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G.R. No.

L-24968 April 27, 1972


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

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


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

MAKALINTAL, J.:p

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

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

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

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

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

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

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

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

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

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

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

mill

(For immediate release)


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

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


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

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


adequately for the requirements of the factory."

jute

Trust Company P250,000.00

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

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


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

for

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


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

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

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

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


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

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

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

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

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

G.R. No. 121413

January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK


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

G.R. No. 121479

January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff,


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

G.R. No. 128604

January 29, 2001

FORD PHILIPPINES, INC., petitioner,


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

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


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

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

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

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

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


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

I. G.R. Nos. 121413 and 121479

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

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

SO ORDERED."

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

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

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


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

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


decision with modifications.

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


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

The court hereby renderes judgment:


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

IT IS SO ORDERED."

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

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

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

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


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

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

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


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

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

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


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

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

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


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

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

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

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

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

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


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

"WHEREFORE, judgment is hereby rendered sentencing defendant


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

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

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

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

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


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

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

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

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

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

xxx

xxx

xxx

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


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

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

and

Mortgage

Bank

vs.

Equitable

Banking

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

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

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

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

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

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

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

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

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

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

G.R. No. 125862

April 15, 2004

FRANCISCO CULABA and DEMETRIA CULABA, doing business under the


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

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

CALLEJO, SR., J.:


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

SAN MIGUEL CORPORATION


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

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

Receipt No. 27331

for P8,0005

April 22, 1983

Receipt No. 27318

for P9,0006

April 27, 1983

Receipt No. 27339

for P4,500

April 30, 1983

Receipt No. 27346

for P3,4108

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


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

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


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

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

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

III

THE TRIAL COURT ERRED IN ORDERING DEFENDANTS TO PAY 20%


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

15

Hence, the instant petition.


The petitioners pose the following issues for the Courts resolution:

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

I. WHETHER OR NOT THE RESPONDENT HAD PROVEN BY


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

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

II. WHETHER OR NOT RESPONDENT HAD PROVEN BY


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

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

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

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

G.R. No. 149420

October 8, 2003

SONNY LO, petitioner,


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

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


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

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

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

G.R. No. L-46658

May 13, 1991

PHILIPPINE NATIONAL BANK, petitioner,


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

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

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

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

xxx

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

xxx

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

xxx

xxx

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


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

xxx

xxx

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

xxx

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

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

G.R. No. 126891 August 5, 1998


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

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

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


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

WHEREFORE, premises considered, it is respectfully


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

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


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

xxx xxx xxx

6. The complaint states no cause of action;

3. Deny specifically the allegation under paragraph 5 of


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

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


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

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


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

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


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

12

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

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

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


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

16

is

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

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

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

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

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

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

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


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

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


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

Art. 1132. The ownership of movables prescribes through uninterrupted


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

Acquisitive prescription is a mode of acquiring ownership by a possessor


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

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


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

G.R. No. 135043

July 14, 2004

TOWNE & CITY DEVELOPMENT CORPORATION, petitioner,


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

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

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

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

sufficient and strong enough to overturn the acknowledgment embodied in


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

G.R. No. 157836

May 26, 2005

NOEMI M. CORONEL, petitioner,


vs.
ENCARNACION C. CAPATI, respondent.
DECISION

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


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

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

WHEREFORE, premises considered, judgment is rendered ordering


defendant:

00

/xx

Received the amount of one hundred twenty one thousand pesos


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

3. To pay the costs of the suit.


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

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


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

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


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

CAPATI

November 13, 1992


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

principal obligation

176,000.00

3% monthly interest from

P1,156,000.00

May to Nov 1992

which she claimed to have paid, as follows:


P 66,000.00

June 18, 1992

40,000.00

September 7, 1992

1,000,000.00

November 13, 1992

50,000.00

December 1, 1992

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

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


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

33

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

G.R. No. 166704

December 20, 2006

AGRIFINA AQUINTEY, petitioner,


vs.
SPOUSES FELICIDAD AND RICO TIBONG, respondents.

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

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

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

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

The Case for Petitioner


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

Date Obtained Interest Per Mo. Due Date

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


as attorney's fees.

P 100,000.00 May 11, 1989 6%

August 11, 1989

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

4,000.00

June 8, 1989

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

50,000.00

June 13, 1989 6%

On demand

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


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

60,000.00

Aug. 16, 1989 7%

January 1990

205,000.00

Oct. 13, 1989 7%

January 1990

128,000.00

Oct. 19, 1989 7%

January 1990

2,000.00

Nov. 12, 1989 6%

April 28, 1990

10,000.00

June 13, 1990 -

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

80,000.00

Jan. 4, 1990

34,000.00

6%

October 19, 1989

100,000.00

July 14, 1989 5%

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

Date
Instrument

8,000.00

August 8, 1990 February 3, 1991

Fely Cirilo

63,600.00

September 13, No date


1990

Virginia Morada

62,379.00

August 9, 1990 February 9, 1991

Carmelita
Casuga

59,000.00

August
1990

28, February 28, 1991

Merlinda Gelacio 17,200.00

August
1990

29, November 29, 199026

October 198913

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

Debtors

Rosemarie
Bandas

of Date Payable

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


Tibong
February 4, 1991
Corazon Dalisay 8,000.00

August 7, 1990 No date

Rita Chomacog

4,480.00

August 8, 1990 September 23, 1990

Antoinette
Manuel

12,000.00

October
1990

19, March 30, 1991

Total

P284,659.00

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

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

SO ORDERED.

48

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

3. [T]o pay the costs.

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

SO ORDERED.46

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

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

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


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

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

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

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


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

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

51

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

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

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

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

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


subsequent obligation would also extinguish the first.

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


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

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

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

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

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


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

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

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

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

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

G.R. No. 130972

January 23, 2002

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

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

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

"SO ORDERED."
The Facts

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


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

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

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


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

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

G.R. No. 72703 November 13, 1992


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

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

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


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

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

ASSUMING THAT PETITIONER IS LIABLE TO MAKE A RETURN OF A


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

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

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

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

A.C. No. 6955

July 27, 2006

MAR YUSON, complainant,


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

To guarantee payment, respondent executed in favor of complainant several


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

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


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

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


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

28

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

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

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

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


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

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


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

G.R. No. 158086

February 14, 2008

ASJ CORPORATION and ANTONIO SAN JUAN, petitioners,


vs.
SPS. EFREN & MAURA EVANGELISTA, respondents.

1/30/1993 SR 112

15,346 eggs

February 20, 1993

2/3/1993

SR 113

10,24[5]7 eggs

February 24, 1993

TOTAL

101,350 eggs

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

SR Number No. of eggs delivered Date


hatched/
Pick-up date

1/13/1993 SR 108

32,566 eggs

February 3, 1993

1/20/1993 SR 109

21,485 eggs

February 10, 1993

1/22/1993 SR 110

7,213 eggs

February 12, 1993

1/28/1993 SR 111

14,495 eggs

February 18, 1993

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

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

14

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

PETITIONERS JOINTLY AND SEVERALLY


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

LIABLE

TO

PAY

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

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


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

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

Costs against defendants.

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

SO ORDERED.

15

Hence, the instant petition, assigning the following errors:


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

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

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

Nonetheless, San Juans subsequent acts of threatening respondents should not


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

= Temperate Damages

41% X (68,784 eggs X P14)

= P394,820.16

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


[P394,820.16 + P14,031.94]

= P408,852.10

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

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

G.R. No. 133498

April 18, 2002

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


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

SO ORDERED.

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

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

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

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

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

G.R. No. 138703

June 30, 2006


1

DEVELOPMENT BANK OF THE PHILIPPINES and PRIVATIZATION AND


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

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

Maturity Date

Interest Rate Per


Annum

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

December 15, 3% over DBPs


16
1990
borrowing rate

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

(2) Promissory
Note17
dated June
1981

June 23, 1991

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

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

$666,666

3% over DBPs
borrowing rate18

5,

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

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

II. THE CA VIOLATED THE PRINCIPLE OF LAW THAT CONTRACTS


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

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

41

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

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

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

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

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

G.R. No. 150806

January 28, 2008

EUFEMIA ALMEDA and ROMEL ALMEDA, petitioners,


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

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

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


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

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

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

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

SEVENTH - In case an extraordinary inflation or devaluation of Philippine


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

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


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

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

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

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

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

WHEREFORE, premises considered, the present appeal is DISMISSED and


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

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

III.

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

WHETHER OR NOT IN NOT APPLYING THE DOCTRINE IN THE CASE


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

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

IV.

We are not convinced.

WHETHER OR NOT THE FINDING OF THE HONORABLE COURT OF


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

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


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

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

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

17

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

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

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


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

Now, on the substantive law issues.

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


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

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

22

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

G.R. No. 190375

February 8, 2012

TAN SHUY, Petitioner,


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

Lopez, Quezon July 10, 1997

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

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

[Sgd.
by
respondent]
.
Lagda

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


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

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

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


in evidence, and

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


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

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

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

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

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

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

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

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


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

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

xxx

xxx

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

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

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

xxx

xxx

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

xxx

xxx

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

xxx

xxx

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

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

G.R. No. 168646

January 12, 2011

LUZON DEVELOPMENT BANK, Petitioner,


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

10

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


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

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


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

25

DELTA appealed the arbiters Decision to the HLURB Board of


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

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


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

Enriquez moved for a reconsideration of the Boards Decision upholding the


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

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

37

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

45

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

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

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

1. Whether the Contract to Sell conveys ownership;

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

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


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

50

51

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

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

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

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

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

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

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

G.R. No. 172825

October 11, 2012

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


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

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

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

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

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


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

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


dispositive portion of which reads:

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


before May 5, 1996; and

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


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

The facts of the case are as follows:


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

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


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

a) P300,000 as moral damages; and


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

15

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

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

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

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

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

40

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

G.R. No. 195640

December 4, 2012

SUGAR REGULATORY ADMINISTRATION, represented by its


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

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

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


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

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

private respondents had refunded the incentives in question. Since private


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

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

21

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


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

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

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


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

G.R. No. 187425

March 28, 2011

DECISION

WHEREFORE, the instant petition is hereby DENIED DUE COURSE and


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

MENDOZA, J.:

No costs.

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

SO ORDERED.

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

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

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

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

COMMISSIONER OF CUSTOMS, Petitioner,


vs.
AGFHA INCORPORATED, Respondent.

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


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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

SO ORDERED.9

Hence, this petition.

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

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

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

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


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

14

[Emphases supplied]

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


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

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


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

G.R. No. L-18411

December 17, 1966

MAGDALENA ESTATES, INC., plaintiff-appellee,


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

(Sgd.) Herminia C. Rodriguez


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

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

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

G.R. No. L-979

April 13, 1949

THE COMMONWEALTH OF THE PHILIPPINES, plaintiff-appellee,


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

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


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

G.R. No. 118342 January 5, 1998


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

DAVIDE, JR., J.:


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

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


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

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

13. That after defendant DBP took possession of the Leasehold


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

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


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

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


favor of defendant Agripina Caperal on August 16, 1984;

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


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

15. Thereafter, defendant Caperal was awarded Fishpond Lease


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

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

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


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

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

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


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

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

4. ORDERING defendant Development Bank of the Philippines and


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

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

5. ORDERING defendant Development Bank of the Philippines to


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

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

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


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

6. And ORDERING defendant Development Bank of the Philippines


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

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

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

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

shall bear the same rate of interest aforementioned are also


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

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

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

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

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

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

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

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


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

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


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

G.R. No. 134219

June 08, 2005

SPOUSES MARIO AND ELIZABETH TORCUATOR, petitioners,


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

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

motion

for

reconsideration

in

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

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

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

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

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

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

....

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

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

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

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

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

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

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

- Mark it.

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

COURT

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

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


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

G.R. No. 169501

June 8, 2007

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


vs.
ROSARIO T. ALZUL, respondent.

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

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

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

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

The Facts

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

The facts culled by the CA are as follows:

SO ORDERED."

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

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

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


perimeter fence and constructing a house thereon.

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

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


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

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

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

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


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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

G.R. No. 172259

December 5, 2006

SPS. JAIME BENOS and MARINA BENOS, petitioners,


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

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

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

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

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

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

16

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

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

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


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

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

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

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


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

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

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

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

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

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

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

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

Portions of the MTC decision read:


xxx xxx xxx

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

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

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

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

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

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

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

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

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

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

6. The costs of suit.

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

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

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

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

WHEREFORE, PREMISES CONSIDERED, judgment is rendered as follows:

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


complaint;

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

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

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

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

SO ORDERED.[7]

Petitioner comes before this Court with the following questions:

WHEN THE PARTIES TO A CONTRACT OF LEASE STIPULATED FOR AN


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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

Costs against petitioner.

SO ORDERED.

G.R. No. 142882

May 2, 2006

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


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

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


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

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

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

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

G.R. No. 137815

November 29, 2001

JUANITA T. SERING, petitioner,


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

The Case

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

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

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

The Facts

The Issue

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


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

Hence, this appeal.16

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

The Court's Ruling


The issue is factual.
17

18

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


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

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

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

25

in toto.

G.R. No. 156846

February 23, 2004

TEDDY G. PABUGAIS, petitioner


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

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

21

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

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

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

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

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

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

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

G.R. No. 153134

June 27, 2006

BANCO FILIPINO SAVINGS AND MORTGAGE BANK, Petitioner,


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

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

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

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

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

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

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

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


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

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

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


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

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

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


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

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

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

G.R. No. 149756

February 11, 2005

MYRNA RAMOS, petitioner,


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

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

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

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

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

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

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

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

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

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


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

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

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

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

Moral Damages and Attorneys Fees

SO ORDERED.

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

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

in

the

amount

of P67,567.10

as

G.R. No. 116896 May 5, 1997


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

DAVIDE, JR., J.:


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

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

xxx xxx xxx

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


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

11. TERMINATION OF LEASE This Agreement may be terminated by


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

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

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


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

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

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

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


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

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

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

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

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

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

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


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

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

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


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

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


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

G.R. No. 107112 February 24, 1994


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

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

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


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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

G.R. No. 124221

August 4, 2000

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


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

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

10

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

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


1985.30

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


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

"WHEREFORE, judgment is rendered for the substituted plaintiffs and


against the defendant

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


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

23

granted the motion and dismissed the complaint.

24

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

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

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


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

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

33

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

36

Hence, this appeal.37


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

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


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

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


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

"SO ORDERED."

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

On November 27, 1984, the trial court


29
of Victorino to prosecute.

28

ordered that the case be archived for failure

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

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

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


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

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


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

CONCEPCION JR., J.:


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

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

G.R. No. 109172 August 19, 1994

Gancayco Law Offices for petitioners.

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


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

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

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

TRANS-PACIFIC INDUSTRIAL SUPPLIES, INC., petitioner,


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

BIDIN, J.:

WHEREFORE, premises considered and upon a clear preponderance of


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

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

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


fully paid;

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


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

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


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

Costs against Transpacific.

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


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

SO ORDERED. (Rollo, p. 47)


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

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


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

RESPONDENT APPELLATE COURT ERRED IN NOT HOLDING THAT


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

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


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

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

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

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


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

G.R. No. 43503 October 31, 1990


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

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

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

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

THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING


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

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

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

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

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


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

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

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


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

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

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

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

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


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

CONCEPCION JR., J.:


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

G.R. No. 129598

August 15, 2001

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

PNB MADECOR, petitioner,


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

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

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

Meanwhile, in the main case, the RTC rendered judgment on July 26, 1995 against
PNEI. The corresponding writ of execution was issued on August 18, 1995.

THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR IN THE


INTERPRETATION OF THE APPLICABLE LAW HEREIN WHEN IT RULED
THAT THE REQUISITES FOR LEGAL COMPENSATION AS SET FORTH
UNDER ARTICLES 1278 AND 1279 OF THE CIVIL CODE DO NOT
CONCUR IN THE CASE AT BAR.

As regards the issue between PNEI and PNB MADECOR, the RTC issued the
assailed order on August 21, 1995, the decretal portion of which provided:
"WHEREFORE, the Sheriff of this Court is hereby directed to garnish/levy or
cause to be garnished/levied the amount stated in the writ of attachment
issued by this Court from the credits and receivables/collectibles of PNEI
from PNB MADECOR (NAREDECO) and to levy and/or cause to levy upon
the assets of the debtor PNB MADECOR should its personal assets be
insufficient to cover its debt with PNEI.

II
THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR IN
INTERPRETING THE PROVISIONS OF SECTION 45, RULE 39 OF THE
RULES OF COURT, NOW SECTION 43, RULE 39 OF THE REVISED
RULES OF COURT, AS AMENDED ON 1 JULY 1997, BY RULING THAT
PETITIONER PNB-MADECOR, UPON BEING CITED FOR AND SERVED
WITH A NOTICE OF GARNISHMENT BECAME A FORCED INTERVENOR,
HENCE, DENYING THE RIGHT OF HEREIN PETITIONER TO VENTILATE
ITS POSITION IN A FULL-BLOWN TRIAL AS PROVIDED FOR UNDER
SEC. 10, RULE 57, WHICH REMAINS THE SAME RULE UNDER THE
REVISED RULES OF COURT AS AMENDED ON 1 JULY 1997.

Furthermore, Mr. Roger L. Venarosa, Vice-President, Trust Department,


Philippine National Bank, and other concerned officials of said bank, is/are
hereby directed to submit the books of accounts of Pantranco North
Express, Inc./Philippine National Express, Inc. under Trust Account Nos. T8461-I, T-8461-II, T-8565 with its position paper within five (5) days from
notice hereof.
SO ORDERED."
Petitioner appealed said order to the CA which, however, affirmed the RTC in a
decision dated February 19, 1997. Petitioner's motion for reconsideration was denied
in a resolution dated June 19, 1997.
According to the CA, there could not be any compensation between PNEI's
receivables from PNB MADECOR and the latter's obligation to the former because
PNB MADECOR's supposed debt to PNEI is the subject of attachment proceedings
initiated by a third party, herein respondent Gerardo Uy. This is a controversy that
would prevent legal compensation from taking place, per the requirements set forth in
Article 1279 of the Civil Code. Moreover, the CA stressed that it was not clear
whether, at the time compensation was supposed to have taken place, the rentals
being claimed by petitioner were indeed still unpaid. The CA pointed out that
petitioner did not present evidence in this regard, apart from a statement of account.
The CA also questioned petitioner's inaction in claiming the unpaid rentals from PNEI,
when the latter started defaulting in its payment as early as 1994. This, according to
the CA, indicates that the debt was either already settled or not yet demandable and
liquidated.
The CA rejected petitioner's contention that Rule 39, Section 43 of the Revised Rules
of Court applies to the present case. Said rule sets forth the procedure to follow when
a person alleged to have property or to be indebted to a judgment obligor claims an
interest in the property or denies the debt. In such a situation, under said Rule the
judgment obligee is required to institute a separate action against such person. The
CA held that there was no need for a separate action here since petitioner had
already become a forced intervenor in the case by virtue of the notice of garnishment
served upon it.
Hence, this petition. Petitioner now assigns the following alleged errors for our
consideration:
I

III
THE [COURT OF APPEALS] COMMITTED AN ERROR IN FINDING THAT
A DEMAND WAS MADE BY PANTRANCO NORTH EXPRESS, INC. TO
PNB MADECOR FOR THE PAYMENT OF THE PROMISSORY NOTE
DATED 31 OCTOBER 1982.7
After considering these assigned errors carefully insofar as they raise issues of law,
we find that the petition lacks merit. We shall now discuss the reasons for our
conclusion.
Petitioner admits its indebtedness to PNEI, in the principal sum of P7,884,921.10, per
a promissory note dated October 31, 1982 executed by its precursor NAREDECO in
favor of PNEI. It also admits that the principal amount should earn an interest of 18
percent per annum under the promissory note, in case NAREDECO fails to pay the
principal amount after notice. Petitioner adds that the receivables of PNEI were
thereafter conveyed to PNB in payment of PNEI's loan obligation to the latter, in
accordance with a dacion en pago agreement executed between PNEI and PNB.
Petitioner, however, maintains that there is nothing now that could be subject of
attachment or execution in favor of respondent since compensation had already taken
place as between its debt to PNEI and the latter's obligation to it, consistent with
Articles 1278, 1279, and 1290 of the Civil Code. Petitioner assails the CA's
ratiocination that compensation could not have taken place because the receivables
in question were the subject of attachment proceedings commenced by a third party
(respondent). This reasoning is contrary to law, according to petitioner.
Petitioner insists that even the Asset Privatization Trust (APT), which now has control
over PNEI, recognized the set-off between the subject receivables as indicated in its
8
reply to petitioner's demand for payment of PNEI's unpaid rentals. The APT stated in
its letter:
"xxx

xxx

xxx

While we have long considered the amount of SEVEN MILLION EIGHT


HUNDRED EIGHTY FIVE THOUSAND PESOS (P7,885,000.00) which
PNEI had earlier transmitted to you as its share in an aborted project as

partial payment for PNEI's unpaid rentals in favor of PNB-Madecor, being a


creditor like your goodself of PNEI, we are unable to be of assistance to you
regarding your claim for the balance thereof. We trust that you will
understand our common predicament.
xxx

xxx

xxx"

Petitioner argues that PNEI's letter dated September 28, 1984 did not contain a
demand for payment but only notice of the implementation of thedacion en
pago agreement between PNB and PNEI.
Petitioner contends that the CA's statement that PNEI's obligation to petitioner had
either been settled or was not yet demandable is highly speculative and conjectural.
On the contrary, petitioner asserts that its failure to institute a judicial action against
PNEI proved that the receivables of petitioner and PNEI had already been subject to
legal compensation.
Petitioner submits that Rule 39, Section 43 of the Revised Rules of Court applies to
the present case. It asserts that it stands to lose more than P7 million if not given the
opportunity to present its side in a formal proceeding such as that provided under the
cited rule. According to petitioner, it was not an original party to this case but only
became involved when it was issued a subpoenaduces tecum by the trial court.
For his part, respondent claims that the requisites for legal compensation are not
present in this case, contrary to petitioner's assertion. He argues that the better rule
should be that compensation cannot take place where one of the obligations sought
to be compensated is the subject of a suit between a third party and a party interested
in the compensation, as in this case.
Moreover, respondent points out that, while the alleged demand letter sent by PNEI to
petitioner was dated September 28, 1984, the unpaid rentals due petitioner from
PNEI accrued during the period October 1990 to March 1994, or before petitioner's
obligation to PNEI became due. This being so, respondent argues that there can be
no compensation since there was as yet no compensable debt in 1984 when PNEI
demanded payment from petitioner.
Even granting that there had been compensation, according to respondent, PNEI
would still have sufficient funds with petitioner since the PNB MADECOR's obligation
to PNEI earned interest.
Respondent echoes the observation of the CA that petitioner failed to file a suit
against PNEI at the time when it should have. This failure gave rise to the
presumption that PNEI's obligation might have already been settle