You are on page 1of 35

DATION IN PAYMENT

SPS. RAFAEL P. ESTANISLAO AND ZENAIDA ESTANISLAO, petitioners,


vs.
EAST WEST BANKING CORPORATION, respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review of the Decision1 of the Court of Appeals dated April 13, 2007 in CAG.R. CV No. 87114 which reversed and set aside the Decision of 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 Resolution2dated 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.
On April 10, 2000, respondent bank filed a suit for replevin with damages, praying that the
equipment covered by the first deed of chattel mortgage be seized and delivered to it. In the
alternative, respondent prayed that petitioners be ordered to pay the outstanding principal
amount of P3,846,127.73 with 19.5% interest per annum reckoned from judicial demand until
fully paid, exemplary damages of P50,000.00, attorneys fees equivalent to 20% of the total
amount due, other expenses and costs of suit.
The case was filed in the Regional Trial Court of Antipolo and raffled to Branch 73 thereof.
Subsequently, respondent moved for suspension of the proceedings on account of an earnest
attempt to arrive at an amicable settlement of the case. The trial court suspended the
proceedings, and during the course of negotiations, a deed of assignment3 dated August 16,
2000 was drafted by the respondent, which provides in part, that:
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 : Isuzu Dump Truck


xxx
Make : Isuzu Dump Truck
xxx
Make : x x x Caterpillar Bulldozer x x x
That the ASSIGNEE hereby accepts the assignment in full payment of the abovementioned debt x x x. (Emphasis supplied)

Petitioners affixed their signatures on the deed of assignment. However, for some unknown
reason, respondent banks duly authorized representative failed to sign the deed.
On October 6, 2000 and March 8, 2001, respectively, petitioners completed the delivery of the
heavy equipment mentioned in the deed of assignment two dump trucks and a bulldozer to
respondent, which accepted the same without protest or objection.
However, on June 20, 2001, respondent filed a manifestation and motion to admit an amended
complaint for the seizure and delivery of two more heavy equipment the bulldozer and wheel
loader which are covered under the second deed of chattel mortgage. Respondent claimed
that its representative inadvertently failed to include the second deed of chattel mortgage
among the documents forwarded to its counsel when the original complaint was being drafted.
Respondent likewise claimed that petitioners were given a chance to submit a refinancing
scheme that would allow them to keep the remaining two heavy equipment, but they failed to
come up with such a scheme despite repeated promises to do so.
Respondents amended complaint for replevin alleged 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 them. By way of counterclaim, petitioners sought the award
of nominal damages in the amount of P500,000.00, moral damages in the amount of
P500,000.00, exemplary damages in the amount of P500,000.00, attorneys fees, litigation
expenses, interest and costs.

On March 14, 2006, the trial court dismissed the amended complaint for lack of merit. It held
that the deed of assignment and the petitioners delivery of the heavy equipment effectively
extinguished petitioners total loan obligation. It also held that respondent was estopped from
further collecting from the petitioners when it accepted, without any protest, delivery of the three
units of heavy equipment as full and complete satisfaction of the petitioners total loan
obligation. Respondent likewise failed to timely rectify its alleged mistake in the original
complaint and deed of assignment, taking almost a year to act.
Respondent bank appealed to the Court of Appeals, which reversed the trial courts decision,
the dispositive portion of which reads:
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

The reversal of the lower courts decision hinges on: (1) the appellate courts finding that the
deed of assignment cannot bind the respondent because it did not sign the same. The appellate
court ruled that the assignment contract was never perfected although it was prepared and
drafted by the respondent; (2) respondent was not estopped by its own declarations in the deed
of assignment, because such declarations were the result of "ignorance founded upon an
innocent mistake" and "plain oversight" on the part of respondents staff in the banks loan
operations department, who failed to forward the complete documents pertaining to petitioners
account to the banks legal department, such that when the original complaint for replevin was
prepared, the second deed of chattel mortgage covering two other pieces of heavy equipment
was inadvertently excluded; (3) petitioners are aware that there were five pieces of heavy
equipment under chattel mortgage for an outstanding balance of over P7 million; and (4) the
appellate court held that even after the delivery of the heavy equipment covered by the deed of
assignment, the petitioners continued to negotiate with the respondent on a possible refinancing
scheme that will enable 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.
Petitioners argue that: a) the appellate court erred in ordering the payment of the principal
obligation in a replevin suit which it erroneously treated as a collection case; b) the deed of
assignment is binding between the parties although it was not signed by the respondent,
constituting as it did an offer which they validly accepted; and c) the respondent is estopped
from collecting or foreclosing on the second deed of chattel mortgage.

On the other hand, respondent argues that: a) the deed of assignment produced no legal effect
between the parties for failure of the respondent to sign the same; b) the deed was founded on
a mistake on its part because it honestly believed that only one chattel mortgage had been
constituted to secure the petitioners obligation; c) the non-inclusion of the second deed of
chattel mortgage in the original complaint was a case of "plain oversight" on the part of the loan
operations unit of respondent bank, which failed to forward to the legal department the complete
documents pertaining to the petitioners loan account; d) the continued negotiations in August
2001 between the parties, after delivery of the three units of heavy equipment, proves that
petitioners acknowledged their continuing obligations to respondent under the second deed of
mortgage; and, e) the deed of assignment did not have the effect of novating the original loan
obligation.
The issue for resolution is: Did the deed of assignment which expressly provides that the
transfer and conveyance to respondent of the three units of heavy equipment, and its
acceptance thereof, shall be in full payment of the petitioners total outstanding obligation to
the latter operate to extinguish petitioners debt to respondent, such that the replevin suit could
no longer prosper?
We find merit in the petition.
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 was a pure
replevin suit, and not a collection case. Recovery of the heavy equipment was the principal aim
of the suit; payment of the total obligation was merely an alternative prayer which respondent
sought in the event manual delivery of the heavy equipment could no longer be made.
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 chattels being
wrongfully detained from the plaintiff by another, or to the provisional remedy that would allow
the plaintiff to retain the thing during the pendency of the action and hold it pendente lite.5
The deed of assignment was a perfected agreement which extinguished petitioners total
outstanding obligation to the respondent. The deed explicitly provides that the assignor
(petitioners), "in full payment" of its obligation in the amount of P7,305,459.52, shall deliver the
three units of heavy equipment to the assignee (respondent), which"accepts the
assignment in full payment of the above-mentioned debt." This could only mean that should
petitioners complete the delivery of the three units of heavy equipment covered by the deed,
respondents credit would have been satisfied in full, and petitioners aggregate indebtedness
of P7,305,459.52 would then be considered to have been paid in full as well.
The nature of the assignment was a dation in payment, whereby property is alienated to the
creditor in satisfaction of a debt in money. Such transaction is governed by the law on
sales.6 Even if we were to consider the agreement as a compromise agreement, there was no
need for respondents signature on the same, because with the delivery of the heavy equipment
which the latter accepted, the agreement was consummated. Respondents approval may be
inferred from its unqualified acceptance of the heavy equipment.

Consent to contracts is manifested by the meeting of the offer and the acceptance of the thing
and the cause which are to constitute the contract; the offer must be certain and the acceptance
absolute.7 The acceptance of an offer must be made known to the offeror, and unless the offeror
knows of the acceptance, there is no meeting of the minds of the parties, no real concurrence of
offer and acceptance.8 Upon due acceptance, the contract is perfected, and from that moment
the parties are bound not only to the fulfillment of what has been expressly stipulated but also to
all the consequences which, according to their nature, may be in keeping with good faith, usage
and law.9
With its years of banking experience, resources and manpower, respondent bank is presumed
to be familiar with the implications of entering into the deed of assignment, whose terms are
categorical and left nothing for interpretation. The alleged non-inclusion in the deed of certain
units of heavy equipment due to inadvertence, plain oversight or mistake, is tantamount to
inexcusable manifest negligence, which should not invalidate the juridical tie that was
created.10 Respondent is presumed to have maintained a high level of meticulousness in its
dealings with petitioners. The business of a bank is affected with public interest; thus, it makes a
sworn profession of diligence and meticulousness in giving irreproachable service.11
Besides, respondents protestations of mistake and plain oversight are self-serving. The
evidence show that from August 16, 2000 (date of the deed of assignment) up to March 8, 2001
(the date of delivery of the last unit of heavy equipment covered under the deed), respondent
did not raise any objections nor make any move to question, invalidate or rescind the deed of
assignment. It was not until June 20, 2001 that respondent raised the issue of its alleged
mistake by filing an amended complaint for replevin involving different chattels, although
founded on the same principal obligation.
The legal presumption is always on the validity of contracts.12 In order to judge the intention of
the contracting parties, their contemporaneous and subsequent acts shall be principally
considered.13 When respondent accepted delivery of all three units of heavy equipment under
the deed of assignment, there could be no doubt that it intended to be bound under the
agreement.
Since the agreement was consummated by the delivery on March 8, 2001 of the last unit of
heavy equipment under the deed, petitioners are deemed to have been released from all their
obligations to respondent.
Since there is no more credit to collect, no principal obligation to speak of, then there is no more
second deed of chattel mortgage that may subsist. A chattel mortgage cannot exist as an
independent contract since its consideration is the same as that of the principal contract. Being
a mere accessory 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 CA-G.R. CV No. 87114 and its Resolution dated June 25, 2007 are 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.

SO ORDERED.

SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-ONG, Petitioners,


vs.
ROBAN LENDING CORPORATION, Respondent.
AUSTRIA-MARTINEZ,*
DECISION
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 ofP4,000,000.00. 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 executed an Amendment to Amended Real
Estate Mortgage2consolidating their loans inclusive of charges thereon which
totaled P5,916,117.50. On even date, the parties executed a Dacion in Payment
Agreement3 wherein petitioners assigned the properties covered by TCT No. 297840 to
respondent in settlement of their total obligation, and a Memorandum of Agreement4 reading:
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 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
In April 2002 (the day is illegible), petitioners filed a Complaint,6 docketed as Civil Case No.
9322, before the Regional Trial Court (RTC) of Tarlac City, for declaration of mortgage contract
as abandoned, annulment of deeds, illegal exaction, unjust enrichment, accounting, and
damages, 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 denominated as
"EVAT/AR."9 Petitioners decried these additional charges as "illegal, iniquitous, unconscionable,

and revolting to the conscience as they hardly allow any borrower any chance of survival in
case of default."10
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 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 without legal force and effect for having been renounced, abandoned, and given up;
b) Declaring the "Memorandum of Agreement" xxx and "Dacion in Payment" x x x as null and
void for beingpactum 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;
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;
e.2 Attorneys fees in the amount of P50,000.00 plus P1,000.00 appearance fee per
hearing; and
e.3 The cost of suit.12

as well as other just and equitable reliefs.


In its Answer with 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;
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;

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
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
1avvphi1

During the scheduled initial hearing of May 7, 2003, the RTC issued the following order:
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.
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)
It appears that the June 18, 2003 setting was eventually rescheduled to February 11, 2004 at
which both counsels were present17 and the RTC issued the following order:
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 x x x18 (Underscoring supplied)
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 Appeals22 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

Nevertheless, finding the error in nomenclature "to be mere semantics with no bearing on the
merits of the case",24the Court of Appeals upheld the RTC decision that there was no pactum
commissorium.25
Their Motion for Reconsideration26 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

The petition is meritorious.


Both parties admit the execution and contents of the Memorandum of Agreement and Dacion in
Payment. They differ, however, on whether both contracts constitute pactum
commissorium or dacion en pago.
This Court finds that the Memorandum of Agreement and Dacion in Payment constitute pactum
commissorium, which is prohibited under Article 2088 of the Civil Code which provides:
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."
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)
there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged
in case of non-payment of the principal obligation within the stipulated period.31
In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no
provisions for foreclosure proceedings nor redemption. Under the Memorandum of Agreement,
the failure by the petitioners to pay their debt within the one-year period gives respondent the
right to enforce the Dacion in Payment transferring to it ownership of the properties covered by
TCT No. 297840. Respondent, in effect, automatically acquires ownership of the properties
upon petitioners failure to pay their debt within the stipulated period.

Respondent argues that the law recognizes dacion en pago as a special form of payment
whereby the debtor alienates property to the creditor in satisfaction of a monetary
obligation.32 This does not persuade. In a true dacion en pago, the assignment of the property
extinguishes the monetary debt.33 In the case at bar, the alienation of the properties was by way
of security, and not by way of satisfying the debt.34 The Dacion in Payment did not extinguish
petitioners obligation to respondent. On the contrary, under the Memorandum of Agreement
executed on the same day as the Dacion in Payment, petitioners had to execute a promissory
note for P5,916,117.50 which they were to pay within one year.35
Respondent cites Solid Homes, Inc. v. Court of Appeals36 where this Court upheld a
Memorandum of Agreement/Dacion en Pago.37 That case did not involve the issue of pactum
commissorium.38
That the questioned contracts were freely and voluntarily executed by petitioners and
respondent is of no moment,pactum commissorium being void for being prohibited by law.39
Respecting the charges on the loans, courts may reduce interest rates, penalty charges, and
attorneys fees if they are iniquitous or unconscionable.40
This Court, based on existing jurisprudence,41 finds the monthly interest rate of 3.5%, or 42%
per annum unconscionable and thus reduces it to 12% per annum. This Court finds too the
penalty fee at the monthly rate of 5% (60% per annum) of the total amount due and demandable
principal plus interest, with interest not paid when due added to and becoming part of the
principal and likewise bearing interest at the same rate, compounded monthly42
unconscionable and reduces it to a yearly rate of 12% of the amount due, to be computed from
the time of demand.43 This Court finds the attorneys fees of 25% of the principal, interests and
interests thereon, and the penalty fees unconscionable, and thus reduces the attorneys fees to
25% of the principal amount only.44
The prayer for accounting in petitioners complaint requires presentation of evidence, they
claiming to have made partial payments on their loans, vis a vis respondents denial thereof.45 A
remand of the case is thus in order.
Prescinding from the above disquisition, the trial court and the Court of Appeals erred in holding
that a summary judgment is proper. A summary judgment is permitted only if there is no genuine
issue as to any material fact and a moving party is entitled to a judgment as a matter of law.46 A
summary 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 genuine.47 A genuine issue, as opposed to a fictitious or contrived one, is an issue of fact
that requires the presentation of evidence.48 As mentioned above, petitioners prayer for
accounting requires the presentation of evidence on the issue of partial payment.
But neither is a judgment on the pleadings proper. A judgment on the pleadings may be
rendered only when an answer fails to tender an issue or otherwise admits the material
allegations of the adverse partys pleadings.49 In the case at bar, respondents Answer with
Counterclaim disputed petitioners claims that the Memorandum of Agreement and Dation in

Payment are illegal and that the extra charges on the loans are unconscionable.50Respondent
disputed too petitioners allegation of bad faith.51
WHEREFORE, the challenged Court of Appeals Decision is REVERSED and SET ASIDE. The
Memorandum of Agreement and the Dacion in Payment executed by petitioner- spouses
Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent Roban Lending Corporation on
February 12, 2001 are declared NULL AND VOID for beingpactum commissorium.
In line with the foregoing findings, the following terms of the loan contracts between the parties
are MODIFIED as follows:
1. The monthly interest rate of 3.5%, or 42% per annum, is reduced to 12% per annum;
2. The monthly penalty fee of 5% of the total amount due and demandable is reduced to
12% per annum, to be computed from the time of demand; and
3. The attorneys fees are reduced to 25% of the principal amount only.

Civil Case No. 9322 is REMANDED to the court of origin only for the purpose of receiving
evidence on petitioners prayer for accounting.
SO ORDERED.

JOSEPH TYPINGCO, Petitioner,


vs.
LINA WONG LIM, JERRY SYCHINGHO, JACKSON SYCHINGHO, JOHNSON SYCHINGHO,
and FAR EAST BANK AND TRUST COMPANY, Respondents.
DECISION
CARPIO MORALES, J.:
Sometime between December 1996 and February 1997, respondents-spouses Lina Wong Lim
(Lina) and Johnson Sychingho (Johnson) borrowed from petitioner Joseph Typingco (Typingco)
the sum of US$600,000 which was later restructured, payable on or before December 31, 1997,
under a promissory note executed by the spouses and co-signed by their children-corespondents Jerry Sychingho (Jerry) and Jackson Sychingho (Jackson) as sureties.1
Following their default in payment, Lina, Jerry, and Jackson conveyed on January 29, 1998 to
Typingco via dacion en pago their house and lot in Greenhills, San Juan (subject property),
covered by Transfer Certificate of Title (TCT) No. 6259-R (the title) of the Register of Deeds of

San Juan, in the name of Lina and her sons, after first paying respondent Far East Bank and
Trust Company (FEBTC) the balance of a promissory note to clear the title of a Real Estate
Mortgage annotated thereon in favor of FEBTC.2
Typingcos repeated demands for the delivery of the owners duplicate copy of the title, the last
of which was by letter of March 2, 1998,3 having remained unheeded, he filed a complaint for
specific performance and recovery of the title against respondents4 Sychinghos and FEBTC
before the Quezon City Regional Trial Court (RTC).
Respondents Sychinghos averred in the main that it was FEBTC that was unlawfully withholding
delivery of the owners duplicate copy of the title despite full payment of the mortgage loan5 with
it.
FEBTC, which was absorbed after a merger by Bank of the Philippine Islands (BPI), contended
that spouses Lina and Johnson had unsettled obligations as sureties for JSY International
Philippines, Inc. and J&J Brothers Corporation under Comprehensive Surety Agreements which
they had executed authorizing FEBTC to retain and proceed against their properties in its
possession; that the Real Estate Mortgage annotated on the title was a continuing security for
their present and future obligations; and that Typingco was not a buyer in good faith, he having
failed to conduct further inquiry on the status of the subject property given that the mortgage in
its favor was annotated on the title.6
At the pre-trial, the parties clarified that the subject matter of the case was only 1/3 inchoate
portion of the subject property7 or that pertaining to Lina as co-owner (as the 2/3 belongs to
her sons Jerry and Jackson), she being a signatory to the Real Estate Mortgage, along with her
sons, as well as to the Comprehensive Surety Agreements, along with her husband, both
documents in favor of FEBTC.
By Decision of March 14, 2003,8 Branch 82 of the Quezon City RTC dismissed the complaint,
holding that Typingco was bound by the Real Estate Mortgage in favor of FEBTC not only
because the same was duly annotated on the title, but also because he failed to verify the status
of the subject property despite his awareness of the said mortgage.
Typingcos Motion for Reconsideration having been denied by Order dated May 23, 2003,9 he
appealed10 to the Court of Appeals. The appellate court dismissed Typingcos appeal by
Decision of September 13, 2007,11 it sustaining for the most part the position of BPI.
Typingcos Motion for Reconsideration having been denied by Resolution dated January 10,
2008,12 he (hereafter petitioner) filed the present Petition for Review on Certiorari.
Petitioner argues that the copy of the Real Estate Mortgage submitted by BPI (Exhibit "10") is
inadmissible, the witness who identified it having no personal knowledge of its existence and
due execution, hence, should not be considered annotated on the title; and that there was no
evidence that respondents Sychinghos had other unpaid obligations with FEBTC for which the
title should continue to stand as security.13

By Manifestation of June 12, 2008, individual respondents informed the Court of Johnsons
passing during the proceedings in the trial court and their waiving of the filing of a Comment to
the present petition, given that their position before the trial and appellate courts14 is now also
petitioners.
BPI, on the other hand, maintains its position before the trial court, adding that the due
execution and authenticity of Exhibit "10," a notarized instrument, need not be proved unlike that
of a private writing.15
The petition is impressed with merit.
Dacion en pago is the delivery and transmission of ownership of another thing by the debtor to
the creditor as an accepted equivalent of performance of an obligation. It partakes of the nature
of a contract of sale, where the thing offered by the debtor is the object of the contract, while the
debt is the consideration or purchase price.16
The pivotal issue is thus whether respondent Sychinghos had the right to sell or convey title to
the subject property at the time of the dacion en pago. The Court finds in the affirmative.
There having been no previous foreclosure of the Real Estate Mortgage on the subject property,
respondent Sychinghos ownership thereof remained intact. Indeed, a mortgage does not affect
the ownership of the property as it is nothing more than a lien thereon serving as security for a
debt. The mortgagee does not acquire title to the mortgaged real estate unless he purchases it
at a public auction, and it is not redeemed within the period provided for by the Rules of
Court.17 This applies a fortiori to the present case where only 1/3, not the
whole, of the subjectproperty was actually encumbered to FEBTC.
1avvph!1

With respect to whatever amount Lina and her sons 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 documents covering
it. Since petitioner agreed to the full 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 enforceable dacion 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 duplicate copy of the title
to the Register of Deeds of San Juan to facilitate the issuance of a new title in his name,20 the
Court deems his action for specific performance and recoveryof the title as substantial
compliance with the prescribed procedure. To require him to institute a new action seeking

essentially the same relief would be to encourage endless litigations and multiplicity of suits
an end abhorrent to the proper administration of justice.
WHEREFORE, the challenged Decision of the Court of Appeals is REVERSED and SET
ASIDE. Bank of the Philippine Islands, to which Far East Bank and Trust Company was merged,
is ordered to surrender the owners duplicate copy of TCT No. 6259-R to the Register of Deeds
of San Juan, Metro Manila in order to process the issuance of a new title over the subject
property in the name of petitioner, Joseph Typingco.
SO ORDERED.

TAN SHUY, Petitioner,


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

Lopez, Quezon July 10, 1997

Tinanggap ko kay G. TAN SHUY ang halagang


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

sinasagutan ko ang lahat ng kaniyang gugol.


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

[Sgd. by respondent]
.
Lagda

Most of the transactions involving Tan Shuy and Guillermo were coursed through Elena Tan,
daughter of petitioner. She served as cashier in the business of Tan Shuy, who primarily
prepared and issued the pesada. In case of her absence, Vicente would issue the pesada. He
also helped his father in buying copra and granting loans to customers (copra sellers).
According to Vicente, part of their agreement with Guillermo was that they would put the
annotation "sulong" on the pesada when partial payment for the loan was made.
Petitioner alleged that despite repeated demands, Guillermo remitted only P 23,000 in August
1998 and P 5,500 in October 1998, or a total of P 28,500.4 He claimed that respondent had an
outstanding balance of P 391,500. Thus, convinced that Guillermo no longer had the intention to
pay the loan, petitioner brought the controversy to the Lupon Tagapamayapa. When no
settlement was reached, petitioner filed a Complaint before the Regional Trial Court (RTC).
Respondent Guillermo countered that he had already paid the subject loan in full. According to
him, he continuously delivered and sold copra to petitioner from April 1998 to April 1999.
Respondent said they had an oral arrangement that the net proceeds thereof shall be applied as
installment payments for the loan. He alleged that his deliveries amounted to P 420,537.68
worth of copra. To bolster his claim, he presented copies of pesadas issued by Elena and
Vicente. He pointed out that the pesadas did not contain the notation "pd," which meant that
actual payment of the net proceeds from copra deliveries was not given to him, but was instead
applied as loan payment. He averred that Tan Shuy filed a case against him, because petitioner
got mad at him for selling copra to other copra buyers.
On 27 July 2007, the trial court issued a Decision, ruling that the net proceeds from Guillermos
copra deliveries represented in the pesadas, which did not bear the notation "pd" should be
applied as installment payments for the loan. It gave weight and credence to the pesadas, as
their due execution and authenticity was established by Elena and Vicente, children of
petitioner.5 However, the court did not credit the net proceeds from 12 pesadas, as they were
deliveries for corn and not copra. According to the RTC, Guillermo himself testified that it was
the net proceeds from the copra deliveries that were to be applied as installment payments for
the loan. Thus, it ruled that the total amount of P 41,585.25, which corresponded to the net
proceeds from corn deliveries, should be deducted from the amount of P 420,537.68 claimed by
Guillermo to be the total value of his copra deliveries. Accordingly, the trial court found that
respondent had not made a full payment for the loan, as the total creditable copra deliveries
merely amounted to P 378,952.43, leaving a balance of P 41,047.57 in his loan.6
On 31 July 2009, the CA issued its assailed Decision, which affirmed the finding of the trial
court. According to the appellate court, petitioner could have easily belied the existence of the
pesadas and the purpose for which they were offered in evidence by presenting his daughter
Elena as witness; however, he failed to do so. Thus, it gave credence to the testimony of
respondent Guillermo in that the net proceeds from the 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.

Petitioner now assails before this Court the aforementioned Decision and Resolution of the CA
and presents the following issues:
Issues
1. Whether the pesadas require authentication before they can be admitted in evidence, and
2. Whether the delivery of copra amounted to installment payments for the loan obtained by
respondents from petitioner.

Discussion
As regards the first issue, petitioner asserts that the pesadas should not have been admitted in
evidence, since they were private documents that were not duly authenticated.8 He further
contends that the pesadas were fabricated in order to show that the goods delivered were copra
and not corn. Finally, he argues that five of the pesadas mentioned in the Formal Offer of
Evidence of respondent were not actually 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 sometimes by plaintiffs son Vicente Tan. x x x.14 (Emphasis supplied)
In affirming the finding of the RTC, the CA reasoned thus:
In his last assigned error, plaintiff-appellant herein impugns the conclusion arrived at by the trial
court, particularly with respect to the giving of evidentiary value to Exhs. "3" to "64" by the latter
in order to prove the claim of defendant-appellee Guillermo that he had fully paid the subject
loan already.
The foregoing deserves scant consideration.
Here, plaintiff-appellant could have easily belied the existence of Exhs. "3" to "64", the pesadas
or receipts, and the purposes for which they were offered in evidence by simply presenting his
daughter, Elena Tan Shuy, but no effort to do so was actually done by the former given that
scenario.15 (Emphasis supplied)
We found no clear showing that the trial court and the CA committed reversible errors of law in
giving credence and according weight to the pesadas presented by respondents. According to
Rule 132, Section 20 of the Rules of Court, there are two ways of proving the due execution and
authenticity of a private document, to wit:
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
xxx

xxx

xxx

x x x. He clarified that in the "pesada" (Exh. "1") prepared by Elena and also in Exh "2", there
appears on the lower right hand portion of the said pesadas the letter "pd", the meaning of
which is to the effect that the seller of the copra has already been paid during that day. He also
confirmed the penmanship and handwriting of his sister Ate Elena who acted as a cashier in the
pesada being shown to him. He was even made to compare the xerox copies of the pesadas
with the original copies presented to him 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 pesadas having 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 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
1wphi1

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:
xxx

xxx

xxx

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

xxx

xxx

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

xxx

xxx

Notwithstanding the above, however, this Court fully agrees with the pronouncement of the trial
court that not all amounts indicated in Exhs. "3" to "64" should be applied as payments to the
subject loan since several of which clearly indicated "mais" deliveries on the part of 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 P 378,952.43. With this partial payment, respondent remains
liable for the balance totaling P 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.

EXTRAORDINARY INFLATION/DEFLATION
EQUITABLE PCI BANK,* AIMEE YU and BEJAN LIONEL APAS, Petitioners,
vs.
NG SHEUNG NGOR** doing business under the name and style "KEN MARKETING," KEN
APPLIANCE DIVISION, INC. and BENJAMIN E. GO, Respondents.
DECISION
CORONA, J.:
This petition for review on certiorari1 seeks to set aside the decision2 of the Court of Appeals
(CA) in CA-G.R. SP No. 83112 and its resolution3 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 contracts5 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 rates7 so they
accepted Equitable's proposal and signed the bank's pre-printed promissory notes on various
dates beginning 1996. They, however, were unaware that the 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
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 period13 and declared the existence of extraordinary
deflation.14 Consequently, the RTC ordered the use of the 1996 dollar exchange rate in
computing respondents' dollar-denominated loans.15 Lastly, because the business reputation of
respondents was (allegedly) severely damaged 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 decision18 provided:


WHEREFORE, premises considered, judgment is hereby rendered:
A) Ordering [Equitable] to reinstate and return the amount of [respondents'] deposit placed
on hold status;
B) Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion [p]esos as moral
damages;
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;
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
Equitable and respondents filed their respective notices of appeal.20
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."21
WHEREFORE, premises considered, the appeal interposed by defendants from the Decision in
the above-entitled 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)

Equitable moved for the reconsideration of the March 1, 2004 order of the RTC23 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 March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for
reconsideration for lack of merit25 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
A writ of execution was thereafter issued29 and three real properties of Equitable were levied
upon.30
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, 200432 and instead filed a petition 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
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 certificates
of sale were issued to them.35
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
injunction order of the CA.36
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
Equitable moved for reconsideration40 but it was denied.41 Thus, this petition.
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 It likewise avers that its petition
for certiorari was meritorious because the RTC committed grave abuse of discretion in issuing
the March 24, 2004 omnibus order which was based on an erroneous assumption. The March
1, 2004 order denying its notice of 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

This petition is meritorious.


Equitable Was Not Guilty Of Forum shopping
Forum shopping exists when two or more actions involving the same transactions, essential
facts and circumstances are filed and those actions raise identical 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
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 taking an appeal by "fraud, accident,
mistake or excusable negligence."47 On the other hand, its petition for certiorari in the CA, a
special civil action, sought to correct the grave abuse of discretion amounting to lack of
jurisdiction committed by the RTC.48
In a petition for relief, the judgment or final order is rendered by a court with competent
jurisdiction. In a petition for certiorari, the order is rendered by a court without or in excess of its
jurisdiction.
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 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 clear indication that it had no intention of maintaining the two actions at
the same time.
The Trial Court Committed Grave Abuse of Discretion In Issuing Its March 1, 2004 and
March 24, 2004 Orders
Section 1, Rule 65 of the Rules of Court provides:
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 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.
There are two substantial requirements in a petition for certiorari. These are:

1. 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
2. that there is no appeal or any plain, speedy and adequate remedy in the ordinary course
of law.

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 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 appealing the February 5, 2004 decision. Not only that. The execution of
the decision was undertaken with indecent haste, 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 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
Thus, we grant Equitable's petition for certiorari and consequently give due course to its appeal.
Equitable Raised Pure Questions of Law in Its Petition For Review
The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.55 There is a
question of law "when the doubt or controversy concerns the correct application of 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
Equitable does not assail the factual findings of the trial court. Its arguments essentially focus on
the nullity of the RTCs February 5, 2004 decision. Equitable points out that that 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
The RTC upheld the validity of the promissory notes despite respondents assertion that those
documents were contracts of adhesion.
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.60
It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are, on
the contrary, as binding as ordinary contracts. A party is in reality free to accept or reject it. A
contract of adhesion becomes void only when the dominant party takes advantage of the
weakness of the other party, completely depriving the latter of the opportunity to bargain on
equal footing.61
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 negotiated
with another bank at the first available instance. But they did not. Instead, they continuously
availed of Equitable's credit facilities for five long years.
While the RTC categorically found that respondents had outstanding dollar- and pesodenominated loans with Equitable, it, however, failed to ascertain the total amount due
(principal, interest and penalties, if any) as of July 9, 2001. The trial court did not explain how it
arrived at the amounts of US$228,200 and P1,000,000.62 In Metro Manila 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 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 Mutuality Of Contracts
Escalation clauses are not void per se. However, one "which grants the creditor an unbridled
right to adjust the interest independently and upwardly, completely depriving the debtor of the
right to assent to an important modification in the agreement" is void. Clauses of that nature
violate the principle of mutuality of contracts.66 Article 130867 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.68
For this reason, we have consistently held that a valid escalation clause provides:
1. 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

2. 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
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
Equitable dictated the interest rates if the term (or 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 escalation clause did not contain the necessary
provisions for validity, that is, it neither provided that the rate of interest would be increased only
if allowed by law or the Monetary Board, nor allowed de-escalation. For these reasons, the
escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National
Bank71 we held that, because the escalation clause was annulled, the principal amount of the
loan was subject to the original or stipulated rate 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 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 an inverse
situation.73
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the currency 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 was contractual in nature;75 and

3. that the parties expressly agreed to consider the effects of the extraordinary inflation or
deflation.76

Despite the devaluation of the peso, the BSP never declared a situation of extraordinary
inflation. Moreover, although the obligation in this instance arose out of a contract, 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.78
The Award Of Moral And Exemplary Damages Lacked Basis
Moral damages are in the category of an award 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:
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
221980 and 222081 . 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 contractual obligations.83 The
breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive.84
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, 2001.86Consequently, Equitable applied respondents' deposits to their
loans upon maturity.
The relationship between a bank and its depositor is that of creditor and debtor.87 For this
reason, a bank has the right to set-off the deposits in its hands for the payment of a depositor's
indebtedness.88
Respondents indeed defaulted on their obligation. For this reason, Equitable had the option to
exercise its legal right to set-off or compensation. However, the RTC mistakenly (or, as it now
appears, deliberately) concluded that Equitable acted "fraudulently or in bad faith or in wanton
disregard" of its 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.

Neither was there reason to award exemplary damages. Since respondents were not entitled to
moral damages, neither should they be awarded exemplary damages.89 And if respondents
were not entitled to moral and exemplary damages, neither could they be awarded attorney's
fees and litigation expenses.90
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the Court of Appeals in CAG.R. SP No. 83112 are hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in Civil
Case No. CEB-26983 is hereby ANNULLED for being rendered with grave abuse of discretion
amounting to lack or excess of jurisdiction. All proceedings undertaken pursuant thereto are
likewise declared null and void.
The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No.
CEB-26983 is herebySET ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee Yu and
Bejan Lionel Apas is therefore given due course.
1avvphi1

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. ordering respondents Ng Sheung Ngor, doing business under the name and style of "Ken
Marketing," Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI
Bank the principal amount of their dollar- and peso-denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under the name and style of "Ken
Marketing," Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI
Bank interest at:
a) 12.66% p.a. with respect to their dollar-denominated loans from January 10, 2001
to July 9, 2001;
b) 20% p.a. with respect to their peso-denominated loans from January 10, 2001 to
July 9, 2001;91
c) pursuant to our ruling in Eastern Shipping Lines v. Court of Appeals,92 the total
amount due on July 9, 2001 shall earn legal interest at 12% p.a. from the time
petitioner Equitable PCI Bank demanded payment, whether judicially or extrajudicially; and
d) after this Decision becomes final and executory, the applicable rate shall be 12%
p.a. until full satisfaction;
3. 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.

EUFEMIA ALMEDA and ROMEL ALMEDA, petitioners,


vs.
BATHALA MARKETING INDUSTRIES, INC., respondent.
DECISION
NACHURA, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, of the
Decision1 of the Court of Appeals (CA), dated September 3, 2001, in CA-G.R. CV No. 67784,
and its Resolution2 dated November 19, 2001. The assailed Decision affirmed with modification
the Decision3 of the Regional Trial Court (RTC), Makati City, Branch 136, dated May 9, 2000 in
Civil Case No. 98-411.
Sometime in May 1997, respondent Bathala Marketing Industries, Inc., as lessee, represented
by its president Ramon H. Garcia, renewed its Contract of Lease4 with Ponciano L. Almeda
(Ponciano), as lessor, husband of petitioner Eufemia and father of petitioner Romel Almeda.
Under the said contract, Ponciano agreed to lease a portion of the Almeda Compound, located
at 2208 Pasong Tamo Street, Makati City, consisting of 7,348.25 square meters, for a monthly
rental of P1,107,348.69, for a term of four (4) years from May 1, 1997 unless sooner terminated
as provided in the contract.5 The contract of lease contained the following pertinent provisions
which gave rise to the instant case:
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 letter7 dated December 29, 1997, petitioners advised respondent that the former
shall assess and collect Value Added Tax (VAT) on its monthly rentals. In response, respondent

contended that VAT may not be imposed as the rentals fixed in the contract of lease were
supposed to include the VAT therein, considering that their contract was executed on May 1,
1997 when the VAT law had long been in effect.8
On January 26, 1998, respondent received another letter from petitioners informing the former
that its monthly rental should be increased by 73% pursuant to condition No. 7 of the contract
and Article 1250 of the Civil Code. Respondent opposed petitioners' demand and insisted that
there was no extraordinary inflation to warrant the application of Article 1250 in light of the
pronouncement of this Court in various cases.9
Respondent refused to pay the VAT and adjusted rentals as demanded by petitioners but
continued to pay the stipulated amount set forth in their contract.
On February 18, 1998, respondent instituted an action for declaratory relief for purposes of
determining the correct interpretation of condition Nos. 6 and 7 of the lease contract to prevent
damage and prejudice.10 The case was docketed as Civil Case No. 98-411 before the RTC of
Makati.
On March 10, 1998, petitioners in turn filed an action for ejectment, rescission and damages
against respondent for failure of the latter to vacate the premises after the 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;
2) declaring that plaintiff is not liable for the payment of any rental adjustment, there being no
[extraordinary] inflation or devaluation, as provided in the Seventh Condition of the lease
contract, to justify the same;
3) holding defendants liable to plaintiff for the total amount of P1,119,102.19, said amount
representing payments erroneously made by plaintiff as VAT charges and rental adjustment
for the months of January, February and March, 1999; and
4) holding defendants liable to plaintiff for the amount of P1,107,348.69, said amount
representing the balance of plaintiff's rental deposit still with defendants.

SO ORDERED.13

The trial court denied petitioners their right to pass on to respondent the burden of paying the
VAT since it was not a new tax that would call for the application of the sixth clause of the
contract. The court, likewise, denied their right to collect the demanded increase in rental, there
being no extraordinary inflation or devaluation as provided for in the seventh clause of the
contract. Because of the payment made by respondent of the rental adjustment demanded by
petitioners, the court ordered the restitution by the latter to the former of the amounts paid,
notwithstanding the 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.
No pronouncement as to costs.
SO ORDERED.14

The appellate court agreed with the conclusions of law and the application of the decisional
rules on the matter made by the RTC. However, it found that the trial court exceeded its
jurisdiction in granting affirmative relief to the respondent, particularly the restitution of its excess
payment.
Petitioners now come before this Court raising the following issues:
I.
WHETHER OR NOT ARTICLE 1250 OF THE NEW CIVIL CODE IS APPLICABLE TO THE
CASE AT BAR.
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.
III.
WHETHER OR NOT IN NOT APPLYING THE DOCTRINE IN THE CASE OF DEL ROSARIO
VS. THE SHELL COMPANY OF THE PHILIPPINES, 164 SCRA 562, THE HONORABLE
COURT OF APPEALS SERIOUSLY ERRED ON A QUESTION OF LAW.

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 PLAINTIFF-APPELLEE
WAS IN BREACH WHEN THE PETITION FOR DECLARATORY RELIEF WAS FILED
BEFORE THE TRIAL COURT.

In fine, the issues for our resolution are as follows: 1) whether the action for declaratory relief is
proper; 2) whether respondent is liable to pay 10% VAT pursuant to Republic Act (RA) 7716;
and 3) whether the amount of rentals due the petitioners should be adjusted by reason of
extraordinary inflation or devaluation.
Declaratory relief is defined as an action by any person interested in a deed, will, contract or
other written instrument, executive order or resolution, to determine any question of construction
or validity arising from the instrument, executive order or regulation, or statute, and for a
declaration of his rights and duties thereunder. The only issue that may be raised in such a
petition is the question of construction or validity of provisions in an instrument or statute.
Corollary is the general rule that such an action must be justified, as no other adequate relief or
remedy is available under the circumstances. 15
Decisional law enumerates the requisites of an action for declaratory relief, as follows: 1) the
subject matter of the controversy must be a deed, will, contract or other written instrument,
statute, executive order or regulation, or ordinance; 2) the terms of said documents and the
validity thereof are doubtful and require judicial construction; 3) there must have been no breach
of the documents in question; 4) there must be an actual justiciable controversy or the "ripening
seeds" of one between persons whose interests are adverse; 5) the issue must be ripe for
judicial determination; and 6) adequate relief is not available through other means or other
forms of action or proceeding.16
It is beyond cavil that the foregoing requisites are present in the instant case, except that
petitioners insist that respondent was already in breach of the contract when the petition was
filed.
We do not agree.
After petitioners demanded payment of adjusted rentals and in the months that followed,
respondent complied with the terms and conditions set forth in their contract of lease by paying
the rentals stipulated therein. Respondent religiously fulfilled its obligations to petitioners even
during the pendency of the present suit. There is no showing that respondent committed an act
constituting a breach of the subject contract of lease. Thus, respondent is not barred from
instituting before the trial court the petition for declaratory relief.

Petitioners claim that the instant petition is not proper because a separate action for rescission,
ejectment and damages had been commenced before another court; thus, the construction of
the subject contractual provisions should be ventilated in the same forum.
We are not convinced.
It is true that in Panganiban v. Pilipinas Shell Petroleum Corporation17 we held that the petition
for declaratory relief should be dismissed in view of the pendency of a separate action for
unlawful detainer. However, we cannot apply the same ruling to the instant case. In Panganiban,
the unlawful detainer case had already been resolved by the trial court before the dismissal of
the declaratory relief case; and it was petitioner in that case who insisted that the action for
declaratory relief be preferred over the action for unlawful detainer. Conversely, in the case at
bench, the trial court had not yet resolved the rescission/ejectment case during the pendency of
the declaratory relief petition. In fact, the trial court, where the rescission case was on appeal,
itself initiated the suspension of the proceedings pending the resolution of the action for
declaratory relief.
We are not unmindful of the doctrine enunciated in Teodoro, Jr. v. Mirasol18 where the
declaratory relief action was dismissed because the issue therein could be threshed out in the
unlawful detainer suit. Yet, again, in that case, there was already a breach of contract at the time
of the filing of the declaratory relief petition. This dissimilar factual milieu proscribes the Court
from applying Teodoro to the instant case.
Given all these attendant circumstances, the Court is disposed to entertain the instant
declaratory relief action instead of dismissing it, notwithstanding the pendency of the
ejectment/rescission case before the trial court. The resolution of the present petition would
write finis to the parties' dispute, as it would settle once and for all the question of the proper
interpretation of the two contractual stipulations subject of this controversy.
Now, on the substantive law issues.
Petitioners repeatedly made a demand on respondent for the payment of VAT and for rental
adjustment allegedly brought about by extraordinary inflation or devaluation. Both the trial court
and the appellate court found no merit in petitioners' claim. We see no reason to depart from
such findings.
As to the liability of respondent for the payment of VAT, we cite with approval the ratiocination of
the appellate court, viz.:
Clearly, the person primarily liable for the payment of VAT is the lessor who may choose to
pass it on to the lessee or absorb the same. Beginning January 1, 1996, the lease of real
property in the ordinary course of business, whether for commercial or residential use, when
the gross annual receipts exceed P500,000.00, is subject to 10% VAT. Notwithstanding the
mandatory payment of the 10% VAT by the lessor, the actual shifting of the said tax burden
upon the lessee is clearly optional on the part of the lessor, under the terms of the statute.
The word "may" in the statute, generally speaking, denotes that it is directory in nature. It is
generally permissive only and operates to confer discretion. In this case, despite the

applicability of the rule under Sec. 99 of the NIRC, as amended by R.A. 7716, granting the
lessor the option to pass on to the lessee the 10% VAT, to existing contracts of lease as of
January 1, 1996, the original lessor, Ponciano L. Almeda did not charge the lessee-appellee
the 10% VAT nor provided for its additional imposition when they renewed the contract of
lease in May 1997. More significantly, said lessor did not actually collect a 10% VAT on the
monthly rental due from the lessee-appellee after the execution of the May 1997 contract of
lease. The inevitable implication is that the lessor intended not to avail of the option granted
him by law to shift the 10% VAT upon the 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 adjustment because of extraordinary inflation
or devaluation.
Petitioners contend that Article 1250 of the Civil Code does not apply to this case because the
contract stipulation speaks of extraordinary inflation or devaluation while the Code speaks of
extraordinary inflation or deflation. They insist that the doctrine pronounced in Del Rosario v.
The Shell Company, Phils. Limited20 should apply.
Essential to contract construction is the ascertainment of the intention of the contracting parties,
and such determination must take into account the contemporaneous and subsequent acts of
the parties. This intention, once 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 1250's "extraordinary inflation or deflation," we find that when the parties
used the term "devaluation," they really did not intend to depart from Article 1250 of the Civil
Code. Condition No. 7 of the contract should, thus, be read in harmony with the Civil Code
provision.
That this is the intention of the parties is evident from petitioners' letter22 dated January 26,
1998, where, in demanding rental adjustment ostensibly based on condition No. 7, petitioners
made explicit reference to Article 1250 of the Civil Code, even quoting the law verbatim. Thus,
the application of Del Rosario is not warranted. Rather, jurisprudential rules on the application of
Article 1250 should be considered.
Article 1250 of the Civil Code states:
In case an extraordinary inflation or deflation of the currency stipulated should supervene,
the value of the currency at the time of the establishment of the obligation shall be the basis
of payment, unless there is an agreement to the contrary.

Inflation has been defined as the sharp increase of money or credit, or both, without a
corresponding increase in business transaction. There is inflation when there is an increase in
the volume of money and credit relative to available goods, resulting in a substantial and
continuing rise in the general price level.23 In a number of cases, this Court had provided a
discourse on what constitutes extraordinary inflation, thus:
[E]xtraordinary inflation exists when there is a decrease or increase in the purchasing power
of the Philippine currency which is unusual or beyond the common fluctuation in the value of
said currency, and such increase or decrease could not have been reasonably foreseen or
was manifestly beyond the contemplation of the parties at the time of the establishment of
the obligation.24

The factual circumstances obtaining in the present case do not make out a case of
extraordinary inflation or devaluation as would justify the application of Article 1250 of the Civil
Code. We would like to stress that the erosion of the value of the Philippine peso in the past
three or four decades, starting in the mid-sixties, is characteristic of most currencies. And while
the Court may take judicial notice of the decline in the purchasing power of the Philippine
currency in that span of time, such downward trend of the peso cannot be considered as the
extraordinary phenomenon contemplated by Article 1250 of the Civil Code. Furthermore, absent
an official pronouncement or declaration by competent authorities of the existence of
extraordinary inflation during a given period, the effects of extraordinary inflation are not to be
applied. 25
WHEREFORE, premises considered, the petition is DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 67784, dated September 3, 2001, and its Resolution dated
November 19, 2001, are AFFIRMED.
SO ORDERED.