ARTICLES 1231-1250

PAYMENT
SPOUSES DEO AGNER and MARICON AGNER, Petitioners,
vs.
BPI FAMILY SAVINGS BANK, INC., Respondent.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the April 30,
2007 Decision1 and May 19, 2008 Resolution2of the Court of
Appeals in CAG.R. CV No. 86021, which affirmed the August
11, 2005 Decision3 of the Regional Trial Court, Branch 33,
Manila City.
On February 15, 2001, petitioners spouses Deo Agner and
Maricon Agner executed a Promissory Note with Chattel
Mortgage in favor of Citimotors, Inc. The contract provides,
among others, that: for receiving the amount of Php834,
768.00, petitioners shall pay Php 17,391.00 every 15th day of
each succeeding month until fully paid; the loan is secured by
a 2001 Mitsubishi Adventure Super Sport; and an interest of
6% per month shall be imposed for failure to pay each
installment on or before the stated due date.4
On the same day, Citimotors, Inc. assigned all its rights, title
and interests in the Promissory Note with Chattel Mortgage to
ABN AMRO Savings Bank, Inc. (ABN AMRO), which, on May
31, 2002, likewise assigned the same to respondent BPI
Family Savings Bank, Inc.5
For failure to pay four successive installments from May 15,
2002 to August 15, 2002, respondent, through counsel, sent to
petitioners a demand letter dated August 29, 2002, declaring
the entire obligation as due and demandable and requiring to
pay Php576,664.04, or surrender the mortgaged vehicle
immediately upon receiving the letter.6 As the demand was left
unheeded, respondent filed on October 4, 2002 an action for
Replevin and Damages before the Manila Regional Trial Court
(RTC).
A writ of replevin was issued.7 Despite this, the subject vehicle
was not seized.8 Trial on the merits ensued. On August 11,
2005, the Manila RTC Br. 33 ruled for the respondent and
ordered petitioners to jointly and severally pay the amount of
Php576,664.04 plus interest at the rate of 72% per annum from
August 20, 2002 until fully paid, and the costs of suit.
Petitioners appealed the decision to the Court of Appeals (CA),
but the CA affirmed the lower courts decision and,

subsequently, denied the motion for reconsideration; hence,

this petition.
Before this Court, petitioners argue that: (1) respondent has no
cause of action, because the Deed of Assignment executed in
its favor did not specifically mention ABN AMROs account
receivable from petitioners; (2) petitioners cannot be
considered to have defaulted in payment for lack of competent
proof that they received the demand letter; and (3)
respondents remedy of resorting to both actions of replevin
and collection of sum of money is contrary to the provision of
Article 14849 of the Civil Code and the Elisco Tool
Manufacturing Corporation v. Court of Appeals10ruling.
The contentions are untenable.
With respect to the first issue, it would be sufficient to state that
the matter surrounding the Deed of Assignment had already
been considered by the trial court and the CA. Likewise, it is an
issue of fact that is not a proper subject of a petition for review
under Rule 45. An issue is factual when the doubt or difference
arises as to the truth or falsehood of alleged facts, or when the
query invites calibration of the whole evidence, considering
mainly the credibility of witnesses, existence and relevancy of
specific surrounding circumstances, their relation to each other
and to the whole, and the probabilities of the situation. 11 Time
and again, We stress that this Court is not a trier of facts and
generally does not weigh anew evidence which lower courts
have passed upon.
As to the second issue, records bear that both verbal and
written demands were in fact made by respondent prior to the
institution of the case against petitioners.12 Even assuming, for
arguments sake, that no demand letter was sent by
respondent, there is really no need for it because petitioners
legally waived the necessity of notice or demand in the
Promissory Note with Chattel Mortgage, which they voluntarily
and knowingly signed in favor of respondents predecessor-ininterest. Said contract expressly stipulates:
In case of my/our failure to pay when due and payable, any
sum which I/We are obliged to pay under this note and/or any
other obligation which I/We or any of us may now or in the
future owe to the holder of this note or to any other party
whether as principal or guarantor x x x then the entire sum
outstanding under this note shall, without prior notice or
demand, immediately become due and payable. (Emphasis
and underscoring supplied)
A provision on waiver of notice or demand has been
recognized as legal and valid in Bank of the Philippine Islands
v. Court of Appeals,13 wherein We held:
The Civil Code in Article 1169 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.14
Further, the Court even ruled in Navarro v. Escobido15 that prior
demand is not a condition precedent to an action for a writ of
replevin, since there is nothing in Section 2, Rule 60 of the
Rules of Court that requires the applicant to make a demand
on the possessor of the property before an action for a writ of
replevin could be filed.
Also, petitioners representation that they have not received a
demand letter is completely inconsequential as the mere act of
sending it would suffice. Again, We look into the Promissory
Note with Chattel Mortgage, which provides:
All correspondence relative to this mortgage, including demand
letters, summonses, subpoenas, or notifications of any judicial
or extrajudicial action shall be sent to the MORTGAGOR at the
address indicated on this promissory note with chattel
mortgage or at the address that may hereafter be given in
writing by the MORTGAGOR to the MORTGAGEE or his/its
assignee. The mere act of sending any correspondence by
mail or by personal delivery to the said address shall be valid
and effective notice to the mortgagor for all legal purposes and
the fact that any communication is not actually received by the
MORTGAGOR or that it has been returned unclaimed to the
MORTGAGEE or that no person was found at the address
given, or that the address is fictitious or cannot be located shall
not excuse or relieve the MORTGAGOR from the effects of
such notice.16 (Emphasis and underscoring supplied)
The Court cannot yield to petitioners denial in receiving
respondents demand letter. To note, their postal address
evidently remained unchanged from the time they executed the
Promissory Note with Chattel Mortgage up to time the case
was filed against them. Thus, the presumption that "a letter
duly directed and mailed was received in the regular course of
the mail"17 stands in the absence of satisfactory proof to the
contrary.
Petitioners cannot find succour from Ting v. Court of
Appeals18 simply because it pertained to violation of Batas
Pambansa Blg. 22 or the Bouncing Checks Law. As a higher
quantum of proof that is, proof beyond reasonable doubt is
required in view of the criminal nature of the case, We found
insufficient the mere presentation of a copy of the demand
letter allegedly sent through registered mail and its
corresponding registry receipt as proof of receiving the notice
of dishonor.

Perusing over the records, what is clear is that petitioners did

not take advantage of all the opportunities to present their
evidence in the proceedings before the courts below. They
miserably failed to produce the original cash deposit slips
proving payment of the monthly amortizations in question. Not
even a photocopy of the alleged proof of payment was
appended to their Answer or shown during the trial. Neither
have they demonstrated any written requests to respondent to
furnish them with official receipts or a statement of account.
Worse, petitioners were not able to make a formal offer of
evidence considering that they have not marked any
documentary evidence during the presentation of Deo Agners
testimony.19
Jurisprudence abounds that, in civil cases, one who pleads
payment has the burden of proving it; the burden rests on the
defendant to prove payment, rather than on the plaintiff to
prove non-payment.20 When the creditor is in possession of the
document of credit, proof of non-payment is not needed for it is
presumed.21 Respondent's possession of the Promissory Note
with Chattel Mortgage strongly buttresses its claim that the
obligation has not been extinguished. As held in Bank of the
Philippine Islands v. Spouses Royeca:22
x x x The creditor's possession of the evidence of debt is proof
that the debt has not been discharged by payment. A
promissory note in the hands of the creditor is a proof of
indebtedness rather than proof of payment. In an action for
replevin by a mortgagee, it is prima facie evidence that the
promissory note has not been paid. Likewise, an uncanceled
mortgage in the possession of the mortgagee gives rise to the
presumption that the mortgage debt is unpaid.23
Indeed, 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 claim of the creditor.24 The
debtor has the burden of showing with legal certainty that the
obligation has been discharged by payment.25
Lastly, there is no violation of Article 1484 of the Civil Code and
the Courts decision in Elisco Tool Manufacturing Corporation v.
Court of Appeals.26
In Elisco, petitioner's complaint contained the following prayer:
WHEREFORE, plaintiffs pray that judgment be rendered as
follows:
ON THE FIRST CAUSE OF ACTION
Ordering defendant Rolando Lantan to pay the plaintiff the sum
of P39,054.86 plus legal interest from the date of demand until
the whole obligation is fully paid;

ON THE SECOND CAUSE OF ACTION

To forthwith issue a Writ of Replevin ordering the seizure of the
motor vehicle more particularly described in paragraph 3 of the
Complaint, from defendant Rolando Lantan and/or defendants
Rina Lantan, John Doe, Susan Doe and other person or
persons in whose possession the said motor vehicle may be
found, complete with accessories and equipment, and direct
deliver thereof to plaintiff in accordance with law, and after due
hearing to confirm said seizure and plaintiff's possession over
the same;
PRAYER COMMON TO ALL CAUSES OF ACTION
1. Ordering the defendant Rolando Lantan to pay the
plaintiff an amount equivalent to twenty-five percent
(25%) of his outstanding obligation, for and as
attorney's fees;
2. Ordering defendants to pay the cost or expenses of
collection, repossession, bonding fees and other
incidental expenses to be proved during the trial; and
3. Ordering defendants to pay the costs of suit.
Plaintiff also prays for such further reliefs as this Honorable
Court may deem just and equitable under the premises.27
The Court therein ruled:
The remedies provided for in Art. 1484 are alternative, not
cumulative. The exercise of one bars the exercise of the
others. This limitation applies to contracts purporting to be
leases of personal property with option to buy by virtue of Art.
1485. The condition that the lessor has deprived the lessee of
possession or enjoyment of the thing for the purpose of
applying Art. 1485 was fulfilled in this case by the filing by
petitioner of the complaint for replevin to recover possession of
movable property. By virtue of the writ of seizure issued by the
trial court, the deputy sheriff seized the vehicle on August 6,
1986 and thereby deprived private respondents of its use. The
car was not returned to private respondent until April 16, 1989,
after two (2) years and eight (8) months, upon issuance by the
Court of Appeals of a writ of execution.
Petitioner prayed that private respondents be made to pay the
sum of P39,054.86, the amount that they were supposed to
pay as of May 1986, plus interest at the legal rate. At the same
time, it prayed for the issuance of a writ of replevin or the
delivery to it of the motor vehicle "complete
with accessories and equipment." In the event the car could
not be delivered to petitioner, it was prayed that private
respondent Rolando Lantan be made to pay petitioner the

amount of P60,000.00, the "estimated actual value" of the car,

"plus accrued monthly rentals thereof with interests at the rate
of fourteen percent (14%) per annum until fully paid." This
prayer of course cannot be granted, even assuming that
private respondents have defaulted in the payment of their
obligation. This led the trial court to say that petitioner wanted
to eat its cake and have it too.28
In contrast, respondent in this case prayed:
(a) Before trial, and upon filing and approval of the
bond, to forthwith issue a Writ of Replevin ordering
the seizure of the motor vehicle above-described,
complete with all its accessories and equipments,
together with the Registration Certificate thereof, and
direct the delivery thereof to plaintiff in accordance
with law and after due hearing, to confirm the said
seizure;
(b) Or, in the event that manual delivery of the said
motor vehicle cannot be effected to render judgment
in favor of plaintiff and against defendant(s) ordering
them to pay to plaintiff, jointly and severally, the sum
ofP576,664.04 plus interest and/or late payment
charges thereon at the rate of 72% per annum from
August 20, 2002 until fully paid;
(c) In either case, to order defendant(s) to pay jointly
and severally:
(1) the sum of P297,857.54 as attorneys
fees, liquidated damages, bonding fees and
other expenses incurred in the seizure of the
said motor vehicle; and
(2) the costs of suit.
Plaintiff further prays for such other relief as this Honorable
Court may deem just and equitable in the premises.29
Compared with Elisco, the vehicle subject matter of this case
was never recovered and delivered to respondent despite the
issuance of a writ of replevin. As there was no seizure that
transpired, it cannot be said that petitioners were deprived of
the use and enjoyment of the mortgaged vehicle or that
respondent pursued, commenced or concluded its actual
foreclosure. The trial court, therefore, rightfully granted the
alternative prayer for sum of money, which is equivalent to the
remedy of "exacting fulfillment of the obligation." Certainly,
there is no double recovery or unjust enrichment30 to speak
of.1wphi1
All the foregoing notwithstanding, We are of the opinion that
the interest of 6% per month should be equitably reduced to

one percent (1%) per month or twelve percent (12%) per

annum, to be reckoned from May 16, 2002 until full payment
and with the remaining outstanding balance of their car loan as
of May 15, 2002 as the base amount.

"WHEREFORE, the Order dated January 28, 1993 issued by

the lower court is REVERSED and SET ASIDE. Let the records
of the instant case be REMANDED to the lower court for the
reception of evidence of all parties."3

Settled is the principle which this Court has affirmed in a

number of cases that stipulated interest rates of three percent
(3%) per month and higher are excessive, iniquitous,
unconscionable, and exorbitant.31 While Central Bank Circular
No. 905-82, which took effect on January 1, 1983, effectively
removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity, nothing in the said
circular could possibly be read as granting carte blanche
authority to lenders to raise interest rates to levels which would
either enslave their borrowers or lead to a hemorrhaging of
their assets.32 Since the stipulation on the interest rate is void
for being contrary to morals, if not against the law, it is as if
there was no express contract on said interest rate; thus, the
interest rate may be reduced as reason and equity demand.33

The Facts

WHEREFORE, the petition is DENIED and the Court AFFIRMS

WITH MODIFICATION the April 30, 2007 Decision and May
19, 2008 Resolution of the Court of Appeals in CA-G.R. CV No.
86021. Petitioners spouses Deo Agner and Maricon Agner are
ORDERED to pay, jointly and severally, respondent BPI Family
Savings Bank, Inc. ( 1) the remaining outstanding balance of
their auto loan obligation as of May 15, 2002 with interest at
one percent ( 1 o/o) per month from May 16, 2002 until fully
paid; and (2) costs of suit.
SO ORDERED.
EFFECT OF DEATH
STRONGHOLD INSURANCE COMPANY, INC., Petitioner,
vs.
REPUBLIC-ASAHI GLASS CORPORATION, Respondent.
DECISION
PANGANIBAN, CJ:
Asurety companys liability under the performance bond it
issues is solidary. The death of the principal obligor does not,
as a rule, extinguish the obligation and the solidary nature of
that liability.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules
of Court, seeking to reverse the March 13, 2001 Decision2 of
the Court of Appeals (CA) in CA-GR CV No. 41630. The
assailed Decision disposed as follows:

The facts of the case are narrated by the CA in this wise:

"On May 24, 1989, [respondent] Republic-Asahi Glass
Corporation (Republic-Asahi) entered into a contract with x x x
Jose D. Santos, Jr., the proprietor of JDS Construction (JDS),
for the construction of roadways and a drainage system in
Republic-Asahis compound in Barrio Pinagbuhatan, Pasig
City, where [respondent] was to pay x x x JDS five million three
hundred thousand pesos (P5,300,000.00) inclusive of value
added tax for said construction, which was supposed to be
completed within a period of two hundred forty (240) days
beginning May 8, 1989. In order to guarantee the faithful and
satisfactory performance of its undertakings x x x JDS, shall
post a performance bond of seven hundred ninety five
thousand pesos (P795,000.00). x x x JDS executed, jointly and
severally with [petitioner] Stronghold Insurance Co., Inc. (SICI)
Performance Bond No. SICI-25849/g(13)9769.
"On May 23, 1989, [respondent] paid to x x x JDS seven
hundred ninety five thousand pesos (P795,000.00) by way of
downpayment.
"Two progress billings dated August 14, 1989 and September
15, 1989, for the total amount of two hundred seventy four
thousand six hundred twenty one pesos and one centavo
(P274,621.01) were submitted by x x x JDS to [respondent],
which the latter paid. According to [respondent], these two
progress billings accounted for only 7.301% of the work
supposed to be undertaken by x x x JDS under the terms of
the contract.
"Several times prior to November of 1989, [respondents]
engineers called the attention of x x x JDS to the alleged
alarmingly slow pace of the construction, which resulted in the
fear that the construction will not be finished within the
stipulated 240-day period. However, said reminders went
unheeded by x x x JDS.
"On November 24, 1989, dissatisfied with the progress of the
work undertaken by x x x JDS, [respondent] Republic-Asahi
extrajudicially rescinded the contract pursuant to Article XIII of
said contract, and wrote a letter to x x x JDS informing the
latter of such rescission. Such rescission, according to Article
XV of the contract shall not be construed as a waiver of
[respondents] right to recover damages from x x x JDS and
the latters sureties.

"[Respondent] alleged that, as a result of x x x JDSs failure to

comply with the provisions of the contract, which resulted in the
said contracts rescission, it had to hire another contractor to
finish the project, for which it incurred an additional expense of
three million two hundred fifty six thousand, eight hundred
seventy four pesos (P3,256,874.00).
"On January 6, 1990, [respondent] sent a letter to [petitioner]
SICI filing its claim under the bond for not less
thanP795,000.00. On March 22, 1991, [respondent] again sent
another letter reiterating its demand for payment under the
aforementioned bond. Both letters allegedly went unheeded.
"[Respondent] then filed [a] complaint against x x x JDS and
SICI. It sought from x x x JDS payment ofP3,256,874.00
representing the additional expenses incurred by [respondent]
for the completion of the project using another contractor, and
from x x x JDS and SICI, jointly and severally, payment
of P750,000.00 as damages in accordance with the
performance bond; exemplary damages in the amount
of P100,000.00 and attorneys fees in the amount of at
least P100,000.00.
"According to the Sheriffs Return dated June 14, 1991,
submitted to the lower court by Deputy Sheriff Rene R.
Salvador, summons were duly served on defendant-appellee
SICI. However, x x x Jose D. Santos, Jr. died the previous year
(1990), and x x x JDS Construction was no longer at its
address at 2nd Floor, Room 208-A, San Buena Bldg. Cor.
Pioneer St., Pasig, Metro Manila, and its whereabouts were
unknown.
"On July 10, 1991, [petitioner] SICI filed its answer, alleging
that the [respondents] money claims against [petitioner and
JDS] have been extinguished by the death of Jose D. Santos,
Jr. Even if this were not the case, [petitioner] SICI had been
released from its liability under the performance bond because
there was no liquidation, with the active participation and/or
involvement, pursuant to procedural due process, of herein
surety and contractor Jose D. Santos, Jr., hence, there was no
ascertainment of the corresponding liabilities of Santos and
SICI under the performance bond. At this point in time, said
liquidation was impossible because of the death of Santos,
who as such can no longer participate in any liquidation. The
unilateral liquidation on the party (sic) of [respondent] of the
work accomplishments did not bind SICI for being violative of
procedural due process. The claim of [respondent] for the
forfeiture of the performance bond in the amount
of P795,000.00 had no factual and legal basis, as payment of
said bond was conditioned on the payment of damages which
[respondent] may sustain in the event x x x JDS failed to
complete the contracted works. [Respondent] can no longer
prove its claim for damages in view of the death of Santos.
SICI was not informed by [respondent] of the death of Santos.
SICI was not informed by [respondent] of the unilateral

rescission of its contract with JDS, thus SICI was deprived of

its right to protect its interests as surety under the performance
bond, and therefore it was released from all liability. SICI was
likewise denied due process when it was not notified of
plaintiff-appellants process of determining and fixing the
amount to be spent in the completion of the unfinished project.
The procedure contained in Article XV of the contract is against
public policy in that it denies SICI the right to procedural due
process. Finally, SICI alleged that [respondent] deviated from
the terms and conditions of the contract without the written
consent of SICI, thus the latter was released from all liability.
SICI also prayed for the award of P59,750.00 as attorneys
fees, and P5,000.00 as litigation expenses.
"On August 16, 1991, the lower court issued an order
dismissing the complaint of [respondent] against x x x JDS and
SICI, on the ground that the claim against JDS did not survive
the death of its sole proprietor, Jose D. Santos, Jr. The
dispositive portion of the [O]rder reads as follows:
ACCORDINGLY, the complaint against the defendants Jose D.
Santos, Jr., doing business under trade and style, JDS
Construction and Stronghold Insurance Company, Inc. is
ordered DISMISSED.
SO ORDERED.
"On September 4, 1991, [respondent] filed a Motion for
Reconsideration seeking reconsideration of the lower courts
August 16, 1991 order dismissing its complaint. [Petitioner]
SICI field its Comment and/or Opposition to the Motion for
Reconsideration. On October 15, 1991, the lower court issued
an Order, the dispositive portion of which reads as follows:
WHEREFORE, premises considered, the Motion for
Reconsideration is hereby given due course. The Order dated
16 August 1991 for the dismissal of the case against
Stronghold Insurance Company, Inc., is reconsidered and
hereby reinstated (sic). However, the case against defendant
Jose D. Santos, Jr. (deceased) remains undisturbed.
Motion for Preliminary hearing and Manifestation with Motion
filed by [Stronghold] Insurance Company Inc., are set for
hearing on November 7, 1991 at 2:00 oclock in the afternoon.
SO ORDERED.
"On June 4, 1992, [petitioner] SICI filed its Memorandum for
Bondsman/Defendant SICI (Re: Effect of Death of defendant
Jose D. Santos, Jr.) reiterating its prayer for the dismissal of
[respondents] complaint.
"On January 28, 1993, the lower court issued the assailed
Order reconsidering its Order dated October 15, 1991, and

ordered the case, insofar as SICI is concerned, dismissed.

[Respondent] filed its motion for reconsideration which was
opposed by [petitioner] SICI. On April 16, 1993, the lower court
denied [respondents] motion for reconsideration. x x x."4
Ruling of the Court of Appeals
The CA ruled that SICIs obligation under the surety agreement
was not extinguished by the death of Jose D. Santos, Jr.
Consequently, Republic-Asahi could still go after SICI for the
bond.
The appellate court also found that the lower court had erred in
pronouncing that the performance of the Contract in question
had become impossible by respondents act of rescission. The
Contract was rescinded because of the dissatisfaction of
respondent with the slow pace of work and pursuant to Article
XIII of its Contract with JDS.
The CA ruled that "[p]erformance of the [C]ontract was
impossible, not because of [respondents] fault, but because of
the fault of JDS Construction and Jose D. Santos, Jr. for failure
on their part to make satisfactory progress on the project,
which amounted to non-performance of the same. x x x
[P]ursuant to the [S]urety [C]ontract, SICI is liable for the nonperformance of said [C]ontract on the part of JDS
Construction."5

As a general rule, the death of either the creditor or the debtor

does not extinguish the obligation.8 Obligations are
transmissible to the heirs, except when the transmission is
prevented by the law, the stipulations of the parties, or the
nature of the obligation.9 Only obligations that are personal10 or
are identified with the persons themselves are extinguished by
death.11
Section 5 of Rule 8612 of the Rules of Court expressly allows
the prosecution of money claims arising from a contract
against the estate of a deceased debtor. Evidently, those
claims are not actually extinguished.13 What is extinguished is
only the obligees action or suit filed before the court, which is
not then acting as a probate court.14
In the present case, whatever monetary liabilities or obligations
Santos had under his contracts with respondent were not
intransmissible by their nature, by stipulation, or by provision of
law. Hence, his death did not result in the extinguishment of
those obligations or liabilities, which merely passed on to his
estate.15 Death is not a defense that he or his estate can set up
to wipe out the obligations under the performance bond.
Consequently, petitioner as surety cannot use his death to
escape its monetary obligation under its performance bond.
The liability of petitioner is contractual in nature, because it
executed a performance bond worded as follows:

Hence, this Petition.6

"KNOW ALL MEN BY THESE PRESENTS:

Issue

"That we, JDS CONSTRUCTION of 208-A San Buena

Building, contractor, of Shaw Blvd., Pasig, MM Philippines, as
principal and the STRONGHOLD INSURANCE COMPANY,
INC. a corporation duly organized and existing under and by
virtue of the laws of the Philippines with head office at Makati,
as Surety, are held and firmly bound unto the REPUBLIC
ASAHI GLASS CORPORATION and to any individual, firm,
partnership, corporation or association supplying the principal
with labor or materials in the penal sum of SEVEN HUNDRED
NINETY FIVE THOUSAND (P795,000.00), Philippine
Currency, for the payment of which sum, well and truly to be
made, we bind ourselves, our heirs, executors, administrators,
successors and assigns, jointly and severally, firmly by these
presents.

Petitioner states the issue for the Courts consideration in the

following manner:
"Death is a defense of Santos heirs which Stronghold could
also adopt as its defense against obligees claim."7
More precisely, the issue is whether petitioners liability under
the performance bond was automatically extinguished by the
death of Santos, the principal.
The Courts Ruling
The Petition has no merit.
Sole Issue:
Effect of Death on the Suretys Liability
Petitioner contends that the death of Santos, the bond
principal, extinguished his liability under the surety bond.
Consequently, it says, it is automatically released from any
liability under the bond.

"The CONDITIONS OF THIS OBLIGATION are as follows;

"WHEREAS the above bounden principal on the ___ day of
__________, 19__ entered into a contract with the REPUBLIC
ASAHI
GLASS
CORPORATION
represented
by
_________________, to fully and faithfully. Comply with the
site preparation works road and drainage system of Philippine
Float Plant at Pinagbuhatan, Pasig, Metro Manila.

"WHEREAS, the liability of the Surety Company under this

bond shall in no case exceed the sum of PESOS SEVEN
HUNDRED NINETY FIVE THOUSAND (P795,000.00)
Philippine Currency, inclusive of interest, attorneys fee, and
other damages, and shall not be liable for any advances of the
obligee to the principal.
"WHEREAS, said contract requires the said principal to give a
good and sufficient bond in the above-stated sum to secure the
full and faithfull performance on its part of said contract, and
the satisfaction of obligations for materials used and labor
employed upon the work;
"NOW THEREFORE, if the principal shall perform well and
truly and fulfill all the undertakings, covenants, terms,
conditions, and agreements of said contract during the original
term of said contract and any extension thereof that may be
granted by the obligee, with notice to the surety and during the
life of any guaranty required under the contract, and shall also
perform well and truly and fulfill all the undertakings,
covenants, terms, conditions, and agreements of any and all
duly authorized modifications of said contract that may
hereinafter be made, without notice to the surety except when
such modifications increase the contract price; and such
principal contractor or his or its sub-contractors shall promptly
make payment to any individual, firm, partnership, corporation
or association supplying the principal of its sub-contractors with
labor and materials in the prosecution of the work provided for
in the said contract, then, this obligation shall be null and void;
otherwise it shall remain in full force and effect. Any extension
of the period of time which may be granted by the obligee to
the contractor shall be considered as given, and any
modifications of said contract shall be considered as
authorized, with the express consent of the Surety.
"The right of any individual, firm, partnership, corporation or
association supplying the contractor with labor or materials for
the prosecution of the work hereinbefore stated, to institute
action on the penal bond, pursuant to the provision of Act No.
3688, is hereby acknowledge and confirmed."16
As a surety, petitioner is solidarily liable with Santos in
accordance with the Civil Code, which provides as follows:
"Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.
"If a person binds himself solidarily with the principal debtor,
the provisions of Section 4,17 Chapter 3, Title I of this Book
shall be observed. In such case the contract is called a
suretyship."
xxxxxxxxx

"Art. 1216. The creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to
those which may subsequently be directed against the others,
so long as the debt has not been fully collected."
Elucidating on these provisions, the Court in Garcia v. Court of
Appeals18 stated thus:
"x x x. The suretys obligation is not an original and direct one
for the performance of his own act, but merely accessory or
collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in essence
secondary only to a valid principal obligation, his liability to the
creditor or promisee of the principal is said to be direct, primary
and absolute; in other words, he is directly and equally bound
with the principal. x x x."19
Under the law and jurisprudence, respondent may sue,
separately or together, the principal debtor and the petitioner
herein, in view of the solidary nature of their liability. The death
of the principal debtor will not work to convert, decrease or
nullify the substantive right of the solidary creditor. Evidently,
despite the death of the principal debtor, respondent may still
sue petitioner alone, in accordance with the solidary nature of
the latters liability under the performance bond.
WHEREFORE, the Petition is DENIED and the Decision of the
Court of Appeals AFFIRMED. Costs against petitioner.
SO ORDERED.
1240 TO WHOM PAYMENT SHOULD BE MADE
PNB VS TAN
ROMERO, J.:
Petitioner Philippine National Bank (PNB) questions the
decision1 of the Court of Appeals partially affirming the
judgment of the Regional Trial Court, Branch 44, Bacolod City.
The dispositive portion of the trial courts decision states:
WHEREFORE, premises considered, the Court hereby
renders judgment in favor of the plaintiff and against the
defendants as follows:
1) Ordering defendants to pay plaintiff jointly and severally the
sum of P32,480.00, with legal rate of interest to be computed
from May 2, 1979, date of filing of this complaint until fully paid;
2)
Ordering defendants to pay plaintiff jointly and severally
the sum of P5,000.00 as exemplary damages;

3) Ordering defendants to pay plaintiff jointly and severally the

sum of P5,000.00 as attorneys fees;

When he failed to recover the amount from PNB, private

respondent filed a motion with the court to require PNB to pay
the same to him.

4) To pay the costs of this suit.

SO ORDERED.2
The facts are the following:

Petitioner filed an opposition contending that Sonia Gonzaga

presented to it a copy of the May 22, 1978 order and a special
power of attorney by virtue of which petitioner delivered the
check to her.

Private respondent Loreto Tan (Tan) is the owner of a parcel of

land abutting the national highway in Mandalagan, Bacolod
City. Expropriation proceedings were instituted by the
government against private respondent Tan and other property
owners before the then Court of First Instance of Negros
Occidental, Branch IV, docketed as Civil Case No. 12924.

The matter was set for hearing on July 21, 1978 and petitioner
was directed by the court to produce the said special power of
attorney thereat. However, petitioner failed to do so.

Tan filed a motion dated May 10, 1978 requesting issuance of

an order for the release to him of the expropriation price of P3
2,480.00.

filed a complaint with the Regional Trial Court in Bacolod City

(Branch 44) against petitioner and Juan Tagamolila, PNBs
Assistant Branch Manager, to recover the said amount.

On May 22, 1978, petitioner PNB (Bacolod Branch) was

required by the trial court to release to Tan the amount of
P32,480.00 deposited with it by the government.

In its defense, petitioner contended that private respondent

had duly authorized Sonia Gonzaga to act as his agent.

On May 24, 1978, petitioner, through its Assistant Branch

Manager Juan Tagamolila, issued a managers check for P3
2,480.00 and delivered the same to one Sonia Gonzaga
without Tans knowledge, consent or authority. Sonia Gonzaga
deposited it in her account with Far East Bank and Trust Co.
(FEBTC) and later on withdrew the said amount.
Private respondent Tan subsequently demanded payment in
the amount of P32,480.00 from petitioner, but the same was
refused on the ground that petitioner had already paid and
delivered the amount to Sonia Gonzaga on the strength of a
Special Power of Attorney (SPA) allegedly executed in her
favor by Tan.
On June 8, 1978, Tan executed an affidavit before petitioners
lawyer, Alejandro S. Somo, stating that:
1) he had never executed any Special Power of Attorney in
favor of Sonia S. Gonzaga;
2) he had never authorized Sonia Gonzaga to receive the sum
of P32,480.00 from petitioner;
3) he signed a motion for the court to issue an Order to release
the said sum of money to him and gave the same to Mr. Nilo
Gonzaga (husband of Sonia) to be filed in court. However, after
the Order was subsequently issued by the court, a certain
Engineer Decena of the Highway Engineers Office issued the
authority to release the funds not to him but to Mr. Gonzaga.

The court decided that there was need for the matter to be
ventilated in a separate civil action and thus private respondent

On September 28, 1979, petitioner filed a third-party complaint

against the spouses Nilo and Sonia Gonzaga praying that they
be ordered to pay private respondent the amount of
P32,480.00. However, for failure of petitioner to have the
summons served on the Gonzagas despite opportunities given
to it, the third-party complaint was dismissed.
Tagamolila, in his answer, stated that Sonia Gonzaga
presented a Special Power of Attorney to him but borrowed it
later with the promise to return it, claiming that she needed it to
encash the check.
On June 7, 1989, the trial court rendered judgment ordering
petitioner and Tagamolila to pay private respondent jointly and
severally the amount of P32,480.00 with legal interest,
damages and attorneys fees.
Both petitioner and Tagamolila appealed the case to the Court
of Appeals.
In a resolution dated April 8, 1991, the appellate court
dismissed Tagamolilas appeal for failure to pay the docket fee
within the reglementary period.
On August 31, 1992, the Court of Appeals affirmed the decision
of the trial court against petitioner, with the modification that the
award of P5,000.00 for exemplary damages and P5,000.00 for
attorneys fees by the trial court was deleted.
Hence, this petition.

Petitioner PNB states that the issue in this case is whether or

not the SPA ever existed. It argues that the existence of the
SPA need not be proved by it under the best evidence rule
because it already proved the existence of the SPA from the
testimonies of its witnesses and by the certification issued by
the Far East Bank and Trust Company that it allowed Sonia
Gonzaga to encash Tans check on the basis of the SPA.
We find the petition unmeritorious.
There is no question that no payment had ever been made to
private respondent as the check was never delivered to him.
When the court ordered petitioner to pay private respondent
the amount of P3 2,480.00, it had the obligation to deliver the
same to him. Under Art. 1233 of the Civil Code, a debt shall not
be understood to have been paid unless the thing or service in
which the obligation consists has been completely delivered or
rendered, as the case may be.
The burden of proof of such payment lies with the debtor.3 In
the instant case, neither the SPA nor the check issued by
petitioner was ever presented in court.
The testimonies of petitioners own witnesses regarding the
check were conflicting. Tagamolila testified that the check was
issued to the order of Sonia Gonzaga as attorney-in-fact of
Loreto Tan,4 while Elvira Tibon, assistant cashier of PNB
(Bacolod Branch), stated that the check was issued to the
order of Loreto Tan.5
Furthermore, contrary to petitioners contention that all that is
needed to be proved is the existence of the SPA, it is also
necessary for evidence to be presented regarding the nature
and extent of the alleged powers and authority granted to
Sonia Gonzaga; more specifically, to determine whether the
document indeed authorized her to receive payment intended
for private respondent. However, no such evidence was ever
presented.
Section 2, Rule 130 of the Rules of Court states that:
SEC. 2. Original writing must be produced; exceptions.
- There can be no evidence of a writing the contents of which is
the subject of inquiry, other than the original writing itself,
except in the following cases:
(a) When the original has been lost, destroyed, or cannot be
produced in court;
(b) 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;

(c) When the original is a record or other document in the

custody of a public officer;
(d) When the original has been recorded in an existing record a
certified copy of which is made evidence by law;
(e) When the original consists of numerous accounts or other
documents which cannot be examined in court without great
loss of time and the fact sought to be established from them is
only the general result of the whole.
Section 4, Rule 130 of the Rules of Court allows the
presentation of secondary evidence when the original is lost or
destroyed, thus:
SEC. 4. Secondary evidence when original is lost or
destroyed. - When the original writing has been lost or
destroyed, or cannot be produced in court, upon proof of its
execution and loss or destruction, or unavailability, its contents
may be proved by a copy, or by a recital of its contents in some
authentic document, or by the recollection of witnesses.
Considering that the contents of the SPA are also in issue
here, the best evidence rule applies. Hence, only the original
document (which has not been presented at all) is the best
evidence of the fact as to whether or not private respondent
indeed authorized Sonia Gonzaga to receive the check from
petitioner. In the absence of such document, petitioners
arguments regarding due payment must fail.
Regarding the award of attorneys fees, we hold that private
respondent Tan is entitled to the same. Art. 2208 of the Civil
Code allows attorneys fees to be awarded if the claimant is
compelled to litigate with third persons or to incur expenses to
protect his interest by reason of an unjustified act or omission
of the party from whom it is sought.6
In Rasonable v. NLRC, et al.,7 we held that when a party is
forced to litigate to protect his rights, he is entitled to an award
of attorneys fees.
As for the award of exemplary damages, we agree with the
appellate court that the same should be deleted.
Under Art. 2232 of the Civil Code, exemplary damages may be
awarded if a party acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner. However, they cannot be
recovered as a matter of right; the court has yet to decide
whether or not they should be adjudicated.8
Jurisprudence has set down the requirements for exemplary
damages to be awarded:

1. they may be imposed by way of example in addition to

compensatory damages, and only after the claimants right to
them has been established;
2.
they cannot be recovered as a matter of right, their
determination depending upon the amount of compensatory
damages that may be awarded to the claimant;
3.
the act must be accompanied by bad faith or done in a
wanton, fraudulent, oppressive or malevolent manner.9
In the case at bench, while there is a clear breach of
petitioners obligation to pay private respondents, there is no
evidence that it acted in a fraudulent, wanton, reckless or
oppressive manner. Furthermore, there is no award to
compensatory damages which is a prerequisite before
exemplary damages may be awarded. Therefore, the award by
the trial court of P5,000.00 as exemplary damages is baseless.
WHEREFORE, the decision of the Court of Appeals is
AFFIRMED with the modification that the award by the
Regional Trial Court of P5,000.00 as attorneys fees is
REINSTATED.
SO ORDERED.
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
CALLEJO, SR., J.:
This is a petition for review under Rule 45 of the Revised Rules
of Civil Procedure of the Decision[1] of the Court of Appeals in
CA-G.R. CV No. 19836 affirming in toto the Decision[2] of the
Regional Trial Court of Makati, Branch 138, in Civil Case No.
1033 for collection of sum of money, and the Resolution[3]
denying the motion for reconsideration of the said decision.
The Undisputed Facts
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
April 22, 1983
April 27, 1983
April 30, 1983

Receipt No. 27331

Receipt No. 27318
Receipt No. 27339
Receipt No. 27346

for P8,000[5]
for P9,000[6]
for P4,500[7]
for P3,410[8]

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.
For its part, SMC submitted a publishers affidavit[9] to prove
that the entire booklet of TCSL Receipts bearing Nos. 2730127350 were reported lost by it, and that it caused 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. 27301-27350 HAVE BEEN LOST.
ANY TRANSACTION, THEREFORE, ENTERED INTO WITH
THE USE OF THE ABOVE RECEIPTS WILL NOT BE
HONORED.
SAN MIGUEL CORPORATION
BEER DIVISION
Makati Beer Region[10]
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:
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

10

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:
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
PLAINTIFF-APPELLEE HAS SUFFICIENTLY PROVED ITS
CAUSE OF ACTION AGAINST THE DEFENDANTS.
III
THE TRIAL COURT ERRED IN ORDERING DEFENDANTS
TO PAY 20% OF THE AMOUNT DUE TO PLAINTIFF AS
ATTORNEYS FEES.[12]

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, tantamount to undue enrichment and
therefore improper.[13]
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]

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.

Hence, the instant petition.

The petitioners pose the following issues for the Courts
resolution:
I. WHETHER OR NOT THE RESPONDENT HAD PROVEN
BY PREPONDERANT EVIDENCE THAT IT HAD PROPERLY
AND TIMELY NOTIFIED PETITIONER OF LOST BOOKLET
OF RECEIPTS
II. WHETHER OR NOT RESPONDENT HAD PROVEN BY
PREPONDERANT EVIDENCE THAT PETITIONER WAS
REMISS IN THE PAYMENT OF HIS ACCOUNTS TO ITS
AGENT.[16]
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

11

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.

evaluate or weigh the probative value of the evidence

presented.[18]
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]
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.

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 wellsettled 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

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,

12

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, or
the doing of something, which a prudent and reasonable man
would not do.[25] 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.
ALLIED
BANKING
CORPORATION, Petitioner,
vs.
LIM SIO WAN, METROPOLITAN BANK AND TRUST CO.,
and PRODUCERS BANK, Respondents.
DECISION
VELASCO, JR., J.:
To ingratiate themselves to their valued depositors, some
banks at times bend over backwards that they unwittingly
expose themselves to great risks.
The Case

This Petition for Review on Certiorari under Rule 45 seeks to

reverse the Court of Appeals (CAs) Decision promulgated on
March 18, 19981 in CA-G.R. CV No. 46290 entitled Lim Sio
Wan v. Allied Banking Corporation, et al. The CA Decision
modified the Decision dated November 15, 19932 of the
Regional Trial Court (RTC), Branch 63 in Makati City rendered
in Civil Case No. 6757.
The Facts
The facts as found by the RTC and affirmed by the CA are as
follows:
On November 14, 1983, respondent Lim Sio Wan deposited
with petitioner Allied Banking Corporation (Allied) at its Quintin
Paredes Branch in Manila a money market placement of PhP
1,152,597.35 for a term of 31 days to mature on December 15,
1983,3 as evidenced by Provisional Receipt No. 1356 dated
November 14, 1983.4
On December 5, 1983, a person claiming to be Lim Sio Wan
called up Cristina So, an officer of Allied, and instructed the
latter to pre-terminate Lim Sio Wans money market placement,
to issue a managers check representing the proceeds of the
placement, and to give the check to one Deborah Dee Santos
who would pick up the check.5 Lim Sio Wan described the
appearance of Santos so that So could easily identify her.6
Later, Santos arrived at the bank and signed the application
form for a managers check to be issued.7 The bank issued
Managers Check No. 035669 for PhP 1,158,648.49,
representing the proceeds of Lim Sio Wans money market
placement in the name of Lim Sio Wan, as payee.8 The check
was cross-checked "For Payees Account Only" and given to
Santos.9
Thereafter, the managers check was deposited in the account
of Filipinas Cement Corporation (FCC) at respondent
Metropolitan Bank and Trust Co. (Metrobank),10 with the forged
signature of Lim Sio Wan as indorser.11
Earlier, on September 21, 1983, FCC had deposited a money
market placement for PhP 2 million with respondent Producers
Bank. Santos was the money market trader assigned to handle
FCCs account.12 Such deposit is evidenced by Official Receipt
No. 31756813 and a Letter dated September 21, 1983 of
Santos addressed to Angie Lazo of FCC, acknowledging
receipt of the placement.14 The placement matured on October
25, 1983 and was rolled-over until December 5, 1983 as
evidenced by a Letter dated October 25, 1983.15 When the
placement matured, FCC demanded the payment of the
proceeds of the placement.16 On December 5, 1983, the same
date that So received the phone call instructing her to preterminate Lim Sio Wans placement, the managers check in
the name of Lim Sio Wan was deposited in the account of

13

FCC, purportedly representing the proceeds of FCCs money

market placement with Producers Bank.17 In other words, the
Allied check was deposited with Metrobank in the account of
FCC as Producers Banks payment of its obligation to FCC.
To clear the check and in compliance with the requirements of
the Philippine Clearing House Corporation (PCHC) Rules and
Regulations, Metrobank stamped a guaranty on the check,
which reads: "All prior endorsements and/or lack of
endorsement guaranteed."18
The check was sent to Allied through the PCHC. Upon the
presentment of the check, Allied funded the check even without
checking the authenticity of Lim Sio Wans purported
indorsement. Thus, the amount on the face of the check was
credited to the account of FCC.19

check was forged.31 Thus, Metrobank withheld the amount

represented by the check from FCC. Later on, Metrobank
agreed to release the amount to FCC after the latter executed
an Undertaking, promising to indemnify Metrobank in case it
was made to reimburse the amount.32
Lim Sio Wan thereafter filed an amended complaint to include
Metrobank as a party-defendant, along with Allied. 33The RTC
admitted the amended complaint despite the opposition of
Metrobank.34 Consequently, Allieds third party complaint
against Metrobank was converted into a cross-claim and the
latters fourth party complaint against FCC was converted into
a third party complaint.35
After trial, the RTC issued its Decision, holding as follows:
WHEREFORE, judgment is hereby rendered as follows:

On December 9, 1983, Lim Sio Wan deposited with Allied a

second money market placement to mature on January 9,
1984.20
On December 14, 1983, upon the maturity date of the first
money market placement, Lim Sio Wan went to Allied to
withdraw it.21 She was then informed that the placement had
been pre-terminated upon her instructions. She denied giving
any instructions and receiving the proceeds thereof. She
desisted from further complaints when she was assured by the
banks manager that her money would be recovered.22
When Lim Sio Wans second placement matured on January 9,
1984, So called Lim Sio Wan to ask for the latters instructions
on the second placement. Lim Sio Wan instructed So to rollover the placement for another 30 days.23On January 24, 1984,
Lim Sio Wan, realizing that the promise that her money would
be recovered would not materialize, sent a demand letter to
Allied asking for the payment of the first placement. 24 Allied
refused to pay Lim Sio Wan, claiming that the latter had
authorized the pre-termination of the placement and its
subsequent release to Santos.25
Consequently, Lim Sio Wan filed with the RTC a Complaint
dated February 13, 198426 docketed as Civil Case No. 6757
against Allied to recover the proceeds of her first money
market placement. Sometime in February 1984, she withdrew
her second placement from Allied.
Allied filed a third party complaint27 against Metrobank and
Santos. In turn, Metrobank filed a fourth party
complaint28 against FCC. FCC for its part filed a fifth party
complaint29 against Producers Bank. Summonses were duly
served upon all the parties except for Santos, who was no
longer connected with Producers Bank.30
On May 15, 1984, or more than six (6) months after funding the
check, Allied informed Metrobank that the signature on the

1. Ordering defendant Allied Banking Corporation to

pay plaintiff the amount of P1,158,648.49 plus 12%
interest per annum from March 16, 1984 until fully
paid;
2. Ordering defendant Allied Bank to pay plaintiff the
amount of P100,000.00 by way of moral damages;
3. Ordering defendant Allied Bank to pay plaintiff the
amount of P173,792.20 by way of attorneys fees;
and,
4. Ordering defendant Allied Bank to pay the costs of
suit.
Defendant Allied Banks cross-claim against defendant
Metrobank is DISMISSED.
Likewise defendant Metrobanks third-party complaint as
against Filipinas Cement Corporation is DISMISSED.
Filipinas Cement Corporations fourth-party complaint against
Producers Bank is also DISMISSED.
SO ORDERED.36
The Decision of the Court of Appeals
Allied appealed to the CA, which in turn issued the assailed
Decision on March 18, 1998, modifying the RTC Decision, as
follows:
WHEREFORE, premises considered, the decision appealed
from is MODIFIED. Judgment is rendered ordering and
sentencing defendant-appellant Allied Banking Corporation to
pay sixty (60%) percent and defendant-appellee Metropolitan

14

Bank and Trust Company forty (40%) of the amount of

P1,158,648.49 plus 12% interest per annum from March 16,
1984 until fully paid. The moral damages, attorneys fees and
costs of suit adjudged shall likewise be paid by defendantappellant Allied Banking Corporation and defendant-appellee
Metropolitan Bank and Trust Company in the same proportion
of 60-40. Except as thus modified, the decision appealed from
is AFFIRMED.

The Liability of the Parties

SO ORDERED.37

Art. 1953. A person who receives a loan of money or any other

fungible thing acquires the ownership thereof, and is bound to
pay to the creditor an equal amount of the same kind and
quality.

Hence, Allied filed the instant petition.

As to the liability of the parties, we find that Allied is liable to

Lim Sio Wan. Fundamental and familiar is the doctrine that the
relationship between a bank and a client is one of debtorcreditor.
Articles 1953 and 1980 of the Civil Code provide:

The Issues
Allied raises the following issues for our consideration:
The Honorable Court of Appeals erred in holding that Lim Sio
Wan did not authorize [Allied] to pre-terminate the initial
placement and to deliver the check to Deborah Santos.
The Honorable Court of Appeals erred in absolving Producers
Bank of any liability for the reimbursement of amount adjudged
demandable.
The Honorable Court of Appeals erred in holding [Allied] liable
to the extent of 60% of amount adjudged demandable in clear
disregard to the ultimate liability of Metrobank as guarantor of
all endorsement on the check, it being the collecting bank.38
The petition is partly meritorious.
A Question of Fact
Allied questions the finding of both the trial and appellate
courts that Allied was not authorized to release the proceeds of
Lim Sio Wans money market placement to Santos. Allied
clearly raises a question of fact. When the CA affirms the
findings of fact of the RTC, the factual findings of both courts
are binding on this Court.39
We also agree with the CA when it said that it could not disturb
the trial courts findings on the credibility of witness So
inasmuch as it was the trial court that heard the witness and
had the opportunity to observe closely her deportment and
manner of testifying. Unless the trial court had plainly
overlooked facts of substance or value, which, if considered,
might affect the result of the case,40 we find it best to defer to
the trial court on matters pertaining to credibility of witnesses.
Additionally, this Court has held that the matter of negligence is
also a factual question.41 Thus, the finding of the RTC, affirmed
by the CA, that the respective parties were negligent in the
exercise of their obligations is also conclusive upon this Court.

Art. 1980. Fixed, savings, and current deposits of money in

banks and similar institutions shall be governed by the
provisions concerning simple loan.
Thus, we have ruled in a line of cases that a bank deposit is in
the nature of a simple loan or mutuum. 42 More succinctly, in
Citibank, N.A. (Formerly First National City Bank) v.
Sabeniano, this Court ruled that a money market placement is
a simple loan or mutuum.43 Further, we defined a money
market in Cebu International Finance Corporation v. Court of
Appeals, as follows:
[A] money market is a market dealing in standardized shortterm credit instruments (involving large amounts) where
lenders and borrowers do not deal directly with each other but
through a middle man or dealer in open market. In a money
market transaction, the investor is a lender who loans his
money to a borrower through a middleman or dealer.
In the case at bar, the money market transaction between the
petitioner and the private respondent is in the nature of a
loan.44
Lim Sio Wan, as creditor of the bank for her money market
placement, is entitled to payment upon her request, or upon
maturity of the placement, or until the bank is released from its
obligation as debtor. Until any such event, the obligation of
Allied to Lim Sio Wan remains unextinguished.
Art. 1231 of the Civil Code enumerates the instances when
obligations are considered extinguished, thus:
Art. 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;

15

(4) By the confusion or merger of the rights of creditor

and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as
annulment, rescission, fulfillment of a resolutory condition, and
prescription, are governed elsewhere in this Code. (Emphasis
supplied.)
From the factual findings of the trial and appellate courts that
Lim Sio Wan did not authorize the release of her money
market placement to Santos and the bank had been negligent
in so doing, there is no question that the obligation of Allied to
pay Lim Sio Wan had not been extinguished. Art. 1240 of the
Code states 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."
As commented by Arturo Tolentino:
Payment made by the debtor to a wrong party does not
extinguish the obligation as to the creditor, if there is no fault or
negligence which can be imputed to the latter. Even when the
debtor acted in utmost good faith and by mistake as to the
person of his creditor, or through error induced by the fraud of
a third person, the payment to one who is not in fact his
creditor, or authorized to receive such payment, is void, except
as provided in Article 1241. Such payment does not prejudice
the creditor, and accrual of interest is not suspended by
it.45 (Emphasis supplied.)
Since there was no effective payment of Lim Sio Wans money
market placement, the bank still has an obligation to pay her at
six percent (6%) interest from March 16, 1984 until the
payment thereof.
We cannot, however, say outright that Allied is solely liable to
Lim Sio Wan.
Allied claims that Metrobank is the proximate cause of the loss
of Lim Sio Wans money. It points out that Metrobank
guaranteed all prior indorsements inscribed on the managers
check, and without Metrobanks guarantee, the present
controversy would never have occurred. According to Allied:
Failure on the part of the collecting bank to ensure that the
proceeds of the check is paid to the proper party is, aside from
being an efficient intervening cause, also the last negligent act,
x x x contributory to the injury caused in the present case,
which thereby leads to the conclusion that it is the collecting
bank, Metrobank that is the proximate cause of the alleged
loss of the plaintiff in the instant case.46

We are not persuaded.

Proximate cause is "that cause, which, in natural and
continuous sequence, unbroken by any efficient intervening
cause, produces the injury and without which the result would
not have occurred."47 Thus, there is an efficient supervening
event if the event breaks the sequence leading from the cause
to the ultimate result. To determine the proximate cause of a
controversy, the question that needs to be asked is: If the
event did not happen, would the injury have resulted? If the
answer is NO, then the event is the proximate cause.
In the instant case, Allied avers that even if it had not issued
the check payment, the money represented by the check
would still be lost because of Metrobanks negligence in
indorsing the check without verifying the genuineness of the
indorsement thereon.
Section 66 in relation to Sec. 65 of the Negotiable Instruments
Law provides:
Section 66. Liability of general indorser.Every indorser who
indorses without qualification, warrants to all subsequent
holders in due course;
a) The matters and things mentioned in subdivisions
(a), (b) and (c) of the next preceding section; and
b) That the instrument is at the time of his
indorsement valid and subsisting;
And in addition, he engages that on due presentment, it shall
be accepted or paid, or both, as the case may be according to
its tenor, and that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he will pay the amount
thereof to the holder, or to any subsequent indorser who may
be compelled to pay it.
Section 65. Warranty where negotiation by delivery, so forth.
Every person negotiating an instrument by delivery or by a
qualified indorsement, warrants:
a) That the instrument is genuine and in all respects
what it purports to be;
b) That he has a good title of it;
c) That all prior parties had capacity to contract;
d) That he has no knowledge of any fact which would
impair the validity of the instrument or render it
valueless.

16

But when the negotiation is by delivery only, the warranty

extends in favor of no holder other than the immediate
transferee.
The provisions of subdivision (c) of this section do not apply to
persons negotiating public or corporation securities, other than
bills and notes. (Emphasis supplied.)
The warranty "that the instrument is genuine and in all respects
what it purports to be" covers all the defects in the instrument
affecting the validity thereof, including a forged indorsement.
Thus, the last indorser will be liable for the amount indicated in
the negotiable instrument even if a previous indorsement was
forged. We held in a line of cases that "a collecting bank which
indorses a check bearing a forged indorsement and presents it
to the drawee bank guarantees all prior indorsements,
including the forged indorsement itself, and ultimately should
be held liable therefor."48
However, this general rule is subject to exceptions. One such
exception is when the issuance of the check itself was
attended with negligence. Thus, in the cases cited above
where the collecting bank is generally held liable, in two of the
cases where the checks were negligently issued, this Court
held the institution issuing the check just as liable as or more
liable than the collecting bank.
In isolated cases where the checks were deposited in an
account other than that of the payees on the strength of forged
indorsements, we held the collecting bank solely liable for the
whole amount of the checks involved for having indorsed the
same. In Republic Bank v. Ebrada,49 the check was properly
issued by the Bureau of Treasury. While in Banco de Oro
Savings and Mortgage Bank (Banco de Oro) v. Equitable
Banking Corporation,50 Banco de Oro admittedly issued the
checks in the name of the correct payees. And in Traders
Royal Bank v. Radio Philippines Network, Inc.,51 the checks
were issued at the request of Radio Philippines Network, Inc.
from Traders Royal Bank.1avvphi1

success of the impostor in encashing the proceeds of the

forged checks. Under these circumstances, we apply Article
2179 of the Civil Code to the effect that while respondent CBC
may recover its losses, such losses are subject to mitigation by
the courts. (See Phoenix Construction Inc. v. Intermediate
Appellate Courts, 148 SCRA 353 [1987]).
Considering the comparative negligence of the two (2) banks,
we rule that the demands of substantial justice are satisfied by
allocating the loss of P2,413,215.16 and the costs of the
arbitration proceeding in the amount of P7,250.00 and the cost
of litigation on a 60-40 ratio.52
Similarly, we ruled in Associated Bank v. Court of Appeals that
the issuing institution and the collecting bank should equally
share the liability for the loss of amount represented by the
checks concerned due to the negligence of both parties:
The Court finds as reasonable, the proportionate sharing of
fifty percent-fifty percent (50%-50%). Due to the negligence of
the Province of Tarlac in releasing the checks to an
unauthorized person (Fausto Pangilinan), in allowing the
retired hospital cashier to receive the checks for the payee
hospital for a period close to three years and in not properly
ascertaining why the retired hospital cashier was collecting
checks for the payee hospital in addition to the hospitals real
cashier, respondent Province contributed to the loss amounting
to P203,300.00 and shall be liable to the PNB for fifty (50%)
percent thereof. In effect, the Province of Tarlac can only
recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB
for fifty (50%) percent of P203,300.00. It is liable on its
warranties as indorser of the checks which were deposited by
Fausto Pangilinan, having guaranteed the genuineness of all
prior indorsements, including that of the chief of the payee
hospital, Dr. Adena Canlas. Associated Bank was also remiss
in its duty to ascertain the genuineness of the payees
indorsement.53

However, in Bank of the Philippine Islands v. Court of Appeals,

we said that the drawee bank is liable for 60% of the amount
on the face of the negotiable instrument and the collecting
bank is liable for 40%. We also noted the relative negligence
exhibited by two banks, to wit:

A reading of the facts of the two immediately preceding cases

would reveal that the reason why the bank or institution which
issued the check was held partially liable for the amount of the
check was because of the negligence of these parties which
resulted in the issuance of the checks.

Both banks were negligent in the selection and supervision of

their employees resulting in the encashment of the forged
checks by an impostor. Both banks were not able to overcome
the presumption of negligence in the selection and supervision
of their employees. It was the gross negligence of the
employees of both banks which resulted in the fraud and the
subsequent loss. While it is true that petitioner BPIs
negligence may have been the proximate cause of the loss,
respondent CBCs negligence contributed equally to the

In the instant case, the trial court correctly found Allied

negligent in issuing the managers check and in transmitting it
to Santos without even a written authorization.54 In fact, Allied
did not even ask for the certificate evidencing the money
market placement or call up Lim Sio Wan at her residence or
office to confirm her instructions. Both actions could have
prevented the whole fraudulent transaction from unfolding.
Allieds negligence must be considered as the proximate cause
of the resulting loss.

17

To reiterate, had Allied exercised the diligence due from a

financial institution, the check would not have been issued and
no loss of funds would have resulted. In fact, there would have
been no issuance of indorsement had there been no check in
the first place.

In Tamio v. Ticson, we further clarified the principle of unjust

enrichment, thus: "Under Article 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."59

The liability of Allied, however, is concurrent with that of

Metrobank as the last indorser of the check. When Metrobank
indorsed the check in compliance with the PCHC Rules and
Regulations55 without verifying the authenticity of Lim Sio
Wans indorsement and when it accepted the check despite the
fact that it was cross-checked payable to payees account
only,56 its negligent and cavalier indorsement contributed to the
easier release of Lim Sio Wans money and perpetuation of the
fraud. Given the relative participation of Allied and Metrobank
to the instant case, both banks cannot be adjudged as equally
liable. Hence, the 60:40 ratio of the liabilities of Allied and
Metrobank, as ruled by the CA, must be upheld.

In the instant case, Lim Sio Wans money market placement in

Allied Bank was pre-terminated and withdrawn without her
consent. Moreover, the proceeds of the placement were
deposited in Producers Banks account in Metrobank without
any justification. In other words, there is no reason that the
proceeds of Lim Sio Wans placement should be deposited in
FCCs account purportedly as payment for FCCs money
market placement and interest in Producers Bank.lavvphil With
such payment, Producers Banks indebtedness to FCC was
extinguished, thereby benefitting the former. Clearly, Producers
Bank was unjustly enriched at the expense of Lim Sio Wan.
Based on the facts and circumstances of the case, Producers
Bank should reimburse Allied and Metrobank for the amounts
the two latter banks are ordered to pay Lim Sio Wan.

FCC, having no participation in the negotiation of the check

and in the forgery of Lim Sio Wans indorsement, can raise the
real defense of forgery as against both banks.57
As to Producers Bank, Allied Banks argument that Producers
Bank must be held liable as employer of Santos under Art.
2180 of the Civil Code is erroneous. Art. 2180 pertains to the
vicarious liability of an employer for quasi-delicts that an
employee has committed. Such provision of law does not apply
to civil liability arising from delict.
One also cannot apply the principle of subsidiary liability in Art.
103 of the Revised Penal Code in the instant case. Such
liability on the part of the employer for the civil aspect of the
criminal act of the employee is based on the conviction of the
employee for a crime. Here, there has been no conviction for
any crime.
As to the claim that there was unjust enrichment on the part of
Producers Bank, the same is correct. Allied correctly claims in
its petition that Producers Bank should reimburse Allied for
whatever judgment that may be rendered against it pursuant to
Art. 22 of the Civil Code, which provides: "Every person who
through an act of performance by another, or any other means,
acquires or comes into possession of something at the
expense of the latter without just cause or legal ground, shall
return the same to him."1avvphi1
The above provision of law was clarified in Reyes v. Lim,
where we ruled that "[t]here is unjust enrichment 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."58

It cannot be validly claimed that FCC, and not Producers Bank,

should be considered as having been unjustly enriched. It must
be remembered that FCCs money market placement with
Producers Bank was already due and demandable; thus,
Producers Banks payment thereof was justified. FCC was
entitled to such payment. As earlier stated, the fact that the
indorsement on the check was forged cannot be raised against
FCC which was not a part in any stage of the negotiation of the
check. FCC was not unjustly enriched.
From the facts of the instant case, we see that Santos could be
the architect of the entire controversy. Unfortunately, since
summons had not been served on Santos, the courts have not
acquired jurisdiction over her.60 We, therefore, cannot ascribe
to her liability in the instant case.
Clearly, Producers Bank must be held liable to Allied and
Metrobank for the amount of the check plus 12% interest per
annum, moral damages, attorneys fees, and costs of suit
which Allied and Metrobank are adjudged to pay Lim Sio Wan
based on a proportion of 60:40.
WHEREFORE, the petition is PARTLY GRANTED. The March
18, 1998 CA Decision in CA-G.R. CV No. 46290 and the
November 15, 1993 RTC Decision in Civil Case No. 6757 are
AFFIRMED with MODIFICATION.
Thus, the CA Decision is AFFIRMED, the fallo of which is
reproduced, as follows:
WHEREFORE, premises considered, the decision appealed
from is MODIFIED. Judgment is rendered ordering and
sentencing defendant-appellant Allied Banking Corporation to
pay sixty (60%) percent and defendant-appellee Metropolitan

18

Bank and Trust Company forty (40%) of the amount of

P1,158,648.49 plus 12% interest per annum from March 16,
1984 until fully paid. The moral damages, attorneys fees and
costs of suit adjudged shall likewise be paid by defendantappellant Allied Banking Corporation and defendant-appellee
Metropolitan Bank and Trust Company in the same proportion
of 60-40. Except as thus modified, the decision appealed from
is AFFIRMED.
SO ORDERED.
Additionally and by way of MODIFICATION, Producers Bank is
hereby ordered to pay Allied and Metrobank the
aforementioned amounts. The liabilities of the parties are
concurrent and independent of each other.
SO ORDERED.
DELA CRUZ VS CONCEPCION
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 respondent Ana
Marie Concepcion are the Court of Appeals (CA) Decision 1
dated March 31, 2005 and Resolution2 dated May 24, 2006 in
CA-G.R. CV No. 83030.
The facts of the case are as follows:
On March 25, 1996, petitioners (as vendors) entered into a
Contract to Sell 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:
a) That an earnest money of P100,000.00 shall be paid
immediately;
b) That a full down payment of Four Hundred Thousand Pesos
(P400,000.00) shall be paid on February 29, 1996;
c) That Five Hundred Thousand Pesos (P500,000.00) shall be
paid on or before May 5, 1996; and
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 obligation which
includes interests and penalties was only P200,000.00.6
Petitioners 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 reminded respondent to pay P209,000.00
within three months.8
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 Complaint
for Sum of Money With Damages10 filed with the Regional
Trial Court (RTC)11of Antipolo, Rizal. The case was docketed
as Civil Case No. 98-4716.
In her Answer with Compulsory Counterclaim,12 respondent
claimed that her unpaid obligation to petitioners is only

19

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
On March 8, 2004, the RTC rendered a Decision14 in favor of
respondent, the dispositive portion of which reads:
WHEREFORE, premises considered, this case is hereby
DISMISSED. The plaintiff is hereby ordered to pay the
defendants counterclaim, amounting to wit:
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 moral damages and attorneys fees in
favor of respondent.17 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 asclaimed 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 P2
million and that her unpaid obligation amounts to
P200,000.00.24 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 the monthly interest agreed upon.25
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 was
not armed with authority to receive payment.26
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.

20

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 balance, it is okay with us. x x x.27
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 objection was raised.29 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 admission will not prejudice him.31
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 no motion was
filed and no amendment of the pleading has been ordered,32
the RTC cannot be faulted for admitting respondents
testimonial and documentary evidence to prove payment.33
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

21

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 Guzman,37 to whom payment should be made
in order to extinguish an obligation:

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
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 Guzman,37 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.

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 and the CA
conclusion that payment had already been made and that it
extinguished respondent's obligations.

In general, a payment in order to be effective to discharge an

obligation, must be made to the proper person. Thus, payment

WHEREFORE, premises considered, the petition is DENIED

for lack of merit. The Court of Appeals Decision dated March

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.

22

31, 2005 and I Resolution dated May 24, 2006 in CA-G.R. CV

No. 83030, are AFFIRMED.

P50,000.00, attorneys fees equivalent to 20% of the total

amount due, other expenses and costs of suit.

SO ORDERED.
The case was filed in the Regional Trial Court of

DATION IN PAYMENT

Antipolo and raffled to Branch 73 thereof.

ESTANISLAO VS. EAST WEST BANKING

Subsequently, respondent moved for suspension of

YNARES-SANTIAGO, J.:

the proceedings on account of an earnest attempt to arrive at

an amicable settlement of the case. The trial court suspended
[1]

This is a petition for review of the Decision of the

the proceedings, and during the course of negotiations, a deed

Court of Appeals dated April 13, 2007 in CA-G.R. CV No.

of assignment[3] dated August 16, 2000 was drafted by the

87114 which reversed and set aside the Decision of

respondent, which provides in part, that:

the Regional Trial Court of Antipolo City, Branch 73 in Civil

Case No. 00-5731. The appellate court entered a new
judgment ordering petitioners spouses Estanislao to pay
respondent East West Banking Corporation P4,275,919.65
plus interest and attorneys fees. Also assailed is the
Resolution[2] dated June 25, 2007 denying the motion for
reconsideration.
The facts are as follows:
On July 24, 1997, petitioners obtained a loan from the
respondent in the amount of P3,925,000.00 evidenced by a
promissory note and secured by two deeds of chattel mortgage
dated July 10, 1997: one covering two dump trucks and a
bulldozer to secure the loan amount of P2,375,000.00, and
another covering bulldozer and a wheel loader to secure the
loan amount of P1,550,000.00. Petitioners defaulted in the
amortizations and the entire obligation became due and
demandable.

x x x the ASSIGNOR is indebted to

the ASSIGNEE in the aggregate sum of
SEVEN MILLION THREE HUNDRED FIVE
THOUSAND FOUR HUNDRED FIFTY NINE
PESOS and FIFTY TWO CENTAVOS
(P7,305,459.52), Philippine currency,
inclusive of accrued interests and
penalties as of August 16, 2000, and in
full payment thereof, the ASSIGNOR does
hereby ASSIGN, TRANSFER and CONVEY
unto the ASSIGNEE those motor vehicles,
with all their tools and accessories, more
particularly described as follows:
Make
Make
Make
Bulldozer x x x

: Isuzu Dump Truck

xxx
: Isuzu Dump Truck
xxx
: x x x Caterpillar

That
the ASSIGNEE
hereby
accepts the assignment in full payment of
the
above-mentioned
debt x
x
x. (Emphasis supplied)

On April 10, 2000, respondent bank filed a suit for

Petitioners affixed their signatures on the deed of

replevin with damages, praying that the equipment covered by

assignment. However, for some unknown reason, respondent

the first deed of chattel mortgage be seized and delivered to

banks duly authorized representative failed to sign the deed.

it. In the alternative, respondent prayed that petitioners be

ordered to pay the outstanding principal amount of

On October 6, 2000 and March 8, 2001, respectively,

P3,846,127.73 with 19.5% interest per annum reckoned from

petitioners completed the delivery of the heavy equipment

judicial demand until fully paid, exemplary damages of

mentioned in the deed of assignment two dump trucks and a

23

bulldozer to respondent, which accepted the same without

in the amount of P500,000.00, attorneys fees, litigation

protest or objection.

expenses, interest and costs.

However, on June 20, 2001, respondent filed a

On March 14, 2006, the trial court dismissed the

manifestation and motion to admit an amended complaint for

amended complaint for lack of merit. It held that the deed of

the seizure and delivery of two more heavy equipment the

assignment and the petitioners delivery of the heavy

bulldozer and wheel loader which are covered under the

equipment effectively extinguished petitioners total loan

second deed of chattel mortgage. Respondent claimed that its

obligation. It also held that respondent was estopped from

representative inadvertently failed to include the second deed

further collecting from the petitioners when it accepted, without

of chattel mortgage among the documents forwarded to its

any protest, delivery of the three units of heavy equipment as

counsel

being

full and complete satisfaction of the petitioners total loan

drafted. Respondent likewise claimed that petitioners were

obligation. Respondent likewise failed to timely rectify its

given a chance to submit a refinancing scheme that would

alleged mistake in the original complaint and deed of

allow them to keep the remaining two heavy equipment, but

assignment, taking almost a year to act.

when

the

original

complaint

was

they failed to come up with such a scheme despite repeated

promises to do so.

Respondent bank appealed to the Court of Appeals,

which reversed the trial courts decision, the dispositive portion

Respondents amended complaint for replevin alleged

of which reads:

that petitioners outstanding indebtedness as of June 14, 2001

stood at P4,275,919.61 which is more or less equal to the
aggregate value of the additional units of heavy equipment
sought to be recovered. It also prayed that, in the event the
two heavy equipment could not be replevied, petitioners be
ordered to pay the outstanding sum of P3,846,127.73 with
19.5% interest per annum reckoned from January 24, 1998,
compound interest, exemplary damages of P50,000.00,
attorneys fees equivalent to 20% of the total amount due,
other expenses and costs of suit.
Petitioners

sought

to

dismiss

the

amended

complaint. They alleged that their previous payments on loan

amortizations, the execution of the deed of assignment on
August 16, 2000, and respondents acceptance of the three
units of heavy equipment, had the effect of full payment or
satisfaction of their total outstanding obligation which is a bar
on respondent bank from recovering any more amounts from

WHEREFORE,
premises
considered, the present appeal is hereby
GRANTED. The Decision dated March 14,
2006 of the Regional Trial Court of Antipolo
City, Branch 73 in Civil Case No. 00-5731 is
hereby REVERSED and SET ASIDE. A new
judgment is hereby entered ordering the
defendants-appellees to pay, jointly and
severally, plaintiff-appellant East West
Banking Corporation the sum of FOUR
MILLION TWO HUNDRED SEVENTY FIVE
THOUSAND NINE HUNDRED NINETEEN
and 69/100 (P4,275,919.69) per Statement
of Account as of June 14, 2001 (Exh. E,
Records, p.328) with interest at 12% per
annum from June 15, 2001 until full payment
thereof. Defendants-appellees are likewise
ordered to pay the plaintiff-appellant
attorneys fees in the sum equivalent to ten
per cent (10%) of the total amount due.
No pronouncement as to costs.
SO ORDERED.[4]

them. By way of counterclaim, petitioners sought the award of

nominal damages in the amount of P500,000.00, moral

The reversal of the lower courts decision hinges on:

damages in the amount of P500,000.00, exemplary damages

(1) the appellate courts finding that the deed of assignment

24

cannot bind the respondent because it did not sign the

a case of plain oversight on the part of the loan operations

same. The appellate court ruled that the assignment contract

unit of respondent bank, which failed to forward to the legal

was never perfected although it was prepared and drafted by

department the complete documents pertaining to the

the respondent; (2) respondent was not estopped by its own

petitioners loan account; d) the continued negotiations in

declarations in the deed of assignment, because such

August 2001 between the parties, after delivery of the three

declarations were the result of ignorance founded upon an

units

innocent mistake and plain oversight on the part of

acknowledged their continuing obligations to respondent under

respondents staff in the banks loan operations department,

the second deed of mortgage; and, e) the deed of assignment

who failed to forward the complete documents pertaining to

did not have the effect of novating the original loan obligation.

of

heavy

equipment,

proves

that

petitioners

petitioners account to the banks legal department, such that

when the original complaint for replevin was prepared, the

The issue for resolution is: Did the deed of

second deed of chattel mortgage covering two other pieces of

assignment which expressly provides that the transfer and

heavy equipment was inadvertently excluded; (3) petitioners

conveyance to respondent of the three units of heavy

are aware that there were five pieces of heavy equipment

equipment, and its acceptance thereof, shall be in full

under chattel mortgage for an outstanding balance of over P7

payment of the petitioners total outstanding obligation to the

million; and (4) the appellate court held that even after the

latter operate to extinguish petitioners debt to respondent,

delivery of the heavy equipment covered by the deed of

such that the replevin suit could no longer prosper?

assignment, the petitioners continued to negotiate with the

respondent on a possible refinancing scheme that will enable

We find merit in the petition.

them to retain the two other units of heavy equipment still in

their possession and which are the subject of the second deed
of chattel mortgage.

The appellate court erroneously denominated the

replevin suit as a collection case. A reading of the original and
amended complaints show that what the respondent initiated

Petitioners argue that: a) the appellate court erred in

was a pure replevin suit, and not a collection case. Recovery

ordering the payment of the principal obligation in a replevin

of the heavy equipment was the principal aim of the suit;

suit which it erroneously treated as a collection case; b) the

payment of the total obligation was merely an alternative

deed of assignment is binding between the parties although it

prayer which respondent sought in the event manual delivery

was not signed by the respondent, constituting as it did an offer

of the heavy equipment could no longer be made.

which they validly accepted; and c) the respondent is estopped

from collecting or foreclosing on the second deed of chattel
mortgage.

Replevin, broadly understood, is both a form of

principal remedy and a provisional relief. It may refer either to
the action itself, i.e., to regain the possession of personal

On the other hand, respondent argues that: a) the

chattels being wrongfully detained from the plaintiff by another,

deed of assignment produced no legal effect between the

or to the provisional remedy that would allow the plaintiff to

parties for failure of the respondent to sign the same; b) the

retain the thing during the pendency of the action and hold

deed was founded on a mistake on its part because it honestly

it pendente lite.[5]

believed that only one chattel mortgage had been constituted

to secure the petitioners obligation; c) the non-inclusion of the

The deed of assignment was a perfected agreement

second deed of chattel mortgage in the original complaint was

which extinguished petitioners total outstanding obligation to

25

the respondent. The deed explicitly provides that the assignor

alleged non-inclusion in the deed of certain units of heavy

(petitioners), in full payment of its obligation in the amount

equipment due to inadvertence, plain oversight or mistake, is

of P7,305,459.52, shall deliver the three units of heavy

tantamount to inexcusable manifest negligence, which should

equipment to the assignee (respondent), which accepts

not invalidate the juridical tie that was created. [10] Respondent

the assignment in full payment of the above-mentioned

is presumed to have maintained a high level of meticulousness

debt. This could only mean that should petitioners complete

in its dealings with petitioners. The business of a bank is

the delivery of the three units of heavy equipment covered by

affected with public interest; thus, it makes a sworn profession

the deed, respondents credit would have been satisfied in full,

of diligence and meticulousness in giving irreproachable

and petitioners aggregate indebtedness of P7,305,459.52

service.[11]

would then be considered to have been paid in full as well.

Besides, respondents protestations of mistake and
The nature of the assignment was a dation in

plain oversight are self-serving. The evidence show that from

payment, whereby property is alienated to the creditor in

August 16, 2000 (date of the deed of assignment) up to March

satisfaction of a debt in money. Such transaction is governed

8, 2001 (the date of delivery of the last unit of heavy equipment

[6]

by the law on sales. Even if we were to consider the

covered under the deed), respondent did not raise any

agreement as a compromise agreement, there was no need for

objections nor make any move to question, invalidate or

respondents signature on the same, because with the delivery

rescind the deed of assignment. It was not until June 20, 2001

of the heavy equipment which the latter accepted, the

that respondent raised the issue of its alleged mistake by filing

agreement was consummated. Respondents approval may be

an amended complaint for replevin involving different chattels,

inferred from its unqualified acceptance of the heavy

although founded on the same principal obligation.

equipment.
The legal presumption is always on the validity of
Consent to contracts is manifested by the meeting of

contracts.[12] In order to judge the intention of the contracting

the offer and the acceptance of the thing and the cause which

parties, their contemporaneous and subsequent acts shall be

are to constitute the contract; the offer must be certain and the

principally considered.[13] When respondent accepted delivery

acceptance absolute.[7] The acceptance of an offer must be

of all three units of heavy equipment under the deed of

made known to the offeror, and unless the offeror knows of the

assignment, there could be no doubt that it intended to be

acceptance, there is no meeting of the minds of the parties, no

bound under the agreement.

[8]

real concurrence of offer and acceptance. Upon due

acceptance, the contract is perfected, and from that moment

Since the agreement was consummated by the

the parties are bound not only to the fulfillment of what has

delivery on March 8, 2001 of the last unit of heavy equipment

been expressly stipulated but also to all the consequences

under the deed, petitioners are deemed to have been released

which, according to their nature, may be in keeping with good

from all their obligations to respondent.

faith, usage and law.[9]

Since there is no more credit to collect, no principal
With its years of banking experience, resources and

obligation to speak of, then there is no more second deed of

manpower, respondent bank is presumed to be familiar with

chattel mortgage that may subsist. A chattel mortgage cannot

the implications of entering into the deed of assignment, whose

exist as an independent contract since its consideration is the

terms are categorical and left nothing for interpretation. The

same as that of the principal contract. Being a mere accessory

26

contract, its validity would depend on the validity of the loan

secured by it.[14] This being so, the amended complaint for
replevin should be dismissed, because the chattel mortgage
agreement upon which it is based had been rendered
ineffectual.
WHEREFORE, the

petition

is GRANTED. The

Decision of the Court of Appeals dated April 13, 2007 in CAG.R. CV No. 87114 and its Resolution dated June 25, 2007 are

totaling P5,916,117.50. The SECOND

PARTY hereby sign [sic] another
promissory note in the amount of
P5,916,117.50 (a copy of which is hereto
attached and forms xxx an integral part
of this document), with a promise to pay
the FIRST PARTY in full within one year
from the date of the consolidation and
restructuring, otherwise the SECOND
PARTY agree to have their DACION IN
PAYMENT agreement, which they have
executed and signed today in favor of the
FIRST PARTY be enforced[.][5]

hereby SET ASIDE. The March 14, 2006 decision of the

Regional Trial Court of Antipolo, Branch 73, which dismisses
Civil Case No. 00-5731, is hereby REINSTATED.

In April 2002 (the day is illegible), petitioners filed a

Complaint,[6] docketed as Civil Case No. 9322, before the

SO ORDERED.

Regional Trial Court (RTC) of Tarlac City, for declaration of

mortgage contract as abandoned, annulment of deeds, illegal

ONG VS. ROBAN LENDING

exaction, unjust enrichment, accounting, and damages,

CARPIO MORALES, J.:

On different dates from July 14, 1999 to March 20,
2000, petitioner-spouses Wilfredo N. Ong and Edna
Sheila Paguio-Ong obtained several loans from Roban
Lending Corporation (respondent) in the total amount
of P4,000,000.00. These loans were secured by a real estate
mortgage on petitioners parcels of land located in
Binauganan, Tarlac City and covered by TCT No. 297840.[1]
On February 12, 2001, petitioners and respondent

alleging that the Memorandum of Agreement and the Dacion in

Payment executed are void for being pactum commissorium.[7]
Petitioners alleged that the loans extended to them
from July 14, 1999 to March 20, 2000 were founded on several
uniform promissory notes, which provided for 3.5% monthly
interest rates, 5% penalty per month on the total amount due
and demandable, and a further sum of 25% attorneys fees
thereon,[8] and in addition, respondent exacted certain sums

Estate

denominated as EVAT/AR.[9] Petitioners decried these

Mortgage[2] consolidating their loans inclusive of charges

additional charges as illegal, iniquitous, unconscionable, and

thereon which totaled P5,916,117.50. On even date, the

revolting to the conscience as they hardly allow any borrower

parties executed a Dacion in Payment Agreement[3]wherein

any chance of survival in case of default.[10]

executed

an Amendment

to Amended

Real

petitioners assigned the properties covered by TCT No.

297840 to respondent in settlement of their total obligation,
and a Memorandum of Agreement[4] reading:

Petitioners further alleged that they had previously

made payments on their loan accounts, but because of the
illegal exactions thereon, the total balance appears not to have

That the FIRST PARTY [Roban

Lending Corporation] and the SECOND
PARTY [the petitioners] agreed to
consolidate
and
restructure
all
aforementioned loans, which have been
all past due and delinquent since April
19, 2000, and outstanding obligations

moved at all, hence, accounting was in order.[11]

Petitioners thus prayed for judgment:
a)
Declaring the Real
Estate Mortgage Contract and its
amendments x x x as null and void and

27

without legal force and effect for having

been renounced, abandoned, and given
up;

The Dacion in Payment

Agreement is lawful and valid as it is
recognized x x x under Art. 1245 of the
Civil Code as a special form of payment
whereby the debtor-Plaintiffs alienates
their property to the creditor-Defendant in
satisfaction of their monetary obligation;

b)
Declaring
the
Memorandum of Agreement xxx and
Dacion in Payment x x x as null and
void for being pactum commissorium;
c)
Declaring
the
interests, penalties, Evat [sic] and
attorneys fees assessed and loaded into
the loan accounts of the plaintiffs with
defendant as unjust, iniquitous,
unconscionable and illegal and therefore,
stricken out or set aside;

The accumulated interest and

other charges which were computed for
more than two (2) years would stand
reasonable and valid taking into
consideration [that] the principal loan
is P4,000,000 and if indeed it became
beyond the Plaintiffs capacity to pay then
the fault is attributed to them and not the
Defendant[.][14]

d)
Ordering
an
accounting on plaintiffs loan accounts to
determine the true and correct balances
on their obligation against legal charges
only; and
e)
Ordering defendant
to [pay] to the plaintiffs: -e.1 Moral damages in
an amount not less
than P100,000.00 and
exemplary damages of
P50,000.00;

After pre-trial, the initial hearing of the case, originally

set on December 11, 2002, was reset several times due to,
among other things, the parties efforts to settle the case
amicably.[15]
During the scheduled initial hearing of May 7, 2003,
the RTC issued the following order:

e.2 Attorneys fees in

the
amount
of
P50,000.00
plus
P1,000.00 appearance
fee per hearing; and

Considering that the plaintiff

Wilfredo Ong is not around on the ground
that he is in Manila and he is attending to
a very sick relative, without objection on
the part of the defendants counsel, the
initial hearing of this case is reset to June
18, 2003 at 10:00 oclock in the morning.

e.3 The cost of suit.

[12]
as well as other just
and equitable reliefs.
In

its

Answer

with

Just in case [plaintiffs counsel]

Atty. Concepcion cannot present his
witness in the person of Mr. Wilfredo Ong
in the next scheduled hearing, the
counsel manifested that he will submit
the case for summary judgment.
[16]
(Underscoring supplied)

Counterclaim,[13] respondent

maintained the legality of its transactions with petitioners,

alleging that:
xxxx
If the voluntary execution of the
Memorandum of Agreement and Dacion
in Payment Agreement novated the Real
Estate Mortgage then the allegation of
Pactum Commissorium has no more
legal leg to stand on;

It appears that the June 18, 2003 setting was

eventually rescheduled to February 11, 2004 at which both
counsels were present[17] and the RTC issued the following
order:

28

The counsel[s] agreed to reset

this case on April 14, 2004, at 10:00
oclock in the morning. However, the
counsels are directed to be ready with
their memorand[a] together with all the
exhibits or evidence needed to support
their respective positions which should
be the basis for the judgment on the
pleadings if the parties fail to settle the
case in the next scheduled setting.
x
supplied)

Their Motion for Reconsideration[26] having been

denied,[27] petitioners filed the instant Petition for Review on
Certiorari,[28] faulting the Court of Appeals for having committed
a clear and reversible error
I.

. . . WHEN IT FAILED AND

REFUSED
TO
APPLY
PROCEDURAL REQUISITES
WHICH WOULD WARRANT
THE SETTING ASIDE OF THE
SUMMARY JUDGMENT IN
VIOLATION OF APPELLANTS
RIGHT TO DUE PROCESS;

II.

. . . WHEN IT FAILED TO
CONSIDER THAT TRIAL IN
THIS CASE IS NECESSARY
BECAUSE THE FACTS ARE
VERY MUCH IN DISPUTE;

III.

. . . WHEN IT FAILED AND

REFUSED TO HOLD THAT
THE MEMORANDUM OF
AGREEMENT (MOA) AND THE
DACION
EN
PAGO
AGREEMENT (DPA) WERE
DESIGNED TO CIRCUMVENT
THE LAW AGAINST PACTUM
COMMISSORIUM; and

IV.

. . . WHEN IT FAILED TO
CONSIDER
THAT
THE
MEMORANDUM
OF
AGREEMENT (MOA) AND THE
DACION EN PAGO (DPA) ARE
NULL AND VOID FOR BEING
CONTRARY TO LAW AND
PUBLIC POLICY.[29]

x[18] (Underscoring

At the scheduled April 14, 2004 hearing, both

counsels appeared but only the counsel of respondent filed a
memorandum.[19]
By Decision of April 21, 2004, Branch 64 of the Tarlac
City RTC, finding on the basis of the pleadings that there was
no pactum commissorium, dismissed the complaint.[20]
On appeal,[21] the Court of Appeals[22] noted that
x x x [W]hile the trial court in its
decision stated that it was rendering
judgment on the pleadings, x x x what it
actually rendered was a summary
judgment. A judgment on the pleadings
is proper when the answer fails to tender
an issue, or otherwise admits the
material allegations of the adverse
partys pleading. However, a judgment
on the pleadings would not have been
proper in this case as the answer
tendered an issue, i.e. the validity of the
MOA and DPA. On the other hand, a
summary judgment may be rendered by
the court if the pleadings, supporting
affidavits, and other documents show
that, except as to the amount of
damages, there is no genuine issue as to
any material fact.[23]

The petition is meritorious.

Both parties admit the execution and contents of the
Memorandum of Agreement and Dacion in Payment. They

Nevertheless, finding the error in nomenclature to be

mere semantics with no bearing on the merits of the case,
[24]

differ, however, on whether both contracts constitute pactum

commissorium or dacion en pago.

the Court of Appeals upheld the RTC decision that there

was no pactum commissorium.[25]

29

This Court finds that the Memorandum of Agreement

the Memorandum of Agreement executed on the same day as

and Dacion in Payment constitute pactum commissorium,

the Dacion in Payment, petitioners had to execute a

which is prohibited under Article 2088 of the Civil Code which

promissory note for P5,916,117.50 which they were to pay

provides:

within one year.[35]

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.

Respondent cites Solid Homes, Inc. v. Court of

[36]

Appeals

where this Court upheld a Memorandum of

Agreement/Dacion en Pago.[37] That case did not involve the

issue of pactum commissorium.[38]

The

elements

of pactum

commissorium, which

enables the mortgagee to acquire ownership of the mortgaged

property without the need of any foreclosure proceedings,
[30]

are: (1) there should be a property mortgaged by way of

security for the payment of the principal obligation, and (2)

That the questioned contracts were freely and

voluntarily executed by petitioners and respondent is of no
moment, pactumcommissorium being void for being prohibited
by law.[39]

there should be a stipulation for automatic appropriation by the

Respecting the charges on the loans, courts may

creditor of the thing mortgaged in case of non-payment of the

reduce interest rates, penalty charges, and attorneys fees if

[31]

principal obligation within the stipulated period.

they are iniquitous or unconscionable.[40]

In the case at bar, the Memorandum of Agreement

This Court, based on existing jurisprudence,[41] finds

and the Dacion in Payment contain no provisions for

the monthly interest rate of 3.5%, or 42% per annum

foreclosure

the

unconscionable and thus reduces it to 12% per annum. This

Memorandum of Agreement, the failure by the petitioners to

Court finds too the penalty fee at the monthly rate of 5% (60%

pay their debt within the one-year period gives respondent the

per annum) of the total amount due and demandable

right to enforce the Dacion in Payment transferring to it

principal plus interest, with interest not paid when due added to

ownership of the properties covered by TCT No. 297840.

and becoming part of the principal and likewise bearing interest

Respondent, in effect, automatically acquires ownership of the

at the same rate, compounded monthly[42] unconscionable

properties upon petitioners failure to pay their debt within the

and reduces it to a yearly rate of 12% of the amount due, to be

stipulated period.

computed from the time of demand.[43] This Court finds the

proceedings

nor

redemption. Under

attorneys fees of 25% of the principal, interests and interests

Respondent argues that the law recognizes dacion en

thereon, and the penalty fees unconscionable, and thus

pago as a special form of payment whereby the debtor

reduces the attorneys fees to 25% of the principal amount

alienates property to the creditor in satisfaction of a monetary

only.[44]

obligation.[32] This does not persuade. In a true dacion en

pago, the assignment of the property extinguishes the
monetary debt.

[33]

The prayer for accounting in petitioners complaint

In the case at bar, the alienation of the

requires presentation of evidence, they claiming to have made

properties was by way of security, and not by way of satisfying

partial payments on their loans, vis a vis respondents denial

[34]

the debt.

The Dacion in Payment did not extinguish

thereof.[45] A remand of the case is thus in order.

petitioners obligation to respondent. On the contrary, under

30

Prescinding from the above disquisition, the trial court

and the Court of Appeals erred in holding that a summary

2.

The monthly penalty fee of 5% of the

judgment is proper. A summary judgment is permitted only if

total amount due and demandable is

there is no genuine issue as to any material fact and a moving

reduced to 12% per annum, to be computed

party is entitled to a judgment as a matter of law. [46] A summary

from the time of demand; and

judgment is proper if, while the pleadings on their face appear

to raise issues, the affidavits, depositions, and admissions
presented by the moving party show that such issues are not

3.

The attorneys fees are reduced to 25%

of the principal amount only.

genuine.[47] A genuine issue, as opposed to a fictitious or

Civil Case No. 9322 is REMANDED to the court of

contrived one, is an issue of fact that requires the presentation

origin only for the purpose of receiving evidence on petitioners

[48]

of evidence.

As mentioned above, petitioners prayer for

prayer for accounting.

accounting requires the presentation of evidence on the issue

SO ORDERED.

of partial payment.

TYPINCO VS. LIM

But neither is a judgment on the pleadings proper. A

CARPIO MORALES, J.:

judgment on the pleadings may be rendered only when an

Sometime between December 1996 and February 1997,

answer fails to tender an issue or otherwise admits the material

respondents-spouses Lina Wong Lim (Lina) and Johnson

allegations of the adverse partys pleadings. [49] In the case at

Sychingho (Johnson) borrowed from petitioner Joseph

bar, respondents Answer with Counterclaim disputed

Typingco (Typingco) the sum of US$600,000 which was later

petitioners claims that the Memorandum of Agreement and

restructured, payable on or before December 31, 1997, under

Dation in Payment are illegal and that the extra charges on the

a promissory note executed by the spouses and co-signed by

loans are unconscionable.[50] Respondent disputed too

their children-co-respondents Jerry Sychingho (Jerry) and

petitioners allegation of bad faith.[51]

Jackson Sychingho (Jackson) as sureties.[1]

WHEREFORE, the challenged Court of Appeals

Following their default in payment, Lina, Jerry, and

Decision is REVERSED and SET ASIDE. The Memorandum

Jackson conveyed on January 29, 1998 to Typingco via dacion

of Agreement and the Dacion in Payment executed by

en pago their house and lot in Greenhills, San Juan (subject

petitioner- spouses Wilfredo N. Ong and Edna Sheila Paguio-

property), covered by Transfer Certificate of Title (TCT) No.

Ong and respondent Roban Lending Corporation on February

6259-R (the title) of the Register of Deeds of San Juan, in the

12, 2001 are declared NULL AND VOID for being pactum

name of Lina and her sons, after first paying respondent Far

commissorium.

East Bank and Trust Company (FEBTC) the balance of a

promissory note to clear the title of a Real Estate Mortgage

In line with the foregoing findings, the following terms

annotated thereon in favor of FEBTC.[2]

of the loan contracts between the parties are MODIFIED as

Typingcos repeated demands for the delivery of the

follows:

owners duplicate copy of the title, the last of which was by

1.

The monthly interest rate of 3.5%, or

letter of March 2, 1998,[3] having remained unheeded, he filed

42% per annum, is reduced to 12% per

a complaint for specific performance and recovery of the title

annum;

31

against respondents[4]Sychinghos and FEBTC before the

appeal by Decision of September 13, 2007,[11] it sustaining for

Quezon City Regional Trial Court (RTC).

the most part the position of BPI.

Respondents Sychinghos averred in the main that it

Typingcos Motion for Reconsideration having been

was FEBTC that was unlawfully withholding delivery of the

denied by Resolution dated January 10, 2008,[12] he (hereafter

owners duplicate copy of the title despite full payment of the

petitioner) filed the present Petition for Review on Certiorari.

[5]

mortgage loan with it.

Petitioner argues that the copy of the Real Estate
FEBTC, which was absorbed after a merger by Bank of

Mortgage submitted by BPI (Exhibit 10) is inadmissible, the

the Philippine Islands (BPI), contended that spouses Lina and

witness who identified it having no personal knowledge of its

Johnson had unsettled obligations as sureties for JSY

existence and due execution, hence, should not be considered

International Philippines, Inc. and J&J Brothers Corporation

annotated on the title; and that there was no evidence that

under Comprehensive Surety Agreements which they had

respondents Sychinghos had other unpaid obligations with

executed authorizing FEBTC to retain and proceed against

FEBTC for which the title should continue to stand as security.

their properties in its possession; that the Real Estate

[13]

Mortgage annotated on the title was a continuing security for

their present and future obligations; and that Typingco was not

By Manifestation of June 12, 2008, individual

a buyer in good faith, he having failed to conduct further inquiry

respondents informed the Court of Johnsons passing during

on the status of the subject property given that the mortgage

the proceedings in the trial court and their waiving of the filing

in its favor was annotated on the title.[6]

of a Comment to the present petition, given that their position

At the pre-trial, the parties clarified that the subject

before the trial and appellate courts[14] is now also petitioners.

matter of the case was only 1/3 inchoate portion of the

subject property[7] or that pertaining to Lina as co-owner (as

BPI, on the other hand, maintains its position before

the 2/3 belongs to her sons Jerry and Jackson), she being a

the trial court, adding that the due execution and authenticity of

signatory to the Real Estate Mortgage, along with her sons, as

Exhibit 10, a notarized instrument, need not be proved unlike

well as to the Comprehensive Surety Agreements, along with

that of a private writing.[15]

her husband, both documents in favor of FEBTC.

The petition is impressed with merit.
[8]

By Decision of March 14, 2003, Branch 82 of the

Quezon City RTC dismissed the complaint, holding that

Dacion en pago is the delivery and transmission of

Typingco was bound by the Real Estate Mortgage in favor of

ownership of another thing by the debtor to the creditor as an

FEBTC not only because the same was duly annotated on the

accepted equivalent of performance of an obligation. It

title, but also because he failed to verify the status of the

partakes of the nature of a contract of sale, where the thing

subject property despite his awareness of the said mortgage.

offered by the debtor is the object of the contract, while the

debt is the consideration or purchase price.[16]

Typingcos Motion for Reconsideration having been

denied by Order dated May 23, 2003, [9] he appealed[10] to the

The pivotal issue is thus whether respondent

Court of Appeals. The appellate court dismissed Typingcos

Sychinghos had the right to sell or convey title to the subject

32

property at the time of thedacion en pago. The Court finds in

duplicate copy of the title to the Register of Deeds of San Juan

the affirmative.

to facilitate the issuance of a new title in his name,[20] the Court

deems

his

action

for specific

performance

There having been no previous foreclosure of the

and recovery of the title as substantial compliance with the

Real Estate Mortgage on the subject property, respondent

prescribed procedure. To require him to institute a new action

Sychinghos ownership thereof remained intact. Indeed, a

seeking essentially the same relief would be to encourage

mortgage does not affect the ownership of the property as it is

endless litigations and multiplicity of suits an end abhorrent

nothing more than a lien thereon serving as security for a

to the proper administration of justice.

debt. The mortgagee does not acquire title to the mortgaged

real estate unless he purchases it at a public auction, and it is

WHEREFORE, the challenged Decision of the Court

not redeemed within the period provided for by the Rules of

of Appeals is REVERSED and SET ASIDE. Bank of the

Court.[17] This

case

Philippine Islands, to which Far East Bank and Trust Company

the

was merged, is ordered to surrender the owners duplicate

whole,of the subject property was actually encumbered to

copy of TCT No. 6259-R to the Register of Deeds of San Juan,

FEBTC.

Metro Manila in order to process the issuance of a new title

where only 1/3,

applies a

fortiori to
not

the

present

over the subject property in the name of petitioner, Joseph

With respect to whatever amount Lina and her sons

Typingco.

may still owe BPI (then FEBTC), the Court finds that this is not
a concern of petitioner as he is not a party to the loan

SO ORDERED.

documents covering it. Since petitioner agreed to the full

TAN SHUY VS. MAULAWIN

extinguishment of respondents spouses then outstanding

obligation in view of the unconditional conveyance to him of the
subject property,[18] there is a perfected and enforceabledacion
en pago. He should thus enjoy full entitlement to the subject
property.
The question of whether the subject property stands
as a continuing security for any outstanding obligations of Lina
and her sons to BPI (then FEBTC) should not detain the Court
any further. Surrender of the certificate of title will not impair
any existing mortgage on the subject property. It is an
elementary principle in civil law that a real estate mortgage
subsists notwithstanding changes in ownership, and all
subsequent purchasers of the property must respect the
mortgage.[19]
Finally, while the remedy of petitioner is to file a
petition in court, following Presidential Decree No. 1529, to
compel then FEBTC (now BPI) to surrender the owners

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
[1]
2009 Resolution of the Court of Appeals (CA).
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 the crop delivered had
already been paid for by petitioner.[2]

33

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 420,000. In

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
420,537.68 worth of copra. To bolster his claim, he presented

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]

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
No 2567
Lopez, Quezon
him, because petitioner got mad at him for selling copra to
other copra
Tinanggap
ko
kay
G.
TAN
SHUY
angbuyers.
halagang
. (P420,000.00) salaping Filipino.
Inaako ko na isusulit sa kanya ang aking LUCAD
at babayaran On
ko ang
nasabing
27 July
2007, the trial court issued a Decision,
halaga. Kung hindi ako makasulit ng LUCAD o makabayad bago sumapit ang
ruling that the net proceeds from Guillermos copra deliveries
., 19 maaari niya akong ibigay sa may kapangyarihan. Kung
represented
ang pagsisingilan ay makakarating sa Juzgado ay sinasagutan
ko angin thepesadas, which did not bear the notation
kaniyang gugol.
pd should be applied as installment payments for the loan.
It gave weight and credence to thepesadas, as their due
[Sgd. by respondent]
execution and authenticity was established by Elena and
P................
.
Lagda
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,
Most of the transactions involving Tan Shuy and
Guillermo himself testified that it was the net proceeds from the
Guillermo were coursed through Elena Tan, daughter of
copra deliveries that were to be applied as installment
petitioner. She served as cashier in the business of Tan Shuy,
payments for the loan. Thus, it ruled that the total amount of
who primarily prepared and issued the pesada. In case of her
41,585.25, which corresponded to the net proceeds from
absence, Vicente would issue the pesada. He also helped his
corn deliveries, should be deducted from the amount of
father in buying copra and granting loans to customers (copra
420,537.68 claimed by Guillermo to be the total value of his
sellers). According to Vicente, part of their agreement with
copra deliveries. Accordingly, the trial court found that
Guillermo was that they would put the annotation sulong on
respondent had not made a full payment for the loan, as the
the pesada when partial payment for the loan was made.
total creditable copra deliveries merely amounted to
Petitioner alleged that despite repeated demands,
Guillermo remitted only 23,000 in August 1998 and 5,500
in October 1998, or a total of 28,500.[4] He claimed that
respondent had an outstanding balance of 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

378,952.43, leaving a balance of 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 copra deliveries were applied as installment payments
for the loan.[7] On 13 November 2009, the CA issued its
assailed Resolution, which denied the Motion for
Reconsideration of petitioner.

34

Petitioner now assails before this Court the

aforementioned Decision and Resolution of the CA and
presents the following issues:
Issues
1.

2.

Whether the pesadas require authentication

before they can be admitted in evidence, and
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
offered.[9]
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.
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]
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 deliveries as installment payments for the loan.[13] 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:
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 copras appearing
therein. Although said pesadas were
private instrument their execution and
authenticity were established by the
plaintiffs daughter Elena Tan and

35

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, plaintiffappellant 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 defendantappellee Guillermo that he had fully paid the
subject loan already.
The foregoing
consideration.

deserves

scant

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:
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:
(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)

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 by plaintiffs son Vicente Tan.[16] The RTC said:
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
x
x

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
and affirmed that they are faithful
reproduction of the originals.[17] (Emphasis
supplied)
In any event, petitioner is already estopped from
questioning the due execution and authenticity of the pesadas.
As 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 pesadashaving been admitted in evidence, with petitioner
failing to timely object thereto, these documents are already
deemed sufficient proof of the facts contained therein.[18] We
hereby uphold the factual findings of the RTC, as affirmed by

36

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 an outstanding debt. [22] 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.[23] 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.[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:
x
x

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

37

(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
x
x

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[25]
P378,952.43). (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
defendantappellee 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
defendantappellee 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[.]
x
x

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
defendantappellee 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 378,952.43. With this partial
payment, respondent remains liable for the balance totaling
41,047.57.[27]
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.
1250 EXTRAORDINARY INFLATION/DEFLATION
EQUITABLE PCI VS. NG SHEUNG NGOR

This petition for review on certiorari[1] seeks to set aside

the decision[2] of the Court of Appeals (CA) in CA-G.R. SP No.
83112 and its resolution[3] denying reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor,
[4]

Ken Appliance Division, Inc. and Benjamin E. Go filed an

action for annulment and/or reformation of documents and

contracts[5] against petitioner Equitable PCI Bank (Equitable)
and its employees, Aimee Yu and Bejan Lionel Apas, in the
Regional Trial Court (RTC), Branch 16 of Cebu City.
[6]

They claimed that Equitable induced them to avail of its

peso and dollar credit facilities by offering low interest

rates[7] so they accepted Equitable's proposal and signed the
bank's pre-printed promissory notes on various dates

38

beginning 1996. They, however, were unaware that the

B)

documents contained identical escalation clauses granting

Equitable authority to increase interest rates without their
consent.[8]
Equitable, in its answer, asserted that respondents
knowingly accepted all the terms and conditions contained in
the promissory notes.[9] In fact, they continuously availed of
and benefited from Equitable's credit facilities for five years.[10]

C) Ordering [Equitable] to pay

[respondents] the sum of P10
[m]illion [p]esos as exemplary
damages;
D) Ordering defendants Aimee Yu and
Bejan [Lionel] Apas to pay
[respondents], jointly and severally,
the sum of [t]wo [m]illion [p]esos as
moral and exemplary damages;
E)

Ordering [Equitable, Aimee Yu and

Bejan Lionel Apas], jointly and
severally, to pay [respondents']
attorney's fees in the sum
of P300,000; litigation expenses in
the sum of P50,000 and the cost of
suit;

F)

Directing plaintiffs Ng Sheung Ngor

and Ken Marketing to pay
[Equitable] the unpaid principal
obligation for the peso loan as well
as the unpaid obligation for the
dollar denominated loan;

After trial, the RTC upheld the validity of the promissory

notes. It found that, in 2001 alone, Equitable restructured
respondents' loans amounting to US$228,200 and P1,000,000.
[11]

The trial court, however, invalidated the escalation clause

contained therein because it violated the principle of mutuality

of contracts.[12] Nevertheless, it took judicial notice of the steep
depreciation of the peso during the intervening period[13] and
declared
[14]

the

existence

of

extraordinary

deflation.

Consequently, the RTC ordered the use of the 1996 dollar

exchange rate in computing respondents' dollar-denominated

loans.[15] Lastly,
respondents was

because

the

(allegedly)

business
severely

reputation
damaged

of

when

Equitable froze their accounts,[16] the trial court awarded moral

and exemplary damages to them.[17]
The dispositive portion of the February 5, 2004 RTC
decision[18] provided:
WHEREFORE, premises
judgment is hereby rendered:

considered,

A) Ordering [Equitable] to reinstate

and return the amount of
[respondents'] deposit placed on
hold status;

Ordering [Equitable] to pay

[respondents] the sum of P12
[m]illion [p]esos as moral damages;

G) Directing plaintiff Ng Sheung Ngor

and Ken Marketing to pay
[Equitable] interest as follows:
1)

12% per annum for the peso

loans;

2)

8% per annum for the dollar

loans. The basis for the
payment of the dollar obligation
is the conversion rate of
P26.50 per dollar availed of at
the time of incurring of the
obligation in accordance with
Article 1250 of the Civil Code
of the Philippines;

H) Dismissing
[Equitable's]
counterclaim except the payment of
the aforestated unpaid principal
loan obligations and interest.
SO ORDERED.[19]

39

Equitable and respondents filed their respective notices

of appeal.[20]

On March 26, 2004, Equitable filed a petition for relief in

the RTC from the March 1, 2004 order. [31] It, however, withdrew
that petition on March 30, 2004[32] and instead filed a petition

In the March 1, 2004 order of the RTC, both notices

were denied due course because Equitable and respondents
failed to submit proof that they paid their respective appeal
fees.

for certiorari with an application for an injunction in the CA to

enjoin the implementation and execution of the March 24, 2004
omnibus order.[33]

[21]

WHEREFORE, premises
considered, the appeal interposed by
defendants from the Decision in the aboveentitled case is DENIED due course. As of
February 27, 2004, the Decision dated
February 5, 2004, is considered final and
executory in so far as [Equitable, Aimee
Yu and Bejan Lionel Apas] are concerned.
[22]
(emphasis supplied)

On June 16, 2004, the CA granted Equitable's

application for injunction. A writ of preliminary injunction was
correspondingly issued.[34]
Notwithstanding the writ of injunction, the properties of
Equitable previously levied upon were sold in a public auction
on July 1, 2004. Respondents were the highest bidders and

Equitable moved for the reconsideration of the March 1,

certificates of sale were issued to them.[35]

2004 order of the RTC[23] on the ground that it did in fact pay
the appeal fees. Respondents, on the other hand, prayed for
the issuance of a writ of execution.[24]

On August 10, 2004, Equitable moved to annul the July

1, 2004 auction sale and to cite the sheriffs who conducted the
sale in contempt for proceeding with the auction despite the

On March 24, 2004, the RTC issued an omnibus

injunction order of the CA.[36]

order denying Equitable's motion for reconsideration for lack

of merit[25] and ordered the issuance of a writ of execution in
favor of respondents.[26] According to the RTC, because
respondents did not move for the reconsideration of the
previous order (denying due course to the parties notices of
appeal),[27] the February 5, 2004 decision became final and
executory as to both parties and a writ of execution against
Equitable was in order.[28]

On October 28, 2005, the CA dismissed the petition for

certiorari.[37] It found Equitable guilty of forum shopping
because the bank filed its petition for certiorari in the CA
several hours before withdrawing its petition for relief in the
RTC.[38] Moreover, Equitable failed to disclose, both in the
statement of material dates and certificate of non-forum
shopping (attached to its petition for certiorari in the CA), that it
had a pending petition for relief in the RTC.[39]

A writ of execution was thereafter issued[29] and three

real properties of Equitable were levied upon.[30]

40

Equitable moved for reconsideration[40] but it was denied.

[41]

taking an appeal by fraud, accident, mistake or excusable

negligence.[47] On the other hand, its petition for certiorari in

Thus, this petition.

the CA, a special civil action, sought to correct the grave abuse
Equitable asserts that it was not guilty of forum shopping
because the petition for relief was withdrawn on the same
day the petition for certiorari was filed.

[42]

of discretion amounting to lack of jurisdiction committed by the

RTC.[48]

It likewise avers that

its petition for certiorari was meritorious because the RTC

In a petition for relief, the judgment or final order is

committed grave abuse of discretion in issuing the March 24,

rendered by a court with competent jurisdiction. In a petition for

2004 omnibus order which was based on an erroneous

certiorari, the order is rendered by a court without or in excess

assumption. The March 1, 2004 order denying its notice of

of its jurisdiction.

appeal for non payment of appeal fees was erroneous because

it had in fact paid the required fees.[43] Thus, the RTC, by
issuing its March 24, 2004 omnibus order, effectively prevented
Equitable from appealing the patently wrong February 5, 2004
decision.[44]

Moreover, Equitable substantially complied with the rule

on non-forum shopping when it moved to withdraw its petition
for relief in the RTC on the same day (in fact just four hours
and forty minutes after) it filed the petition for certiorari in the
CA. Even if Equitable failed to disclose that it had a pending

This petition is meritorious.

EQUITABLE WAS NOT GUILTY OF FORUM SHOPPING

petition for relief in the RTC, it rectified what was doubtlessly a

careless oversight by withdrawing the petition for relief just a
few hours after it filed its petition for certiorari in the CA a

Forum shopping exists when two or more actions

clear indication that it had no intention of maintaining the two

involving the same transactions, essential facts and

actions at the same time.

circumstances are filed and those actions raise identical

THE TRIAL COURT COMMITTED GRAVE ABUSE OF

DISCRETION IN ISSUING ITS MARCH 1, 2004 AND
MARCH 24, 2004 ORDERS

issues, subject matter and causes of action.[45] The test is

whether, in two or more pending cases, there is identity of
parties, rights or causes of actions and reliefs.[46]

Section 1, Rule 65 of the Rules of Court provides:

Equitable's petition for relief in the RTC and its petition
for certiorari in the CA did not have identical causes of action.
The petition for relief from the denial of its notice of appeal was
based on the RTCs judgment or final order preventing it from

Section 1. Petition for Certiorari. When any

tribunal, board or officer exercising
judicial or quasi-judicial function has
acted without or in excess of its or his
jurisdiction, or with grave abuse of
discretion amounting to lack or excess of
jurisdiction, and there is no appeal, nor
any plain, speedy or adequate remedy in

41

the ordinary course of law, a person

aggrieved thereby may file a verified petition
in the proper court, alleging the facts with
certainty and praying that judgment be
rendered annulling or modifying the
proceedings of such tribunal, board or
officer, and granting such incidental reliefs as
law and justice may require.
The petition shall be accompanied by
a certified true copy of the judgment, order or
resolution subject thereof, copies of all
pleadings and documents relevant and
pertinent thereto, and a sworn certificate of
non-forum shopping as provided in the third
paragraph of Section 3, Rule 46.

The March 1, 2004 order denied due course to the

notices of appeal of both Equitable and respondents. However,
it declared that the February 5, 2004 decision was final and
executory only with respect to Equitable.[50] As expected,
the March 24, 2004 omnibus order denied Equitable's motion
for reconsideration and granted respondents' motion for the
issuance of a writ of execution.[51]
The March 1, 2004 and March 24, 2004 orders of the
RTC were obviously intended to prevent Equitable, et al. from

There are two substantial requirements in a petition for

appealing the February 5, 2004 decision. Not only that. The

certiorari. These are:

execution of the decision was undertaken with indecent haste,

1.

2.

that the tribunal, board or officer

exercising judicial or quasi-judicial
functions acted without or in
excess of his or its jurisdiction or
with grave abuse of discretion
amounting to lack or excess of
jurisdiction; and
that there is no appeal or any
plain, speedy and adequate
remedy in the ordinary course of
law.

effectively obviating or defeating Equitable's right to avail of

possible legal remedies. No matter how we look at it, the RTC
committed grave abuse of discretion in rendering those orders.
With regard to whether Equitable had a plain, speedy
and adequate remedy in the ordinary course of law, we hold
that there was none. The RTC denied due course to its notice
of appeal in the March 1, 2004 order. It affirmed that denial in

For a petition for certiorari premised on grave abuse of

discretion to prosper, petitioner must show that the public
respondent patently and grossly abused his discretion and that
abuse amounted to an evasion of positive duty or a virtual
refusal to perform a duty enjoined by law or to act at all in
contemplation of law, as where the power was exercised in an
arbitrary and despotic manner by reason of passion or hostility.
[49]

the March 24, 2004 omnibus order. Hence, there was no way
Equitable could have possibly appealed the February 5, 2004
decision.[52]
Although Equitable filed a petition for relief from the
March 24, 2004 order, that petition was not a plain, speedy and
adequate remedy in the ordinary course of law. [53] A petition
for relief under Rule 38 is an equitable remedy allowed only in
exceptional circumstances or where there is no other available
or adequate remedy.[54]

42

Thus, we grant Equitable's petition for certiorari and

It is erroneous, however, to conclude that contracts of

consequently give due course to its appeal.

adhesion are invalid per se. They are, on the contrary, as

EQUITABLE RAISED PURE QUESTIONS OF LAW IN ITS

binding as ordinary contracts. A party is in reality free to accept

PETITION FOR REVIEW

or reject it. A contract of adhesion becomes void only when the

The jurisdiction of this Court in Rule 45 petitions is

dominant party takes advantage of the weakness of the other

limited to questions of law.[55] There is a question of law when

party, completely depriving the latter of the opportunity to

the doubt or controversy concerns the correct application of

bargain on equal footing.[61]

law or jurisprudence to a certain set of facts; or when the issue

does not call for the probative value of the evidence presented,
the truth or falsehood of facts being admitted.[56]

That was not the case here. As the trial court noted, if
the terms and conditions offered by Equitable had been truly
prejudicial to respondents, they would have walked out and

Equitable does not assail the factual findings of the trial

negotiated with another bank at the first available instance. But

court. Its arguments essentially focus on the nullity of the

they did not. Instead, they continuously availed of Equitable's

RTCs February 5, 2004 decision. Equitable points out that that

credit facilities for five long years.

decision was patently erroneous, specially the exorbitant

award of damages, as it was inconsistent with existing law
and jurisprudence.[57]
THE PROMISSORY NOTES WERE VALID

While the RTC categorically found that respondents had

outstanding dollar- and peso-denominated loans with
Equitable, it, however, failed to ascertain the total amount due
(principal, interest and penalties, if any) as of July 9,

The RTC upheld the validity of the promissory notes

2001. The trial court did not explain how it arrived at the

despite respondents assertion that those documents were

amounts of US$228,200 and P1,000,000.[62] In Metro Manila

contracts of adhesion.

Transit Corporation v. D.M. Consunji,[63] we reiterated that this

Court is not a trier of facts and it shall pass upon them only for

A contract of adhesion is a contract whereby almost all

of its provisions are drafted by one party. [58] The participation of
the other party is limited to affixing his signature or his
adhesion to the contract.[59] For this reason, contracts of
adhesion are strictly construed against the party who drafted it.

compelling reasons which unfortunately are not present in this

case.[64]Hence, we ordered the partial remand of the case for
the sole purpose of determining the amount of actual
damages.[65]
ESCALATION CLAUSE VIOLATED THE PRINCIPLE OF

[60]

MUTUALITY OF CONTRACTS

43

Escalation clauses are not void per se. However, one

escalation clause did not contain the necessary provisions for

which grants the creditor an unbridled right to adjust the

validity, that is, it neither provided that the rate of interest would

interest independently and upwardly, completely depriving the

be increased only if allowed by law or the Monetary Board, nor

debtor of the right to assent to an important modification in the

allowed de-escalation. For these reasons, the escalation

agreement is void. Clauses of that nature violate the principle

clause was void.

of mutuality of contracts.[66] Article 1308[67] of the Civil Code

holds that a contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.

With regard to the proper rate of interest, in New

Sampaguita Builders v. Philippine National Bank[71] we held
that, because the escalation clause was annulled, the principal

[68]

amount of the loan was subject to the original or stipulated rate

For this reason, we have consistently held that a valid
escalation clause provides:
1.

2.

that the rate of interest will only

be increased if the applicable
maximum rate of interest is
increased by law or by the
Monetary Board; and
that the stipulated rate of
interest will be reduced if
the applicable maximum rate of
interest is reduced by law or by the
Monetary Board (de-escalation
clause).[69]

of interest. Upon maturity, the amount due was subject to legal

interest at the rate of 12% per annum.[72]
Consequently, respondents should pay Equitable the
interest rates of 12.66% p.a. for their dollar-denominated loans
and 20% p.a. for their peso-denominated loans from January
10, 2001 to July 9, 2001. Thereafter, Equitable was entitled to
legal interest of 12% p.a. on all amounts due.
THERE WAS NO EXTRAORDINARY DEFLATION.
Extraordinary inflation exists when there is an unusual

The RTC found that Equitable's promissory notes

uniformly stated:
If subject promissory note is extended, the
interest for subsequent extensions shall be
at such rate as shall be determined by the
bank.[70]

decrease in the purchasing power of currency (that is, beyond

the common fluctuation in the value of currency) and such
decrease could not be reasonably foreseen or was manifestly
beyond the contemplation of the parties at the time of the
obligation. Extraordinary deflation, on the other hand, involves

Equitable dictated the interest rates if the term (or

an inverse situation.[73]

period for repayment) of the loan was extended. Respondents

had no choice but to accept them. This was a violation of
Article 1308 of the Civil Code. Furthermore, the assailed

Article 1250 of the Civil Code provides:

Article 1250. In case an extraordinary
inflation or deflation of the currency

44

stipulated should intervene, 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.

For extraordinary inflation (or deflation) to affect an

obligation, the following requisites must be proven:
1. that there was an official
declaration
of
extraordinary
inflation or deflation from the
Bangko Sentral ng Pilipinas
(BSP);[74]
2.

that
the
obligation
contractual in nature;[75] and

was

3.

that the parties expressly agreed

to consider the effects of the
extraordinary inflation or deflation.
[76]

1.

That he or she suffered

besmirched
reputation,
or
physical, mental or psychological
suffering sustained by the
claimant;

2.

That the defendant committed a

wrongful act or omission;

3.

That the wrongful act or omission

was the proximate cause of the
damages the claimant sustained;

4.

The case is predicated on any of

the instances expressed or
envisioned by Article 2219[80] and
2220[81]. [82]

In culpa contractual or breach of contract, moral

damages are recoverable only if the defendant acted
fraudulently or in bad faith or in wanton disregard of his

Despite the devaluation of the peso, the BSP never

contractual obligations.[83] The breach must be wanton,

declared a situation of extraordinary inflation. Moreover,

reckless, malicious or in bad faith, and oppressive or abusive.

although the obligation in this instance arose out of a contract,

[84]

the parties did not agree to recognize the effects of

extraordinary inflation (or deflation).

[77]

The RTC never

mentioned that there was a such stipulation either in the

promissory note or loan agreement. Therefore, respondents
should pay their dollar-denominated loans at the exchange
rate fixed by the BSP on the date of maturity.

The RTC found that respondents did not pay Equitable

the interest due on February 9, 2001 (or any month thereafter
prior to the maturity of the loan)[85] or the amount due (principal
plus interest) due on July 9, 2001.[86] Consequently, Equitable
applied respondents' deposits to their loans upon maturity.

[78]

The relationship between a bank and its depositor is that

THE AWARD OF MORAL AND EXEMPLARY DAMAGES
LACKED BASIS

of creditor and debtor.[87] For this reason, a bank has the right

Moral damages are in the category of an award

to set-off the deposits in its hands for the payment of a

designed to compensate the claimant for actual injury suffered,

not to impose a penalty to the wrongdoer. [79] To be entitled to
moral damages, a claimant must prove:

depositor's indebtedness.[88]
Respondents indeed defaulted on their obligation. For
this reason, Equitable had the option to exercise its legal right

45

to set-off or compensation. However, the RTC mistakenly (or,

hereby SET ASIDE. The appeal of petitioners Equitable PCI

as it now appears, deliberately) concluded that Equitable acted

Bank, Aimee Yu and Bejan Lionel Apas is therefore given due

fraudulently or in bad faith or in wanton disregard of its

course.

contractual obligations despite the absence of proof. The

undeniable fact was that, whatever damage respondents
sustained was purely the consequence of their failure to
pay their loans. There was therefore absolutely no basis for
the award of moral damages to them.

The February 5, 2004 decision of the Regional Trial

Court, Branch 16 of Cebu City in Civil Case No. CEB-26983 is
accordingly SET ASIDE. New judgment is hereby entered:
1.

doing business under the name and style of

Neither was there reason to award exemplary damages.

Ken Marketing, Ken Appliance Division,

Since respondents were not entitled to moral damages, neither

Inc. and Benjamin E. Go to pay petitioner

should they be awarded exemplary damages.[89] And if

Equitable PCI Bank the principal amount of

respondents were not entitled to moral and exemplary

their dollar- and peso-denominated loans;

damages, neither could they be awarded attorney's fees and

litigation expenses.[90]

ordering respondents Ng Sheung Ngor,

2.

ordering respondents Ng Sheung Ngor,

doing business under the name and style of

ACCORDINGLY, the petition is hereby GRANTED.

Ken Marketing, Ken Appliance Division,

Inc. and Benjamin E. Go to pay petitioner

The October 28, 2005 decision and February 3, 2006

resolution of the Court of Appeals in CA-G.R. SP No. 83112

Equitable PCI Bank interest at:

a)

are herebyREVERSED and SET ASIDE.

their dollar-denominated loans from

January 10, 2001 to July 9, 2001;

The March 24, 2004 omnibus order of the Regional Trial

Court, Branch 16, Cebu City in Civil Case No. CEB-26983 is

12.66% p.a. with respect to

b)

20% p.a. with respect to their

herebyANNULLED for being rendered with grave abuse of

peso-denominated

discretion amounting to lack or excess of jurisdiction. All

January 10, 2001 to July 9, 2001;[91]

proceedings undertaken pursuant thereto are likewise declared

null and void.

c)

pursuant to our ruling in Eastern

Shipping Lines v. Court of Appeals,
[92]

The March 1, 2004 order of the Regional Trial Court,

Branch 16 of Cebu City in Civil Case No. CEB-26983 is

loans from

the total amount due on July 9,

2001 shall earn legal interest at

12% p.a. from the time petitioner

46

Equitable PCI Bank demanded

payment, whether judicially or
extra-judicially; and
d)

and executory, the applicable rate

be

12% p.a. until

full

satisfaction;
3.

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

after this Decision becomes final

shall

consisting of 7,348.25 square meters, for a monthly rental

all other claims and counterclaims are

dismissed.

As a starting point, the Regional Trial Court, Branch 16

of Cebu City shall compute the exact amounts due on the
respective dollar-denominated and peso-denominated loans,
as of July 9, 2001, of respondents Ng Sheung Ngor, doing
business under the name and style of Ken Marketing, Ken
Appliance Division and Benjamin E. Go.
SO ORDERED.
ALMEDA VS BATHALA MARKETING
NACHURA, J.:
This is a Petition for Review on Certiorari under Rule

which gave rise to the instant case:

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;
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]
During the effectivity of the contract, Ponciano
died. Thereafter, respondent dealt with petitioners. In a

45 of the Rules of Court, of the Decision[1] of the Court of

letter[7] dated December

Appeals (CA), dated September 3, 2001, in CA-G.R. CV No.

respondent that the former shall assess and collect Value

67784, and its Resolution[2] dated November 19, 2001. The

Added Tax (VAT) on its monthly rentals. In response,

assailed Decision affirmed with modification the Decision[3] of

respondent contended that VAT may not be imposed as the

the Regional Trial Court (RTC), Makati City, Branch 136,

rentals fixed in the contract of lease were supposed to include

dated May 9, 2000 in Civil Case No. 98-411.

the VAT therein, considering that their contract was executed

Sometime in May 1997, respondent Bathala Marketing

29,

1997,

petitioners

advised

on May 1, 1997 when the VAT law had long been in effect.[8]

Industries, Inc., as lessee, represented by its president Ramon

H. Garcia, renewed its Contract of Lease[4] with Ponciano L.

On January 26, 1998, respondent received another

Almeda (Ponciano), as lessor, husband of petitioner Eufemia

letter from petitioners informing the former that its monthly

and father of petitioner Romel Almeda. Under the said

rental should be increased by 73% pursuant to condition No. 7

contract, Ponciano agreed to lease a portion of the Almeda

of the contract and Article 1250 of the Civil Code. Respondent

Compound, located at 2208 Pasong Tamo Street, Makati City,

opposed petitioners demand and insisted that there was no

47

extraordinary inflation to warrant the application of Article 1250

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;

in light of the pronouncement of this Court in various cases.[9]

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.

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

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 lease contract to
prevent damage and prejudice.[10] The case was docketed as

4) holding defendants liable to

plaintiff for the amount of P1,107,348.69,
said amount representing the balance of
plaintiffs rental deposit still with defendants.

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

SO ORDERED.[13]

failure of the latter to vacate the premises after the demand

made by the former.[11] Before respondent could file an answer,
petitioners filed a Notice of Dismissal.[12] 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.
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.
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:
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;

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 well-established 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.

48

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:

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

I.
WHETHER OR NOT ARTICLE 1250 OF
THE NEW CIVIL CODE IS APPLICABLE TO
THE CASE AT BAR.

of his rights and duties thereunder. The only issue that may be

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.

other adequate relief or remedy is available under the

III.
WHETHER OR NOT IN NOT APPLYING
THE DOCTRINE IN THE CASE
OF DEL ROSARIO VS.
THE
SHELL
COMPANY OF THEPHILIPPINES, 164
SCRA 562, THE HONORABLE COURT OF
APPEALS SERIOUSLY ERRED ON A
QUESTION OF LAW.
IV.
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.
V.
WHETHER OR NOT DECLARATORY
RELIEF IS PROPER SINCE PLAINTIFFAPPELLEE WAS IN BREACH WHEN THE
PETITION FOR DECLARATORY RELIEF
WAS FILED BEFORE THE TRIAL COURT.

raised in such a petition is the question of construction or

validity of provisions in an instrument or statute. Corollary is
the general rule that such an action must be justified, as no
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.

49

After petitioners demanded payment of adjusted rentals

declaratory relief petition. This dissimilar factual milieu

and in the months that followed, respondent complied with the

proscribes the Court from applying Teodoro to the instant case.

terms and conditions set forth in their contract of lease by

paying the rentals stipulated therein. Respondent religiously

Given all these attendant circumstances, the Court is

fulfilled its obligations to petitioners even during the pendency

disposed to entertain the instant declaratory relief action

of the present suit. There is no showing that respondent

instead of dismissing it, notwithstanding the pendency of the

committed an act constituting a breach of the subject contract

ejectment/rescission case before the trial court. The resolution

of lease. Thus, respondent is not barred from instituting before

of the present petition would write finisto the parties dispute, as

the trial court the petition for declaratory relief.

it would settle once and for all the question of the proper
interpretation of the two contractual stipulations subject of this

Petitioners claim that the instant petition is not proper

controversy.

because a separate action for rescission, ejectment and

damages had been commenced before another court; thus, the

Now, on the substantive law issues.

construction of the subject contractual provisions should be

ventilated in the same forum.

Petitioners repeatedly made a demand on respondent

for the payment of VAT and for rental adjustment allegedly

We are not convinced.

brought about by extraordinary inflation or devaluation. Both

the trial court and the appellate court found no merit in

It is true that in Panganiban v. Pilipinas Shell Petroleum

Corporation[17] we held that the petition for declaratory relief

petitioners claim. We see no reason to depart from such

findings.

should be dismissed in view of the pendency of a separate

action for unlawful detainer. However, we cannot apply the

As to the liability of respondent for the payment of VAT,

same ruling to the instant case. In Panganiban, the unlawful

we cite with approval the ratiocination of the appellate

detainer case had already been resolved by the trial court

court, viz.:

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.
We are not unmindful of the doctrine enunciated
in Teodoro, Jr. v. Mirasol[18] 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

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

50

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 lessee-appellee. 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

acts of the parties. This intention, once ascertained, is deemed

an integral part of the contract.[21]
While, indeed, condition No. 7 of the contract speaks of
extraordinary inflation or devaluation as compared to Article
1250s 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.
That this is the intention of the parties is evident from
petitioners letter[22] 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.

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. Limited

[20]

should apply.

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

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

51

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]

declaration by competent authorities of the existence of

extraordinary inflation during a given period, the effects of
extraordinary inflation are not to be applied. [25]
WHEREFORE, premises considered, the petition

The factual circumstances obtaining in the present case

is DENIED. The Decision of the Court of Appeals in CA-G.R.

do not make out a case of extraordinary inflation or devaluation

CV No. 67784,dated September 3, 2001, and its Resolution

as would justify the application of Article 1250 of the Civil

dated November 19, 2001, are AFFIRMED.

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

SO ORDERED.

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

52