two contracts. 50 While there is really no hard
and fast rule to determine what might constitute to be a sufficient change that can
bring about novation, the touchstone for contrariety, however, would be an
irreconcilable incompatibility between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of novation and
thereby produce the effect of extinguishing an obligation by another which substitutes
the same. The first is when novation has been explicitly stated and declared in
unequivocal terms. The second is when the old and the new obligations are
incompatible on every point. The test of incompatibility is whether the two obligations
can stand together, each one having its independent existence. 51 If they cannot, they
are incompatible and the latter obligation novates the first. 52Corollarily, changes that
breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements of the obligation, such
as its object, cause or principal conditions thereof; otherwise, the change would be
merely modificatory in nature and insufficient to extinguish the original obligation.53

mere extension of payment and the addition of another obligation not incompatible
with the old one is not a novation thereof.
In this case, the attendant facts do not make out a case of novation. The restructuring
agreement between Delta and CBLI executed on October 7, 1981, shows that the
parties did not expressly stipulate that the restructuring agreement novated the
promissory notes. Absent an unequivocal declaration of extinguishment of the preexisting obligation, only a showing of complete incompatibility between the old and
the new obligation would sustain a finding of novation by implication. 59 However, our
review of its terms yields no incompatibility between the promissory notes and the
restructuring agreement.
The five promissory notes, which Delta assigned to SIHI on September 13, 1983,
contained the following common stipulations:
1. They were payable in 60 monthly installments up to July 31, 1985;
2. Interest: 14% per annum;
3. Failure to pay any of the installments would render the entire remaining
balance due and payable at the option of the holder of the notes;
4. In case of judicial collection on the notes, the maker (CBLI) and co-maker
(its president, Mr. Dionisio O. Llamas, Jr) were solidarily liable of attorneys
fees and expenses of 25% of the amount due in addition to the costs of suit.
The restructuring agreement, for its part, had the following provisions:
WHEREAS, CBL and LLAMAS admit their past due installment on the following
promissory notes:
a. PN Nos. 16 to 26 (11 units)
Past Due as of September 30, 1981 P1,411,434.00
b. PN Nos. 52 to 57 (24 units)
Past Due as of September 30, 1981 P1,105,353.00
WHEREAS, the parties agreed to restructure the above-mentioned past due
installments under the following terms and conditions:
a. PN Nos. 16 to 26 (11 units) 37 months
PN Nos. 52 to 57 (24 units) 46 months

The necessity to prove the foregoing by clear and convincing evidence is accentuated
where the obligation of the debtor invoking the defense of novation has already
matured.54

b. Interest Rate: 16% per annum

With respect to obligations to pay a sum of money, this Court has consistently applied
the well-settled rule that the obligation is not novated by an instrument that expressly
recognizes the old, changes only the terms of payment, and adds other obligations
not incompatible with the old ones, or where the new contract merely supplements
the old one.55

d. Penalty previously incurred and Restructuring fee: 4% p.a.

56

In Inchausti & Co. v. Yulo this Court held that an obligation to pay a sum of money is
not novated in a new instrument wherein the old is ratified, by changing only the term
of payment and adding other obligations not incompatible with the old one. In Tible v.
57
58
Aquino and Pascual v. Lacsamana this Court declared that it is well settled that a

c. Documentation Fee: 2% per annum

e. Mode of Payment: Daily Remittance

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties
hereby agree and covenant as follows:
1. That the past due installment referred to above plus the current and/or falling due
amortization as of October 1, 1981 for Promissory Notes Nos. 16 to 26 and 52 to 57
shall be paid by CBL and/or LLAMAS in accordance with the following schedule of
payments:
Daily payments of P11,000.00 from<>October 1 to December 31, 1981

Daily payments of P12,000.00 from<>January 1, 1982 to March 31, 1982

Daily payments of P13,000.00 from<>April 1, 1982 to June 30, 1982
Daily payments of P14,000.00 from<>July 1, 1982 to September 30, 1982
Daily payments of P15,000.00 from<>October 1, 1982 to December 31,
1982
Daily payments of P16,000.00 from<>January 1, 1983 to June 30, 1983
Daily payments of P17,000.00 from<>July 1, 1983
2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily
cash payments due to DMC in accordance with the schedule in paragraph 1. DMC
may send a collector to receive the amount due at CBLs premises. All delayed
remittances shall be charged additional 2% penalty interest per month.
3. All payments shall be applied to amortizations and penalties due in accordance
with paragraph of the restructured past due installments above mentioned and PN
Nos. 16 to 26 and 52 to 57.
4. DMC may at anytime assign and/or send its representatives to monitor the
operations of CBL pertaining to the financial and field operations and service and
maintenance matters of M.A.N. units. Records needed by the DMC representatives in
monitoring said operations shall be made available by CBL and LLAMAS.
5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and 52 to
57, CBL or LLAMAS shall remit in lump sum whatever balance is left after deducting
all payments made from what is due and payable to DMC in accordance with
paragraph 1 of this agreement and PN Nos. 16 to 26 and 52 to 57.
6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed upon
and the total accumulated unremitted amount has reached and (sic) equivalent of
Sixty (60) days, DMC and Silverio shall exercise any or all of the following options:
(a) The whole sum remaining then unpaid plus 2% penalty per month and
16% interest per annum on total past due installments will immediately
become due and payable. In the event of judicial proceedings to enforce
collection, CBL and LLAMAS will pay to DMC an additional sum equivalent
to 25% of the amount due for attorneys fees and expenses of collection,
whether actually incurred or not, in addition to the cost of suit;
(b) To enforce in accordance with law, their rights under the Chattel
Mortgage over various M.A.N. Diesel bus with Nos. CU 80-39, 80-40, 80-41,
80-42, 80-43, 80-44 and 80-15, and/or
(c) To take over management and operations of CBL until such time that
CBL and/or LLAMAS have remitted and/or updated their past due account
with DMC.
7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for the
M.A.N. Diesel Buses and shall make available to CBL at the price prevailing at the
time of purchase, an inventory of spare parts consisting of at least ninety (90%)
percent of the needs of CBL based on a moving 6-month requirement to be prepared
and submitted by CBL, and acceptable to DMC, within the first week of each month.

8. Except as otherwise modified in this Agreement, the terms and conditions

stipulated in PN Nos. 16 to 26 and 52 to 57 shall continue to govern the relationship
between the parties and that the Chattel Mortgage over various M.A.N. Diesel Buses
with Nos. CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and CM No. 80-15 as well
as the Deed of Pledge executed by Mr. Llamas shall continue to secure the obligation
until full payment.
9. DMC and SILVERIO undertake to recall or withdraw its previous request to Notary
Public Alberto G. Doller and to instruct him not to proceed with the public auction sale
of the shares of stock of CBL subject-matter of the Deed of Pledge of Shares.
LLAMAS, on the other hand, undertakes to move for the immediate dismissal of Civil
Case No. 9460-P entitled "Dionisio O. Llamas vs. Alberto G. Doller, et al.", Court of
First Instance of Pasay, Branch XXIX. 60
It is clear from the foregoing that the restructuring agreement, instead of containing
provisions "absolutely incompatible" with the obligations of the judgment, expressly
ratifies such obligations in paragraph 8 and contains provisions for satisfying them.
There was no change in the object of the prior obligations. The restructuring
agreement merely provided for a new schedule of payments and additional security in
paragraph 6 (c) giving Delta authority to take over the management and operations of
CBLI in case CBLI fails to pay installments equivalent to 60 days. Where the parties
to the new obligation expressly recognize the continuing existence and validity of the
old one, there can be no novation.61 Moreover, this Court has ruled that an agreement
subsequently executed between a seller and a buyer that provided for a different
schedule and manner of payment, to restructure the mode of payments by the buyer
so that it could settle its outstanding obligation in spite of its delinquency in payment,
is not tantamount to novation. 62
The addition of other obligations likewise did not extinguish the promissory notes. In
Young v. CA63, this Court ruled that a change in the incidental elements of, or an
addition of such element to, an obligation, unless otherwise expressed by the parties
will not result in its extinguishment.
In fine, the restructuring agreement can stand together with the promissory notes.
Neither is there merit in CBLIs argument that the compromise agreement dated July
24, 1984, in Civil Case No. 0023-P superseded and/or discharged the five promissory
notes. Both Delta and CBLI cannot deny that the five promissory notes were no
longer subject of Civil Case No. 0023-P when they entered into the compromise
agreement on July 24, 1984.
Having previously assigned the five promissory notes to SIHI, Delta had no more right
to compromise the same. Deltas limited authority to collect for SIHI stipulated in the
September 13, 1985, Deed of Sale cannot be construed to include the power to
compromise CBLIs obligations in the said promissory notes. An authority to
compromise, by express provision of Article 187864 of the Civil Code, requires a
special power of attorney, which is not present in this case. Incidentally, Deltas
authority to collect in behalf of SIHI was, by express provision of the Continuing Deed
of Assignment,65 automatically revoked when SIHI opted to collect directly from CBLI.
As regards CBLI, SIHIs demand letter dated December 13, 1983, requiring CBLI to
remit the payments directly to SIHI effectively revoked Deltas limited right to collect in
behalf of SIHI. This should have dispelled CBLIs erroneous notion that Delta was
acting in behalf of SIHI, with authority to compromise the five promissory notes.

But more importantly, the compromise agreement itself provided that it covered the
rights and obligations only of Delta and CBLI and that it did not refer to, nor cover the
rights of, SIHI as the new creditor of CBLI in the subject promissory notes. CBLI and
Delta stipulated in paragraph 5 of the agreement that:
5. This COMPROMISE AGREEMENT constitutes the entire understanding by and
between the plaintiffs and the defendants as well as their lawyers, and operates as
full and final settlement, adjudication and termination of all their rights and obligations
as of the date of this agreement, and of the issues in this case. 66
Even in the absence of such a provision, the compromise agreement still cannot bind
SIHI under the settled rule that a compromise agreement determines the rights and
obligations of only the parties to it.67 Therefore, we hold that the compromise
agreement covered the rights and obligations only of Delta and CBLI and only with
respect to the eleven (11) other promissory notes that remained with Delta.
CBLI next maintains that SIHI is estopped from questioning the compromise
agreement because SIHI failed to intervene in Civil Case No. 0023-P after CBLI
informed it of the takeover by Delta of CBLIs management and operations and the
resultant impossibility for CBLI to comply with its obligations in the subject promissory
notes. CBLI also adds that SIHIs failure to intervene in Civil Case No. 0023-P is proof
that Delta continued to act in SIHIs behalf in effecting collection under the notes.
The contention is untenable. As a result of the assignment, Delta relinquished all its
rights to the subject promissory notes in favor of SIHI. This had the effect of
separating the five promissory notes from the 16 promissory notes subject of Civil
Case No. 0023-P. From that time, CBLIs obligations to SIHI embodied in the five
promissory notes became separate and distinct from CBLIs obligations in eleven (11)
other promissory notes that remained with Delta. Thus, any breach of these
independent obligations gives rise to a separate cause of action in favor of SIHI
against CBLI. Considering that Deltas assignment to SIHI of these five promissory
notes had the effect of removing the said notes from Civil Case No. 0023-P, there
was no reason for SIHI to intervene in the said case. SIHI did not have any interest to
protect in Civil Case No. 0023-P.
68

Moreover, intervention is not mandatory, but only optional and permissive. Notably,
69
Section 2, Rule 12 of the then 1988 Revised Rules of Procedure uses the word
may in defining the right to intervene. The present rules maintain the permissive
nature of intervention in Section 1, Rule 19 of the 1997 Rules of Civil Procedure,
which provides as follows:
SEC. 1. Who may intervene.A person who has a legal interest in the matter in
litigation, or in the success of either of the parties, or an interest against both, or is so
situated as to be adversely affected by a distribution or other disposition of property in
the custody of the court or of an officer thereof may, with leave of court, be allowed to
intervene in the action. The court shall consider whether or not the intervention will
unduly delay or prejudice the adjudication of the rights of the original parties, and
whether or not the intervenor's rights may be fully protected in a separate
proceeding.70
Also, recall that Delta transferred the five promissory notes to SIHI on September 13,
1983 while Civil Case No. 0023-P was pending. Then as now, the rule in case of
transfer of interest pendente lite is that the action may be continued by or against the
original party unless the court, upon motion, directs the person to whom the interest is
transferred to be substituted in the action or joined with the original party. 71 The non-

inclusion of a necessary party does not prevent the court from proceeding in the
action, and the judgment rendered therein shall be without prejudice to the rights of
such necessary party.72
In light of the foregoing, SIHIs refusal to intervene in Civil Case No. 0023-P in
another court does not amount to an estoppel that may prevent SIHI from instituting a
separate and independent action of its own. 73 This is especially so since it does not
appear that a separate proceeding would be inadequate to protect fully SIHIs
rights.74 Indeed, SIHIs refusal to intervene is precisely because it considered that its
rights would be better protected in a separate and independent suit.
The judgment on compromise in Civil Case No. 0023-P did not operate as res
judicata to prevent SIHI from prosecuting its claims in the present case. As previously
discussed, the compromise agreement and the judgment on compromise in Civil
Case No. 0023-P covered only Delta and CBLI and their respective rights under the
11 promissory notes not assigned to SIHI. In contrast, the instant case involves SIHI
and CBLI and the five promissory notes. There being no identity of parties and
subject matter, there is no res judicata.
CBLI maintains, however, that in any event, recovery under the subject promissory
notes is no longer allowed by Article 1484(3)75 of the Civil Code, which prohibits a
creditor from suing for the deficiency after it has foreclosed on the chattel mortgages.
SIHI, being the successor-in-interest of Delta, is no longer allowed to recover on the
promissory notes given as security for the purchase price of the 35 buses because
Delta had already extrajudicially foreclosed on the chattel mortgages over the said
buses on April 2, 1987.
This claim is likewise untenable.
Article 1484(3) finds no application in the present case. The extrajudicial foreclosure
of the chattel mortgages Delta effected cannot prejudice SIHIs rights. As stated
earlier, the assignment of the five notes operated to create a separate and
independent obligation on the part of CBLI to SIHI, distinct and separate from CBLIs
obligations to Delta. And since there was a previous revocation of Deltas authority to
collect for SIHI, Delta was no longer SIHIs collecting agent. CBLI, in turn, knew of the
assignment and Deltas lack of authority to compromise the subject notes, yet it
readily agreed to the foreclosure. To sanction CBLIs argument and to apply Article
1484 (3) to this case would work injustice to SIHI by depriving it of its right to collect
against CBLI who has not paid its obligations.
That SIHI later on levied on execution and acquired in the ensuing public sale in Civil
Case No. 84-23019 the buses Delta earlier extrajudicially foreclosed on April 2, 1987,
in Civil Case No. 0023-P, did not operate to render the compromise agreement and
the foreclosure binding on SIHI. At the time SIHI effected the levy on execution to
satisfy its judgment credit against Delta in Civil Case No. 84-23019, the said buses
already pertained to Delta by virtue of the April 2, 1987 auction sale. CBLI no longer
had any interest in the said buses.1wphi1 Under the circumstances, we cannot see
how SIHIs belated acquisition of the foreclosed buses operates to hold the
compromise agreementand consequently Article 1484(3)applicable to SIHI as
CBLI contends. CBLIs last contention must, therefore, fail. We hold that the writ of
execution to enforce the judgment of compromise in Civil Case No. 0023-P and the
foreclosure sale of April 2, 1987, done pursuant to the said writ of execution affected
only the eleven (11) other promissory notes covered by the compromise agreement
and the judgment on compromise in Civil Case No. 0023-P.

In support of its third assignment of error, CBLI maintains that there was no basis for
SIHIs application for a writ of preliminary attachment. 76 According to CBLI, it
committed no fraud in contracting its obligation under the five promissory notes
because it was financially sound when it issued the said notes on April 25,
77
1980. CBLI also asserts that at no time did it falsely represent to SIHI that it would
78
be able to pay its obligations under the five promissory notes. According to CBLI, it
was not guilty of fraudulent concealment, removal, or disposal, or of fraudulent intent
to conceal, remove, or dispose of its properties to defraud its creditors; 79 and that
SIHIs bare allegations on this matter were insufficient for the preliminary attachment
of CBLIs properties.80
The question whether the attachment of the sixteen (16) buses was valid and in
accordance with law, however, has already been resolved with finality by the Court of
Appeals in CA-G.R. SP No. 08376. In its July 31, 1987, decision, the Court of
Appeals upheld the legality of the writ of preliminary attachment SIHI obtained and
ruled that the trial court judge acted with grave abuse of discretion in discharging the
writ of attachment despite the clear presence of a determined scheme on the part of
CBLI to dispose of its property. Considering that the said Court of Appeals decision
has already attained finality on August 22, 1987, there exists no reason to resolve this
question anew. Reasons of public policy, judicial orderliness, economy and judicial
time and the interests of litigants as well as the peace and order of society, all require
that stability be accorded the solemn and final judgments of courts or tribunals of
81
competent jurisdiction.
Finally, in the light of the justness of SIHIs claim against CBLI, we cannot sustain
CBLIs contention that the Court of Appeals erred in dismissing its counterclaim for
lost income and the value of the 16 buses over which SIHI obtained a writ of
preliminary attachment. Where the party who requested the attachment acted in good
faith and without malice, the claim for damages resulting from the attachment of
property cannot be sustained.82
WHEREFORE, the decision dated April 17, 2001, of the Court of Appeals in CA-G.R.
CV No. 52667 is AFFIRMED. Petitioner California Bus Lines, Inc., is ORDERED to
pay respondent State Investment House, Inc., the value of the five (5) promissory
notes subject of the complaint in Civil Case No. 84-28505 less the proceeds from the
sale of the attached sixteen (16) buses. No pronouncement as to costs.
SO ORDERED.

G.R. No. 144413

July 30, 2004

REPUBLIC GLASS CORPORATION and GERVEL, INC, petitioners,

vs.
LAWRENCE C. QUA, respondent.

DECISION

CARPIO, J.:
The Case
Before the Court is a petition for review1 assailing the 6 March 2000 Decision2 and the
26 July 2000 Resolution of the Court of Appeals in CA-G.R. CV No. 54737. The Court
of Appeals set aside the Order3 of 3 May 1996 of the Regional Trial Court of Makati,
Branch 63 ("RTC-Branch 63"), in Civil Case No. 88-2643 and reinstated the
Decision4 of 12 January 1996 in respondents favor.
The Facts
Petitioners Republic Glass Corporation ("RGC") and Gervel, Inc. ("Gervel") together
with respondent Lawrence C. Qua ("Qua") were stockholders of Ladtek, Inc.
("Ladtek"). Ladtek obtained loans from Metropolitan Bank and Trust Company
5
6
("Metrobank") and Private Development Corporation of the Philippines ("PDCP")
with RGC, Gervel and Qua as sureties. Among themselves, RGC, Gervel and Qua
executed Agreements for Contribution, Indemnity and Pledge of Shares of Stocks
7
("Agreements").
The Agreements all state that in case of default in the payment of Ladteks loans, the
parties would reimburse each other the proportionate share of any sum that any might
pay to the creditors.8 Thus, a common provision appears in the Agreements:
RGC, GERVEL and QUA each covenant that each will respectively
reimburse the party made to pay the Lenders to the extent and subject to the
limitations set forth herein, all sums of money which the party made to pay
the Lenders shall pay or become liable to pay by reason of any of the
foregoing, and will make such payments within five (5) days from the date
that the party made to pay the Lenders gives written notice to the parties
hereto that it shall have become liable therefor and has advised the Lenders
of its willingness to pay whether or not it shall have already paid out such
sum or any part thereof to the Lenders or to the persons entitled thereto.
(Emphasis supplied)
Under the same Agreements, Qua pledged 1,892,360 common shares of stock of
General Milling Corporation ("GMC") in favor of RGC and Gervel. The pledged shares
of stock served as security for the payment of any sum which RGC and Gervel may
be held liable under the Agreements.
Ladtek defaulted on its loan obligations to Metrobank and PDCP. Hence, Metrobank
filed a collection case against Ladtek, RGC, Gervel and Qua docketed as Civil Case
No. 8364 ("Collection Case No. 8364") which was raffled to the Regional Trial Court
of Makati, Branch 149 ("RTC-Branch 149"). During the pendency of Collection Case
No. 8364, RGC and Gervel paid Metrobank P7 million. Later, Metrobank executed a

waiver and quitclaim dated 7 September 1988 in favor of RGC and Gervel. Based on
this waiver and quitclaim,9 Metrobank, RGC and Gervel filed on 16 September 1988 a
joint motion to dismiss Collection Case No. 8364 against RGC and Gervel.
Accordingly, RTC-Branch 149 dismissed the case against RGC and Gervel, leaving
10
Ladtek and Qua as defendants.
In a letter dated 7 November 1988, RGC and Gervels counsel, Atty. Antonio C.
Pastelero, demanded that Qua pay P3,860,646, or 42.22% of P8,730,543.55, 11 as
reimbursement of the total amount RGC and Gervel paid to Metrobank and PDCP.
Qua refused to reimburse the amount to RGC and Gervel. Subsequently, RGC and
Gervel furnished Qua with notices of foreclosure of Quas pledged shares.
Qua filed a complaint for injunction and damages with application for a temporary
restraining order, docketed as Civil Case No. 88-2643 ("Foreclosure Case No. 882643"), with RTC-Branch 63 to prevent RGC and Gervel from foreclosing the pledged
shares. Although it issued a temporary restraining order on 9 December 1988, RTCBranch 63 denied on 2 January 1989 Quas "Urgent Petition to Suspend Foreclosure
Sale." RGC and Gervel eventually foreclosed all the pledged shares of stock at public
auction. Thus, Quas application for the issuance of a preliminary injunction became
moot.12
Trial in Foreclosure Case No. 88-2643 ensued. RGC and Gervel offered Quas
Motion to Dismiss13 in Collection Case No. 8364 as basis for the foreclosure of Quas
pledged shares. Quas Motion to Dismiss states:
8. The foregoing facts show that the payment of defendants Republic
Glass Corporation and Gervel, Inc. was for the entire obligation covered
by the Continuing Surety Agreements which were Annexes "B" and "C" of
the Complaint, and that the same naturally redound[ed] to the benefit of
defendant Qua herein, as provided for by law, specifically Article 1217 of the
Civil Code, which states that:
xxx
10. It is very clear that the payment of defendants Republic Glass
Corporation and Gervel, Inc. was much more than the amount stipulated in
the Continuing Surety Agreement which is the basis for the action against
them and defendant Qua, which was just SIX MILLION TWO HUNDRED
[THOUSAND] PESOS (P6,200,000.00), hence, logically the said alleged
obligation must now be considered as fully paid and extinguished.
RGC and Gervel likewise offered as evidence in Foreclosure Case No. 88-2643 the
Order dismissing Collection Case No. 8364,14 which RTC-Branch 149 subsequently
reversed on Metrobanks motion for reconsideration. Thus, RTC-Branch 149
reinstated Collection Case No. 8364 against Qua.
On 12 January 1996, RTC-Branch 63 rendered a Decision in Foreclosure Case No.
88-2643 ("12 January 1996 Decision") ordering RGC and Gervel to return the
foreclosed shares of stock to Qua. The dispositive portion of the 12 January 1996
Decision reads:
WHEREFORE, premises considered, this Court hereby renders judgment
ordering defendants jointly and severally liable to return to plaintiff the
1,892,360 shares of common stock of General Milling Corporation which
they foreclosed on December 9, 1988, or should the return of these shares

be no longer possible then to pay to plaintiff the amount of P3,860,646.00

with interest at 6% per annum from December 9, 1988 until fully paid and to
pay plaintiff P100,000.00 as and for attorneys fees. The costs will be for
defendants account.
SO ORDERED.

15

However, on RGC and Gervels Motion for Reconsideration, RTC-Branch 63 issued

its Order of 3 May 1996 ("3 May 1996 Order") reconsidering and setting aside the 12
January 1996 Decision. The 3 May 1996 Order states:
After a thorough review of the records of the case, and an evaluation of the
evidence adduced by the parties as well as their contentions, the issues to
be resolved boil down to the following:

considered fully paid and extinguished. With the dismissal of the case,
the indications are that the creditors are no longer running after plaintiff to
enforce his liabilities as surety of Ladtek.
Whether or not the surety agreements signed by the parties and the
creditors were novated is not material in this controversy. The fact is that
there was payment of the obligation. Hence, the Indemnity Agreements
govern.
In the final analysis, defendants payments gave rise to plaintiffs obligation
to reimburse the former. Having failed to do so, upon demand, defendants
were justified in foreclosing the pledged shares of stocks.
xxx

1. Whether or not the parties obligation to reimburse, under the

Indemnity Agreements was premised on the payment by any of
them of the entire obligation;

WHEREFORE, premises considered, the decision dated January 12, 1996 is

reconsidered and set aside. The above-entitled complaint against
defendants is DISMISSED.

2. Whether or not there is basis to plaintiffs apprehension that he

would be made to pay twice for the single obligation; and

Likewise, defendants counterclaim is also dismissed.

3. Whether or not plaintiff was benefited by the payments made by

defendants.
Regarding the first issue, a closer scrutiny of the pertinent provisions of the
Indemnity Agreements executed by the parties would not reveal any
significant indication that the parties liabilities are indeed premised on the
payment by any of them of the entire obligation. These agreements clearly
provide that the parties obligation to reimburse accrues upon mere advice
that one of them has paid or will so pay the obligation. It is not specified
whether the payment is for the entire obligation or not.
Accordingly, the Court stands corrected in this regard. The obvious
conclusion that can be seen now is that payment of the entire
obligation is not a condition sine qua non for the paying party to
demand reimbursement. The parties have expressly contracted that each
will reimburse whoever is made to pay the obligation whether entirely or just
a portion thereof.
On the second issue, plaintiffs apprehension that he would be made to pay
twice for the single obligation is unfounded. Under the above-mentioned
Indemnity Agreements, in the event that the creditors are able to collect from
him, he has the right to ask defendants to pay their proportionate share, in
the same way defendants had collected from the plaintiff, by foreclosing his
pledged shares of stock, his proportionate share, after they had made
payments. From all indications, the provisions of the Indemnity Agreements
have remained binding between the parties.
On the third issue, there is merit to defendants assertion that plaintiff has
benefited from the payments made by defendants. As alleged by
defendants, and this has not been denied by plaintiff, in Civil Case No.
8364 filed before Branch 149 of this Court, where the creditors were
enforcing the parties liabilities as sureties, plaintiff succeeded in
having the case dismissed by arguing that defendants payments
[were] for the entire obligation, hence, the obligation should be

SO ORDERED.16 (Emphasis supplied)

Qua filed a motion for reconsideration of the 3 May 1996 Order which RTC-Branch 63
denied.
Aggrieved, Qua appealed to the Court of Appeals. During the pendency of the appeal,
Qua filed a Manifestation17with the Court of Appeals attaching the Decision18 of 21
November 1996 rendered in Collection Case No. 8364. The dispositive portion of the
decision reads:
WHEREFORE, premises considered, judgment is hereby rendered ordering
defendants Ladtek, Inc. and Lawrence C. Qua:
1. To pay, jointly and severally, the plaintiff the amount of P44,552,738.34 as
of October 31, 1987 plus the stipulated interest of 30.73% per annum and
penalty charges of 12% per annum from November 1, 1987 until the whole
amount is fully paid, less P7,000,000.00 paid by defendants Republic Glass
Corporation and Gervel, Inc., but the liability of defendant Lawrence C.
Qua should be limited only to P5,000,000.00 and P1,200,000.00, the
amount stated in the Continuing Suretyship dated June 15, 1983, Exh.
"D" and Continuing Suretyship dated December 14, 1981, Exh. "D-1",
respectively, plus the stipulated interest and expenses incurred by the
plaintiff.
2. To pay, jointly and severally, the plaintiff an amount equivalent to ten
(10%) percent of the total amount due as and by way of attorneys fees;
3. To pay the cost of suit.
The Counterclaims of the defendants Ladtek, Inc. and Lawrence C. Qua
against the plaintiff are hereby dismissed.
Likewise, the cross-claims of the defendants are dismissed.
SO ORDERED.19 (Emphasis supplied)

In reversing the 3 May 1996 Order and reinstating the 12 January 1996 Decision, the
appellate court quoted the RTC-Branch 63s 12 January 1996 Decision:

plan covering his "pro-rata share", the release from solidary liability by
PDCP, Exhibit "J", mentioning full payment by the Republic and Gervel of
their "pro rata share" in the loan, as solidary obligors, subject however to the
terms and conditions of the hold out agreement; and the non-payment in full
of the loan, subject of the May 10, 1984 Promissory Note, except the 7
million payment by both Republic and Gervel, as mentioned in the Decision
(Case No. 8364, Metrobank vs. Ladtek, et al). Precisely, Ladtek and the
appellant, in said Decision were directed to pay Metrobank the balance of
P9,560,798, supposedly due and unpaid.

The liability of each party under the indemnity agreements therefore is

premised on the payment by any of them of the entire obligation. Without
such payment, there would be no corresponding share to reimburse.
Payment of the entire obligation naturally redounds to the benefit of the other
solidary debtors who must then reimburse the paying co-debtors to the
extent of his corresponding share.

Thus, the payment did not extinguish the entire obligation and did not benefit Qua.
Accordingly, RGC and Gervel cannot demand reimbursement. The Court of Appeals
also held that Qua even became solely answerable for the unpaid balance of the
obligations by virtue of the quitclaims executed by Metrobank and PDCP in favor of
RGC and Gervel. RGC and Gervel ceased to be solidarily liable for Ladteks loan
obligations.22

In the case at bar, Republic Glass and Gervel made partial payments only,
and so they did not extinguish the entire obligation. But Republic Glass and
Gervel nevertheless obtained quitclaims in their favor and so they ceased to
be solidarily liable with plaintiff for the balance of the debt (Exhs. "D", "E",
and "I"). Plaintiff thus became solely liable for the unpaid portion of the debt
even as he is being held liable for reimbursement on the said portion.

The Issues

On 6 March 2000, the Court of Appeals rendered the questioned Decision setting
aside the 3 May 1996 Order of RTC-Branch 63 and reinstating the 12 January 1996
Decision ordering RGC and Gervel to return the foreclosed shares of stock to Qua.20
Hence, this petition.
The Ruling of the Court of Appeals

What happened therefore, was that Metrobank and PDCP in effect enforced
the Suretyship Agreements jointly as against plaintiff and defendants.
Consequently, the solidary obligation under the Suretyship Agreements was
novated by the substantial modification of its principal conditions. xxx The
resulting change was from one with three solidary debtors to one in which
Lawrence Qua became the sole solidary co-debtor of Ladtek.
Defendants cannot simply pay off a portion of the debt and then absolve
themselves from any further liability when the obligation has not been totally
extinguished.
xxx
In the final reckoning, this Court finds that the foreclosure and sale of the
shares pledged by plaintiff was totally unjustified and without basis because
the obligation secured by the underlying pledge had been extinguished by
novation. xxx21
The Court of Appeals further held that there was an implied novation or substantial
incompatibility in the suretys mode or manner of payment from one for the entire
obligation to one merely of proportionate share. The appellate court ruled that RGC
and Gervels payment to the creditors only amounted to their proportionate shares of
the obligation, considering the following evidence:
The letter of the Republic to the appellant, Exhibit "G", dated June 25, 1987,
which mentioned the letter from PDCP confirming its willingness to release
the joint and solidary obligation of the Republic and Gervel subject to some
terms and conditions, one of which is the appellants acceptable repayment
plan of his "pro-rata share"; and the letter of PDCP to the Republic, Exhibit
"H", mentioning full payment of the "pro rata share" of the Republic and
Gervel, and the need of the appellant to submit an acceptable repayment

RGC and Gervel raise the following issues for resolution:

I.
WHETHER THE PRINCIPLE OF ESTOPPEL APPLIES TO QUAS
JUDICIAL STATEMENTS THAT RGC AND GERVEL PAID THE ENTIRE
OBLIGATION.
II.
WHETHER PAYMENT OF THE ENTIRE OBLIGATION IS A
CONDITION SINE QUA NON FOR RGC AND GERVEL TO DEMAND
REIMBURSEMENT FROM QUA UNDER THE INDEMNITY AGREEMENTS
EXECUTED BY THEM AFTER RGC AND GERVEL PAID METROBANK
UNDER THE SURETY AGREEMENT.
III.
ASSUMING ARGUENDO THAT THERE WAS NOVATION OF THE
SURETY AGREEMENTS SIGNED BY THE PARTIES AND THE
CREDITORS, WHETHER THE NOVATION IS MATERIAL IN THIS CASE. 23
The Courts Ruling
We deny the petition.
Whether Qua was in estoppel
RGC and Gervel contend that Qua is in estoppel for making conflicting statements in
two different and separate cases. Qua cannot now claim that the payment made to
Metrobank was not for the entire obligation because of his Motion to Dismiss
Collection Case No. 8364 where he stated that RGC and Gervels payment was for
theentire obligation.
The essential elements of estoppel in pais are considered in relation to the party to be
estopped, and to the party invoking the estoppel in his favor. On the party to be
estopped, such party (1) commits conduct amounting tofalse representation or
concealment of material facts or at least calculated to convey the impression that the
facts are inconsistent with those which the party subsequently attempts to assert; (2)

has the intent, or at least expectation that his conduct shall at least influence the other
party; and (3) has knowledge, actual or constructive, of the real facts. On the party
claiming the estoppel, such party (1) has lack of knowledge and of the means of
knowledge of the truth on the facts in question; (2) has relied, in good faith, on the
conduct or statements of the party to be estopped; (3) has acted or refrained from
acting based on such conduct or statements as to change the position or status of the
party claiming the estoppel, to his injury, detriment or prejudice.24
In this case, the essential elements of estoppel are inexistent.
While Quas statements in Collection Case No. 8364 conflict with his statements in
Foreclosure Case No. 88-2643, RGC and Gervel miserably failed to show that Qua,
in making those statements, intended to falsely represent or conceal the material
facts. Both parties undeniably know the real facts.
Nothing in the records shows that RGC and Gervel relied on Quas statements in
Collection Case No. 8364 such that they changed their position or status, to their
injury, detriment or prejudice. RGC and Gervel repeatedly point out that it was the
presiding judge25 in Collection Case No. 8364 who relied on Quas statements in
Collection Case No. 8364. RGC and Gervel claim that Qua "deliberately led the
Presiding Judge to believe" that their payment to Metrobank was for the entire
obligation. As a result, the presiding judge ordered the dismissal of Collection Case
No. 8364 against Qua.26
RGC and Gervel further invoke Section 4 of Rule 129 of the Rules of Court to support
their stance:
Sec. 4. Judicial admissions. An admission, verbal or written, made by a
party in the course of the proceedings in the same case, does not require
proof. The admission may be contradicted only by showing that it was made
through palpable mistake or that no such admission was made.
A party may make judicial admissions in (a) the pleadings filed by the parties, (b)
during the trial either by verbal or written manifestations or stipulations, or (c) in other
27
stages of the judicial proceeding.
The elements of judicial admissions are absent in this case. Qua made conflicting
statements in Collection Case No. 8364 and in Foreclosure Case No. 88-2643, and
not in the "same case" as required in Section 4 of Rule 129. To constitute judicial
admission, the admission must be made in the same case in which it is offered. If
made in another case or in another court, the fact of such admission must be proved
as in the case of any other fact, although if made in a judicial proceeding it is entitled
to greater weight.28
RGC and Gervel introduced Quas Motion to Dismiss and the Order dismissing
Collection Case No. 8364 to prove Quas claim that the payment was for the entire
obligation. Qua does not deny making such statement but explained that he "honestly
believed and pleaded in the lower court and in CA-G.R. CV No. 58550 that the entire
29
debt was fully extinguished when the petitioners paid P7 million to Metrobank."
We find Quas explanation substantiated by the evidence on record. As stated in the
Agreements, Ladteks original loan from Metrobank was only P6.2 million. Therefore,
Qua reasonably believed that RGC and Gervels P7 million payment to Metrobank
pertained to the entire obligation. However, subsequent facts indisputably show that
RGC and Gervels payment was not for the entire obligation. RTC-Branch 149

reinstated Collection Case No. 8364 against Qua and ruled in Metrobanks favor,
ordering Qua to pay P6.2 million.
Whether payment of the entire obligation is an essential condition for
reimbursement
RGC and Gervel assail the Court of Appeals ruling that the parties liabilities under
the Agreements depend on the full payment of the obligation. RGC and Gervel insist
that it is not an essential condition that the entire obligation must first be paid before
they can seek reimbursement from Qua. RGC and Gervel contend that Qua should
pay 42.22% of any amount which they paid or would pay Metrobank and PDCP.
RGC and Gervels contention is partly meritorious.
Payment of the entire obligation by one or some of the solidary debtors results in a
corresponding obligation of the other debtors to reimburse the paying
debtor.30 However, we agree with RGC and Gervels contention that in this case
payment of the entire obligation is not an essential condition before they can seek
reimbursement from Qua. The words of the Agreements are clear.
RGC, GERVEL and QUA each covenant that each will respectively
reimburse the party made to pay the Lenders to the extent and subject to the
limitations set forth herein, all sums of money which the party made to
pay the Lenders shall pay or become liable to pay by reason of any of
the foregoing, and will make such payments within five (5) days from the
date that the party made to pay the Lenders gives written notice to the
parties hereto that it shall have become liable therefor and has advised the
Lenders of its willingness to pay whether or not it shall have already paid out
such sum or any part thereof to the Lenders or to the persons entitled
thereto. (Emphasis supplied)
The Agreements are contracts of indemnity not only against actual loss but against
liability as well. In Associated Insurance & Surety Co., Inc. v. Chua,31 we
distinguished between a contract of indemnity against loss and a contract of
32
indemnity against liability, thus:
The agreement here sued upon is not only one of indemnity against loss but
of indemnity against liability. While the first does not render the indemnitor
liable until the person to be indemnified makes payment or sustains loss, the
second becomes operative as soon as the liability of the person
indemnified arises irrespective of whether or not he has suffered actual
loss. (Emphasis supplied)
Therefore, whether the solidary debtor has paid the creditor, the other solidary
debtors should indemnify the former once his liability becomes absolute. However, in
this case, the liability of RGC, Gervel and Qua became absolute simultaneously when
Ladtek defaulted in its loan payment. As a result, RGC, Gervel and Qua all became
directly liable at the same time to Metrobank and PDCP. Thus, RGC and Gervel
cannot automatically claim for indemnity from Qua because Qua himself is liable
directly to Metrobank and PDCP.
If we allow RGC and Gervel to collect from Qua his proportionate share, then Qua
would pay much more than his stipulated liability under the Agreements. In addition to
the P3,860,646 claimed by RGC and Gervel, Qua would have to pay his liability of
P6.2 million to Metrobank and more than P1 million to PDCP. Since Qua would surely

exceed his proportionate share, he would then recover from RGC and Gervel the
excess payment. This situation is absurd and circuitous.
Contrary to RGC and Gervels claim, payment of any amount will not automatically
result in reimbursement. If a solidary debtor pays the obligation in part, he can
recover reimbursement from the co-debtors only in so far as his
payment exceeded his share in the obligation.33 This is precisely because if a
solidary debtor pays an amount equal to his proportionate share in the obligation,
then he in effect pays only what is due from him. If the debtor pays less than his
share in the obligation, he cannot demand reimbursement because his payment is
less than his actual debt.
To determine whether RGC and Gervel have a right to reimbursement, it is
indispensable to ascertain the total obligation of the parties. At this point, it becomes
necessary to consider the decision in Collection Case No. 8364 on the parties
obligation to Metrobank. To repeat, Metrobank filed Collection Case No. 8364 against
Ladtek, RGC, Gervel and Qua to collect Ladteks unpaid loan.
RGC and Gervel assail the Court of Appeals consideration of the decision in
Collection Case No. 836434 because Qua did not offer the decision in evidence during
the trial in Foreclosure Case No. 88-2643 subject of this petition. RTC-Branch
6235 rendered the decision in Collection Case No. 8364 on 21 November 1996 while
Qua filed his Notice of Appeal of the 3 May 1996 Order on 19 June 1996. Qua could
not have possibly offered in evidence the decision in Collection Case No. 8364
because RTC-Branch 62 rendered the decision only after Qua elevated the present
case to the Court of Appeals. Hence, Qua submitted the decision in Collection Case
No. 8364 during the pendency of the appeal of Foreclosure Case No. 88-2643 in the
Court of Appeals.
As found by RTC-Branch 62, RGC, Gervel and Quas total obligation was
P14,200,854.37 as of 31 October 1987.36 During the pendency of Collection Case No.
8364, RGC and Gervel paid Metrobank P7 million. Because of the payment,
Metrobank executed a quitclaim37 in favor of RGC and Gervel. By virtue of
Metrobanks quitclaim, RTC-Branch 62 dismissed Collection Case No. 8364 against
RGC and Gervel, leaving Ladtek and Qua as defendants. Considering that RGC and
Gervel paid only P7 million out of the total obligation of P14,200,854.37, which
payment was less than RGC and Gervels combined shares in the obligation, 38 it was
clearly partial payment. Moreover, if it were full payment, then the obligation would
have been extinguished. Metrobank would have also released Qua from his
obligation.
RGC and Gervel also made partial payment to PDCP. Proof of this is the Release
from Solidary Liability that PDCP executed in RGC and Gervels favor which stated
that their payment of P1,730,543.55 served as "full payment of their corresponding
proportionate share" in Ladteks foreign currency loan.39 Moreover, PDCP filed a
collection case against Qua alone, docketed as Civil Case No. 2259, in the Regional
Trial Court of Makati, Branch 150.40
Since they only made partial payments, RGC and Gervel should clearly and
convincingly show that their payments to Metrobank and PDCP exceeded their
proportionate shares in the obligations before they can seek reimbursement from
Qua. This RGC and Gervel failed to do. RGC and Gervel, in fact, never claimed that
their payments exceeded their shares in the obligations. Consequently, RGC and
Gervel cannot validly seek reimbursement from Qua.

Whether there was novation of the Agreements

RGC and Gervel contend that there was no novation of the Agreements. RGC and
Gervel further contend that any novation of the Agreements is immaterial to this case.
RGC and Gervel disagreed with the Court of Appeals on the effect of the "implied
novation" which supposedly transpired in this case. The Court of Appeals found that
"there was an implied novation or substantial incompatibility in the mode or manner of
payment by the surety from the entire obligation, to one merely of proportionate
share." RGC and Gervel claim that if it is true that an implied novation occurred, then
the effect "would be to release respondent (Qua) as the entire obligation is
considered extinguished by operation of law." Thus, Qua should now reimburse RGC
and Gervel his proportionate share under the surety agreements.
Novation extinguishes an obligation by (1) changing its object or principal conditions;
(2) substituting the person of the debtor; and (3) subrogating a third person in the
rights of the creditor. Article 1292 of the Civil Code clearly provides that in order that
an obligation may be extinguished by another which substitutes the same, it should
be declared in unequivocal terms, or that the old and new obligations be on every
point incompatible with each other. 41 Novation may either be extinctive or
modificatory. Novation is extinctive when an old obligation is terminated by the
creation of a new obligation that takes the place of the former. Novation is merely
modificatory when the old obligation subsists to the extent it remains compatible with
the amendatory agreement.42
We find that there was no novation of the Agreements. The parties did not constitute
a new obligation to substitute the Agreements. The terms and conditions of the
Agreements remain the same. There was also no showing of complete incompatibility
in the manner of payment of the parties obligations. Contrary to the Court of Appeals
ruling, the mode or manner of payment by the parties did not change from one for the
entire obligation to one merely of proportionate share. The creditors, namely
Metrobank and PDCP, merely proceeded against RGC and Gervel for their
proportionate shares only.43 This preference is within the creditors discretion which
did not necessarily affect the nature of the obligations as well as the terms and
conditions of the Agreements. A creditor may choose to proceed only against some
and not all of the solidary debtors. The creditor may also choose to collect part of the
debt from some of the solidary debtors, and the remaining debt from the other
solidary debtors.
In sum, RGC and Gervel have no legal basis to seek reimbursement from Qua.
Consequently, RGC and Gervel cannot validly foreclose the pledge of Quas GMC
shares of stock which secured his obligation to reimburse. 44Therefore, the foreclosure
of the pledged shares of stock has no leg to stand on.
WHEREFORE, we DENY the petition. The Decision dated 6 March 2000 of the Court
of Appeals in CA-G.R. CV No. 54737 is AFFIRMED. Costs against petitioners.
SO ORDERED.

G.R No. 148753

July 30, 2004

The Facts

NEW SAMPAGUITA BUILDERS CONSTRUCTION INC. (NSBCI) and Spouses

EDUARDO R. DEE and ARCELITA M. DEE, petitioners

The facts are narrated by the CA as follows:

vs.
PHILIPPINE NATIONAL BANK

DECISION

PANGANIBAN, J.:

Courts have the authority to strike down or to modify provisions in promissory notes
that grant the lenders unrestrained power to increase interest rates, penalties and
other charges at the latters sole discretion and without giving prior notice to and
securing the consent of the borrowers. This unilateral
__________________
* On leave.
authority is anathema to the mutuality of contracts and enable lenders to take undue
advantage of borrowers. Although the Usury Law has been effectively repealed,
courts may still reduce iniquitous or unconscionable rates charged for the use of
money. Furthermore, excessive interests, penalties and other charges not revealed in
disclosure statements issued by banks, even if stipulated in the promissory notes,
cannot be given effect under the Truth in Lending Act.

On February 11, 1989, Board Resolution No. 05, Series of 1989 was approved by
[Petitioner] NSBCI [1)] authorizing the company to x x x apply for or secure a
commercial loan with the PNB in an aggregate amount of P8.0M, under such terms
agreed by the Bank and the NSBCI, using or mortgaging the real estate properties
registered in the name of its President and Chairman of the Board [Petitioner]
Eduardo R. Dee as collateral; [and] 2) authorizing [petitioner-spouses] to secure the
loan and to sign any [and all] documents which may be required by [Respondent]
PNB[,] and that [petitioner-spouses] shall act as sureties or co-obligors who shall be
jointly and severally liable with [Petitioner] NSBCI for the payment of any [and all]
obligations.

On August 15, 1989, Resolution No. 77 was approved by granting the request of
[Respondent] PNB thru its Board NSBCI for an P8 Million loan broken down into a
revolving credit line of P7.7M and an unadvised line of P0.3M for additional operating
and working capital[7] to mobilize its various construction projects, namely:

1) MWSS Watermain;
2) NEA-Liberty farm;
3) Olongapo City Pag-Asa Public Market;
4) Renovation of COA-NCR Buildings 1, 2 and 9;

The Case

5) Dupels, Inc., Extensive prawn farm development project;

6) Banawe HOTEL Phase II;

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to
nullify the June 20, 2001 Decision[2] of the Court of Appeals[3] (CA) in CA-GR CV
No. 55231. The decretal portion of the assailed Decision reads as follows:

WHEREFORE, the decision of the Regional Trial Court of Dagupan City, Branch 40
dated December 28, 1995 is REVERSED and SET ASIDE. The foreclosure
proceedings of the mortgaged properties of defendants-appellees[4] and the February
26, 1992 auction sale are declared legal and valid and said defendants-appellees are
ordered to pay plaintiff-appellant PNB,[5] jointly and severally[,] the amount of
deficiency that will be computed by the trial court based on the original penalty of 6%
per annum as explicitly stated in the loan documents and to pay attorneys fees in an
amount equivalent to x x x 1% of the total amount due and the costs of suit and
expenses of litigation.[6]

7) Clark Air Base -- Barracks and Buildings; and

8) Others: EDSA Lighting, Roxas Blvd. Painting NEA Sapang Palay and Angeles City.

The loan of [Petitioner] NSBCI was secured by a first mortgage on the following: a)
three (3) parcels of residential land located at Mangaldan, Pangasinan with total land
area of 1,214 square meters[,] including improvements thereon and registered under
TCT Nos. 128449, 126071, and 126072 of the Registry of Deeds of Pangasinan; b)
six (6) parcels of residential land situated at San Fabian, Pangasinan with total area
of 1,767 square meters[,] including improvements thereon and covered by TCT Nos.
144006, 144005, 120458, 120890, 144161[,] and 121127 of the Registry of Deeds of
Pangasinan; and c) a residential lot and improvements thereon located at Mangaldan,
Pangasinan with an area of 4,437 square meters and covered by TCT No. 140378 of
the Registry of Deeds of Pangasinan.

The loan was further secured by the joint and several signatures of [Petitioners]
Eduardo Dee and Arcelita Marquez Dee, who signed as accommodation-mortgagors
since all the collaterals were owned by them and registered in their names.

Moreover [Petitioner] NSBCI executed the following documents, viz: a) promissory

note dated June 29, 1989 in the amount of P5,000,000.00 with due date on October
27, 1989; [b)] promissory note dated September 1, 1989 in the amount of
P2,700,000.00 with due date on December 30, 1989; and c) promissory note dated
September 6, 1989 in the amount of P300,000.00 with maturity date on January 4,
1990.

In addition, [petitioner] corporation also signed the Credit Agreement dated August
31, 1989 relating to the revolving credit line of P7.7 Million x x x and the Credit
Agreement dated September 5, 1989 to support the unadvised line of P300,000.00.

P53,678.93 for insurance[,] with the issuance of post-dated checks to be dated not
later than November 29, 1991.

On September 6, 1991, [Petitioner] Eduardo Dee wrote the PNB Branch Manager
reiterating his proposals for the settlement of [Petitioner] NSBCIs past due loan
account amounting to P7,019,231.33.

[Petitioner] Eduardo Dee later tendered four (4) post-dated Interbank checks
aggregating P1,111,306.67 in favor of [Respondent] PNB, viz:

Check No. Date Amount

03500087 Sept. 29, 1991 P277,826.70

On August 31, 1989, [petitioner-spouses] executed a Joint and Solidary Agreement
(JSA) in favor of [Respondent] PNB unconditionally and irrevocably binding
themselves to be jointly and severally liable with the borrower for the payment of all
sums due and payable to the Bank under the Credit Document.

03500088 Oct. 29, 1991 P277,826.70

Later on, [Petitioner] NSBCI failed to comply with its obligations under the promissory
notes.

Upon presentment[,] however, x x x check nos. 03500087 and 03500088 dated

September 29 and October 29, 1991 were dishonored by the drawee bank and
returned due [to] a stop payment order from [petitioners].

On June 18, 1991, [Petitioner] Eduardo R. Dee on behalf of [Petitioner] NSBCI sent a
letter to the Branch Manager of the PNB Dagupan Branch requesting for a 90-day
extension for the payment of interests and restructuring of its loan for another term.

Subsequently, NSBCI tendered payment to [Respondent] PNB [of] three (3) checks
aggregating P1,000,000.00, namely 1) check no. 316004 dated August 8, 1991 in the
amount of P200,000.00; 2) check no. 03499997 dated August 8, 1991 in the amount
of P650,000.00; and 3) check no. 03499998 dated August 15, 1991 in the amount of
P150,000.00.[8]

In a meeting held on August 12, 1991, [Respondent] PNBs representative[,] Mr. Rolly
Cruzabra, was informed by [Petitioner] Eduardo Dee of his intention to remit to
[Respondent] PNB post-dated checks covering interests, penalties and part of the
loan principals of his due account.

On August 22, 1991, [Respondent] banks Crispin Carcamo wrote [Petitioner] Eduardo
Dee[,] informing him that [Petitioner] NSBCIs proposal [was] acceptable[,] provided
the total payment should be P4,128,968.29 that [would] cover the amount of
P1,019,231.33 as principal, P3,056,058.03 as interests and penalties[,] and

03500089 Nov. 29, 1991 P277,826.70

03500090 Dec. 20, 1991 P277,826.57

On November 12, 1991, PNBs Mr. Carcamo wrote [Petitioner] Eduardo Dee informing
him that unless the dishonored checks [were] made good, said PNB branch shall
recall its recommendation to the Head Office for the restructuring of the loan account
and refer the matter to its legal counsel for legal action.[] [Petitioners] did not heed
[respondents] warning and as a result[,] the PNB Dagupan Branch sent demand
letters to [Petitioner] NSBCI at its office address at 1611 ERDC Building, E.
Rodriguez Sr. Avenue, Quezon City[,] asking it to settle its past due loan account.

[Petitioners] nevertheless failed to pay their loan obligations within the [timeframe]
given them and as a result, [Respondent] PNB filed with the Provincial Sheriff of
Pangasinan at Lingayen a Petition for Sale under Act 3135, as amended[,] and
Presidential Decree No. 385 dated January 30, 1992.

The notice of extra-judicial sale of the mortgaged properties relating to said PNBs
[P]etition for [S]ale was published in the February 8, 15 and 22, 1992 issues of the
Weekly Guardian, allegedly a newspaper of general circulation in the Province of
Pangasinan, including the cities of Dagupan and San Carlos. In addition[,] copies of
the notice were posted in three (3) public places[,] and copies thereof furnished
[Petitioner] NSBCI at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City,

[and at] 555 Shaw Blvd., Mandaluyong[, Metro Manila;] and [Petitioner] Sps. Eduardo
and Arcelita Dee at 213 Wilson St., San Juan, Metro Manila.

On February 26, 1992, the Provincial Deputy Sheriff Cresencio F. Ferrer of Lingayen,
Pangasinan foreclosed the real estate mortgage and sold at public auction the
mortgaged properties of [petitioner-spouses,] with [Respondent] PNB being declared
the highest bidder for the amount of P10,334,000.00.

On March 2, 1992, copies of the Sheriffs Certificate of Sale were sent by registered
mail to [petitioner] corporations address at 1611 [ERDC Building,] E. Rodriguez Sr.
Avenue, Quezon City and [petitioner-spouses] address at 213 Wilson St., San Juan,
Metro Manila.

On April 6, 1992, the PNB Dagupan Branch Manager sent a letter to [petitioners] at
their address at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City[,]
informing them that the properties securing their loan account [had] been sold at
public auction, that the Sheriffs Certificate of Sale had been registered with the
Registry of Deeds of Pangasinan on March 13, 1992[,] and that a period of one (1)
year therefrom [was] granted to them within which to redeem their properties.

[Petitioners] failed to redeem their properties within the one-year redemption period[,]
and so [Respondent] PNB executed a [D]eed of [A]bsolute [S]ale consolidating title to
the properties in its name. TCT Nos. 189935 to 189944 were later issued to
[Petitioner] PNB by the Registry of Deeds of Pangasinan.

On August 4, 1992, [Respondent] PNB informed [Petitioner] NSBCI that the proceeds
of the sale conducted on February 26, 1992 were not sufficient to cover its total claim
amounting to P12,506,476.43[,] and thus demanded from the latter the deficiency of
P2,172,476.43 plus interest and other charges[,] until the amount [was] fully paid.

[Petitioners] refused to pay the above deficiency claim which compelled [Respondent]
PNB to institute the instant [C]omplaint for the collection of its deficiency claim.

Finding that the PNB debt relief package automatically [granted] to [Petitioner] NSBCI
the benefits under the program, the court a quo ruled in favor of [petitioners] in its
Decision dated December 28, 1995, the fallo of which reads:

In view of the foregoing, the Court believes and so holds that the [respondent] has no
cause of action against the [petitioners].

WHEREFORE, the case is hereby DISMISSED, without costs.[9]

On appeal, respondent assailed the trial courts Decision dismissing its deficiency
claim on the mortgage debt. It also challenged the ruling of the lower court that
Petitioner NSBCIs loan account was bloated, and that the inadequacy of the bid price
was sufficient to set aside the auction sale.

Ruling of the Court of Appeals

Reversing the trial court, the CA held that Petitioner NSBCI did not avail itself of
respondents debt relief package (DRP) or take steps to comply with the conditions for
qualifying under the program. The appellate court also ruled that entitlement to the
program was not a matter of right, because such entitlement was still subject to the
approval of higher bank authorities, based on their assessment of the borrowers
repayment capability and satisfaction of other requirements.

As to the misapplication of loan payments, the CA held that the subsidiary ledgers of
NSBCIs loan accounts with respondent reflected all the loan proceeds as well as the
partial payments that had been applied either to the principal or to the interests,
penalties and other charges. Having been made in the ordinary and usual course of
the banking business of respondent, its entries were presumed accurate, regular and
fair under Section 5(q) of Rule 131 of the Rules of Court. Petitioners failed to rebut
this presumption.

The increases in the interest rates on NSBCIs loan were also held to be authorized by
law and the Monetary Board and -- like the increases in penalty rates -- voluntarily
and freely agreed upon by the parties in the Credit Agreements they executed. Thus,
these increases were binding upon petitioners.

However, after considering that two to three of Petitioner NSBCIs projects covered by
the loan were affected by the economic slowdown in the areas near the military bases
in the cities of Angeles and Olongapo, the appellate court annulled and deleted the
adjustment in penalty from 6 percent to 36 percent per annum. Not only did
respondent fail to demonstrate the existence of market forces and economic
conditions that would justify such increases; it could also have treated petitioners
request for restructuring as a request for availment of the DRP. Consequently, the
original penalty rate of 6 percent per annum was used to compute the deficiency
claim.

The auction sale could not be set aside on the basis of the inadequacy of the auction
price, because in sales made at public auction, the owner is given the right to redeem
the mortgaged properties; the lower the bid price, the easier it is to effect redemption

or to sell such right. The bid price of P10,334,000.00 vis--vis respondents claim of
P12,506,476.43 was found to be neither shocking nor unconscionable.

Whether or not the auction price at which the mortgaged properties was sold was
disproportionate to their actual fair mortgage value.
V

The attorneys fees were also reduced by the appellate court from 10 percent to 1
percent of the total indebtedness. First, there was no extreme difficulty in an
extrajudicial foreclosure of a real estate mortgage, as this proceeding was merely
administrative in nature and did not involve a court litigation contesting the
proceedings prior to the auction sale. Second, the attorneys fees were exclusive of all
stipulated costs and fees. Third, such fees were in the nature of liquidated damages
that did not inure to respondents salaried counsel.

Whether or not Respondent PNB is not entitled to recover the deficiency in the
mortgage account not realized in the foreclosure sale, considering that:

Respondent was also declared to have the unquestioned right to foreclose the Real
Estate Mortgage. It was allowed to recover any deficiency in the mortgage account
not realized in the foreclosure sale, since petitioner-spouses had agreed to be
solidarily liable for all sums due and payable to respondent.

C.
The NSBCI Board Resolution is not valid and binding on [petitioner-spouses]
because they were compelled to execute the said Resolution[;] otherwise[,]
Respondent PNB would not grant petitioner corporation the loan;

Finally, the appellate court concluded that the extrajudicial foreclosure proceedings
and auction sale were valid for the following reasons: (1) personal notice to the
mortgagors, although unnecessary, was actually made; (2) the notice of extrajudicial
sale was duly published and posted; (3) the extrajudicial sale was conducted through
the deputy sheriff, under the direction of the clerk of court who was concurrently the
ex-oficio provincial sheriff and acting as agent of respondent; (4) the sale was
conducted within the province where the mortgaged properties were located; and (5)
such sale was not shown to have been attended by fraud.

VI

A.
Petitioners are merely guarantors of the mortgage debt of petitioner corporation
which has a separate personality from the [petitioner-spouses].
B.
The joint and solidary agreement executed by [petitioner- spouses] are
contracts of adhesion not binding on them;

D.
The Respondent PNB had already in its possession the properties of the
[petitioner-spouses] which served as a collateral to the loan obligation of petitioner
corporation[,] and to still allow Respondent PNB to recover the deficiency claim
amounting to a very substantial amount of P2.1 million would constitute unjust
enrichment on the part of Respondent PNB.

Whether or not the extrajudicial foreclosure proceedings and auction sale, including
all subsequent proceedings[,] are null and void for non-compliance with jurisdictional
and other mandatory requirements; whether or not the petition for extrajudicial
foreclosure of mortgage was filed prematurely; and whether or not the finding of fraud
by the trial court is amply supported by the evidence on record.[11]

Hence this Petition.[10]

Issues

The foregoing may be summed up into two main issues: first, whether the loan
accounts are bloated; and second, whether the extrajudicial foreclosure and
subsequent claim for deficiency are valid and proper.

Petitioners submit the following issues for our consideration:

I
Whether or not the Honorable Court of Appeals correctly ruled that petitioners did not
avail of PNBs debt relief package and were not entitled thereto as a matter of right.
II
Whether or not petitioners have adduced sufficient and convincing evidence to
overthrow the presumption of regularity and correctness of the PNB entries in the
subsidiary ledgers of the loan accounts of petitioners.
III
Whether or not the Honorable Court of Appeals seriously erred in not holding that the
Respondent PNB bloated the loan account of petitioner corporation by imposing
interests, penalties and attorneys fees without legal, valid and equitable justification.
IV

The Courts Ruling

The Petition is partly meritorious.
First Main Issue:
Bloated Loan Accounts

At the outset, it must be stressed that only questions of law[12] may be raised in a
petition for review on certiorari under Rule 45 of the Rules of Court. As a rule,
questions of fact cannot be the subject of this mode of appeal,[13] for [t]he Supreme
Court is not a trier of facts.[14] As exceptions to this rule, however, factual findings of
the CA may be reviewed on appeal[15] when, inter alia, the factual inferences are
manifestly mistaken;[16] the judgment is based on a misapprehension of facts;[17] or
the CA manifestly overlooked certain relevant and undisputed facts that, if properly
considered, would justify a different legal conclusion.[18] In the present case, these
exceptions exist in various instances, thus prompting us to take cognizance of factual

issues and to decide upon them in the interest of justice and in the exercise of our
sound discretion.[19]

Indeed, Petitioner NSBCIs loan accounts with respondent appear to be bloated with
some iniquitous imposition of interests, penalties, other charges and attorneys fees.
To demonstrate this point, the Court shall take up one by one the promissory notes,
the credit agreements and the disclosure statements.
Increases in Interest Baseless
Promissory Notes. In each drawdown, the Promissory Notes specified the interest
rate to be charged: 19.5 percent in the first, and 21.5 percent in the second and again
in the third. However, a uniform clause therein permitted respondent to increase the
rate within the limits allowed by law at any time depending on whatever policy it may
adopt in the future x x x,[20] without even giving prior notice to petitioners. The Court
holds that petitioners accessory duty to pay interest[21] did not give respondent
unrestrained freedom to charge any rate other than that which was agreed upon. No
interest shall be due, unless expressly stipulated in writing.[22] It would be the zenith
of farcicality to specify and agree upon rates that could be subsequently upgraded at
whim by only one party to the agreement.

The unilateral determination and imposition[23] of increased rates is violative of the

principle of mutuality of contracts ordained in Article 1308[24] of the Civil Code.[25]
One-sided impositions do not have the force of law between the parties, because
such impositions are not based on the parties essential equality.

Although escalation clauses[26] are valid in maintaining fiscal stability and retaining
the value of money on long-term contracts,[27] giving respondent an unbridled right to
adjust the interest independently and upwardly would completely take away from
petitioners the right to assent to an important modification in their agreement[28] and
would also negate the element of mutuality in their contracts. The clause cited earlier
made the fulfillment of the contracts dependent exclusively upon the uncontrolled
will[29] of respondent and was therefore void. Besides, the pro forma promissory
notes have the character of a contract dadhsion,[30] where the parties do not bargain
on equal footing, the weaker partys [the debtors] participation being reduced to the
alternative to take it or leave it.[31]

While the Usury Law[32] ceiling on interest rates was lifted by [Central Bank] Circular
No. 905,[33] nothing in the said Circular grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets.[34] In fact, we have declared nearly ten years ago that
neither this Circular nor PD 1684, which further amended the Usury Law,
authorized either party to unilaterally raise the interest rate without the others
consent.[35]

Moreover, a similar case eight years ago pointed out to the same respondent (PNB)
that borrowing signified a capital transfusion from lending institutions to businesses
and industries and was done for the purpose of stimulating their growth; yet
respondents continued unilateral and lopsided policy[36] of increasing interest rates
without the prior assent[37] of the borrower not only defeats this purpose, but also
deviates from this pronouncement. Although such increases are not usurious, since
the Usury Law is now legally inexistent[38] -- the interest ranging from 26 percent to
35 percent in the statements of account[39] -- must be equitably reduced for being
iniquitous, unconscionable and exorbitant.[40] Rates found to be
iniquitous or unconscionable are void, as if it there were no express contract
thereon.[41] Above all, it is undoubtedly against public policy to charge excessively
for the use of money.[42]

It cannot be argued that assent to the increases can be implied either from the June
18, 1991 request of petitioners for loan restructuring or from their lack of response to
the statements of account sent by respondent. Such request does not indicate any
agreement to an interest increase; there can be no implied waiver of a right when
there is no clear, unequivocal and decisive act showing such purpose.[43] Besides,
the statements were not letters of information sent to secure their conformity; and
even if we were to presume these as an offer, there was no acceptance. No one
receiving a proposal to modify a loan contract, especially interest -- a vital component
-- is obliged to answer the proposal.[44]

Furthermore, respondent did not follow the stipulation in the Promissory Notes
providing for the automatic conversion of the portion that remained unpaid after 730
days -- or two years from date of original release -- into a medium-term loan, subject
to the applicable interest rate to be applied from the dates of original release.[45]

In the first,[46] second[47] and third[48] Promissory Notes, the amount that remained
unpaid as of October 27, 1989, December 1989 and January 4, 1990 -- their
respective due dates -- should have been automatically converted by respondent into
medium-term loans on June 30, 1991, September 2, 1991, and September 7, 1991,
respectively. And on this unpaid amount should have been imposed the same interest
rate charged by respondent on other medium-term loans; and the rate applied from
June 29, 1989, September 1, 1989 and September 6, 1989 -- their respective original
release -- until paid. But these steps were not taken. Aside from sending demand
letters, respondent did not at all exercise its option to enforce collection as of these
Notes due dates. Neither did it renew or extend the account.

In these three Promissory Notes, evidently, no complaint for collection was filed with
the courts. It was not until January 30, 1992 that a Petition for Sale of the mortgaged
properties was filed -- with the provincial sheriff, instead.[49] Moreover, respondent
did not supply the interest rate to be charged on medium-term loans granted by
automatic conversion. Because of this deficiency, we shall use the legal rate of 12
percent per annum on loans and forbearance of money, as provided for by CB
Circular 416.[50]

Credit Agreements. Aside from the promissory notes, another main document
involved in the principal obligation is the set of credit agreements executed and their
annexes.
The first Credit Agreement[51] dated June 19, 1989 -- although offered and admitted
in evidence, and even referred to in the first Promissory Note -- cannot be given
weight.

First, it was not signed by respondent through its branch manager.[52] Apparently it
was surreptitiously acknowledged before respondents counsel, who unflinchingly
declared that it had been signed by the parties on every page, although respondents
signature does not appear thereon.[53]

Second, it was objected to by petitioners,[54] contrary to the trial courts findings.[55]

However, it was not the Agreement, but the revolving credit line[56] of P5,000,000,
that expired one year from the Agreements date of implementation.[57]

Third, there was no attached annex that contained the General Conditions.[58] Even
the Acknowledgment did not allude to its existence.[59] Thus, no terms or conditions
could be added to the Agreement other than those already stated therein.

Since the first Credit Agreement cannot be given weight, the interest rate on the first
availment pegged at 3 percent over and above respondents prime rate[60] on the
date of such availment[61] has no bearing at all on the loan. After the first Notes due
date, the rate
of 19 percent agreed upon should continue to be applied on the availment, until its
automatic conversion to a medium-term loan.

The second Credit Agreement[62] dated August 31, 1989, provided for interest -respondents prime rate, plus the applicable spread[63] in effect as of the date of each
availment,[64] on a revolving credit line of P7,700,000[65] -- but did not state any
provision on its increase or decrease.[66] Consequently, petitioners could not be
made to bear interest more than such prime rate plus spread. The Court gives weight
to this second Credit Agreement for the following reasons.

First, this document submitted by respondent was admitted by petitioners.[67] Again,

contrary to their assertion, it was not the Agreement -- but the credit line -- that
expired one year from the Agreements date of implementation.[68] Thus, the terms
and conditions continued to apply, even if drawdowns could no longer be made.

Second, there was no 7-page annex[69] offered in evidence that contained the
General Conditions,[70] notwithstanding the Acknowledgment of its existence by

respondents counsel. Thus, no terms or conditions could be appended to the

Agreement other than those specified therein.

Third, the 12-page General Conditions[71] offered and admitted in evidence had no
probative value. There was no reference to it in the Acknowledgment of the
Agreement; neither was respondents signature on any of the pages thereof. Thus, the
General Conditions stipulations on interest adjustment,[72] whether on a fixed or a
floating scheme, had no effect whatsoever on the Agreement. Contrary to the trial
courts findings,[73] the General Condition were correctly objected to by
petitioners.[74] The rate of 21.5 percent agreed upon in the second Note thus
continued to apply to the second availment, until its automatic conversion into a
medium-term loan.

The third Credit Agreement[75] dated September 5, 1989, provided for the same rate
of interest as that in the second Agreement. This rate was to be applied to availments
of an unadvised line of P300,000. Since there was no mention in the third Agreement,
either, of any stipulation on increases or decreases[76] in interest, there would be no
basis for imposing amounts higher than the prime rate plus spread. Again, the 21.5
percent rate agreed upon would continue to apply to the third availment indicated in
the third Note, until such amount was automatically converted into a medium-term
loan.

The Court also finds that, first, although this document was admitted by
petitioners,[77] it was the credit line that expired one year from the implementation of
the Agreement.[78] The terms and conditions therein continued to apply, even if
availments could no longer be drawn after expiry.

Second, there was again no 7-page annex[79] offered that contained the General
Conditions,[80] regardless of the Acknowledgment by the same respondents counsel
affirming its existence. Thus, the terms and conditions in this Agreement relating to
interest cannot be expanded beyond that which was already laid down by the parties.

Disclosure Statements. In the present case, the Disclosure Statements[81] furnished

by respondent set forth the same interest rates as those respectively indicated in the
Promissory Notes. Although no method of computation was provided showing how
such rates were arrived at, we will nevertheless take up the Statements seriatim in
order
to determine the applicable rates clearly.

As to the first Disclosure Statement on Loan/Credit Transaction[82] dated June 13,

1989, we hold that the 19.5 percent effective interest rate per annum[83] would
indeed apply to the first availment or drawdown evidenced by the first Promissory
Note. Not only was this Statement issued prior to the consummation of such
availment or drawdown, but the rate shown therein can also be considered equivalent

to 3 percent over and above respondents prime rate in effect. Besides, respondent
mentioned no other rate that it considered to be the prime rate chargeable to
petitioners. Even if we disregarded the related Credit Agreement, we assume that this
private transaction between the parties was fair and regular,[84] and that the ordinary
course of business was followed.[85]

As to the second Disclosure Statement on Loan/Credit Transaction[86] dated

September 2, 1989, we hold that the 21.5 percent effective interest rate per
annum[87] would definitely apply to the second availment or drawdown evidenced by
the second Promissory Note. Incidentally, this Statement was issued only after the
consummation of its related availment or drawdown, yet such rate can be deemed
equivalent to the prime rate plus spread, as stipulated in the corresponding Credit
Agreement. Again, we presume that this private transaction was fair and regular, and
that the ordinary course of business was followed. That the related Promissory Note
was pre-signed would also bolster petitioners claim although, under crossexamination Efren Pozon -- Assistant Department Manager I[88] of PNB, Dagupan
Branch -- testified that the Disclosure Statements were the basis for preparing the
Notes.[89]

As to the third Disclosure Statement on Loan/Credit Transaction[90] dated September

6, 1989, we hold that the same 21.5 percent effective interest rate per annum[91]
would apply to the third
availment or drawdown evidenced by the third Promissory Note. This Statement was
made available to petitioner-spouses, only after the related Credit Agreement had
been executed, but simultaneously with the consummation of the Statements related
availment or drawdown. Nonetheless, the rate herein should still be regarded as
equivalent to the prime rate plus spread, under the similar presumption that this
private transaction was fair and regular and that the ordinary course of business was
followed.

No penalty charges or increases thereof appear either in the Disclosure

Statements[96] or in any of the clauses in the second and the third Credit
Agreements[97] earlier discussed. While a standard penalty charge of 6 percent per
annum has been imposed on the amounts stated in all three Promissory Notes still
remaining unpaid or unrenewed when they fell due,[98] there is no stipulation therein
that would justify any increase in that charges. The effect, therefore, when the
borrower is not clearly informed of the Disclosure Statements -- prior to the
consummation of the availment or drawdown -- is that the lender will have no right to
collect upon such charge[99] or increases thereof, even if stipulated in the Notes. The
time is now ripe to give teeth to the often ignored forty-one-year old Truth in Lending
Act[100] and thus transform it from a snivelling paper tiger to a growling financial
watchdog of hapless borrowers.

Besides, we have earlier said that the Notes are contracts of adhesion; although not
invalid per se, any apparent ambiguity in the loan contracts -- taken as a whole -shall be strictly construed against respondent who caused it.[101] Worse, in the
statements of account, the penalty rate has again been unilaterally increased by
respondent to 36 percent without petitioners consent. As a result of its move, such
liquidated damages intended as a penalty shall be equitably reduced by the Court to
zilch[102] for being iniquitous or unconscionable.[103]

Although the first Disclosure Statement was furnished Petitioner NSBCI prior to the
execution of the transaction, it is not a contract that can be modified by the related
Promissory Note, but a mere statement in writing that reflects the true and effective
cost of loans from respondent. Novation can never be presumed,[104] and the
animus novandi must appear by express agreement of the parties, or by their acts
that are too clear and unequivocal to be mistaken.[105] To allow novation will surely
flout the policy of the State to protect
its citizens from a lack of awareness of the true cost of credit.[106]

In sum, the three disclosure statements, as well as the two credit agreements
considered by this Court, did not provide for any increase in the specified interest
rates. Thus, none would now be permitted. When cross-examined, Julia Ang-Lopez,
Finance Account Analyst II of PNB, Dagupan Branch, even testified that the bases for
computing such rates were those sent by the head office from time to time, and not
those indicated in the notes or disclosure statements.[92]

In addition to the preceding discussion, it is then useless to labor the point that the
increase in rates violates the impairment[93] clause of the Constitution,[94] because
the sole purpose of this provision is to safeguard the integrity of valid contractual
agreements against unwarranted interference by the State[95] in the form of laws.
Private individuals intrusions on interest rates is governed by statutory enactments
like the Civil Code.
Penalty, or Increases
Thereof, Unjustified

With greater reason should such penalty charges be indicated in the second and third
Disclosure Statements, yet none can be found therein. While the charges are issued
after the respective availment or drawdown, the disclosure statements are given
simultaneously therewith. Obviously, novation still does not apply.
Other Charges Unwarranted
In like manner, the other charges imposed by respondent are not warranted. No
particular values or rates of service charge are indicated in the Promissory Notes or
Credit Agreements, and no total value or even the breakdown figures of such nonfinance charge are specified in the Disclosure Statements. Moreover, the provision in
the Mortgage that requires the payment of insurance and other charges is neither
made part of nor reflected in such Notes, Agreements, or Statements.[107]
Attorneys Fees Equitably Reduced
We affirm the equitable reduction in attorneys fees.[108] These are not an integral
part of the cost of borrowing, but arise only when collecting upon the Notes becomes
necessary. The purpose of these fees is not to give respondent a larger

compensation for the loan than the law already allows, but to protect it against any
future loss or damage by being compelled to retain counsel in-house or not -- to
institute judicial proceedings for the collection of its credit.[109] Courts have has the
power[110] to determine their reasonableness[111] based on quantum meruit[112]
and to reduce[113] the amount thereof if excessive.[114]

In addition, the disqualification argument in the Affidavit of Publication raised by

petitioners no longer holds water, inasmuch as Act 496[115] has repealed the
Spanish Notarial Law.[116] In the same vein, their engagement of their counsel in
another capacity concurrent with the practice of law is not prohibited, so long as the
roles being assumed by such counsel is made clear to the client.[117] The only
reason for this clarification requirement is that certain ethical considerations operative
in one profession may not be so in the other.[118]

Entries in Subsidiary Ledgers

Regular and Correct
Contrary to petitioners assertions, the subsidiary ledgers of respondent properly
reflected all entries pertaining to Petitioner NSBCIs loan accounts. In accordance with
the Generally Accepted Accounting Principles (GAAP) for the Banking Industry,[130]
all interests accrued or earned on such loans, except those that were restructured
and non-accruing,[131] have been periodically taken into income.[132] Without a
doubt, the subsidiary ledgers in a manual accounting system are mere private
documents[133] that support and are controlled by the general ledger.[134] Such
ledgers are neither foolproof nor standard in format, but are periodically subject to
audit. Besides, we go by the presumption that the recording of private transactions
has been fair and regular, and that the ordinary course of business has been
followed.

Debt Relief Package

Not Availed Of
We also affirm the CAs disquisition on the debt relief package (DRP).

Second Main Issue:

Extrajudicial Foreclosure Valid, But
Deficiency Claims Excessive

Respondents Circular is not an outright grant of assistance or extension of

payment,[119] but a mere offer subject to specific terms and conditions.
Petitioner NSBCI failed to establish satisfactorily that it had been seriously and
directly affected by the economic slowdown in the peripheral areas of the then US
military bases. Its allegations, devoid of any verification, cannot lead to a supportable
conclusion. In fact, for short-term loans, there is still a need to conduct a thorough
review of the borrowers repayment possibilities.[120]

Respondent aptly exercised its option to foreclose the mortgage,[135] after petitioners
had failed to pay all the Notes in full when they fell due.[136] The extrajudicial sale
and subsequent proceedings are therefore valid, but the alleged deficiency claim
cannot be recovered.

Auction Price Adequate

Neither has Petitioner NSBCI shown enough margin of equity,[121] based on the
latest loan value of hard collaterals,[122] to be eligible for the package. Additional
ACCOMMODATIONS on an unsecured basis may be granted only when regular
payment amortizations have been established, or when the merits of the credit
application would so justify.[123]

The branch managers recommendation to restructure or extend a total outstanding

loan not exceeding P8,000,000 is not final, but subject to the approval of respondents
Branches Department Credit Committee, chaired by its executive vice-president.[124]
Aside from being further conditioned on other pertinent policies of respondent,[125]
such approval nevertheless needs to be reported to its Board of Directors for
confirmation.[126] In fact, under the General Banking Law of 2000,[127] banks shall
grant loans and other credit ACCOMMODATIONS only in amounts and for periods of
time essential to the effective completion of operations to be financed, consistent with
safe and sound banking practices.[128] The Monetary Board -- then and now -- still
prescribes, by regulation, the conditions and limitations under which banks may grant
extensions or renewals of their loans and other credit accommodations.[129]

In the accessory contract[137] of real mortgage,[138] in which immovable property or

real rights thereto are used as security[139] for the fulfillment of the principal loan
obligation,[140] the bid price may be lower than the propertys fair market value.[141]
In fact, the loan value itself is only 70 percent of the appraised value.[142] As
correctly emphasized by the appellate court, a low bid price will make it
easier[143] for the owner to effect redemption[144] by subsequently reacquiring the
property or by selling the right to redeem and thus recover alleged losses. Besides,
the public auction sale has been regularly and fairly conducted,[145] there has been
ample authority to effect the sale,[146] and the Certificates of Title can be relied upon.
No personal notice[147] is even required,[148] because an extrajudicial foreclosure is
an action in rem, requiring only notice by publication and posting, in order to bind
parties interested in the foreclosed property.[149]

As no redemption[150] was exercised within one year after the date of registration of
the Certificate of Sale with the Registry of Deeds,[151] respondent -- being the
highest bidder -- has the right to a writ of possession, the final process that will
consummate the extrajudicial foreclosure. On the other hand, petitioner-spouses, who
are mortgagors herein, shall lose all their rights to the property.[152]

No Deficiency Claim Receivable

After the foreclosure and sale of the mortgaged property, the Real Estate Mortgage is
extinguished. Although the mortgagors, being third persons, are not liable for any
deficiency in the absence of a contrary stipulation,[153] the action for recovery of
such amount -- being clearly sureties to the principal obligation -- may still be directed
against them.[154] However, respondent may impose only the stipulated interest
rates of 19.5 percent and 21.5 percent on the respective availments -- subject to the
12 percent legal rate revision upon automatic conversion into medium-term loans -plus 1 percent attorneys fees, without additional charges on penalty, insurance or any
increases thereof.

In fine, under solutio indebiti[160] or payment by mistake,[161] there is no deficiency

receivable in favor of PNB, but rather an excess claim or surplus[162] payable by
respondent; this excess should immediately be returned to petitioner-spouses or their
assigns -- not to mention the buildings and improvements[163] on and the fruits of the
property -- to the end that no one may be unjustly enriched or benefited at
the expense of another.[164] Such surplus is in the amount of P3,686,101.52,
computed as follows:

Total unpaid principal and interest on the

promissory notes as of February 26, 1992:

Accordingly, the excessive interest rates in the Statements of Account sent to

petitioners are reduced to 19.5 percent and 21.5 percent, as stipulated in the
Promissory Notes; upon loan conversion, these rates are further reduced to the legal
rate of 12 percent. Payments made by petitioners are pro-rated, the charges on
penalty and insurance eliminated, and the resulting total unpaid principal and interest
of P6,582,077.70 as of the date of public auction is then subjected to 1 percent
attorneys fees. The total outstanding obligation is compared to the bid price. On the
basis of these rates and the comparison made, the deficiency claim receivable
amounting to P2,172,476.43 in fact vanishes. Instead, there is an overpayment by
more than P3 million, as shown in the following Schedules:

Drawdown on June 29, 1989

(Schedule 1) P 4,037,204.10
Drawdown on September 1, 1989
(Schedule 2) 2,289,040.38
Drawdown on September 6, 1989
(Schedule 3) 255,833.22
6,582,077.70
Add: 1% attorneys fees 65,820.78

In the preparation of the above-mentioned schedules, these basic legal principles

were followed:

Total outstanding obligation 6,647,898.48

Less: Bid price 10,334,000.00

First, the payments were applied to debts that were already due.[155] Thus, when the
first payment was made and applied on January 5, 1990, all Promissory Notes were
already due.

Second, payments of the principal were not made until the interests had been
covered.[156] For instance, the first payment on January 15, 1990 had initially been
applied to all interests due on the notes, before deductions were made from their
respective principal amounts. The resulting decrease in interest balances served as
the bases for subsequent pro-ratings.

Third, payments were proportionately applied to all interests that were due and of the
same nature and burden.[157] This legal principle was the rationale for the pro-rated
computations shown on Schedule 4.

Fourth, since there was no stipulation on capitalization, no interests due and unpaid
were added to the principal; hence, such interests did not earn any additional
interest.[158] The simple -- not compounded -- method of interest calculation[159]
was used on all Notes until the date of public auction.

Excess P 3,686,101.52

Joint and Solidary Agreement. Contrary to the contention of the petitioner-spouses,

their Joint and Solidary Agreement (JSA)[165] was indubitably a surety, not a
guaranty.[166] They consented to be jointly and severally liable with Petitioner NSBCI
-- the borrower -- not only for the payment of all sums due and payable in favor of
respondent, but also for the faithful and prompt performance of all the terms and
conditions thereof.[167] Additionally, the corporate secretary of Petitioner NSBCI
certified as early as February 23, 1989, that the spouses should act as such
surety.[168] But, their solidary liability should be carefully studied, not sweepingly
assumed to cover all availments instantly.

First, the JSA was executed on August 31, 1989. As correctly adverted to by
petitioners,[169] it covered only the Promissory Notes of P2,700,000 and P300,000
made after that date. The terms of a contract of suretyship undeniably determine the
suretys liability[170] and cannot extend beyond what is stipulated therein.[171] Yet,
the total amount petitioner-spouses agreed to be held liable for was P7,700,000; by
the time the JSA was executed, the first Promissory Note was still unpaid and was
thus brought within the JSAs ambit.[172]

Second, while the JSA included all costs, charges and expenses that respondent
might incur or sustain in connection with the credit documents,[173] only the interest
was imposed under the pertinent Credit Agreements. Moreover, the relevant
Promissory Notes had to be RESORTED to for proper valuation of the interests
charged.

Third, although the JSA, as a contract of adhesion, should be taken contra

proferentum against the party who may have caused any ambiguity therein, no such
ambiguity was found. Petitioner-spouses, who agreed to be ACCOMMODATION
mortgagors,[174] can no longer be held individually liable for the entire onerous
obligation[175] because, as
it turned out, it was respondent that still owed them.

To summarize, to give full force to the Truth in Lending Act, only the interest rates of
19.5 percent and 21.5 percent stipulated in the Promissory Notes may be imposed by
respondent on the respective availments. After 730 days, the portions remaining
unpaid are automatically converted into medium-term loans at the legal rate of 12
percent. In all instances, the simple method of interest computation is followed.
Payments made by petitioners are applied and pro-rated according to basic legal
principles. Charges on penalty and insurance are eliminated, and 1 percent attorneys
fees imposed upon the total unpaid balance of the principal and interest as of the date
of public auction. The P2 million deficiency claim therefore vanishes, and a refund of
P3,686,101.52 arises.

WHEREFORE, this Petition is hereby PARTLY GRANTED. The Decision of the Court
of Appeals is AFFIRMED, with the MODIFICATION that PNB is ORDERED to refund
the sum of P3,686,101.52 representing the overcollection computed above, plus
interest thereon at the legal rate of six percent (6%) per annum from the filing of the
Complaint until the finality of this Decision. After this Decision becomes final and
executory, the applicable rate shall be twelve percent (12%) per annum until its
satisfaction. No costs.

SO ORDERED.

G.R. No. 138544

October 3, 2000

"The antecedent material and relevant facts are that defendant-appellant Sta. Ines
Melale (Sta. Ines) is a corporation engaged in logging operations. It was a holder of
a Timber License Agreement issued by the Department of Environment and Natural
Resources (DENR).

SECURITY BANK AND TRUST COMPANY, Inc., petitioner,

vs.
RODOLFO M. CUENCA, respondent.
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed against the
creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental
rules of fair play require the creditor to obtain the consent of the surety to any material
alteration in the principal loan agreement, or at least to notify it thereof. Hence,
petitioner bank cannot hold herein respondent liable for loans obtained in excess of
the amount or beyond the period stipulated in the original agreement, absent any
clear stipulation showing that the latter waived his right to be notified thereof, or to
give consent thereto. This is especially true where, as in this case, respondent was
no longer the principal officer or major stockholder of the corporate debtor at the time
the later obligations were incurred. He was thus no longer in a position to compel the
debtor to pay the creditor and had no more reason to bind himself anew to the
subsequent obligations.
The Case
This is the main principle used in denying the present Petition for Review under Rule
45 of the Rules of Court. Petitioner assails the December 22, 1998 Decision1 of the
Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads
as follows:
"WHEREFORE, the judgment appealed from is hereby amended in the sense that
defendant-appellant Rodolfo M. Cuenca [herein respondent] is RELEASED from
liability to pay any amount stated in the judgment.
"Furthermore,
[Respondent]
Rodolfo
hereby DISMISSED for lack of merit.

M.

Cuencas

counterclaim

is

"On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant
Sta. Ines Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion
[p]esos (P8,000,000.00) to assist the latter in meeting the additional capitalization
requirements of its logging operations.
"The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility
shall be effective until 30 November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued
at 200% of the lines plus JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the borrowings,
indicating therein the companys duly authorized signatory/ies;
3. Reasonable/compensating deposit balances in current account shall be
maintained at all times; in this connection, a Makati account shall be opened prior to
availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the aforementioned terms and
conditions upon written notice to the Borrower. (Emphasis supplied.)
"To secure the payment of the amounts drawn by appellant SIMC from the abovementioned credit line, SIMC executed a Chattel Mortgage dated 23 December 1980
(Exhibit A) over some of its machinery and equipment in favor of [Petitioner] SBTC.
As additional security for the payment of the loan, [Respondent] Rodolfo M. Cuenca
executed an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of
[Petitioner] SBTC whereby he solidarily bound himself with SIMC as follows:

"In all other respect[s], the decision appealed from is AFFIRMED."

xxx

Also challenged is the April 14, 1999 CA Resolution, 3 which denied petitioners
Motion for Reconsideration.

Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the
client (SIMC) in favor of the bank for the payment, upon demand and without the
benefit of excussion of whatever amount x x x the client may be indebted to the bank
x x x by virtue of aforesaid creditACCOMMODATION (s) including the
substitutions, renewals, extensions, increases, amendments, conversions and
revivals of the aforesaid creditACCOMMODATION (s) x x x . (Emphasis
supplied).

Modified by the CA was the March 6, 1997 Decision of the Regional Trial Court
(RTC) of Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as
follows:
"WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale
Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security
Bank & Trust Company the sum of P39,129,124.73 representing the balance of the
loan as of May 10, 1994 plus 12% interest per annum until fully paid, and the sum
of P100,000.00 as attorneys fees and litigation expenses and to pay the costs.
SO ORDERED."
The Facts
The facts are narrated by the Court of Appeals as follows:

xxx

xxx

"On 26 November 1981, four (4) days prior to the expiration of the period of effectivity
of the P8M-Credit Loan Facility, appellant SIMC made a first drawdown from its credit
line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand
[p]esos (P6,100,000.00). To cover said drawdown, SIMC duly executed promissory
Note No. TD/TLS-3599-81 for said amount (Exhibit C).
"Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the
Board of Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings
of [Respondent] Cuenca in defendant-appellant Sta. Ines were sold at a public
auction relative to Civil Case No. 18021 entitled Adolfo A. Angala vs. Universal

Holdings, Inc. and Rodolfo M. Cuenca. Said shares were bought by Adolfo Angala
who was the highest bidder during the public auction.
"Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six
(6) other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion
[t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos
(P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos.
DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and
DLS/74/47/86 to cover the amounts of the abovementioned additional loans against
the credit line.
6

"Appellant SIMC, however, encountered difficulty in making the amortization

payments on its loans and requested [Petitioner] SBTC for a complete restructuring of
its indebtedness. SBTC accommodated appellant SIMCs request and signified its
approval in a letter dated 18 February 1988 (Exhibit G) wherein SBTC and
defendant-appellant Sta. Ines, without notice to or the prior consent of [Respondent]
Cuenca, agreed to restructure the past due obligations of defendant-appellant Sta.
Ines. [Petitioner] Security Bank agreed to extend to defendant-appellant Sta. Ines the
following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos
(P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant
Sta. Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of
Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I,
pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos
(P3,400,000.00), to be applied to liquidate the past due interest and penalty portion of
the indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf.
Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol. II,
p. 33 to 34).
"It should be pointed out that in restructuring defendant-appellant Sta. Ines
obligations to [Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in the
amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which
was the only loan incurred prior to the expiration of the P8M-Credit Loan Facility on
30 November 1981 and the only one covered by the Indemnity Agreement dated 19
December 1980 (Exhibit 3-Cuenca, Expediente, at Vol. II, p. 331), was not
segregated from, but was instead lumped together with, the other loans, i.e.,
Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D,
E, and F, Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant
Sta. Ines which were not secured by said Indemnity Agreement.
"Pursuant to the agreement to restructure its past due obligations to [Petitioner]
Security Bank, defendant-appellant Sta. Ines thus executed the following promissory
notes, both dated 09 March 1988 in favor of [Petitioner] Security Bank:
PROMISSORY NOTE NO. AMOUNT
RL/74/596/88

P8,800,000.00

RL/74/597/88

P3,400,000.00

TOTAL

P12,200,000.00

(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).

"To formalize their agreement to restructure the loan obligations of defendantappellant Sta. Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines
executed a Loan Agreement dated 31 October 1989 (Exhibit 5-Cuenca, Expediente,
at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement dated 31 October
1989 provides:
1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate
amount of TWELVE MILLION TWO HUNDRED THOUSAND PESOS
(P12,200,000.00), Philippines [c]urrency (the Loan). The loan shall be released in
two (2) tranches of P8,800,000.00 for the first tranche (the First Loan)
and P3,400,000.00 for the second tranche (the Second Loan) to be applied in the
manner and for the purpose stipulated hereinbelow.
1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding indebtedness to the Lender (the indebtedness)
while the Second Loan shall be applied to liquidatethe past due interest and penalty
portion of the Indebtedness. (Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca,
Expediente, at Vol. I, p. 33)
"From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made
further payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even
[h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC
up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to 165)
"Appellant SIMC defaulted in the payment of its restructured loan obligations to
[Petitioner] SBTC despite demands made upon appellant SIMC and CUENCA, the
last of which were made through separate letters dated 5 June 1991 (Exhibit K) and
27 June 1991 (Exhibit L), respectively.
"Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus,
SBTC filed a complaint for collection of sum of money on 14 June 1993, resulting
after trial on the merits in a decision by the court a quo, x x x from which
[Respondent] Cuenca appealed."
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan
Agreement had novated the 1980 credit accommodation earlier granted by the bank
to Sta. Ines. Accordingly, such novation extinguished the Indemnity Agreement, by
which Cuenca, who was then the Board chairman and president of Sta. Ines, had
bound himself solidarily liable for the payment of the loans secured by that credit
accommodation. It noted that the 1989 Loan Agreement had been executed without
notice to, much less consent from, Cuenca who at the time was no longer a
stockholder of the corporation.

The appellate court also noted that the Credit Approval Memorandum had specified
that the credit accommodation was for a total amount of P8 million, and that its expiry
date was November 30, 1981. Hence, it ruled that Cuenca was liable only for loans
obtained prior to November 30, 1981, and only for an amount not exceeding P8
million.

amendment, conversion or revival of the said credit accommodation. As preliminary

matters, the procedural questions raised by respondent will also be addressed.

It further held that the restructuring of Sta. Ines obligation under the 1989 Loan
Agreement was tantamount to a grant of an extension of time to the debtor without
the consent of the surety. Under Article 2079 of the Civil Code, such extension
extinguished the surety.

Preliminary Matters: Procedural Questions

The CA also opined that the surety was entitled to notice, in case the bank and Sta.
Ines decided to materially alter or modify the principal obligation after the expiry date
of the credit accommodation.
Hence, this recourse to this Court.7
The Issues
In its Memorandum, petitioner submits the following for our consideration:

"A. Whether or not the Honorable Court of Appeals erred in releasing Respondent
Cuenca from liability as surety under the Indemnity Agreement for the payment of the
principal amount of twelve million two hundred thousand pesos (P12,200,000.00)
under Promissory Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note
No. RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties and other
charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling that
Respondent Cuencas liability under the Indemnity Agreement covered only
availments on SIMCs credit line to the extent of eight million pesos
(P8,000,000.00) and made on or before 30 November 1981;
ii. Whether or not the Honorable Court of Appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit
accommodation was tantamount to an extension granted to SIMC without
Respondent Cuencas consent, thus extinguishing his liability under the
Indemnity Agreement pursuant to Article 2079 of the Civil Code;
iii. Whether or not the Honorable Court of appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit
accommodation constituted a novation of the principal obligation, thus
extinguishing Respondent Cuencas liability under the indemnity agreement;
B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was
extinguished by the payments made by SIMC;
C. Whether or not petitioners Motion for Reconsideration was pro-forma;
D. Whether or not service of the Petition by registered mail sufficiently complied with
Section 11, Rule 13 of the 1997 Rules of Civil Procedure."
Distilling the foregoing, the Court will resolve the following issues: (a) whether the
1989 Loan Agreement novated the original credit accommodation and Cuencas
liability under the Indemnity Agreement; and (b) whether Cuenca waived his right to
be notified of and to give consent to any substitution, renewal, extension, increase,

The Courts Ruling

The Petition has no merit.

Motion for Reconsideration Not Pro Forma

Respondent contends that petitioners Motion for Reconsideration of the CA Decision,
in merely rehashing the arguments already passed upon by the appellate court, was
pro forma; that as such, it did not toll the period for filing the present Petition for
Review.9 Consequently, the Petition was filed out of time.10
We disagree. A motion for reconsideration is not pro forma just because it reiterated
the arguments earlier passed upon and rejected by the appellate court. The Court has
explained that a movant may raise the same arguments, precisely to convince the
court that its ruling was erroneous.11
Moreover, there is no clear showing of intent on the part of petitioner to delay the
proceedings. In Marikina Valley Development Corporation v. Flojo, 12 the Court
explained that a pro forma motion had no other purpose than to gain time and to
delay or impede the proceedings. Hence, "where the circumstances of a case do not
show an intent on the part of the movant merely to delay the proceedings, our Court
has refused to characterize the motion as simply pro forma." It held:
"We note finally that because the doctrine relating to pro forma motions for
reconsideration impacts upon the reality and substance of the statutory right of
appeal, that doctrine should be applied reasonably, rather than literally. The right to
appeal, where it exists, is an important and valuable right. Public policy would be
better served by according the appellate court an effective opportunity to review the
decision of the trial court on the merits, rather than by aborting the right to appeal by a
literal application of the procedural rules relating to pro forma motions for
reconsideration."
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
"SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the
service and filing of pleadings and other papers shall be done personally. Except with
respect to papers emanating from the court, a resort to other modes must be
accompanied by a written explanation why the service or filing was not done
personally. A violation of this Rule may be cause to consider the paper as not filed."
Respondent maintains that the present Petition for Review does not contain a
sufficient written explanation why it was served by registered mail.
13

We do not think so. The Court held in Solar Entertainment v. Ricafort that the
aforecited rule was mandatory, and that "only when personal service or filing is not
practicable may resort to other modes be had, which must then be accompanied by a
written explanation as to why personal service or filing was not practicable to begin
with."
In this case, the Petition does state that it was served on the respective counsels of
Sta. Ines and Cuenca "by registered mail in lieu of personal service due to limitations

14

in time and distance." This explanation sufficiently shows that personal service was
not practicable. In any event, we find no adequate reason to reject the contention of
petitioner and thereby deprive it of the opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil
Code, which reads as follows:
"ART. 1292. In order that an obligation may be extinguished by another
which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other."
Novation of a contract is never presumed. It has been held that "[i]n the absence of
an express agreement, novation takes place only when the old and the new
obligations are incompatible on every point."15 Indeed, the following requisites must
be established: (1) there is a previous valid obligation; (2) the parties concerned
agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid
new contract.16
Petitioner contends that there was no absolute incompatibility between the old and
the new obligations, and that the latter did not extinguish the earlier one. It further
argues that the 1989 Agreement did not change the original loan in respect to the
parties involved or the obligations incurred. It adds that the terms of the 1989
Contract were "not more onerous."17 Since the original credit accomodation was not
extinguished, it concludes that Cuenca is still liable under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are present in this
case. The 1989 Loan Agreement extinguished the obligation18 obtained under the
1980 credit accomodation. This is evident from its explicit provision to "liquidate" the
principal and the interest of the earlier indebtedness, as the following shows:
"1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding Indebtedness to the Lender (the "Indebtedness")
while the Second Loan shall be applied to liquidatethe past due interest and penalty
19
portion of the Indebtedness." (Italics supplied.)
The testimony of an officer20 of the bank that the proceeds of the 1989 Loan
Agreement were used "to pay-off" the original indebtedness serves to strengthen this
ruling.21
Furthermore, several incompatibilities between the 1989 Agreement and the 1980
original obligation demonstrate that the two cannot coexist. While the 1980 credit
accommodation had stipulated that the amount of loan was not to exceed P8
22
million, the 1989 Agreement provided that the loan was P12.2 million. The periods
for payment were also different.
Likewise, the later contract contained conditions, "positive covenants" and "negative
covenants" not found in the earlier obligation. As an example of a positive covenant,
Sta. Ines undertook "from time to time and upon request by the Lender, [to] perform
such further acts and/or execute and deliver such additional documents and writings
as may be necessary or proper to effectively carry out the provisions and purposes of
23
this Loan Agreement." Likewise, SIMC agreed that it would not create any mortgage
or encumbrance on any asset owned or hereafter acquired, nor would it participate in
any merger or consolidation.24

Since the 1989 Loan Agreement had extinguished the original credit accommodation,
the Indemnity Agreement, an accessory obligation, was necessarily extinguished
also, pursuant to Article 1296 of the Civil Code, which provides:
"ART. 1296. When the principal obligation is extinguished in consequence of
a novation, accessory obligations may subsist only insofar as they may
benefit third persons who did not give their consent."
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of
25
the P8 million original accommodation; it was not a novation.
This argument must be rejected. To begin with, the 1989 Loan Agreement expressly
stipulated that its purpose was to "liquidate," not to renew or extend, the outstanding
indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan
Agreement, which had allegedly extended the original P8 million credit facility. Hence,
his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of
the Civil Code, which specifically states that "[a]n extension granted to the debtor by
the creditor without the consent of the guarantor extinguishes the guaranty. x x x." In
an earlier case,26 the Court explained the rationale of this provision in this wise:
"The theory behind Article 2079 is that an extension of time given to the principal
debtor by the creditor without the suretys consent would deprive the surety of his
right to pay the creditor and to be immediately subrogated to the creditors remedies
against the principal debtor upon the maturity date. The surety is said to be entitled to
protect himself against the contingency of the principal debtor or the indemnitors
becoming insolvent during the extended period."
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the Credit Approval
Memorandum in holding that the credit accommodation was only for P8 million, and
that it was for a period of one year ending on November 30, 1981. Petitioner objects
to the appellate courts reliance on that document, contending that it was not a
binding agreement because it was not signed by the parties. It adds that it was merely
for its internal use.
We disagree. It was petitioner itself which presented the said document to prove the
accommodation. Attached to the Complaint as Annex A was a copy thereof
"evidencing the accommodation."27 Moreover, in its Petition before this Court, it
alluded to the Credit Approval Memorandum in this wise:
"4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC") was granted by
the Bank a credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00)
to assist SIMC in meeting the additional capitalization requirements for its logging
operations. For this purpose, the Bank issued a Credit Approval Memorandum dated
10 November 1980."
Clearly, respondent is estopped from denying the terms and conditions of the P8
million credit accommodation as contained in the very document it presented to the
courts. Indeed, it cannot take advantage of that document by agreeing to be bound
only by those portions that are favorable to it, while denying those that are
disadvantageous.
Second Issue: Alleged Waiver of Consent

Pursuing another course, petitioner contends that Respondent Cuenca "impliedly

gave his consent to any modification of the credit accommodation or otherwise
waived his right to be notified of, or to give consent to, the same." 28 Respondents
consent or waiver thereof is allegedly found in the Indemnity Agreement, in which he
held
himself
liable
for
the
"credit
accommodation
including
[its]
substitutions, renewals, extensions, increases, amendments, conversions and
revival." It explains that the novation of the original credit accommodation by the 1989
Loan Agreement is merely its "renewal," which "connotes cessation of an old contract
29
and birth of another one x x x."
At the outset, we should emphasize that an essential alteration in the terms of the
Loan Agreement without the consent of the surety extinguishes the latters obligation.
As the Court held in National Bank v. Veraguth,30 "[i]t is fundamental in the law of
suretyship that any agreement between the creditor and the principal debtor which
essentially varies the terms of the principal contract, without the consent of the surety,
will release the surety from liability."
In this case, petitioners assertion - that respondent consented to the alterations in the
credit accommodation -- finds no support in the text of the Indemnity Agreement,
which is reproduced hereunder:

even amounting to, say, P100 billion obtained 100 years after the expiration of the
credit accommodation, on the ground that he consented to all alterations and
extensions thereof.
Indeed, it has been held that a contract of surety "cannot extend to more than what is
stipulated. It is strictly construed against the creditor, every doubt being resolved
against enlarging the liability of the surety."31 Likewise, the Court has ruled that "it is a
well-settled legal principle that if there is any doubt on the terms and conditions of the
surety agreement, the doubt should be resolved in favor of the surety x x x.
32
Ambiguous contracts are construed against the party who caused the ambiguity." In
the absence of an unequivocal provision that respondent waived his right to be
notified of or to give consent to any alteration of the credit accommodation, we cannot
sustain petitioners view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly shows that
the bank did not have absolute authority to unilaterally change the terms of the loan
accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to
this condition:
"5. The Bank reserves the right to amend any of the aforementioned terms and
conditions upon written notice to the Borrower."33

"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest
Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in
consideration of the credit accommodation in the total amount of eight million pesos
(P8,000,000.00) granted by the SECURITY BANK AND TRUST COMPANY, a
commercial bank duly organized and existing under and by virtue of the laws of the
Philippine, 6778 Ayala Avenue, Makati, Metro Manila hereinafter referred to as the
BANK in favor of STA. INES MELALE FOREST PRODUCTS CORP., x x x ---hereinafter referred to as the CLIENT, with the stipulated interests and charges
thereon, evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed
and delivered by the CLIENT in favor of the BANK hereby bind(s) himself/themselves
jointly and severally with the CLIENT in favor of the BANK for the payment , upon
demand and without benefit of excussion of whatever amount or amounts the CLIENT
may be indebted to the BANK under and by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions, increases,
amendment, conversions and revivals of the aforesaid credit accommodation(s), as
well as of the amount or amounts of such other obligations that the CLIENT may owe
the BANK, whether direct or indirect, principal or secondary, as appears in the
accounts, books and records of the BANK, plus interest and expenses arising from
any agreement or agreements that may have heretofore been made, or may hereafter
be executed by and between the parties thereto, including the substitutions, renewals,
extensions, increases, amendments, conversions and revivals of the aforesaid credit
accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor of
the BANK for the faithful compliance of all the terms and conditions contained in the
aforesaid credit accommodation(s), all of which are incorporated herein and made
part hereof by reference."

We reject petitioners submission that only Sta. Ines as the borrower, not respondent,
was entitled to be notified of any modification in the original loan
accommodation.34 Following the banks reasoning, such modification would not be
valid as to Sta. Ines if no notice were given; but would still be valid as to respondent
to whom no notice need be given. The latters liability would thus be more
burdensome than that of the former. Such untenable theory is contrary to the principle
that a surety cannot assume an obligation more onerous than that of the principal. 35

While respondent held himself liable for the credit accommodation or any modification
thereof, such clause should be understood in the context of the P8 million limit and
the November 30, 1981 term. It did not give the bank or Sta. Ines any license to
modify the nature and scope of the original credit accommodation, without informing
or getting the consent of respondent who was solidarily liable. Taking the banks
submission to the extreme, respondent (or his successors) would be liable for loans

Contending that the Indemnity Agreement was in the nature of a continuing surety,
petitioner maintains that there was no need for respondent to execute another surety
contract to secure the 1989 Loan Agreement.

36

The present controversy must be distinguished from Philamgen v. Mutuc, in which

the Court sustained a stipulation whereby the surety consented to be bound not only
for the specified period, "but to any extension thereafter made, an extension x x x that
could be had without his having to be notified."
In that case, the surety agreement contained this unequivocal stipulation: "It is hereby
further agreed that in case of any extension of renewal of the bond, we equally bind
ourselves to the Company under the same terms and conditions as herein provided
without the necessity of executing another indemnity agreement for the purpose and
that we hereby equally waive our right to be notified of any renewal or extension of
the bond which may be granted under this indemnity agreement."
In the present case, there is no such express stipulation.1wphi1 At most, the alleged
basis of respondents waiver is vague and uncertain. It confers no clear authorization
on the bank or Sta. Ines to modify or extend the original obligation without the
consent of the surety or notice thereto.
Continuing Surety

This argument is incorrect. That the Indemnity Agreement is a continuing surety does
not authorize the bank to extend the scope of the principal obligation
inordinately.37 In Dino v. CA,38 the Court held that "a continuing guaranty is one which

covers all transactions, including those arising in the future, which are within the
description or contemplation of the contract of guaranty, until the expiration or
termination thereof."
To repeat, in the present case, the Indemnity Agreement was subject to the two
limitations of the credit accommodation: (1) that the obligation should not exceed P8
million, and (2) that the accommodation should expire not later than November 30,
1981. Hence, it was a continuing surety only in regard to loans obtained on or before
the aforementioned expiry date and not exceeding the total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained
on November 26, 1991. It did not secure the subsequent loans, purportedly under the
1980 credit accommodation, that were obtained in1986. Certainly, he could not have
guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981
and which exceeded the stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety liable for
the loan obtained after the payment of the original one, which was covered by a
continuing surety agreement. At the risk of being repetitious, we hold that in Dino, the
surety Agreement specifically provided that "each suretyship is a continuing one
which shall remain in full force and effect until this bank is notified of its revocation."
Since the bank had not been notified of such revocation, the surety was held liable
even for the subsequent obligations of the principal borrower.
No similar provision is found in the present case. On the contrary, respondents
liability was confined to the 1980 credit accommodation, the amount and the expiry
date of which were set down in the Credit Approval Memorandum.
Special Nature of the JSS
It is a common banking practice to require the JSS ("joint and solidary signature") of a
major stockholder or corporate officer, as an additional security for loans granted to
corporations. There are at least two reasons for this. First, in case of default, the
creditors recourse, which is normally limited to the corporate properties under the veil
of separate corporate personality, would extend to the personal assets of the
surety. Second, such surety would be compelled to ensure that the loan would be
used for the purpose agreed upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for the bank to have
required the JSS of respondent, who was the chairman and president of Sta. Ines in
1980 when the creditACCOMMODATION was granted. There was no reason or
logic, however, for the bank or Sta. Ines to assume that he would still agree to act as
surety in the 1989 Loan Agreement, because at that time, he was no longer an officer
or a stockholder of the debtor-corporation. Verily, he was not in a position then to
ensure the payment of the obligation. Neither did he have any reason to bind himself
further to a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of
respondent, without even informing him, smacks of negligence on the part of the bank
and bad faith on that of the principal debtor. Since that Loan Agreement constituted a
new indebtedness, the old loan having been already liquidated, the spirit of fair play
should have impelled Sta. Ines to ask somebody else to act as a surety for the new
loan.

In the same vein, a little prudence should have impelled the bank to insist on the JSS
of one who was in a position to ensure the payment of the loan. Even a perfunctory
attempt at credit investigation would have revealed that respondent was no longer
connected with the corporation at the time. As it is, the bank is now relying on an
unclear Indemnity Agreement in order to collect an obligation that could have been
secured by a fairly obtained surety. For its defeat in this litigation, the bank has only
itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation the
obligation under the 1980 P8 million creditACCOMMODATION . Hence, the
Indemnity Agreement, which had been an accessory to the 1980 credit
accommodation, was also extinguished. Furthermore, we reject petitioners
submission that respondent waived his right to be notified of, or to give consent to,
any modification or extension of the 1980 credit accommodation.
In this light, we find no more need to resolve the issue of whether the loan obtained
before the expiry date of the credit accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.

G.R. No. 138677

February 12, 2002

TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners,

vs.
HON. COURT OF APPEALS & SECURITY BANK & TRUST
COMPANY, respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court, assailing the decision and resolutions of the Court of Appeals in CA-G.R. CV
No. 34594, entitled "Security Bank and Trust Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a
loan in the amount of P120,000.00 from respondent Security Bank and Trust
Company. Petitioners executed a promissory note binding themselves, jointly and
severally, to pay the sum borrowed with an interest of 15.189% per annum upon
maturity and to pay a penalty of 5% every month on the outstanding principal and
interest in case of default. In addition, petitioners agreed to pay 10% of the total
amount due by way of attorneys fees if the matter were indorsed to a lawyer for
collection or if a suit were instituted to enforce payment. The obligation matured on 8
September 1981; the bank, however, granted an extension but only up until 29
December 1981.
Despite several demands from the bank, petitioners failed to settle the debt which, as
of 20 May 1982, amounted to P114,416.10. On 30 September 1982, the bank sent a
final demand letter to petitioners informing them that they had five days within which
to make full payment. Since petitioners still defaulted on their obligation, the bank filed
on 3 November 1982, with the Regional Trial Court of Makati, Branch 143, a
complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its
evidence and, on 27 March 1985, rested its case. Petitioners, instead of introducing
their own evidence, had the hearing of the case reset on two consecutive occasions.
In view of the absence of petitioners and their counsel on 28 August 1985, the third
hearing date, the bank moved, and the trial court resolved, to consider the case
submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration
of the order of the trial court declaring them as having waived their right to present
evidence and prayed that they be allowed to prove their case. The court a quo denied
the motion in an order, dated 5 September 1988, and on 20 October 1989, it rendered
1
its decision, the dispositive portion of which read:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants, ordering the latter to pay, jointly and severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per
annum, 2% service charge and 5% per month penalty charge, commencing
on 20 May 1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the total amount of
indebtedness for and as attorneys fees; and
"3. To pay the costs of the suit."2

Petitioners interposed an appeal with the Court of Appeals, questioning the rejection
by the trial court of their motion to present evidence and assailing the imposition of
the 2% service charge, the 5% per month penalty charge and 10% attorney's fees. In
3
its decision of 7 March 1996, the appellate court affirmed the judgment of the trial
court except on the matter of the 2% service charge which was deleted pursuant to
Central Bank Circular No. 783. Not fully satisfied with the decision of the appellate
court, both parties filed their respective motions for reconsideration.4 Petitioners
prayed for the reduction of the 5% stipulated penalty for being unconscionable. The
bank, on the other hand, asked that the payment of interest and penalty be
commenced not from the date of filing of complaint but from the time of default as so
stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
"We find merit in plaintiff-appellees claim that the principal sum of P114,416.00 with
interest thereon must commence not on the date of filing of the complaint as we have
previously held in our decision but on the date when the obligation became due.
"Default generally begins from the moment the creditor demands the performance of
the obligation. However, demand is not necessary to render the obligor in default
when the obligation or the law so provides.
"In the case at bar, defendants-appellants executed a promissory note where they
undertook to pay the obligation on its maturity date 'without necessity of demand.'
They also agreed to pay the interest in case of non-payment from the date of default.
"x x x

xxx

xxx

"While we maintain that defendants-appellants must be bound by the contract which

they acknowledged and signed, we take cognizance of their plea for the application of
the provisions of Article 1229 x x x.
"Considering that defendants-appellants partially complied with their obligation under
the promissory note by the reduction of the original amount of P120,000.00 to
P114,416.00 and in order that they will finally settle their obligation, it is our view and
we so hold that in the interest of justice and public policy, a penalty of 3% per month
or 36% per annum would suffice.
"x x x

xxx

xxx

"WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The

defendants-appellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered
to pay the plaintiff-appellee Security Bank and Trust Company the following:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per
annum and 3% per month penalty charge commencing May 20, 1982 until
fully paid;
"2. The sum equivalent to 10% of the total amount of the indebtedness as
5
and for attorneys fees."
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to
admit newly discovered evidence,6 alleging that while the case was pending before
the trial court, petitioner Tolomeo Ligutan and his wife Bienvenida Ligutan executed a
real estate mortgage on 18 January 1984 to secure the existing indebtedness of
petitioners Ligutan and dela Llana with the bank. Petitioners contended that the
execution of the real estate mortgage had the effect of novating the contract between

them and the bank. Petitioners further averred that the mortgage was extrajudicially
foreclosed on 26 August 1986, that they were not informed about it, and the bank did
not credit them with the proceeds of the sale. The appellate court denied the omnibus
motion for reconsideration and to admit newly discovered evidence, ratiocinating that
such a second motion for reconsideration cannot be entertained under Section 2,
Rule 52, of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said,
the newly-discovered evidence being invoked by petitioners had actually been known
to them when the case was brought on appeal and when the first motion for
7
reconsideration was filed.
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners
elevated their case to this Court on 9 July 1999 via a petition for review
on certiorari under Rule 45 of the Rules of Court, submitting thusly "I. The respondent Court of Appeals seriously erred in not holding that the
15.189% interest and the penalty of three (3%) percent per month or thirtysix (36%) percent per annum imposed by private respondent bank on
petitioners loan obligation are still manifestly exorbitant, iniquitous and
unconscionable.
"II. The respondent Court of Appeals gravely erred in not reducing to a
reasonable level the ten (10%) percent award of attorneys fees which is
highly and grossly excessive, unreasonable and unconscionable.
"III. The respondent Court of Appeals gravely erred in not admitting
petitioners newly discovered evidence which could not have been timely
produced during the trial of this case.
"IV. The respondent Court of Appeals seriously erred in not holding that
there was a novation of the cause of action of private respondents complaint
in the instant case due to the subsequent execution of the real estate
mortgage during the pendency of this case and the subsequent foreclosure
of the mortgage."8
Respondent bank, which did not take an appeal, would, however, have it that the
penalty sought to be deleted by petitioners was even insufficient to fully cover and
compensate for the cost of money brought about by the radical devaluation and
decrease in the purchasing power of the peso, particularly vis-a-vis the U.S. dollar,
taking into account the time frame of its occurrence. The Bank would stress that only
the amount of P5,584.00 had been remitted out of the entire loan of P120,000.00. 9
A penalty clause, expressly recognized by law, 10 is an accessory undertaking to
assume greater liability on the part of an obligor in case of breach of an obligation. It
11
functions to strengthen the coercive force of the obligation and to provide, in effect,
for what could be the liquidated damages resulting from such a breach. The obligor
would then be bound to pay the stipulated indemnity without the necessity of proof on
the existence and on the measure of damages caused by the breach.12 Although a
court may not at liberty ignore the freedom of the parties to agree on such terms and
conditions as they see fit that contravene neither law nor morals, good customs,
public order or public policy, a stipulated penalty, nevertheless, may be equitably
reduced by the courts if it is iniquitous or unconscionable or if the principal obligation
has been partly or irregularly complied with. 13
The question of whether a penalty is reasonable or iniquitous can be partly subjective
and partly objective. Its resolution would depend on such factors as, but not

necessarily confined to, the type, extent and purpose of the penalty, the nature of the
obligation, the mode of breach and its consequences, the supervening realities, the
standing and relationship of the parties, and the like, the application of which, by and
large, is addressed to the sound discretion of the court. In Rizal Commercial Banking
14
Corp. vs. Court of Appeals, just an example, the Court has tempered the penalty
charges after taking into account the debtors pitiful situation and its offer to settle the
entire obligation with the creditor bank. The stipulated penalty might likewise be
reduced when a partial or irregular performance is made by the debtor. 15 The
stipulated penalty might even be deleted such as when there has been substantial
performance in good faith by the obligor, 16 when the penalty clause itself suffers from
fatal infirmity, or when exceptional circumstances so exist as to warrant it. 17
The Court of Appeals, exercising its good judgment in the instant case, has reduced
the penalty interest from 5% a month to 3% a month which petitioner still disputes.
Given the circumstances, not to mention the repeated acts of breach by petitioners of
their contractual obligation, the Court sees no cogent ground to modify the ruling of
the appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time,
question its reasonableness and prays that the Court reduce the amount. This
contention is a fresh issue that has not been raised and ventilated before the courts
below. In any event, the interest stipulation, on its face, does not appear as being that
excessive. The essence or rationale for the payment of interest, quite often referred to
as cost of money, is not exactly the same as that of a surcharge or a penalty. A
penalty stipulation is not necessarily preclusive of interest, if there is an agreement to
that effect, the two being distinct concepts which may separately be
demanded.18What may justify a court in not allowing the creditor to impose full
surcharges and penalties, despite an express stipulation therefor in a valid
agreement, may not equally justify the non-payment or reduction of interest. Indeed,
the interest prescribed in loan financing arrangements is a fundamental part of the
banking business and the core of a bank's existence. 19
Petitioners next assail the award of 10% of the total amount of indebtedness by way
of attorney's fees for being grossly excessive, exorbitant and unconscionable vis-avis the time spent and the extent of services rendered by counsel for the bank and the
nature of the case. Bearing in mind that the rate of attorneys fees has been agreed to
by the parties and intended to answer not only for litigation expenses but also for
collection efforts as well, the Court, like the appellate court, deems the award of 10%
attorneys fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a
new trial or to admit newly discovered evidence. As the appellate court so held in its
resolution of 14 May 1999 "Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for
reconsideration of a judgment or final resolution by the same party shall be
entertained. Considering that the instant motion is already a second motion for
reconsideration, the same must therefore be denied.
"Furthermore, it would appear from the records available to this court that the newlydiscovered evidence being invoked by defendants-appellants have actually been
existent when the case was brought on appeal to this court as well as when the first
motion for reconsideration was filed.1wphi1 Hence, it is quite surprising why

defendants-appellants raised the alleged newly-discovered evidence only at this

stage when they could have done so in the earlier pleadings filed before this court.
"The propriety or acceptability of such a second motion for reconsideration is not
contingent upon the averment of 'new' grounds to assail the judgment, i.e., grounds
other than those theretofore presented and rejected. Otherwise, attainment of finality
of a judgment might be stayed off indefinitely, depending on the partys
ingenuousness or cleverness in conceiving and formulating 'additional flaws' or 'newly
discovered errors' therein, or thinking up some injury or prejudice to the rights of the
20
movant for reconsideration."
At any rate, the subsequent execution of the real estate mortgage as security for the
existing loan would not have resulted in the extinguishment of the original contract of
loan because of novation. Petitioners acknowledge that the real estate mortgage
contract does not contain any express stipulation by the parties intending it to
supersede the existing loan agreement between the petitioners and the
bank.21 Respondent bank has correctly postulated that the mortgage is but an
accessory contract to secure the loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement
of all the parties to the new contract; third, the extinguishment of the obligation;
and fourth, the validity of the new one.22 In order that an obligation may be
extinguished by another which substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligation be on every
23
point incompatible with each other. An obligation to pay a sum of money is not
extinctively novated by a new instrument which merely changes the terms of payment
or adding compatible covenants or where the old contract is merely supplemented by
the new one.24When not expressed, incompatibility is required so as to ensure that
the parties have indeed intended such novation despite their failure to express it in
categorical terms. The incompatibility, to be sure, should take place in any of the
essential elements of the obligation, i.e., (1) the juridical relation or tie, such as from a
merecommodatum to lease of things, or from negotiorum gestio to agency, or from a
mortgage to antichresis,25 or from a sale to one of loan;26 (2) the object or principal
conditions, such as a change of the nature of the prestation; or (3) the subjects, such
as the substitution of a debtor27 or the subrogation of the creditor. Extinctive novation
does not necessarily imply that the new agreement should be complete by itself;
certain terms and conditions may be carried, expressly or by implication, over to the
new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.

G.R. No. 152984

November 22, 2006

WILLIAM G. KWONG, Petitioner,

vs.
ATTY. RAMON GARGANTOS, ANACLETO GARGANTOS, SPS. REY & REMY
SANTOS, and SPS. LORNA & DANIEL ARCEO, Respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Petitioner William G. Kwong is the owner of fifteen (15) lots located in the province of
Pampanga. In an unnotarized Deed of Conditional Sale, petitioner, for himself and in
behalf of William G. Kwong Management, sold said lots to respondents Anacleto
Gargantos, Remy Santos and Lorna Arceo for the sum of $137,255.00 payable in two
installments, with $10,000.00 being paid by respondents at the time of the execution
of the contract, and the balance of $127,255.00 to be paid on or before December 15,
1986.1 When respondents failed to pay the balance on the expected date, it was
subsequently agreed that the same shall be paid on a staggered basis starting March
1989. Respondents, however, again failed to comply with their obligation. This
compelled petitioner to write a letter of demand, through counsel, on November 16,
1989, asking respondents compliance with their monetary obligation; otherwise, the
contract shall be rescinded.2 The letter was addressed to respondent Gargantos.
There being no reply, another letter of demand dated February 21, 1990 was sent. 3
On May 1, 1990, Atty. Ramon Gargantos (brother of respondent Anacleto
4
Gargantos), armed with a Special Power of Attorney executed by respondents, paid
5
the amount of P1,776,200.00. Thereafter, petitioner and Atty. Gargantos executed a
notarized Deed of Absolute Sale, wherein petitioner sold to respondent Gargantos 11
out of the 15 lots for the sum of P500,000.00,6 and Atty. Gargantos signed a
Promissory Note for the payment of the amount of P373,074.95, on or before June
30, 1990, representing the unpaid balance of the purchase covering the remaining
four lots.7
Again, respondent Gargantos failed to pay the agreed amount, forcing petitioner to
write subsequent demand letters on November 12, 1990, 8 November 10,
1994,9 October 15, 1995,10 and July 29, 1996.11 Respondent Gargantos, through
counsel, finally answered, claiming that it was petitioner who did not comply with his
undertaking to transfer 11 of the 15 titles to respondents prior to the payment of the
balance, with the remaining four titles to be transferred afterwards. 12
Petitioner then wrote respondents on September 15, 1996 asking for a conference in
order to settle the matter. 13In a letter dated November 12, 1996, respondent
Gargantoss counsel reiterated his demand for the delivery of the 11 titles, failing
which a complaint for specific performance with damages and a criminal case for
14
estafa will be filed against petitioner.
On November 14, 1996, petitioner filed before the Regional Trial Court (RTC) of
Angeles City, Branch 62, a complaint for the rescission of the Deed of Conditional
Sale and forfeiture of all the payments made by respondents against herein
respondents.15
Respondents filed an Answer with Compulsory Counterclaim, denying petitioners
allegations, and asking for the dismissal of the complaint. Respondents also prayed

for the delivery of the 11 titles indicated in the Deed of Absolute Sale in exchange for
the remaining balance and for damages.16
In a Pre-trial Order issued by the RTC on June 9, 1997, the following facts were
admitted:
1. That plaintiff [petitioner] agreed to sell his real properties, consisting of 15
lots, to defendant for $137,255.00 U.S. Currency or in Philippine Currency at
the rate of P20.40 per dollar, as evidenced by a deed of conditional sale
dated November 1986.
2. That on the date the conditional sale was executed, defendants paid
$10,000.00 U.S. Currency orP204,000.00, Philippine Currency thereby
leaving a balance of $127,255.00 or P2,596,002.00 Philippine Currency
which shall be paid on December 15, 1986 without interest.
3. That to guarantee payment of the balance defendants thru their attorneyin-fact, Atty. Ramon Gargantos, executed a promissory note dated May 1,
1990; and
4. That on the same date a deed of absolute sale was likewise executed. 17
The issues were defined as follows:
1. Whether or not the terms and conditions of the deed of conditional sale
dated November 1986 has been complied with by the parties;
2. Whether or not the said deed of conditional sale has been superseded or
novated by the subsequent execution of the deed of absolute sale dated
May 1, 1990; and
3. Whether or not the deed of absolute sale is binding and/or enforceable.

18

On the first issue, the RTC ruled that "not only that defendants failed to comply with
the terms and conditions of the Deed of Conditional Sale of 1986 but also of the
Promissory Note of May 1, 1990."19
On the second issue, the RTC ruled that there was no novation of the Deed of
Conditional Sale by the execution of the Deed of Absolute Sale because the parties
continued to recognize the validity of the conditional sale; the absolute sale was
executed without the knowledge and consent of the other respondents; and there was
no showing that the other respondents were released from their obligation under the
20
conditional sale.
On the third and last issue, the RTC ruled that the Deed of Absolute Sale cannot be
enforced since Atty. Gargantos exceeded his powers under the Special Power of
Attorney when he entered into the transaction. 21
Thus, in its Decision dated February 4, 1999, the RTC granted rescission of the Deed
of Conditional Sale and ordered petitioner to refund one-half of the amount paid by
respondents, subject to 6% interest, with respondents forfeiting the other half in favor
of petitioner. Respondents counterclaim was dismissed. 22
Respondents appealed to the Court of Appeals (CA), which reversed and set aside
the RTC Decision, and dismissed petitioners complaint and respondents
23
counterclaim per its Decision dated December 14, 2001. The CA held that petitioner
does not have any right to rescind the Deed of Conditional Sale because the Deed of

24

Absolute Sale and the Promissory Note have already superseded it. The CA also
denied petitioners Motion for Reconsideration per Resolution dated April 11, 2002. 25

full payment of the purchase price partakes of a suspensive condition, and nonfulfillment of the condition prevents the obligation to sell from arising. 30

Petitioner now comes before the Court by way of a petition for review under Rule 45
of the Rules of Court, submitting that the CA committed a serious reversible error
when it held that it was the parties intention to supersede the Deed of Conditional
Sale with the Deed of Absolute Sale.

The fact that the Deed of Absolute Sale of the 11 lots was executed even without
respondents having fully paid the purchase price for the entire 15 parcels of land
covered by the Deed of Conditional Sale enforces the conclusion that the parties
intended to enter into a new agreement and discard the old one; otherwise, petitioner
could have enforced his right to rescind the contract by filing a complaint instead of
dealing anew with respondents and entering into the succeeding agreements. What
subsequently occurred was a segregated sale of the 11 lots, while the Promissory
Note covered the remaining four lots.

The petition lacks merit.

Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object or principal conditions, or, by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor. 26
Under Article 1292 of the Civil Code, in order that an obligation may be extinguished
by another which substitutes the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other. The parties to a contract must expressly agree that they
are abrogating their old contract in favor of a new one. In the absence of an express
agreement, novation takes place only when the old and the new obligations are
incompatible on every point.27
In Iloilo Traders Finance, Inc, v. Heirs of Soriano, Jr., 28 the nature of novation was
explained, thus:
Novation may either be extinctive or modificatory, much being dependent on the
nature of the change and the intention of the parties. Extinctive novation is never
presumed; there must be an express intention to novate; in cases where it is implied,
the acts of the parties must clearly demonstrate their intent to dissolve the old
obligation as the moving consideration for the emergence of the new one. Implied
novation necessitates that the incompatibility between the old and new obligation be
total on every point such that the old obligation is completely superseded by the new
one. The test of incompatibility is whether they can stand together, each one
having an independent existence; if they cannot and are irreconcilable, the
subsequent obligation would also extinguish the first. (Emphasis supplied)
The test of incompatibility between two obligations or contracts is whether or not they
can stand together, each one having an independent existence. If they cannot, they
are incompatible, and the later obligation novates the first. 29
In this case, an examination of the Deed of Absolute Sale and the Promissory Note,
as well as the surrounding circumstances of this case, shows that it was meant to
novate and replace the Deed of Conditional Sale. Logically, the Deed of Conditional
Sale and the Deed of Absolute Sale cannot co-exist as these are of different nature
and provide for separate and distinct obligations, to wit:
A contract of sale is absolute when title to the property passes to the vendee upon
delivery of the thing sold. A deed of sale is absolute when there is no stipulation in the
contract that title to the property remains with the seller until full payment of the
purchase price. The sale is also absolute if there is no stipulation giving the vendor
the right to cancel unilaterally the contract the moment the vendee fails to pay within a
fixed period. In a conditional sale, as in a contract to sell, ownership remains with the
vendor and does not pass to the vendee until full payment of the purchase price. The

The Court notes that respondents had already paid a substantial amount for the
subject lots. Petitioner admitted that a down payment of $10,000.00 was made upon
the execution of the Deed of Conditional Sale, and respondents also made further
payments in the amount of $20,000.00.31 Thereafter, Atty. Gargantos, in behalf of
respondents, paid P1,776,200.00 on May 1, 1990. It was after such payment was
made that the parties entered into the Deed of Absolute Sale and the Promissory
Note. Obviously, the Deed of Absolute Sale was intended by the parties to close the
transaction involving the 11 lots. What remained for enforcement is the Promissory
Note, which covers the four remaining lots.
The Court also notes that the Deed of Conditional Sale reflected the amount of
$137,255.00 or its peso equivalent at the rate of P20.40 per US dollar
(or P2,800,002.00), as purchase price for the entire 15 lots. On the other hand, the
Deed of Absolute Sale provided that the 11 parcels of land were being sold
for P500,000.00, while the Promissory Note reflects the intention of petitioner to sell
the other four lots for an undisclosed amount the balance of which is P373,074.95.
Apparently, these two subsequent agreements do not show the true value of the
subject lots.
Nevertheless, it is well-settled that if the terms of a contract are clear and leave
no doubt upon the intention of the contracting parties, the literal meaning of its
stipulations shall control; however, if the contract appears to be contrary to the
evident intentions of the parties, the latter shall prevail over the former. Moreover, the
agreement of the parties may be embodied in only one contract or in two or more
separate writings. In such event, the writings of the parties should be read and
interpreted together in such a way as to render their intention effective. 32
It is at this point that the receipt 33 dated May 1, 1990 for P1,776,200.00 becomes
material. Construed in conjunction with the Deed of Absolute Sale and the Promissory
Note, it becomes clear that the 15 lots have already been substantially paid for by
respondents, and there only remains the balance of P373,074.95. What the parties
clearly intended was that the Deed of Absolute Sale will then cover the 11 lots, the
purchase price of which shall be considered as fully paid, with the payment of
the P500,000.00 acknowledged in the Deed of Absolute Sale, while the Promissory
Note will answer for the other four lots. For whatever purpose the parties in this case
may have had in undervaluing the properties, the fact remains that the Deed of
Absolute Sale and the Promissory Note were meant to supplant the Deed of
Conditional Sale.
Whats more, it was petitioners own counsel, Atty. Avelino Liangco, who drafted the
Deed of Absolute Sale and Promissory Note on May 1, 1990, after petitioner met with
Atty. Gargantos at the Shanghai Restaurant, which was owned by petitioner.

According to Atty. Liangco, on May 1, 1990, Atty. Gargantos paid a "considerable"

sum of money to petitioner as partial fulfillment of respondents obligation under the
Deed of Conditional Sale. Thereafter, Atty. Liangco prepared the Deed of Absolute
34
Sale of the 11 lots and the Promissory Note for the remaining obligation. Atty.
Liangco also testified that it was petitioner himself who dictated the amount to be
indicated in the Deed of Absolute Sale and the Promissory Note, and petitioner kept
the original copies of these documents.35It is settled that in order to ascertain the true
intention of the parties, their actions, subsequent or contemporaneous, must be
36
principally considered. The foregoing circumstances confirm petitioners grasp of
what he was entering into and was very well aware of the terms and conditions of the
Deed of Absolute Sale and the Promissory Note. He cannot now turn his back on it
and claim that it was merely executed so that Atty. Gargantos will have something to
show his principals. To sustain this is to make a mockery of the sanctity of contracts.
In addition, it is merely bare allegation supported by nothing but uncorroborated
words.
In fine, the Deed of Conditional Sale had ceased to exist with the execution of the
Deed of Absolute Sale and the Promissory Note.1wphi1 There is nothing more to
rescind. Petitioners complaint must therefore fail.
Petitioner cannot be compelled, in the present petition, to deliver to respondents the
titles to the 11 lots because the latter did not appeal from the CAs dismissal of their
counterclaim.
WHEREFORE the petition is DENIED. The assailed Decision dated December 14,
2001 and Resolution dated April 11, 2002 of the Court of Appeals are AFFIRMED.
Costs against petitioner.
SO ORDERED.

G.R. No. 149140

September 12, 2006

VICTORIA ONG, petitioner,

vs.
1
ERNESTO BOGALBAL and HON. COURT OF APPEALS, respondents.
DECISION
CHICO-NAZARIO, J.:
In this Special Civil Action for Certiorari under Rule 65 of the Rules of Court, petitioner
seeks the nullification of a 22 May 2001 Court of Appeals Resolution denying her
2
Motion for Reconsideration of a 31 March 2000 Decision.
The Court of Appeals found the facts to be as follows:
On January 2, 1995, [herein respondent] Ernesto Bogalbal, an architectcontractor doing business under the name and style of E.B. Bogalbal
Construction, entered into an "Owner-Contractor Agreement" with [herein
petitioner] Victoria Ong, a businesswoman, for the construction of a
proposed boutique owned by the latter to be known as Les Galeries de Paris
located at the 3rd Floor of the Shangri-La Plaza, Epifanio Delos Santos
Avenue corner Shaw Boulevard, Mandaluyong City (Exhibits "A" and "1", pp.
100-102, ibid). The agreement provides that in consideration of the sum of
two hundred thousand pesos (P200,000.00), the contractor agrees to furnish
labor, tools and equipment to complete the work on the boutique as per
specification within forty-five (45) days excluding Sundays from the date of
delivery of the construction materials. Payment by the owner shall be made
by progress billing to be collected every two (2) weeks based on the
accomplishment of work value submitted by the contractor to the owner as
certified for payment by the architect assigned on site. The agreement
likewise provides for a change order as a result of fluctuation in the cost of
labor. Moreover, should the owner require the contractor to perform work
over and above that required, the additional cost shall be added to the
contract amount and if ordered to omit work as required by their agreement,
the cost of work omitted shall be deducted from the contract amount.
Actual work on the project commenced on January 19, 1995. For work
accomplished during the period January 19 to 28, 1995, [respondent
Bogalbal] submitted and was paid his progress billing no. 1 in the sum of
P35,950.00 equivalent to 17.975% of the total job to be performed (Exh. "E",
p. 106, ibid). Partial billing nos. 2 and 3 for the period from January 29 to
February 15, 1995 and February 16 to March 3, 1995 in the sum of
P69,000.00 and P41,500.00, equivalent to 34.65% and 20.63% of the total
job, respectively, were likewise made to respondent and paid for by the latter
(Exhs. "F" and "G", pp. 107-108, ibid.).
It is with respect to progress billing no. 4 that the present controversy arose.
When [respondent Bogalbal] submitted the fourth progress billing on March
31, 1995 for the period covering March 4 to 18, 1995, in the sum of
P30,950.00 equivalent to 15.47% of the total job (Exh. "B", p. 103, ibid.),
[petitioner Ong] refused to pay the same. As in the previous three billings,
the fourth billing was first evaluated and recommended for payment by
Supervising Architect John Noel R. Cano, an employee of Balce-Sindac and

Associates, the principal designer of the [petitioner Ong's] boutique (Exh. "H1", p. 110, ibid.).
The reason for [petitioner Ong's] refusal to pay the fourth (4th) progress
billing is not clear on the record. It is [respondent Bogalbal's] contention
that [petitioner Ong] refused to pay since she was insisting that the flooring,
which she asked to be changed from vinyl tiles to kenzo flooring where
polyurethane is to be used as coating, be first completed within three (3)
days from April 22, 1995. [Respondent Bogalbal], however, insisted that the
same is not possible because the floor needed to be cured first to avoid
adverse chemical reaction of the polyurethane on the color of the flooring.
Due to the insistence of [petitioner Ong] that the flooring be finished in time
for the arrival of the furniture from abroad, [respondent Bogalbal]
proceeded with the work but the rushed work resulted in the reddish reaction
of the polyurethane on the floor, which was not acceptable to respondent
(TSN, March 28, 1996, pp. 30-32; June 21, 1996, pp. 15-18).
On the other hand, [petitioner Ong] contends that her refusal to pay was
because the fourth billing was allegedly in excess and over the value of the
work accomplished during the period. To settle the matter, the parties
purportedly met whereby [respondent Bogalbal] supposedly agreed to
finish the kenzo flooring on or before April 24, 1995 before [petitioner Ong]
would pay the fourth (4th) progress billing. However, instead of complying
with his commitment, [respondent Bogalbal] abandoned the project on April
24, 1995 when it became apparent that he could not complete the kenzo
flooring on the date agreed upon.
Due to [petitioner Ong's] continued refusal to pay [respondent Bogalbal's]
fourth (4th) progress billing despite written demands from his counsel (Exhs.
"C" and "D", pp. 104-105, ibid), the latter was constrained to file an action for
sum of money with damages with the Metropolitan Trial Court (MeTC) of
Caloocan City.
The complaint, which was docketed as Civil Case No. 22143 and raffled to
Branch 49 of the court, prayed for actual damages in the total sum of
P50,450.00 representing P30,950.00 (4th progress billing), P16,000.00 on
the change order from vinyl tiles to kenzo flooring and an unidentified
amount. It likewise prayed for moral and exemplary damages, as well as
attorney's fees.
In her answer with counterclaim, [petitioner Ong] refused payment of the
fourth (4th) progress billing since [respondent Bogalbal] failed to perform
what was incumbent upon him under their agreement, but instead
abandoned the job to her great damage and prejudice. As to the P16,000.00
value of the change order, she alleged that the same was premature since
she had never received any billing for said change order duly certified for
payment and approved by the Architect assigned on site. Besides, [petitioner
Ong] averred that the P16,000.00 being charged by [respondent Bogalbal]
was grossly disproportionate with the quantity of the work actually
accomplished by the former. By way of counterclaim, [petitioner Ong] prayed
for actual damages by reason of [respondent Bogalbal's] refusal to finish
the job agreed upon which forced her to hire a new contractor to complete
the same for which she paid the sum of P78,000.00 and for loss of business

opportunity in the amount of P50,000.00. She likewise prayed for moral,

exemplary and liquidated damages, as well as attorney's fees.

In the instant Petition for Certiorari, filed on 10 August 2001, petitioner Ong alleges
that:

After trial on the merits, the [MeTC], in a Decision dated June 18, 1998,
ruled in favor of [respondent Bogalbal,] awarding to him the sum of
P30,950.00 representing the fourth progress billing, P13,000.00 representing
the value of the accomplished work on the kenzo flooring, P15,000.00 as
attorney's fees, P20,000.00 and P25,000.00 as moral and exemplary
damages, respectively (p. 175, ibid.).

THE RESPONDENT COURT COMMITTED GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OF JURISDICTION IN DENYING
THE MOTION FOR RECONSIDERATION AND IN RESOLVING THE
ABOVE-ENTITLED CASE IN FAVOR OF THE PRIVATE RESPONDENT. 6

Aggrieved by the decision of the court, [petitioner Ong] elevated the case on
appeal to the Regional Trial Court (RTC) of Caloocan City. The appeal was
docketed as Civil Case No. C-18466 and raffled to Branch 126 thereof.
The court a quo, after requiring the parties to submit their respective
memoranda, reversed and set aside the ruling of the MTC and rendered
judgment in favor of [petitioner Ong] in a Decision dated February 18, 1999
(p. 407, ibid.). It is worthy to note that although the RTC ruled in favor of
[petitioner Ong], it did not specify the relief granted to her in the dispositive
portion of its decision.3
Respondent Bogalbal then filed a Petition for Review with the Court of Appeals. On
31 March 2000, the Court of Appeals granted the Petition, disposing of the case as
follows:
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is
hereby GRANTED. The Decision of the Regional Trial Court dated February
18, 1999 is REVERSED and SET ASIDE, and the Decision of the
Metropolitan Trial Court dated June 18, 1998 is REINSTATED. No
pronouncement as to costs.4
The dispositive portion of the reinstated 18 June 1998 Metropolitan Trial Court
(MeTC) Decision is as follows:
WHEREFORE, after a careful consideration of the foregoing evidence, the
Court finds the same to strongly preponderates (sic) in favor of the plaintiff
and hereby orders defendant Victoria Ong to pay plaintiff Ernesto Bognalbal
the amount of THIRTY THOUSAND NINE HUNDRED FIFTY PESOS
(P30,950.00) representing the value of his accomplished work for the period
from March 4 to March 18, 1995, the amount of (P13,000.00) THIRTEEN
THOUSAND PESOS representing the value of his accomplished work on
the kenzo flooring equivalent to 60% of the agreed fee of P25,000.00 minus
the amount of P2,000.00 paid under the third progress billing, the amount of
FIFTEEN THOUSAND (P15,000.00) PESOS as and for attorney's fees, the
amount of TWENTY THOUSAND (P20,000.00) PESOS AS MORAL
damages and the amount of TWENTY-FIVE THOUSAND (P25,000.00)
PESOS as exemplary damages. Defendant is further ordered to pay the
costs of this suit.

Propriety/Impropriety of Special Civil Action

for Certiorari under Rule 65
Petitioner claims that a special civil action for certiorari is proper since appeal
by certiorari under Rule 45 is limited only to questions of law. This is wrong. The writ
of certiorari is proper to correct errors of jurisdiction committed by the lower court, or
grave abuse of discretion which is tantamount to lack of jurisdiction. Where the error
is not one of jurisdiction but an error of law or fact which is a mistake of judgment,
appeal is the remedy.7
It is true that, as a general rule, in the exercise of the Supreme Court's power of
review, the Court is not a trier of facts and does not normally undertake the reexamination of the evidence presented by the contending parties during the trial of
the case considering that the findings of facts of the Court of Appeals are conclusive
and binding on the Court. However, the Court had recognized several exceptions to
this rule, to wit: (1) when the findings are grounded entirely on speculation, surmises
or conjectures; (2) when the inference made is manifestly mistaken, absurd or
impossible; (3) when there is grave abuse of discretion; (4) when the judgment is
based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6)
when in making its findings the Court of Appeals went beyond the issues of the case,
or its findings are contrary to the admissions of both the appellant and the appellee;
(7) when the findings are contrary to the trial court; (8) when the findings are
conclusions without citation of specific evidence on which they are based; (9) when
the facts set forth in the petition as well as in the petitioner's main and reply briefs are
not disputed by the respondent; (10) when the findings of fact are premised on the
supposed absence of evidence and contradicted by the evidence on record; and (11)
when the Court of Appeals manifestly overlooked certain relevant facts not disputed
8
by the parties, which, if properly considered, would justify a different conclusion.
If the allegedly erroneous findings of fact by the Court of Appeals amounts to grave
abuse of discretion amounting to lack of or excess of jurisdiction, the proper remedy
would indeed be a petition for certiorari under Rule 65. However, if the allegedly
erroneous findings of fact constitute only a mistake of judgment, the proper remedy is
a petition for review on certiorari under Rule 45. Since the petition filed in the case at
bar is one under Rule 65, we would be constrained to dismiss the same if we find a
mere error of judgment.
Credibility of Architect Noel Cano
The contract between petitioner and respondent provides:

For lack of sufficient basis, the counterclaim of the defendant is hereby

dismissed.5

4.01 Progress Billing will commence 15 days after the Contractor receive[s]
the notice to proceed from the Owner.

On 22 May 2001, the Court of Appeals denied petitioner Ong's Motion for
Reconsideration in the assailed Resolution, a copy of which was received by
petitioner, through counsel, on 11 June 2001.

4.02 Balance will be collected every 2-weeks, based on the accomplishment

of work value submitted by the contractor to the Owner and to be certified for
payment by the architect assigned on site.

4.03 Final and full payment of the consideration herein above-mentioned

shall be made by the owner to the contractor upon fulfilling the condition set
forth and approved by the architect assigned on site. 9

Art. 1730. If it is agreed that the work shall be accomplished to the

satisfaction of the proprietor, it is understood that in case of disagreement
the question shall be subject to expert judgment.

Pursuant thereto, the architect on site, Architect John Noel Cano, certified for
10
payment four progress billings, which petitioner Ong paid on the following dates :

If the work is subject to the approval of a third person, his decision shall be
final, except in case of fraud or manifest error.

Partial Date Sent Covered Amount

Progress
Period
Billing

1st

28
January
1995

2nd

15
29
P 69,300.00 34.650 %
February January
1995
to
15
February

22
4 March
February 1995
1995

3rd

8 March 16
P 41,500.00 20.750 %
1995
February
to
3
March

24 March 6
April
1995
1995

31 March 4-18
1995
March

---

4th

Total

19-28
January

Part of Project Date of Date of

Accomplished
Partial
Full
(contract
Payment Payment
price: P200,000.00)

P 35,950.00 17.975 %

P 30,950.00 15.475 %

---

6
February
1995

---

P 181,700.00 88.850 %

As earlier stated, this controversy arose with respect to the fourth partial billing.
Petitioner Ong claims that the fourth partial billing is not yet due and demandable,
since only 60% of the work has been accomplished. Petitioner Ong claims that
Architect Cano's certification as to the accomplishment of the work cannot be trusted,
11
since Architect Cano was allegedly biased in favor of respondent Bogalbal.
Petitioner Ong claims that "Arch. Cano was an associate of [respondent Bogalbal] in
his construction business, and because of this, he was partial, biased and
12
unprofessional about his work." Petitioner Ong adds that work was conducted on
the job site seven days a week, but Architect Cano was present only twice or thrice a
week, and therefore "[h]e was in no position to determine whether or not [respondent
Bogalbal] performed as claimed."13
The afore-quoted Article 4.02 of the Owner-Contractor Agreement between petitioner
Ong and respondent Bogalbal, which provides that the "[b]alance shall be collected
every 2-weeks, based on the accomplishment of work value submitted by the
contractor to the Owner and to be certified for payment by the architect on
site,"14makes the second paragraph of the following provision of the Civil Code
applicable:

The existence of fraud or manifest error, being an exception to the finality of the
decision of a third person under Article 1730, should be adequately proven by
petitioner Ong.
Petitioner Ong, however, miserably failed to prove the same. Petitioner Ong's
allegation that "the certifications may have been purposely doctored or engineered in
such a fashion as to unduly favor [respondent Bogalbal], in the desire of Architect
Cano to return a favor or repay a debt of gratitude"15 is a bare speculation that cannot
be given any credence. It is utterly inappropriate for petitioner Ong to paint Architect
Cano as "biased, partial, and unprofessional" just because Architect Cano's
architectural firm, Balce-Sindac & Associates, was allegedly recommended to her by
respondent Bogalbal. The fact remains that it was petitioner Ong and Balce-Sindac
& Associates which had privity of contract with each other, petitioner Ong having
contracted with the latter firm for its project architectural design and plan. BalceSindac & Associates, in turn, assigned Architect Cano as supervising architect on
site. The alleged recommendation by respondent Bogalbal is enormously
inadequate to prove bad faith on the part of Architect Cano. Good faith is always
16
presumed. It is the one who alleges bad faith who has the burden to prove the
17
same.
Neither was petitioner able to prove manifest error on the part of Architect Cano. The
presence of Architect Cano only twice or thrice a week was not adequately proven to
have made him incompetent to determine the completion of the project.
Determination of project completion requires inspection of a product rather than a
process. Besides, whereas Architect Cano provided a detailed progress report that
substantiate respondent Bogalbal's allegation that 88.45% of the project had been
accomplished,18 petitioner Ong was not able to demonstrate her repeated claim that
only 60% of the project has been completed. 19 Petitioner Ong alleged that the same
20
was admitted by respondent Bogalbal in the pleadings filed with this Court, but we
were unable to find any such admission. It seems that petitioner Ong was referring to
the Kenzo flooring, 60% of which respondent claims to have finished.21
Time and again, this Court has ruled that the findings of the lower court respecting the
credibility of witnesses are accorded great weight and respect since it had the
opportunity to observe the demeanor of the witnesses as they testified before the
court. Unless substantial facts and circumstances have been overlooked or
misunderstood by the latter which, if considered, would materially affect the result of
the case, this Court will undauntedly sustain the findings of the lower court. 22 In the
case at bar, the credibility of Architect Cano was upheld by the MeTC, which had the
opportunity to observe Architect Cano's demeanor as he testified. Neither the Court of
Appeals, nor the RTC, questioned such credibility, the RTC having ruled in favor of
23
petitioner Ong pursuant to an interpretation of law.
Alleged novation of the Owner-Contractor Agreement
Petitioner Ong also claims, as a defense against payment of the fourth progress
billing, that "the only reason why the fourth billing was not paid was because
[respondent Bogalbal] himself agreed and committed to collect the fourth progress

24

billing after he completed the Kenzo flooring." Petitioner Ong claims that, because
of this promise, her obligation to pay respondent Bogalbal has not yet become due
and demandable.25
The Court of Appeals rejected this argument, ruling that respondent Bogalbal's
stoppage of work on the project prior to its completion cannot justify petitioner Ong's
refusal to pay the fourth progress billing and the value of respondent Bogalbal's
accomplished work on the Kenzo flooring. On the contrary, according to the Court of
Appeals, respondent Bogalbal was justified to refuse to continue the project due to
26
petitioner Ong's failure to pay the fourth progress billing. According to the Court of
Appeals:
Records reveal that [herein respondent Bogalbal] submitted his fourth (4th)
progress billing for work accomplished on [herein petitioner Ong's] boutique
for the period covering March 4 to 18, 1995 (Exh. "B", ibid.). Said billing was
in accordance with the parties' agreement that it will be collected every two
(2) weeks, based on the accomplishment of work value submitted by the
contractor to the owner and certified for payment by the architect assigned
on site (Article 4.02, Owner-contractor Agreement; Exh. "A-1", p. 101, ibid.).
However, [petitioner Ong], immediately upon her receipt of said billing,
refused to pay the same since it was allegedly "in excess and over the value
of the work accomplished during the period." This was, in fact, part of the
statement/findings of the facts of the lower court's decision (p. 2, RTC
Decision; p. 400, ibid.).
[Petitioner Ong], at the very outset, refused to pay the fourth (4th) billing
despite actual work accomplished on her botique which was certified by the
architect on site, John Noel Cano, all in accordance with the agreement of
the parties. [Respondent Bogalbal's] eventual decision not to proceed
anymore with the contract cannot be used as a reason to justify
[petitioner Ong's] refusal to pay her obligation. This notwithstanding
the parties' supposed verbal agreement that collection of said billing
will be held on abeyance until after [respondent Bogalbal] finished the
work on the kenzo flooring which [petitioner Ong] requested to be
changed from its original plan of vinyl tile flooring. The proven fact is
that there was work accomplished on [petitioner Ong's] boutique equivalent
to the bill being charged her in the fourth (4th) progress billing in accordance
with their contract. While the fourth (4th) billing covered the accomplished
work therefor as certified by the architect assigned on site, the agreement as
to the kenzo flooring is subject to another bill covered by the change order.
27
(Emphasis supplied.)
The Court of Appeals is in error. If the parties indeed had a verbal agreement that
collection of said billing will be held on abeyance until after respondent Bogalbal
finished the work on the Kenzo flooring, there would have been a novation of
petitioner Ong's obligation to pay the price covered by the fourth billing by changing
the principal conditions therefor. This falls under the first type of novation under
Article 1291 of the Civil Code which provides:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor.

While the subject of novation is, in the Civil Code, included in Book IV, Title I, Chapter
4, which refers to extinguishment of obligations, the effect of novation may be partial
or total. There is partial novation when there is only a modification or change in some
principal conditions of the obligation. It is total, when the obligation is completely
extinguished.28 Also, the term principal conditions in Article 1291 should be construed
to include a change in the period to comply with the obligation. Such a change in the
period would only be a partial novation, since the period merely affects the
29
performance, not the creation of the obligation.
If petitioner Ong's allegation was true, then the fourth partial billing's principal
condition -- that the "(b)alance shall be collected every 2-weeks, based on the
accomplishment of work value submitted by the contractor to the Owner and to be
certified for payment by the architect assigned on site"30 would have been modified
to include another condition, that of the finishing of the Kenzo flooring by respondent
Bogalbal.
As previously discussed, the Court of Appeals did not bother to review the evidence
on petitioner Ong's allegation of respondent Bogalbal's promise to finish the Kenzo
flooring before the fourth progress billing shall be paid. The Court of Appeals instead
brushed off the contention with its explanation that "[respondent Bogalbal's] eventual
decision not to proceed anymore with the contract cannot be used as a reason to
justify [petitioner Ong's] refusal to pay her obligation, x x x notwithstanding the parties'
supposed verbal agreement that collection of said billing will be held on abeyance
until after [respondent Bogalbal] finished the work on the kenzo flooring which
[petitioner Ong] requested to be changed from its original plan of vinyl tile flooring."
Novation is never presumed. Unless it is clearly shown either by express agreement
31
of the parties or by acts of equivalent import, this defense will never be allowed.
The evidence preponderates in favor of respondent Bogalbal that there had been no
novation of the contract. At best, what was proven was a grudging accommodation on
the part of respondent Bogalbal to continue working on the project despite petitioner
Ong's failure to pay the fourth progress billing. Respondent Bogalbal's fourth partial
billing demand letters dated 21 April 1995 and 15 May 1995, both of which were
32
served upon petitioner Ong after the alleged 20 April 1995 meeting, is inconsistent
with the theory that the meeting had produced a novation of the petitioner Ong's
obligation to pay the subject billing.
More importantly, assuming that there was indeed a novation of the obligation of
petitioner Ong to pay the fourth billing so as to include as additional condition the
completion of the Kenzo flooring, such new condition would, nevertheless, be
deemed fulfilled. This is pursuant to Article 1186 of the Civil Code, which provides:
Article 1186. The condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment.
According to petitioner Ong herself:
Petitioner sent [respondent Bogalbal] letters demanding that he should
return to the jobsite with his people and comply with his commitment. When
the demand letters were ignored, petitioner was constrained to hire the
services of another contractor, for which she had to unnecessarily incur
expenses in the amount ofP78,000.00. But just the same, the completion of

the project was delayed for eighty two (82) days, which also caused
petitioner additional damages.33
The Civil Code indeed provides that, "(i)f 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 contravention of the tenor of the obligation. Furthermore, it may be decreed that
what has been poorly done be undone."34 There is no question, however, that such
allegation constitutes an admission that Petitioner Ong had voluntarily prevented the
fulfillment of the condition which should have given rise to her obligation to pay the
amount of the fourth billing. Respondent Bogalbal would no longer have the
opportunity to finish the Kenzo flooring if another contractor had already finished the
same. Such condition would, hence, be deemed fulfilled under Article 1186 of the
Civil Code, and, therefore, petitioner Ong's obligation to pay the amount of the fourth
billing has been converted to a pure obligation.
Authority of respondent Bogalbal to abandon work
This Court has held that, even if respondent Bogalbal unjustifiably withdrew from the
project, petitioner Ong's obligation is nevertheless due and demandable because of
the third-party certification by Architect Cano on the completion of the fourth project
billing as required by their contract. This Court has also held that petitioner Ong has
not sufficiently proven the alleged contract novation adding a new condition for her
payment of the fourth progress billing.
The following arguments of petitioner Ong are already inconsequential as to whether
she should be held liable for the fourth billing: (1) that the power to resolve contracts
under Article 119135 of the Civil Code cannot be invoked extrajudicially in the absence
of stipulation to the contrary;36 (2) that petitioner never rushed respondent Bogalbal
to complete the Kenzo flooring in three days; 37 (3) and that respondent Bogalbal
38
failed to complete the Kenzo flooring on time because of his incompetence. All
these arguments merely amplify petitioner Ong's primary contention that respondent
Bogalbal was not justified in abandoning the project. 39

According to the RTC, the exception in Article 1724 (change in plans and
specifications authorized by the proprietor in writing, and the additional price therefor
being determined by the proprietor in writing) applies only with respect to the
prohibition to "demand an increase in the price on account of the higher cost of labor
or materials" and not with respect to the prohibition to "withdraw from the contract."
There is therefore no exception allowed by law insofar as withdrawal from the
contract is concerned, and, hence, respondent Bogalbal cannot claim the change
order as a justification for his abandonment of the project. 40
41

This is incorrect. According to this Court in Arenas v. Court of Appeals, Article 1724
contemplates disputes arising from increased costs of labor and materials. Article
1724 should, therefore, be read as to prohibit a contractor from perpetrating two acts:
(1) withdrawing from the contract on account of the higher cost of the labor or
materials; and (2) demanding an increase in the price on account of the higher cost of
the labor or materials.42This focus on disputes arising from increased cost of labor
and materials is even more evident when the origin of Article 1754 is reviewed. Article
43
1754 of the 1950 Civil Code is based on Article 1593 of the Spanish Civil Code,
which states:
Art. 1593. An architect or contractor who, for a lump sum, undertakes the
construction of a building, or any other work to be done in accordance with a
plan agreed upon with the owner of the ground, may not demand an
increase of the price, even if the cost of the materials or labor has increased;
but he may do so when any change increasing the work is made in the
plans, provided the owner has given his consent thereto.
Article 1593 of the Spanish Civil Code did not contain a similar prohibition against
abandonment, and was entirely focused on its apparent objective to providing an
exception to the rule that a contracting party cannot unilaterally amend (by increasing
the contract price) the contract despite supervening circumstances.

The Court rules in favor of petitioner Ong on this score. There is nothing in the record
which would justify respondent Bogalbal's act of abandoning the project.

Neither party is claiming that the abandonment arose from increased costs of labor
and materials. Petitioner Ong claims that respondent Bogalbal failed to complete the
Kenzo flooring on time because of his incompetence. 44Respondent Bogalbal claims,
on the other hand, that he abandoned the work because of petitioner Ong's
continuing refusal to pay the fourth progress billing in violation of their
contract.45 Since the dispute has nothing to do with increased costs of labor and
materials, Article 1724 is not applicable. 46

However, contrary to the finding of the RTC, Article 1724 is inapplicable to this case.
Article 1724 provides:

Thus, it is the general rules on contracts which are applicable. Expounding on the
argument by respondent Bogalbal, the Court of Appeals held:

Art. 1724. The contractor who undertakes to build a structure or any other
work for a stipulated price, in conformity with plans and specifications agreed
upon with the landowner, can neither withdraw from the contract nor demand
an increase in the price on account of the higher cost of labor or materials,
save when there has been a change in the plans and specifications,
provided:

It should be noted that the power to rescind obligations is implied in

reciprocal ones, in case one of the obligors should not comply with what is
incumbent upon him (par. 1, Art. 1191, Civil Code).

The issue of whether or not respondent Bogalbal is justified in abandoning the

project is relevant to the resolution of petitioner Ong's counterclaim against
respondent Bogalbal.

(1) Such change has been authorized by the proprietor in writing; and
(2) The additional price to be paid to the contractor has been determined in
writing by both parties.

[Herein petitioner Ong's] breach of contract was her failure to pay what she
was legally bound to pay under her contract with [respondent Bogalbal].
Payment, being the very consideration of the contract, is certainly not a mere
casual or slight breach but a very substantial and fundamental breach as to
defeat the object of the parties making the agreement, due to which
rescission of the contract may be had (Ang vs. Court of Appeals, 170 SCRA
286, 296). [Petitioner Ong's] contention that [respondent Bogalbal] should
have had more capital to absorb a little delay in her payment is not quite
tenable (TSN, June 21 1996; p. 7).47

This Court, however, has held in Tan v. Court of Appeals,

48

that:

[T]he power to rescind obligations is implied in reciprocal ones in case one

of the obligors should not comply with what is incumbent upon him x x x.
However, it is equally settled that, in the absence of a stipulation to the
contrary, this power must be invoked judicially; it cannot be exercised
solely on a party's own judgment that the other has committed a
breach of the obligation. Where there is nothing in the contract
empowering [a party] to rescind it withoutRESORT to the courts,
[such party's] action in unilaterally terminating the contract x x x is
unjustified.
In the case at bar, there is nothing in the Owner-Contractor Agreement empowering
either party to rescind it without resort to the courts. Hence, respondent Bogalbal's
unilateral termination the contract without a court action is unjustified.
Petitioner Ong's Counterclaim
Since respondent Bogalbal is unjustified in abandoning the project, should this Court
award damages to petitioner Ong? Considering that both parties committed a breach
of their respective obligations, Article 1192 of the Civil Code is on all fours:
Art. 1192. In case both parties have committed a breach of the obligation,
the liability of the first infractor shall be equitably tempered by the courts. If it
cannot be determined which of the parties first violated the contract, the
same shall be deemed extinguished, and each shall bear his own damages.

Court's finding that there had been no contract novation requiring respondent
Bogalbal to finish the Kenzo flooring before the fourth progress billing shall be paid,
it is crystal clear that it was petitioner Ong who first violated the contract. As such, it is
petitioner Ong who is liable to pay damages, which may, however, be reduced,
depending on what is equitable under the circumstances. On the other hand, since
respondent Bogalbal is the second infractor, he is not liable for damages in
petitioner Ong's counterclaim.
Care must, however, be judiciously taken when applying Article 1192 of the Civil
Code to contracts such as this where there has been partial performance on the part
of either or both reciprocal obligors. Article 1192, in making the first infractor liable for
mitigated damages and in exempting the second infractor from liability for damages,
presupposes that the contracting parties are on equal footing with respect to their
reciprocal principal obligations. Actual damages representing deficiencies in the
performance of the principal obligation should be taken out of the equation. 54
In the case at bar, the partial performance of respondent Bogalbal (88.85% 55 of the
original contract and 60% of the Kenzo flooring) is more than the partial payment of
petitioner Ong (73.375%56 of the original contract and 0% of the Kenzo flooring).
For reference, the MeTC Decision, which was reinstated by the Court of Appeals,
awarded the following to respondent Bogalbal:
Value of accomplished work
for the period 4 to 18 March 1995:

on

the

original

contract P 30,950.00

49

Under this provision, the second infractor is not liable for damages at all; the
damages for the second breach, which would have been payable by the second
infractor to the first infractor, being compensated instead by the mitigation of the first
infractor's liability for damages arising from his earlier breach. The first infractor, on
the other hand, is liable for damages, but the same shall be equitably tempered by
the courts, since the second infractor also derived or thought he would derive some
advantage by his own act or neglect.50 Article 2215, however, seems contradictory, as
it gives the court the option whether or not to equitably mitigate the damages, and
does not take into account which infractor first committed breach:
Art. 2215. In contracts, quasi-contracts, and quasi-delicts, the
court may equitably mitigate the damages under circumstances other than
the case referred to in the preceding article, 51 as in the following instances:
(1) That the plaintiff himself has contravened the terms of the contract; x x x
It is a cardinal principle that a statute must be so construed as to harmonize all
apparent conflicts, and give effect to all its provisions whenever possible. 52
Articles 1192 and 2215 of the Civil Code are not irreconcilably conflicting. The plaintiff
referred to in Article 2215(1) should be deemed to be the second infractor, while the
one whose liability for damages may be mitigated is the first infractor. Furthermore,
the directions to equitably temper the liability of the first infractor in Articles 1192 and
2215 are both subject to the discretion of the court, despite the word "shall" in Article
1192, in the sense that it is for the courts to decide what is equitable under the
circumstances.
In the case at bar, both respondent Bogalbal and petitioner Ong claim that it was the
53
other party who first committed a breach of contractual obligations. Considering this

Value of accomplished work on the Kenzo flooring P 13,000.00

(60% of the agreed fee of P 25,000, minus P2,000
paid under the third progress billing)
Moral damages

P 20,000.00

Exemplary damages

P 25,000.00

TOTAL

P 88,950.00

Petitioner Ong should first be obliged to pay the value of the accomplished work
(P30,950.00 and P13,000.00), before the damage scheme under Article 1192 of the
Civil Code is applied. Therefore, this Court would have been limited to determining
how much of the moral and exemplary damages, for which petitioner Ong is liable,
may be mitigated by the amount of damages caused by respondent Bogalbal, as
provided under Article 1192.
As earlier discussed, however, this mitigation is subject to the discretion of the court,
depending on what is equitable under the circumstances. It would have been within
this Court's power to mitigate the moral and exemplary damages for which petitioner
Ong is liable if she had only filed an ordinary appeal under Rule 45 of the Rules of
Court. It would be an exaggeration to consider such non-mitigation by the Court of
Appeals as grave abuse of discretion leading to lack of or excess of jurisdiction, which
would have been reviewable by this Court in a certiorari proceeding under Rule
57
65. Grave abuse of discretion implies a capricious and whimsical exercise of

judgment as is equivalent to lack of jurisdiction, or, when the power is exercised in an

arbitrary or despotic manner by reason of passion or personal hostility, and it must be
so patent and gross as to amount to an evasion of positive duty enjoined or to act at
58
all in contemplation of law. Mere abuse of discretion is not enough -- it must be
59
grave.
All of the foregoing shows that while there had been some errors of law on the part of
the Court of Appeals, the Petition would still fail even if it were a Petition for Review
under Rule 45. With more reason is this Court constrained to dismiss a Petition
for Certiorari under Rule 65, which requires not a mere error in judgment, but a grave
abuse of discretion amounting to lack of or excess of jurisdiction.
Finally, this Court notices that the prayer in the instant Petition for Certiorari only
seeks to nullify the Resolution of the Court of Appeals on petitioner Ong's Motion for
Reconsideration, without praying for the nullification of the Decision itself sought to be
reconsidered. The reason seems to be the fact that petitioner Ong, through counsel,
received the Decision more than sixty days prior to the filing of the Petition. A Petition
seeking to nullify such Decision was, thus, perceived to be violative of Section 4, Rule
65 of the 1997 Rules of Civil Procedure, whichoriginally provides:
SEC. 4. Where petition filed. The petition may be filed not later than sixty
(60) days from notice of the judgment, order or resolution sought to be
assailed in the Supreme Court or, if it relates to the acts or omissions of a
lower court or of a corporation, board, officer or person, in the Regional Trial
Court exercising jurisdiction over the territorial area as defined by the
Supreme Court. It may also be filed in the Court of Appeals whether or not
the same is in aid of its appellate jurisdiction, x x x.
Section 4, Rule 65 was, however, amended on 1 September 2000, several months
before the filing of this Petition, to insert the following provision:
In case a motion for reconsideration or new trial is timely filed, whether such
motion is required or not, the sixty (60) day period shall be counted from
notice of the denial of said motion.
This insertion gives petitioner Ong a fresh 60-day period to assail the Decision via a
Petition for Certiorari, which is what this Petition really seeks and which is how this
Court has treated the same.
WHEREFORE, the Decision of the Court of Appeals reinstating the Decision of the
Metropolitan Trial Court holding petitioner Victoria Ong liable for damages is affirmed.
The instant Petition for Certiorari is herebyDISMISSED for lack of merit. Costs against
petitioner.
SO ORDERED.

G.R. No. 165881

April 19, 2006

OSCAR VILLAMARIA, JR. Petitioner,

vs.
COURT OF APPEALS and JERRY V. BUSTAMANTE, Respondents
DECISION
CALLEJO, SR., J.:
Before us is a Petition for Review on Certiorari under Rule 65 of the Revised Rules of
Court assailing the Decision1 and Resolution2 of the Court of Appeals (CA) in CA3
G.R. SP No. 78720 which set aside the Resolution of the National Labor Relations
Commission (NLRC) in NCR-30-08-03247-00, which in turn affirmed the Decision4of
the Labor Arbiter dismissing the complaint filed by respondent Jerry V. Bustamante.
Petitioner Oscar Villamaria, Jr. was the owner of Villamaria Motors, a sole
proprietorship engaged in assembling passenger jeepneys with a public utility
franchise to operate along the Baclaran-Sucat route. By 1995, Villamaria stopped
assembling jeepneys and retained only nine, four of which he operated by employing
drivers on a "boundary basis." One of those drivers was respondent Bustamante who
drove the jeepney with Plate No. PVU-660. Bustamante remitted P450.00 a day to
Villamaria as boundary and kept the residue of his daily earnings as compensation for
driving the vehicle. In August 1997, Villamaria verbally agreed to sell the jeepney to
Bustamante under the "boundary-hulog scheme," where Bustamante would remit to
Villarama P550.00 a day for a period of four years; Bustamante would then become
the owner of the vehicle and continue to drive the same under Villamarias franchise.
It was also agreed that Bustamante would make a downpayment of P10,000.00.
On August 7, 1997, Villamaria executed a contract entitled "Kasunduan ng Bilihan ng
5
Sasakyan sa Pamamagitan ng Boundary-Hulog" over the passenger jeepney with
Plate No. PVU-660, Chassis No. EVER95-38168-C and Motor No. SL-26647. The
parties agreed that if Bustamante failed to pay the boundary-hulog for three days,
Villamaria Motors would hold on to the vehicle until Bustamante paid his arrears,
including a penalty of P50.00 a day; in case Bustamante failed to remit the daily
boundary-hulog for a period of one week, the Kasunduan would cease to have legal
effect and Bustamante would have to return the vehicle to Villamaria Motors.
Under the Kasunduan, Bustamante was prohibited from driving the vehicle without
prior authority from Villamaria Motors. Thus, Bustamante was authorized to operate
the vehicle to transport passengers only and not for other purposes. He was also
required to display an identification card in front of the windshield of the vehicle; in
case of failure to do so, any fine that may be imposed by government authorities
would be charged against his account. Bustamante further obliged himself to pay for
the cost of replacing any parts of the vehicle that would be lost or damaged due to his
negligence. In case the vehicle sustained serious damage, Bustamante was obliged
to notify Villamaria Motors before commencing repairs. Bustamante was not allowed
to wear slippers, short pants or undershirts while driving. He was required to be polite
and respectful towards the passengers. He was also obliged to notify Villamaria
Motors in case the vehicle was leased for two or more days and was required to
attend any meetings which may be called from time to time. Aside from the boundaryhulog, Bustamante was also obliged to pay for the annual registration fees of the
vehicle and the premium for the vehicles comprehensive insurance. Bustamante
promised to strictly comply with the rules and regulations imposed by Villamaria for
the upkeep and maintenance of the jeepney.

Bustamante continued driving the jeepney under the supervision and control of
Villamaria. As agreed upon, he made daily remittances of P550.00 in payment of the
purchase price of the vehicle. Bustamante failed to pay for the annual registration
fees of the vehicle, but Villamaria allowed him to continue driving the jeepney.
In 1999, Bustamante and other drivers who also had the same arrangement with
Villamaria Motors failed to pay their respective boundary-hulog. This prompted
Villamaria to serve a "Paalala,"6 reminding them that under the Kasunduan, failure to
pay the daily boundary-hulog for one week, would mean their respective jeepneys
would be returned to him without any complaints. He warned the drivers that the
Kasunduan would henceforth be strictly enforced and urged them to comply with their
obligation to avoid litigation.
On July 24, 2000, Villamaria took back the jeepney driven by Bustamante and barred
the latter from driving the vehicle.
On August 15, 2000, Bustamante filed a Complaint7 for Illegal Dismissal against
8
Villamaria and his wife Teresita. In his Position Paper, Bustamante alleged that he
was employed by Villamaria in July 1996 under the boundary system, where he was
required to remit P450.00 a day. After one year of continuously working for them, the
spouses Villamaria presented the Kasunduan for his signature, with the assurance
that he (Bustamante) would own the jeepney by March 2001 after paying P550.00 in
daily installments and that he would thereafter continue driving the vehicle along the
same route under the same franchise. He further narrated that in July 2000, he
informed the Villamaria spouses that the surplus engine of the jeepney needed to be
replaced, and was assured that it would be done. However, he was later arrested and
his drivers license was confiscated because apparently, the replacement engine that
was installed was taken from a stolen vehicle. Due to negotiations with the
apprehending authorities, the jeepney was not impounded. The Villamaria spouses
took the jeepney from him on July 24, 2000, and he was no longer allowed to drive
the vehicle since then unless he paid them P70,000.00.
Bustamante prayed that judgment be rendered in his favor, thus:
WHEREFORE, in the light of the foregoing, it is most respectfully prayed that
judgment be rendered ordering the respondents, jointly and severally, the following:
1. Reinstate complainant to his former position without loss of seniority rights
and execute a Deed of Sale in favor of the complainant relative to the PUJ
with Plate No. PVU-660;
2. Ordering the respondents to pay backwages in the amount of P400.00 a
day and other benefits computed from July 24, 2000 up to the time of his
actual reinstatement;
3. Ordering respondents to return the amount of P10,000.00 and
P180,000.00 for the expenses incurred by the complainant in the repair and
maintenance of the subject jeep;
4. Ordering the respondents to refund the amount of One Hundred
(P100.00) Pesos per day counted from August 7, 1997 up to June 2000 or a
total of P91,200.00;
5. To pay moral and exemplary damages of not less than P200,000.00;
6. Attorneys fee[s] of not less than 10% of the monetary award.

Other just and equitable reliefs under the premises are also being prayed for.

10

In their Position Paper, the spouses Villamaria admitted the existence of the
Kasunduan, but alleged that Bustamante failed to pay the P10,000.00 downpayment
and the vehicles annual registration fees. They further alleged that Bustamante
eventually failed to remit the requisite boundary-hulog of P550.00 a day, which
prompted them to issue the Paalaala. Instead of complying with his obligations,
Bustamante stopped making his remittances despite his daily trips and even brought
the jeepney to the province without permission. Worse, the jeepney figured in an
accident and its license plate was confiscated; Bustamante even abandoned the
vehicle in a gasoline station in Sucat, Paraaque City for two weeks. When the
security guard at the gasoline station requested that the vehicle be retrieved and
Teresita Villamaria asked Bustamante for the keys, Bustamante told her: "Di kunin
ninyo." When the vehicle was finally retrieved, the tires were worn, the alternator was
gone, and the battery was no longer working.
Citing the cases of Cathedral School of Technology v. NLRC11 and Canlubang
12
Security Agency Corporation v. NLRC, the spouses Villamaria argued that
Bustamante was not illegally dismissed since the Kasunduan executed on August 7,
1997 transformed the employer-employee relationship into that of vendor-vendee.
Hence, the spouses concluded, there was no legal basis to hold them liable for illegal
dismissal. They prayed that the case be dismissed for lack of jurisdiction and patent
lack of merit.
13

In his Reply, Bustamante claimed that Villamaria exercised control and supervision
over the conduct of his employment. He maintained that the rulings of the Court in
National Labor Union v. Dinglasan,14 Magboo v. Bernardo,15 and Citizen's League of
Free Workers v. Abbas16 are germane to the issue as they define the nature of the
owner/operator-driver relationship under the boundary system. He further reiterated
that it was the Villamaria spouses who presented the Kasunduan to him and that he
conformed thereto only upon their representation that he would own the vehicle after
four years. Moreover, it appeared that the Paalala was duly received by him, as he,
together with other drivers, was made to affix his signature on a blank piece of paper
purporting to be an "attendance sheet."
17

On March 15, 2002, the Labor Arbiter rendered judgment in favor of the spouses
Villamaria and ordered the complaint dismissed on the following ratiocination:
Respondents presented the contract of Boundary-Hulog, as well as the PAALALA, to
prove their claim that complainant violated the terms of their contract and afterwards
abandoned the vehicle assigned to him. As against the foregoing, [the] complaints
(sic) mere allegations to the contrary cannot prevail.
Not having been illegally dismissed, complainant is not entitled to damages and
18
attorney's fees.
Bustamante appealed the decision to the NLRC, 19 insisting that the Kasunduan did
not extinguish the employer-employee relationship between him and Villamaria. While
he did not receive fixed wages, he kept only the excess of the boundary-hulog which
he was required to remit daily to Villamaria under the agreement. Bustamante
maintained that he remained an employee because he was engaged to perform
activities which were necessary or desirable to Villamarias trade or business.
The NLRC rendered judgment20 dismissing the appeal for lack of merit, thus:

WHEREFORE, premises considered, complainant's appeal is hereby DISMISSED for

reasons not stated in the Labor Arbiter's decision but mainly on a jurisdictional issue,
there being none over the subject matter of the controversy. 21
The NLRC ruled that under the Kasunduan, the juridical relationship between
Bustamante and Villamaria was that of vendor and vendee, hence, the Labor Arbiter
had no jurisdiction over the complaint. Bustamante filed a Motion for Reconsideration,
which the NLRC resolved to deny on May 30, 2003.22
Bustamante elevated the matter to the CA via Petition for Certiorari, alleging that the
NLRC erred
I
IN DISMISSING PETITIONERS APPEAL "FOR REASON NOT STATED IN THE
LABOR ARBITERS DECISION, BUT MAINLY ON JURISDICTIONAL ISSUE;"
II
IN DISREGARDING THE LAW AND PREVAILING JURISPRUDENCE WHEN IT
DECLARED THAT THE RELATIONSHIP WHICH WAS ESTABLISHED BETWEEN
PETITIONER AND THE PRIVATE RESPONDENT WAS DEFINITELY A MATTER
WHICH IS BEYOND THE PROTECTIVE MANTLE OF OUR LABOR LAWS. 23
Bustamante insisted that despite the Kasunduan, the relationship between him and
Villamaria continued to be that of employer-employee and as such, the Labor Arbiter
had jurisdiction over his complaint. He further alleged that it is common knowledge
that operators of passenger jeepneys (including taxis) pay their drivers not on a
regular monthly basis but on commission or boundary basis, or even the boundaryhulog system. Bustamante asserted that he was dismissed from employment without
any lawful or just cause and without due notice.
For his part, Villamaria averred that Bustamante failed to adduce proof of their
employer-employee relationship. He further pointed out that the Dinglasan case
pertains to the boundary system and not the boundary-hulog system, hence
inapplicable in the instant case. He argued that upon the execution of the Kasunduan,
the juridical tie between him and Bustamante was transformed into a vendor-vendee
relationship. Noting that he was engaged in the manufacture and sale of jeepneys
and not in the business of transporting passengers for consideration, Villamaria
contended that the daily fees which Bustmante paid were actually periodic
installments for the the vehicle and were not the same fees as understood in the
boundary system. He added that the boundary-hulog plan was basically a scheme to
help the driver-buyer earn money and eventually pay for the unit in full, and for the
owner to profit not from the daily earnings of the driver-buyer but from the purchase
price of the unit sold. Villamaria further asserted that the apparently restrictive
conditions in the Kasunduan did not mean that the means and method of driverbuyers conduct was controlled, but were mere ways to preserve the vehicle for the
benefit of both parties: Villamaria would be able to collect the agreed purchase price,
while Bustamante would be assured that the vehicle would still be in good running
condition even after four years. Moreover, the right of vendor to impose certain
conditions on the buyer should be respected until full ownership of the property is
vested on the latter. Villamaria insisted that the parallel circumstances obtaining in
Singer Sewing Machine Company v. Drilon24 has analogous application to the instant
issue.

25

In its Decision dated August 30, 2004, the CA reversed and set aside the NLRC
decision. The fallo of the decision reads:
UPON THE VIEW WE TAKE IN THIS CASE, THUS, the impugned resolutions of the
NLRC must be, as they are hereby are, REVERSED AND SET ASIDE, and judgment
entered in favor of petitioner:
1. Sentencing private respondent Oscar Villamaria, Jr. to pay petitioner Jerry
Bustamante separation pay computed from the time of his employment up to
the time of termination based on the prevailing minimum wage at the time of
termination; and,
2. Condemning private respondent Oscar Villamaria, Jr. to pay petitioner
Jerry Bustamante back wages computed from the time of his dismissal up to
March 2001 based on the prevailing minimum wage at the time of his
dismissal.
Without Costs.
SO ORDERED.

26

The appellate court ruled that the Labor Arbiter had jurisdiction over Bustamantes
complaint. Under the Kasunduan, the relationship between him and Villamaria was
dual: that of vendor-vendee and employer-employee. The CA ratiocinated that
Villamarias exercise of control over Bustamantes conduct in operating the jeepney is
inconsistent with the formers claim that he was not engaged in the transportation
business. There was no evidence that petitioner was allowed to let some other person
drive the jeepney.
The CA further held that, while the power to dismiss was not mentioned in the
Kasunduan, it did not mean that Villamaria could not exercise it. It explained that the
existence of an employment relationship did not depend on how the worker was paid
but on the presence or absence of control over the means and method of the
employees work. In this case, Villamarias directives (to drive carefully, wear an
identification card, don decent attire, park the vehicle in his garage, and to inform him
about provincial trips, etc.) was a means to control the way in which Bustamante was
to go about his work. In view of Villamarias supervision and control as employer, the
fact that the "boundary" represented installment payments of the purchase price on
the jeepney did not remove the parties employer-employee relationship.
While the appellate court recognized that a weeks default in paying the boundaryhulog constituted an additional cause for terminating Bustamantes employment, it
held that the latter was illegally dismissed. According to the CA, assuming that
Bustamante failed to make the required payments as claimed by Villamaria, the latter
nevertheless failed to take steps to recover the unit and waited for Bustamante to
abandon it. It also pointed out that Villamaria neither submitted any police report to
support his claim that the vehicle figured in a mishap nor presented the affidavit of the
gas station guard to substantiate the claim that Bustamante abandoned the unit.
Villamaria received a copy of the decision on September 8, 2004, and filed, on
September 17, 2004, a motion for reconsideration thereof. The CA denied the motion
in a Resolution27 dated November 2, 2004, and Villamaria received a copy thereof on
November 8, 2004.
Villamaria, now petitioner, seeks relief from this Court via petition for review on
certiorari under Rule 65 of the Rules of Court, alleging that the CA committed grave

abuse of its discretion amounting to excess or lack of jurisdiction in reversing the

decision of the Labor Arbiter and the NLRC. He claims that the CA erred in ruling that
the juridical relationship between him and respondent under the Kasunduan was a
combination of employer-employee and vendor-vendee relationships. The terms and
conditions of the Kasunduan clearly state that he and respondent Bustamante had
entered into a conditional deed of sale over the jeepney; as such, their employeremployee relationship had been transformed into that of vendor-vendee. Petitioner
insists that he had the right to reserve his title on the jeepney until after the purchase
price thereof had been paid in full.
In his Comment on the petition, respondent avers that the appropriate remedy of
petitioner was an appeal via a petition for review on certiorari under Rule 45 of the
Rules of Court and not a special civil action of certiorari under Rule 65. He argues
that petitioner failed to establish that the CA committed grave abuse of its discretion
amounting to excess or lack of jurisdiction in its decision, as the said ruling is in
accord with law and the evidence on record.
Respondent further asserts that the Kasunduan presented to him by petitioner which
provides for a boundary-hulog scheme was a devious circumvention of the Labor
Code of the Philippines. Respondent insists that his juridical relationship with
petitioner is that of employer-employee because he was engaged to perform activities
which were necessary or desirable in the usual business of petitioner, his employer.
In his Reply, petitioner avers that the Rules of Procedure should be liberally
construed in his favor; hence, it behooves the Court to resolve the merits of his
petition.
We agree with respondents contention that the remedy of petitioner from the CA
decision was to file a petition for review on certiorari under Rule 45 of the Rules of
Court and not the independent action of certiorari under Rule 65. Petitioner had 15
days from receipt of the CA resolution denying his motion for the reconsideration
within which to file the petition under Rule 45.28 But instead of doing so, he filed a
petition for certiorari under Rule 65 on November 22, 2004, which did not, however,
suspend the running of the 15-day reglementary period; consequently, the CA
decision became final and executory upon the lapse of the reglementary period for
29
appeal. Thus, on this procedural lapse, the instant petition stands to be dismissed.
It must be stressed that the recourse to a special civil action under Rule 65 of the
Rules of Court is proscribed by the remedy of appeal under Rule 45. As the Court
elaborated in Tomas Claudio Memorial College, Inc. v. Court of Appeals: 30
We agree that the remedy of the aggrieved party from a decision or final resolution of
the CA is to file a petition for review on certiorari under Rule 45 of the Rules of Court,
as amended, on questions of facts or issues of law within fifteen days from notice of
the said resolution. Otherwise, the decision of the CA shall become final and
executory. The remedy under Rule 45 of the Rules of Court is a mode of appeal to
this Court from the decision of the CA. It is a continuation of the appellate process
over the original case. A review is not a matter of right but is a matter of judicial
discretion. The aggrieved party may, however, assail the decision of the CA via a
petition for certiorari under Rule 65 of the Rules of Court within sixty days from notice
of the decision of the CA or its resolution denying the motion for reconsideration of
the same. This is based on the premise that in issuing the assailed decision and
resolution, the CA acted with grave abuse of discretion, amounting to excess or lack
of jurisdiction and there is no plain, speedy and adequate remedy in the ordinary

course of law. A remedy is considered plain, speedy and adequate if it will promptly
relieve the petitioner from the injurious effect of the judgment and the acts of the
lower court.
The aggrieved party is proscribed from filing a petition for certiorari if appeal is
available, for the remedies of appeal and certiorari are mutually exclusive and not
alternative or successive. The aggrieved party is, likewise, barred from filing a petition
for certiorari if the remedy of appeal is lost through his negligence. A petition for
certiorari is an original action and does not interrupt the course of the principal case
unless a temporary restraining order or a writ of preliminary injunction has been
issued against the public respondent from further proceeding. A petition for certiorari
must be based on jurisdictional grounds because, as long as the respondent court
acted within its jurisdiction, any error committed by it will amount to nothing more than
an error of judgment which may be corrected or reviewed only by appeal. 31
However, we have also ruled that a petition for certiorari under Rule 65 may be
considered as filed under Rule 45, conformably with the principle that rules of
procedure are to be construed liberally, provided that the petition is filed within the
reglementary period under Section 2, Rule 45 of the Rules of Court, and where valid
and compelling circumstances warrant that the petition be resolved on its merits. 32 In
this case, the petition was filed within the reglementary period and petitioner has
raised an issue of substance: whether the existence of a boundary-hulog agreement
negates the employer-employee relationship between the vendor and vendee, and,
as a corollary, whether the Labor Arbiter has jurisdiction over a complaint for illegal
dismissal in such case.
We resolve these issues in the affirmative.
The rule is that, the nature of an action and the subject matter thereof, as well as,
which court or agency of the government has jurisdiction over the same, are
determined by the material allegations of the complaint in relation to the law involved
and the character of the reliefs prayed for, whether or not the complainant/plaintiff is
entitled to any or all of such reliefs. 33 A prayer or demand for relief is not part of the
petition of the cause of action; nor does it enlarge the cause of action stated or
change the legal effect of what is alleged. 34 In determining which body has jurisdiction
over a case, the better policy is to consider not only the status or relationship of the
parties but also the nature of the action that is the subject of their controversy. 35
Article 217 of the Labor Code, as amended, vests on the Labor Arbiter exclusive
original jurisdiction only over the following:
x x x (a) Except as otherwise provided under this Code, the Labor Arbiters shall have
original and exclusive jurisdiction to hear and decide, within thirty (30) calendar days
after the submission of the case by the parties for decision without extension, even in
the absence of stenographic notes, the following cases involving all workers, whether
agricultural or non-agricultural:
1. Unfair labor practice cases;
2. Termination disputes;
3. If accompanied with a claim for reinstatement, those cases that workers
may file involving wage, rates of pay, hours of work, and other terms and
conditions of employment;

4. Claims for actual, moral, exemplary and other forms of damages arising
from the employer-employee relations;
5. Cases arising from violation of Article 264 of this Code, including
questions involving the legality of strikes and lockouts; and
6. Except claims for Employees Compensation, Social Security, Medicare
and maternity benefits, all other claims, arising from employer-employee
relationship, including those of persons in domestic or household service,
involving an amount exceeding five thousand pesos (P5,000.00) regardless
of whether accompanied with a claim for reinstatement.
(b) The Commission shall have exclusive appellate jurisdiction over
all cases decided by Labor Arbiters.
(c) Cases arising from the interpretation or implementation of
collective bargaining agreements, and those arising from the
interpretation or enforcement of company personnel policies shall
be disposed of by the Labor Arbiter by referring the same to the
grievance machinery and voluntary arbitration as may be provided
in said agreements.
In the foregoing cases, an employer-employee relationship is an indispensable
jurisdictional requisite.36 The jurisdiction of Labor Arbiters and the NLRC under Article
217 of the Labor Code is limited to disputes arising from an employer-employee
relationship which can only be resolved by reference to the Labor Code, other labor
37
statutes or their collective bargaining agreement. Not every dispute between an
employer and employee involves matters that only the Labor Arbiter and the NLRC
can resolve in the exercise of their adjudicatory or quasi-judicial powers. Actions
between employers and employees where the employer-employee relationship is
merely incidental is within the exclusive original jurisdiction of the regular
courts.38 When the principal relief is to be granted under labor legislation or a
collective bargaining agreement, the case falls within the exclusive jurisdiction of the
Labor Arbiter and the NLRC even though a claim for damages might be asserted as
an incident to such claim.39
We agree with the ruling of the CA that, under the boundary-hulog scheme
incorporated in the Kasunduan, a dual juridical relationship was created between
petitioner and respondent: that of employer-employee and vendor-vendee. The
Kasunduan did not extinguish the employer-employee relationship of the parties
extant before the execution of said deed.
As early as 1956, the Court ruled in National Labor Union v. Dinglasan40 that the
jeepney owner/operator-driver relationship under the boundary system is that of
employer-employee and not lessor-lessee. This doctrine was affirmed, under similar
41
42
factual settings, in Magboo v. Bernardo and Lantaco, Sr. v. Llamas, and was
analogously applied to govern the relationships between auto-calesa owner/operator
43
44
and driver, bus owner/operator and conductor, and taxi owner/operator and
45
driver.
The boundary system is a scheme by an owner/operator engaged in transporting
passengers as a common carrier to primarily govern the compensation of the driver,
that is, the latters daily earnings are remitted to the owner/operator less the excess of
the boundary which represents the drivers compensation. Under this system, the
owner/operator exercises control and supervision over the driver. It is unlike in lease

of chattels where the lessor loses complete control over the chattel leased but the
lessee is still ultimately responsible for the consequences of its use. The
management of the business is still in the hands of the owner/operator, who, being
the holder of the certificate of public convenience, must see to it that the driver follows
the route prescribed by the franchising and regulatory authority, and the rules
promulgated with regard to the business operations. The fact that the driver does not
receive fixed wages but only the excess of the "boundary" given to the
owner/operator is not sufficient to change the relationship between them. Indubitably,
the driver performs activities which are usually necessary or desirable in the usual
business or trade of the owner/operator. 46

5. Na ang TAUHAN NG IKALAWANG PANIG ay kinakailangang maglagay

ng ID Card sa harap ng windshield upang sa pamamagitan nito ay
madaliang malaman kung ang nagmamaneho ay awtorisado ng
VILLAMARIA MOTORS o hindi.

Under the Kasunduan, respondent was required to remit P550.00 daily to petitioner,
an amount which represented the boundary of petitioner as well as respondents
partial payment (hulog) of the purchase price of the jeepney.

8. Kailangan sa VILLAMARIA MOTORS pa rin ang garahe habang

hinuhulugan pa rin ng TAUHAN NG IKALAWANG PANIG ang nasabing
sasakyan.

Respondent was entitled to keep the excess of his daily earnings as his daily wage.
Thus, the daily remittances also had a dual purpose: that of petitioners boundary and
respondents partial payment (hulog) for the vehicle. This dual purpose was expressly
stated in the Kasunduan. The well-settled rule is that an obligation is not novated by
an instrument that expressly recognizes the old one, changes only the terms of
payment, and adds other obligations not incompatible with the old provisions or where
the new contract merely supplements the previous one. 47 The two obligations of the
respondent to remit to petitioner the boundary-hulog can stand together.

9. Na kung magkaroon ng mabigat na kasiraan ang sasakyang ipinagkaloob

ng TAUHAN NG UNANG PANIG, ang TAUHAN NG IKALAWANG PANIG ay
obligadong itawag ito muna sa VILLAMARIA MOTORS bago ipagawa sa
alin mang Motor Shop na awtorisado ng VILLAMARIA MOTORS.

In resolving an issue based on contract, this Court must first examine the contract
itself, keeping in mind that when the terms of the agreement are clear and leave no
doubt as to the intention of the contracting parties, the literal meaning of its
stipulations shall prevail.48 The intention of the contracting parties should be
ascertained by looking at the words used to project their intention, that is, all the
words, not just a particular word or two or more words standing alone. The various
stipulations of a contract shall be interpreted together, attributing to the doubtful ones
that sense which may result from all of them taken jointly. 49 The parts and clauses
must be interpreted in relation to one another to give effect to the whole. The legal
effect of a contract is to be determined from the whole read together. 50
Under the Kasunduan, petitioner retained supervision and control over the conduct of
the respondent as driver of the jeepney, thus:
Ang mga patakaran, kaugnay ng bilihang ito sa pamamagitan ng boundary hulog ay
ang mga sumusunod:
1. Pangangalagaan at pag-iingatan ng TAUHAN NG IKALAWANG PANIG
ang sasakyan ipinagkatiwala sa kanya ng TAUHAN NG UNANG PANIG.
2. Na ang sasakyan nabanggit ay gagamitin lamang ng TAUHAN NG
IKALAWANG PANIG sa paghahanapbuhay bilang pampasada o
pangangalakal sa malinis at maayos na pamamaraan.
3. Na ang sasakyan nabanggit ay hindi gagamitin ng TAUHAN NG
IKALAWANG PANIG sa mga bagay na makapagdudulot ng kahihiyan,
kasiraan o pananagutan sa TAUHAN NG UNANG PANIG.
4. Na hindi ito mamanehohin ng hindi awtorisado ng opisina ng UNANG
PANIG.

6. Na sasagutin ng TAUHAN NG IKALAWANG PANIG ang [halaga ng]

multa kung sakaling mahuli ang sasakyang ito na hindi nakakabit ang ID
card sa wastong lugar o anuman kasalanan o kapabayaan.
7. Na sasagutin din ng TAUHAN NG IKALAWANG PANIG ang materyales o
piyesa na papalitan ng nasira o nawala ito dahil sa kanyang kapabayaan.

10. Na hindi pahihintulutan ng TAUHAN NG IKALAWANG PANIG sa

panahon ng pamamasada na ang nagmamaneho ay naka-tsinelas, naka
short pants at nakasando lamang. Dapat ang nagmamaneho ay laging nasa
maayos ang kasuotan upang igalang ng mga pasahero.
11. Na ang TAUHAN NG IKALAWANG PANIG o ang awtorisado niyang
driver ay magpapakita ng magandang asal sa mga pasaheros at hindi dapat
magsasalita ng masama kung sakali man may pasaherong pilosopo upang
maiwasan ang anumang kaguluhan na maaaring kasangkutan.
12. Na kung sakaling hindi makapagbigay ng BOUNDARY HULOG ang
TAUHAN NG IKALAWANG PANIG sa loob ng tatlong (3) araw ay ang
opisina ng VILLAMARIA MOTORS ang may karapatang mangasiwa ng
nasabing sasakyan hanggang matugunan ang lahat ng responsibilidad. Ang
halagang dapat bayaran sa opisina ay may karagdagang multa ng P50.00
sa araw-araw na ito ay nasa pangangasiwa ng VILLAMARIA MOTORS.
13. Na kung ang TAUHAN NG IKALAWANG PANIG ay hindi makapagbigay
ng BOUNDARY HULOG sa loob ng isang linggo ay nangangahulugan na
ang kasunduang ito ay wala ng bisa at kusang ibabalik ng TAUHAN NG
IKALAWANG PANIG ang nasabing sasakyan sa TAUHAN NG UNANG
PANIG.
14. Sasagutin ng TAUHAN NG IKALAWANG PANIG ang bayad sa rehistro,
comprehensive insurance taon-taon at kahit anong uri ng aksidente habang
ito ay hinuhulugan pa sa TAUHAN NG UNANG PANIG.
15. Na ang TAUHAN NG IKALAWANG PANIG ay obligadong dumalo sa
pangkalahatang pagpupulong ng VILLAMARIA MOTORS sa tuwing tatawag
ang mga tagapangasiwa nito upang maipaabot ang anumang mungkahi sa
ikasusulong ng samahan.
16. Na ang TAUHAN NG IKALAWANG PANIG ay makikiisa sa lahat ng mga
patakaran na magkakaroon ng pagbabago o karagdagan sa mga darating
na panahon at hindi magiging hadlang sa lahat ng mga balakin ng

VILLAMARIA MOTORS sa lalo pang ipagtatagumpay at ikakatibay ng

Samahan.

on a boundary basis of P550.00 daily despite the termination of their vendor-vendee

relationship.

17. Na ang TAUHAN NG IKALAWANG PANIG ay hindi magiging buwaya sa

pasahero upang hindi kainisan ng kapwa driver at maiwasan ang
pagkakasangkot sa anumang gulo.

The juridical relationship of employer-employee between petitioner and respondent

was not negated by the foregoing stipulation in the Kasunduan, considering that
petitioner retained control of respondents conduct as driver of the vehicle. As
correctly ruled by the CA:

18. Ang nasabing sasakyan ay hindi kalilimutang siyasatin ang kalagayan

lalo na sa umaga bago pumasada, at sa hapon o gabi naman ay sisikapin
mapanatili ang kalinisan nito.
19. Na kung sakaling ang nasabing sasakyan ay maaarkila at aabutin ng
dalawa o higit pang araw sa lalawigan ay dapat lamang na ipagbigay alam
muna ito sa VILLAMARIA MOTORS upang maiwasan ang mga anumang
suliranin.
20. Na ang TAUHAN NG IKALAWANG PANIG ay iiwasan ang pakikipagunahan sa kaninumang sasakyan upang maiwasan ang aksidente.
21. Na kung ang TAUHAN NG IKALAWANG PANIG ay mayroon sasabihin
sa VILLAMARIA MOTORS mabuti man or masama ay iparating agad ito sa
kinauukulan at iwasan na iparating ito kung [kani-kanino] lamang upang
maiwasan ang anumang usapin. Magsadya agad sa opisina ng
VILLAMARIA MOTORS.
22. Ang mga nasasaad sa KASUNDUAN ito ay buong galang at puso kong
sinasang-ayunan at buong sikap na pangangalagaan ng TAUHAN NG
IKALAWANG PANIG ang nasabing sasakyan at gagamitin lamang ito sa
paghahanapbuhay at wala nang iba pa.51
The parties expressly agreed that petitioner, as vendor, and respondent, as vendee,
entered into a contract to sell the jeepney on a daily installment basis of P550.00
payable in four years and that petitioner would thereafter become its owner. A
contract is one of conditional sale, oftentimes referred to as contract to sell, if the
ownership or title over the
property sold is retained by the vendor, and is not passed to the vendee unless and
until there is full payment of the purchase price and/or upon faithful compliance with
the other terms and conditions that may lawfully be stipulated. 52 Such payment or
satisfaction of other preconditions, as the case may be, is a positive suspensive
condition, the failure of which is not a breach of contract, casual or serious, but simply
an event that would prevent the obligation of the vendor to convey title from acquiring
53
binding force. Stated differently, the efficacy or obligatory force of the vendor's
obligation to transfer title is subordinated to the happening of a future and uncertain
event so that if the suspensive condition does not take place, the parties would stand
as if the conditional obligation had never existed. 54 The vendor may extrajudicially
terminate the operation of the contract, refuse conveyance, and retain the sums or
installments already received, where such rights are expressly provided for.55
Under the boundary-hulog scheme, petitioner retained ownership of the jeepney
although its material possession was vested in respondent as its driver. In case
respondent failed to make his P550.00 daily installment payment for a week, the
agreement would be of no force and effect and respondent would have to return the
jeepney to petitioner; the employer-employee relationship would likewise be
terminated unless petitioner would allow respondent to continue driving the jeepney

The exercise of control by private respondent over petitioners conduct in operating

the jeepney he was driving is inconsistent with private respondents claim that he is,
or was, not engaged in the transportation business; that, even if petitioner was
allowed to let some other person drive the unit, it was not shown that he did so; that
the existence of an employment relation is not dependent on how the worker is paid
but on the presence or absence of control over the means and method of the work;
that the amount earned in excess of the "boundary hulog" is equivalent to wages; and
that the fact that the power of dismissal was not mentioned in the Kasunduan did not
mean that private respondent never exercised such power, or could not exercise such
power.
Moreover, requiring petitioner to drive the unit for commercial use, or to wear an
identification card, or to don a decent attire, or to park the vehicle in Villamaria Motors
garage, or to inform Villamaria Motors about the fact that the unit would be going out
to the province for two days of more, or to drive the unit carefully, etc. necessarily
related to control over the means by which the petitioner was to go about his work;
that the ruling applicable here is not Singer Sewing Machine but National Labor Union
since the latter case involved jeepney owners/operators and jeepney drivers, and that
the fact that the "boundary" here represented installment payment of the purchase
price on the jeepney did not withdraw the relationship from that of employeremployee, in view of the overt presence of supervision and control by the employer. 56
Neither is such juridical relationship negated by petitioners claim that the terms and
conditions in the Kasunduan relative to respondents behavior and deportment as
driver was for his and respondents benefit: to insure that respondent would be able to
pay the requisite daily installment of P550.00, and that the vehicle would still be in
good condition despite the lapse of four years. What is primordial is that petitioner
retained control over the conduct of the respondent as driver of the jeepney.
Indeed, petitioner, as the owner of the vehicle and the holder of the franchise, is
entitled to exercise supervision and control over the respondent, by seeing to it that
the route provided in his franchise, and the rules and regulations of the Land
Transportation Regulatory Board are duly complied with. Moreover, in a business
establishment, an identification card is usually provided not just as a security measure
but to mainly identify the holder thereof as a bona fide employee of the firm who
57
issues it.
As respondents employer, it was the burden of petitioner to prove that respondents
termination from employment was for a lawful or just cause, or, at the very least, that
respondent failed to make his daily remittances of P550.00 as boundary. However,
petitioner failed to do so. As correctly ruled by the appellate court:
It is basic of course that termination of employment must be effected in accordance
with law. The just and authorized causes for termination of employment are
enumerated under Articles 282, 283 and 284 of the Labor Code.

Parenthetically, given the peculiarity of the situation of the parties here, the default in
the remittance of the boundary hulog for one week or longer may be considered an
additional cause for termination of employment. The reason is because the
Kasunduan would be of no force and effect in the event that the purchaser failed to
remit the boundary hulog for one week. The Kasunduan in this case pertinently
stipulates:
13. Na kung ang TAUHAN NG IKALAWANG PANIG ay hindi makapagbigay ng
BOUNDARY HULOG sa loob ng isang linggo ay NANGANGAHULUGAN na ang
kasunduang ito ay wala ng bisa at kusang ibabalik ng TAUHAN NG IKALAWANG
PANIG ang nasabing sasakyan sa TAUHAN NG UNANG PANIG na wala ng
paghahabol pa.
Moreover, well-settled is the rule that, the employer has the burden of proving that the
dismissal of an employee is for a just cause. The failure of the employer to discharge
this burden means that the dismissal is not justified and that the employee is entitled
to reinstatement and back wages.
In the case at bench, private respondent in his position paper before the Labor
Arbiter, alleged that petitioner failed to pay the miscellaneous fee of P10,000.00 and
the yearly registration of the unit; that petitioner also stopped remitting the "boundary
hulog," prompting him (private respondent) to issue a "Paalala," which petitioner
however ignored; that petitioner even brought the unit to his (petitioners) province
without informing him (private respondent) about it; and that petitioner eventually
abandoned the vehicle at a gasoline station after figuring in an accident. But private
respondent failed to substantiate these allegations with solid, sufficient proof. Notably,
private respondents allegation viz, that he retrieved the vehicle from the gas station,
where petitioner abandoned it, contradicted his statement in the Paalala that he would
enforce the provision (in the Kasunduan) to the effect that default in the remittance of
the boundary hulog for one week would result in the forfeiture of the unit. The Paalala
reads as follows:
"Sa lahat ng mga kumukuha ng sasakyan
"Sa pamamagitan ng BOUNDARY HULOG
"Nais ko pong ipaalala sa inyo ang Kasunduan na inyong pinirmahan particular na
ang paragrapo 13 na nagsasaad na kung hindi kayo makapagbigay ng Boundary
Hulog sa loob ng isang linggo ay kusa ninyong ibabalik and nasabing sasakyan na
inyong hinuhulugan ng wala ng paghahabol pa.
"Mula po sa araw ng inyong pagkatanggap ng Paalala na ito ay akin na pong
ipatutupad ang nasabing Kasunduan kayat aking pinaaalala sa inyong lahat na
tuparin natin ang nakalagay sa kasunduan upang maiwasan natin ito.
"Hinihiling ko na sumunod kayo sa hinihingi ng paalalang ito upang hindi na tayo
makaabot pa sa korte kung sakaling hindi ninyo isasauli ang inyong sasakyan na
hinuhulugan na ang mga magagastos ay kayo pa ang magbabayad sapagkat ang
hindi ninyo pagtupad sa kasunduan ang naging dahilan ng pagsampa ng kaso.
"Sumasainyo
"Attendance: 8/27/99
"(The Signatures appearing herein
include (sic) that of petitioners) (Sgd.)

OSCAR VILLAMARIA, JR."

If it were true that petitioner did not remit the boundary hulog for one week or more,
why did private respondent not forthwith take steps to recover the unit, and why did
he have to wait for petitioner to abandon it?1avvphil.net
On another point, private respondent did not submit any police report to support his
claim that petitioner really figured in a vehicular mishap. Neither did he present the
affidavit of the guard from the gas station to substantiate his claim that petitioner
abandoned the unit there.58
Petitioners claim that he opted not to terminate the employment of respondent
because of magnanimity is negated by his (petitioners) own evidence that he took the
jeepney from the respondent only on July 24, 2000.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The decision of the
Court of Appeals in CA-G.R. SP No. 78720 is AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. Nos. 147933-34

December 12, 2001

PUBLIC ESTATES AUTHORITY, petitioner,

vs.
ELPIDIO S. UY, doing business under the name and style EDISON
DEVELOPMENT & CONSTRUCTION, AND THE COURT OF
APPEALS, respondents.
YNARES-SANTIAGO, J.:
This is a petition for review of the Joint Decision dated September 25, 2000 1 and the
2
Joint Resolution dated April 25, 2001 of the Court of Appeals in the consolidated
cases CA-G.R. SP Nos. 59308 and 59849.
Petitioner Public Estates Authority is the government agency tasked by the Bases
Conversion Development Authority to develop the first-class memorial park known as
the Heritage Park, located in Fort Bonifacio, Taguig, Metro Manila. On November 20,
1996, petitioner executed with respondent Elpidio S. Uy, doing business under the
name and style Edison Development & Construction, a Landscaping and
Construction Agreement, whereby respondent undertook to perform all landscaping
works on the 105-hectare Heritage Park. The Agreement stipulated that the
completion date for the landscaping job was within 450 days, commencing within 14
days after receipt by respondent of petitioner's written notice to proceed. Due to
delays, the contracted period was extended to 693 days. Among the causes of the
delay was petitioner's inability to deliver to respondent 45 hectares of the property for
landscaping, because of the existence of squatters and a public cemetery.
Respondent instituted with the Construction Industry Arbitration Commission an
action, docketed as CIAC Case No. 02-2000, seeking to collect from petitioner
damages arising from its delay in the delivery of the entire property for landscaping.
Specifically, respondent alleged that he incurred additional rental costs for the
equipment which were kept on standby and labor costs for the idle manpower.
Likewise, the delay incurred by petitioner caused the topsoil at the original supplier to
be depleted, which compelled respondent to obtain the topsoil from a farther source,
thereby incurring added costs. He also claims that he had to mobilize water trucks for
the plants and trees which have already been delivered at the site. Furthermore, it
became necessary to construct a nursery shade to protect and preserve the young
plants and trees prior to actual transplanting at the landscaped area.
On May 16, 2000, the CIAC rendered a decision, the dispositive portion of which
reads:
WHEREFORE, judgment is hereby rendered in favor of the Claimant
Contractor ELPIDIO S. UY and Award is hereby made on its monetary claim
as follows:
Respondent PUBLIC ESTATES AUTHORITY is directed to pay the Claimant
the following amounts:
P19,604,132.06

for the cost of idle time of equipment.

2,275,721.00

for the cost of idled manpower.

6,050,165.05

for the construction of the nursery shade net area.

605,016.50

for attorney's fees.

Interest on the amount of P6,050,165.05 as cost for the construction of the

nursery shade net area shall be paid at the rate of 6% per annum from the
date the Complaint was filed on 12 January 2000. Interest on the total
amount of P21,879,853.06 for the cost of idled manpower and equipment
shall be paid at the same rate of 6% per annum from the date this Decision
is promulgated. After finality of this Decision, interest at the rate of 12% per
annum shall be paid on the total of these 3 awards amounting to
P27,930,018.11 until full payment of the awarded amount shall have been
made, "this interim period being deemed to be at that time already a
forbearance of credit" (Eastern Shipping Lines Inc. v. Court of Appeals et
al., 243 SCRA 78 [1994]; Keng Hua Paper Products Co., Inc. v. Court of
Appeals, 286 SCRA 257 [1998]; Crismina Garments Inc. v. Court of
Appeals, G.R. No. 128721, March 9, 1999).
SO ORDERED.

Both petitioner and respondent filed petitions for review with the Court of Appeals. In
CA-G.R. SP No. 59308, petitioner contested the monetary awards given by the CIAC.
On the other hand, respondent filed CA-G.R. SP No. 59849, arguing that the CIAC
erred in awarding a reduced amount for equipment stand-by costs and for denying his
claims for additional costs for topsoil hauling and operating costs of water trucks.
The two petitions were consolidated. On September 25, 2000, the Court of Appeals
rendered the now assailed Joint Decision, dismissing the petitions, to wit:
WHEREFORE, premises considered, the petitions in CA-G.R. SP No.
59308, entitled "Public Estates Authority v. Elpidio S. Uy, doing business
under the name and style of Edison Development & Construction," and CAG.R. SP No. 59849, "Elpidio S. Uy, doing business under the name and style
of Edison Development & Construction v. Public Estates Authority," are both
hereby DENIED DUE COURSE and accordingly, DISMISSED, for lack of
merit.
Consequently, the Award/Decision issued by the Construction Industry
Arbitration Commission on May 16, 2000 in CIAC Case No. 02-200, entitled
"Elpidio S. Uy, doing business under the name and style of Edison
Development & Construction v. Public Estates Authority," is hereby
AFFIRMED in toto.
No pronouncement as to costs.
SO ORDERED.4
Both parties filed motions for reconsideration. Subsequently, petitioner filed with the
Court of Appeals an Urgent Motion for Issuance of a Temporary Restraining Order
and/or Writ of Preliminary Injunction, seeking to enjoin the CIAC from proceeding with
CIAC Case No. 03-2001, which respondent has filed. Petitioner alleged that the said
case involved claims by respondent arising from the same Landscaping and
Construction Agreement, subject of the cases pending with the Court of Appeals.

On April 25, 2001, the Court of Appeals issued the assailed Joint Resolution, thus:
WHEREFORE, the present Motion/s for Reconsideration in CA-G.R. SP No.
59308 and CA-G.R. SP No. 59849 are hereby both DENIED, for lack of
merit.
Accordingly, let an injunction issue permanently enjoining the Construction
Industry Arbitration Commission from proceeding with CIAC Case No. 032001, entitled ELPIDIO S. UY, doing business under the name and style of
EDISON DEVELOPMENT & CONSTRUCTION v. PUBLIC ESTATES
AUTHORITY and/or HONORABLE CARLOS P. DOBLE.
SO ORDERED.5
Hence, this petition for review, raising the following arguments:
I
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN DENYING DUE
COURSE PETITIONER'S (SIC) PETITION FILED PURSUANT TO RULE 43 OF THE
1997 RULES OF CIVIL PROCEDURE APPEALING THE ADVERSE DECISION OF
THE CIAC A QUO.
II
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN DENYING THE
HEREIN PETITIONER'S MOTION FOR RECONSIDERATION ON THE JOINT
DECISION PROMULGATED ON SEPTEMBER 25, 2000.
III
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT ALLOWING
THE APPEAL ON THE MERITS TO BE THRESHED OUT PURSUANT TO
EXISTING LAWS AND JURISPRUDENCE ALL IN INTEREST OF DUE PROCESS.
IV
THE HONORABLE COURT OF APPEALS ERRED IN DENYING PETITIONER'S
CLAIM FOR UNRECOUPED BALANCE IN THE 15% ADVANCE PAYMENT;
UNRECOUPED BALANCE ON PRE-PAID MATERIALS, AND OVERPAYMENT
BASED
ON
ACTUAL PAYMENT
MADE
AS AGAINST PHYSICAL
ACCOMPLISHMENTS.
V
THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE CIAC
DECISION FINDING RESPONDENT ENTITLED TO ATTORNEY'S FEES IN THE
AMOUNT OF P605,096.50 WHICH IS 10% OF THE AMOUNT AWARDED FOR
THE CLAIM OF NURSERY SHADE CONSTRUCTION WHILE DENYING
PETITIONER'S COUNTERCLAIM FOR ATTORNEY'S FEES.
VI
THE HONORABLE COURT OF APPEALS ERRED IN NOT FINDING THAT
PETITIONER'S OBLIGATION, IF ANY, HAS BEEN EFFECTIVELY EXTINGUISHED.
VII

THE HONORABLE COURT OF APPEALS ERRED IN NOT ORDERING THE

RESPONDENT TO REIMBURSE THE PETITIONER THE AMOUNT OF P345,583.20
THE LATTER PAID TO THE CONSTRUCTION INDUSTRY ARBITRATION
6
COMMISSION.
7

After respondent filed its comment on August 20, 2001, this Court issued a
resolution dated September 3, 20018requiring petitioner to file its reply within ten days
from notice. Despite service of the resolution on petitioner and its counsel on October
1, 2001, no reply has been filed with this Court to date. Therefore, we dispense with
the filing of petitioner's reply and decide this case based on the pleadings on record.
The petition is without merit.
Petitioner assails the dismissal of its petition by the Court of Appeals based on a
technicality, i.e., the verification and certification of non-forum shopping was signed
by its Officer-in-Charge, who did not appear to have been authorized by petitioner to
represent it in the case. Petitioner moreover argues that in an earlier resolution, the
First Division of the Court of Appeals gave due course to its petition. Despite this, it
was the Seventeenth Division of the Court of Appeals which rendered the Joint
Decision dismissing its petition.
The contention is untenable. Petitioner, being a government owned and controlled
corporation, can act only through its duly authorized representatives. In the case
of Premium Marble Resources, Inc. v. Court of Appeals,9which the Court of Appeals
cited, we made it clear that in the absence of an authority from the board of directors,
no person, not even the officers of the corporation, can validly bind the
corporation.10 Thus, we held in that case:
We agree with the finding of public respondent Court of Appeals, that "in the
absence of any board resolution from its board of directors the [sic] authority
to act for and in behalf of the corporation, the present action must necessary
fail. The power of the corporation to sue and be sued in any court is lodged
with the board of directors that exercises its corporate powers. Thus, the
issue of authority and the invalidity of plaintiff-appellant's subscription which
is still pending, is a matter that is also addressed, considering the premises,
11
to the sound judgment of the Securities and Exchange Commission."
Therefore, the Court of Appeals did not err in finding that, in view of the absence of a
board resolution authorizing petitioner's Officer-in-Charge to represent it in the
petition, the verification and certification of non-forum shopping executed by said
officer failed to satisfy the requirement of the Rules. In this connection, Rule 43,
Section 7, of the 1997 Rules of Civil Procedure categorically provides:
Effect of failure to comply with requirements. The failure of the petition to
comply with any of the foregoing requirements regarding the payment of the
docket and other lawful fees, the deposit for costs, proof of service of the
petition, and the contents of and the documents which should accompany
the petition shall be sufficient ground for the dismissal thereof.
Anent petitioner's contention that its petition had already been given due course, it is
well to note that under the Internal Rules of the Court of Appeals, each case is raffled
to a Justice twice the first raffle for completion of records and the second raffle for
study and report.12 Hence, there was nothing unusual in the fact that its petition was
first raffled to the First Division of the Court of Appeals but was later decided by the
Seventeenth Division thereof. Petitioner's imputations of irregularity have no basis

whatsoever, and can only be viewed as a desperate attempt to muddle the issue by
nit-picking on non-essential matters. Likewise, the giving of due course to a petition is
not a guarantee that the same will be granted on its merits.
Significantly, the dismissal by the Court of Appeals of the petition was based not only
on its fatal procedural defect, but also on its lack of substantive merit; specifically, its
failure to show that the CIAC committed gross abuse of discretion, fraud or error of
law, such as to warrant the reversal of its factual findings.
We have carefully gone over the decision of the CIAC in CIAC Case No. 02-2000,
and we have found that it contains an exhaustive discussion of all claims and
counterclaims of respondent and petitioner, respectively. More importantly, its
findings are well supported by evidence which are properly referred to in the record.
In all, we have found no ground to disturb the decision of the CIAC, especially since it
possesses the required expertise in the field of construction arbitration. It is well
settled that findings of fact of administrative agencies and quasi-judicial bodies, which
have acquired expertise because their jurisdiction is confined to specific matters, are
generally accorded not only respect, but finality when affirmed by the Court of
Appeals.13
Thus, we affirm the factual findings and conclusions of the CIAC as regards the
arbitral awards to respondent. The records clearly show that these are amply
supported by substantial evidence.
Coming now to petitioner's counterclaims, we find that the CIAC painstakingly sifted
through the records to discuss these, despite its initial observation that petitioner
"absolutely omitted to make any arguments" to substantiate the same. 14 As far as the
unrecouped balance on prepaid materials are concerned, the CIAC found:
The Arbitral Tribunal finds the evidence adduced by the Respondents
(petitioner herein) sorely lacking to establish this counterclaim. The affidavit
of Mr. Jaime Millan touched on this matter by merely stating this "additional
claim a) Unrecouped balance on prepaid materials amounting to
P45,372,589.85." No further elaboration was made of this bare statement.
The affidavit of Mr. Roigelio A. Cantoria merely states that as Senior
Accountant, it was he who prepared the computation for the recoupment of
prepaid materials and advance payment marked as "Annex "B" of
Respondent's Compliance/Submission dated 16 March 2000. Examination of
that single page document shows that for the 2nd Billing, the amount of
P32,695,138.86 was "75% Prepaid" for some unspecified "Materials on
Hand." The rest of the other items were payments for "trees and shrubs RCP
Baluster & Cons. Paver, and GFRC (Baluster)" in various amounts taken
from other billings. The billings themselves have not been introduced in
evidence. No testimonial evidence was also offered to explain how these
computations were made, if only to explain the meaning of those terms
above-quoted and why the recoupment of amounts of the various billings
were generally much lower than the payment for materials. As stated at the
outset of the discussion of these additional claims, "it is not the burden of
this Tribunal to dig into the haystack to look for the proverbial needle to
support these counterclaims."15
On the other hand, we find that the CIAC correctly deferred determination of the
counterclaim for unrecouped balance on the advance payment. It explained that the
amount of this claim is determined by deducting from respondent's progress billing a

proportionate amount equal to the percentage of work accomplished. However, this

could not be done since petitioner terminated the construction contract. At the time
the CIAC rendered its decision, the issue of the validity of the termination was still
pending determination by the Regional Trial Court of Paraaque. Thus, in view of the
non-fulfillment of that "precondition to the grant" of petitioner's counterclaim, the CIAC
16
deferred resolution of the same. In the case at bar, petitioner still failed to show that
its termination of the construction contract was upheld by the court as valid.
Anent petitioner's claim for attorney's fees, suffice it to state that it was represented
by the Government Corporate Counsel in the proceedings before the CIAC.
Attorney's fees are in the nature of actual damages, which must be duly
proved.17 Petitioner failed to show with convincing evidence that it incurred attorney's
fees.
Petitioner further argues that its liability to respondent has been extinguished by
novation when it assigned and turned over all its contracted works at the Heritage
Park to the Heritage Park Management Corporation. 18 This, however, can not bind
respondent, who was not a party to the assignment. Moreover, it has not been shown
that respondent gave his consent to the turn-over. Article 1293 of the Civil Code
expressly provides:
Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by the new debtor gives him the rights
mentioned in articles 1236 and 1237. (emphasis ours)
Lastly, petitioner argues that respondent should reimburse to it all fees paid to the
CIAC by reason of the case. To be sure, this contention is based on the premise that
the suit filed by respondent was unwarranted and without legal and factual basis. But
as shown in the CIAC decision, this was not so. In fact, respondent was adjudged
entitled to the arbitral awards made by the CIAC. These awards have been sustained
by the Court of Appeals, and now by this Court.
It appears that there is a pending motion to consolidate the instant petition with G.R.
No. 147925-26, filed by respondent. Considering, however, that the instant petition
has no merit, the motion for consolidation is rendered also without merit, as there will
be no more petition to consolidate with the said case. Hence, the motion to
consolidate filed in this case must be denied.
However, in order not to prejudice the deliberations of the Court's Second Division in
G.R. No. 147925-26, it should be stated that the findings made in this case, especially
as regards the correctness of the findings of the CIAC, are limited to the arbitral
awards granted to respondent Elpidio S. Uy and to the denial of the counterclaims of
petitioner Public Estates Authority. Our decision in this case does not affect the other
claims of respondent Uy which were not granted by the CIAC in its questioned
decision, the merits of which were not submitted to us for determination in the instant
petition.
WHEREFORE, in view of the foregoing, the petition for review is DENIED. The
Motion to Consolidate this petition with G.R. No. 147925-26 is also DENIED.
SO ORDERED.

G.R. No. 177498

January 18, 2012

STOLT-NIELSEN TRANSPORTATION GROUP, INC. AND CHUNG GAI SHIP

MANAGEMENT, Petitioners,
vs.
SULPECIO MEDEQUILLO, JR., Respondent.
DECISION
PEREZ, J.:
Before the Court is a Petition for Review on Certiorari1 of the Decision2 of the First
Division of the Court of Appeals in CA-G.R. SP No. 91632 dated 31 January 2007,
denying the petition for certiorari filed by Stolt-Nielsen Transportation Group, Inc. and
Chung Gai Ship Management (petitioners) and affirming the Resolution of the
National Labor Relations Commission (NLRC). The dispositive portion of the assailed
decision reads:
WHEREFORE, the petition is hereby DENIED. Accordingly, the assailed Decision
promulgated on February 28, 2003 and the Resolution dated July 27, 2005
are AFFIRMED.3
The facts as gathered by this Court follow:
On 6 March 1995, Sulpecio Madequillo (respondent) filed a complaint before the
Adjudication Office of the Philippine Overseas Employment Administration (POEA)
against the petitioners for illegal dismissal under a first contract and for failure to
deploy under a second contract. In his complaint-affidavit,4 respondent alleged that:
1.

On 6 November 1991(First Contract), he was hired by Stolt-Nielsen Marine

Services, Inc on behalf of its principal Chung-Gai Ship Management of
Panama as Third Assistant Engineer on board the vessel "Stolt Aspiration"
for a period of nine (9) months;

9.

He made a follow-up with the petitioner but the same refused to comply with
the Second Employment Contract.

10. On 22 December 1994, he demanded for his passport, seamans book and
other employment documents. However, he was only allowed to claim the
said documents in exchange of his signing a document;
11. He was constrained to sign the document involuntarily because without
these documents, he could not seek employment from other agencies.
He prayed for actual, moral and exemplary damages as well as attorneys fees for his
illegal dismissal and in view of the Petitioners bad faith in not complying with the
Second Contract.
The case was transferred to the Labor Arbiter of the DOLE upon the effectivity of the
Migrant Workers and Overseas Filipinos Act of 1995.
The parties were required to submit their respective position papers before the Labor
Arbiter. However, petitioners failed to submit their respective pleadings despite the
5
opportunity given to them.
On 21 July 2000, Labor Arbiter Vicente R. Layawen rendered a judgment 6 finding that
the respondent was constructively dismissed by the petitioners. The dispositive
portion reads:
WHEREFORE, premises considered, judgment is hereby rendered, declaring the
respondents guilty of constructively dismissing the complainant by not honoring the
employment contract. Accordingly, respondents are hereby ordered jointly and
solidarily to pay complainant the following:
1.

$12,537.00 or its peso equivalent at the time of payment. 7

The Labor Arbiter found the first contract entered into by and between the
complainant and the respondents to have been novated by the execution of the
second contract. In other words, respondents cannot be held liable for the first
contract but are clearly and definitely liable for the breach of the second
contract.8 However, he ruled that there was no substantial evidence to grant the
9
prayer for moral and exemplary damages.

2.

He would be paid with a monthly basic salary of $808.00 and a fixed

overtime pay of $404.00 or a total of $1,212.00 per month during the
employment period commencing on 6 November 1991;

3.

On 8 November 1991, he joined the vessel MV "Stolt Aspiration";

4.

On February 1992 or for nearly three (3) months of rendering service and
while the vessel was at Batangas, he was ordered by the ships master to
disembark the vessel and repatriated back to Manila for no reason or
explanation;

The petitioners appealed the adverse decision before the National Labor Relations
Commission assailing that they were denied due process, that the respondent cannot
be considered as dismissed from employment because he was not even deployed yet
and the monetary award in favor of the respondent was exorbitant and not in
10
accordance with law.

5.

Upon his return to Manila, he immediately proceeded to the petitioners

office where he was transferred employment with another vessel named MV
"Stolt Pride" under the same terms and conditions of the First Contract;

On 28 February 2003, the NLRC affirmed with modification the Decision of the Labor
Arbiter. The dispositive portion reads:

6.

On 23 April 1992, the Second Contract was noted and approved by the
POEA;

WHEREFORE, premises considered, the decision under review is hereby, MODIFIED

BY DELETING the award of overtime pay in the total amount of Three Thousand Six
Hundred Thirty Six US Dollars (US $3,636.00).

7.

The POEA, without knowledge that he was not deployed with the vessel,
certified the Second Employment Contract on 18 September 1992.

In all other respects, the assailed decision so stands as, AFFIRMED.

8.

Despite the commencement of the Second Contract on 21 April 1992,

petitioners failed to deploy him with the vessel MV "Stolt Pride";

Before the NLRC, the petitioners assailed that they were not properly notified of the
hearings that were conducted before the Labor Arbiter. They further alleged that after
the suspension of proceedings before the POEA, the only notice they received was a
12
copy of the decision of the Labor Arbiter.

11

The NLRC ruled that records showed that attempts to serve the various notices of
hearing were made on petitioners counsel on record but these failed on account of
their failure to furnish the Office of the Labor Arbiter a copy of any notice of change of
address. There was also no evidence that a service of notice of change of address
13
was served on the POEA.
The NLRC upheld the finding of unjustified termination of contract for failure on the
part of the petitioners to present evidence that would justify their non-deployment of
the respondent.14 It denied the claim of the petitioners that the monetary award
should be limited only to three (3) months for every year of the unexpired term of the
contract. It ruled that the factual incidents material to the case transpired within 19911992 or before the effectivity of Republic Act No. 8042 or the Migrant Workers and
Overseas Filipinos Act of 1995 which provides for such limitation. 15
However, the NLRC upheld the reduction of the monetary award with respect to the
deletion of the overtime pay due to the non-deployment of the respondent.16
The Partial Motion for Reconsideration filed by the petitioners was denied by the
NLRC in its Resolution dated 27 July 2005.17
The petitioners filed a Petition for Certiorari before the Court of Appeals alleging
grave abuse of discretion on the part of NLRC when it affirmed with modification the
ruling of the Labor Arbiter. They prayed that the Decision and Resolution promulgated
by the NLRC be vacated and another one be issued dismissing the complaint of the
respondent.
Finding no grave abuse of discretion, the Court of Appeals AFFIRMED the Decision
of the labor tribunal.
The Courts Ruling
The following are the assignment of errors presented before this Court:
I.
THE COURT A QUO ERRED IN FINDING THAT THE SECOND CONTRACT
NOVATED THE FIRST CONTRACT.
1.

2.

THERE WAS NO NOVATION OF THE FIRST CONTRACT BY THE

SECOND CONTRACT; THE ALLEGATION OF ILLEGAL DISMISSAL
UNDER THE FIRST CONTRACT MUST BE RESOLVED SEPARATELY
FROM THE ALLEGATION OF FAILURE TO DEPLOY UNDER THE
SECOND CONTRACT.
THE ALLEGED ILLEGAL DISMISSAL UNDER THE FIRST CONTRACT
TRANSPIRED MORE THAN THREE (3) YEARS AFTER THE CASE WAS
FILED AND THEREFORE HIS CASE SHOULD HAVE BEEN DISMISSED
FOR BEING BARRED BY PRESCRIPTION.

II.
THE COURT A QUO ERRED IN RULING THAT THERE WAS CONSTRUCTIVE
DISMISSAL UNDER THE SECOND CONTRACT.
1.

IT IS LEGALLY IMPOSSIBLE TO HAVE CONSTRUCTIVE DISMISSAL

WHEN THE EMPLOYMENT HAS NOT YET COMMENCED.

2.

ASSUMING THERE WAS OMISSION UNDER THE SECOND CONTRACT,

PETITIONERS CAN ONLY BE FOUND AS HAVING FAILED IN
DEPLOYING PRIVATE RESPONDENT BUT WITH VALID REASON.

III.
THE COURT A QUO ERRED IN FAILING TO FIND THAT EVEN ASSUMING
THERE WAS BASIS FOR HOLDING PETITIONER LIABLE FOR "FAILURE TO
DEPLOY" RESPONDENT, THE POEA RULES PENALIZES SUCH OMISSION WITH
A MERE "REPRIMAND."18
The petitioners contend that the first employment contract between them and the
private respondent is different from and independent of the second contract
subsequently executed upon repatriation of respondent to Manila.
We do not agree.
Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object or principal conditions, or, by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor. In order for
novation to take place, the concurrence of the following requisites is indispensable:
1. There must be a previous valid obligation,
2. There must be an agreement of the parties concerned to a new contract,
3. There must be the extinguishment of the old contract, and
4. There must be the validity of the new contract. 19
In its ruling, the Labor Arbiter clarified that novation had set in between the first and
second contract. To quote:
xxx [T]his office would like to make it clear that the first contract entered into by and
between the complainant and the respondents is deemed to have been novated by
the execution of the second contract. In other words, respondents cannot be held
liable for the first contract but are clearly and definitely liable for the breach of the
second contract.20
This ruling was later affirmed by the Court of Appeals in its decision ruling that:
Guided by the foregoing legal precepts, it is evident that novation took place in this
particular case. The parties impliedly extinguished the first contract by agreeing to
enter into the second contract to placate Medequillo, Jr. who was unexpectedly
dismissed and repatriated to Manila. The second contract would not have been
necessary if the petitioners abided by the terms and conditions of Madequillo, Jr.s
employment under the first contract. The records also reveal that the 2nd contract
extinguished the first contract by changing its object or principal. These contracts
were for overseas employment aboard different vessels. The first contract was for
employment aboard the MV "Stolt Aspiration" while the second contract involved
working in another vessel, the MV "Stolt Pride." Petitioners and Madequillo, Jr.
accepted the terms and conditions of the second contract. Contrary to petitioners
assertion, the first contract was a "previous valid contract" since it had not yet been
terminated at the time of Medequillo, Jr.s repatriation to Manila. The legality of his
dismissal had not yet been resolved with finality. Undoubtedly, he was still employed
under the first contract when he negotiated with petitioners on the second contract.

As such, the NLRC correctly ruled that petitioners could only be held liable under the
second contract.21
We concur with the finding that there was a novation of the first employment contract.
We reiterate once more and emphasize the ruling in Reyes v. National Labor
22
Relations Commission, to wit:
x x x [F]indings of quasi-judicial bodies like the NLRC, and affirmed by the Court of
Appeals in due course, are conclusive on this Court, which is not a trier of facts.
xxxx
x x x Findings of fact of administrative agencies and quasi-judicial bodies, which
have acquired expertise because their jurisdiction is confined to specific
matters, are generally accorded not only respect, but finality when affirmed by
the Court of Appeals. Such findings deserve full respect and, without justifiable
reason, ought not to be altered, modified or reversed.(Emphasis supplied) 23
With the finding that respondent "was still employed under the first contract when he
24
negotiated with petitioners on the second contract", novation became an
unavoidable conclusion.
Equally settled is the rule that factual findings of labor officials, who are deemed to
have acquired expertise in matters within their jurisdiction, are generally accorded not
only respect but even finality by the courts when supported by substantial
evidence, i.e., the amount of relevant evidence which a reasonable mind might accept
as adequate to justify a conclusion.25 But these findings are not infallible. When there
is a showing that they were arrived at arbitrarily or in disregard of the evidence on
record, they may be examined by the courts. 26 In this case, there was no showing of
any arbitrariness on the part of the lower courts in their findings of facts. Hence, we
follow the settled rule.
We need not dwell on the issue of prescription. It was settled by the Court of Appeals
with its ruling that recovery of damages under the first contract was already timebarred. Thus:
Accordingly, the prescriptive period of three (3) years within which Medequillo Jr. may
initiate money claims under the 1st contract commenced on the date of his
repatriation. xxx The start of the three (3) year prescriptive period must therefore be
reckoned on February 1992, which by Medequillo Jr.s own admission was the date of
his repatriation to Manila. It was at this point in time that Medequillo Jr.s cause of
action already accrued under the first contract. He had until February 1995 to pursue
a case for illegal dismissal and damages arising from the 1st contract. With the filing
of his Complaint-Affidavit on March 6, 1995, which was clearly beyond the
prescriptive period, the cause of action under the 1st contract was already timebarred.27
The issue that proceeds from the fact of novation is the consequence of the nondeployment of respondent.
The petitioners argue that under the POEA Contract, actual deployment of the
28
seafarer is a suspensive condition for the commencement of the employment. We
agree with petitioners on such point. However, even without actual deployment, the
perfected contract gives rise to obligations on the part of petitioners.

A contract is a meeting of minds between two persons whereby one binds himself,
with respect to the other, to give something or to render some service. 29 The
contracting parties may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals, good
30
customs, public order, or public policy.
The POEA Standard Employment Contract provides that employment shall
commence "upon the actual departure of the seafarer from the airport or seaport in
the port of hire."31 We adhere to the terms and conditions of the contract so as to
credit the valid prior stipulations of the parties before the controversy started. Else,
the obligatory force of every contract will be useless. Parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the consequences
which, according to their nature, may be in keeping with good faith, usage and law. 32
Thus, even if by the standard contract employment commences only "upon actual
departure of the seafarer", this does not mean that the seafarer has no remedy in
case of non-deployment without any valid reason. Parenthetically, the contention of
the petitioners of the alleged poor performance of respondent while on board the first
ship MV "Stolt Aspiration" cannot be sustained to justify the non-deployment, for no
evidence to prove the same was presented. 33
We rule that distinction must be made between the perfection of the employment
contract and the commencement of the employer-employee relationship. The
perfection of the contract, which in this case coincided with the date of execution
thereof, occurred when petitioner and respondent agreed on the object and the
cause, as well as the rest of the terms and conditions therein. The commencement of
the employer-employee relationship, as earlier discussed, would have taken place
had petitioner been actually deployed from the point of hire. Thus, even before the
start of any employer-employee relationship, contemporaneous with the perfection of
the employment contract was the birth of certain rights and obligations, the breach of
which may give rise to a cause of action against the erring party. Thus, if the reverse
had happened, that is the seafarer failed or refused to be deployed as agreed upon,
he would be liable for damages.34
Further, we do not agree with the contention of the petitioners that the penalty is a
mere reprimand.
The POEA Rules and Regulations Governing Overseas Employment 35 dated 31 May
1991 provides for the consequence and penalty against in case of non-deployment of
the seafarer without any valid reason. It reads:
Section 4. Workers Deployment. An agency shall deploy its recruits within the
deployment period as indicated below:
xxx
b. Thirty (30) calendar days from the date of processing by the administration of the
employment contracts of seafarers.
Failure of the agency to deploy a worker within the prescribed period without
valid reasons shall be a cause for suspension or cancellation of license or
fine. In addition, the agency shall return all documents at no cost to the
worker.(Emphasis and underscoring supplied)
The appellate court correctly ruled that the penalty of reprimand36 provided under
Rule IV, Part VI of the POEA Rules and Regulations Governing the Recruitment and

Employment of Land-based Overseas Workers is not applicable in this case. The

breach of contract happened on February 1992 and the law applicable at that time
was the 1991 POEA Rules and Regulations Governing Overseas Employment. The
penalty for non-deployment as discussed is suspension or cancellation of license or
fine.
Now, the question to be dealt with is how will the seafarer be compensated by reason
of the unreasonable non-deployment of the petitioners?
The POEA Rules Governing the Recruitment and Employment of Seafarers do not
provide for the award of damages to be given in favor of the employees. The claim
provided by the same law refers to a valid contractual claim for compensation or
benefits arising from employer-employee relationship or for any personal injury,
illness or death at levels provided for within the terms and conditions of employment
of seafarers. However, the absence of the POEA Rules with regard to the payment of
damages to the affected seafarer does not mean that the seafarer is precluded from
claiming the same. The sanctions provided for non-deployment do not end with the
suspension or cancellation of license or fine and the return of all documents at no
cost to the worker. As earlier discussed, they do not forfend a seafarer from instituting
an action for damages against the employer or agency which has failed to deploy
him.37
We thus decree the application of Section 10 of Republic Act No. 8042 (Migrant
Workers Act) which provides for money claims by reason of a contract involving
Filipino workers for overseas deployment.lavvphil The law provides:
Sec. 10. Money Claims. Notwithstanding any provision of law to the contrary, the
Labor Arbiters of the National Labor Relations Commission (NLRC) shall have the
original and exclusive jurisdiction to hear and decide, within ninety (90) calendar days
after the filing of the complaint, the claims arising out of an employer-employee
relationship or by virtue of any law or contract involving Filipino workers for overseas
deployment including claims for actual, moral, exemplary and other forms of
damages. x x x (Underscoring supplied)
Following the law, the claim is still cognizable by the labor arbiters of the NLRC under
the second phrase of the provision.
Applying the rules on actual damages, Article 2199 of the New Civil Code provides
that one is entitled to an adequate compensation only for such pecuniary loss
suffered by him as he has duly proved. Respondent is thus liable to pay petitioner
actual damages in the form of the loss of nine (9) months worth of salary as provided
in the contract.38 This is but proper because of the non-deployment of respondent
without just cause.
WHEREFORE, the appeal is DENIED. The 31 January 2007 Decision of the Court of
Appeals in CA-G.R. SP. No. 91632 is hereby AFFIRMED. The Petitioners are hereby
ordered to pay Sulpecio Medequillo, Jr., the award of actual damages equivalent to
his salary for nine (9) months as provided by the Second Employment Contract.
SO ORDERED.

G.R. No. 164051

October 3, 2012

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
LILIAN S. SORIANO, Respondent.
DECISION
PEREZ, J.:
We arc urged in this petition for review on certiorari to reverse and set aside the
Decision of the Court of Appeals in C A-G.R. SP No. 762431 finding no grave abuse
of discretion in the ruling of the Secretary of the Department of Justice ( DOJ) which,
in turn, dismissed the criminal complaint for Estafa, i.e., violation of Section 13 of
Presidential Decree No. 1 15 (Trust Receipts Law), in relation to Article 315,
paragraph (b) of the Revised Penal Code, filed by petitioner Philippine National Bank
(PNB) against respondent Lilian S. Soriano (Soriano). 2
First, the ostensibly simple facts as found by the Court of Appeals and adopted by
PNB in its petition and memorandum:
On March 20, 1997, [PNB] extended a credit facility in the form of [a] Floor Stock Line
(FSL) in the increased amount of Thirty Million Pesos (30 Million) to Lisam
Enterprises, Inc. [LISAM], a family-owned and controlled corporation that maintains
Current Account No. 445830099-8 with petitioner PNB.
x x x. Soriano is the chairman and president of LISAM, she is also the authorized
signatory in all LISAMs Transactions with [PNB].
On various dates, LISAM made several availments of the FSL in the total amount of
Twenty Nine Million Six Hundred Forty Five Thousand Nine Hundred Forty Four
Pesos and Fifty Five Centavos (P29,645,944.55), the proceeds of which were
credited to its current account with [PNB]. For each availment, LISAM through
[Soriano], executed 52 Trust Receipts (TRs). In addition to the promissory notes,
showing its receipt of the items in trust with the duty to turn-over the proceeds of the
sale thereof to [PNB].
Sometime on January 21-22, 1998, [PNBs] authorized personnel conducted an
actual physical inventory of LISAMs motor vehicles and motorcycles and found that
only four (4) units covered by the TRs amounting to One Hundred Forty Thousand
Eight Hundred Pesos (158,100.00) (sic) remained unsold.
Out of the Twenty Nine Million Six Hundred Forty Four Thousand Nine Hundred Forty
Four Pesos and Fifty Five Centavos (29,644,944.55) as the outstanding principal
balance [of] the total availments on the line covered by TRs, [LISAM] should have
remitted to [PNB], Twenty Nine Million Four Hundred Eighty Seven Thousand Eight
Hundred Forty Four Pesos and Fifty Five Centavos (29,487,844.55). Despite
several formal demands, respondent Soriano failed and refused to turn over the said
[amount to] the prejudice of [PNB]. 3
Given the terms of the TRs which read, in pertinent part:
RECEIVED in Trust from the [PNB], Naga Branch, Naga City, Philippines, the motor
vehicles ("Motor Vehicles") specified and described in the Invoice/s issued by
HONDA PHILIPPINES, INC. (HPI) to Lisam Enterprises, Inc., (the "Trustee") hereto
attached as Annex "A" hereof, and in consideration thereof, the trustee hereby agrees
to hold the Motor Vehicles in storage as the property of PNB, with the liberty to sell

the same for cash for the Trustees account and to deliver the proceeds thereof to
PNB to be applied against its acceptance on the Trustees account. Under the terms
of the Invoices and (sic) the Trustee further agrees to hold the said vehicles and
proceeds of the sale thereof in Trust for the payment of said acceptance and of any
[of] its other indebtedness to PNB.
xxxx
For the purpose of effectively carrying out all the terms and conditions of the Trust
herein created and to insure that the Trustee will comply strictly and faithfully with all
undertakings hereunder, the Trustee hereby agrees and consents to allow and permit
PNB or its representatives to inspect all of the Trustees books, especially those
pertaining to its disposition of the Motor Vehicles and/or the proceeds of the sale
hereof, at any time and whenever PNB, at its discretion, may find it necessary to do
so.
The Trustees failure to account to PNB for the Motor Vehicles received in Trust
and/or for the proceeds of the sale thereof within thirty (30) days from demand made
by PNB shall constitute prima facie evidence that the Trustee has converted or
misappropriated said vehicles and/or proceeds thereof for its benefit to the detriment
and prejudice of PNB.4
and Sorianos failure to account for the proceeds of the sale of the motor vehicles,
PNB, as previously adverted to, filed a complaint-affidavit before the Office of the City
Prosecutor of Naga City charging Soriano with fifty two (52) counts of violation of the
Trust Receipts Law, in relation to Article 315, paragraph 1(b) of the Revised Penal
Code.
In refutation, Soriano filed a counter-affidavit asserting that:
1. The obligation of [LISAM] which I represent, and consequently[,] my obligation, if
any, is purely civil in nature. All of the alleged trust receipt agreements were
availments made by the corporation [LISAM] on the PNB credit facility known as
"Floor Stock Line" (FSL), which is just one of the several credit facilities granted to
[LISAM] by PNB. When my husband Leandro A. Soriano, Jr. was still alive, [LISAM]
submitted proposals to PNB for the restructuring of all of [LISAMs] credit facilities.
After exchanges of several letters and telephone calls, Mr. Josefino Gamboa, Senior
Vice President of PNB on 12 May 1998 wrote [LISAM] informing PNBs lack of
objection to [LISAMs] proposal of restructuring all its obligations. x x x.
2. On September 22, 1998 Mr. Avengoza sent a letter to [LISAM], complete with
attached copy of PNB Boards minutes of meeting, with the happy information that the
Board of Directors of PNB has approved the conversion of [LISAMs] existing credit
facilities at PNB, which includes the FSL on which the Trust receipts are availments,
to [an] Omnibus Line (OL) available by way of Revolving Credit Line (RCL),
Discounting Line Against Post-Dated Checks (DLAPC), and Domestic Bills
Purchased Line (DBPL) and with a "Full waiver of penalty charges on RCL, FSL
(which is the Floor Stock Line on which the trust receipts are availments) and Time
Loan. x x x.
3. The [FSL] and the availments thereon allegedly secured by Trust Receipts,
therefore, was (sic) already converted into[,] and included in[,] an Omnibus Line (OL)
of 106 million on September 22, 1998, which was actually a Revolving Credit Line
(RCL)[.]5

PNB filed a reply-affidavit maintaining Sorianos criminal liability under the TRs:
2. x x x. While it is true that said restructuring was approved, the same was never
implemented because [LISAM] failed to comply with the conditions of approval stated
in B/R No. 6, such as the payment of the interest and other charges and the
submission of the title of the 283 sq. m. of vacant residential lot, x x x Tandang Sora,
Quezon City, as among the common conditions stated in paragraph V, of B/R 6. The
nonimplementation of the approved restructuring of the account of [LISAM] has the
effect of reverting the account to its original status prior to the said approval.
Consequently, her claim that her liability for violation of the Trust Receipt Agreement
is purely civil does not hold water. 6

Accordingly, the prosecution is hereby given fifteen (15) days from receipt hereof
within which to comply with the directive of the Department of Justice.
2. 21 February 200312
Finding the Motion to Withdraw Informations filed by Pros. Edgar Imperial duly
approved by the City Prosecutor of Naga City to be meritorious the same is hereby
granted. As prayed for, the Informations in Crim. Cases Nos. RTC 2001-0641 to
2001-0693 entitled, People of the Philippines vs. Lilian S. Soriano, consisting of fiftytwo (52) cases except for Crim. Case No. RTC 2001-0671 which had been previously
dismissed, are hereby ordered WITHDRAWN.

In a Resolution,7 the City Prosecutor of Naga City found, thus:

3. 15 July 200313

WHEREFORE, the undersigned finds prima facie evidence that respondent LILIAN
SORIANO is probably guilty of violation of [the] Trust Receipt Law, in relation to
Article 315 par. 1 (b) of the Revised Penal Code, let therefore 52 counts of ESTAFA
8
be filed against the respondent.

The prosecution of the criminal cases herein filed being under the control of the City
Prosecutor, the withdrawal of the said cases by the Prosecution leaves this Court
without authority to re-instate, revive or refile the same.

Consequently, on 1 August 2001, the same office filed Informations against Soriano
for fifty two (52) counts ofEstafa (violation of the Trust Receipts Law), docketed as
Criminal Case Nos. 2001-0641 to 2001-0693, which were raffled to the Regional Trial
Court (RTC), Branch 21, Naga City.
Meanwhile, PNB filed a petition for review of the Naga City Prosecutors Resolution
before the Secretary of the DOJ.
In January 2002, the RTC ordered the dismissal of one of the criminal cases against
Soriano, docketed as Criminal Case No. 2001-0671. In March of the same year,
Soriano was arraigned in, and pled not guilty to, the rest of the criminal cases.
Thereafter, on 16 October 2002, the RTC issued an Order resetting the continuation
of the pre-trial on 27 November 2002.
On the other litigation front, the DOJ, in a Resolution9 dated 25 June 2002, reversed
and set aside the earlier resolution of the Naga City Prosecutor:
WHEREFORE, the questioned resolution is REVERSED and SET ASIDE and the
City Prosecutor of Naga City is hereby directed to move, with leave of court, for the
withdrawal of the informations for estafa against Lilian S. Soriano in Criminal Case
Nos. 2001-0641 to 0693 and to report the action taken thereon within ten (10) days
from receipt thereof.10
On various dates the RTC, through Pairing Judge Novelita Villegas Llaguno, issued
the following Orders:
1. 27 November 200211
When this case was called for continuation of pre-trial, [Sorianos] counsel appeared.
However, Prosecutor Edgar Imperial failed to appear.
Records show that a copy of the Resolution from the Department of Justice
promulgated on October 28, 2002 was received by this Court, (sic) denying the
Motion for Reconsideration of the Resolution No. 320, series of 2002 reversing that of
the City Prosecutor of Naga City and at the same time directing the latter to move
with leave of court for the withdrawal of the informations for Estafa against Lilian
Soriano.

Wherefore, the Motion for Reconsideration filed by the private complainant is hereby
DENIED.
With the denial of its Motion for Reconsideration of the 25 June 2002 Resolution of
the Secretary of the DOJ, PNB filed a petition for certiorari before the Court of
Appeals alleging that:
A. THE SECRETARY OF THE DOJ COMMITTED GRAVE ABUSE OF DISCRETION
AMOUNTING TO WANT OR EXCESS OF JURISDICTION IN REVERSING AND
SETTING ASIDE THE RESOLUTON OF THE CITY PROSECUTOR OF NAGA CITY
FINDING A PRIMA FACIE CASE AGAINST PRIVATE RESPONDENT [SORIANO],
FOR THE SAME HAS NO LEGAL BASES AND IS NOT IN ACCORD WITH THE
JURISPRUDENTIAL RULINGS ON THE MATTER.14
As stated at the outset, the appellate court did not find grave abuse of discretion in
the questioned resolution of the DOJ, and dismissed PNBs petition for certiorari.
Hence, this appeal by certiorari.
Before anything else, we note that respondent Soriano, despite several opportunities
to do so, failed to file a Memorandum as required in our Resolution dated 16 January
2008. Thus, on 8 July 2009, we resolved to dispense with the filing of Sorianos
Memorandum.
In its Memorandum, PNB posits the following issues:
I. Whether or not the Court of Appeals gravely erred in concurring with the finding of
the DOJ that the approval by PNB of [LISAMs] restructuring proposal of its account
with PNB had changed the status of [LISAMs] obligations secured by Trust Receipts
to one of an ordinary loan, non-payment of which does not give rise to a criminal
liability.
II. Whether or not the Court of Appeals gravely erred in concluding and concurring
with the June 25, 2002 Resolution of the DOJ directing the withdrawal of the
Information for Estafa against the accused in Criminal Case Nos. 2001-0641 up to
0693 considering the well-established rule that once jurisdiction is vested in court, it is
retained up to the end of the litigation.

III. Whether or not the reinstatement of the 51 counts (Criminal Case No. 2001-0671
was already dismissed) of criminal cases for estafa against Soriano would violate her
constitutional right against double jeopardy.15
Winnowed from the foregoing, we find that the basic question is whether the Court of
Appeals gravely erred in affirming the DOJs ruling that the restructuring of LISAMs
loan secured by trust receipts extinguished Sorianos criminal liability therefor.
It has not escaped us that PNBs second and third issues delve into the three (3)
Orders of the RTC which are not the subject of the petition before us. To clarify, the
instant petition assails the Decision of the appellate court in CA-G.R. SP No. 76243
which, essentially, affirmed the ruling of the DOJ in I.S. Nos. 2000-1123, 2000-1133
and 2000-1184. As previously narrated, the DOJ Resolution became the basis of the
RTCs Orders granting the withdrawal of the Informations against Soriano. From
these RTC Orders, the remedy of PNB was to file a petition for certiorari before the
Court of Appeals alleging grave abuse of discretion in the issuance thereof.
However, for clarity and to obviate confusion, we shall first dispose of the peripheral
issues raised by PNB:
1. Whether the withdrawal of Criminal Cases Nos. 2001-0641 to 2001-0693 against
Soriano as directed by the DOJ violates the well-established rule that once the trial
court acquires jurisdiction over a case, it is retained until termination of litigation.
2. Whether the reinstatement of Criminal Cases Nos. 2001-0641 to 2001-0693 violate
the constitutional provision against double jeopardy.
We rule in the negative.
Precisely, the withdrawal of Criminal Cases Nos. 2001-0641 to 2001-0693 was
ordered by the RTC. In particular, the Secretary of the DOJ directed City Prosecutor
of Naga City to move, with leave of court, for the withdrawal of the Informations
for estafa against Soriano. Significantly, the trial court gave the prosecution fifteen
(15) days within which to comply with the DOJs directive, and thereupon, readily
granted the motion. Indeed, the withdrawal of the criminal cases did not occur, nay,
could not have occurred, without the trial courts imprimatur. As such, the DOJs
directive for the withdrawal of the criminal cases against Soriano did not divest nor
oust the trial court of its jurisdiction.
Regrettably, a perusal of the RTCs Orders reveals that the trial court relied solely on
the Resolution of the DOJ Secretary and his determination that the Informations
for estafa against Soriano ought to be withdrawn. The trial court abdicated its judicial
power and refused to perform a positive duty enjoined by law. On one occasion, we
have declared that while the recommendation of the prosecutor or the ruling of the
16
Secretary of Justice is persuasive, it is not binding on courts. We shall return to this
point shortly.
In the same vein, the reinstatement of the criminal cases against Soriano will not
violate her constitutional right against double jeopardy.
Section 7,17 Rule 117 of the Rules of Court provides for the requisites for double
jeopardy to set in: (1) a first jeopardy attached prior to the second; (2) the first
jeopardy has been validly terminated; and (3) a second jeopardy is for the same
offense as in the first. A first jeopardy attaches only (a) after a valid indictment; (b)
before a competent court; (c) after arraignment; (d) when a valid plea has been

entered; and (e) when the accused has been acquitted or convicted, or the case
dismissed or otherwise terminated without his express consent.18
In the present case, the withdrawal of the criminal cases did not include a categorical
dismissal thereof by the RTC. Double jeopardy had not set in because Soriano was
not acquitted nor was there a valid and legal dismissal or termination of the fifty one
(51) cases against her. It stands to reason therefore that the fifth requisite which
requires conviction or acquittal of the accused, or the dismissal of the case without
the approval of the accused, was not met.
19

On both issues, the recent case of Cerezo v. People, is enlightening. In Cerezo, the
trial court simply followed the prosecutions lead on how to proceed with the libel case
against the three accused. The prosecution twice changed their mind on whether
there was probable cause to indict the accused for libel. On both occasions, the trial
court granted the prosecutors motions. Ultimately, the DOJ Secretary directed the
prosecutor to re-file the Information against the accused which the trial court forthwith
reinstated. Ruling on the same issues raised by PNB in this case, we emphasized,
thus:
x x x. In thus resolving a motion to dismiss a case or to withdraw an Information, the
trial court should not rely solely and merely on the findings of the public prosecutor or
the Secretary of Justice. It is the courts bounden duty to assess independently the
merits of the motion, and this assessment must be embodied in a written order
disposing of the motion. x x x.
In this case, it is obvious from the March 17, 2004 Order of the RTC, dismissing the
criminal case, that the RTC judge failed to make his own determination of whether or
not there was a prima faciecase to hold respondents for trial. He failed to make an
independent evaluation or assessment of the merits of the case. The RTC judge
blindly relied on the manifestation and recommendation of the prosecutor when he
should have been more circumspect and judicious in resolving the Motion to Dismiss
and Withdraw Information especially so when the prosecution appeared to be
uncertain, undecided, and irresolute on whether to indict respondents.
The same holds true with respect to the October 24, 2006 Order, which reinstated the
case. The RTC judge failed to make a separate evaluation and merely awaited the
resolution of the DOJ Secretary. This is evident from the general tenor of the Order
and highlighted in the following portion thereof:
As discussed during the hearing of the Motion for Reconsideration, the Court will
resolve it depending on the outcome of the Petition for Review. Considering the
findings of the Department of Justice reversing the resolution of the City Prosecutor,
the Court gives favorable action to the Motion for Reconsideration.
By relying solely on the manifestation of the public prosecutor and the resolution of
the DOJ Secretary, the trial court abdicated its judicial power and refused to perform
a positive duty enjoined by law. The said Orders were thus stained with grave abuse
of discretion and violated the complainants right to due process. They were void, had
no legal standing, and produced no effect whatsoever.
xxxx
It is beyond cavil that double jeopardy did not set in. Double jeopardy exists when the
following requisites are present: (1) a first jeopardy attached prior to the second; (2)
the first jeopardy has been validly terminated; and (3) a second jeopardy is for the

same offense as in the first. A first jeopardy attaches only (a) after a valid indictment;
(b) before a competent court; (c) after arraignment; (d) when a valid plea has been
entered; and (e) when the accused has been acquitted or convicted, or the case
dismissed or otherwise terminated without his express consent.
Since we have held that the March 17, 2004 Order granting the motion to dismiss was
committed with grave abuse of discretion, then respondents were not acquitted nor
was there a valid and legal dismissal or termination of the case. Ergo, the fifth
requisite which requires the conviction and acquittal of the accused, or the dismissal
of the case without the approval of the accused, was not met. Thus, double jeopardy
has not set in.20 (Emphasis supplied)
We now come to the crux of the matter: whether the restructuring of LISAMs loan
account extinguished Sorianos criminal liability.
PNB admits that although it had approved LISAMs restructuring proposal, the actual
restructuring of LISAMs account consisting of several credit lines was never reduced
into writing. PNB argues that the stipulations therein such as the provisions on the
schedule of payment of the principal obligation, interests, and penalties, must be in
writing to be valid and binding between the parties. PNB further postulates that
assuming the restructuring was reduced into writing, LISAM failed to comply with the
conditions precedent for its effectivity, specifically, the payment of interest and other
charges, and the submission of the titles to the real properties in Tandang Sora,
Quezon City. On the whole, PNB is adamant that the events concerning the
restructuring of LISAMs loan did not affect the TR security, thus, Sorianos criminal
liability thereunder subsists.
On the other hand, the appellate court agreed with the ruling of the DOJ Secretary
that the approval of LISAMs restructuring proposal, even if not reduced into writing,
changed the status of LISAMs loan from being secured with Trust Receipts (TRs) to
one of an ordinary loan, non-payment of which does not give rise to criminal liability.
The Court of Appeals declared that there was no breach of trust constitutive
of estafa through misappropriation or conversion where the relationship between the
parties is simply that of creditor and debtor, not as entruster and entrustee.
We cannot subscribe to the appellate courts reasoning. The DOJ Secretarys and the
Court of Appeals holding that, the supposed restructuring novated the loan
agreement between the parties is myopic.
To begin with, the purported restructuring of the loan agreement did not constitute
novation.
21

Novation is one of the modes of extinguishment of obligations; it is a single juridical

act with a diptych function. The substitution or change of the obligation by a
subsequent one extinguishes the first, resulting in the creation of a new obligation in
22
lieu of the old. It is not a complete obliteration of the obligor-obligee relationship, but
operates as a relative extinction of the original obligation.
Article 1292 of the Civil Code which provides:
Art. 1292. In order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point incompatible with each other.

contemplates two kinds of novation: express or implied. The extinguishment of the old
obligation by the new one is a necessary element of novation, which may be effected
either expressly or impliedly.
In order for novation to take place, the concurrence of the following requisites is
indispensable:
(1) There must be a previous valid obligation;
(2) There must be an agreement of the parties concerned to a new contract;
(3) There must be the extinguishment of the old contract; and
(4) There must be the validity of the new contract.23
Novation is never presumed, and the animus novandi, whether totally or partially,
must appear by express agreement of the parties, or by their acts that are too clear
and unmistakable. The contracting parties must incontrovertibly disclose that their
object in executing the new contract is to extinguish the old one. Upon the other hand,
no specific form is required for an implied novation, and all that is prescribed by law
24
would be an incompatibility between the two contracts. Nonetheless, both kinds of
novation must still be clearly proven.25
In this case, without a written contract stating in unequivocal terms that the parties
were novating the original loan agreement, thus undoubtedly eliminating an express
novation, we look to whether there is an incompatibility between the Floor Stock Line
secured by TRs and the subsequent restructured Omnibus Line which was
supposedly approved by PNB.
Soriano is confident with her assertion that PNBs approval of her proposal to
restructure LISAMs loan novated the loan agreement secured by TRs. Soriano relies
on the following:
1. x x x. All the alleged trust receipt agreements were availments made by [LISAM] on
the PNB credit facility known as "Floor Stock Line," (FSL) which is just one of the
several credit facilities granted to [LISAM] by PNB. When my husband Leandro A.
Soriano, Jr. was still alive, [LISAM] submitted proposals to PNB for the restructuring
of all of [LISAMs] credit facilities. After exchanges of several letters and telephone
calls, Mr. Josefino Gamboa, Senior Vice President of PNB on 12 May 1998 wrote
[LISAM] informing PNBs lack of objection to [LISAMs] proposal of restructuring all its
obligations. x x x.
2. On September 22, 1998, Mr. Avengoza sent a letter to [LISAM], complete with
attached copy of PNBs Boards minutes of meeting, with the happy information that
the Board of Directors of PNB has approved the conversion of [LISAMs] existing
credit facilities at PNB, which includes the FSL on which the trust receipts are
availments, to [an] Omnibus Line (OL) available by way of Revolving Credit Line
(RCL), Discounting Line Against Post-Dated Checks (DLAPC), and Domestic Bills
Purchased Line (DBPL) and with a "Full waiver of penalty charges on RCL, FSL
(which is the Floor Stock Line on which the trust receipts are availments) and Time
Loan. x x x.26
Sorianos reliance thereon is misplaced. The approval of LISAMs restructuring
proposal is not the bone of contention in this case. The pith of the issue lies in
whether, assuming a restructuring was effected, it extinguished the criminal liability on
the loan obligation secured by trust receipts, by extinguishing the entruster-entrustee

relationship and substituting it with that of an ordinary creditor-debtor relationship.

Stated differently, we examine whether the Floor Stock Line is incompatible with the
purported restructured Omnibus Line.
The test of incompatibility is whether the two obligations can stand together, each one
having its independent existence. If they cannot, they are incompatible and the latter
obligation novates the first. Corollarily, changes that breed incompatibility must be
essential in nature and not merely accidental. The incompatibility must take place in
any of the essential elements of the obligation, such as its object, cause or principal
conditions thereof; otherwise, the change would be merely modificatory in nature and
insufficient to extinguish the original obligation. 27
We have scoured the records and found no incompatibility between the Floor Stock
Line and the purported restructured Omnibus Line. While the restructuring was
approved in principle, the effectivity thereof was subject to conditions precedent such
as the payment of interest and other charges, and the submission of the titles to the
real properties in Tandang Sora, Quezon City. These conditions precedent imposed
on the restructured Omnibus Line were never refuted by Soriano who, oddly enough,
failed to file a Memorandum. To our mind, Sorianos bare assertion that the
restructuring was approved by PNB cannot equate to a finding of an implied novation
which extinguished Sorianos obligation as entrustee under the TRs.
Moreover, as asserted by Soriano in her counter-affidavit, the waiver pertains to
penalty charges on the Floor Stock Line. There is no showing that the waiver
extinguished Sorianos obligation to "sell the [merchandise] for cash for [LISAMs]
account and to deliver the proceeds thereof to PNB to be applied against its
acceptance on [LISAMs] account." Soriano further agreed to hold the "vehicles and
proceeds of the sale thereof in Trust for the payment of said acceptance and of any of
its other indebtedness to PNB." Well-settled is the rule that, with respect to obligations
to pay a sum of money, the obligation is not novated by an instrument that expressly
recognizes the old, changes only the terms of payment, adds other obligations not
incompatible with the old ones, or the new contract merely supplements the old
one.28 Besides, novation does not extinguish criminal liability.29 It stands to reason
therefore, that Sorianos criminal liability under the TRs subsists considering that the
civil obligations under the Floor Stock Line secured by TRs were not extinguished by
the purported restructured Omnibus Line.
In Transpacific Battery Corporation v. Security Bank and Trust Company,30 we held
that the restructuring of a loan agreement secured by a TR does not per se novate or
extinguish the criminal liability incurred thereunder:
x x x Neither is there an implied novation since the restructuring agreement is not
incompatible with the trust receipt transactions.
Indeed, the restructuring agreement recognizes the obligation due under the trust
receipts when it required "payment of all interest and other charges prior to
restructuring." With respect to Michael, there was even a proviso under the
agreement that the amount due is subject to "the joint and solidary liability of Spouses
Miguel and Mary Say and Michael Go Say." While the names of Melchor and
Josephine do not appear on the restructuring agreement, it cannot be presumed that
they have been relieved from the obligation. The old obligation continues to subsist
subject to the modifications agreed upon by the parties.
The circumstance that motivated the parties to enter into a restructuring agreement
was the failure of petitioners to account for the goods received in trust and/or deliver

the proceeds thereof. To remedy the situation, the parties executed an agreement to
restructure Transpacific's obligations.
The Bank only extended the repayment term of the trust receipts from 90 days to one
year with monthly installment at 5% per annum over prime rate or 30% per annum
whichever is higher. Furthermore, the interest rates were flexible in that they are
subject to review every amortization due. Whether the terms appeared to be more
onerous or not is immaterial.1wphi1 Courts are not authorized to extricate parties
from the necessary consequences of their acts. The parties will not be relieved from
their obligations as there was absolutely no intention by the parties to supersede or
abrogate the trust receipt transactions. The intention of the new agreement was
precisely to revive the old obligation after the original period expired and the loan
remained unpaid. Well-settled is the rule that, with respect to obligations to pay a sum
of money, the obligation is not novated by an instrument that expressly recognizes
the old, changes only the terms of payment, adds other obligations not incompatible
with the old ones, or the new contract merely supplements the old one.31
Based on all the foregoing, we find grave error in the Court of Appeals dismissal of
PNBs petition for certiorari. Certainly, while the determination of probable cause to
indict a respondent for a crime lies with the prosecutor, the discretion must not be
exercised in a whimsical or despotic manner tantamount to grave abuse of discretion.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in
CA-G.R. SP No. 76243 finding no grave abuse of discretion on the part of the
Secretary of Justice is REVERSED and SET ASIDE.
The Resolution of the Secretary of Justice dated 25 June 2002, directing the City
Prosecutor of Naga City to move for the withdrawal of the Informations for estafa in
relation to the Trust Receipts Law against respondent Lilian S. Soriano, and his 29
October 2002 Resolution, denying petitioner's Motion for Reconsideration,
are ANNULLEDand SET ASIDE for having been issued with grave abuse of
discretion; and the Resolution or the Naga City Prosecutor's Office dated 19 March
2001,
finding
probable
cause
against
herein
respondent,
is REINSTATED.Consequently, the Orders of the Regional Trial Court, Branch 21 of
Naga City in Criminal Cases Nos. 2001-0641 to 2001-0693, except Criminal Case No.
2001-0671, dated 27 November 2002, 21 February 2003 and 15 July 2003 are SET
ASIDE and its Order of 16 October 2002 resetting the continuation or the pre-trial
is REINSTATED.The RTC is further ordered to conduct the pretrial with dispatch.
SO ORDERED.

G.R. No. 159709

June 27, 2012

"P500,000.00

HEIRS OF SERVANDO FRANCO, Petitioners,

vs.
SPOUSES VERONICA AND DANILO GONZALES, Respondents.
DECISION
BERSAMIN, J.:
There is novation when there is an irreconcilable incompatibility between the old and
the new obligations. There is no novation in case of only slight modifications; hence,
the old obligation prevails.
1

The petitioners challenge the decision promulgated on March 19, 2003, whereby the
Court of Appeals (CA) upheld the issuance of a writ of execution by the Regional Trial
Court (RTC), Branch 16, in Malolos, Bulacan.
Antecedents
The Court adopts the following summary of the antecedents rendered by the Court in
2
Medel v. Court of Appeals, the case from which this case originated, to wit:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and
Leticia) obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was
engaged in the money lending business under the name "Gonzales Credit
Enterprises", in the amount of P50,000.00, payable in two months. Veronica gave
only the amount of P47,000.00, to the borrowers, as she retained P3,000.00, as
advance interest for one month at 6% per month. Servado and Leticia executed a
promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.
On November 19, 1985, Servando and Leticia obtained from Veronica another loan in
the amount of P90,000.00, payable in two months, at 6% interest per month. They
executed a promissory note to evidence the loan, maturing on January 19, 1986.
They received only P84,000.00, out of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the
indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in
the amount of P300,000.00, maturing in one month, secured by a real estate
mortgage over a property belonging to Leticia Makalintal Yaptinchay, who issued a
special power of attorney in favor of Leticia Medel, authorizing her to execute the
mortgage. Servando and Leticia executed a promissory note in favor of Veronica to
pay the sum of P300,000.00, after a month, or on July 11, 1986. However, only the
sum of P275,000.00, was given to them out of the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel,
consolidated all their previous unpaid loans totaling P440,000.00, and sought from
Veronica another loan in the amount of P60,000.00, bringing their indebtedness to a
total of P500,000.00, payable on August 23, 1986. They executed a promissory note,
reading as follows:
"Baliwag, Bulacan July 23, 1986
"Maturity Date August 23, 1986

"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of
VERONICA R. GONZALES doing business in the business style of GONZALES
CREDIT ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of
Baliwag Bulacan, the sum of PESOS ........ FIVE HUNDRED THOUSAND .....
(P500,000.00)
Philippine
Currency with interest thereon at the rate of 5.5PER CENT per month plus 2% servic
e charge per annum from date hereof until fully paid according to the amortization
schedule contained herein. (Underscoring supplied)
"Payment will be made in full at the maturity date.
"Should I/WE fail to pay any amortization or portion hereof when due, all the other
installments together with all interest accrued shall immediately be due and payable
and
I/WE
hereby
agree
to
pay
an additional amount equivalent to one per cent (1%) per month of the amount due an
ddemandable as penalty charges in the form of liquidated damages until fully paid;
and the furthersum of TWENTY FIVE PER CENT (25%) thereof in full, without
deductions as Attorney's Fee whether actually incurred or not, of the total amount due
and demandable, exclusive of costs and judicial or extra judicial expenses.
(Underscoring supplied)
"I, WE further agree that in the event the present rate of interest on loan is increased
by law or the Central Bank of the Philippines, the holder shall have the option to apply
and collect the increased interest charges without notice although the original interest
have already been collected wholly or partially unless the contrary is required by law.
"It is also a special condition of this contract that the parties herein agree that the
amount of peso-obligation under this agreement is based on the present value of
peso, and if there be any change in the value thereof, due to extraordinary inflation or
deflation, or any other cause or reason, then the peso-obligation herein contracted
shall be adjusted in accordance with the value of the peso then prevailing at the time
of the complete fulfillment of obligation.
"Demand and notice of dishonor waived. Holder may accept partial payments and
grant renewals of this note or extension of payments, reserving rights against each
and all indorsers and all parties to this note.
"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors
waive all his/their rights under the provisions of Section 12, Rule 39, of the Revised
Rules of Court."
On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00,
plus interests and penalties, evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G.
Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos,
Bulacan, a complaint for collection of the full amount of the loan including interests
and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant
Servando alleged that he did not obtain any loan from the plaintiffs; that it was
defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the sum
of P500,000.00, and actually received the amount and benefited therefrom; that the

loan was secured by a real estate mortgage executed in favor of the plaintiffs, and
that he (Servando Franco) signed the promissory note only as a witness.
In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel
alleged that the loan was the transaction of Leticia Yaptinchay, who executed a
mortgage in favor of the plaintiffs over a parcel of real estate situated in San Juan,
Batangas; that the interest rate is excessive at 5.5% per month with additional service
charge of 2% per annum, and penalty charge of 1% per month; that the stipulation for
attorney's fees of 25% of the amount due is unconscionable, illegal and excessive,
and that substantial payments made were applied to interest, penalties and other
charges.
After due trial, the lower court declared that the due execution and genuineness of the
four promissory notes had been duly proved, and ruled that although the Usury Law
had been repealed, the interest charged by the plaintiffs on the loans was
unconscionable and "revolting to the conscience". Hence, the trial court applied "the
provision of the New [Civil] Code" that the "legal rate of interest for loan or
forbearance of money, goods or credit is 12% per annum."
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive
portion of which reads as follows:
"WHEREFORE, premises considered, judgment is hereby rendered, as follows:
"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally,
to pay plaintiffs the amount of P47,000.00 plus 12% interest per annum from
November 7, 1985 and 1% per month as penalty, until the entire amount is paid in
full.
"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly
and severally the amount of P84,000.00 with 12% interest per annum and 1% per
cent per month as penalty from November 19,1985 until the whole amount is fully
paid;
"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount
of P285,000.00 plus 12% interest per annum and 1% per month as penalty from July
11, 1986, until the whole amount is fully paid;

that may be charged on the loan". The Court of Appeals further held that "the
imposition of an additional amount equivalent to 1% per month of the amount due
and demandable as penalty charges in the form of liquidated damages until fully paid
was allowed by law".
Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision
reversing that of the Regional Trial Court, disposing as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants
are hereby ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per month
interest and 2% service charge per annum effective July 23, 1986, plus 1% per month
of the total amount due and demandable as penalty charges effective August 24,
1986, until the entire amount is fully paid.
"The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the
imposition of costs against the defendants.
"SO ORDERED."
On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said
decision. By resolution dated November 25, 1997, the Court of Appeals denied the
motion.3
On review, the Court in Medel v. Court of Appeals struck down as void the stipulation
on the interest for being iniquitous or unconscionable, and revived the judgment of the
RTC rendered on December 9, 1991, viz:
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the
Court of Appeals promulgated on March 21, 1997, and its resolution dated November
25, 1997. Instead, we render judgment REVIVING and AFFIRMING the decision
dated December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos,
Bulacan, in Civil Case No. 134-M-90, involving the same parties.
No pronouncement as to costs in this instance.
SO ORDERED.

"With costs against the defendants."

Upon the finality of the decision in Medel v. Court of Appeals, the respondents moved
for execution.5 Servando Franco opposed,6 claiming that he and the respondents had
agreed to fix the entire obligation at P775,000.00.7According to Servando, their
agreement, which was allegedly embodied in a receipt dated February 5,
8
1992, whereby he made an initial payment of P400,000.00 and promised to pay the
balance of P375,000.00 on February 29, 1992, superseded the July 23, 1986
promissory note.

In due time, both plaintiffs and defendants appealed to the Court of Appeals.

The RTC granted the motion for execution over Servandos opposition, thus:

In their appeal, plaintiffs-appellants argued that the promissory note, which

consolidated all the unpaid loans of the defendants, is the law that governs the
parties. They further argued that Circular No. 416 of the Central Bank prescribing the
rate of interest for loans or forbearance of money, goods or credit at 12% per annum,
applies only in the absence of a stipulation on interest rate, but not when the parties
agreed thereon.

There is no doubt that the decision dated December 9, 1991 had already been
affirmed and had already become final and executory. Thus, in accordance with Sec.
1 of Rule 39 of the 1997 Rules of Civil Procedure, execution shall issue as a matter of
right. It has likewise been ruled that a judgment which has acquired finality becomes
immutable and unalterable and hence may no longer be modified at any respect
except only to correct clerical errors or mistakes (Korean Airlines Co. Ltd. vs. C.A.,
247 SCRA 599). In this respect, the decision deserves to be respected.

"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount
of P50,000.00 as attorney's fees;
"5. All counterclaims are hereby dismissed.

The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the
Usury Law having become legally inexistent with the promulgation by the Central
Bank in 1982 of Circular No. 905, the lender and borrower could agree on any interest

The argument about the modification of the contract or non-participation of defendant

Servando Franco in the proceedings on appeal on the alleged belief that the payment

he made had already absolved him from liability is of no moment. Primarily, the
decision was for him and Leticia Medel to pay the plaintiffs jointly and severally the
amounts stated in the Decision. In other words, the liability of the defendants
thereunder is solidary. Based on this aspect alone, the new defense raised by
defendant Franco is unavailing.

The petitioners submit that the CA erred in ruling that:

I
THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL
TRIAL COURT OF MALOLOS, BULACAN WAS NOT NOVATED BY THE
COMPROMISE AGREEMENT BETWEEN THE PARTIES ON 5 FEBRUARY
1992.

WHEREFORE, in the light of all the foregoing, the Court hereby grants the Motion for
Execution of Judgment.

II

Accordingly, let a writ of execution be issued for implementation by the Deputy Sheriff
of this Court.

THE LIABILITY OF THE PETITIONER TO RESPONDENTS SHOULD BE

BASED ON THE DECEMBER 1991 DECISION OF BRANCH 16 OF THE
REGIONAL TRIAL COURT OF MALOLOS, BULACAN AND NOT ON THE
COMPROMISE AGREEMENT EXECUTED IN 1992.

SO ORDERED.9
On March 8, 2001, the RTC issued the writ of execution. 10
Servando moved for reconsideration,11 but the RTC denied his motion.12
On March 19, 2003, the CA affirmed the RTC through its assailed decision, ruling that
the execution was proper because of Servandos failure to comply with the terms of
13
the compromise agreement, stating:
Petitioner cannot deny the fact that there was no full compliance with the tenor of the
compromise agreement. Private respondents on their part did not disregard the
payments made by the petitioner. They even offered that whatever payments made
by petitioner, it can be deducted from the principal obligation including interest.
However, private respondents posit that the payments made cannot alter, modify or
revoke the decision of the Supreme Court in the instant case.
In the case of Prudence Realty and Development Corporation vs. Court of Appeals,
the Supreme Court ruled that:
"When the terms of the compromise judgment is violated, the aggrieved party must
move for its execution, not its invalidation."
It is clear from the aforementioned jurisprudence that even if there is a compromise
agreement and the terms have been violated, the aggrieved party, such as the private
respondents, has the right to move for the issuance of a writ of execution of the final
judgment subject of the compromise agreement.
Moreover, under the circumstances of this case, petitioner does not stand to suffer
any harm or prejudice for the simple reason that what has been asked by private
respondents to be the subject of a writ of execution is only the balance of petitioners
obligation after deducting the payments made on the basis of the compromise
agreement.

The petitioners insist that the RTC could not validly enforce a judgment based on a
promissory note that had been already novated; that the promissory note had been
impliedly novated when the principal obligation ofP500,000.00 had been fixed
at P750,000.00, and the maturity date had been extended from August 23, 1986 to
February 29, 1992.
In contrast, the respondents aver that the petitioners seek to alter, modify or revoke
the final and executory decision of the Court; that novation did not take place because
there was no complete incompatibility between the promissory note and the
memorandum receipt; that Servandos previous payment would be deducted from the
total liability of the debtors based on the RTCs decision.
Issue
Was there a novation of the August 23, 1986 promissory note when respondent
Veronica Gonzales issued the February 5, 1992 receipt?
Ruling
The petition lacks merits.
I
Novation did not transpire because no
irreconcilable incompatibility existed
between the promissory note and the receipt

WHEREFORE, premises considered, the instant petition is hereby DENIED DUE

COURSE and consequently DISMISSED for lack of merit.

To buttress their claim of novation, the petitioners rely on the receipt issued on
February 5, 1992 by respondent Veronica whereby Servandos obligation was fixed
at P750,000.00. They insist that even the maturity date was extended until February
29, 1992. Such changes, they assert, were incompatible with those of the original
agreement under the promissory note.

SO ORDERED.

The petitioners assertion is wrong.

His motion for reconsideration having been denied,14 Servando appealed. He was
eventually substituted by his heirs, now the petitioners herein, on account of his
intervening death. The substitution was pursuant to the resolution dated June 15,
2005.15
Issue

A novation arises when there is a substitution of an obligation by a subsequent one

that extinguishes the first, either by changing the object or the principal conditions, or
by substituting the person of the debtor, or by subrogating a third person in the rights
16
of the creditor. For a valid novation to take place, there must be, therefore: (a) a
previous valid obligation; (b) an agreement of the parties to make a new contract; (c)
17
an extinguishment of the old contract; and (d) a valid new contract. In short, the new
obligation extinguishes the prior agreement only when the substitution is

unequivocally declared, or the old and the new obligations are incompatible on every
point. A compromise of a final judgment operates as a novation of the judgment
obligation upon compliance with either of these two conditions.18
The receipt dated February 5, 1992, excerpted below, did not create a new obligation
incompatible with the old one under the promissory note, viz:
February 5, 1992
Received from SERVANDO FRANCO BPI Managers Check No. 001700 in the
amount of P400,00.00 as partial payment of loan. Balance of P375,000.00 to be paid
on or before FEBRUARY 29, 1992. In case of default an interest will be charged as
stipulated in the promissory note subject of this case.
(Sgd)
V. Gonzalez19
To be clear, novation is not presumed. This means that the parties to a contract
should expressly agree to abrogate the old contract in favor of a new one. In the
absence of the express agreement, the old and the new obligations must be
incompatible on every point.20 According to California Bus Lines, Inc. v. State
Investment House, Inc.:21

contract that is a mere reiteration, acknowledgment or ratification of the old contract

with slight modifications or alterations as to the cause or object or principal conditions
can stand together with the former one, and there can be no incompatibility between
25
them. Moreover, a creditors acceptance of payment after demand does not operate
26
as a modification of the original contract.
Worth noting is that Servandos liability was joint and solidary with his co-debtors. In a
solidary obligation, the creditor may proceed against any one of the solidary debtors
or some or all of them simultaneously. 27 The choice to determine against whom the
collection is enforced belongs to the creditor until the obligation is fully
satisfied.28Thus, the obligation was being enforced against Servando, who, in order to
escape liability, should have presented evidence to prove that his obligation had
already been cancelled by the new obligation or that another debtor had assumed his
place. In case of change in the person of the debtor, the substitution must be clear
and express,29 and made with the consent of the creditor. 30 Yet, these circumstances
did not obtain herein, proving precisely that Servando remained a solidary debtor
against whom the entire or part of the obligation might be enforced.
Lastly, the extension of the maturity date did not constitute a novation of the previous
agreement. It is settled that an extension of the term or period of the maturity date
does not result in novation.31

The extinguishment of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly.1wphi1 The term
"expressly" means that the contracting parties incontrovertibly disclose that their
object in executing the new contract is to extinguish the old one. Upon the other hand,
no specific form is required for an implied novation, and all that is prescribed by law
would be an incompatibility between the two contracts. While there is really no hard
and fast rule to determine what might constitute to be a sufficient change that can
bring about novation, the touchstone for contrariety, however, would be an
irreconcilable incompatibility between the old and the new obligations.

II

There is incompatibility when the two obligations cannot stand together, each one
having its independent existence. If the two obligations cannot stand together, the
22
latter obligation novates the first. Changes that breed incompatibility must be
essential in nature and not merely accidental. The incompatibility must affect any of
the essential elements of the obligation, such as its object, cause or principal
conditions thereof; otherwise, the change is merely modificatory in nature and
insufficient to extinguish the original obligation.23

The balance of P375,000.00 was premised on the taking place of a novation.

However, as found now, novation did not take place. Accordingly, Servandos
obligation, being solidary, remained to be that decreed in the December 9, 1991
decision of the RTC, inclusive of interests, less the amount of P400,000.00 that was
meanwhile paid by him.

In light of the foregoing, the issuance of the receipt created no new obligation.
Instead, the respondents only thereby recognized the original obligation by stating in
the receipt that the P400,000.00 was "partial payment of loan" and by referring to "the
promissory note subject of the case in imposing the interest." The loan mentioned in
the receipt was still the same loan involving the P500,000.00 extended to Servando.
Advertence to the interest stipulated in the promissory note indicated that the contract
still subsisted, not replaced and extinguished, as the petitioners claim.
The receipt dated February 5, 1992 was only the proof of Servandos payment of his
obligation as confirmed by the decision of the RTC. It did not establish the novation of
his agreement with the respondents. Indeed, the Court has ruled that an obligation to
pay a sum of money is not novated by an instrument that expressly recognizes the
old, or changes only the terms of payment, or adds other obligations not incompatible
24
with the old ones, or the new contract merely supplements the old one. A new

Total liability to be reduced by P400,000.00

The petitioners argue that Servandos remaining liability amounted to
only P375,000.00, the balance indicated in the February 5, 1992 receipt. Accordingly,
the balance was not yet due because the respondents did not yet make a demand for
payment.
The petitioners cannot be upheld.

WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated
on March 19, 2003; ORDERS the Regional Trial Court, Branch 16, in Malolos,
Bulacan to proceed with the execution based on its decision rendered on December
9, 1991, deducting the amount of P400,000.00 already paid by the late Servando
Franco; and DIRECTS the petitioners to pay the costs of suit.
SO ORDERED.

G.R. No. 171750

January 25, 2012

UNITED PULP AND PAPER CO., INC., Petitioner,

vs.
ACROPOLIS CENTRAL GUARANTY CORPORATION, Respondent.
DECISION
MENDOZA, J.:
This is a petition for review under Rule 45 praying for the annulment of the November
17, 2005 Decision1 and the March 2, 2006 Resolution2 of the Court of Appeals (CA) in
CA-G.R. SP No. 89135 entitled Acropolis Central Guaranty Corporation (formerly
known as the Philippine Pryce Assurance Corp.) v. Hon. Oscar B. Pimentel, as
Presiding Judge, RTC of Makati City, Branch 148 (RTC), and United Pulp and Paper
Co., Inc.
The Facts
On May 14, 2002, United Pulp and Paper Co., Inc. (UPPC) filed a civil case for
collection of the amount ofP42,844,353.14 against Unibox Packaging Corporation
(Unibox) and Vicente Ortega (Ortega) before the Regional Trial Court of Makati,
Branch 148 (RTC).3 UPPC also prayed for a Writ of Preliminary Attachment against
the properties of Unibox and Ortega for the reason that the latter were on the verge of
4
insolvency and were transferring assets in fraud of creditors. On August 29, 2002,
5
the RTC issued the Writ of Attachment after UPPC posted a bond in the same
amount of its claim. By virtue of the said writ, several properties and assets of Unibox
6
and Ortega were attached.
On October 10, 2002, Unibox and Ortega filed their Motion for the Discharge of
Attachment,7 praying that they be allowed to file a counter-bond in the amount
of P42,844,353.14 and that the writ of preliminary attachment be discharged after the
filing of such bond. Although this was opposed by UPPC, the RTC, in its Order dated
October 25, 2002, granted the said motion for the discharge of the writ of attachment
subject to the condition that Unibox and Ortega file a counter-bond.8 Thus, on
November 21, 2002, respondent Acropolis Central Guaranty Corporation (Acropolis)
9
issued the Defendants Bond for Dissolution of Attachment in the amount
ofP42,844,353.14 in favor of Unibox.
Not satisfied with the counter-bond issued by Acropolis, UPPC filed its Manifestation
and Motion to Discharge the Counter-Bond10 dated November 27, 2002, claiming that
Acropolis was among those insurance companies whose licenses were set to be
cancelled due to their failure to put up the minimum amount of capitalization required
by law. For that reason, UPPC prayed for the discharge of the counter-bond and the
11
reinstatement of the attachment. In its December 10, 2002 Order, the RTC denied
UPPCs Motion to Discharge Counter-Bond and, instead, approved and admitted the
counter-bond posted by Acropolis. Accordingly, it ordered the sheriff to cause the
lifting of the attachment on the properties of Unibox and Ortega.
On September 29, 2003, Unibox, Ortega and UPPC executed a compromise
12
agreement, wherein Unibox and Ortega acknowledged their obligation to UPPC in
the amount of P35,089,544.00 as of August 31, 2003, inclusive of the principal and
the accrued interest, and bound themselves to pay the said amount in accordance
with a schedule of payments agreed upon by the parties. Consequently, the RTC

promulgated its Judgment

agreement.

13

dated October 2, 2003 approving the compromise

For failure of Unibox and Ortega to pay the required amounts for the months of May
14
and June 2004 despite demand by UPPC, the latter filed its Motion for Execution to
15
satisfy the remaining unpaid balance. In the July 30, 2004 Order, the RTC acted
favorably on the said motion and, on August 4, 2004, it issued the requested Writ of
Execution.16
The sheriff then proceeded to enforce the Writ of Execution. It was discovered,
however, that Unibox had already ceased its business operation and all of its assets
had been foreclosed by its creditor bank. Moreover, the responses of the selected
banks which were served with notices of garnishment indicated that Unibox and
Ortega no longer had funds available for garnishment. The sheriff also proceeded to
the residence of Ortega to serve the writ but he was denied entry to the premises.
Despite his efforts, the sheriff reported in his November 4, 2008 Partial Return17 that
there was no satisfaction of the remaining unpaid balance by Unibox and Ortega.
On the basis of the said return, UPPC filed its Motion to Order Surety to Pay Amount
of Counter-Bond18 directed at Acropolis. On November 30, 2004, the RTC issued its
Order19 granting the motion and ordering Acropolis to comply with the terms of its
counter-bond and pay UPPC the unpaid balance of the judgment in the amount
ofP27,048,568.78 with interest of 12% per annum from default.
Thereafter, on December 13, 2004, Acropolis filed its Manifestation and Very Urgent
20
Motion for Reconsideration, arguing that it could not be made to pay the amount of
the counter-bond because it did not receive a demand for payment from UPPC.
Furthermore, it reasoned that its obligation had been discharged by virtue of the
novation of its obligation pursuant to the compromise agreement executed by UPPC,
Unibox and Ortega. The motion, which was set for hearing on December 17, 2004,
was received by the RTC and UPPC only on December 20, 2004. 21 In the Order
dated February 22, 2005, the RTC denied the motion for reconsideration for lack of
merit and for having been filed three days after the date set for the hearing on the
said motion.22
Aggrieved, Acropolis filed a petition for certiorari before the CA with a prayer for the
23
issuance of a Temporary Restraining Order and Writ of Preliminary Injunction. On
24
November 17, 2005, the CA rendered its Decision granting the petition, reversing the
February 22, 2005 Order of the RTC, and absolving and relieving Acropolis of its
liability to honor and pay the amount of its counter-attachment bond. In arriving at
said disposition, the CA stated that, firstly, Acropolis was able to comply with the
three-day notice rule because the motion it filed was sent by registered mail on
December 13, 2004, four days prior to the hearing set for December 17,
25
2004; secondly, UPPC failed to comply with the following requirements for recovery
of a judgment creditor from the surety on the counter-bond in accordance with
Section 17, Rule 57 of the Rules of Court, to wit: (1) demand made by creditor on the
surety, (2) notice to surety and (3) summary hearing as to his liability for the judgment
under the counter-bond;26 and, thirdly, the failure of UPPC to include Acropolis in the
27
compromise agreement was fatal to its case.
UPPC then filed a motion for reconsideration but it was denied by the CA in its
28
Resolution dated March 1, 2006.
Hence, this petition.

The Issues
For the allowance of its petition, UPPC raises the following
GROUNDS
I.
The Court of Appeals erred in not holding respondent liable on its counter-attachment
bond which it posted before the trial court inasmuch as:
A. The requisites for recovering upon the respondent-surety were clearly complied
with by petitioner and the trial court, inasmuch as prior demand and notice in writing
was made upon respondent, by personal service, of petitioners motion to order
respondent surety to pay the amount of its counter-attachment bond, and a hearing
thereon was held for the purpose of determining the liability of the respondent-surety.
B. The terms of respondents counter-attachment bond are clear, and unequivocally
provide that respondent as surety shall jointly and solidarily bind itself with defendants
to secure and pay any judgment that petitioner may recover in the action. Hence,
such being the terms of the bond, in accordance with fair insurance practices,
respondent cannot, and should not be allowed to, evade its liability to pay on its
counter-attachment bond posted by it before the trial court.
II.
The Court of Appeals erred in holding that the trial court gravely abused its discretion
in denying respondents manifestation and motion for reconsideration considering that
the said motion failed to comply with the three (3)-day notice rule under Section 4,
Rule 15 of the Rules of Court, and that it had lacked substantial merit to warrant a
reversal of the trial courts previous order. 29
Simply put, the issues to be dealt with in this case are as follows:
(1) Whether UPPC failed to make the required demand and notice upon Acropolis;
and
(2) Whether the execution of the compromise agreement between UPPC and Unibox
and Ortega was tantamount to a novation which had the effect of releasing Acropolis
from its obligation under the counter-attachment bond.
The Courts Ruling
UPPC complied with the twin requirements of notice and demand
On the recovery upon the counter-bond, the Court finds merit in the arguments of the
petitioner.
UPPC argues that it complied with the requirement of demanding payment from
Acropolis by notifying it, in writing and by personal service, of the hearing held on
UPPCs Motion to Order Respondent-Surety to Pay the Bond.30Moreover, it points out
that the terms of the counter-attachment bond are clear in that Acropolis, as surety,
shall jointly and solidarily bind itself with Unibox and Ortega to secure the payment of
any judgment that UPPC may recover in the action. 31
Section 17, Rule 57 of the Rules of Court sets forth the procedure for the recovery
from a surety on a counter-bond:

Sec. 17. Recovery upon the counter-bond. When the judgment has become
executory, the surety or sureties on any counter-bond given pursuant to the
provisions of this Rule to secure the payment of the judgment shall become charged
on such counter-bond and bound to pay the judgment obligee upon demand the
amount due under the judgment, which amount may be recovered from such surety
or sureties after notice and summary hearing on the same action.
From a reading of the abovequoted provision, it is evident that a surety on a counterbond given to secure the payment of a judgment becomes liable for the payment of
the amount due upon: (1) demand made upon the surety; and (2) notice and
summary hearing on the same action. After a careful scrutiny of the records of the
case, the Court is of the view that UPPC indeed complied with these twin
requirements.
This Court has consistently held that the filing of a complaint constitutes a judicial
demand.32 Accordingly, the filing by UPPC of the Motion to Order Surety to Pay
Amount of Counter-Bond was already a demand upon Acropolis, as surety, for the
payment of the amount due, pursuant to the terms of the bond. In said bond,
Acropolis bound itself in the sum of P 42,844,353.14 to secure the payment of any
judgment that UPPC might recover against Unibox and Ortega. 33
Furthermore, an examination of the records reveals that the motion was filed by
UPPC on November 11, 2004 and was set for hearing on November 19,
34
2004. Acropolis was duly notified of the hearing and it was personally served a copy
35
of the motion on November 11, 2004, contrary to its claim that it did not receive a
copy of the motion.
On November 19, 2004, the case was reset for hearing on November 30, 2004. The
minutes of the hearing on both dates show that only the counsel for UPPC was
present. Thus, Acropolis was given the opportunity to defend itself. That it chose to
ignore its day in court is no longer the fault of the RTC and of UPPC. It cannot now
invoke the alleged lack of notice and hearing when, undeniably, both requirements
were met by UPPC.
No novation despite compromise agreement; Acropolis still liable under the terms of
the counter-bond
UPPC argues that the undertaking of Acropolis is to secure any judgment rendered
by the RTC in its favor. It points out that because of the posting of the counter-bond
by Acropolis and the dissolution of the writ of preliminary attachment against Unibox
and Ortega, UPPC lost its security against the latter two who had gone bankrupt. 36 It
cites the cases of Guerrero v. Court of Appeals37 and Martinez v. Cavives38 to support
its position that the execution of a compromise agreement between the parties and
the subsequent rendition of a judgment based on the said compromise agreement
39
does not release the surety from its obligation nor does it novate the obligation.
Acropolis, on the other hand, contends that it was not a party to the compromise
agreement. Neither was it aware of the execution of such an agreement which
contains an acknowledgment of liability on the part of Unibox and Ortega that was
prejudicial to it as the surety. Accordingly, it cannot be bound by the judgment issued
40
based on the said agreement. Acropolis also questions the applicability
of Guerrero and draws attention to the fact that in said case, the compromise
agreement specifically stipulated that the surety shall continue to be liable, unlike in
the case at bench where the compromise agreement made no mention of its
obligation to UPPC.41

On this issue, the Court finds for UPPC also.

The terms of the Bond for Dissolution of Attachment issued by Unibox and Acropolis
in favor of UPPC are clear and leave no room for ambiguity:

by the judge"; that upon the filing of the counterbond "the property attached ... shall
be delivered to the party making the deposit or giving the counterbond, or the person
appearing on his behalf, the deposit or counterbond aforesaid standing in place of the
property so released."

WHEREAS, the Honorable Court in the above-entitled case issued on _____ an

Order dissolving / lifting partially the writ of attachment levied upon the defendant/s
personal property, upon the filing of a counterbond by the defendants in the sun of
PESOS FORTY TWO MILLION EIGHT HUNDRED FORTY FOUR THOUSAND
THREE HUNDRED FIFTY THREE AND 14/100 ONLY (P 42,844,353.14) Philippine
Currency.

The italicized expressions constitute the key to the entire problem. Whether the
judgment be rendered after trial on the merits or upon compromise, such judgment
undoubtedly may be made effective upon the property released; and since the
counterbond merely stands in the place of such property, there is no reason why the
judgment should not be made effective against the counterbond regardless of the
manner how the judgment was obtained.

NOW, THEREFORE, we UNIBOX PACKAGING CORP. as Principal and PHILIPPINE

PRYCE ASSURANCE CORP., a corporation duly organized and existing under and
by virtue of the laws of the Philippines, as Surety, in consideration of the
dissolution of said attachment, hereby jointly and severally bind ourselves in
the sum of FORTY TWO MILLION EIGHT HUNDRED FORTY FOUR THOUSAND
THREE HUNDRED FIFTY THREE AND 14/100 ONLY (P 42,844,353.14) Philippine
Currency, in favor of the plaintiff to secure the payment ofany judgment that the
plaintiff may recover against the defendants in this action.42 [Emphasis and
underscoring supplied]

xxx

Based on the foregoing, Acropolis voluntarily bound itself with Unibox to be solidarily
liable to answer for ANY judgment which UPPC may recover from Unibox in its civil
case for collection. Its counter-bond was issued in consideration of the dissolution of
the writ of attachment on the properties of Unibox and Ortega. The counter-bond then
replaced the properties to ensure recovery by UPPC from Unibox and Ortega. It
would be the height of injustice to allow Acropolis to evade its obligation to UPPC,
especially after the latter has already secured a favorable judgment.
43

This issue is not novel. In the case of Luzon Steel Corporation v. Sia, Luzon Steel
Corporation sued Metal Manufacturing of the Philippines and Jose Sia for breach of
contract and damages. A writ of preliminary attachment was issued against the
properties of the defendants therein but the attachment was lifted upon the filing of a
counter-bond issued by Sia, as principal, and Times Surety & Insurance Co., as
surety. Later, the plaintiff and the defendants entered into a compromise agreement
whereby Sia agreed to settle the plaintiffs claim. The lower court rendered a
judgment in accordance with the terms of the compromise. Because the defendants
failed to comply with the same, the plaintiff obtained a writ of execution against Sia
and the surety on the counter-bond. The surety moved to quash the writ of execution
on the ground that it was not a party to the compromise and that the writ was issued
without giving the surety notice and hearing. Thus, the court set aside the writ of
execution and cancelled the counter-bond. On appeal, this Court, speaking through
the learned Justice J.B.L. Reyes, discussed the nature of the liability of a surety on a
counter-bond:

As declared by us in Mercado v. Macapayag, 69 Phil. 403, 405-406, in passing upon

the liability of counter sureties in replevin who bound themselves to answer solidarily
for the obligations of the defendants to the plaintiffs in a fixed amount of P 912.04, to
secure payment of the amount that said plaintiff be adjudged to recover from the
defendants,
the liability of the sureties was fixed and conditioned on the finality of the judgment
rendered regardless of whether the decision was based on the consent of the parties
or on the merits. A judgment entered on a stipulation is nonetheless a judgment of the
court because consented to by the parties.44
[Emphases and underscoring supplied]
The argument of Acropolis that its obligation under the counter-bond was novated by
the compromise agreement is, thus, untenable. In order for novation to extinguish its
obligation, Acropolis must be able to show that there is an incompatibility between the
compromise agreement and the terms of the counter-bond, as required by Article
1292 of the Civil Code, which provides that:
Art. 1292. In order that an obligation may be extinguished by another which substitute
the same, it is imperative that it be so declared in unequivocal terms, or that the old
and the new obligations be on every point incompatible with each other. (1204)
Nothing in the compromise agreement indicates, or even hints at, releasing Acropolis
from its obligation to pay UPPC after the latter has obtained a favorable judgment.
Clearly, there is no incompatibility between the compromise agreement and the
counter-bond. Neither can novation be presumed in this case. As explained inDugo
v. Lopena:45
Novation by presumption has never been favored. To be sustained, it need be
established that the old and new contracts are incompatible in all points, or that the
will to novate appears by express agreement of the parties or in acts of similar
import.46

Main issues posed are (1) whether the judgment upon the compromise discharged
the surety from its obligation under its attachment counterbond and (2) whether the
writ of execution could be issued against the surety without previous exhaustion of
the debtor's properties.

All things considered, Acropolis, as surety under the terms of the counter-bond it
issued, should be held liable for the payment of the unpaid balance due to UPPC.

Both questions can be solved by bearing in mind that we are dealing with a
counterbond filed to discharge a levy on attachment. Rule 57, section 12, specifies
that an attachment may be discharged upon the making of a cash deposit or filing a
counterbond "in an amount equal to the value of the property attached as determined

Although this issue has been obviated by our disposition of the two main issues, the
Court would like to point out that the three-day notice requirement is not a hard and
fast rule and substantial compliance is allowed.

Three-day notice rule, not a hard and fast rule

Pertinently, Section 4, Rule 15 of the Rules of Court reads:

Sec. 4. Hearing of motion. Except for motions which the court may act upon without
prejudicing the rights of the adverse party, every written motion shall be set for
hearing by the applicant.
Every written motion required to be heard and the notice of the hearing thereof shall
be served in such a manner as to insure its receipt by the other party at least
three (3) days before the date of hearing, unless the court for good cause sets the
hearing on shorter notice. [Emphasis supplied]1wphi1
The law is clear that it intends for the other party to receive a copy of the written
motion at least three days before the date set for its hearing. The purpose of the three
(3)-day notice requirement, which was established not for the benefit of the movant
but rather for the adverse party, is to avoid surprises upon the latter and to grant it
sufficient time to study the motion and to enable it to meet the arguments interposed
therein.47 In Preysler, Jr. v. Manila Southcoast Development Corporation, 48 the Court
restated the ruling that "the date of the hearing should be at least three days after
receipt of the notice of hearing by the other parties."
It is not, however, a hard and fast rule. Where a party has been given the opportunity
to be heard, the time to study the motion and oppose it, there is compliance with the
rule. This was the ruling in the case of Jehan Shipping Corporation v. National Food
Authority,49 where it was written:
Purpose Behind the
Notice Requirement
This Court has indeed held time and time again that, under Sections 4 and 5 of Rule
15 of the Rules of Court, mandatory is the notice requirement in a motion, which is
rendered defective by failure to comply with the requirement. As a rule, a motion
without a notice of hearing is considered pro forma and does not affect the
reglementary period for the appeal or the filing of the requisite pleading.
As an integral component of procedural due process, the three-day notice required by
the Rules is not intended for the benefit of the movant. Rather, the requirement is for
the purpose of avoiding surprises that may be sprung upon the adverse party, who
must be given time to study and meet the arguments in the motion before a resolution
by the court. Principles of natural justice demand that the right of a party should not
be affected without giving it an opportunity to be heard.
The test is the presence of the opportunity to be heard, as well as to have time
to study the motion and meaningfully oppose or controvert the grounds upon
which it is based. Considering the circumstances of the present case, we believe
that the requirements of procedural due process were substantially complied with,
and that the compliance justified a departure from a literal application of the rule on
notice of hearing.50[Emphasis supplied]
In the case at bench, the RTC gave UPPC sufficient time to file its comment on the
motion. On January 14, 2005, UPPC filed its Opposition to the motion, discussing the
issues raised by Acropolis in its motion. Thus, UPPCs right to due process was not
violated because it was afforded the chance to argue its position.
WHEREFORE, the petition is GRANTED. The November 17, 2005 Decision and the
March 1, 2006 Resolution of the Court of Appeals, in CA-G.R. SP No. 89135, are
hereby REVERSED and SET ASIDE. The November 30, 2004 Order of the Regional

Trial Court, Branch 148, Makati City, ordering Acropolis to comply with the terms of its
counter-bond and pay UPPC the unpaid balance of the judgment in the amount
of P27,048,568.78 with interest of 12% per annum from default is REINSTATED.

G.R. No. 190755

November 24, 2010

LAND BANK OF THE PHILIPPINES, Petitioner,

vs.
ALFREDO ONG, Respondent.
DECISION
VELASCO, JR., J.:
This is an appeal from the October 20, 2009 Decision of the Court of Appeals (CA) in
CA-G.R. CR-CV No. 84445 entitled Alfredo Ong v. Land Bank of the Philippines,
which affirmed the Decision of the Regional Trial Court (RTC), Branch 17 in Tabaco
City.
The Facts
On March 18, 1996, spouses Johnson and Evangeline Sy secured a loan from Land
Bank Legazpi City in the amount of PhP 16 million. The loan was secured by three (3)
residential lots, five (5) cargo trucks, and a warehouse. Under the loan agreement,
PhP 6 million of the loan would be short-term and would mature on February 28,
1997, while the balance of PhP 10 million would be payable in seven (7) years. The
Notice of Loan Approval dated February 22, 1996 contained an acceleration clause
wherein any default in payment of amortizations or other charges would accelerate
1
the maturity of the loan.
Subsequently, however, the Spouses Sy found they could no longer pay their loan.
On December 9, 1996, they sold three (3) of their mortgaged parcels of land for PhP
150,000 to Angelina Gloria Ong, Evangelines mother, under a Deed of Sale with
Assumption of Mortgage. The relevant portion of the document 2 is quoted as follows:
WHEREAS, we are no longer in a position to settle our obligation with the bank;
NOW THEREFORE, for and in consideration of the sum of ONE HUNDRED FIFTY
THOUSAND PESOS (P150,000.00) Philippine Currency, we hereby these presents
SELL, CEDE, TRANSFER and CONVEY, by way of sale unto ANGELINA GLORIA
ONG, also of legal age, Filipino citizen, married to Alfredo Ong, and also a resident of
Tabaco, Albay, Philippines, their heirs and assigns, the above-mentioned debt with
the said LAND BANK OF THE PHILIPPINES, and by reason hereof they can make
the necessary representation with the bank for the proper restructuring of the loan
with the said bank in their favor;
That as soon as our obligation has been duly settled, the bank is authorized to
release the mortgage in favor of the vendees and for this purpose VENDEES can
register this instrument with the Register of Deeds for the issuance of the titles
already in their names.

Evangelines father, petitioner Alfredo Ong, later went to Land Bank to inform it about
the sale and assumption of mortgage.3 Atty. Edna Hingco, the Legazpi City Land
Bank Branch Head, told Alfredo and his counsel Atty. Ireneo de Lumen that there was
nothing wrong with the agreement with the Spouses Sy but provided them with
requirements for the assumption of mortgage. They were also told that Alfredo should
pay part of the principal which was computed at PhP 750,000 and to update due or
accrued interests on the promissory notes so that Atty. Hingco could easily approve
the assumption of mortgage. Two weeks later, Alfredo issued a check for PhP
750,000 and personally gave it to Atty. Hingco. A receipt was issued for his payment.
He also submitted the other documents required by Land Bank, such as financial
statements for 1994 and 1995. Atty. Hingco then informed Alfredo that the certificate
of title of the Spouses Sy would be transferred in his name but this never
materialized. No notice of transfer was sent to him. 4
Alfredo later found out that his application for assumption of mortgage was not
approved by Land Bank. The bank learned from its credit investigation report that the
Ongs had a real estate mortgage in the amount of PhP 18,300,000 with another bank
that was past due. Alfredo claimed that this was fully paid later on. Nonetheless, Land
Bank foreclosed the mortgage of the Spouses Sy after several months. Alfredo only
learned of the foreclosure when he saw the subject mortgage properties included in a
Notice of Foreclosure of Mortgage and Auction Sale at the RTC in Tabaco, Albay.
Alfredos other counsel, Atty. Madrilejos, subsequently talked to Land Banks lawyer
5
and was told that the PhP 750,000 he paid would be returned to him.
On December 12, 1997, Alfredo initiated an action for recovery of sum of money with
damages against Land Bank in Civil Case No. T-1941, as Alfredos payment was not
returned by Land Bank. Alfredo maintained that Land Banks foreclosure without
informing him of the denial of his assumption of the mortgage was done in bad faith.
He argued that he was lured into believing that his payment of PhP 750,000 would
cause Land Bank to approve his assumption of the loan of the Spouses Sy and the
transfer of the mortgaged properties in his and his wifes name. 6 He also claimed
incurring expenses for attorneys fees of PhP 150,000, filing fee of PhP 15,000, and
PhP 250,000 in moral damages.7
Testifying for Land Bank, Atty. Hingco claimed during trial that as branch manager
she had no authority to approve loans and could not assure anybody that their
assumption of mortgage would be approved. She testified that the breakdown of
Alfredos payment was as follows:
PhP 101,409.59 applied to principal

216,246.56

accrued interests receivable

396,571.77

interests

18,766.10

penalties

IN WITNESS WHEREOF, we have hereunto affixed our signatures this 9th day of
December 1996 at Tabaco, Albay, Philippines.
(signed)
(signed)
EVANGELINE O. SY JOHNSON B. SY
Vendor
Vendor

16,805.98

accounts receivable

---------------Total: 750,000.00
According to Atty. Hingco, the bank processes an assumption of mortgage as a new
loan, since the new borrower is considered a new client. They used character,
capacity, capital, collateral, and conditions in determining who can qualify to assume
a loan. Alfredos proposal to assume the loan, she explained, was referred to a
separate office, the Lending Center. 8
During cross-examination, Atty. Hingco testified that several months after Alfredo
made the tender of payment, she received word that the Lending Center rejected
Alfredos loan application. She stated that it was the Lending Center and not her that
should have informed Alfredo about the denial of his and his wifes assumption of
mortgage. She added that although she told Alfredo that the agreement between the
spouses Sy and Alfredo was valid between them and that the bank would accept
payments from him, Alfredo did not pay any further amount so the foreclosure of the
loan collaterals ensued. She admitted that Alfredo demanded the return of the PhP
750,000 but said that there was no written demand before the case against the bank
was filed in court. She said that Alfredo had made the payment of PhP 750,000 even
before he applied for the assumption of mortgage and that the bank received the said
amount because the subject account was past due and demandable; and the Deed of
Assumption of Mortgage was not used as the basis for the payment. 9
The Ruling of the Trial Court
The RTC held that the contract approving the assumption of mortgage was not
perfected as a result of the credit investigation conducted on Alfredo. It noted that
Alfredo was not even informed of the disapproval of the assumption of mortgage but
was just told that the accounts of the spouses Sy had matured and gone unpaid. It
ruled that under the principle of equity and justice, the bank should return the amount
Alfredo had paid with interest at 12% per annum computed from the filing of the
complaint. The RTC further held that Alfredo was entitled to attorneys fees and
litigation expenses for being compelled to litigate. 10
The dispositive portion of the RTC Decision reads:
WHEREFORE, premises considered, a decision is rendered, ordering defendant
bank to pay plaintiff, Alfredo Ong the amount of P750,000.00 with interest at 12% per
annum computed from Dec. 12, 1997 and attorneys fees and litigation expenses of
P50,000.00.
Costs against defendant bank.
SO ORDERED.11
The Ruling of the Appellate Court
On appeal, Land Bank faulted the trial court for (1) holding that the payment of PhP
750,000 made by Ong was one of the requirements for the approval of his proposal to
assume the mortgage of the Sy spouses; (2) erroneously ordering Land Bank to
return the amount of PhP 750,000 to Ong on the ground of its failure to effect

novation; and (3) erroneously affirming the award of PhP 50,000 to Ong as attorneys
fees and litigation expenses.
The CA affirmed the RTC Decision.12 It held that Alfredos recourse is not against the
Sy spouses. According to the appellate court, the payment of PhP 750,000 was for
the approval of his assumption of mortgage and not for payment of arrears incurred
by the Sy spouses. As such, it ruled that it would be incorrect to consider Alfredo a
third person with no interest in the fulfillment of the obligation under Article 1236 of
the Civil Code. Although Land Bank was not bound by the Deed between Alfredo and
the Spouses Sy, the appellate court found that Alfredo and Land Banks active
preparations for Alfredos assumption of mortgage essentially novated the agreement.
On January 5, 2010, the CA denied Land Banks motion for reconsideration for lack of
merit. Hence, Land Bank appealed to us.
The Issues
I
Whether the Court of Appeals erred in holding that Art. 1236 of the Civil
Code does not apply and in finding that there is no novation.
II
Whether the Court of Appeals misconstrued the evidence and the law when
it affirmed the trial court decisions ordering Land Bank to pay Ong the
amount of Php750,000.00 with interest at 12% annum.
III
Whether the Court of Appeals committed reversible error when it affirmed
the award of Php50,000.00 to Ong as attorneys fees and expenses of
litigation.
The Ruling of this Court
We affirm with modification the appealed decision.
Recourse is against Land Bank
Land Bank contends that Art. 1236 of the Civil Code backs their claim that Alfredo
should have sought recourse against the Spouses Sy instead of Land Bank. Art. 1236
provides:
The creditor is not bound to accept payment or performance by a third person who
has no interest in the fulfillment of the obligation, unless there is a stipulation to the
contrary.
Whoever pays for another may demand from the debtor what he has paid, except that
if he paid without the knowledge or against the will of the debtor, he can recover only
insofar as the payment has been beneficial to the debtor.1avvphi1
We agree with Land Bank on this point as to the first part of paragraph 1 of Art. 1236.
Land Bank was not bound to accept Alfredos payment, since as far as the former
was concerned, he did not have an interest in the payment of the loan of the Spouses
Sy. However, in the context of the second part of said paragraph, Alfredo was not
making payment to fulfill the obligation of the Spouses Sy. Alfredo made a conditional
payment so that the properties subject of the Deed of Sale with Assumption of

Mortgage would be titled in his name. It is clear from the records that Land Bank
required Alfredo to make payment before his assumption of mortgage would be
approved. He was informed that the certificate of title would be transferred
accordingly. He, thus, made payment not as a debtor but as a prospective mortgagor.
But the trial court stated:
[T]he contract was not perfected or consummated because of the adverse finding in
the credit investigation which led to the disapproval of the proposed assumption.
There was no evidence presented that plaintiff was informed of the disapproval. What
he received was a letter dated May 22, 1997 informing him that the account of
spouses Sy had matured but there [were] no payments. This was sent even before
the conduct of the credit investigation on June 20, 1997 which led to the disapproval
of the proposed assumption of the loans of spouses Sy.13
Alfredo, as a third person, did not, therefore, have an interest in the fulfillment of the
obligation of the Spouses Sy, since his interest hinged on Land Banks approval of his
application, which was denied. The circumstances of the instant case show that the
second paragraph of Art. 1236 does not apply. As Alfredo made the payment for his
own interest and not on behalf of the Spouses Sy, recourse is not against the latter.
And as Alfredo was not paying for another, he cannot demand from the debtors, the
Spouses Sy, what he has paid.
Novation of the loan agreement
Land Bank also faults the CA for finding that novation applies to the instant case. It
reasons that a substitution of debtors was made without its consent; thus, it was not
bound to recognize the substitution under the rules on novation.
On the matter of novation, Spouses Benjamin and Agrifina Lim v. M.B. Finance
Corporation14 provides the following discussion:
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive
when an old obligation is terminated by the creation of a new obligation that takes the
place of the former; it is merely modificatory when the old obligation subsists to the
extent it remains compatible with the amendatory agreement. An extinctive novation
results either by changing the object or principal conditions (objective or real), or by
substituting the person of the debtor or subrogating a third person in the rights of the
creditor (subjective or personal). Under this mode, novation would have dual
functions one to extinguish an existing obligation, the other to substitute a new one
in its place requiring a conflux of four essential requisites: (1) a previous valid
obligation; (2) an agreement of all parties concerned to a new contract; (3) the
extinguishment of the old obligation; and (4) the birth of a valid new obligation. x x x
In order that an obligation may be extinguished by another which substitutes the
same, it is imperative that it be so declared in unequivocal terms, or that the old and
the new obligations be on every point incompatible with each other. The test of
incompatibility is whether or not the two obligations can stand together, each one
having its independent existence. x x x (Emphasis supplied.)
Furthermore, Art. 1293 of the Civil Code states:
Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237.

We do not agree, then, with the CA in holding that there was a novation in the
contract between the parties. Not all the elements of novation were present. Novation
must be expressly consented to. Moreover, the conflicting intention and acts of the
parties underscore the absence of any express disclosure or circumstances with
which to deduce a clear and unequivocal intent by the parties to novate the old
15
agreement. Land Bank is thus correct when it argues that there was no novation in
the following:
[W]hether or not Alfredo Ong has an interest in the obligation and payment was made
with the knowledge or consent of Spouses Sy, he may still pay the obligation for the
reason that even before he paid the amount of P750,000.00 on January 31, 1997, the
substitution of debtors was already perfected by and between Spouses Sy and
Spouses Ong as evidenced by a Deed of Sale with Assumption of Mortgage executed
by them on December 9, 1996. And since the substitution of debtors was made
without the consent of Land Bank a requirement which is indispensable in order to
effect a novation of the obligation, it is therefore not bound to recognize the
substitution of debtors. Land Bank did not intervene in the contract between Spouses
Sy and Spouses Ong and did not expressly give its consent to this substitution. 16
Unjust enrichment
Land Bank maintains that the trial court erroneously applied the principle of equity
and justice in ordering it to return the PhP 750,000 paid by Alfredo. Alfredo was
allegedly in bad faith and in estoppel. Land Bank contends that it enjoyed the
presumption of regularity and was in good faith when it accepted Alfredos tender of
PhP 750,000. It reasons that it did not unduly enrich itself at Alfredos expense during
the foreclosure of the mortgaged properties, since it tendered its bid by subtracting
PhP 750,000 from the Spouses Sys outstanding loan obligation. Alfredos recourse
then, according to Land Bank, is to have his payment reimbursed by the Spouses Sy.
We rule that Land Bank is still liable for the return of the PhP 750,000 based on the
principle of unjust enrichment. Land Bank is correct in arguing that it has no obligation
as creditor to recognize Alfredo as a person with interest in the fulfillment of the
obligation. But while Land Bank is not bound to accept the substitution of debtors in
the subject real estate mortgage, it is estopped by its action of accepting Alfredos
payment from arguing that it does not have to recognize Alfredo as the new debtor.
The elements of estoppel are:
First, the actor who usually must have knowledge, notice or suspicion of the true
facts, communicates something to another in a misleading way, either by words,
conduct or silence; second, the other in fact relies, and relies reasonably or justifiably,
upon that communication; third, the other would be harmed materially if the actor is
later permitted to assert any claim inconsistent with his earlier conduct; and fourth,
the actor knows, expects or foresees that the other would act upon the information
given or that a reasonable person in the actors position would expect or foresee such
action.17
By accepting Alfredos payment and keeping silent on the status of Alfredos
application, Land Bank misled Alfredo to believe that he had for all intents and
purposes stepped into the shoes of the Spouses Sy.
The defense of Land Bank Legazpi City Branch Manager Atty. Hingco that it was the
banks Lending Center that should have notified Alfredo of his assumption of
mortgage disapproval is unavailing. The Lending Centers lack of notice of
disapproval, the Tabaco Branchs silence on the disapproval, and the banks

subsequent actions show a failure of the bank as a whole, first, to notify Alfredo that
he is not a recognized debtor in the eyes of the bank; and second, to apprise him of
how and when he could collect on the payment that the bank no longer had a right to
keep.
We turn then on the principle upon which Land Bank must return Alfredos payment.
Unjust enrichment exists "when a person unjustly retains a benefit to the loss of
another, or when a person retains money or property of another against the
fundamental principles of justice, equity and good conscience."18 There is unjust
enrichment under Art. 22 of the Civil Code when (1) a person is unjustly benefited,
and (2) such benefit is derived at the expense of or with damages to another. 19
Additionally, unjust enrichment has been applied to actions called accion in rem
verso. In order that the accion in rem verso may prosper, the following conditions
must concur: (1) that the defendant has been enriched; (2) that the plaintiff has
suffered a loss; (3) that the enrichment of the defendant is without just or legal
ground; and (4) that the plaintiff has no other action based on contract, quasi20
contract, crime, or quasi-delict. The principle of unjust enrichment essentially
contemplates payment when there is no duty to pay, and the person who receives the
payment has no right to receive it. 21
The principle applies to the parties in the instant case, as, Alfredo, having been
deemed disqualified from assuming the loan, had no duty to pay petitioner bank and
the latter had no right to receive it.
Moreover, the Civil Code likewise requires under Art. 19 that "[e]very person must, in
the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith." Land Bank, however, did not
even bother to inform Alfredo that it was no longer approving his assumption of the
Spouses Sys mortgage. Yet it acknowledged his interest in the loan when the branch
head of the bank wrote to tell him that his daughters loan had not been paid.22 Land
Bank made Alfredo believe that with the payment of PhP 750,000, he would be able
to assume the mortgage of the Spouses Sy. The act of receiving payment without
returning it when demanded is contrary to the adage of giving someone what is due to
him. The outcome of the application would have been different had Land Bank first
conducted the credit investigation before accepting Alfredos payment. He would have
been notified that his assumption of mortgage had been disapproved; and he would
not have taken the futile action of paying PhP 750,000. The procedure Land Bank
took in acting on Alfredos application cannot be said to have been fair and proper.
As to the claim that the trial court erred in applying equity to Alfredos case, we hold
that Alfredo had no other remedy to recover from Land Bank and the lower court
properly exercised its equity jurisdiction in resolving the collection suit. As we have
held in one case:
Equity, as the complement of legal jurisdiction, seeks to reach and complete justice
where courts of law, through the inflexibility of their rules and want of power to adapt
their judgments to the special circumstances of cases, are incompetent to do so.
Equity regards the spirit and not the letter, the intent and not the form, the substance
23
rather than the circumstance, as it is variously expressed by different courts.
Another claim made by Land Bank is the presumption of regularity it enjoys and that it
was in good faith when it accepted Alfredos tender of PhP 750,000.

The defense of good faith fails to convince given Land Banks actions. Alfredo was
not treated as a mere prospective borrower. After he had paid PhP 750,000, he was
made to sign bank documents including a promissory note and real estate mortgage.
He was assured by Atty. Hingco that the titles to the properties covered by the
Spouses Sys real estate mortgage would be transferred in his name, and upon
payment of the PhP 750,000, the account would be considered current and renewed
in his name.24
Land Bank posits as a defense that it did not unduly enrich itself at Alfredos expense
during the foreclosure of the mortgaged properties, since it tendered its bid by
subtracting PhP 750,000 from the Spouses Sys outstanding loan obligation. It is
observed that this is the first time Land Bank is revealing this defense. However,
issues, arguments, theories, and causes not raised below may no longer be posed on
appeal.25 Land Banks contention, thus, cannot be entertained at this point.1avvphi1
Land Bank further questions the lower courts decision on the basis of the
inconsistencies made by Alfredo on the witness stand. It argues that Alfredo was not
a credible witness and his testimony failed to overcome the presumption of regularity
in the performance of regular duties on the part of Land Bank.
This claim, however, touches on factual findings by the trial court, and we defer to
these findings of the trial court as sustained by the appellate court. These are
generally binding on us. While there are exceptions to this rule, Land Bank has not
26
satisfactorily shown that any of them is applicable to this issue. Hence, the rule that
the trial court is in a unique position to observe the demeanor of witnesses should be
applied and respected27 in the instant case.
In sum, we hold that Land Bank may not keep the PhP 750,000 paid by Alfredo as it
had already foreclosed on the mortgaged lands.
Interest and attorneys fees
As to the applicable interest rate, we reiterate the guidelines found in Eastern
Shipping Lines, Inc. v. Court of Appeals:28
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum
of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except when
or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so

reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
No evidence was presented by Alfredo that he had sent a written demand to Land
Bank before he filed the collection suit. Only the verbal agreement between the
lawyers of the parties on the return of the payment was mentioned. 29 Consequently,
the obligation of Land Bank to return the payment made by Alfredo upon the formers
denial of the latters application for assumption of mortgage must be reckoned from
the date of judicial demand on December 12, 1997, as correctly determined by the
trial court and affirmed by the appellate court.
The next question is the propriety of the imposition of interest and the proper
imposable rate of applicable interest. The RTC granted the rate of 12% per annum
which was affirmed by the CA. From the above-quoted guidelines, however, the
proper imposable interest rate is 6% per annum pursuant to Art. 2209 of the Civil
Code.Sunga-Chan v. Court of Appeals is illuminating in this regard:
In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum
under Central Bank (CB) Circular No. 416 shall be adjudged only in cases involving
the loan or forbearance of money. And for transactions involving payment of
indemnities in the concept of damages arising from default in the performance
of obligations in general and/or for money judgment not involving a loan or
forbearance of money, goods, or credit, the governing provision is Art. 2209 of the
Civil Code prescribing a yearly 6% interest. Art. 2209 pertinently provides:
Art. 2209. 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.
The term "forbearance," within the context of usury law, has been described as a
contractual obligation of a lender or creditor to refrain, during a given period of time,
from requiring the borrower or debtor to repay the loan or debt then due and payable.
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if
proper, and the applicable rate, as follows: The 12% per annum rate under CB
Circular No. 416 shall apply only to loans or forbearance of money, goods, or credits,
as well as to judgments involving such loan or forbearance of money, goods, or
credit, while the6% per annum under Art. 2209 of the Civil Code applies "when
the transaction involves the payment of indemnities in the concept of damage
arising from the breach or a delay in the performance of obligations in
general," with the application of both rates reckoned "from the time the complaint
was filed until the [adjudged] amount is fully paid." In either instance, the reckoning
period for the commencement of the running of the legal interest shall be subject to
the condition "that the courts are vested with discretion, depending on the equities of
each case, on the award of interest."30 (Emphasis supplied.)

Based on our ruling above, forbearance of money refers to the contractual obligation
of the lender or creditor to desist for a fixed period from requiring the borrower or
debtor to repay the loan or debt then due and for which 12% per annum is imposed
as interest in the absence of a stipulated rate. In the instant case, Alfredos
conditional payment to Land Bank does not constitute forbearance of money, since
there was no agreement or obligation for Alfredo to pay Land Bank the amount of
PhP 750,000, and the obligation of Land Bank to return what Alfredo has conditionally
paid is still in dispute and has not yet been determined. Thus, it cannot be said that
Land Banks alleged obligation has become a forbearance of money.
On the award of attorneys fees, attorneys fees and expenses of litigation were
awarded because Alfredo was compelled to litigate due to the unjust refusal of Land
Bank to refund the amount he paid. There are instances when it is just and equitable
to award attorneys fees and expenses of litigation. 31 Art. 2208 of the Civil Code
pertinently states:
In the absence of stipulation, attorneys fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:
xxxx
(2) When the defendants act or omission has compelled the plaintiff to litigate with
third persons or to incur expenses to protect his interest.
Given that Alfredo was indeed compelled to litigate against Land Bank and incur
expenses to protect his interest, we find that the award falls under the exception
above and is, thus, proper given the circumstances.
On a final note. The instant case would not have been litigated had Land Bank been
more circumspect in dealing with Alfredo. The bank chose to accept payment from
Alfredo even before a credit investigation was underway, a procedure worsened by
the failure to even inform him of his credit standings impact on his assumption of
mortgage. It was, therefore, negligent to a certain degree in handling the transaction
with Alfredo. It should be remembered that the business of a bank is affected with
public interest and it should observe a higher standard of diligence when dealing with
the public.32
WHEREFORE, the appeal is DENIED. The CA Decision in CA-G.R. CR-CV No.
84445 is AFFIRMED with MODIFICATION in that the amount of PhP 750,000 will
earn interest at 6% per annum reckoned from December 12, 1997, and the total
aggregate monetary awards will in turn earn 12% per annum from the finality of this
Decision until fully paid.
SO ORDERED.

G.R. No. 165548

June 13, 2011

PHILIPPINE REALTY AND HOLDINGS CORPORATION, Petitioner,

vs.
LEY CONSTRUCTION AND DEVELOPMENT CORPORATION, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 167879
LEY CONSTRUCTION AND DEVELOPMENT CORPORATION, Petitioner,
vs.
PHILIPPINE REALTY AND HOLDINGS CORPORATION, Respondent.
DECISION
SERENO, J.:
These are consolidated petitions for review under Rule 45 of the New Rules of Civil
Procedure filed by both parties from a Court of Appeals (CA) Decision in CA-GR No.
71293 dated 30 September 2004. This Decision reversed a Decision of the Regional
Trial Court (RTC), National Capital Judicial Region (NCJR), Branch 135 in Makati City
dated 31 January 2001 in Civil Case No. 96-160.
The foregoing are the facts culled from the record, and from the findings of the CA
and the RTC.
Ley Construction and Development Corporation (LCDC) was the project contractor for
the construction of several buildings for Philippine Realty & Holdings Corporation
(PRHC), the project owner. Engineer Dennis Abcede (Abcede) was the project
construction manager of PRHC, while Joselito Santos (Santos) was its general
manager and vice-president for operations.
Sometime between April 1988 and October 1989, the two corporations entered into
four major construction projects, as evidenced by four duly notarized "construction
agreements." LCDC committed itself to the construction of the buildings needed by
PRHC, which in turn committed itself to pay the contract price agreed upon. These
were the four construction projects the parties entered into involving a Project 1,
Project 2, Project 3 (all of which involve the Alexandra buildings) and a Tektite
Building:
1. Construction Agreement dated 25 April 1988 Alexandra-Cluster C
involving the construction of two units of seven-storey buildings with
basement at a contract price of P 68,000,000 (Project 1);
2. Construction Agreement dated 25 July 1988 Alexandra-Cluster B
involving the construction of an eleven-storey twin-tower building with a
common basement at a contract price of P 140,500,000 (Project 2);
3. Construction Agreement dated 23 November 1988 Alexandra-Cluster E
involving the construction of an eleven-storey twin-tower building with
common basement at a contract price of P 140,500,000 (Project 3); and
4. Construction Agreement dated 10 October 1989 Tektite Towers Phase I
involving the construction of Tektite Tower Building I at Tektite Road at a
contract price of P 729,138,964 (Tektite Building).

The agreement covering the construction of the Tektite Building was signed by a Mr.
Campos under the words "Phil. Realty & Holdings Corp." and by Santos as a witness.
Manuel Ley, the president of LCDC, signed under the words "Ley Const. & Dev.
Corp."
The terms embodied in the afore-listed construction agreements were almost
identical. Each agreement provided for a fixed price to be paid by PRHC for every
project.
All the aforementioned agreements contain the following provisions:
ARTICLE IV CONTRACT PRICE
...

...

...

The Contract Price shall not be subject to escalation except due to work addition,
(approved by the OWNER and the ARCHITECT) and to official increase in minimum
wage as covered by the Labor Adjustment Clause below. All costs and expenses over
and above the Contract Price except as provided in Article V hereof shall be for the
account of the CONTRACTOR. It is understood that there shall be no escalation on
the price of materials. However, should there be any increase in minimum daily wage
level, the adjustment on labor cost only shall be considered based on conditions as
stipulated below.
...

...

...

ARTICLE VII TIME OF COMPLETION

...

...

...

Should the work be delayed by any act or omission of the OWNER or any other
person employed by or contracted by the OWNER in the project, including days in the
delivery or (sic) materials furnished by the OWNER or others, or by any appreciable
additions or alterations in the work ordered by the OWNER or the ARCHITECT, under
Article V or by force majeure, war, rebellion, strikes, epidemics, fires, riots, or acts of
the civil or military authorities, the CONTRACTOR shall be granted time extension.
Sometime after the execution of these agreements, two more were entered into by
the parties:
1. Letter-agreement dated 24 August 1989 Project 3 for the
construction of the drivers quarters in Project 3; and
2. Agreement dated 7 January 1993 Tektite Towers for the
concreting works on "GL, 5, 9, & A" (ground floor to the 5th floor) of
the Tektite Towers.
Santos signed the letter-agreement on the construction of the drivers quarters in
Project 3,1 while both he and Abcede signed the letter-agreement on the concreting
2
works on GL, 5, 9, and A, and also of Project 3.
In order to jump-start the construction operations, LCDC was required to submit a
performance bond as provided for in the construction agreements. As stated in these
agreements, as soon as PRHC received the performance bond, it would deliver its
initial payment to LCDC. The remaining balance was to be paid in monthly progress
payments based on actual work completed. In practice, these monthly progress
payments were used by LCDC to purchase the materials needed to continue the
construction of the remaining parts of the building.

In the course of the construction of the Tektite Building, it became evident to both
parties that LCDC would not be able to finish the project within the agreed period.
Thus, through its president, LCDC met with Abcede to discuss the cause of the delay.
LCDC explained that the unanticipated delay in construction was due mainly to the
sudden, unexpected hike in the prices of cement and other construction materials. It
claimed that, without a corresponding increase in the fixed prices found in the
agreements, it would be impossible for it to finish the construction of the Tektite
Building. In their analysis of the project plans for the building and of all the external
factors affecting the completion of the project, the parties discovered that even if
LCDC were able to collect the entire balance from the contract, the collected amount
would still be insufficient to purchase all the materials needed to complete the
construction of the building.

LCDC religiously submitted to PRHC monthly reports that contained the amounts of
infusion it made from the period August 1991 to December 1991. These monthly
reports all had the following heading:

Both parties agreed that their foremost objective should be to ensure that the Tektite
Building project would be completed. To achieve this goal, they entered into another
agreement. Abcede asked LCDC to advance the amount necessary to complete
construction. Its president acceded, on the absolute condition that it be allowed to
escalate the contract price. It wanted PRHC to allow the escalation and to disregard
the prohibition contained in Article VII of the agreements. Abcede replied that he
would take this matter up with the board of directors of PRHC.

Construction Managers

The board of directors turned down the request for an escalation agreement. 3 Neither
PRHC nor Abcede gave notice to LCDC of the alleged denial of the proposal.
However, on 9 August 1991 Abcede sent a formal letter to LCDC, asking for its
conformity, to the effect that should it infuse P36 million into the project, a contract
price escalation for the same amount would be granted in its favor by PRHC. 4
This letter was signed by Abcede above the title "Construction Manager," as well as
by LCDC.5 A plain reading of the letter-agreement will reveal that the blank above the
words "PHIL. REALTY & HOLDINGS CORP." was never signed, 6 viz:

...

...

...

MR. JOSELITO L. SANTOS

VICE PRESIDENT OPERATION
PHIL. REALTY & HOLDINGS CORP.
4th Floor Quad Alpha Centrum Bldg.
125 Pioneer St., Mandaluyong, M.M.
T H R U : D.A. ABCEDE & ASSOCIATES

SUBJECT : P 36.0M INFUSION-TEKTITE TOWERS PROJECT

From these monthly reports, it can be gleaned that the following were the cash
infusions made by LCDC:
Month

Amount

Date of monthly report

August 1991

PhP 6,724,632.26

15 October 1991

September 1991 PhP 7,326,230.69

7 October 199110

October 1991

PhP 7,756,846.88

7 November 199111

November 1991

PhP 8,553,313.50

7 December 199112

December 1991

PhP 7,887,440.50

9 January 199213

Very truly yours,

(Signed)
_______________________
DENNIS A. ABCEDE
Construction Manager
CONFORME:
(Signed)
_______________________
LEY CONST. & DEV. CORP.
APPROVED & ACCEPTED :
_______________________
PHIL. REALTY & HOLDINGS CORP.
Notwithstanding the absence of a signature above PRHCs name, LCDC proceeded
with the construction of the Tektite Building, expending the entire amount necessary
to complete the project. From August to December 1991, it infused amounts
totaling P 38,248,463.92. These amounts were not deposited into the joint account of
7
LCDC and PRHC, but paid directly to the suppliers upon the instruction of Santos.

PhP 38,248,463.92
PRHC never replied to any of these monthly reports.
On 20 January 1992, LCDC wrote a letter addressed to Santos stating that it had
already complied with its commitment as of 31 December 1991 and was requesting
the release of P 2,248,463.92. It attached a 16 January 1992 letter written by D.A.
Abcede & Associates, informing PRHC of the total cash infusion made by LCDC to
the project, to wit:
in compliance with the commitment of Ley Construction and Devt Corp. to
infuse P36.00M for the above subject project x x x
x x x we would like to present the total cash infusion by LCDC for the period covering
the month of August, 1991 to December 1991 broken down as follows:

...

...

...

T O T A L: P 38,248,463.92
PRHC never replied to this letter.
In another letter dated 7 September 1992, there was a reconciliation of accounts
between the two corporations with respect to the balances due for Projects 1, 2, and
3. The reconciliation of accounts resulted in PRHC owing LCDC the sum
of P 20,862,546.41, broken down as follows:

originally requested were considered. It further claimed that its president inquired
from Abcede and Santos why its requests for extension of time were not granted in
full. The two, however, assured him that LCDC would not be penalized with damages
for even a single day of delay, because the fact that it was working hard on the
16
Tektite Building project was known to PRHC.
Thereafter, in a letter dated 18 January 1993, LCDC demanded payment of the
agreed total balance for Projects 1, 2, and 3. Through a reply letter dated 16 February
1993, PRHC denied any liability. During the course of the proceedings, both parties
conducted another reconciliation of their respective records. The reconciliation
showed the following balances in favor of LCDC:

Project 1 P 1,783,046.72
Project 1 P 1,703,955.07
Project 2 P 13,550,003.93
Project 2 P 13,251,152.61
Project 3 P 5,529,495.76
Project 3 P 5,529,495.76
P 20,862,546.41
14

In a letter dated 8 September 1992, when 96.43% of Tektite Building had been
completed, LCDC requested the release of the P 36 million escalation price. PRHC
did not reply, but after the construction of the building was completed, it conveyed its
decision in a letter on 7 December 1992.15 That decision was to set off, in the form of
liquidated damages, its claim to the supposed liability of LCDC, to wit:
...

...

...

In this regard, please be advised that per owners decision; your claim
of P 36,000,00.00 adjustment will be applied to the liquidated damages for concreting
works computed in the amount of Thirty Nine Million Three Hundred Twenty Six
Thousand Eight Hundred Seventeen & 15/100 (P39,326,817.15) as shown in the
attached sheet.
Further, the net difference P 3,326,817.15 will also be considered waived as
additional consideration.
...

...

...

In a letter dated 18 January 1993, LCDC, through counsel, demanded payment of the
agreed escalation price ofP 36 million. In its reply on 16 February 1993, PRHC
suddenly denied any liability for the escalation price. In the same letter, it claimed that
LCDC had incurred 111 days of delay in the construction of the Tektite Building and
demanded that the latter pay P 39,326,817.15 as liquidated damages. This claim was
set forth in PRHCs earlier 7 December 1992 letter.
LCDC countered that there were many times when its requests for time extension
although due to reasonable causes sanctioned by the construction agreement such
as power failures, water supply interruption, and scarcity of construction materials
were unreasonably reduced to shorter periods by PRHC. In its letter dated 9
December 1992, LCDC claimed that in a period of over two years, out of the 618 days
of extension it requested, only 256 days or not even half the number of days

Total:

P 20,484,603.44

In addition to the agreed-upon outstanding balance in favor of LCDC, the latter

claimed another outstanding balance of P 232,367.96 in its favor for the construction
of the drivers quarters in Project 3.
It also further claimed the amount of P 7,112,738.82, representing the balance for the
concreting works from the ground floor to the fifth floor of the Tektite Building.
Seeking to recover all the above-mentioned amounts, LCDC filed a Complaint with
Application for the Issuance of a Writ of Preliminary Attachment on 2 February 1996
before the RTC in Makati City docketed as Civil Case No. 96-160:
WHEREFORE, it is respectfully prayed that:
1. Immediately upon the filing of this Complaint, an order of preliminary
attachment be issued over defendant Philrealtys properties as security for
any judgment which plaintiff may recover against said defendant; and
2. After trial, judgment be rendered as follows:
2.1. On the first, second and third alternative causes of action,
(a) Ordering defendant Philrealty to pay plaintiff actual
damages in the amount ofP36,000,00.00 with legal
interest thereon from the filing of this Complaint until fully
paid;
(b) In the alternative, ordering defendants Abcede and
Santos to jointly and severally, in the event that they acted
without necessary authority, to pay plaintiff actual
damages in the amount of P36,000,00.00 with legal

interest thereon from the filing of this Complaint until fully

paid; and

Tektite Building

(c) Ordering defendant Philrealty or defendants Abcede

and Santos to pay plaintiff exemplary damages in the
amount to be determined by the Honorable Court but not
less thanP5,000,000.00
2.2. On the fourth cause of action, ordering defendant Philrealty to
pay plaintiff
(a) Actual damages in the amount of P7,112,738.82 with
legal interest thereon from the filing of this Complaint until
fully paid; and
(b) Exemplary damages in the amount to be determined
by the Honorable Court but not less than P1,000,000.00
2.3. On the fifth cause of action, ordering defendant Philrealty to
pay plaintiff
(a) Actual damages in the amount of P20,862,546.41 with
legal interest thereon from the filing of this Complaint until
fully paid; and
(b) Exemplary damages in an amount to be determined by
the Honorable Court but not less than P5,000,000.00.
2.4. On the sixth cause of action, ordering defendant Philrealty to
pay plaintiff
(a) Actual damages in the amount of P232,367.96 with
legal interest thereon from the filing of this Complaint until
fully paid; and
(b) Exemplary damages in the amount to be determined
by the Honorable Court but not less than P100,000.00
2.5. On the seventh cause of action, ordering defendant Philrealty
and/or defendants Abcede and Santos to pay plaintiff attorneys
fees in the amount of P750,000.00 and expenses of litigation in the
amount of P50,000.00, plus costs.
Plaintiff prays for such other just and equitable reliefs as may be warranted by the
circumstances.
On 23 July 1999, a joint Stipulation of Facts17 was filed by the parties. In the said
stipulation, they reconciled their respective claims on the payments made and the
balances due for the construction of the Tektite Building project, Project 1, and
Project 2. The reconciliation shows that the following amounts are due and/or
overpaid:
Due to LCDC

Overpaid to LCDC

P4,646,947.35

Project 1

P1,703,955.07

Project 2

P3,251,152.61

P14,955,107.68 P4,646,947.35
Both parties agreed that the only remaining issues to be resolved by the court, with
respect to the Tektite Building project and Projects 1 to 3, were as follows:
a) The validity of Ley Constructions claim that Philrealty had granted the former a
contract price escalation for Tektite Tower I in the amount of P36,000,000.00
b) The validity of the claim of Philrealty that the following amounts should be charged
to Ley Construction:
Payments/Advances without LCDCs conformity and recommendation of the
Construction Manager, D.A. Abcede & Associates that subject items are LCDCs
account:
a. Esicor, Inc. waterproofing works Cluster B P1,121,000.00
b. Ideal Marketing, Inc. waterproofing works
2 P885,000.00 P2,006,000.00

at

Cluster

B,

Quadrant

c) The claim of Philrealty for liquidated damages for delay in completion of the
construction as follows:
d) Tektite Tower I - P39,326,817.15
Alexandra Cluster B - 12,785,000.00
Alexandra Cluster C - 1,100,000.00
and
e) The claim of Ley Construction for additional sum of P2,248,463.92 which it
allegedly infused for the Tektite Tower I project over and above the
original P36,000,000.00 it had allegedly bound itself to infuse.18
On 31 January 2001, the RTC promulgated its Decision. LCDC filed a Motion for
Partial Reconsideration, which was granted.
It must be noted that in the Stipulation of Facts, the parties had jointly agreed that
the P7,112,738.82 unpaid account in the concreting of Tektite Building would no
longer be included in the list of claims submitted to the RTC for decision.
Nonetheless, this amount was still included as an award in the trial courts 7 May
2001 amended Decision, the dispositive portion of which provides:
WHEREFORE, premises considered, judgment is hereby rendered:

A. Dismissing the counter-claim of defendant DENNIS ABCEDE and the

cross-claim of defendant JOSELITO SANTOS; and

[4] P4,646,947.75 overpayment by defendant-appellant PRHC to plaintiffappellee LCDC for the Tektite Tower Phase I Project;

B. Ordering defendant PHILIPPINE REALTY AND HOLDING

CORPORATION to pay plaintiff LEY CONSTRUCTION AND
DEVELOPMENT CORPORATION:

[5] P1,121,000.00 expenses incurred by defendant-appellant PRHC for

corrective works to redo/repair allegedly defective Waterproofing
construction work or plaintiff-appellee LCDC in the Alexander Cluster B
Project which was paid by defendant-appellant PRHC to contractor Escritor,
Inc.;

1. P33,601,316.17, for the Tektite Tower I Project with legal interest

thereon from date of the filing of the complaint until fully paid;

[6] P885,000.00 expenses incurred by defendant-appellant PRHC for

corrective works to redo/repair allegedly defective Waterproofing
construction work of plaintiff-appellee LCDC at the Alexandra Cluster B
Quadrant in the Alexander Cluster B Project which was paid by defendantappellant PRHC to contractor Ideal Marketing Inc., and consideration.

2. P13,251,152.61 for Alexandra Cluster B with legal interest

thereon from date of the filing of the complaint until fully paid;
3. P1,703,955.07 for Alexandra Cluster C with legal interest thereon
from date of the filing of the complaint until fully paid;
4. P7,112,738.82 in actual damages for the concreting works of
Tektite Tower I, with legal interest thereon from the date of the filing
of the complaint until fully paid;
5. P5,529,495.76 in actual damages for the construction of
Alexandra Cluster E, with legal interest thereon from the date of the
filing of the complaint until fully paid;
6. P232,367.96 in actual damages for the construction of the
drivers quarters of Alexandra Cluster E, with legal interest thereon
from the date of the filing of the complaint until fully paid;
7. P750,000.00 for attorneys fees and expenses of litigation; and
8. Costs.
SO ORDERED.

19

PRHC filed a Notice of Appeal on 14 June 2001. The Court of Appeals, in CA-G.R.
CV No. 71293,20 reversed the lower courts amended Decision on 30 September
2004 and ruled thus:
WHEREFORE, premises considered, the assailed January 31, 2001 decision and the
May 7, 2001 amended decision are hereby REVERSED and SET ASIDE and a new
one is entered:
I. FINDING plaintiff-appellee LCDC LIABLE to defendant-appellant PRHC in the
amount of Sixty million Four Hundred Sixty Four (Thousand) Seven Hundred Sixty
Four 90/100 (P60,464,764.90) PESOS detailed as follows:
[1] P39,326,817.15 liquidated damages pursuant to contract for delay
incurred by plaintiff-appellee LCDC in the construction of Tektite Tower
Phase I, the length of delay having been signed and confirmed by LCDC;
[2] P12,785,000.00 liquidated damages pursuant to contract for delay
incurred by plaintiff-appellee LCDC in the construction of Alexandra Cluster
B, the length of delay having been signed and confirmed by LCDC;
[3] P1,700,000.00 liquidated damages pursuant to contract for delay incurred
by plaintiff appellee LCDC in the construction of Alexandra Cluster C, the
length of delay having been confirmed by LCDC;

...

...

...

In a letter dated 18 January 1993, LCDC, through counsel, demanded payment of the
agreed escalation price ofP 36 million. In its reply on 16 February 1993, PRHC
suddenly denied any liability for the escalation price. In the same letter, it claimed that
LCDC had incurred 111 days of delay in the construction of the Tektite Building and
demanded that the latter pay P 39,326,817.15 as liquidated damages. This claim was
set forth in PRHCs earlier 7 December 1992 letter.
LCDC countered that there were many times when its requests for time extension
although due to reasonable causes sanctioned by the construction agreement such
as power failures, water supply interruption, and scarcity of construction materials
were unreasonably reduced to shorter periods by PRHC. In its letter dated 9
December 1992, LCDC claimed that in a period of over two years, out of the 618 days
of extension it requested, only 256 days or not even half the number of days
originally requested were considered. It further claimed that its president inquired
from Abcede and Santos why its requests for extension of time were not granted in
full. The two, however, assured him that LCDC would not be penalized with damages
for even a single day of delay, because the fact that it was working hard on the
Tektite Building project was known to PRHC. 16
Thereafter, in a letter dated 18 January 1993, LCDC demanded payment of the
agreed total balance for Projects 1, 2, and 3. Through a reply letter dated 16 February
1993, PRHC denied any liability. During the course of the proceedings, both parties
conducted another reconciliation of their respective records. The reconciliation
showed the following balances in favor of LCDC:
Project 1 P 1,703,955.07

Project 2 P 13,251,152.61
Project 3 P 5,529,495.76

Total:

P 20,484,603.44

In addition to the agreed-upon outstanding balance in favor of LCDC, the latter

claimed another outstanding balance of P 232,367.96 in its favor for the construction
of the drivers quarters in Project 3.

2.4. On the sixth cause of action, ordering defendant Philrealty to

pay plaintiff
(a) Actual damages in the amount of P232,367.96 with
legal interest thereon from the filing of this Complaint until
fully paid; and

It also further claimed the amount of P 7,112,738.82, representing the balance for the
concreting works from the ground floor to the fifth floor of the Tektite Building.
Seeking to recover all the above-mentioned amounts, LCDC filed a Complaint with
Application for the Issuance of a Writ of Preliminary Attachment on 2 February 1996
before the RTC in Makati City docketed as Civil Case No. 96-160:
WHEREFORE, it is respectfully prayed that:
1. Immediately upon the filing of this Complaint, an order of preliminary
attachment be issued over defendant Philrealtys properties as security for
any judgment which plaintiff may recover against said defendant; and
2. After trial, judgment be rendered as follows:
2.1. On the first, second and third alternative causes of action,
(a) Ordering defendant Philrealty to pay plaintiff actual
damages in the amount ofP36,000,00.00 with legal
interest thereon from the filing of this Complaint until fully
paid;
(b) In the alternative, ordering defendants Abcede and
Santos to jointly and severally, in the event that they acted
without necessary authority, to pay plaintiff actual
damages in the amount of P36,000,00.00 with legal
interest thereon from the filing of this Complaint until fully
paid; and
(c) Ordering defendant Philrealty or defendants Abcede
and Santos to pay plaintiff exemplary damages in the
amount to be determined by the Honorable Court but not
less thanP5,000,000.00
2.2. On the fourth cause of action, ordering defendant Philrealty to
pay plaintiff
(a) Actual damages in the amount of P7,112,738.82 with
legal interest thereon from the filing of this Complaint until
fully paid; and
(b) Exemplary damages in the amount to be determined
by the Honorable Court but not less than P1,000,000.00
2.3. On the fifth cause of action, ordering defendant Philrealty to
pay plaintiff
(a) Actual damages in the amount of P20,862,546.41 with
legal interest thereon from the filing of this Complaint until
fully paid; and
(b) Exemplary damages in an amount to be determined by
the Honorable Court but not less than P5,000,000.00.

(b) Exemplary damages in the amount to be determined

by the Honorable Court but not less than P100,000.00
2.5. On the seventh cause of action, ordering defendant Philrealty
and/or defendants Abcede and Santos to pay plaintiff attorneys
fees in the amount of P750,000.00 and expenses of litigation in the
amount of P50,000.00, plus costs.
Plaintiff prays for such other just and equitable reliefs as may be warranted by the
circumstances.
17

On 23 July 1999, a joint Stipulation of Facts was filed by the parties. In the said
stipulation, they reconciled their respective claims on the payments made and the
balances due for the construction of the Tektite Building project, Project 1, and
Project 2. The reconciliation shows that the following amounts are due and/or
overpaid:
Due to LCDC

Tektite Building

Overpaid to LCDC

P4,646,947.35

Project 1

P1,703,955.07

Project 2

P3,251,152.61

P14,955,107.68 P4,646,947.35
Both parties agreed that the only remaining issues to be resolved by the court, with
respect to the Tektite Building project and Projects 1 to 3, were as follows:
a) The validity of Ley Constructions claim that Philrealty had granted the
former a contract price escalation for Tektite Tower I in the amount
of P36,000,000.00
b) The validity of the claim of Philrealty that the following amounts should be
charged to Ley Construction:
Payments/Advances without LCDCs conformity and recommendation of the
Construction Manager, D.A. Abcede & Associates that subject items are
LCDCs account:
a. Esicor, Inc. waterproofing works Cluster B P1,121,000.00

b. Ideal Marketing, Inc. waterproofing works at Cluster B,

Quadrant 2 P885,000.00 P2,006,000.00
c) The claim of Philrealty for liquidated damages for delay in completion of
the construction as follows:
d) Tektite Tower I - P39,326,817.15
Alexandra Cluster B - 12,785,000.00
Alexandra Cluster C - 1,100,000.00
and
e) The claim of Ley Construction for additional sum of P2,248,463.92 which
it allegedly infused for the Tektite Tower I project over and above the
original P36,000,000.00 it had allegedly bound itself to infuse.18
On 31 January 2001, the RTC promulgated its Decision. LCDC filed a Motion for
Partial Reconsideration, which was granted.
It must be noted that in the Stipulation of Facts, the parties had jointly agreed that
the P7,112,738.82 unpaid account in the concreting of Tektite Building would no
longer be included in the list of claims submitted to the RTC for decision.
Nonetheless, this amount was still included as an award in the trial courts 7 May
2001 amended Decision, the dispositive portion of which provides:
WHEREFORE, premises considered, judgment is hereby rendered:
A. Dismissing the counter-claim of defendant DENNIS ABCEDE and the
cross-claim of defendant JOSELITO SANTOS; and
B. Ordering defendant PHILIPPINE REALTY AND HOLDING
CORPORATION to pay plaintiff LEY CONSTRUCTION AND
DEVELOPMENT CORPORATION:
1. P33,601,316.17, for the Tektite Tower I Project with legal interest
thereon from date of the filing of the complaint until fully paid;
2. P13,251,152.61 for Alexandra Cluster B with legal interest
thereon from date of the filing of the complaint until fully paid;
3. P1,703,955.07 for Alexandra Cluster C with legal interest thereon
from date of the filing of the complaint until fully paid;
4. P7,112,738.82 in actual damages for the concreting works of
Tektite Tower I, with legal interest thereon from the date of the filing
of the complaint until fully paid;
5. P5,529,495.76 in actual damages for the construction of
Alexandra Cluster E, with legal interest thereon from the date of the
filing of the complaint until fully paid;
6. P232,367.96 in actual damages for the construction of the
drivers quarters of Alexandra Cluster E, with legal interest thereon
from the date of the filing of the complaint until fully paid;
7. P750,000.00 for attorneys fees and expenses of litigation; and
8. Costs.

SO ORDERED.

19

PRHC filed a Notice of Appeal on 14 June 2001. The Court of Appeals, in CA-G.R.
CV No. 71293,20 reversed the lower courts amended Decision on 30 September
2004 and ruled thus:
WHEREFORE, premises considered, the assailed January 31, 2001 decision and the
May 7, 2001 amended decision are hereby REVERSED and SET ASIDE and a new
one is entered:
I. FINDING plaintiff-appellee LCDC LIABLE to defendant-appellant PRHC in
the amount of Sixty million Four Hundred Sixty Four (Thousand) Seven
Hundred Sixty Four 90/100 (P60,464,764.90) PESOS detailed as follows:
[1] P39,326,817.15 liquidated damages pursuant to contract for
delay incurred by plaintiff-appellee LCDC in the construction of
Tektite Tower Phase I, the length of delay having been signed and
confirmed by LCDC;
[2] P12,785,000.00 liquidated damages pursuant to contract for
delay incurred by plaintiff-appellee LCDC in the construction of
Alexandra Cluster B, the length of delay having been signed and
confirmed by LCDC;
[3] P1,700,000.00 liquidated damages pursuant to contract for
delay incurred by plaintiff appellee LCDC in the construction of
Alexandra Cluster C, the length of delay having been confirmed by
LCDC;
[4] P4,646,947.75 overpayment by defendant-appellant PRHC to
plaintiff-appellee LCDC for the Tektite Tower Phase I Project;
[5] P1,121,000.00 expenses incurred by defendant-appellant PRHC
for corrective works to redo/repair allegedly defective Waterproofing
construction work or plaintiff-appellee LCDC in the Alexander
Cluster B Project which was paid by defendant-appellant PRHC to
contractor Escritor, Inc.;
[6] P885,000.00 expenses incurred by defendant-appellant PRHC
for corrective works to redo/repair allegedly defective Waterproofing
construction work of plaintiff-appellee LCDC at the Alexandra
Cluster B Quadrant in the Alexander Cluster B Project which was
paid by defendant-appellant PRHC to contractor Ideal Marketing
Inc., and
II. FINDING defendant-appellant PRHC LIABLE to plaintiff-appellee LCDC in
the amount of Fifty Six million Seven Hundred Sixteen Thousand Nine
Hundred Seventy One 40/100 (P56,716,971.40) detailed as follows:
43

In Yao Ka Sin Trading v. Court of Appeals, et al,. this Court discussed the
applicable rules on the doctrine of apparent authority, to wit:
The rule is of course settled that "[a]lthough an officer or agent acts without, or in
excess of, his actual authority if he acts within the scope of an apparent authority with
which the corporation has clothed him by holding him out or permitting him to appear
as having such authority, the corporation is bound thereby in favor of a person who
deals with him in good faith in reliance on such apparent authority, as where an

officer is allowed to exercise a particular authority with respect to the business, or a

particular branch of it, continuously and publicly, for a considerable time." Also, "if a
private corporation intentionally or negligently clothes its officers or agents with
apparent power to perform acts for it, the corporation will be estopped to deny that
such apparent authority is real, as to innocent third persons dealing in good faith with
44
such officers or agents."
In Peoples Aircargo and Warehousing Co. Inc. v. Court of Appeals, et al.,45 we held
that apparent authority is derived not merely from practice:
Its existence may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act or, in other words,
the apparent authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, whether within or beyond the scope of his ordinary powers.
We rule that Santos and Abcede held themselves out as possessing the authority to
act, negotiate and sign documents on behalf of PRHC; and that PRHC sanctioned
these acts. It would be the height of incongruity to now allow PRHC to deny the extent
of the authority with which it had clothed both individuals. We find that Abcedes role
as construction manager, with regard to the construction projects, was akin to that of
a general manager with regard to the general operations of the corporation he or she
is representing.
Consequently, the escalation agreement entered into by LCDC and Abcede is a valid
agreement that PRHC is obligated to comply with. This escalation agreement
whether written or verbal has lifted, through novation, the prohibition contained in
the Tektite Building Agreement.
In order for novation to take place, the concurrence of the following requisites is
indispensable:
1. There must be a previous valid obligation.
2. The parties concerned must agree to a new contract.
3. The old contract must be extinguished.
4. There must be a valid new contract. 46
All the aforementioned requisites are present in this case. The obligation of both
parties not to increase the contract price in the Tektite Building Agreement was
extinguished, and a new obligation increasing the old contract price by P 36 million
was created by the parties to take its place.
What makes this Court believe that it is incorrect to allow PRHC to escape liability for
the escalation price is the fact that LCDC was never informed of the board of
directors supposed non-approval of the escalation agreement until it was too late.
Instead, PRHC, for its own benefit, waited for the former to finish infusing the entire
amount into the construction of the building before informing it that the said
agreement had never been approved by the board of directors. LCDC diligently
informed PRHC each month of the partial amounts the former infused into the project.
PRHC must be deemed estopped from denying the existence of the escalation
agreement for having allowed LCDC to continue infusing additional money spending
for its own project, when it could have promptly notified LCDC of the alleged
disapproval of the proposed escalation price by its board of directors.

Estoppel is an equitable principle rooted in natural justice; it is meant to prevent

persons from going back on their own acts and representations, to the prejudice of
others who have relied on them.47 Article 1431 of the Civil Code provides:
Through estoppel an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person relying
thereon.
Article 1431 is reflected in Rule 131, Section 2 (a) of the Rules of Court, viz.:
Sec. 2. Conclusive presumptions. The following are instances of conclusive
presumptions:
(a) Whenever a party has by his own declaration, act or omission, intentionally and
deliberately led another to believe a particular thing true, and to act upon such belief,
he cannot, in any litigation arising out of such declaration, act or omission be
permitted to falsify it.
This Court has identified the elements of estoppel as:
[F]irst, the actor who usually must have knowledge, notice or suspicion of the true
facts, communicates something to another in a misleading way, either by words,
conduct or silence; second, the other in fact relies, and relies reasonably or justifiably,
upon that communication; third, the other would be harmed materially if the actor is
later permitted to assert any claim inconsistent with his earlier conduct; and fourth,
the actor knows, expects or foresees that the other would act upon the information
given or that a reasonable person in the actor's position would expect or foresee such
48
action.
This liability of PRHC, however, has a ceiling. The escalation agreement entered into
was for P 36 millionthe maximum amount that LCDC contracted itself to infuse and
that PRHC agreed to reimburse. Thus, the Court of Appeals was correct in ruling that
the P 2,248,463.92 infused by LCDC over and above the P 36 million should be for its
account, since PRHC never agreed to pay anything beyond the latter amount. While
PRHC benefited from this excess infusion, this did not result in its unjust enrichment,
as defined by law.
Unjust enrichment exists "when a person unjustly retains a benefit to the loss of
another, or when a person retains money or property of another against the
49
fundamental principles of justice, equity and good conscience." Under Art. 22 of the
Civil Code, there is unjust enrichment when (1) a person is unjustly benefited, and (2)
such benefit is derived at the expense of or with damages to another. 50 The term is
further defined thus:
Unjust enrichment is a term used to depict result or effect of failure to make
remuneration of or for property or benefits received under circumstances that give
rise to legal or equitable obligation to account for them; to be entitled to remuneration,
one must confer benefit by mistake, fraud, coercion, or request.51
In order for an unjust enrichment claim to prosper, one must not only prove that the
other party benefited from ones efforts or the obligations of others; it must also be
shown that the other party was unjustly enriched in the sense that the term "unjustly"
could mean "illegally" or "unlawfully."52 LCDC was aware that the escalation
agreement was limited to P36 million. It is not entitled to remuneration of the excess,
since it did not confer this benefit by mistake, fraud, coercion, or request. Rather, it

voluntarily infused the excess amount with full knowledge that PRHC had no
obligation to reimburse it.
Parenthetically, we note that the CA had ruled that the 7 December 1992 letter
demonstrates that PRHC treated the P 36 million as a loan deductible from the
53
liquidated damages for which LCDC is supposedly liable. It ruled that when PRHC
informed LCDC that it would apply the P 36 million to the liquidated damages, PRHC,
in effect, acknowledged that it was in debt to LCDC in the amount of P 36 million, and
that forms the basis for PRHCs liability to LCDC for the said amount.
We disagree with this analysis.
In a contract of loan, ownership of the money is transferred from the lender to the
borrower.54 In this case, ownership of the P 36 million was never transferred to
PRHC. As previously mentioned, such amount was paid directly to the
suppliers.55 We find that arrangement between PRHC and LCDC cannot be
construed as a loan agreement but rather, it was an agreement to advance the costs
of construction. In Liwanag v. Court of Appeals et al., we state:

In case the CONTRACTOR encounters any justifiable cause or reason for delay, the
CONTRACTOR shall within ten (10) days, after encountering such cause of delay
submit to the OWNER in writing a written request for time extension indicating therein
the requested contract time extension. Failure by the CONTRACTOR to comply with
this requirements (sic) will be adequate reason for the OWNER not to grant the time
extension.1avvphi1
The following table shows the dates of LCDCs letter-requests, the supposed causes
justifying them, the number of days requested, and the number of days granted by
PRHC and supposedly conformed to by LCDC:

Cause

# of days requested

# of days
granted

1
Mar Due to additional works and shortage of supplies and
30
1990
cement

11

14 Apr
Shortage of cement supply
1990

18

10 May
Frequent power failures
1990

10

9
Jul Bad weather which endangered the lives of the
10
1990
construction workers ("heavy winds")

It is important to note that PRHC does not question the veracity of the factual
representations of LCDC to justify the latters requests for extension of time. It insists,
however, that in any event LCDC agreed to the limits of the time extensions it
57
granted.

4 Sep Inclement weather that endangered the lives of the

10
1990
construction workers

The practice of the parties is that each time LCDC requests for more time, an
extension agreement is executed and signed by both parties to indicate their joint
approval of the number of days of extension agreed upon.

28 Feb Architectural and structural revisions of R.C. beams at

20
1991
the 8th floor level

For change order work and revisions in the plans

28 Aug
initiated by the architect and Abcedes delay in giving 271
1991
the revised plans to contractor

136

2 Sep
Inclement weather and scarcity of cement
1991

17

Neither can the transaction be considered a loan, since in a contract of loan once the
money is received by the debtor, ownership over the same is transferred. Being the
owner, the borrower can dispose of it for whatever purpose he may deem proper. In
the instant petition, however, it is evident that Liwanag could not dispose of the
money as she pleased because it was only delivered to her for a single purpose,
namely, for the purchase of cigarettes, and if this was not possible then to return the
money to Rosales.
LCDC is not liable for liquidated damages for delay in the construction of the buildings
for PRHC.
There is no question that LCDC was not able to fully construct the Tektite Building
and Projects 1, 2, and 3 on time. It reasons that it should not be made liable for
liquidated damages, because its rightful and reasonable requests for time extension
were denied by PRHC.56

The applicable provision in the parties agreements is as follows:

ARTICLE VII TIME OF COMPLETION
...

...

...

Should the work be delayed by any act or omission of the OWNER or any other
person employed by or contracted by the OWNER in the project, including days in the
delivery or (sic) materials furnished by the OWNER or others, or by any appreciable
additions or alterations in the work ordered by the OWNER or the ARCHITECT, under
Article V or by force majeure, war, rebellion, strikes, epidemics, fires, riots, or acts of
the civil or military authorities, the CONTRACTOR shall be granted time extension.

13

25

Oct Water supply interruption and power failures preventing 15

The appellate court further ruled that each signed extension is a separate contract
that becomes the law between the parties: 60

1991

the mixing of cement

5 Dec
1991

Typhoon Uring and water supply interruption (typhoon

Uring alone caused a delay for more than 10 days due 15
to strong and continuous rains)

there is nothing arbitrary or unreasonable about the number of days extension of time
because each extension is a meeting of the minds between the parties, each under
joint signature OWNER and CONTRACTOR witnessed by the CONSTRUCTION
MANAGER.61
Inasmuch as LCDCs claimed exemption from liability are beyond the approved time
extensions, LCDC, according to the majority of the CA, is liable therefor.

2
Apr Inadequate supply of Portland cement and frequent
1992
power failures

15

12

5 May Inadequate supply of cement and frequent power

1992
failures

17

12

456

217

additions and alterations in the work ordered by the

108
owner and architect
564

20

237

As previously mentioned, LCDC sent a 9 December 1992 letter to PRHC claiming

that, in a period of over two years, only 256 out of the 618 days of extension
requested were considered. We disregard these numbers presented by LCDC
because of its failure to present evidence to prove its allegation. The tally that we will
acceptas reflected by the evidence submitted to the lower courtis as follows: out
of the 564 days requested, only 237 were considered.
Essentially the same aforementioned reasons or causes are presented by LCDC as
defense against liability for both Projects 1 and 2. 58 In this regard, the CA ruled:
Plaintiff-appellees allegation that determination by PHRC of extensions of time were
unreasonable or arbitrary is untenable in the light of express provisions of the
Construction Agreements which prescribed precise procedures for extensions of time.
In fact the procedure is fool-proof because both OWNER and CONTRACTOR sign to
indicate approval of the number of days of extension. Computation of the penalty
becomes mechanical after that. Each extension as signed by the parties is a contract
by itself and has the force of law between them.
In fact, the parties followed that prescribed procedure strictly the CONTRACTOR
first requested the OWNER to approve the number of days applied for as extension of
time to finish the particular project and the OWNER will counter-offer by approving
only a lower number of days extension of time for CONTRACTOR to finish the
contract as recommended by the CONSTRUCTION MANAGER ABCEDE, and in the
end, both CONTRACTOR and OWNER sign jointly the approved number of days
agreed upon. That signed extension of time is taken to be the contract between the
59
parties.

Justice Juan Q. Enriquez, in his Dissenting Opinion, held that the reasons submitted
by LCDC fell under the definition of force majeure. 62 This specific point was not
refuted by the majority.
We agree with Justice Enriquez on this point and thereby disagree with the majority
ruling of the CA.
Article 1174 of the Civil Code provides: "Except in cases expressly specified by the
law, or when it is otherwise declared by stipulation or when the nature of the
obligation requires the assumption of risk, no person shall be responsible for those
events which could not be foreseen, or which though foreseen, were inevitable." A
perusal of the construction agreements shows that the parties never agreed to make
LCDC liable even in cases of force majeure. Neither was the assumption of risk
required. Thus, in the occurrence of events that could not be foreseen, or though
foreseen were inevitable, neither party should be held responsible.
Under Article 1174 of the Civil Code, to exempt the obligor from liability for a breach
of an obligation due to an "act of God" or force majeure, the following must concur:
(a) the cause of the breach of the obligation must be independent of the will of the
debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must
be such as to render it impossible for the debtor to fulfill his obligation in a normal
manner; and (d) the debtor must be free from any participation in, or aggravation of
the injury to the creditor.63
64

The shortage in supplies and cement may be characterized as force majeure. In the
present case, hardware stores did not have enough cement available in their supplies
or stocks at the time of the construction in the 1990s. Likewise, typhoons, power
failures and interruptions of water supply all clearly fall under force majeure. Since
LCDC could not possibly continue constructing the building under the circumstances
prevailing, it cannot be held liable for any delay that resulted from the causes
aforementioned.
Further, PRHC is barred by the doctrine of promissory estoppel from denying that it
agreed, and even promised, to hold LCDC free and clear of any liquidated damages.
Abcede and Santos also promised that the latter corporation would not be held liable
for liquidated damages even for a single day of delay despite the non-approval of the
requests for extension.65 Mr. Ley testified to this fact as follows:
Q: So, Mr. Witness in all those requests for extension and whenever the D.A. Abcede
& Associates did not grant you the actual number of days stated in your requests for
extension, what did Ley construction and Development do, if any?
A: We talked to Dennis Abcede and Mr. Santos, Maam.
Q: And what did you tell them?

A: I will tell them why did you not grant the extension for us, Maam.
Q: What was the response of Mr. Abcede and Mr. Santos?
A: Mr. Abcede and Mr. Santos told me, Mr. Ley dont worry, you will not be liquidated
of any single day for this because we can see that you worked so hard for this project,
Maam.
Q: And what did you do after you were given that response of Mr. Abcede and Mr.
Santos?
A: They told me you just relax and finish the project, and we will pay you up to the last
centavos, Maam.
Q: What did you do after taking that statement or assurance?
A: As gentlemans agreement I just continued working without complaining anymore,
Maam.66
The above testimony is uncontradicted. Even assuming that all the reasons LCDC
presented do not qualify as fortuitous events, as contemplated by law, this Court finds
that PRHC is estopped from denying that it had granted a waiver of the liquidated
damages the latter corporation may collect from the former due to a delay in the
construction of any of the buildings.
Courts may rule on causes of action not included in the Complaint, as long as these
have been proven during trial without the objection of the opposing party.
PRHC argues that since the parties had already limited the issues to those reflected
in their joint stipulation of facts, neither the trial court nor the appellate court has the
authority to rule upon issues not included therein. Thus it was wrong for the trial court
and the CA to have awarded the amounts of P 5,529,495.76 representing the
remaining balance for Project 3 as well as for the P 232,367.96 representing the
balance for the construction of the drivers quarters in Project 3. PRHC claims that in
the Stipulation of Facts, all the issues regarding Project 3 were already made part of
the computation of the balances for the other projects. It thus argues that the
computation for the Tektite Building showed that the overpayment for Project 3 in the
67
amount of P 9,531,181.80 was credited as payment for the Tektite Tower Project. It
reasons that, considering that it actually made an overpayment for Project 3, it should
not be made liable for the remaining balances for Project 3 and the drivers quarters
68
in Project 3. It is LCDCs position, however, that the Stipulation of Facts covers the
balances due only for the Tektite Tower Project, Project 1, and Project 2. 69 Since
Project 3 was not included in the reconciliation contained in the said stipulation, it
maintains that the balance for Project 3 remains at P 5,529,495.76,70 and that the
balance for the construction of the drivers quarters in Project 3 remains
at P 232,367.96.
On its part, LCDC disputes the deletion by the CA of the lower courts grant of the
alleged P 7,112,738.82 unpaid balance for the concreting works in the Tektite
Building. The CA had ruled that this cause of action was withdrawn by the parties
when they did not include it in their Joint Stipulation of Facts. LCDC argues that to the
contrary, the silence of the Stipulation of Facts on this matter proves that the claim
still stands.71
Considering that the unpaid balances for Project 3, its drivers quarters, and the
concreting works in the Tektite Building were not covered by the Stipulation of Facts

entered into by the parties, we rule that no judicial admission could have been made
by LCDC regarding any issue involving the unpaid balances for those pieces of work.
We affirm in this case the doctrine that courts may rule or decide on matters that,
although not submitted as issues, were proven during trial. The admission of
evidence, presented to support an allegation not submitted as an issue, should be
objected to at the time of its presentation by the party to be affected thereby;
otherwise, the court may admit the evidence, and the fact that such evidence seeks to
prove a matter not included or presented as an issue in the pleadings submitted
becomes irrelevant, because of the failure of the appropriate party to object to the
presentation.
No objection was raised when LCDC presented evidence to prove the outstanding
balances for Project 3, its drivers quarters, and the concreting works in the Tektite
Building.
In Phil. Export and Foreign Loan Guarantee Corp. v. Phil. Infrastructures, et al., 72 this
Court held:
It is settled that even if the complaint be defective, but the parties go to trial thereon,
and the plaintiff, without objection, introduces sufficient evidence to constitute the
particular cause of action which it intended to allege in the original complaint, and the
defendant voluntarily produces witnesses to meet the cause of action thus
established, an issue is joined as fully and as effectively as if it had been previously
joined by the most perfect pleadings. Likewise, when issues not raised by the
pleadings are tried by express or implied consent of the parties, they shall be treated
in all respects as if they had been raised in the pleadings.
Considering the absence of timely and appropriate objections, the trial court did not
err in admitting evidence of the unpaid balances for Project 3, its drivers quarters,
and the concreting works in the Tektite Building. Furthermore, both the lower and the
appellate courts found that the supporting evidence presented by LCDC were
sufficient to prove that the claimed amounts were due, but that they remained unpaid.
LCDC should be held liable for the corrective works to redo or repair the defective
waterproofing in Project 2.
The waterproofing of Project 2 was not undertaken by LCDC. Instead, Vulchem
Corporation (Vulchem), which was recommended by Santos and Abcede, was hired
for that task. Vulchems waterproofing turned out to be defective. In order to correct or
repair the defective waterproofing, PRHC had to contract the services of another
corporation, which charged it P2,006,000.
Denying liability by alleging that PRHC forced it into hiring Vulchem Corporation for
the waterproofing works in Project 2, LCDC argues that under Article 1892, an agent
is responsible for the acts of the substitute if he was given the power to appoint a
substitute. Conversely, if it is the principal and not the agent who appointed the
substitute, the agent bears no responsibility for the acts of the sub-agent.73 The
provision reads:
"Art. 1892. The agent may appoint a substitute if the principal has not prohibited him
from doing so; but he shall be responsible for the acts of the substitute:
(1) When he was not given the power to appoint one;

(2) When he was given such power, but without designating the person, and
the person appointed was notoriously incompetent or insolvent."
LCDC argues that because PRHC, as the principal, had designated Vulchem as subagent, LCDC, as the agent, should not be made responsible for the acts of the
74
substitute, even in the instance where the latter were notoriously incompetent.
LCDCs reliance on Art. 1892 is misplaced. The principles of agency are not to be
applied to this case, since the legal relationship between PRHC and LCDC was not
one of agency, but was rather that between the owner of the project and an
independent contractor under a contract of service. Thus, it is the agreement between
the parties and not the Civil Code provisions on agency that should be applied to
resolve this issue.
Art. XIV of the Project 2 Agreement clearly states that if the contractor sublets any
part of the agreement to a third party, who in effect becomes a sub-contractor, the
losses or expenses that result from the acts/inactions of the sub-contractor should be
for the contractors account, to wit:
ARTICLE XIV ASSIGNMENT
This Agreement, and/or any of the payments to be due hereunder shall not be
assigned in whole or in part by the CONTRACTOR nor shall any part of the works be
sublet by CONTRACTOR without the prior written consent of OWNER, and such
consent shall not relieve the CONTRACTOR from full responsibility and liability for the
works hereunder shall not be granted in any event until CONTRACTOR has furnished
OWNER with satisfactory evidence that the Sub-Contractor is carrying ample
insurance to the same extent and in the same manner as herein provided to be
furnished by CONTRACTOR. If the agreement is assigned or any part thereof is
sublet, CONTRACTOR shall exonerate, indemnify and save harmless the OWNER
75
from and against any and all losses or expenses caused thereby.
LCDC had every right to reject Vulchem as sub-contractor for the waterproofing work
of Project 2 but it did not do so and proceeded to hire the latter. It is not unusual for
project owners to recommend sub-contractors, and such recommendations do not
diminish the liability of contractors in the presence of an Article XIV-type clause in the
construction agreement. The failure of LCDC to ensure that the work of its subcontractor is satisfactory makes it liable for the expenses PRHC incurred in order to
correct the defective works of the sub-contractor. The CA did not err in ruling that the
contract itself gave PRHC the authority to recover the expenses for the "re-do" works
arising from the defective work of Vulchem. 76
LCDC is entitled to attorneys fees and the expenses of litigation and costs.
According to the CA, LCDC was not entitled to attorneys fees, because it was not the
aggrieved party, but was the one that violated the terms of the construction
agreements and should thus be made to pay costs.77 LCDC claims, on the other
hand, that the CA seriously erred in deleting the lower courts award of P750,000
attorneys fees and the expenses of litigation in its favor, since this award is justified
78
under the law. To support its claim, LCDC cites Article 2208(5), which provides:
ART. 2208. In the absence of stipulation, attorneys fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:
...

...

...

(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiffs plainly valid, just and demandable claim;
...

...

...

Attorney's fees may be awarded when the act or omission of the defendant compelled
79
the plaintiff to incur expenses to protect the latters interest. In ABS-CBN
80
Broadcasting Corp. v. CA, we held thus:
The general rule is that attorney's fees cannot be recovered as part of damages
because of the policy that no premium should be placed on the right to litigate. They
are not to be awarded every time a party wins a suit. The power of the court to award
attorney's fees under Article 2208 demands factual, legal, and equitable justification.
Even when a claimant is compelled to litigate with third persons or to incur expenses
to protect his rights, still attorney's fees may not be awarded where no sufficient
showing of bad faith could be reflected in a party's persistence in a case other than an
erroneous conviction of the righteousness of his cause.
LCDC has failed to establish bad faith on the part of PRHC so as to sustain its
position that it is entitled to attorneys fees. Nevertheless, the CA erred in reversing
the lower courts Decision granting LCDCs claim for attorneys fees considering that
the construction agreements contain a penal clause that deals with the award of
attorneys fees, as follows:
In the event the OWNER/CONTRACTOR institutes a judicial proceeding in order to
enforce any terms or conditions of this Agreement, the CONTRACTOR/OWNER
should it be adjudged liable in whole or in part, shall pay the OWNER/CONTRACTOR
reasonable attorneys fees in the amount equivalent to Twenty Percent (20%) of the
total amount claimed in addition to all expenses of litigation and costs of the suit.
Equivalent to at least Twenty Percent (20%) of the total amount claimed in addition to
all expenses of litigation and costs of the suit.
As long as a stipulation does not contravene the law, morals, and public order, it is
binding upon the obligor.81Thus, LCDC is entitled to recover attorneys fees.
Nevertheless, this Court deems it proper to equitably reduce the stipulated amount.
Courts have the power to reduce the amount of attorneys fees when found to be
excessive,82viz:
We affirm the equitable reduction in attorneys fees. These are not an integral part of
the cost of borrowing, but arise only when collecting upon the Notes becomes
necessary. The purpose of these fees is not to give respondent a larger
compensation for the loan than the law already allows, but to protect it against any
future loss or damage by being compelled to retain counsel in-house or notto
institute judicial proceedings for the collection of its credit. Courts have has the power
to determine their reasonableness based on quantum meruit and to reduce the
amount thereof if excessive.83
We reverse the appellate courts Decision and reinstate the lower courts award of
attorneys fees, but reduce the amount from P750,000 to P200,000.
WHEREFORE, we SET ASIDE the Decision of the Court of Appeals and RULE as
follows:

I. We find Philippine Realty and Holdings Corporation (PRHC) LIABLE to Ley

Construction Development Corporation (LCDC) in the amount of P 64,029,710.22,
detailed as follows:
1. P 13,251,152.61 as balance yet unpaid by PRHC for Project 2;
2. P 1,703,955.07 as balance yet unpaid by PRHC for Project 1;
3. P 5,529,495.76 as balance yet unpaid by PRHC for Project 3;
4. P 232,367.96 as balance yet unpaid by PRHC for the drivers
quarters for Project 3;
5. P 36,000,000.00 as agreed upon in the escalation agreement
entered into by PRHCs representatives and LCDC for the Tektite
Building;
6. P 7,112,738.82 as balance yet unpaid by PRHC for the
concreting works from the ground floor to the fifth floor of the
Tektite Building;
7. P 200,000.00 as LCDCs reduced attorneys fees.
II. Further, we find LCDC LIABLE to PRHC in the amount of P 6,652,947.75 detailed
as follows:
1. P 4,646,947.75 for the overpayment made by PRHC for the
Tektite Building;
2. P 2,006,000.00 for the expenses incurred by PRHC for corrective
works to redo/repair the allegedly defective waterproofing
construction work done by LCDC in Project 2.
The respective liabilities of the parties as enumerated above are hereby SET OFF
against each other, and PRHC is hereby DIRECTED to pay LCDC the net amount
due, which is P 57,376,762.47, with legal interest from the date of the filing of
Complaint.
SO ORDERED.

G.R. No. 154127

December 8, 2003

ROMEO C. GARCIA, petitioner,

vs.
DIONISIO V. LLAMAS, respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the express assent
of the parties or by the complete incompatibility between the old and the new
agreements. Petitioner herein fails to show either requirement convincingly; hence,
the summary judgment holding him liable as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to
nullify the November 26, 2001 Decision2 and the June 26, 2002 Resolution3 of the
Court of Appeals (CA) in CA-GR CV No. 60521. The appellate court disposed as
follows:
"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from,
insofar as it pertains to [Petitioner] Romeo Garcia, must be, as it hereby is,
AFFIRMED, subject to the modification that the award for attorneys fees and cost of
suit is DELETED. The portion of the judgment that pertains to x x x Eduardo de Jesus
is SET ASIDE and VACATED. Accordingly, the case against x x x Eduardo de Jesus
is REMANDED to the court of origin for purposes of receiving ex parte [Respondent]
4
Dionisio Llamas evidence against x x x Eduardo de Jesus."
The challenged Resolution, on the other hand, denied petitioners Motion for
Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
"This case started out as a complaint for sum of money and damages by x x x
[Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia and Eduardo
de Jesus. Docketed as Civil Case No. Q97-32-873, the complaint alleged that on 23
December 1996[,] [petitioner and de Jesus] borrowed P400,000.00 from [respondent];
that, on the same day, [they] executed a promissory note wherein they bound
themselves jointly and severally to pay the loan on or before 23 January 1997 with a
5% interest per month; that the loan has long been overdue and, despite repeated
demands, [petitioner and de Jesus] have failed and refused to pay it; and that, by
reason of the[ir] unjustified refusal, [respondent] was compelled to engage the
services of counsel to whom he agreed to pay 25% of the sum to be recovered from
[petitioner and de Jesus], plus P2,000.00 for every appearance in court. Annexed to
the complaint were the promissory note above-mentioned and a demand letter, dated
02 May 1997, by [respondent] addressed to [petitioner and de Jesus].
"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed
no liability under the promissory note because he signed it merely as
anACCOMMODATION party for x x x de Jesus; and, alternatively, that he is
relieved from any liability arising from the note inasmuch as the loan had been paid
by x x x de Jesus by means of a check dated 17 April 1997; and that, in any event,

the issuance of the check and [respondents] acceptance thereof novated or

superseded the note.
"[Respondent] tendered a reply to [Petitioner] Garcias answer, thereunder asserting
that the loan remained unpaid for the reason that the check issued by x x x de Jesus
bounced, and that [Petitioner] Garcias answer was not even accompanied by a
certificate of non-forum shopping. Annexed to the reply were the face of the check
and the reverse side thereof.
"For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of
the supposed P400,000.00 loan, he received only P360,000.00, the P40,000.00
having been advance interest thereon for two months, that is, for January and
February 1997; that[,] in fact[,] he paid the sum of P120,000.00 by way of interests;
that this was made when [respondents] daughter, one Nits Llamas-Quijencio,
received from the Central Police District Command at Bicutan, Taguig, Metro Manila
(where x x x de Jesus worked), the sum of P40,000.00, representing the peso
equivalent of his accumulated leave credits, another P40,000.00 as advance interest,
and still anotherP40,000.00 as interest for the months of March and April 1997; that
he had difficulty in paying the loan and had asked [respondent] for an extension of
time; that [respondent] acted in bad faith in instituting the case, [respondent] having
agreed to accept the benefits he (de Jesus) would receive for his retirement, but
[respondent] nonetheless filed the instant case while his retirement was being
processed; and that, in defense of his rights, he agreed to pay his
counsel P20,000.00 [as] attorneys fees, plus P1,000.00 for every court appearance.
"During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did
they file any pre-trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his
counsel even manifested that he would no [longer] present evidence. Given this
development, the trial court gave [respondent] permission to present his evidence ex
parte against x x x de Jesus; and, as regards [Petitioner] Garcia, the trial court
directed [respondent] to file a motion for judgment on the pleadings, and for
[Petitioner] Garcia to file his comment or opposition thereto.
"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to
allow him to present his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a
[M]anifestation submitting his defense to a judgment on the pleadings. Subsequently,
[respondent] filed a [M]anifestation/[M]otion to submit the case for judgement on the
pleadings, withdrawing in the process his previous motion. Thereunder, he asserted
that [petitioners and de Jesus] solidary liability under the promissory note cannot be
any clearer, and that the check issued by de Jesus did not discharge the loan since
the check bounced."5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222)
disposed of the case as follows:
"WHEREFORE, premises considered, judgment on the pleadings is hereby rendered
in favor of [respondent] and against [petitioner and De Jesus], who are hereby
ordered to pay, jointly and severally, the [respondent] the following sums, to wit:
1) P400,000.00 representing the principal amount plus 5% interest thereon
per month from January 23, 1997 until the same shall have been fully paid,
less the amount of P120,000.00 representing interests already paid by x x x
de Jesus;

2) P100,000.00 as attorneys fees plus appearance fee of P2,000.00 for

each day of [c]ourt appearance, and;
3) Cost of this suit."6
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment on the
pleadings against De Jesus. According to the appellate court, his Answer raised
genuinely contentious issues. Moreover, he was still required to present his evidence
ex parte. Thus, respondent was not ipso facto entitled to the RTC judgment, even
though De Jesus had been declared in default. The case against the latter was
therefore remanded by the CA to the trial court for the ex parte reception of the
formers evidence.
As to petitioner, the CA treated his case as a summary judgment, because his
Answer had failed to raise even a single genuine issue regarding any material fact.
The appellate court ruled that no novation -- express or implied -- had taken place
when respondent accepted the check from De Jesus. According to the CA, the check
was issued precisely to pay for the loan that was covered by the promissory note
jointly and severally undertaken by petitioner and De Jesus. Respondents
acceptance of the check did not serve to make De Jesus the sole debtor because,
first, the obligation incurred by him and petitioner was joint and several; and, second,
the check -- which had been intended to extinguish the obligation -- bounced upon its
presentment.
Hence, this Petition.

Issues
Petitioner submits the following issues for our consideration:
"I
Whether or not the Honorable Court of Appeals gravely erred in not holding that
novation applies in the instant case as x x x Eduardo de Jesus had expressly
assumed sole and exclusive liability for the loan obligation he obtained from x x x
Respondent Dionisio Llamas, as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full amount of the
loan of P400,000.00 in favor of Respondent Llamas, although the check
subsequently bounced[;]
b) Acceptance of the check by the x x x respondent x x x which resulted in
[the] substitution by x x x de Jesus or [the superseding of] the promissory
note;
c) x x x de Jesus having paid interests on the loan in the total amount
of P120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus
that due to financial difficulties, he be given an extension of time to pay his
loan obligation and that his retirement benefits from the Philippine National
Police will answer for said obligation.
"II

Whether or not the Honorable Court of Appeals seriously erred in not holding that the
defense of petitioner that he was merely an accommodation party, despite the fact
that the promissory note provided for a joint and solidary liability, should have been
given weight and credence considering that subsequent events showed that the
principal obligor was in truth and in fact x x x de Jesus, as evidenced by the foregoing
circumstances showing his assumption of sole liability over the loan obligation.
"III
Whether or not judgment on the pleadings or summary judgment was properly availed
of by Respondent Llamas, despite the fact that there are genuine issues of fact, which
the Honorable Court of Appeals itself admitted in its Decision, which call for the
presentation of evidence in a full-blown trial."8
Simply put, the issues are the following: 1) whether there was novation of the
obligation; 2) whether the defense that petitioner was only an accommodation party
had any basis; and 3) whether the judgment against him -- be it a judgment on the
pleadings or a summary judgment -- was proper.
The Courts Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by
insisting that novation took place, either through the substitution of De Jesus as sole
debtor or the replacement of the promissory note by the check. Alternatively, the
former argues that the original obligation was extinguished when the latter, who was
his co-obligor, "paid" the loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The check could
not have extinguished the obligation, because it bounced upon presentment. By
9
law, the delivery of a check produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a
third person to the rights of the creditor.10 Article 1293 of the Civil Code defines
novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor gives him
rights mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1)
expromision and (2) delegacion. In expromision, the initiative for the change does not
come from -- and may even be made without the knowledge of -- the debtor, since it
consists of a third persons assumption of the obligation. As such, it logically requires
the consent of the third person and the creditor. In delegacion, the debtor offers, and
the creditor accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary. 11 Both modes of
12
substitution by the debtor require the consent of the creditor.

Novation may also be extinctive or modificatory. It is extinctive when an old obligation

is terminated by the creation of a new one that takes the place of the former. It is
merely modificatory when the old obligation subsists to the extent that it remains
13
compatible with the amendatory agreement. Whether extinctive or modificatory,
novation is made either by changing the object or the principal conditions, referred to
as objective or real novation; or by substituting the person of the debtor or
subrogating a third person to the rights of the creditor, an act known as subjective or
personal novation.14 For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.15
Novation may also be express or implied. It is express when the new obligation
declares in unequivocal terms that the old obligation is extinguished. It is implied
16
when the new obligation is incompatible with the old one on every point. The test of
incompatibility is whether the two obligations can stand together, each one with its
own independent existence.17
Applying the foregoing to the instant case, we hold that no novation took place.

and payment made by one of them extinguishes the obligation. It therefore follows
that in case the creditor fails to collect from one of the solidary debtors, he may still
proceed against the other or others. x x x "22
Moreover, it must be noted that for novation to be valid and legal, the law requires
23
that the creditor expressly consent to the substitution of a new debtor. Since
novation implies a waiver of the right the creditor had before the novation, such
waiver must be express.24 It cannot be supposed, without clear proof, that the present
respondent has done away with his right to exact fulfillment from either of the solidary
25
debtors.
More important, De Jesus was not a third person to the obligation. From the
beginning, he was a joint and solidary obligor of the P400,000 loan; thus, he can be
released from it only upon its extinguishment. Respondents acceptance of his check
did not change the person of the debtor, because a joint and solidary obligor is
required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to demand the
satisfaction of the whole obligation from any or all of the debtors. 26 It is up to the
former to determine against whom to enforce collection. 27 Having made himself jointly
and severally liable with De Jesus, petitioner is therefore liable28 for the entire
obligation.29
Second Issue:

The parties did not unequivocally declare that the old obligation had been
extinguished by the issuance and the acceptance of the check, or that the check
would take the place of the note. There is no incompatibility between the promissory
note and the check. As the CA correctly observed, the check had been issued
precisely to answer for the obligation. On the one hand, the note evidences the loan
obligation; and on the other, the check answers for it. Verily, the two can stand
together.

Petitioner avers that he signed the promissory note merely as an accommodation

party; and that, as such, he was released as obligor when respondent agreed to
extend the term of the obligation.

Neither could the payment of interests -- which, in petitioners view, also constitutes
18
novation -- change the terms and conditions of the obligation. Such payment was
already provided for in the promissory note and, like the check, was totally in accord
with the terms thereof.

"PROMISSORY NOTE

Accommodation Party

This reasoning is misplaced, because the note herein is not a negotiable instrument.
The note reads:

"P400,000.00

Also unmeritorious is petitioners argument that the obligation was novated by the
substitution of debtors. In order to change the person of the debtor, the old one must
be expressly released from the obligation, and the third person or new debtor must
assume the formers place in the relation. 19 Well-settled is the rule that novation is
never presumed.20 Consequently, that which arises from a purported change in the
person of the debtor must be clear and express. 21 It is thus incumbent on petitioner to
show clearly and unequivocally that novation has indeed taken place.

"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED

THOUSAND PESOS, Philippine Currency payable on or before January 23, 1997 at
No. 144 K-10 St. Kamias, Quezon City, with interest at the rate of 5% per month or
fraction thereof.

In the present case, petitioner has not shown that he was expressly released from the
obligation, that a third person was substituted in his place, or that the joint and
solidary obligation was cancelled and substituted by the solitary undertaking of De
Jesus. The CA aptly held:

By its terms, the note was made payable to a specific person rather than to bearer or
to order31 -- a requisite for negotiability under Act 2031, the Negotiable Instruments
Law (NIL). Hence, petitioner cannot avail himself of the NILs provisions on the
liabilities and defenses of an accommodation party. Besides, a non-negotiable note is
merely a simple contract in writing and is evidence of such intangible rights as may
32
have been created by the assent of the parties. The promissory note is thus covered
by the general provisions of the Civil Code, not by the NIL.

"x x x. Plaintiffs acceptance of the bum check did not result in substitution by de
Jesus either, the nature of the obligation being solidary due to the fact that the
promissory note expressly declared that the liability of appellants thereunder is joint
and [solidary.] Reason: under the law, a creditor may demand payment or
performance from one of the solidary debtors or some or all of them simultaneously,

"It is understood that our liability under this loan is jointly and severally [sic].
"Done at Quezon City, Metro Manila this 23rd day of December, 1996."30

Even granting arguendo that the NIL was applicable, still, petitioner would be liable for
the promissory note. Under Article 29 of Act 2031, an accommodation party is liable
for the instrument to a holder for value even if, at the time of its taking, the latter knew

the former to be only an accommodation party. The relation between an

accommodation party and the party accommodated is, in effect, one of principal and
surety -- the accommodation party being the surety.33 It is a settled rule that a surety
is bound equally and absolutely with the principal and is deemed an original
34
promissor and debtor from the beginning. The liability is immediate and direct.
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the pleadings
and a summary judgment. Under Section 3 of Rule 35 of the Rules of Court, a
summary judgment may be rendered after a summary hearing if the pleadings,
supporting affidavits, depositions and admissions on file show that (1) except as to
the amount of damages, there is no genuine issue regarding any material fact; and
(2) the moving party is entitled to a judgment as a matter of law.
A summary judgment is a procedural device designed for the prompt disposition of
actions in which the pleadings raise only a legal, not a genuine, issue regarding any
material fact.35 Consequently, facts are asserted in the complaint regarding which
there is yet no admission, disavowal or qualification; or specific denials or affirmative
defenses are set forth in the answer, but the issues are fictitious as shown by the
pleadings, depositions or admissions.36 A summary judgment may be applied for by
either a claimant or a defending party.37
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on
the pleadings is proper when an answer fails to render an issue or otherwise admits
the material allegations of the adverse partys pleading. The essential question is
whether there are issues generated by the pleadings.38 A judgment on the pleadings
may be sought only by a claimant, who is the party seeking to recover upon a claim,
counterclaim or cross-claim; or to obtain a declaratory relief. 39
Apropos thereto, it must be stressed that the trial courts judgment against petitioner
was correctly treated by the appellate court as a summary judgment, rather than as a
judgment on the pleadings. His Answer40 apparently raised several issues -- that he
signed the promissory note allegedly as a mere accommodation party, and that the
obligation was extinguished by either payment or novation. However, these are not
factual issues requiring trial. We quote with approval the CAs observations:
"Although Garcias [A]nswer tendered some issues, by way of affirmative defenses,
the documents submitted by [respondent] nevertheless clearly showed that the issues
so tendered were not valid issues. Firstly, Garcias claim that he was merely an
accommodation party is belied by the promissory note that he signed. Nothing in the
note indicates that he was only an accommodation party as he claimed to be. Quite
the contrary, the promissory note bears the statement: It is understood that our
liability under this loan is jointly and severally [sic]. Secondly, his claim that his codefendant de Jesus already paid the loan by means of a check collapses in view of
the dishonor thereof as shown at the dorsal side of said check."41
From the records, it also appears that petitioner himself moved to submit the case for
judgment on the basis of the pleadings and documents.1wphi1 In a written
Manifestation,42 he stated that "judgment on the pleadings may now be rendered
without further evidence, considering the allegations and admissions of the parties."43

In view of the foregoing, the CA correctly considered as a summary judgment that

which the trial court had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed Decision AFFIRMED.
Costs against petitioner.
SO ORDERED.

G.R. No. 123581 August 29, 1997

RODRIGO B. BANGAYAN, BENJAMIN B. BANGAYAN, ET. AL., petitioners,
vs.
THE HONORABLE COURT OF APPEALS and ANGELITA OCAMPO
LIM, respondents.

PUNO, J.:
In this petition for review, petitioners assail the decision of the Court of Appeals dated
February 21, 1995, in CA-G.R. SP No. 136101 reversing and setting aside the
decision of the Regional Trial Court of Manila, Branch 10, dated February 9, 1994, in
Civil Case No. 90-54459.
The facts show that on July 6, 1988, Teofista Ocampo and Petronilla Lingat entered
into a Contract of Lease involving a piece of land with a two storey building of mixed
materials located at 2309 Severino Street, Sta. Cruz, Manila, at a monthly rental of
P7,000.00. The lease contract contains the following provisions:
xxx xxx xxx

Since she failed and refused and still failing and refusing to
exercise her FIRST OPTION within the period stated in our letter,
our client is now free to offer the subject property to other interested
buyers and to entertain and receive offers for her consideration.
Meanwhile, your client is not precluded to make the offer.
Moreover, it shall now be on a "FIRST COME, FIRST SERVE"
basis as your client has waived her above mentioned privilege. 1
In March 1990, Petronilla Lingat agreed to sell the above property to Rodrigo,
Roberto, and Benjamin, Jr., all surnamed Bangayan, at P1,000,000.00. The
Bangayans partially paid the consideration. 2 On April 5, 1990, Atty. Amador advised
Ocampo of the sale of the property to the Bangayans. He also cancelled the Contract
of Lease for breach of its terms and conditions. Ocampo was asked to vacate the
premises and to pay the rentals in arrears. Ocampo did not heed the demand and an
ejectment case against her was filed by the Bangayans before the Metropolitan Trial
Court.
On May 7, 1990, Petronilla Lingat executed a Deed of Absolute Sale involving the
said property to the Bangayans. A new Transfer Certificate of Title No. 193035 was
issued by the Register of Deeds of Manila in favor of the Bangayans with the adverse
claim of Teofista Ocampo annotated therein.

4. The lessee hereby expressly warrants that the leased premises

shall be used exclusively by herfor an automobile supply and parts
company and partly as a dwelling place for her employees only and
the lessee is strictly prohibited from using the said premises for any
other purpose without the written consent of the lessor.

On September 18, 1990, Ocampo filed a complaint against Petronilla Lingat and the
Bangayans for the annulment of their deed of sale, cancellation of title issued to the
Bangayans, reconveyance of title and damages before the Regional Trial Court of
Manila, Branch 10. The case was docketed as Civil Case No. 90-54459.

5. The lessee shall not directly or indirectly sublease, assign,

transfer,
convey,
mortgage
or
in
any
manner
encumber its (sic) right of 1ease over the leased premises or any
portion thereof under any circumstances whatsoever.

While Civil Case No. 90-54459 was pending in the Regional Trial Court, the ejectment
case was decided against Ocampo by the Metropolitan Trial Court on February 21,
1991. The assailed decision was affirmed by the Regional Trial Court, the Court of
Appeals and by this Court on October 2, 1991.

8. The lessee hereby expressly acknowledges the right of the

lessor to sell the leased premises, but in the event of the sale, the
lessee shall be given by the lessor the FIRST OPTION to purchase
the property. And in the event that it is sold to a third person, the
lessor is duty bound to place a condition on the deed of sale to the
effect that this Lease Contract shall be binding and shall be
honored by the vendee.

It appears that Teofista Ocampo died in October 1991. She was substituted in Civil
Case No. 90-54459 by her daughter, Angelita Ocampo Lim. Allegedly, Teofista
Ocampo assigned her right of first option to buy the leased property to Angelita
Ocampo Lim before she died. On February 9, 1994, the Regional Trial Court of
3
Manila dismissed the case of Ocampo. It found that Teofista Ocampo cannot be
substituted by her daughter. It held that the death of Ocampo terminated her lease
contract with Lingat and extinguished all her rights therein, including her right of first
option.

xxx xxx xxx

On January 2, 1990, Atty. Almario Amador, counsel of Petronilla Lingat, notified
Teofista Ocampo by mail that she could exercise her right of first option within 30
days from receipt of his letter. In response, Ocampo asked Atty. Amador for the
selling price of the property. In a letter dated February 3, 1990, Atty. Amador informed
Ocampo that she should make a written offer to buy and indicate the price she was
willing to pay for the property.
The parties' negotiation appears to have bogged down on who should first make the
offer with a price. In a letter dated February 9, 1990, Ocampo reiterated to Atty.
Amador her desire to buy the property and again inquired about its price. On
February 22, 1990, Atty. Amador terminated the negotiation by sending the following
letter to Ocampo's counsel, viz:

Angelita Ocampo Lim appealed to the Court of Appeals. In a Decision dated February
21, 1995, the appellate court reversed the trial court. The dispositive portion of the
Decision states:
xxx xxx xxx
WHEREFORE, this petition is GRANTED. The challenged decision
of the Regional Trial Court of Manila, Branch 10, is hereby
REVERSED and SET ASIDE. A new judgment is entered (1)
declaring the deed of absolute sale between Petronilla Lingat and
the Bangayans to be null and void; (2) directing the Register of
Deeds of Manila to cancel Transfer Certificate of Title No. 193035;
and (3) ordering Petronilla Lingat to offer to sell the property to the
petitioner in accordance with the above discussion.

In this petition for review, the Bangayans pose the following issues for resolution: (1)
whether or not the termination of the Contract of Lease pursuant to the decision in the
ejectment case extinguished Teofista Ocampo's right of first option; (2) whether or not
Teofista Ocampo's right of first option provided for under the Contract of Lease was
violated by Petronilla Lingat and the Bangayans; and (3) whether or not the Court of
Appeals decided the case in a way not in accord with the applicable decision of the
Supreme Court.
We find merit in the petition.
The threshold issue is whether the late Teofista Ocampo has the right to assign her
right of first option under the lease contract to her daughter, Angelita Ocampo Lim. If
Ocampo's right is assignable, then her daughter, Angelita Ocampo Lim, can continue
Civil Case No. 90-54459.
The respondent Court of Appeals held that the said right of Ocampo is
transmissible, viz:
xxx xxx xxx
We found no legal or factual basis for concluding that the lease
contract between Teofista Ocampo and Lingat was automatically
extinguished upon the death of the former. There is no provision in
the law which so provides. It also appears from the pleadings and
the decision of the trial court that the lease contract in question
does not provide for such an eventuality.
Indeed, the right to continue a lease contract either as lessor or
lessee is not automatically extinguished by death of either of the
contracting parties without any express provision either by will or
agreement in this regard. It becomes part of the inheritance so that
the heirs of the decedent succeed to the rights and obligations of
the latter arising from the lease contract (III Tolentino: Civil Code of
the Philippines 14-15, 1979 ed.; III Paras: Civil Code of the
Philippines Annotated 7, 12th ed.).
We find this ruling erroneous. Firstly, the respondent Court of Appeals harbored the
wrong notion that Angelita Ocampo Lim inherited from Teofista Ocampo her right of
first option upon the latter's death. The evidence, however, shows that Ocampo
assigned her right of first option to Angelita even during her lifetime. The assignment
was made on August 23, 1990. This assignment has no legal warrant. Article 1311 of
the Civil Code is too clear to be misinterpreted. It provides that "contracts take effect
only between the parties, their assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible by their nature, or by
stipulation or
by
provision
of
law. . . ." In the case at bar, paragraphs 4 and 5 of the lease contract specifically
provide:
4. The lessee hereby expressly warrants that the leased premises
shall be used exclusively by herfor an automobile supply and parts
company and partly as a dwelling place for her employees only and
the latter is strictly prohibited from using the said premises for any
other purpose without the written consent of the lessor.

5. The lessee shall not directly or indirectly sublease, assign,

transfer,
convey,
mortgage
or
in
any
manner
encumber its (sic) right of lease over the leased premises or any
portion thereof under any circumstances whatsoever.
These stipulations are consistent with Article 1649 of the Civil Code which
provides that "the lessee cannot assign the lease without the consent of the
lessor, unless there is a stipulation to the contrary." We have held that the
consent of the lessor is necessary because the assignment of the lease
would involve the transfer, not only of rights but also of obligations. It
constitutes novation by a substitution of the person of one of the parties. 4
A reasonable perusal of paragraphs 4 and 5 of the lease contract reveals the intent of
the parties to limit their lease relationship to themselves alone. Paragraph 4 provides
that "the leased premises shall be used exclusivelyby her," referring to the late
Teofista Ocampo. Paragraph 5 prohibits Ocampo from directly or indirectly assigning,
transferring or conveying her right of lease over the leased premises or any portion
thereof under any circumstances whatsoever. It cannot be denied that Ocampo's right
of first option to buy the leased property in case of its sale is but part of the bigger
right to lease said property from Lingat. The option was given to Ocampo because
she was the lessee of the subject property. It was a component of the consideration
of the lease. The option was by no means an independent right which can be
exercised by Ocampo. It ought to follow that if Ocampo is barred by the contract from
assigning her right to lease the subject property to any other party, she is similarly
barred from assigning her first option to buy the leased property to her daughter,
Angelita Ocampo Lim. Needless to state, Angelita Ocampo Lim had no right to
substitute her mother, Teofista Ocampo, in Civil Case No. 90-54459.
IN VIEW WHEREOF, the decision of the respondent Court of Appeals dated February
21, 1995 is reversed and the decision of the RTC of Manila, Branch 10, dated
February 9, 1994 in Civil Case No. 90-54459 is reinstated. No costs.
SO ORDERED.

G.R. No. L-47369 June 30, 1987

JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners,
vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.

FELICIANO, J.:
This case was certified to us by the Court of Appeals in its resolution dated 11
November 1977 as one involving only questions of law and, therefore, falling within
the exclusive appellate jurisdiction of this Court under Section 17, Republic Act 296,
as amended.
In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and
was granted an increase in its line of credit from P400,000.00 to P800,000.00 (the
"Principal Obligation"), with the Philippine National Bank (PNB). To secure PNB's
approval, PAGRICO had to give a good and sufficient bond in the amount of
P400,000.00, representing the increment in its line of credit, to secure its faithful
compliance with the terms and conditions under which its line of credit was increased.
In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765,
issued by the respondent R & B Surety and Insurance Co., Inc. (R & B Surety") in the
specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO
and R & B Surety bound themselves jointly and severally to comply with the "terms
and conditions of the advance line [of credit] established by the [PNB]." PNB had the
right under the Surety Bond to proceed directly against R & B Surety "without the
necessity of first exhausting the assets" of the principal obligor, PAGRICO. The
Surety Bond also provided that R & B Surety's liability was not to be limited to the
principal sum of P400,000.00, but would also include "accrued interest" on the said
amount "plus all expenses, charges or other legal costs incident to collection of the
obligation [of R & B Surety]" under the Surety Bond.
In consideration of R & B Surety's issuance of the Surety Bond, two Identical
indemnity agreements were entered into with R & B Surety: (a) one agreement dated
23 December 1963 was executed by the Catholic Church Mart (CCM) and by
petitioner Joseph Cochingyan, Jr, the latter signed not only as President of CCM but
also in his personal and individual capacity; and (b) another agreement dated 24
December 1963 was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO),
Jose K. Villanueva and Liu Tua Ben Mr. Villanueva signed both as Manager of
PAGRICO and in his personal and individual capacity; Mr. Liu signed both as
President of PACOCO and in his individual and personal capacity.
Under both indemnity agreements, the indemnitors bound themselves jointly and
severally to R & B Surety to pay an annual premium of P5,103.05 and "for the faithful
compliance of the terms and conditions set forth in said SURETY BOND for a period
beginning ... until the same is CANCELLED and/or DISCHARGED." The Indemnity
Agreements further provided:
(b) INDEMNITY: TO indemnify the SURETY COMPANY for any
damage, prejudice, loss, costs, payments, advances and expenses
of whatever kind and nature, including [of] attorney's fees, which
the CORPORATION may, at any time, become liable for, sustain or
incur as consequence of having executed the above mentioned
Bond, its renewals, extensions or substitutions and said attorney's

fees [shall] not be less than twenty [20%] per cent of the total
amount claimed by the CORPORATION in each action, the same
to be due, demandable and payable, irrespective of whether the
case is settled judicially or extrajudicially and whether the amount
has been actually paid or not;
(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED
HEREWITH: The said indemnities will be paid to the
CORPORATION as soon as demand is received from the Creditor
or upon receipt of Court order or as soon as it becomes liable to
make payment of any sum under the terms of the above-mentioned
Bond, its renewals, extensions, modifications or substitutions,
whether the said sum or sums or part thereof, have been actually
paid or not.
We authorize the SURETY COMPANY, to accept in any case and
at its entire discretion, from any of us, payments on account of the
pending obligations, and to grant extension to any of us, to liquidate
said obligations, without necessity of previous knowledge of [or]
consent from the other obligors.
xxx xxx xxx
(e) INCONTESTABILITY OF PAYMENTS MADE BY THE
COMPANY. Any payment or disbursement made by the
SURETY COMPANY on account of the above-mentioned Bonds,
its renewals, extensions or substitutions, either in the belief that the
SURETY COMPANY was obligate[d] to make such payment or in
the belief that said payment was necessary in order to avoid
greater losses or obligations for which the SURETY COMPANY
might be liable by virtue of the terms of the above-mentioned Bond,
its renewals, extensions or substitutions, shall be final and will not
be disputed by the undersigned, who jointly and severally bind
themselves to indemnify the SURETY COMPANY of any and all
such payments as stated in the preceding clauses.
xxx xxx xxx
When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB
demanded payment from R & B Surety of the sum of P400,000.00, the full amount of
the Principal Obligation. R & B Surety made a series of payments to PNB by virtue of
that demand totalling P70,000.00 evidenced by detailed vouchers and receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr.
and Jose K. Villanueva for reimbursement of the payments made by it to the PNB and
for a discharge of its liability to the PNB under the Surety Bond. When petitioners
failed to heed its demands, R & B Surety brought suit against Joseph Cochingyan,
Jr., Jose K. Villanueva and Liu Tua Ben in the Court of First Instance of Manila,
praying principally that judgment be rendered:
b. Ordering defendants to pay jointly and severally, unto the
plaintiff, the sum of P20,412.20 representing the unpaid premiums
for Surety Bond No. 4765 from 1965 up to 1968, and the additional
amount of P5,103.05 yearly until the Surety Bond No. 4765 is

discharged, with interest thereon at the rate of 12% per annum;

[and]
c. Ordering the defendants to pay jointly and severally, unto the
plaintiff the sum of P400,000.00 representing the total amount of
the Surety Bond No. 4765 with interest thereon at the rate of 12%
per annum on the amount of P70,000.00 which had been paid to
the Phil. National Bank already, the interest to begin from the
month of September, 1966;
xxx xxx xxx
Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity
Agreement he executed in favor of R & B Surety: (i) did not express the true intent of
the parties thereto in that he had been asked by R & B Surety to execute the
Indemnity Agreement merely in order to make it appear that R & B Surety had
complied with the requirements of the PNB that credit lines be secured; (ii) was
executed so that R & B Surety could show that it was complying with the regulations
of the Insurance Commission concerning bonding companies; (iii) that R & B Surety
had assured him that the execution of the agreement was a mere formality and that
he was to be considered a stranger to the transaction between the PNB and R & B
Surety; and (iv) that R & B Surety was estopped from enforcing the Indemnity
Agreement as against him.
Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the
Indemnity Agreement in favor of R & B Surety only "for accommodation purposes"
and that it did not express their true intention; (ii) that the Principal Obligation of
PAGRICO to the PNB secured by the Surety Bond had already been assumed by
CCM by virtue of a Trust Agreement entered into with the PNB, where CCM
represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of
PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement was
thereby extinguished by novation arising from the change of debtor under the
Principal Obligation; and (iv) that the filing of the complaint was premature,
considering that R & B Surety filed the case against him as indemnitor although the
PNB had not yet proceeded against R & B Surety to enforce the latter's liability under
the Surety Bond.
Petitioner Cochingyan, however, did not present any evidence at all to support his
asserted defenses. Petitioner Villanueva did not submit any evidence either on his
"accommodation" defense. The trial court was therefore constrained to decide the
case on the basis alone of the terms of the Trust Agreement and other documents
submitted in evidence.
In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in
favor of R & B Surety, the dispositive portion of which reads as follows;
Premises considered, judgment is hereby rendered: (a) ordering
the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to
pay, jointly and severally, unto the plaintiff the sum of 400,000,00,
representing the total amount of their liability on Surety Bond No.
4765, and interest at the rate of 6% per annum on the following
amounts:
On P14,000.00 from September 27, 1966;

On P4,000.00 from November 28, 1966;

On P4,000.00 from December 14, 1966;
On P4,000.00 from January 19, 1967;
On P8,000.00 from February 13, 1967;
On P4,000.00 from March 6, 1967;
On P8,000.00 from June 24, 1967;
On P8,000. 00 from September 14, 1967;
On P8,000.00 from November 28, 1967; and
On P8,000. 00 from February 26, 1968
until full payment; (b) ordering said defendants to pay, jointly and
severally, unto the plaintiff the sum of P20,412.00 as the unpaid
premiums for Surety Bond No. 4765, with legal interest thereon
from the filing of plaintiff's complaint on August 1, 1968 until fully
paid, and the further sum of P4,000.00 as and for attorney's fees
and expenses of litigation which this Court deems just and
equitable.
There being no showing the summons was duly served upon the
defendant Liu Tua Ben who has filed no answer in this case,
plaintiff's complaint is hereby dismissed as against defendant Liu
Tua Ben without prejudice.
Costs against the defendants Joseph Cochingyan, Jr. and Jose K.
Villanueva.
Not satisfied with the decision of the trial court, the petitioners took this appeal to the
Court of Appeals which, as already noted, certified the case to us as one raising only
questions of law.
The issues we must confront in this appeal are:
1. whether or not the Trust Agreement had extinguished, by novation, the obligation
of R & B Surety to the PNB under the Surety Bond which, in turn, extinguished the
obligations of the petitioners under the Indemnity Agreements;
2. whether the Trust Agreement extended the term of the Surety Bond so as to
release petitioners from their obligation as indemnitors thereof as they did not give
their consent to the execution of the Trust Agreement; and
3. whether or not the filing of this complaint was premature since the PNB had not yet
filed a suit against R & B Surety for the forfeiture of its Surety Bond.
We address these issues seriatim.
1. The Trust Agreement referred to by both petitioners in their separate briefs, was
executed on 28 December 1965 (two years after the Surety Bond and the Indemnity
Agreements were executed) between: (1) Jose and Susana Cochingyan, Sr., doing
business under the name and style of the Catholic Church Mart, represented by
Joseph Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee;

and (3) the PNB asbeneficiary. The Trust Agreement provided, in pertinent part, as
follows:
WHEREAS, the TRUSTOR has guaranteed a bond in the amount
of P400,000.00 issued by the R & B Surety and Insurance Co. (R &
B) at the instance of Pacific Agricultural Suppliers, Inc. (PAGRICO)
on December 21, 1963, in favor of the BENEFICIARY in connection
with the application of PAGRICO for an advance line of
P400,000.00 to P800,000.00;
WHEREAS, the TRUSTOR has also guaranteed a bond issued by
the Consolacion Insurance & Surety Co., Inc. (CONSOLACION) in
the amount of P900,000.00 in favor of the BENEFICIARY to secure
certain credit facilities extended by the BENEFICIARY to the Pacific
Copra Export Co., Inc. (PACOCO);
WHEREAS, the PAGRICO and the PACOCO have defaulted in the
payment of their respective obligations in favor of the
BENEFICIARY guaranteed by the bonds issued by the R & B
and the CONSOLACION, respectively, and by reason of said
default, the BENEFICIARY has demanded compliance by the R &
B and the CONSOLACION of their respective obligations under the
aforesaid bonds;
WHEREAS, the TRUSTOR is, therefore, bound to comply with his
obligation under the indemnity agreements aforementioned
executed by him in favor of R & B and the CONSOLACION,
respectively and in order to forestall impending suits by the
BENEFICIARY against said companies, he is willing as he hereby
agrees to pay the obligations of said companies in favor of the
BENEFICIARY in the total amount of P1,300,000 without interest
from the net profits arising from the procurement of reparations
consumer goods made thru the allocation of WARVETS; . . .
l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA
as TRUSTEE for the purpose of paying to the BENEFICIARY
Philippine National Bank in the manner stated hereunder, the
obligations of the R & B under the R & B Bond No. G-4765 for
P400,000.00 dated December 23, 1963, and of the
CONSOLACION under The Consolacion Bond No. G-5938 of June
3, 1964 for P900,000.00 or the total amount of P1,300,000.00
without interest from the net profits arising from the procurement of
reparations consumer goods under the Memorandum of Settlement
and Deeds of Assignment of February 2, 1959 through the
allocation of WARVETS;
xxx xxx xxx
6. THE BENEFICIARY agrees to hold in abeyance any action to
enforce its claims against R & B and CONSOLACION, subject of
the bond mentioned above. In the meantime that this TRUST
AGREEMENT is being implemented, the BENEFICIARY hereby
agrees to forthwith reinstate the R & B and the CONSOLACION as
among the companies duly accredited to do business with the
BENEFICIARY and its branches, unless said companies have been

blacklisted for reasons other than those relating to the obligations

subject of the herein TRUST AGREEMENT;
xxx xxx xxx
9. This agreement shall not in any manner release the R & B and
CONSOLACION from their respective liabilities under the bonds
mentioned above. (emphasis supplied)
There is no question that the Surety Bond has not been cancelled or fully
discharged 2 by payment of the Principal Obligation. Unless, therefore, the Surety
Bond has been extinguished by another means, it must still subsist. And so must the
supporting Indemnity Agreements. 3
We are unable to sustain petitioners' claim that the Surety Bond and their respective
obligations under the Indemnity Agreements were extinguished by novation brought
about by the subsequent execution of the Trust Agreement.
Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which terminates it, either by changing its object or
principal conditions, or by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. 4 Novation through a change of
the object or principal conditions of an existing obligation is referred to as objective (or
real) novation. Novation by the change of either the person of the debtor or of the
creditor is described as subjective (or personal) novation. Novation may also be both
objective and subjective (mixed) at the same time. In both objective and subjective
novation, a dual purpose is achieved-an obligation is extinguished and a new one is
created in lieu thereof. 5
If objective novation is to take place, it is imperative that the new obligation expressly
declare that the old obligation is thereby extinguished, or that the new obligation be
6
on every point incompatible with the old one. Novation is never presumed: it must be
established either by the discharge of the old debt by the express terms of the new
agreement, or by the acts of the parties whose intention to dissolve the old obligation
7
as a consideration of the emergence of the new one must be clearly discernible.
Again, if subjective novation by a change in the person of the debtor is to occur, it is
not enough that the juridical relation between the parties to the original contract is
extended to a third person. It is essential that the old debtor be released from the
obligation, and the third person or new debtor take his place in the new relation. If the
old debtor is not released, no novation occurs and the third person who has assumed
the obligation of the debtor becomes merely a co-debtor or surety or a co-surety. 8
Applying the above principles to the instant case, it is at once evident that the Trust
Agreement does not expressly terminate the obligation of R & B Surety under the
Surety Bond. On the contrary, the Trust Agreement expressly provides for the
continuing subsistence of that obligation by stipulating that "[the Trust Agreement]
shall not in any manner release" R & B Surety from its obligation under the Surety
Bond.
Neither can the petitioners anchor their defense on implied novation. Absent an
unequivocal declaration of extinguishment of a pre-existing obligation, a showing of
complete incompatibility between the old and the new obligation (and nothing else)
would sustain a finding of novation by implication. 9 But where, as in this case, the
parties to the new obligation expressly recognize the continuing existence and validity

of the old one, where, in other words, the parties expressly negated the lapsing of the
old obligation, there can be no novation. The issue of implied novation is not reached
at all.
What the trust agreement did was, at most, merely to bring in another person or
persons-the Trustor[s]-to assume the same obligation that R & B Surety was bound to
perform under the Surety Bond. It is not unusual in business for a stranger to a
contract to assume obligations thereunder; a contract of suretyship or guarantee is
the classical example. The precise legal effect is the increase of the number of
persons liable to the obligee, and not the extinguishment of the liability of the first
debtor. 10 Thus, in Magdalena Estates vs. Rodriguez, 11 we held that:
[t]he mere fact that the creditor receives a guaranty or accepts
payments from a third person who has agreed to assume the
obligation, when there is no agreement that the first debtor shall be
released from responsibility, does not constitute a novation, and the
creditor can still enforce the obligation against the original debtor.
In the present case, we note that the Trustor under the Trust Agreement, the
CCM, was already previously bound to R & B Surety under its Indemnity Agreement.
Under the Trust Agreement, the Trustor also became directly liable to the PNB. So far
as the PNB was concerned, the effect of the Trust Agreement was that where there
had been only two, there would now be three obligors directly and solidarily bound in
favor of the PNB: PAGRICO, R & B Surety and the Trustor. And the PNB could
proceed against any of the three, in any order or sequence. Clearly, PNB never
intended to release, and never did release, R & B Surety. Thus, R & B Surety, which
was not a party to the Trust Agreement, could not have intended to release any of its
own indemnitors simply because one of those indemnitors, the Trustor under the
Trust Agreement, became also directly liable to the PNB.
2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as
indemnitor under the 24 December 1963 Indemnity Agreement with R & B Surety was
extinguished when the PNB agreed in the Trust Agreement "to hold in abeyance any
action to enforce its claims against R & B Surety .
The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and
severally (in solidum) to the R & B Surety] to become SURETY upon a SURETY
BOND demanded by and in favor of [PNB] in the sum of [P400,000.00] for the faithful
compliance of the terms and conditions set forth in said SURETY BOND ." This
part of the Agreement suggests that the indemnitors (including the petitioners) would
become co-sureties on the Security Bond in favor of PNB. The record, however, is
bereft of any indication that the petitioners-indemnitors ever in fact became cosureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes,
remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB
could not have directly demanded payment of the Principal Obligation from the
petitioners. Thus, we do not see how Article 2079 of the Civil Code-which provides in
part that "[a]n extension granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guaranty" could apply in the instant case.
The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was
concerned and any extension of time granted by PNB to any of the first-tier obligators
(PAGRICO, R &B Surety and the trustors[s]) could not prejudice the second-tier
parties.

There is no other reason why petitioner Villanueva's contention must fail. PNB's
undertaking under the Trust Agreement "to hold in abeyance any action to enforce its
claims" against R & B Surety did not extend the maturity of R & B Surety's obligation
under the Surety Bond. The Principal Obligation had in fact already matured, along
with that of R &B Surety, by the time the Trust Agreement was entered into.
Petitioner's Obligation had in fact already matured, for those obligations were to
amture "as soon as [R & B Surety] became liable to make payment of any sum under
the terms of the [Surety Bond] whether the said sum or sums or part thereof have
been actually paid or not." Thus, the situation was that precisely envisaged in Article
2079:
[t]he mere failure on the part of the creditor to demand payment
after the debt has become due does not of itself constitute any
extension of the referred to herein.(emphasis supplied)
The theory behind Article 2079 is that an extension of time given to the principal
debtor by the creditor without the surety of his right to pay the creditor and to be
immediately subrogated to the creditor's remedies against the principal debtor upon
the original maturity date. The surety is said to be entitled to protect himself against
the principal debtor upon the orginal maturity date. The surety is said to be entitled to
protect himself against the contingency of the principal debtor or the indemnitors
becoming insolvent during the extended period. The underlying rationale is not
present in the instant case. As this Court has held,
merely delay or negligence in proceeding against the principal will
not discharge a surety unless there is between the creditor and the
principal debtor a valid and binding agreement therefor, one which
tends to prejudice [the surety] or to deprive it of the power of
obtaining indemnity by presenting a legal objection for the time, to
the prosecution of an action on the original security. 12
In the instant case, there was nothing to prevent the petitioners from tendering
payment, if they were so minded, to PNB of the matured obligation on behalf of R & B
Surety and thereupon becoming subrogated to such remedies as R & B Surety may
have against PAGRICO.
3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity
Agreements (quoted above) allow R & B Surety to recover from petitioners even
before R & B Surety shall have paid the PNB. We have previously held similar
indemnity clauses to be enforceable and not violative of any public policy. 13
The petitioners lose sight of the fact that the Indemnity Agreements are contracts of
indemnification not only against actual loss but against liability as well. 14 While in a
contract of indemnity against loss as indemnitor will not be liable until the person to
be indemnified makes payment or sustains loss, in a contract of indemnity against
liability, as in this case, the indemnitor's liability arises as soon as the liability of the
person to be indemnified has arisen without regard to whether or not he has suffered
actual loss. 15 Accordingly, R & B Surety was entitled to proceed against petitioners
not only for the partial payments already made but for the full amount owed by
PAGRICO to the PNB.
Summarizing, we hold that :

(1) The Surety Bond was not novated by the Trust Agreement. Both agreements can
co-exist. The Trust Agreement merely furnished to PNB another party obligor to the
Principal Obligation in addition to PAGRICO and R & B Surety.
(2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim"
against R & B Surety did not amount to an "extension granted to the debtor" without
petitioner's consent so as to release petitioner's from their undertaking as indemnitors
of R & B Surety under the INdemnity Agreements; and
(3) Petitioner's are indemnitors of R & B Surety against both payments to and liability
for payments to the PNB. The present suit is therefore not premature despite the fact
that the PNB has not instituted any action against R & B Surety for the collection of its
matured obligation under the Surety Bond.
WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the
decision of the trial court is AFFIRMED in toto. Costs against the petitioners.
SO ORDERED.

G.R. No. L-56545 January 28, 1983

BERT OSMEA & ASSOCIATES, petitioners,
vs.
THE COURT OF APPEALS and SPOUSES PEDRO QUIMBO and LEONADIZA
QUIMBO, respondents.
Siguion Reyna, Montecillo & Ongsiako for petitioners.
Hilario Davide, Jr., for private respondents.
RESOLUTION

To pay, jointly and severally, the plaintiffs P3,040.00, with interest

at the legal rate from June 2, 1971 until the same shall have been
fully paid; P100,000.00 as compensation for the pecuniary loss
plaintiffs suffered for failure to construct their residential house;
P5,610.00 as reimbursement for the rentals plaintiffs paid from
January 1972 to September 6, 1974; P50,000.00 as moral
damages, P25,000.00 as exemplary damages, P5,000.00 as
attorney's fees; and the cost. 1
The Appellate Court affirmed the judgment of the Trial Court in toto. Hence, this
recourse by petitioner company, advancing tile following arguments:

MELENCIO-HERRERA, J.:

1) The Honorable Court of Appeals seriously erred in not having

considered the contract as having been novated by virtue of the
change in the subject matter or object of the contract;

Sought to be reversed in this Petition for Review on certiorari is the Decision of

respondent Court of Appeals in CA-G.R. No. 62601-R, entitled "Pedro Quimbo and
Leonadiza Quimbo vs. Carmen Siguenza and Helena Siguenza, Bert Osmea &
Associates, Inc." sentencing defendants, jointly and severally, to pay damages to the
plaintiffs, who are the private respondents herein.

2) The courts below seriously erred for having found petitioner to

have acted fraudulently where there is no evidence to support such
a finding;

Upon a review of the evidence, we find as established: (1) that on June 3, 1971, a
"Contract of Sale" over Lots 1 and 2, Block I, Phase II of the Clarita Subdivision, Cebu
City, for the total price of P15,200.00, was executed in favor of the Quimbo spouses.
The sellers were petitioner company, developer of the subdivision, and Carmen and
Helena Siguenza, owners of the property, represented by petitioner. Antonio V.
Osmea signed the contract on behalf of the company. Signing as witness was one
C. Siguenza.
(2) The spouses had intended to construct a house thereon inasmuch as their rented
abode, for which they were paying P170.00 monthly, had become inconvenient for
their family. Plans for the house were drawn. The spouses were ready to pay the
purchase price in full even before the due date of the first installment and advised
Helena Siguenza accordingly so that title in their names could be delivered to them.
On the pretext that a road would traverse the lots purchased, Helena proposed to
exchange another lot (Lot 409) with the same area for the lots purchased by the
spouses to which the latter hesitating agreed. Until 1973, however, no title could be
given the Quimbo spouses.
(3) It turned out that on December 15, 1969, or approximately a year and a half prior
to the sale in the spouses' favor, Lots Nos. 1 and 2 had already been sold to Dr.
Francisco Maningo (Exhs. "G " and "G-1 "), and that Transfer Certificates of Title Nos.
48546 and 48547 were issued in favor of Irenea Maningo on September 21, 1970
(Exhs. "H" and "H-1 "), or about nine months before. the sale. Annotated on said titles
were mortgages in favor of petitioner.
(4) Discovering this fact only in 1973, respondent spouses instituted this suit for
Damages against petitioner company and the Siguenzas on March 25, 1974.
In its judgment, the lower Court ordered petitioner company and the Siguenzas to pay
damages to respondent spouses as follows:
WHEREFORE, based on all the foregoing considerations, judgment
is hereby rendered in favor of the plaintiffs and against the
defendants ordering the latter:

3) The Court of Appeals committed serious error in law when it held

petitioner jointly and severally liable to pay P100,000.00 as
compensation for the pecuniary loss suffered by Mrs. Quimbo;
4) The Court seriously erred in holding petitioner jointly and
severally liable with the Siguenzas to pay moral damages to
Quimbo, there being no evidence showing fraud or bad faith
perpetrated by petitioner;
5) The lower court seriously erred in holding petitioner liable to pay
the sum of P5,610.00 as reimbursement for rentals because
Quimbo was no longer interested in the lots on which her house
was supposed to have been constructed but sought only for
reimbursement of the downpayment;
6) The Court below erred in holding petitioner liable jointly and
severally for exemplary damages, attorneys fees and costs;
7) The court seriously erred in fact and in law in holding petitioner
jointly and severally with the Siguenzas to return the downpayment.
Except for some items of damages awarded, we affirm.
1) Petitioner's contention that in. as much as respondent spouses had agreed to
exchange Lot 409 for Lots 1 and 2, the contract of sale had been novated and its
liability extinguished, in untenable. No new contract was ever executed between.
petitioner and respondent spouses, notwithstanding Helena Siguenza's assurances to
that effect. As held by respondent Court:
This stand taken by appellant only reveals its misconception of
novation. Novation is a contract containing two stipulations: one to
extinguish an existing obligation, the other to substitute a new one
in its place. It requires the creation of a new contractual relation as
well as the extinguishment of the old. There must be a consent of
all the parties to the substitution, resulting in the extinction of the

old obligation and the creation of a new valid one (Tiu Suico vs.
Habana, 45 Phil. 707). 2

The contract ... is clear that appellant is one of the Seller-of the lots
in question. We will not allow a variation of the terms of the written
contract by parole evidence, for there is never an allegation in the
appellant's answer that Exhibit 6-Osmea does not express the true
intent of the parties or that it is suffering from a vice or mistake or
imperfection. Further, appellant never asserted in its answer that it
is a mere agent of its co-defendant Helena. Indeed, the tenor of its
Answer is one which shows its admission that it is a co-seller of all
lots in subdivision which it is developing. We take particular
attention to appellant's admission in its answer to the allegations in
par. 4, 8 and 9 of appellees' complaint, which show that appellant
was not an agent but a co-seller of the lots. 8

2) Fraud has been established. As the trial Court had concluded:

There is no question that the defendants have conveyed and
disposed of Lots 1 and 2, Block I, Phase II of the Clarita Village
Subdivision to the plaintiffs at a time when they were no longer the
owners thereof. At the time of the execution of the contract of sale,
their only interest thereon was a mortgage lien in the amount of
P13,440.00. As mortgagee they did not have the right to sell the
same. Helena and Carmen Siguenza did not reveal this fact to the
plaintiffs and the latter relied on their assurances that the same
belong to them. Bert Osmea and Associates, Inc. as developer
and at the same time attorney-in-fact for Carmen and Helena
Siguenza similarly concealed this fact.1wph1.tTheir efforts to
cover up this fraud make the acts more detestable and obnoxious.
Defendants demonstrated palpable malice, bad faith, wantonness
and incurable dishonesty. 3
The finding of fraud in this case was a finding of fact and there are no factors which
can justify a reversal thereof.
3) The award in the amount of P100,000.00 representing pecuniary loss for not
having been able to build a P100,000.00 house should be eliminated. Respondent
spouses did not lose that amount. It was only the estimated cost of the house they
were unable to construct. It was an expense item, not expected income.
4) The amount of P5,610.00 awarded representing rentals the spouses could have
saved, from the time when the house was to be finished to the date when respondent
Leonadiza testified in Court (January 1972 to September 6, 1974), should also be
eliminated for being speculative. If they had built their P100,000.00 house, thus
avoiding the payment of rentals, they would, on the other hand, be losing interest or
income from that amount. Evidence that the plaintiff could have bettered his position
had it not been for the defendant's wrongful act cannot serve as basis for an award of
4
damages.
5) Fraud and bad faith by petitioner company and the Siguenzas having been
established, the award of moral damages is in order. Moral damages should be
reduced, however, from P50,000.00 to P10,000.00.
6) Moral damages having been awarded, exemplary damages were also properly
awarded. 5 They should be reduced, however, from P25,000.00 to P5,000.00.
7) The award of P5,000.00 as attorney's fees is affirmed inasmuch as respondent
spouses were compelled to litigate for the protection of their interests. 6
8) The portion of the Decision requiring petitioners and the Siguenzas to return the
downpayment of P3,040.00 is also justified. The Quimbo spouses are entitled to the
return of their downpayment, with interest at the legal rate from March 25, 1974 when
7
the instant, suit was commenced.
9) Petitioner's plea for exception from liability for damages on the ground that it was a
mere agent of the Siguenzas is untenable. The contract of sale describes petitioner
as seller together with the Siguenzas. In fact, petitioner was the lone signatory for the
sellers in said contract. As held by respondent Court:

ACCORDINGLY, the judgment appealed from is hereby modified in that petitioner is

hereby ordered to pay private respondents the following sums: P3,040.00 with
interest at the legal rate from March 25, 1974 until fully paid; P10,000.00 as moral
damages; P5,000.00 as exemplary damages; and P5,000.00 as attorney's fees.
Costs against petitioner company.
SO ORDERED.

G.R. No. 127897

November 15, 2001

DELSAN TRANSPORT LINES, INC., petitioner,

vs.
THE HON. COURT OF APPEALS and AMERICAN HOME ASSURANCE
CORPORATION, respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals
in CA-G.R. CV No. 39836 promulgated on June 17, 1996, reversing the decision of
the Regional Trial Court of Makati City, Branch 137, ordering petitioner to pay private
respondent the sum of Five Million Ninety-Six Thousand Six Hundred Thirty-Five
Pesos and Fifty-Seven Centavos (P5,096,635.57) and costs and the
Resolution2 dated January 21, 1997 which denied the subsequent motion for
reconsideration.
The facts show that Caltex Philippines (Caltex for brevity) entered into a contract of
affreightment with the petitioner, Delsan Transport Lines, Inc., for a period of one year
whereby the said common carrier agreed to transport Caltexs industrial fuel oil from
the Batangas-Bataan Refinery to different parts of the country. Under the contract,
petitioner took on board its vessel, MT Maysun 2,277.314 kiloliters of industrial fuel oil
of Caltex to be delivered to the Caltex Oil Terminal in Zamboanga City. The shipment
was insured with the private respondent, American Home Assurance Corporation.
On August 14, 1986, MT Maysum set sail from Batangas for Zamboanga City.
Unfortunately, the vessel sank in the early morning of August 16, 1986 near Panay
Gulf in the Visayas taking with it the entire cargo of fuel oil.
Subsequently, private respondent paid Caltex the sum of Five Million Ninety-Six
Thousand Six Hundred Thirty-Five Pesos and Fifty-Seven Centavos (P5,096,635.67)
representing the insured value of the lost cargo. Exercising its right of subrogation
under Article 2207 of the New Civil Code, the private respondent demanded of the
petitioner the same amount it paid to Caltex.1wphi1.nt
Due to its failure to collect from the petitioner despite prior demand, private
respondent filed a complaint with the Regional Trial Court of Makati City, Branch 137,
for collection of a sum of money. After the trial and upon analyzing the evidence
adduced, the trial court rendered a decision on November 29, 1990 dismissing the
complaint against herein petitioner without pronouncement as to cost. The trial court
found that the vessel, MT Maysum, was seaworthy to undertake the voyage as
determined by the Philippine Coast Guard per Survey Certificate Report No. M5-016MH upon inspection during its annual dry-docking and that the incident was caused
by unexpected inclement weather condition or force majeure, thus exempting the
common carrier (herein petitioner) from liability for the loss of its cargo. 3
The decision of the trial court, however, was reversed, on appeal, by the Court of
Appeals. The appellate court gave credence to the weather report issued by the
Philippine Atmospheric, Geophysical and Astronomical Services Administration
(PAGASA for brevity) which showed that from 2:00 oclock to 8:oo oclock in the
morning on August 16, 1986, the wind speed remained at 10 to 20 knots per hour
while the waves measured from .7 to two (2) meters in height only in the vicinity of the
Panay Gulf where the subject vessel sank, in contrast to herein petitioners allegation
that the waves were twenty (20) feet high. In the absence of any explanation as to
what may have caused the sinking of the vessel coupled with the finding that the

same was improperly manned, the appellate court ruled that the petitioner is liable on
its obligation as common carrier4 to herein private respondent insurance company as
subrogee of Caltex. The subsequent motion for reconsideration of herein petitioner
was denied by the appellate court.
Petitioner raised the following assignments of error in support of the instant
petition,5 to wit:
I
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF
THE REGIONAL TRIAL COURT.
II
THE COURT OF APPEALS ERRED AND WAS NOT JUSTIFIED IN
REBUTTING THE LEGAL PRESUMPTION THAT THE VESSEL MT
"MAYSUN" WAS SEAWORTHY.
III
THE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE
OF THE SUPREME COURT IN THE CASE OF HOME INSURANCE
CORPORATION V. COURT OF APPEALS.
Petitioner Delsan Transport Lines, Inc. invokes the provision of Section 113 of the
Insurance Code of the Philippines, which states that in every marine insurance upon
a ship or freight, or freightage, or upon any thin which is the subject of marine
insurance there is an implied warranty by the shipper that the ship is seaworthy.
Consequently, the insurer will not be liable to the assured for any loss under the
policy in case the vessel would later on be found as not seaworthy at the inception of
the insurance. It theorized that when private respondent paid Caltex the value of its
lost cargo, the act of the private respondent is equivalent to a tacit recognition that the
ill-fated vessel was seaworthy; otherwise, private respondent was not legally liable to
Caltex due to the latters breach of implied warranty under the marine insurance
policy that the vessel was seaworthy.
The petitioner also alleges that the Court of Appeals erred in ruling that MT Maysun
was not seaworthy on the ground that the marine officer who served as the chief mate
of the vessel, Francisco Berina, was allegedly not qualified. Under Section 116 of the
Insurance Code of the Philippines, the implied warranty of seaworthiness of the
vessel, which the private respondent admitted as having been fulfilled by its payment
of the insurance proceeds to Caltex of its lost cargo, extends to the vessels
complement. Besides, petitioner avers that although Berina had merely a 2 nd officers
license, he was qualified to act as the vessels chief officer under Chapter IV(403),
Category III(a)(3)(ii)(aa) of the Philippine Merchant Marine Rules and Regulations. In
fact, all the crew and officers of MT Maysun were exonerated in the administrative
investigation conducted by the Board of Marine Inquiry after the subject accident. 6
In any event, petitioner further avers that private respondent failed, for unknown
reason, to present in evidence during the trial of the instant case the subject marine
cargo insurance policy it entered into with Caltex. By virtue of the doctrine laid down
in the case of Home Insurance Corporation vs. CA,7 the failure of the private
respondent to present the insurance policy in evidence is allegedly fatal to its claim
inasmuch as there is no way to determine the rights of the parties thereto.

Hence, the legal issues posed before the Court are:

I
Whether or not the payment made by the private respondent to Caltex for
the insured value of the lost cargo amounted to an admission that the vessel
was seaworthy, thus precluding any action for recovery against the
petitioner.
II
Whether or not the non-presentation of the marine insurance policy bars the
complaint for recovery of sum of money for lack of cause of action.
We rule in the negative on both issues.
The payment made by the private respondent for the insured value of the lost cargo
operates as waiver of its (private respondent) right to enforce the term of the implied
warranty against Caltex under the marine insurance policy. However, the same
cannot be validly interpreted as an automatic admission of the vessels seaworthiness
by the private respondent as to foreclose recourse against the petitioner for any
liability under its contractual obligation as a common carrier. The fact of payment
grants the private respondent subrogatory right which enables it to exercise legal
remedies that would otherwise be available to Caltex as owner of the lost cargo
8
against the petitioner common carrier. Article 2207 of the New civil Code provides
that:
Art. 2207. If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of the
wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person
who has violated the contract. If the amount paid by the insurance company
does not fully cover the injury or loss, the aggrieved party shall be entitled to
recover the deficiency from the person causing the loss or injury.
The right of subrogation has its roots in equity. It is designed to promote and to
accomplish justice and is the mode which equity adopts to compel the ultimate
payment of a debt by one who in justice and good conscience ought to pay. 9 It is not
dependent upon, nor does it grow out of, any privity of contract or upon written
assignment of claim. It accrues simply upon payment by the insurance company of
the insurance claim.10 Consequently, the payment made by the private respondent
(insurer) to Caltex (assured) operates as an equitable assignment to the former of all
the remedies which the latter may have against the petitioner.
From the nature of their business and for reasons of public policy, common carriers
are bound to observe extraordinary diligence in the vigilance over the goods and for
the safety of passengers transported by them, according to all the circumstance of
each case.11 In the event of loss, destruction or deterioration of the insured goods,
common carriers shall be responsible unless the same is brought about, among
others, by flood, storm, earthquake, lightning or other natural disaster or calamity.12 In
all other cases, if the goods are lost, destroyed or deteriorated, common carriers are
presumed to have been at fault or to have acted negligently, unless they prove that
13
they observed extraordinary diligence.
In order to escape liability for the loss of its cargo of industrial fuel oil belonging to
Caltex, petitioner attributes the sinking of MT Maysun to fortuitous even or force

majeure. From the testimonies of Jaime Jarabe and Francisco Berina, captain and
chief mate, respectively of the ill-fated vessel, it appears that a sudden and
unexpected change of weather condition occurred in the early morning of August 16,
1986; that at around 3:15 oclock in the morning a squall ("unos") carrying strong
winds with an approximate velocity of 30 knots per hour and big waves averaging
eighteen (18) to twenty (20) feet high, repeatedly buffeted MT Maysun causing it to
tilt, take in water and eventually sink with its cargo. 14 This tale of strong winds and big
waves by the said officers of the petitioner however, was effectively rebutted and
15
belied by the weather report from the Philippine Atmospheric, Geophysical and
Astronomical Services Administration (PAGASA), the independent government
agency charged with monitoring weather and sea conditions, showing that from 2:00
oclock to 8:00 oclock in the morning on August 16, 1986, the wind speed remained
at ten (10) to twenty (20) knots per hour while the height of the waves ranged from .7
to two (2) meters in the vicinity of Cuyo East Pass and Panay Gulf where the subject
vessel sank. Thus, as the appellate court correctly ruled, petitioners vessel, MT
Maysun, sank with its entire cargo for the reason that it was not seaworthy. There
was no squall or bad weather or extremely poor sea condition in the vicinity when the
said vessel sank.
The appellate court also correctly opined that the petitioners witnesses, Jaime Jarabe
and Francisco Berina, ship captain and chief mate, respectively, of the said vessel,
could not be expected to testify against the interest of their employer, the herein
petitioner common carrier.
Neither may petitioner escape liability by presenting in evidence certificates 16 that
tend to show that at the time of dry-docking and inspection by the Philippine Coast
Guard, the vessel MT Maysun, was fit for voyage. These pieces of evidence do not
necessarily take into account the actual condition of the vessel at the time of the
commencement of the voyage. As correctly observed by the Court of appeals:
At the time of dry-docking and inspection, the ship may have appeared fit.
The certificates issued, however, do not negate the presumption of
unseaworthiness triggered by an unexplained sinking. Of certificates issued
in this regard, authorities are likewise clear as to their probative value,
(thus):
Seaworthiness relates to a vessels actual condition. Neither the
granting of classification or the issuance of certificates established
seaworthiness. (2-A Benedict on Admiralty, 7-3, Sec. 62).
And also:
Authorities are clear that diligence in securing certificates of
seaworthiness does not satisfy the vessel owners obligation. Also
securing the approval of the shipper of the cargo, or his surveyor, of
the condition of the vessel or her stowage does not establish due
diligence if the vessel was in fact unseaworthy, for the cargo owner
17
has no obligation in relation to seaworthiness. (Ibid.)
Additionally, the exoneration of MT Maysuns officers and crew by the Board of
Marine Inquiry merely concerns their respective administrative liabilities. It does not in
any way operate to absolve the petitioner common carrier from its civil liabilities. It
does not in any way operate to absolve the petitioner common carrier from its civil
liability arising from its failure to observe extraordinary diligence in the vigilance over
the goods it was transporting and for the negligent acts or omissions of its employees,

18

the determination of which properly belongs to the courts. In the case at bar,
petitioner is liable for the insured value of the lost cargo of industrial fuel oil belonging
to Caltex for its failure to rebut the presumption of fault or negligence as common
19
carrier occasioned by the unexplained sinking of its vessel, MT Maysun, while in
transit.
Anent the second issue, it is our view and so hold that the presentation in evidence of
the marine insurance policy is not indispensable in this case before the insurer may
recover from the common carrier the insured value of the lost cargo in the exercise of
its subrogatory right. The subrogation receipt, by itself, is sufficient to establish not
only the relationship of herein private respondent as insurer and Caltex, as the
assured shipper of the lost cargo of industrial fuel oil, but also the amount paid to
settle the insurance claim. The right of subrogation accrues simply upon payment by
the insurance company of the insurance claim.20
The presentation of the insurance policy was necessary in the case of Home
Insurance Corporation v. CA21 (a case cited by petitioner) because the shipment
therein (hydraulic engines) passed through several stages with different parties
involved in each stage. First, from the shipper to the port of departure; second, from
the port of departure to the M/S Oriental Statesman; third, from the M/S Oriental
Statesman to the M/S Pacific Conveyor; fourth, from the M/S Pacific Conveyor to the
port or arrival; fifth, from the port of arrival to the arrastre operator; sixth, from the
arrastre operator to the hauler, Mabuhay Brokerage Co., Inc. (private respondent
therein); and lastly, from the hauler to the consignee. We emphasized in that case
that in the absence of proof of stipulations to the contrary, the hauler can be liable
only for any damage that occurred from the time it received the cargo until it finally
delivered it to the consignee. Ordinarily, it cannot be held responsible for the handling
of the cargo before it actually received it. The insurance contract, which was not
presented in evidence in that case would have indicated the scope of the insurers
liability, if any, since no evidence was adduced indicating at what stage in the
handling process the damage to the cargo was sustained.
Hence, our ruling on the presentation of the insurance policy in the said case of Home
Insurance Corporation is not applicable to the case at bar. In contrast, there is no
doubt that the cargo of industrial fuel oil belonging to Caltex, in the case at bar, was
lost while on board petitioners vessel, MT Maysun, which sank while in transit in the
vicinity of Panay Gulf and Cuyo East Pass in the early morning of August 16, 1986.
WHEREFORE, the instant petition is DENIED. The Decision dated June 17, 1996 of
the Court of Appeals in CA-G.R. CV No. 39836 is AFFIRMED. Costs against the
petitioner.
SO ORDERED

G.R. No. 147724

June 8, 2004

LORENZO SHIPPING CORP., petitioner,

vs.
CHUBB and SONS, Inc., GEARBULK, Ltd. and PHILIPPINE TRANSMARINE
CARRIERS, INC., respondents.
DECISION
PUNO, J.:
On appeal is the Court of Appeals August 14, 2000 Decision1 in CA-G.R. CV No.
2
3
61334 and March 28, 2001 Resolution affirming the March 19, 1998 Decision of the
Regional Trial Court of Manila which found petitioner liable to pay respondent Chubb
and Sons, Inc. attorney's fees and costs of suit.
Petitioner Lorenzo Shipping Corporation (Lorenzo Shipping, for short), a domestic
corporation engaged in coastwise shipping, was the carrier of 581 bundles of black
steel pipes, the subject shipment, from Manila to Davao City. From Davao City,
respondent Gearbulk, Ltd., a foreign corporation licensed as a common carrier under
the laws of Norway and doing business in the Philippines through its agent,
respondent Philippine Transmarine Carriers, Inc. (Transmarine Carriers, for short), a
domestic corporation, carried the goods on board its vessel M/V San Mateo Victory to
the United States, for the account of Sumitomo Corporation. The latter, the
consignee, is a foreign corporation organized under the laws of the United States of
America. It insured the shipment with respondent Chubb and Sons, Inc., a foreign
corporation organized and licensed to engage in insurance business under the laws
of the United States of America.
The facts are as follows:
On November 21, 1987, Mayer Steel Pipe Corporation of Binondo, Manila,
4
loaded 581 bundles of ERW black steel pipes worth US$137,912.84 on
board the vessel M/V Lorcon IV, owned by petitioner Lorenzo Shipping, for
shipment to Davao City. Petitioner Lorenzo Shipping issued a clean bill of
5
lading designated as Bill of Lading No. T-3 for the account of the consignee,
Sumitomo Corporation of San Francisco, California, USA, which in turn,
insured the goods with respondent Chubb and Sons, Inc. 6
The M/V Lorcon IV arrived at the Sasa Wharf in Davao City on December 2, 1987.
Respondent Transmarine Carriers received the subject shipment which was
discharged on December 4, 1987, evidenced by Delivery Cargo Receipt No.
7
115090. It discovered seawater in the hatch of M/V Lorcon IV, and found the steel
pipes submerged in it. The consignee Sumitomo then hired the services of R.J. Del
Pan Surveyors to inspect the shipment prior to and subsequent to discharge. Del
Pans Survey Report8 dated December 4, 1987 showed that the subject shipment
was no longer in good condition, as in fact, the pipes were found with rust formation
on top and/or at the sides. Moreover, the surveyor noted that the cargo hold of the
M/V Lorcon IV was flooded with seawater, and the tank top was "rusty, thinning, and
with several holes at different places." The rusty condition of the cargo was noted on
the mates receipts and the checker of M/V Lorcon IV signed his conforme thereon.9
After the survey, respondent Gearbulk loaded the shipment on board its vessel M/V
San Mateo Victory, for carriage to the United States. It issued Bills of Lading Nos.
10
DAV/OAK 1 to 7, covering 364 bundles of steel pipes to be discharged at Oakland,

11

U.S.A., and Bills of Lading Nos. DAV/SEA 1 to 6, covering 217 bundles of steel
pipes to be discharged at Vancouver, Washington, U.S.A. All bills of lading were
marked "ALL UNITS HEAVILY RUSTED."
While the cargo was in transit from Davao City to the U.S.A., consignee Sumitomo
12
sent a letter of intent dated December 7, 1987, to petitioner Lorenzo Shipping,
which the latter received on December 9, 1987. Sumitomo informed petitioner
Lorenzo Shipping that it will be filing a claim based on the damaged cargo once such
damage had been ascertained. The letter reads:
Please be advised that the merchandise herein below noted has been
landed in bad order ex-Manila voyage No. 87-19 under B/L No. T-3 which
arrived at the port of Davao City on December 2, 1987.
The extent of the loss and/or damage has not yet been determined but apparently all
bundles are corroded. We reserve the right to claim as soon as the amount of claim is
determined and the necessary supporting documents are available.
Please find herewith a copy of the survey report which we had arranged for after
unloading of our cargo from your vessel in Davao.
We trust that you shall make everything in order.
On January 17, 1988, M/V San Mateo Victory arrived at Oakland, California, U.S.A.,
where it unloaded 364 bundles of the subject steel pipes. It then sailed to Vancouver,
Washington on January 23, 1988 where it unloaded the remaining 217 bundles.
Toplis and Harding, Inc. of San Franciso, California, surveyed the steel pipes, and
also discovered the latter heavily rusted. When the steel pipes were tested with a
silver nitrate solution, Toplis and Harding found that they had come in contact with
salt water. The survey report,13 dated January 28, 1988 states:
xxx
We entered the hold for a close examination of the pipe, which revealed
moderate to heavy amounts of patchy and streaked dark red/orange rust on
all lifts which were visible. Samples of the shipment were tested with a
solution of silver nitrate revealing both positive and occasional negative
chloride reactions, indicating pipe had come in contact with salt water. In
addition, all tension applied metal straps were very heavily rusted, and also
exhibited chloride reactions on testing with silver nitrate.
xxx
It should be noted that subject bills of lading bore the following remarks as to
conditions of goods: "ALL UNITS HEAVILY RUSTED." Attached herein is a
copy of a survey report issued by Del Pan Surveyors of Davao City,
Philippines dated, December 4, 1987 at Davao City, Philippines, which
describes conditions of the cargo as sighted aboard the vessel "LORCON
IV," prior to and subsequent to discharge at Davao City. Evidently, the
aforementioned rust damages were apparently sustained while the shipment
was in the custody of the vessel "LORCON IV," prior to being laden on board
the vessel "SAN MATEO VICTORY" in Davao.
Due to its heavily rusted condition, the consignee Sumitomo rejected the
damaged steel pipes and declared them unfit for the purpose they were

14

intended. It then filed a marine insurance claim with respondent Chubb and
Sons, Inc. which the latter settled in the amount of US$104,151.00. 15
On December 2, 1988, respondent Chubb and Sons, Inc. filed a complaint 16 for
collection of a sum of money, docketed as Civil Case No. 88-47096, against
respondents Lorenzo Shipping, Gearbulk, and Transmarine. Respondent Chubb and
Sons, Inc. alleged that it is not doing business in the Philippines, and that it is suing
under an isolated transaction.
On February 21, 1989, respondents Gearbulk and Transmarine filed their
17
answer with counterclaim and cross-claim against petitioner Lorenzo Shipping
denying liability on the following grounds: (a) respondent Chubb and Sons, Inc. has
no capacity to sue before Philippine courts; (b) the action should be dismissed on the
ground offorum non conveniens; (c) damage to the steel pipes was due to the
inherent nature of the goods or to the insufficiency of packing thereof; (d) damage to
the steel pipes was not due to their fault or negligence; and, (e) the law of the country
of destination, U.S.A., governs the contract of carriage.
Petitioner Lorenzo Shipping filed its answer with counterclaim on February 28, 1989,
and amended it on May 24, 1989. It denied liability, alleging, among others: (a) that
rust easily forms on steel by mere exposure to air, moisture and other marine
elements; (b) that it made a disclaimer in the bill of lading; (c) that the goods were
improperly packed; and, (d) prescription, laches, and extinguishment of obligations
and actions had set in.
The Regional Trial Court ruled in favor of the respondent Chubb and Sons, Inc.,
finding that: (1) respondent Chubb and Sons, Inc. has the right to institute this action;
and, (2) petitioner Lorenzo Shipping was negligent in the performance of its
obligations as a carrier. The dispositive portion of its Decision states:
WHEREFORE, the judgment is hereby rendered ordering Defendant
Lorenzo Shipping Corporation to pay the plaintiff the sum of US$104,151.00
or its equivalent in Philippine peso at the current rate of exchange with
interest thereon at the legal rate from the date of the institution of this case
until fully paid, the attorneys fees in the sum of P50,000.00, plus the costs of
the suit, and dismissing the plaintiffs complaint against defendants
Gearbulk, Ltd. and Philippine Transmarine Carriers, Inc., for lack of merit,
and the two defendants counterclaim, there being no showing that the
plaintiff had filed this case against said defendants in bad faith, as well as
the two defendants cross-claim against Defendant Lorenzo Shipping
Corporation, for lack of factual basis.18
Petitioner Lorenzo Shipping appealed to the Court of Appeals insisting that: (a)
respondent Chubb and Sons does not have capacity to sue before Philippine courts;
and, (b) petitioner Lorenzo Shipping was not negligent in the performance of its
obligations as carrier of the goods. The appellate court denied the petition and
affirmed the decision of the trial court.
The Court of Appeals likewise denied petitioner Lorenzo Shippings Motion for
Reconsideration19 dated September 3, 2000, in a Resolution20 promulgated on March
28, 2001.
Hence, this petition. Petitioner Lorenzo Shipping submits the following issues for
resolution:

(1) Whether or not the prohibition provided under Art. 133 of the Corporation
Code applies to respondent Chubb, it being a mere subrogee or assignee of
the rights of Sumitomo Corporation, likewise a foreign corporation admittedly
doing business in the Philippines without a license;
(2) Whether or not Sumitomo, Chubbs predecessor-in-interest, validly made
a claim for damages against Lorenzo Shipping within the period prescribed
by the Code of Commerce;
(3) Whether or not a delivery cargo receipt without a notation on it of
damages or defects in the shipment, which created a prima facie
presumption that the carrier received the shipment in good condition, has
been overcome by convincing evidence;
(4) Assuming that Lorenzo Shipping was guilty of some lapses in
transporting the steel pipes, whether or not Gearbulk and Transmarine, as
common carriers, are to share liability for their separate negligence in
21
handling the cargo.
In brief, we resolve the following issues:
(1) whether respondent Chubb and Sons has capacity to sue before the
Philippine courts; and,
(2) whether petitioner Lorenzo Shipping is negligent in carrying the subject
cargo.
Petitioner argues that respondent Chubb and Sons is a foreign corporation not
licensed to do business in the Philippines, and is not suing on an isolated transaction.
It contends that because the respondent Chubb and Sons is an insurance company, it
was merely subrogated to the rights of its insured, the consignee Sumitomo, after
paying the latters policy claim. Sumitomo, however, is a foreign corporation doing
business in the Philippines without a license and does not have capacity to sue
before Philippine courts. Since Sumitomo does not have capacity to sue, petitioner
then concludes that, neither the subrogee-respondent Chubb and Sons could sue
before Philippine courts.
We disagree with petitioner.
In the first place, petitioner failed to raise the defense that Sumitomo is a foreign
corporation doing business in the Philippines without a license. It is therefore
estopped from litigating the issue on appeal especially because it involves a question
of fact which this Court cannot resolve. Secondly, assuming arguendo that Sumitomo
cannot sue in the Philippines, it does not follow that respondent, as subrogee, has
also no capacity to sue in our jurisdiction.
Subrogation is the substitution of one person in the place of another with reference to
a lawful claim or right, so that he who is substituted succeeds to the rights of the other
in relation to a debt or claim, including its remedies or securities. 22 The principle
covers the situation under which an insurer that has paid a loss under an insurance
policy is entitled to all the rights and remedies belonging to the insured against a third
23
party with respect to any loss covered by the policy. It contemplates full substitution
such that it places the party subrogated in the shoes of the creditor, and he may use
24
all means which the creditor could employ to enforce payment.

The rights to which the subrogee succeeds are the same as, but not greater than,
those of the person for whom he is substituted he cannot acquire any claim,
security, or remedy the subrogor did not have. 25 In other words, a subrogee cannot
26
succeed to a right not possessed by the subrogor. A subrogee in effect steps into
the shoes of the insured and can recover only if insured likewise could have
recovered.
However, when the insurer succeeds to the rights of the insured, he does so only in
relation to the debt. The person substituted (the insurer) will succeed to all the rights
27
of the creditor (the insured), having reference to the debt due the latter. In the
instant case, the rights inherited by the insurer, respondent Chubb and Sons, pertain
only to the payment it made to the insured Sumitomo as stipulated in the insurance
contract between them, and which amount it now seeks to recover from petitioner
Lorenzo Shipping which caused the loss sustained by the insured Sumitomo. The
capacity to sue of respondent Chubb and Sons could not perchance belong to the
group of rights, remedies or securities pertaining to the payment respondent insurer
made for the loss which was sustained by the insured Sumitomo and covered by the
contract of insurance. Capacity to sue is a right personal to its holder. It is conferred
by law and not by the parties. Lack of legal capacity to sue means that the plaintiff is
not in the exercise of his civil rights, or does not have the necessary qualification to
appear in the case, or does not have the character or representation he claims. It
refers to a plaintiffs general disability to sue, such as on account of minority, insanity,
incompetence, lack of juridical personality, or any other disqualifications of a
party.28Respondent Chubb and Sons who was plaintiff in the trial court does not
possess any of these disabilities. On the contrary, respondent Chubb and Sons has
satisfactorily proven its capacity to sue, after having shown that it is not doing
business in the Philippines, but is suing only under an isolated transaction, i.e., under
the one (1) marine insurance policy issued in favor of the consignee Sumitomo
covering the damaged steel pipes.
The law on corporations is clear in depriving foreign corporations which are doing
business in the Philippines without a license from bringing or maintaining actions
before, or intervening in Philippine courts. Art. 133 of the Corporation Code states:
Doing business without a license. No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns,
shall be permitted to maintain or intervene in any action, suit or proceeding
in any court or administrative agency of the Philippines; but such corporation
may be sued or proceeded against before Philippine courts or administrative
tribunals on any valid cause of action recognized under Philippine laws.
The law does not prohibit foreign corporations from performing single acts of
business. A foreign corporation needs no license to sue before Philippine courts on
an isolated transaction.29 As held by this Court in the case ofMarshall-Wells
Company vs. Elser & Company:30
The object of the statute (Secs. 68 and 69, Corporation Law) was not to
prevent the foreign corporation from performing single acts, but to prevent it
from acquiring a domicile for the purpose of business without taking the
steps necessary to render it amenable to suit in the local courts . . . the
implication of the law (being) that it was never the purpose of the legislature
to exclude a foreign corporation which happens to obtain an isolated order
for business for the Philippines, from seeking redress in the Philippine
courts.

Likewise, this Court ruled in Universal Shipping Lines, Inc. vs. Intermediate
Appellate Court31 that:
. . . The private respondent may sue in the Philippine courts upon the marine
insurance policies issued by it abroad to cover international-bound cargoes
shipped by a Philippine carrier, even if it has no license to do business in this
country, for it is not the lack of the prescribed license (to do business in the
Philippines) but doing business without such license, which bars a foreign
corporation from access to our courts.
We reject the claim of petitioner Lorenzo Shipping that respondent Chubb and Sons
is not suing under an isolated transaction because the steel pipes, subject of this
case, are covered by two (2) bills of lading; hence, two transactions. The stubborn
fact remains that these two (2) bills of lading spawned from the single marine
insurance policy that respondent Chubb and Sons issued in favor of the consignee
Sumitomo, covering the damaged steel pipes. The execution of the policy is a single
act, an isolated transaction. This Court has not construed the term "isolated
transaction" to literally mean "one" or a mere single act. In Eriks Pte. Ltd. vs. Court
of Appeals, this Court held that:32
. . . What is determinative of "doing business" is not really the number or the
quantity of the transactions, but more importantly, the intention of an entity to
continue the body of its business in the country. The number and quantity
are merely evidence of such intention. The phrase "isolated transaction" has
a definite and fixed meaning, i.e. a transaction or series of transactions set
apart from the common business of a foreign enterprise in the sense that
there is no intention to engage in a progressive pursuit of the purpose and
object of the business organization. Whether a foreign corporation is "doing
business" does not necessarily depend upon the frequency of its
transactions, but more upon the nature and character of the transactions.
[Emphasis supplied.]
In the case of Gonzales vs. Raquiza, et al.,33 three contracts, hence three
transactions were challenged as void on the ground that the three American
corporations which are parties to the contracts are not licensed to do business in the
Philippines. This Court held that "one single or isolated business transaction does not
constitutedoing business within the meaning of the law. Transactions which are
occasional, incidental, and casual not of a character to indicate a purpose to
engage in business do not constitute the doing or engaging in business as
contemplated by law. Where the three transactions indicate no intent by the foreign
corporation to engage in a continuity of transactions, they do not constitute doing
business in the Philippines."
Furthermore, respondent insurer Chubb and Sons, by virtue of the right of
subrogation provided for in the policy of insurance, 34 is the real party in interest in the
action for damages before the court a quo against the carrier Lorenzo Shipping to
recover for the loss sustained by its insured. Rule 3, Section 2 of the 1997 Rules of
Civil Procedure defines a real party in interest as one who is entitled to the avails of
any judgment rendered in a suit, or who stands to be benefited or injured by it. Where
an insurance company as subrogee pays the insured of the entire loss it suffered, the
35
insurer-subrogee is the only real party in interest and must sue in its own name to
enforce its right of subrogation against the third party which caused the loss. This is
because the insurer in such case having fully compensated its insured, which
payment covers the loss in full, is subrogated to the insureds claims arising from

such loss. The subrogated insurer becomes the owner of the claim and, thus entitled
to the entire fruits of the action. 36 It then, thus possesses the right to enforce the claim
and the significant interest in the litigation. 37 In the case at bar, it is clear that
respondent insurer was suing on its own behalf in order to enforce its right of
subrogation.
On the second issue, we affirm the findings of the lower courts that petitioner Lorenzo
Shipping was negligent in its care and custody of the consignees goods.
The steel pipes, subject of this case, were in good condition when they were loaded
at the port of origin (Manila) on board petitioner Lorenzo Shippings M/V Lorcon IV en
route to Davao City. Petitioner Lorenzo Shipping issued clean bills of lading covering
the subject shipment. A bill of lading, aside from being a contract 38 and a receipt,39is
also a symbol40 of the goods covered by it. A bill of lading which has no notation of
any defect or damage in the goods is called a "clean bill of lading."41 A clean bill of
lading constitutes prima facie evidence of the receipt by the carrier of the goods as
therein described.42
The case law teaches us that mere proof of delivery of goods in good order to a
carrier and the subsequent arrival in damaged condition at the place of destination
raises a prima facie case against the carrier. 43 In the case at bar, M/V Lorcon IV of
petitioner Lorenzo Shipping received the steel pipes in good order and condition,
evidenced by the clean bills of lading it issued. When the cargo was unloaded from
petitioner Lorenzo Shippings vessel at the Sasa Wharf in Davao City, the steel pipes
were rusted all over. M/V San Mateo Victory of respondent Gearbulk, Ltd, which
received the cargo, issued Bills of Lading Nos. DAV/OAK 1 to 7 and Nos. DAV/SEA 1
to 6 covering the entire shipment, all of which were marked "ALL UNITS HEAVILY
RUSTED." R.J. Del Pan Surveyors found that the cargo hold of the M/V Lorcon IV
was flooded with seawater, and the tank top was rusty, thinning and perforated,
thereby exposing the cargo to sea water. There can be no other conclusion than that
the cargo was damaged while on board the vessel of petitioner Lorenzo Shipping,
and that the damage was due to the latters negligence. In the case at bar, not only
did the legal presumption of negligence attach to petitioner Lorenzo Shipping upon
the occurrence of damage to the cargo. 44 More so, the negligence of petitioner was
sufficiently established. Petitioner Lorenzo Shipping failed to keep its vessel in
seaworthy condition. R.J. Del Pan Surveyors found the tank top of M/V Lorcon IV to
be "rusty, thinning, and with several holes at different places." Witness Captain Pablo
Fernan, Operations Manager of respondent Transmarine Carriers, likewise observed
the presence of holes at the deck of M/V Lorcon IV.45 The unpatched holes allowed
seawater, reaching up to three (3) inches deep, to enter the flooring of the hatch of
the vessel where the steel pipes were stowed, submerging the latter in sea
46
water. The contact with sea water caused the steel pipes to rust. The silver nitrate
test,
which
Toplis
and
Harding
employed,
further
verified
this
conclusion.47 Significantly, petitioner Lorenzo Shipping did not even attempt to
present any contrary evidence. Neither did it offer any proof to establish any of the
causes that would exempt it from liability for such damage. 48 It merely alleged that
the: (1) packaging of the goods was defective; and (2) claim for damages has
prescribed.
To be sure, there is evidence that the goods were packed in a superior condition.
John M. Graff, marine surveyor of Toplis and Harding, examined the condition of the
cargo on board the vessel San Mateo Victory. He testified that the shipment had
superior packing "because the ends were covered with plastic, woven plastic.

Whereas typically they would not go to that bother ... Typically, they come in with no
plastic on the ends. They might just be banded, no plastic on the ends ..."49
On the issue of prescription of respondent Chubb and Sons claim for damages, we
rule that it has not yet prescribed at the time it was made.
Art. 366 of the Code of Commerce states:
Within the twenty-four hours following the receipt of the merchandise, the
claim against the carrier for damage or average, which may be found therein
upon the opening of the packages, may be made, provided that the
indications of the damage or average which gives rise to the claim cannot be
ascertained from the outside part of such package, in which case the claim
shall be admitted only at the time of the receipt.
After the periods mentioned have elapsed, or transportation charges have
been paid, no claim shall be admitted against the carrier with regard to the
condition in which the goods transported were delivered.
A somewhat similar provision is embodied in the Bill of Lading No. T-3 which reads:

50

NOTE: No claim for damage or loss shall be honored twenty-four (24) hours
after delivery.
(Ref. Art. 366 C Com.)
The twenty-four-hour period prescribed by Art. 366 of the Code of Commerce within
which claims must be presented does not begin to run until the consignee has
received such possession of the merchandise that he may exercise over it the
51
ordinary control pertinent to ownership. In other words, there must be delivery of the
cargo by the carrier to the consignee at the place of destination.52 In the case at bar,
consignee Sumitomo has not received possession of the cargo, and has not
physically inspected the same at the time the shipment was discharged from M/V
Lorcon IV in Davao City. Petitioner Lorenzo Shipping failed to establish that an
authorized agent of the consignee Sumitomo received the cargo at Sasa Wharf in
Davao City. Respondent Transmarine Carriers as agent of respondent Gearbulk, Ltd.,
which carried the goods from Davao City to the United States, and the principal,
respondent Gearbulk, Ltd. itself, are not the authorized agents as contemplated by
law. What is clear from the evidence is that the consignee received and took
possession of the entire shipment only when the latter reached the United States
shore. Only then was delivery made and completed. And only then did the 24-hour
prescriptive period start to run.
Finally, we find no merit to the contention of respondents Gearbulk and Transmarine
that American law governs the contract of carriage because the U.S.A. is the country
of destination. Petitioner Lorenzo Shipping, through its M/V Lorcon IV, carried the
goods from Manila to Davao City. Thus, as against petitioner Lorenzo Shipping, the
place of destination is Davao City. Hence, Philippine law applies.
IN VIEW THEREOF, the petition is DENIED. The Decision of the Court of Appeals in
CA-G.R. CV No. 61334 dated August 14, 2000 and its Resolution dated March 28,
2001 are hereby AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 142838

August 9, 2001

ABELARDO B. LICAROS, petitioner,

vs.
ANTONIO P. GATMAITAN, respondent.
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court. The
petition seeks to reverse and set aside the Decision1 dated February 10, 2000 of the
Court of Appeals and its Resolution2 dated April 7, 2000 denying petitioner's Motion
3
for Reconsideration thereto. The appellate court decision reversed the Decision dated
November 11, 1997 of the Regional Trial Court of Makati, Branch 145 in Civil Case
No. 96-1211.
The facts of the case, as stated in the Decision of the Court o Appeals dated
February 10, 2000, are as follows:
"The Anglo-Asean Bank and Trust Limited (Anglo-Asean, for brevity), is a
private bank registered and organized to do business under the laws of the
Republic of Vanuatu but not in the Philippines. Its business consists primarily
in receiving fund placements by way of deposits from institutions and
individuals investors from different parts of the world and thereafter investing
such deposits in money market placements and potentially profitable capital
ventures in Hongkong, Europe and the United States for the purpose of
maximizing the returns on those investments.
Enticed by the lucrative prospects of doing business with Anglo-Asean,
Abelardo Licaros, a Filipino businessman, decided to make a fund
placement with said bank sometime in the 1980's. As it turned out, the grim
outcome of Licaros' foray in overseas fund investment was not exactly what
he envisioned it to be. More particularly, Licaros, after having invested in
Anglo-Asean, encountered tremendous and unexplained difficulties in
retrieving, not only the interest or profits, but even the very investments he
had put in Anglo-Asean.1wphi1.nt
Confronted with the dire prospect of not getting back any of his investments,
Licaros then decide to seek the counsel of Antonio P. Gatmaitan, a
reputable banker and investment manager who had been extending
managerial, financial and investment consultancy services to various firms
and corporations both here and abroad. To Licaros' relief, Gatmaitan was
only too willing enough to help. Gatmaitan voluntarily offered to assume the
payment of Anglo-Asean's indebtedness to Licaros subject to certain terms
and conditions. In order to effectuate and formalize the parties' respective
commitments, the two executed a notarized MEMORANDUM OF
AGREEMENT on July 29, 1988 (Exh. "B"); also Exhibit "1"), the full text of
which reads:
Memorandum of Agreement
KNOW ALL MEN BY THESE PRESENTS:
This MEMORANDUM OF AGREEMENT made and executed this 29th day of July
1988, at Makati by and between:

ABELARDO B. LICAROS, Filipino, of legal age and holding office at Concepcion

Building, Intramuros, Manila hereinafter referred to as THE PARTY OF THE FIRST
PART,
and
ANTONIO P. GATMAITAN, Filipino, of legal age and residing at 7 Mangyan St., La
vista, hereinafter referred to as the PARTY OF THE SECOND PART,
WITNESSETH THAT:
WHEREAS, ANGLO-ASEAN BANK & TRUST, a company incorporated by the
Republic of Vanuatu, hereinafter referred to as the OFFSHORE BANK, is indebted to
the PARTY OF THE FIRST PART in the amount of US dollars; ONE HUNDRED
FIFTY THOUSAND ONLY (US$150,000) which debt is now due and demandable.
WHEREAS, the PARTY OF THE FIRST PART has encountered difficulties in
securing full settlement of the said indebtedness from the OFFSHORE BANK and has
sought a business arrangement with the PARTY OF THE SECOND PART regarding
his claims;
WHEREAS, the PARTY OF THE SECOND PART, with his own resources and due to
his association with the OFFSHORE BANK, has offered to the PARTY OF THE
FIRST PART to assume the payment of the aforesaid indebtedness, upon certain
terms and conditions, which offer, the PARTY OF THE FIRST PART has accepted;
WHREAS, the parties herein have come to an agreement on the nature, form and
extent of their mutual prestations which they now record herein with the express
conformity of the third parties concerned;
NOW, THEREFORE, for and in consideration of the foregoing and the mutual
covenants stipulated herein, the PARTY OF THE FIRST PART and the PARTY OF
THE SECOND PART have agreed, as they do hereby agree, as follows:
1. The PARTY OF THE SECOND PART hereby undertakes to pay the
PARTY OF THE FIRST PART the amount of US DOLLARS ONE
HOUNDRED FIFTY THOUSAND (US$150,000) payable in Philippine
Currency at the fixed exchange rate of Philippine Pesos 21 to US$1 without
interest on or before July 15, 1993.
For this purpose, the PARTY OF THE SECOND PART shall execute and
deliver a non negotiable promissory note, bearing the aforesaid material
consideration in favor of the PARTY OF THE FIRST PART upon execution
of this MEMORANDUM OF AGREEMENT, which promissory note shall form
part as ANNEX A hereof.
2. For and in consideration of the obligation of the PARTY OF THE
SECOND PART, the PARTY OF THE FIRST does hereby;
a. Sell, assign, transfer and set over unto the PARTY OF THE
SECOND PART that certain debt now due and owing to the PARTY
OF THE FIRST PART by the OFFSHORE BANK, to the amount of
US Dollars One Hundred Fifty Thousand plus interest due and
accruing thereon;
b. Grant the PART OF THE SECOND PART the full power and
authority, for his own use and benefit, but at his own cost and

expense, to demand, collect, receive, compound, compromise and

give acquittance for the same or any part thereof, and in the name
of the PARTY OF THE FIRST PART, to prosecute, and withdraw
any suit or proceedings therefor;
c. Agree and stipulate that the debt assigned herein is justly owing
and due to the PARTY OF THE FIRST PART from the said
OFFSHORE BANK, and that the PARTY OF THE FIRST PART has
not done and will not cause anything to be done to diminish or
discharge said debt, or to delay or prevent the PARTY OF THE
SECOND PART from collecting the same; and;
d. At the request of the PARTY OF SECOND PART and the latter's
own cost and expense, to execute and do all such further acts and
deeds as shall be reasonably necessary for proving said debt and
to more effectually enable the PARTY OF THE SECOND PART to
recover the same in accordance with the true intent and meaning of
the arrangements herein.
IN WITNESS WHEREOF, the parties have caused this MEMORANDUM OF
AGREEMENT to be signed on the date and place first written above.
Sgd.

Sgd.

ABELARDO B. LICAROS

ANTONIO P. GATMAITAN

PARTY OF THE FIRST PART

PARTY OF THE FIRST ART

WITH OUR CONFORME:

ANGLO-ASEAN BANK &amp; TRUST

BY: (Unsigned)

________________________________

Conformably with his undertaking under paragraph 1 of the aforequoted agreement,

Gatmaitan executed in favor of Licaros a NON-NEGOTIABLE PROMISSORY NOTE
WITH ASSIGNMENT OF CASH DIVIDENDS (Exhs. "A"; Also Exh. "2"), which
promissory note, appended as Annex "A" to the same Memorandum of Agreement,
states in full, thus
"NON-NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF CASH
DIVIDENDS
This promissory note is Annex A of the Memorandum of Agreement
executed between Abelardo B. Licaros and Antonio P. Gatmaitan, on
______ 1988 at Makati, Philippines and is an integral part of said
Memorandum of Agreement.
P3,150.00.
On or before July 15, 1993, I promise to pay to Abelardo B. Licaros the sum
of Philippine Pesos 3,150,000 (P3,150,000) without interest as material
consideration for the full settlement of his money claims from ANGLOASEAN BANK, referred to in the Memorandum of Agreement as the
'OFFSHORE BANK".
As security for the payment of this of Promissory Note. I hereby ASSIGN,
CEDE and TRANSFER, Seventy Percent (70%) of ALL CASH DIVIDENDS,
that may be due or owing to me as the registered owner of
__________________ (______________) shares of stock in the Prudential
Life Realty, Inc.
This assignment shall likewise include SEVENTY PERCENT (70%) of cash
dividends that may be declared by Prudential Life Realty, Inc. and due or
owing to Prudential Life Plan, Inc., of which I am a stockholder, to the extent
of or in proportion to my aforesaid shareholding in Prudential Life Plan, Inc,
the latter being the holding company of Prudential Life Realty, Inc.
In the event that I decide to sell or transfer my aforesaid shares in either or
both the Prudential Life Plan, Inc. or Prudential Life Realty, Inc. and the
Promissory Note remains unpaid or outstanding, I hereby give Mr. Abelardo
B. Licaros the first option to buy the said shares.
Manila, Philippines

SIGNED IN THE PRESENCE OF:

________________________________

July ______, 1988

(SGD.)

Sgd. (Illegible)
ANTONIO P. GATMAITAN
7 Mangyan St., La Vista QC

SIGNED IN THE PRESENCE OF:

(SGD.)
______________________________
_____
Francisco A. Alba
President, Prudential Life Plan, Inc."

_________________________

Thereafter, Gatmaitan presented to Anglo-Asean the Memorandum of Agreement

earlier executed by him and Licaros for the purpose of collecting the latter's
placement thereat of U.S. $150,000.00. Albeit the officers of Anglo-Asean allegedly
committed themselves to "look into [this matter]", no formal response was ever made
by said bank to either Licaros or Gatmaitan. To date, Anglo-Asean has not acted on
Gatmaitan's monetary claims.
Evidently, because of his inability to collect from Anglo-Asean, Gatmaitan did not
bother anymore to make good his promise to pay Licaros the amount stated in his
promissory note (Exh. "A"; also Exh. 2"). Licaros, however, thought differently. He felt
that he had a right to collect on the basis of the promissory note regardless of the
outcome of Gatmaitan's recovery efforts. Thus, in July, 1996, Licaros, thru counsel,
addressed successive demand letters to Gatmaitan (Exhs. "C" and "D"), demanding
payment of the later's obligations under the promissory note. Gatmaitan, however, did
not accede to these demands.
Hence, on August 1, 1996, in the Regional Trial Court at Makati, Licaros filed the
complaint in this case. In his complaint, docketed in the court below as Civil case No.
96-1211, Licaros prayed for a judgment ordering Gatmaitan to pay him the following:
'a) Principal Obligation in the amount of Three Million Five Hundred
Thousand Pesos (P3,500,000.00);
b) Legal interest thereon at the rate of six (6%) percent per annum from July
16, 1993 when the amount became due until the obligation is fully paid;
b) Twenty percent (20%) of the amount due as reasonable attorney's fees;
d) Costs of the suit.'"

After trial on the merits, the court a quo rendered judgment in favor of petitioner
Licaros and found respondent Gatmaitan liable under the Memorandum of Agreement
and Promissory Note for P3,150,000.00 plus 12% interest per annum from July 16,
1993 until the amount is fully paid. Respondent was likewise ordered to pay attorney's
fees of P200,000.00.5
Respondent Gatmaitan appealed the trial court's decision to the Court of Appeals. In
a decision promulgated on February 10, 2000, the appellate court reversed the
decision of the trial court and held that respondent Gatmaitan did not at any point
become obligated to pay to petitioner Licaros the amount stated in the promissory
note. In a Resolution dated April 7, 2000 the Court of Appeals denied petitioner's
Motion for Reconsideration of its February 10, 2000 Decision.
Hence this petition for review on certiorari where petitioner prays for the reversal of
the February 10, 2000 Decision of the Court of Appeals and the reinstatement of the
November 11, 1997 decision of the Regional Trial Court.
The threshold issue for the determination of this Court is whether the Memorandum of
Agreement between petitioner and respondent is one of assignment of credit or one

of conventional subrogation. This matter is determinative of whether or not

respondent became liable to petitioner under the promissory note considering that its
efficacy is dependent on the Memorandum of Agreement, the note being merely an
6
annex to the said memorandum.
An assignment of credit has been defined as the process of transferring the right of
the assignor to the assignee who would then have the right to proceed against the
debtor. The assignment may be done gratuitously or onerously, in which case, the
assignment has an effect similar to that of a sale. 7
On the other hand, subrogation has been defined as the transfer of all the rights of
the creditor to a third person, who substitutes him in all his rights. It may either be
legal or convention. Legal subrogation is that which takes place without agreement
but by operation of law because of certain acts. Conventional subrogation is that
which takes place by agreement of parties. 8
The general tenor of the foregoing definitions of the terms "subrogation" and
"assignment of credit" may make it seem that they are one and the same which they
are not. A noted expert in civil law notes their distinctions thus:
"Under our Code, however, conventional subrogation is not identical to
assignment of credit. In the former, the debtor's consent is necessary; in the
latter it is not required. Subrogation extinguishes the obligation and gives
rise to a new one; assignment refers to the same right which passes from
one person to another. The nullity of an old obligation may be cured by
subrogation, such that a new obligation will be perfectly valid; but the nullity
of an obligation is not remedied by the assignment of the creditor's right to
another."9
For our purposes, the crucial distinction deals with the necessity of the consent of the
debtor in the original transaction. In an assignment of credit, the consent of the debtor
is not necessary in order that the assignment may fully produce legal effects. 10 What
the law requires in an assignment of credit is not the consent of the debtor but merely
notice to him as the assignments takes effect only from the time he has knowledge
thereof.11 A creditor may, therefore, validly assign his credit and its accessories
12
without the debtor's consent. On the other hand, conventional subrogation requires
an agreement among the three parties concerned the original creditor, the debtor,
and the new creditor. It is a new contractual relation based on the mutual agreement
among all the necessary parties. Thus, Article 1301 of the Civil Code explicitly states
that "(C)onventional subrogation of a third person requires the consent of the original
parties and of the third person."
The trial court, in finding for the petitioner, ruled that the Memorandum of Agreement
was in the nature of an assignment of credit. As such, the court a quo held
respondent liable for the amount stated in the said agreement even if the parties
thereto failed to obtain the consent of Anglo-Asean Bank. On the other hand, the
appellate court held that the agreement was one of conventional subrogation which
necessarily requires the agreement of all the parties concerned. The Court of Appeals
thus ruled that the Memorandum of Agreement never came into effect due to the
failure of the parties to get the consent of Anglo-Asean Bank to the agreement and,
as such, respondent never became liable for the amount stipulated.
We agree with the finding of the Court of Appeals that the Memorandum of
Agreement dated July 29, 1988 was in the nature of a conventional subrogation which

requires the consent of the debtor, Anglo-Asean Bank, for its validity. We note with
approval the following pronouncement of the Court of Appeals:

consent of the debtor is needed in the subrogation of a third person to the rights of a
creditor.

"Immediately discernible from above is the common feature of contracts

involving conventional subrogation, namely, the approval of the debtor to the
subrogation of a third person in place of the creditor. That Gatmaitan and
Licaros had intended to treat their agreement as one of conventional
subrogation is plainly borne by a stipulation in their Memorandum of
Agreement, to wit:

In this petition, petitioner assails the ruling of the Court of Appeals that what was
entered into by the parties was a conventional subrogation of petitioner's rights as
creditor of the Anglo-Asean Bank which necessary requires the consent of the latter.
In support, petitioner alleges that: (1) the Memorandum of Agreement did not create a
new obligation and, as such, the same cannot be a conventional subrogation; (2) the
consent of Anglo-Asean Bank was not necessary for the validity of the Memorandum
of Agreement; (3) assuming that such consent was necessary, respondent failed to
secure the same as was incumbent upon him; and (4) respondent himself admitted
that the transaction was one of assignment of credit.

"WHEREAS, the parties herein have come to an agreement on the nature,

form and extent of their mutual prestations which hey now record herein with
the express conformity of the third parties concerned" (emphasis supplied),
which third party is admittedly Anglo-Asean Bank.
Had the intention been merely to confer on appellant the status of a mere
"assignee" of appellee's credit, there is simply no sense for them to have
stipulated in their agreement that the same is conditioned on the "express
conformity" thereto of Anglo-Asean Bank. That they did so only accentuates
their intention to treat the agreement as one of conventional subrogation.
And it is basic in the interpretation of contracts that the intention of the
parties must be the one pursued (Rule 130, Section 12, Rules of Court).
Given our finding that the Memorandum of Agreement (Exh. "B"; also Exh.
"1"), is not one of "assignment of credit" but is actually a "conventional
subrogation", the next question that comes to mind is whether such
agreement was ever perfected at all. Needless to state, the perfection or
non-perfection of the subject agreement is of utmost relevance at this
point. For, if the same Memorandum of Agreement was actually perfected,
then it cannot be denied that Gatmaitan still has a subsisting commitment to
pay Licaros on the basis of his promissory note. If not, Licaros' suit for
collection must necessarily fail.
Here, it bears stressing that the subject Memorandum of Agreement
expressly requires the consent of Anglo-Asean to the subrogation. Upon
whom the task of securing such consent devolves, be it on Licaros or
Gatmaitan, is of no significance. What counts most is the hard reality that
there has been an abject failure to get Anglo-Asean's nod of approval over
Gatmaitan's being subrogated in the place of Licaros. Doubtless, the
absence of such conformity on the part of Anglo-Asean, which is thereby
made a party to the same Memorandum of Agreement, prevented the
agreement from becoming effective, much less from being a source of any
cause of action for the signatories thereto"13
Aside for the "whereas clause" cited by the appellate court in its decision, we likewise
note that on the signature page, right under the place reserve for the signatures of
petitioner and respondent, there is, typewritten, the words "WITH OUR CONFORME."
Under this notation, the words "ANGLO-ASEAN BANK AND TRUST" were written by
hand.14 To our mind, this provision which contemplates the signed conformity of
Anglo-Asean Bank, taken together with the aforementioned preambulatory clause
leads to the conclusion that both parties intended that Anglo-Asean Bank should
signify its agreement and conformity to the contractual arrangement between
petitioner and respondent. The fact that Anglo-Asean Bank did not give such consent
rendered the agreement inoperative considering that, as previously discussed, the

Petitioner argues that the parties to the Memorandum of Agreement could not have
intended the same to be a conventional subrogation considering that no new
obligation was created. According to petitioner, the obligation of Anglo-Asean Bank to
pay under Contract No. 00193 was not extinguished and in fact, it was the basic
intention of the parties to the Memorandum of Agreement to enforce the same
obligation of Anglo-Asean Bank under its contract with petitioner. Considering that the
old obligation of Anglo-Asean Bank under Contract No. 00193 was never
extinguished under the Memorandum of Agreement, it is contended that the same
could not be considered as a conventional subrogation.
We are not persuaded.
It is true that conventional subrogation has the effect of extinguishing the old
obligation and giving rise to a new one. However, the extinguishment of the old
obligation is the effect of the establishment of a contract for conventional subrogation.
It is not a requisite without which a contract for conventional subrogation may not be
created. As such, it is not determinative of whether or not a contract of conventional
subrogation was constituted.
Moreover, it is of no moment that the subject of the Memorandum of Agreement was
the collection of the obligation of Anglo-Asean Bank to petitioner Licaros under
Contract No. 00193. Precisely, if conventional subrogation had taken place with the
consent of Anglo-Asian Bank to effect a change in the person of its creditor, there is
necessarily created a new obligation whereby Anglo-Asean Bank must now give
payment to its new creditor, herein respondent.
Petitioner next argues that the consent or conformity of Anglo-Asean Bank is not
necessary to the validity of the Memorandum of Agreement as the evidence on record
allegedly shows that it was never the intention of the parties thereto to treat the same
as one of conventional subrogation. He claims that the preambulatory clause
requiring the express conformity of third parties, which admittedly was Anglo-Asean
Bank, is a mere surplusage which is not necessary to the validity of the agreement.
As previously discussed, the intention of the parties to treat the Memorandum of
Agreement as embodying a conventional subrogation is shown not only by the
"whereas clause" but also by the signature space captioned "WITH OUR
CONFORME" reserved for the signature of a representative of Anglo-Asean Bank.
These provisions in the aforementioned Memorandum of Agreement may not simply
be disregarded or dismissed as superfluous.
It is a basic rule in the interpretation of contracts that "(t)he various stipulations of a
contract shall be interpreted together, attributing to the doubtful ones that sense

15

which may result from all of them taken jointly." Moreover, under our Rules of Court,
it is mandated that "(I)n the construction of an instrument where there are several
provisions or particulars, such a construction is, if possible, to be adopted as will give
16
effect to all." Further, jurisprudence has laid down the rule that contracts should be
17
so construed as to harmonize and give effect to the different provisions thereof.
In the case at bench, the Memorandum of Agreement embodies certain provisions
that are consistent with either a conventional subrogation or assignment of credit. It
has not been shown that any clause or provision in the Memorandum of Agreement is
inconsistent or incompatible with a conventional subrogation. On the other hand, the
two cited provisions requiring consent of the debtor to the memorandum is
inconsistent with a contract of assignment of credit. Thus, if we were to interpret the
same as one of assignment of credit, then the aforementioned stipulations regarding
the consent of Anglo-Asean Bank would be rendered inutile and useless considering
that, as previously discussed, the consent of the debtor is not necessary in an
assignment of credit.
Petitioner next argues that assuming that the conformity of Anglo-Asean was
necessary to the validity of the Memorandum of Agreement, respondently only had
himself to blame for the failure to secure such conformity as was, allegedly,
incumbent upon him under the memorandum.
As to this argument regarding the party responsible for securing the conformity of
Anglo-Asean Bank, we fail to see how this question would have any relevance on the
outcome of this case. Having ruled that the consent of Anglo-Asean was necessary
for the validity of the Memorandum of Agreement, the determinative fact is that such
consent was not secured by either petitioner or respondent which consequently
resulted in the invalidity of the said memorandum.
With respect to the argument of petitioner that respondent himself allegedly admitted
in open court that an assignment of credit was intended, it is enough to say that
respondent apparently used the word "assignment" in his testimony in the general
sense. Respondent is not a lawyer and as such, he is no so well versed in law that he
would be able to distinguish between the concepts of conventional subrogation and of
assignment of credit. Moreover, even assuming that there was an admission on his
part, such admission is not conclusive on this court as the nature and interpretation of
the Memorandum of Agreement is a question of law which may not be the subject of
stipulations and admission.18
Considering the foregoing, it cannot then be said that the consent of the debtor AngloAsean Bank is not necessary to the validity of the Memorandum of Agreement. As
above stated, the Memorandum of Agreement embodies a contract for conventional
subrogation and in such a case, the consent of the original parties and the third
19
person is required. The absence of such conformity by Anglo-Asean Bank
prevented the Memorandum of Agreement from becoming valid and effective.
Accordingly, the Court of Appeals did not err when it ruled that the Memorandum of
Agreement was never perfected.
Having arrived at the above conclusion, the Court finds no need to discuss the other
issues raised by petitioner.
WHEREFORE, the instant petition is DENIED and the Decision of the Court of
Appeals dated February 10, 2000 and its Resolution dated April 7, 2000 are hereby
AFFIRMED.

G.R. No. 150094

August 18, 2004

FEDERAL EXPRESS CORPORATION, petitioner,

vs.
AMERICAN HOME ASSURANCE COMPANY and PHILAM INSURANCE
COMPANY, INC., respondents.

DECISION

PANGANIBAN, J.:
Basic is the requirement that before suing to recover loss of or damage to transported
goods, the plaintiff must give the carrier notice of the loss or damage, within the
period prescribed by the Warsaw Convention and/or the airway bill.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging
the June 4, 2001 Decision2and the September 21, 2001 Resolution3 of the Court of
Appeals (CA) in CA-GR CV No. 58208. The assailed Decision disposed as follows:
"WHEREFORE, premises considered, the present appeal is hereby
DISMISSED for lack of merit. The appealed Decision of Branch 149 of the
Regional Trial Court of Makati City in Civil Case No. 951219,entitled 'American Home Assurance Co. and PHILAM Insurance Co.,
Inc. v. FEDERAL EXPRESS CORPORATION and/or CARGOHAUS, INC.
(formerly U-WAREHOUSE, INC.),' is hereby AFFIRMED andREITERATED.
"Costs against the [petitioner and Cargohaus, Inc.]."4
The assailed Resolution denied petitioner's Motion for Reconsideration.
The Facts
The antecedent facts are summarized by the appellate court as follows:
"On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of
Nebraska, USA delivered to Burlington Air Express (BURLINGTON), an
agent of [Petitioner] Federal Express Corporation, a shipment of 109 cartons
of veterinary biologicals for delivery to consignee SMITHKLINE and French
Overseas Company in Makati City, Metro Manila. The shipment was covered
by Burlington Airway Bill No. 11263825 with the words, 'REFRIGERATE
WHEN NOT IN TRANSIT' and 'PERISHABLE' stamp marked on its face.
That same day, Burlington insured the cargoes in the amount of $39,339.00
with American Home Assurance Company (AHAC). The following day,
Burlington turned over the custody of said cargoes to Federal Express which
transported the same to Manila. The first shipment, consisting of 92 cartons
arrived in Manila on January 29, 1994 in Flight No. 0071-28NRT and was
immediately stored at [Cargohaus Inc.'s] warehouse. While the second,
consisting of 17 cartons, came in two (2) days later, or on January 31, 1994,
in Flight No. 0071-30NRT which was likewise immediately stored at
Cargohaus' warehouse. Prior to the arrival of the cargoes, Federal Express

informed GETC Cargo International Corporation, the customs broker hired

by the consignee to facilitate the release of its cargoes from the Bureau of
Customs, of the impending arrival of its client's cargoes.
"On February 10, 1994, DARIO C. DIONEDA ('DIONEDA'), twelve (12) days
after the cargoes arrived in Manila, a non-licensed custom's broker who was
assigned by GETC to facilitate the release of the subject cargoes, found out,
while he was about to cause the release of the said cargoes, that the same
[were] stored only in a room with two (2) air conditioners running, to cool the
place instead of a refrigerator. When he asked an employee of Cargohaus
why the cargoes were stored in the 'coolROOM' only, the latter told him
that the cartons where the vaccines were contained specifically indicated
therein that it should not be subjected to hot or cold temperature. Thereafter,
DIONEDA, upon instructions from GETC, did not proceed with the
withdrawal of the vaccines and instead, samples of the same were taken
and brought to the Bureau of Animal Industry of the Department of
Agriculture in the Philippines by SMITHKLINE for examination wherein it was
discovered that the 'ELISA reading of vaccinates sera are below the positive
reference serum.'
"As a consequence of the foregoing result of the veterinary biologics test,
SMITHKLINE abandoned the shipment and, declaring 'total loss' for the
unusable shipment, filed a claim with AHAC through its representative in the
Philippines, the Philam Insurance Co., Inc. ('PHILAM') which recompensed
SMITHKLINE for the whole insured amount of THIRTY NINE THOUSAND
THREE HUNDRED THIRTY NINE DOLLARS ($39,339.00). Thereafter,
[respondents] filed an action for damages against the [petitioner] imputing
negligence on either or both of them in the handling of the cargo.
"Trial ensued and ultimately concluded on March 18, 1997 with the
[petitioner] being held solidarily liable for the loss as follows:
'WHEREFORE, judgment is hereby rendered in favor of
[respondents] and [petitioner and its Co-Defendant Cargohaus] are
directed to pay [respondents], jointly and severally, the following:
1. Actual damages in the amount of the peso equivalent of
US$39,339.00 with interest from the time of the filing of
the complaint to the time the same is fully paid.
2. Attorney's fees in the amount of P50,000.00 and
3. Costs of suit.
'SO ORDERED.'
"Aggrieved, [petitioner] appealed to [the CA]."5
Ruling of the Court of Appeals
The Test Report issued by the United States Department of Agriculture (Animal and
Plant Health Inspection Service) was found by the CA to be inadmissible in evidence.
Despite this ruling, the appellate court held that the shipping Receipts were a prima
facie proof that the goods had indeed been delivered to the carrier in good condition.
We quote from the ruling as follows:

"Where the plaintiff introduces evidence which shows prima facie that the
goods were delivered to the carrier in good condition [i.e., the shipping
receipts], and that the carrier delivered the goods in a damaged condition, a
presumption is raised that the damage occurred through the fault or
negligence of the carrier,and this casts upon the carrier the burden of
showing that the goods were not in good condition when delivered to the
carrier, or that the damage was occasioned by some cause excepting the
carrier from absolute liability. This the [petitioner] failed to discharge. x x x."6

The correctness of legal conclusions drawn by the Court of Appeals from undisputed
facts is a question of law cognizable by the Supreme Court.9

Found devoid of merit was petitioner's claim that respondents had no personality to
sue. This argument was supposedly not raised in the Answer or during trial.

Petitioner contends that respondents have no personality to sue -- thus, no cause of

action against it -- because the payment made to Smithkline was erroneous.

Hence, this Petition.7

Pertinent to this issue is the Certificate of Insurance10 ("Certificate") that both

opposing parties cite in support of their respective positions. They differ only in their
interpretation of what their rights are under its terms. The determination of those
rights involves a question of law, not a question of fact. "As distinguished from a
question of law which exists 'when the doubt or difference arises as to what the law is
on a certain state of facts' -- 'there is a question of fact when the doubt or difference
arises as to the truth or the falsehood of alleged facts'; or when the 'query necessarily
invites calibration of the whole evidence considering mainly the credibility of
witnesses, existence and relevancy of specific surrounding circumstance, their
relation to each other and to the whole and the probabilities of the situation.'" 11

The Issues
In its Memorandum, petitioner raises the following issues for our consideration:
"I.
Are the decision and resolution of the Honorable Court of Appeals proper
subject for review by the Honorable Court under Rule 45 of the 1997 Rules
of Civil Procedure?
"II.
Is the conclusion of the Honorable Court of Appeals petitioner's claim that
respondents have no personality to sue because the payment was made by
the respondents to Smithkline when the insured under the policy is
Burlington Air Express is devoid of merit correct or not?
"III.
Is the conclusion of the Honorable Court of Appeals that the goods were
received in good condition, correct or not?
"IV.
Are Exhibits 'F' and 'G' hearsay evidence, and therefore, not admissible?
"V.
Is the Honorable Court of Appeals correct in ignoring and disregarding
respondents' own admission that petitioner is not liable? and
"VI.
Is the Honorable Court of Appeals correct in ignoring the Warsaw
Convention?"8
Simply stated, the issues are as follows: (1) Is the Petition proper for review by the
Supreme Court? (2) Is Federal Express liable for damage to or loss of the insured
goods?
This Court's Ruling
The Petition has merit.
Preliminary Issue:
Propriety of Review

In the present case, the facts are undisputed. As will be shown shortly, petitioner is
questioning the conclusions drawn from such facts. Hence, this case is a proper
subject for review by this Court.
Main Issue:
Liability for Damages

Proper Payee
The Certificate specifies that loss of or damage to the insured cargo is "payable to
order x x x upon surrender of this Certificate." Such wording conveys the right of
collecting on any such damage or loss, as fully as if the property were covered by a
special policy in the name of the holder itself. At the back of the Certificate appears
the signature of the representative of Burlington. This document has thus been duly
indorsed in blank and is deemed a bearer instrument.
Since the Certificate was in the possession of Smithkline, the latter had the right of
collecting or of being indemnified for loss of or damage to the insured shipment, as
fully as if the property were covered by a special policy in the name of the holder.
Hence, being the holder of the Certificate and having an insurable interest in the
goods, Smithkline was the proper payee of the insurance proceeds.
Subrogation
Upon receipt of the insurance proceeds, the consignee (Smithkline) executed a
subrogation Receipt12 in favor of respondents. The latter were thus authorized "to file
claims and begin suit against any such carrier, vessel, person, corporation or
government." Undeniably, the consignee had a legal right to receive the goods in the
same condition it was delivered for transport to petitioner. If that right was violated,
the consignee would have a cause of action against the person responsible therefor.
Upon payment to the consignee of an indemnity for the loss of or damage to the
insured goods, the insurer's entitlement to subrogation pro tanto -- being of the
highest equity -- equips it with a cause of action in case of a contractual breach or
13
negligence. "Further, the insurer's subrogatory right to sue for recovery under the
bill of lading in case of loss of or damage to the cargo is jurisprudentially upheld." 14
In the exercise of its subrogatory right, an insurer may proceed against an erring
carrier. To all intents and purposes, it stands in the place and in substitution of the

consignee. A fortiori, both the insurer and the consignee are bound by the contractual
stipulations under the bill of lading.15
Prescription of Claim
From the initial proceedings in the trial court up to the present, petitioner has tirelessly
pointed out that respondents' claim and right of action are already barred. The latter,
and even the consignee, never filed with the carrier any written notice or complaint
regarding its claim for damage of or loss to the subject cargo within the period
required by the Warsaw Convention and/or in the airway bill. Indeed, this fact has
never been denied by respondents and is plainly evident from the records.
Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states:
"6. No action shall be maintained in the case of damage to or partial loss of
the shipment unless a written notice, sufficiently describing the goods
concerned, the approximate date of the damage or loss, and the details of
the claim, is presented by shipper or consignee to an office of Burlington
within (14) days from the date the goods are placed at the disposal of the
person entitled to delivery, or in the case of total loss (including non-delivery)
unless presented within (120) days from the date of issue of the [Airway
Bill]."16
Relevantly, petitioner's airway bill states:
"12./12.1 The person entitled to delivery must make a complaint to the
carrier in writing in the case:
12.1.1 of visible damage to the goods, immediately after discovery of the
damage and at the latest within fourteen (14) days from receipt of the goods;
12.1.2 of other damage to the goods, within fourteen (14) days from the date
of receipt of the goods;
12.1.3 delay, within twenty-one (21) days of the date the goods are placed at
his disposal; and
12.1.4 of non-delivery of the goods, within one hundred and twenty (120)
days from the date of the issue of the air waybill.
12.2 For the purpose of 12.1 complaint in writing may be made to the carrier
whose air waybill was used, or to the first carrier or to the last carrier or to
the carrier who performed the transportation during which the loss, damage
or delay took place."17
Article 26 of the Warsaw Convention, on the other hand, provides:
"ART. 26. (1) Receipt by the person entitled to the delivery of baggage or
goods without complaint shall be prima facie evidence that the same have
been delivered in good condition and in accordance with the document of
transportation.
(2) In case of damage, the person entitled to delivery must complain to the
carrier forthwith after the discovery of the damage, and, at the latest, within 3
days from the date of receipt in the case of baggage and 7 days from the
date of receipt in the case of goods. In case of delay the complaint must be
made at the latest within 14 days from the date on which the baggage or
goods have been placed at his disposal.

(3) Every complaint must be made in writing upon the document of

transportation or by separate notice in writing dispatched within the times
aforesaid.
(4) Failing complaint within the times aforesaid, no action shall lie against the
18
carrier, save in the case of fraud on his part."
Condition Precedent
In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor
actually constitutes a condition precedent to the accrual of a right of action against a
19
carrier for loss of or damage to the goods. The shipper or consignee must allege
and prove the fulfillment of the condition. If it fails to do so, no right of action against
the carrier can accrue in favor of the former. The aforementioned requirement is a
reasonable condition precedent; it does not constitute a limitation of action. 20
The requirement of giving notice of loss of or injury to the goods is not an empty
formalism. The fundamental reasons for such a stipulation are (1) to inform the carrier
that the cargo has been damaged, and that it is being charged with liability therefor;
and (2) to give it an opportunity to examine the nature and extent of the injury. "This
protects the carrier by affording it an opportunity to make an investigation of a claim
while the matter is fresh and easily investigated so as to safeguard itself from false
and fraudulent claims."21
When an airway bill -- or any contract of carriage for that matter -- has a stipulation
that requires a notice of claim for loss of or damage to goods shipped and the
stipulation is not complied with, its enforcement can be prevented and the liability
cannot be imposed on the carrier. To stress, notice is a condition precedent, and the
carrier is not liable if notice is not given in accordance with the stipulation. 22 Failure to
comply with such a stipulation bars recovery for the loss or damage suffered. 23
24

Being a condition precedent, the notice must precede a suit for enforcement. In the
present case, there is neither an allegation nor a showing of respondents' compliance
with this requirement within the prescribed period. While respondents may have had a
cause of action then, they cannot now enforce it for their failure to comply with the
aforesaid condition precedent.
In view of the foregoing, we find no more necessity to pass upon the other issues
raised by petitioner.
We note that respondents are not without recourse. Cargohaus, Inc. -- petitioner's codefendant in respondents' Complaint below -- has been adjudged by the trial court as
liable for, inter alia, "actual damages in the amount of the peso equivalent of US
$39,339."25 This judgment was affirmed by the Court of Appeals and is already final
26
and executory.
WHEREFORE, the
Petition
is GRANTED, and
the
assailed
Decision REVERSED insofar as it pertains to Petitioner Federal Express Corporation.
No pronouncement as to costs.
SO ORDERED.