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G.R. Nos.

198916-17

MALAYAN INSURANCE COMPANY, INC., Petitioner,


vs.
ST. FRANCIS SQUARE REALTY CORPORATION, Respondent.

x-----------------------x

G.R. Nos. 198920-21

ST. FRANCIS SQUARE REALTY CORPORATION, Petitioner,


vs.
MALAYAN INSURANCE COMPANY, INC., Respondent.

DECISION

PERALTA, J.:

This resolves the Petition for Partial Review on Certiorari under Rule 45 of the Rules of
Court filed by Malayan Insurance Company, Inc. and the Petition for Review filed by St. Francis
Square Realty Corporation, both seeking to reverse and/or modify the Court of Appeals
Decision1 dated January 27, 2011 in CA-G.R. SP Nos. 109286 and 109298, which affirmed with
modifications the Award2 dated March 27, 2009 of the Construction Industry Arbitration
Commission (CIAC) in CIAC CASE No. 33-2008 entitled "ST. FRANCIS SQUARE REALTY
CORPORATION, Claimant, - versus- MALAYAN INSURANCE COMPANY, INC.,
Respondent."

Malayan Insurance Company, Inc. (Malayan) is a duly-organized domestic corporation engaged


in insurance business. Formerly known as ASB Realty Corporation (ASB), St. Francis Square
Realty Corporation (St. Francis) is a duly-organized domestic corporation engaged in real estate
development.

The admitted facts are as follows:

1. The parties respective juridical existence;

1.1 The ASB Group of Companies, which include the ASB Realty Corporation
(now St. Francis Square Realty Corp.), is under rehabilitation with the Securities
and Exchange Commission (SEC) pursuant to a petition dated May 2, 2000;

2. [Malayan], as Owner, and [St. Francis], as Developer, executed a Joint Project Development
Agreement (JPDA) on 09 November 1995 for the construction, development and completion of
what was then known as "ASB Malayan Tower" ("the Project"), originally a 50-storey
office/residential condominium located at the ADB Avenue cor. Opal St., Ortigas Center, Pasig
City.
3. [Malayan] is the absolute and registered owner of the parcel of land (the Lot) in Pasig City
where the Project is located, as evidenced by Transfer Certificate of Title No. PT-78585 xxx;

4. The Certificate of Registration No. 96-04-2701 issued by the Housing Land Use and
Regulatory Board (HLURB) on 12 April 1996 shows that [Malayan] is the Owner and [St.
Francis] is the developer xxx;

5. The License to Sell No. 96-05-2844 issued by the HLURB also refers to [Malayan] as the
Owner and [St. Francis] as Developer xxx;

6. The Master Deed with Declaration of Restrictions of the ASB-Malayan Tower dated 13 May
1996 approved by the HLURB and registered with the Register of Deeds of Pasig City, sets forth
Malayan as "the Developer (absolute and registered owner) x x x ;

7. ASB Realty Corporation [now, St. Francis] was not able to complete the Project;

7.1 The parties executed a Memorandum of Agreement (MOA) on 30 April 2002,


under which [Malayan] undertook to complete the condominium project then
known as "ASB Malayan Project" that later became "Malayan Plaza Tower" xxx;

8. The MOA was approved by the SEC;

9. The Lot was the subject of a Contract to Sell between [Malayan] as seller and [St. Francis] as
buyer, but [St. Francis] was unable to completely perform its obligation under the Contract to
Sell;

10. Under Sec. 2 of the MOA, [Malayan] "shall invest the amount necessary to complete the
Project", among other obligations;

11. The basis for the distribution and disposition of the condominium units is the parties
respective capital investments in the Project as provided in Sec. 4 of the MOA;

11.1 [St. Francis] represented and warranted to Malayan that Malayan can
complete the Project at a cost not exceeding Php452,424,849.00 (the Remaining
Construction Cost [RCC]) [Sec. 9 of MOA].

12. The net saleable area included in Schedule 4 of the 30 April 2002 MOA ("Reserved Units")
originally covered fifty-three (53) units with thirty-eight (38) parking spaces. The aforesaid 53
Reserved Units became only thirty-nine (39) units after a reconfiguration was done;

13. The aggregate monetary value of the Reserved Units as fixed by [St. Francis], is One
Hundred Seventy-Five Million Eight Hundred Fifty-Six Thousand Three Hundred Twenty-Three
Pesos and 05/100 (P175,856,323.05);

14. Under the MOA, [Malayan] assumed vast powers and revoked all authorities previously
granted to [St. Francis] (Section 8 of the MOA, xxx), with the exception of including [St.
Francis] in the bidding committee for bidding of material and services requirements of the
Project (Section 9, paragraph v of the MOA, xxx). The general supervision, management and
control of the day-to-day operations were undertaken by [Malayan] (Section 5, paragraph b of
the MOA, xxx) but under Sec. 9 of the MOA, "Malayan shall allow one (1) representative of [St.
Francis] to observe the development and completion of the Project";

15. On 24 August 2006, [St. Francis] sent a letter to [Malayan] seeking to reconcile several items
amounting to P133.64 million xxx;

16. There was a change in the specification of the floor finish from Narra Parque[t] to Kendall
Laminated Flooring;

17. [Malayan] made interest expense, amounting to P37,705,346.62 as of August 2006, as part of
its actual construction cost on that date;

18. [St. Francis] filed a case against the Register of Deeds of Pasig City and Atty. Francis
Serrano docketed as OMB-C-C-06-0583-J before the Office of the Ombudsman due to alleged
alterations on the Condominium Certificates of Title over the units comprising the net saleable
area in Schedule 4 of the MOA;

19. [Malayan] has included some of the units under Schedule 4 of the MOA in the condotel pool
managed by Quantum Hotels and Resorts from which it derives income;

20. Despite the completion of the Project and the turnover of the units to [St. Francis],
[Malayan], and other buyers of units, the issue of actual cost of construction has not been
resolved to the mutual satisfaction of the parties; and

21. The parties agreed to submit a list of documents that they admitted the authenticity and due
execution thereof.3

On November 7, 2008, St. Francis filed with the CIAC a Complaint with Prayer for Interim
Relief against Malayan. St. Francis alleged that in August 2006, it secured a copy of a document
entitled "cost to complete" from Malayan which fixed the Actual Remaining Construction Cost
(ARCC) at P614,593,565.96. It disputed several cost items in the ARCC, amounting to
P145,487,496.42, and argued that their exclusion would entitle it to some reserved units.

On December 8, 2008, Malayan filed a Verified Answer (With Grounds for Immediate
Dismissal), claiming that St. Francis failed to state a cause of action because the ARCC had
already reached P635,018,369.05 as of November 30, 2008, thereby exceeding the Remaining
Construction Cost (RCC) [P452,424,849.00] by more than the aggregate value of the reserved
units [P175,856,323.05]; hence, St. Francis is no longer entitled to any of such units.

On January 20, 2009, a preliminary conference was held where the parties stipulated on facts,
formulated issues, and drafted and signed the Terms of Reference (TOR) which would govern the
proceedings of the case. Aside from the above-stated admitted facts, the TOR, which was later
amended, listed the following issues to be determined by the CIAC:
2. What is the meaning or scope of the term Remaining Construction Cost (RCC) as used in the
MOA as stated in Par. 11.1 of the Admitted Facts?

2.1. What is the meaning or scope of the term "actual remaining construction
cost" as used in the MOA?

2.2. Specifically, were the following costs and expenses part of the actual
remaining construction cost incurred by [Malayan] and questioned by [St.
Francis] to wit:

2.2.1. Awarded contracts, specifically those pertaining to Narra Parquet


Works, Interior Design Works, Sanitary/Plumbing and Fire Protection
Works, Additional Consultants Fees and Audio Intercom and Paging
System;

2.2.2. Change Orders, pursuant to the reconfiguration done on several of


the units;

2.2.3. Interest Expense from loans incurred to finance the construction,


development and completion of the Project;

2.2.4. Input Value Added Taxes ("VAT") paid to the government for goods
and services utilized from the Project;

2.2.5. Attendance Fees;

2.2.6. Alleged Prolongation Costs and Extended Overhead;

2.2.7. Judgment Award in CIAC Case No. 27-2007 (TVI v MICO);


[Additional issue from TOR Amendment]

2.2.8. Contractors All Risk Insurance;

2.2.9. Contingency Costs.

2.2.10 Other costs as mentioned in Exhibit "R-24" [Additional issue from


TOR Amendment]

3. What is the total capital investment or contribution respectively of [St. Francis] and [Malayan]
to the Project per MOA? [Additional issue from TOR Amendment]

4. What is the actual remaining construction cost to complete the Project spent by [Malayan] as
of today in excess of [St. Francis] estimate RCC?
5. After completion of the Project and computation of the actual remaining construction costs to
complete the same, is [St. Francis] still entitled to any of the Reserved units in Schedule 4 of the
MOA?

5.1. If so, is [St. Francis] entitled to the income therefrom?

6. Is [Malayan] entitled to its Counterclaim for the excess in the actual remaining construction
cost it incurred vis--vis the value of the Reserved Units?

7. Which party is entitled to attorneys fees?

[7.1] How much?

[8.] Which party shall bear the cost of arbitration?4

On March 2, 2009, St. Francis submitted the Joint Affidavit of Witnesses of Claimant, while
Malayan submitted theJoint Affidavit of Respondents Witnesses. Thereafter, both parties
submitted their respective Joint Reply-Affidavits. Malayan also filed a Joint Affidavit of
Respondents Witnesses by Way of (1) Evidence for New Issue No. 3 Defined under the Amended
Terms of Reference; (2) Sur-Rejoinder Affidavit of Claimants Witnesses; and (3) Redirect
Examination.

Trial ensued during which the witnesses of St. Francis and Malayan testified. Both parties
likewise submitted Lists of Exhibits. After trial, the parties simultaneously filed on April 27,
2009 their respective Memoranda in the form of Draft Decisions.

On May 27, 2009, the CIAC rendered its Award, the dispositive portion of which states:

WHEREFORE, AWARD is hereby made as follows:

FOR THE CLAIMANT[St. Francis]:

GRANT[S] its claims for DISALLOWANCES amounting to 52,864,385.00 from the ARCC
of P614,593.565.96under Exhibit C-3;

ALLOCATES 37.8% ownership over the Reserved Units (P66,551,993.09/P175,856,325.05);

As a consequence of these awards, Respondent [Malayan] is hereby DIRECTED to deliver


possession and transfer title over the Reserved Units in the proportion hereby stated.

GRANTS 37.8% proportionate share of the income realized from rentals of the Reserved
Units up to the present date.

As a consequence of these awards, Respondent [Malayan] is hereby DIRECTED to pay the


Claimant [St. Francis] its proportionate share in the income from the Reserved Units.
FOR THE RESPONDENT [Malayan]:

ALLOCATES 62.2% proportionate share of the income realized from rentals of the Reserved
Units up to the present date (P109,304,331.96/P175,856,325.05);

GRANTS 62.2% proportionate share of the income realized from rentals of the Reserved
Units up to the present date.

FOR BOTH CLAIMANT [St. Francis] and RESPONDENT [Malayan], all their Claims and
Counterclaims for Attorneys Fees are DENIED. Arbitration costs are maintained according to
the pro rata sharing that they had initially shared.

SO ORDERED.5

Dissatisfied with the CIAC Award, both parties filed with the Court of Appeals (CA) their
respective Petitions for Review under Rule 43 of the Rules of Court. On January 27, 2011, the
CA affirmed with modifications the CIAC Award, the dispositive portion of the decision reads:

WHEREFORE, premises considered, the CIACs Award is hereby AFFIRMED subject to the
following modifications:

1) The total amount of deductions should be P15,135,166.51 and this is, in turn,
shall be deducted from the Total Actual Remaining Construction Cost
of P615,880,672.47 to arrive at the Net amount of P600,745,505.96 as computed
above;

2) St. Francis should be entitled to 16% ownership over the reserved units
(P27,535,668.09/P175,856,325.05) ownership of the reserved units to be done by
drawing of lots with the corresponding interest thereon;

3) As a consequence of the above awards, Malayan is hereby DIRECTED to


deliver possession and transfer title over the reserved units in accordance and in
the proportion above-stated and to pay St. Francis its proportionate share in the
income from the reserved units reckoned from the date of completion of the
Project, that is from June 7, 2006 up to the finality of this decision, and to render
full accounting of all the rentals and such other income derived from said reserved
units so awarded to St. Francis;

4) Arbitration Costs shall be maintained pro rata in accordance with their


respective shares in the reserved units.

5) Malayan and all others claiming rights under it, are enjoined from exercising
acts of ownership over the reserved units relative to the proportionate share
awarded to St. Francis hereunder;
6) The concerned Register of Deeds is directed to immediately reinstate the name
of St. Francis Square Realty Corporation (formerly ASB Realty Corporation) as
the registered owner in the corresponding Condominium Certificates of Title
Covering the reserved units herein awarded to St. Francis; and

7) All other awards granted by CIAC in its Award dated 27 May 2009 not affected
by the above modifications are affirmed. No costs.

SO ORDERED.6

Aggrieved by the CA decision, both parties filed their respective motions for reconsideration,
which were denied in the Resolution dated October 4, 2011. Hence, the present petitions of both
parties.

St. Francis raises the following issues:

I.

The Court of Appeals gravely erred in ruling that interest [expenses] should be part of the actual
remaining construction cost. The ruling is contrary to law and the evidence on record.

II.

The Court of Appeals committed serious error in finding that the actual construction cost is
P554,583,160.20. The ruling is contrary to law and the evidence on record.

III.

The Court of Appeals erred in considering VAT as part of the ARCC. This is contrary to the facts
and records of the case.

IV.

The Court of Appeals committed grave error in allowing the inclusion of the alleged cost of the
Contractors All Risk Insurance as part of the ARCC. This is contrary to law and the records of
the case.

V.

The Court of Appeals committed grave and serious error on its allocation of the reserved units.
This is contrary to law and the records of the case.7

On the other hand, Malayan raises the following issues:

A.
THE COURT OF APPEALS COMMITTED SERIOUS LEGAL ERROR IN PLACING THE
BURDEN ON MALAYAN TO PROVE THAT IT HAD ACTUALLY INCURRED THE ARCC,
DESPITE THE FACT THAT DURING THE ARBITRAL PROCEEDINGS, ST. FRANCIS HAD
NEVER DISPUTED, AND THEREFORE, ADMITTED, THAT MALAYAN HAD INCURRED
THE ARCC. THE COURT OF APPEALS THUS DECIDED A QUESTION OF SUBSTANCE
DEFINITELY NOT IN ACCORD WITH THE BASIC LEGAL PRINCIPLE THAT A PARTY
NEED NOT PROVE WHAT HAS NOT BEEN RAISED, DISPUTED OR PUT IN ISSUE.

B.

THE COURT OF APPEALS SERIOUSLY ERRED IN ALLOWING ST. FRANCIS TO


BELATEDLY CHANGE ITS THEORY IN ITS DRAFT DECISION FILED WITH THE CIAC
AND ITS APPEAL. THE COURT OF APPEALS THUS DECIDED A QUESTION OF
SUBSTANCE IN DISREGARD OF THE BASIC DUE PROCESS TENET THAT A PARTY
CANNOT CHANGE ITS THEORY AFTER TRIAL OR ON APPEAL BECAUSE IN BOTH
CASES THE OTHER PARTY IS DEPRIVED OF THE OPPORTUNITY TO MEET THE NEW
ISSUES.

C.

THE COURT OF APPEALS SERIOUSLY ERRED IN DISREGARDING


UNCONTROVERTED TESTIMONIAL EVIDENCE THAT MALAYAN HAD ACTUALLY
INCURRED ITS ARCC, AND FOCUSING EXCLUSIVELY ON DOCUMENTARY
EVIDENCE.

D.

THE COURT OF APPEALS SERIOUSLY ERRED IN EXCLUDING THE FOLLOWING


COSTS FROM THE ARCC, DESPITE THE FACT THAT THEY WERE PROPER,
NECESSARY AND REASONABLE FOR THE COMPLETION OF THE PROJECT:

1. CHANGE ORDERS DUE TO RECONFIGURATION;

2. CHANGE ORDERS NOT DUE TO RECONFIGURATION;

3. HALF OF THE COSTS FOR THE NARRA PARQUET WORKS;

4. HALF OF THE COSTS FOR THE COMPREHENSIVE ALLRISK


INSURANCE (CARI);

5. HALF OF THE COSTS FOR THE INTERIOR DESIGN WORKS;

6. CONTINGENCY COSTS; AND

7. COSTS INCURRED AND/OR PAID AFTER JUNE 2006.


E.

THE COURT OF APPEALS SERIOUSLY ERRED IN RULING THAT ST. FRANCIS IS


ENTITLED TO SOME OF THE RESERVED UNITS. MALAYANS ARCC EXCEEDED THE
ST. FRANCIS WARRANTED RCC BY MORE THAN THE VALUE OF THE RESERVED
UNITS. HENCE, ST. FRANCIS SHOULD NOT GET EVEN ONE OF THE RESERVED
UNITS.

F.

THE COURT OF APPEALS SERIOUSLY ERRED IN RULING THAT ST. FRANCIS IS


ENTITLED TO THE INCOME RECEIVED BY MALAYAN FROM ST. FRANCISS (sic)
SHARE IN THE RESERVED UNITS, IF ANY, MALAYAN IS ENTITLED TO ALL OF THE
RESERVED UNITS. AND EVEN ASSUMING ARGUENDO THAT ST. FRANCIS IS
ENTITLED TO SOME RESERVED UNITS, THE COURT OF APPEALS DIRECTIVE IS IN
DISREGARD OF ARTICLE 1187 OF THE CIVIL CODE.

G.

THE COURT OF APPEALS SERIOUSLY ERRED IN NOT AWARDING MALAYAN ITS


COUNTERCLAIMS AS WELL AS ATTORNEYS FEES, AND IN NOT ORDERING ST.
FRANCIS TO BEAR ALL THE COSTS OF ARBITRATION.8

The Court finds partial merit in both the petition for review of St. Francis and the petition for
partial review oncertiorari of Malayan.

In resolving in seriatim all the issues raised by both parties, the Court is guided by the rule that
findings of fact of quasi-judicial bodies, which have acquired expertise because their jurisdiction
is confined to specific matters, are generally accorded not only respect, but also finality,
especially when affirmed by the CA. In particular, factual findings of construction arbitrators are
final and conclusive and not reviewable by this Court on appeal.9

As exceptions, however, factual findings of construction arbitrators may be reviewed by the


Court when the petitioner proves affirmatively that: (1) the award was procured by corruption,
fraud or other undue means; (2) there was evident partiality or corruption of the arbitrators or any
of them; (3) the arbitrators were guilty of misconduct in refusing to hear evidence pertinent and
material to the controversy; (4) one or more of the arbitrators were disqualified to act as such
under Section Nine of Republic Act No. 876 and willfully refrained from disclosing such
disqualifications or of any other misbehavior by which the rights of any party have been
materially prejudiced; or (5) the arbitrators exceeded their powers, or so imperfectly executed
them, that a mutual, final and definite award upon the subject matter submitted to them was not
made; (6) when there is a very clear showing of grave abuse of discretion resulting in lack or loss
of jurisdiction as when a party was deprived of a fair opportunity to present its position before
the Arbitral Tribunal or when an award is obtained through fraud or the corruption of arbitrators;
(7) when the findings of the CA are contrary to those of the CIAC, and (8) when a party is
deprived of administrative due process.10 Apart from conflicting findings of fact of the CA and
the CIAC as to the propriety of some arbitral awards, mathematical computations, and
entitlement to claim certain costs as part of the amount necessary to complete the project, none
of the other exceptions above was shown to obtain in this case. Hence, the Court will not disturb
those findings where the CA and the CIAC are consistent with each other, but will review their
findings which are inconsistent and cannot be reconciled.

The Court will discuss first the issues raised by St. Francis.

I. Interest expense

The CIAC stated that only costs directly related to construction costs can be included in the
ARCC because such intention of the parties in the MOA can be inferred from the fact that the
baseline or starting point for the determination of the ARCC is the estimate made by St. Francis
based on Schedule 9 of the MOA.11 The CIAC held that the ARCC was intended to be spent
within and among the four categories above exclusively, subject to adjustments by reason of
price increases and awarded contracts. It also rejected Malayans theory that costs which are not
directly incurred for the construction, but which are actually related to it and to the completion of
the building, should be included in the ARCC. According to the CIAC, such could not have been
the intention of the parties; otherwise, St. Francis would be placed at the complete mercy of
Malayan since the determination of what costs are related to construction is left to the latters
entire discretion. Had such been the intention, the parties would have set up standards to guide
the discretion in determining what expenses or costs are related to construction so as to be
included in the term ARCC. Without such standards, the validity of the MOA would have been
questionable, as its interpretation would contravene Article 1308 of the New Civil Code which
provides that the performance of a contract cannot be left to the will of one of the parties.

The CA reversed the CIAC ruling and held that Malayan had to obtain loans in order to finance
the completion of the project, and in doing so, it incurred interests which are deemed as an
accessory of such loans. It added that actual expenditures should not be limited only to
traditional construction costs as the parties intention was to include those relative to the actual
completion of the project, for which Malayan had to invest in the form of seeking loan facilities
from banking institutions in order to fully finance the obligations set forth in the MOA. It also
stressed that it was specifically stated in the MOA that the parties investment in the project
would be distributed in accordance with their respective contributions

St. Francis contends that interest expense should not be included in the computation of the Actual
Remaining Construction Cost (ARCC). According to St. Francis, the term ARCC should be
understood in its ordinary context or plain meaning. The word "construction" refers to all on-site
work on buildings or altering structures from land clearance through completion, including
excavation, erection and the assembly and installation of components and equipment. Plainly,
ARCC is the actual cost of completing and building the structure which is the
condominium/project.

Malayan counters that the MOA itself is replete with provisions recognizing the parties
contractual intent to include the ARCC interest expense and the parties respective capital
contributions or investment in the project. Such intent is confirmed by the parties
contemporaneous and subsequent acts when St. Francis own interest expense was credited to
determine the number of units it was entitled to.

The Court upholds the CIAC ruling to disallow the interest expense from loans secured by
Malayan to finance the completion of the project, and thus, reverses the CA ruling that such
expense in the amount of P39,348,659.88 should be included in the computation of the ARCC.
As correctly held by the CIAC, only costs directly related to construction costs should be
included in the ARCC. Interest expense should not be included in the computation of the ARCC
because it is not an actual expenditure necessary to complete the project, but a mere financial
cost. As will be discussed later, the term ARCC should be construed in its traditional
"construction" sense, rather than in the "investment" sense.

It also bears emphasis that part of Malayans investment under Section 2 of the MOA12 is the
payment of P65,804,381.00 as the principal amount of the loan obtained by ASB from the Rizal
Commercial Banking Corporation (RCBC) to finance the project. If it were the intention of the
parties to include interest expense as part of their investments, or even the ARCC, then the MOA
would have expressly indicated such intent in the provisions on investments of Malayan and of
ASB. Nowhere in the provisions of the MOA can it be gathered that interest expense is included
in the computation of the ARCC.

Apart from the ARCCs definition as actual expenditures necessary to complete the project, the
closest provision in the MOA that could shed light on the scope and meaning of ARCC is Section
9 on the Remaining Construction Cost (RCC) whereby St. Francis represented and warranted that
Malayan can complete the project at a cost not exceeding P452,424,849.00 as set forth in ASBs
Construction Budget Report, which reads:

Estimated Cost to Complete

I. Balance to Complete Existing Contracts - Php 161,098,039.86


II. Unawarded Contracts 224,045,419.16
III. Professional Fee 4,138,108.08
IV. Contingencies 63,143,281.10

Php 452,424,849.10

The Court concurs with the CIAC that the ARCC was intended to be spent within and among the
four categories above, subject to adjustments by reason of price increases and awarded contracts.
In construction parlance, "contingency" is an amount of money, included in the budget for
building construction, that is uncommitted for any purpose, intended to cover the cost of
unforeseen factors related to the construction which are not specifically addressed in the
budget.13 Being a cost of borrowing money, interest expense from bank loans to finance the
project completion can hardly be considered as a cost due to unforeseen factors.

That interest expense cannot be considered as part of any of the said categories is further
substantiated by the reports of the Davis Langdon Seah Philippines, Inc. (DLS) and Surequest
Development Associates (Surequest), which contain traditional construction cost components
and items, but not investment costs such as interest expense. As the one who engaged the
services of both DLS and Surequest to come up with a valuation of the cost to complete the
project and to evaluate what had been accomplished in the project prior the take-over, Malayan
cannot deny that interest expense is not included in their computation of the construction costs.

As regards the supposed contemporaneous act of St. Francis of including the amount of
P207,500,000.00 as interest expense in its claim for reimbursement for its contributions in the
project, in the form of several units per Schedules 1 and 3 of the MOA, the Court cannot
determine whether or not such expense should be considered as its contribution for purposes of
computing the return of capital investment. Unlike the investment of Malayan which is
specifically stated under Section 214 of the MOA, but does not include payment of interest of the
bank loan to finance the project, the investment of ASB (now St. Francis) is merely described as
follows:

Section 3. Recognition of ASBs Investment. The parties confirm that as of the date hereof, ASB
invested in the Project an amount equivalent to its entitlement to the net saleable area of the
Building under Section 4 below, including ASBs interest as buyer under the Contract to Sell.

From such vague definition of ASBs investment, the Court cannot rule if St. Francis should also
be disallowed from claiming interest expense as part of its investment, unlike Malayan which is
disallowed from including interest expense as part of the ARCC contemplated in the MOA,
because such financial cost is not an actual expenditure necessary to complete the project.
Having in mind the rule that the interpretation of obscure words or stipulations in a contract shall
not favor the party who caused the obscurity,15 the Court cannot give credence to the August 1,
2000 telefax of Evelyn Nolasco, St. Francis former Chief Financial Officer (CFO), to Malayans
CFO, Gema Cheng, which shows St. Francis computation for reimbursement, including the
claim of P207,500,000.00 as interest expense.

Further negating Malayans claim that interest expense should be included in the computation of
the ARCC is the restrictive construction industry definition of the term "construction cost" which
means the cost of all construction portions of the project, generally based upon the sum of the
construction contract(s) and other direct construction costs; it does not include the compensation
paid to the architect and consultants, the cost of the land, right-of-way, or other costs which are
defined in the contract documents as being the responsibility of the owner.16 Aside from the fact
that such expense is not a directly related construction cost, Section 2 of the MOA states that
Malayans investment includes, among other matters, the amount it had paid to RCBC, on behalf
of ASB, for the principal loan to finance the project, but not the interest thereof. This casts doubt
on Malayans claim that the parties intended interest expense to become part of their capital
contribution, let alone the ARCC.

In view of the foregoing discussion, the Court will no longer delve into Malayans two other
contentions on the issue of interest expense, namely: (1) that since St. Francis only claimed that
such expense cannot be included as part of the ARCC as the same is not a direct construction
cost, it cannot now change its theory and argue that there is no substantial evidence to show that
Malayan incurred such expense in completing the project because it is deemed to have admitted
the same, and allowing St. Francis to do so would amount to a prohibited change of its theory;
and (2) that Malayan was able to prove that it incurred interest expense on loans which were
used to finance completion of the project.

II. Scope and total amount of ARCC

According to the CIAC, ARCC refers to actual expenditures made by Malayan to complete the
project. What is proper and necessary to complete the project is the essence of the dispute
between the parties. As used in the MOA, ARCC should be understood in the traditional
"construction" sense rather than in "investment" sense. The dispute is a construction dispute and
not an investment dispute which would have taken the dispute outside the ambit of construction
arbitration. Notably, the cost component/pay items stated in Exhibit "C-2" (MOA Schedule 9),
Exhibit "R-7" (Surequest Report) and Exhibit "R-8" (Davis Langdon Seah Report) contain basic
and traditional construction cost, and not investment cost which is broader in scope. As to the
amount of the ARCC, CIAC held that it is P614,593,565.96 as stated in Exhibit "C-3"17 which
was prepared by Malayan itself and submitted to St. Francis. Exhibit "C-3" listed the expenses
incurred as of August 10, 2006 which was close enough to the project completion date of June 7,
2006, as a basis to determine what items should be disallowed therefrom.

Reversing the CIACs ruling, the CA held that actual expenditures should not be limited only to
traditional construction cost as the parties intention when they executed the MOA was to also
include expenditures relative to the actual completion of the project. It noted that the clear
intention of the parties that whatever expenditures they have spent shall be considered as their
investment subject to the proportionate sharing after determining the actual construction cost,
can be gleaned from the following provisions of the MOA:

Section 2. Investment of Malayan. Subject to the provisions of Section 9 below, Malayan shall
invest the amount necessary to complete the Project and the following amounts:

xxxx

Section 3. Recognition of [St. Francis] Investment. The parties confirm that as of the date
hereof, [St. Francis] invested in the Project an amount equivalent to its entitlement to the net
saleable area of the Building under Section 4 below, including [St. Francis] interest as buyer
under the Contract to Sell.

Section 4. Distribution and Disposition of Units (a) As a return of its capital investment in the
Project, each party shall be entitled to such portion of all the net saleable area of the Building
that their respective contributions to the Project bear to the actual construction cost. As of the
date of the execution hereof, and on the basis of the total costs incurred to date in relation to the
Remaining Construction Cost (as defined in Section 9(a) hereof), the parties shall respectively be
entitled to the following (which entitlement shall be conditioned on, and subject to, adjustments
as provided in sub-paragraph [b] of Section 4 in the event that the actual remaining construction
cost exceeds the Remaining Construction Cost):

The CA stressed that based on its reading of the MOA in its entirety, the ARCC clearly means the
"investment" incurred as contributed by Malayan in the completion of the project, and that there
being no ambiguity in the MOA, its literal meaning is controlling. The CA added that its
interpretation is consistent with the rule that when the terms of agreement have been reduced into
writing, it is considered as containing all the terms agreed upon by the parties and there can be
between the parties and their successors-in-interest, no evidence of such terms other than the
contents of the written agreement.

As to the amount of the ARCC, the CA found that the gross ARCC based on evidence is
P554,583,160.20 [Including 1/11% Input VAT and 2% Withholding Tax], while the net payment
is P552,152,508.70. According to the CA, St. Francis and Malayan correctly argued that the
CIAC mainly relied on Exhibit "C-3" which is a mere summary of the expenses or a tabulation
of figures incurred by Malayan without any other supporting documents to prove the contents
and authenticity of the figures stated therein. In determining the ARCC, the CA thus reviewed
the records and ruled that Exhibit "C-3" and Exhibit "R-24"18 [Project Cost to Complete as of
October 2008 amounting to P648,266,145.96] should be utilized vis--vis Exhibit "R-48-
series" which contain construction costs and computations supported by receipts, vouchers,
checks and other documents that are necessary to arrive at the final computation of the ARCC. In
this regard, St. Francis agrees with the CA that Exhibit "R-48-series" should be taken into
account because it contains computations supported by such documentary evidence, but gravely
erred in considering only the summaries in such exhibit without actually verifying and counter-
checking if the amounts indicated in the summaries actually correspond to the amounts reflected
in the supporting documents. St. Francis points out that the ARCC considered as being claimed
by Malayan that are actually receipted is only P514,179,217.94 based on Exhibit "R-48-series."

Due to the conflicting findings of the CIAC and the CA on the scope, meaning and computation
of the ARCC, the Court is compelled to review them in light of the evidence on record.

As duly noted by the CA, the controversy between St. Francis and Malayan lies in the
interpretation of the term "Actual Remaining Construction Cost" (ARCC) in relation to the
Estimated Remaining Construction Cost (RCC), in order to determine the proportionate
ownership over the reserved units, if any, as embodied in their Memorandum of Agreement dated
April 30, 2002, the pertinent provisions of which read:

Section 4. Distribution and Disposition of Units (a) As a return of its capital investment in the
Project, each party shall be entitled to such portion of all the net saleable area of the Building
that their respective contributions to the Project bear to the actual construction cost. As of the
date of the execution hereof, and on the basis of the total costs incurred to date in relation to the
Remaining Construction Cost (as defined in Section 9(a) hereof), the parties shall respectively be
entitled to the following (which entitlement shall be conditioned on, and subject to, adjustments
as provided in sub-paragraph [b] of Section 4 in the event that the actual remaining
construction cost exceeds the Remaining Construction Cost):

xxx

(ii) ASB [now, St. Francis] the following net saleable area:
(C) provided that the actual remaining construction costs do not exceed the Remaining
Construction Cost, the net saleable area particularly described in Schedule 4 hereof which shall
be delivered to [St. Francis] upon completion of the Project and determination of its actual
construction costs. If the actual remaining construction costs exceed the Remaining
Construction Cost, sub-paragraph (b) of Section 4 shall apply.

(b) In the event that the actual remaining construction costs exceed the Remaining
Construction Cost as represented and warranted by [St. Francis] to Malayan under Section 9(a)
hereof, and Malayan pays for such excess, the pro rata sharing in the net saleable area of the
Building, as provided in sub-paragraph (a) of this Section 4 shall be adjusted accordingly. In
such event, Malayan shall be entitled to such net saleable area in Schedule 4 that corresponds to
the excess of the actual remaining cost over the Remaining Construction Cost.

xxx

Section 9. Remaining Construction Cost (a) [St. Francis] represents and warrants to Malayan
that Malayan can complete the Project at a cost not exceeding Four Hundred Fifty-Two Million
Four Hundred Twenty-Four Thousand Eight Hundred Forty-Nine Pesos (P452,424,849) (the
Remaining Construction Cost) as set forth in [St. Francis] Construction Budget Report attached
hereto and made an integral part hereof as Schedule 9 that:

xxx

(b) Malayan shall pay for any additional costs and expenses that may be incurred in excess of the
Remaining Construction Cost. In such event, it shall be entitled to such net saleable area as
indicated in Schedule 4 that corresponds to the increase in remaining construction cost. [St.
Francis] shall be entitled to such net saleable area, if any, remaining in the aforesaid Schedule
4.19

The ultimate purpose of determining the ARCC, as simply stated by CIAC, is to determine the
proportionate or absolute ownership of the properties over the net saleable area of the building
(Reserved Units), as provided in sub-paragraph (a) of Section 4 of the MOA, by calculating how
much was spent by Malayan to complete the project in excess of the estimate (Remaining
Construction Cost) made by St. Francis.

After a careful review of the MOA as to the scope and meaning of the term "ARCC," the Court
sustains the CIAC that such term should be understood as the actual expenditures necessary to
complete the project, which is the traditional "construction" sense rather than the "investment"
sense. The Court thus reverses the CAs ruling that the parties intention was to also include in
the computation of the ARCC whatever expenditures relative to the actual completion of the
project, as such expenses are considered as their investment subject to the proportionate sharing
after determining the actual construction cost.

It bears stressing that the intent of the parties in entering into the MOA is to provide for the terms
and conditions of the completion of the Project and the allocation of the ownership of
condominium units in the Project among themselves.20 To recall, Malayan and St. Francis (then
ASB) entered into the Joint Project Development Agreement (JPDA) dated November 9, 1995 to
construct a thirty-six (36)-storey condominium [but originally a fifty (50)-storey-building]
whereby the parties agreed (a) that Malayan would contribute a parcel of land, and ASB would
defray the construction cost of the project, and (b) that they would allocate the net saleable area
of the project, as return of their capital investment. In a Contract to Sell dated November 20,
1996, Malayan also agreed to sell the said land to ASB (now St. Francis) for a consideration of
P640,847,928.48, but the latter was only able to pay P427,231,952.32. However, ASB was
unable to completely perform its obligations under the JPDA and the Contract to Sell because it
underwent corporate rehabilitation, and the Securities and Exchange Commission suspended,
among other things, the performance of such obligations. Since ASB had pre-sold a number of
condominium units, and in order to protect the interests of the buyers, to preserve its interest in
the project, its goodwill and business reputation, Malayan proposed to complete the project
subject to the terms and conditions of the MOA.

Under Section 5(a) of the MOA, Malayan undertook to construct, develop and complete the
Project based on the general specifications already agreed upon by the parties and set forth in
Schedule 6 of the MOA, within two (2) years from (i) the date of effectivity of Malayans
obligations as provided in Section 21, or (ii) the date of approval of all financing/loan facilities
from any financial or banking institution to fully finance the obligations of Malayan under the
MOA, whichever of said dates shall come later; or within such extended period as may be agreed
upon by the parties. Section 21 of the MOA provides that Malayan shall be bound by and
perform its obligations, including the completion of the Project, only upon (i) fulfillment by St.
Francis of all its obligations under Section 6, items (a), (b), (c) and (d),21 and (ii) approval by the
Insurance Commission of the MOA.

Section 5(a) of the MOA also states that that the project shall be deemed complete, and the
obligation of Malayan fulfilled, if the construction and development of the Project is finished as
certified by the architect of the project. Upon completion of the project, the general provision
which governs the distribution and disposition of units is the first sentence of Section 4(a) of the
MOA, to wit: "[a]s a return of its capital investment in the Project, each party shall be entitled to
such portion of all the net saleable area of the Building that their respective contributions to the
Project bear to the actual construction cost." The second sentence22 of Section 4(a) provides the
specific details on the pro rata sharing of units to which the parties are entitled based on the
RCC in relation to total costs incurred as of the date of the execution of the MOA dated April 30,
2002. It also states, however, that entitlement to certain units are subject to adjustments in the
event that the ARCC exceeds the RCC, and Malayan pays for such excess.

Clearly, the parties foresaw that Malayan may incur additional cost and expenses in excess of the
Remaining Construction Cost (RCC) of P452,424,849.00 which amount St. Francis represented
and warranted that Malayan would have to spend to complete the project. Section 9(b)23 of the
MOA thus adds that, in such event, Malayan shall be entitled to such net saleable area as
indicated in Schedule 4 that corresponds to the increase in remaining construction costs, while
St. Francis shall be entitled to such net saleable area, if any, remaining in the said Schedule 4. As
admitted by the parties in the Amended Terms of Reference, the net saleable area included in
Schedule 4 ("Reserved Units") originally covered fifty-three (53) units (which was reduced to
thirty-nine [39] units after reconfiguration) with thirty-eight (38) parking spaces, and the
aggregate monetary value of said units is P175,856,323.05.

In determining the entitlement of the parties to the reserved units in Schedule 4, Malayan insists
that the ARCC should include all its capital contributions to complete the project, including
financial costs which are not directly related tothe construction of the building. It argues that the
MOA is replete with provisions recognizing the parties intent to include in the ARCC their
respective capital contributions or investment.

Malayans argument fails to persuade.

The term ARCC should only be construed in light of its plain meaning which is the actual
expenditures necessary to complete the project, and it is not equivalent to the term "investment"
under the MOA.

As stated in the MOA, the investment of Malayan is composed of (1) the amount necessary to
complete the project, and (2) the following amounts: (a) P65,804,381, representing Malayans
payment on behalf of ASB (now St. Francis) of the principal amount of the loan obtained by
ASB from the RCBC to finance the project; and (b) P38,176,725, representing Malayans
payment on behalf of ASB of the outstanding obligations to project contractors as of the signing
of the MOA.24 On the other hand, the investment of St. Francis is broadly defined as the ASBs
invested amount equivalent to its entitlement to the net saleable area of the Building under
Section 4 of the MOA, including ASBs interest as buyer under the Contract to Sell.25 Hence, the
Court holds that the ARCC, which pertains only to the amount necessary to complete the project,
can be considered as part of the capital investment, but they are not synonymous.

Likewise negating Malayans argument that all its contribution to complete the project should be
included in the ARCC is the restrictive construction industry definition of "construction cost", to
wit: the cost of all construction portions of the project, generally based upon the sum of the
construction contract(s) and other direct construction costs; it does not include the compensation
paid to the architect and consultants, the cost of the land, right-of-way, or other costs which are
defined in the contract documents as being the responsibility of the owner.26

As to the computation of the ARCC, the Court agrees with the CA that the CIAC erred in relying
mainly on Exhibit"C-3," which is a mere summary or tabulation of the cost to complete the
project as of August 10, 2006, and that Exhibit "R-24" (a 26-page Cost to Complete as of
October 2008) and Exhibit "R-48-series" (consisting of about 2,230 pages construction costs
computation, receipts, vouchers, checks and other documents) should also be considered in
determining the ARCC. After a careful review of the records, the Court finds partial merit in the
claim of St. Francis that certain items in the computations are unsubstantiated by evidence, while
the other costs should either be included or excluded in the ARCC for reasons that will be
explained below. Hence, the CAs own computation of the ARCC based on Exhibit "R-48-
series" in the total amount of P554,583.160.20 (including 1/11% Input VAT and 2% withholding
tax) should be modified in order to arrive at the net ARCC of P505,391,573.63, thus:
Construction Cost as per receipts (Exhibit "R-48-series"27) (with 1/11% Input VAT and 2%
withholding tax) P554,583,160.20

Total Inclusion: P8,282,974.82

Award to Total Ventures, Inc.

(Prolongation costs and extended Overhead) + 8,282,974.82


Total ARCC: P554,583,160.20+8,282,974.82=P562,866,135.02

(Construction Costs as per receipts + Inclusion)

Total Deductions:P41,705,696.66

Interest expense paid by Malayan to RCBC P39,348,659.88


Change orders not due to Reconfiguration 971,796.29
Contingencies 631,154.39
Interior Design Works + 754,086.10
P41,705,696.66

Total Exclusions:P15,768,864.73

(Unsubstantiated Costs)

Item 1.028 P 9,297,947.22


Items 5.3 and 5.429 530,563.65
Items 5.3 and 5.4 725,877.62
Item 5.7.130 50,710.61
Item 6.2.2531 194,171.00
Item 6.1132 3,499.64
Item 6.11 1,360.00
Item 6.12.333 2,397,047.8934
Item F335 368,397.52
Item F3 448,534.59
Item F3 634,232.26
Professional Fees C& D36 427,500.00
Professional Fees N37 + 79,022.73

P15,768,864.73
(Total Deductions) P41,705,696.66
(Total Exclusions) +15,768,864.73

P57,474,561.39
Total ARCC - Total Deductions & Exclusions = Net ARCC: P505,391,573.63

P562,866,135.02 - P57,474,561.39 = P 505,391,573.63

III. Input VAT

St. Francis contends that Input VAT should not be treated as part of construction cost, because it
is not part of the costs of goods and services purchased or engaged under Section 11038 of the
National Internal Revenue Code (NIRC). According to St. Francis, VAT Ruling No. 053-94,
February 9, 1994, states that VAT paid by a VAT-registered person on his purchases (or input tax)
is an asset account in the Balance Sheet and not to be treated as an expense, unless he is exempt
from VAT in which case the VAT paid would form part of the cost to acquire what was
purchased. In fact, per Malayans own documentary evidence, cash vouchers in Exhibit"R-48-
series,"input VAT is indicated as an account separate from the actual cost of services or
materials. Also, in Malayans audited financial statements, input VAT is treated as a separate item
and was, in fact, claimed as an asset under the heading "Other Assets."

St. Francis further points out that Malayans counsel admitted that input VAT is not part of cost
when he stated that VAT and interest expense are actually financial cost and part of its capital
contribution in the construction, but, strictly speaking, not directly related construction cost. St.
Francis claims that even from an accounting standpoint, input tax is not entered into the books as
part of cost. While contract prices for contractors or suppliers are VAT inclusive, it does not
mean that input VAT is considered part of cost; input VAT is treated as account in a different
account, either under "Other assets" or "Input Tax", which is an asset account. Besides, the input
VAT claimed by Malayan as part of its construction cost in the usual course of business as a VAT-
able entity is offset or credited against output VAT to determine the net VAT due or payable to the
government. Since Malayan also has output VAT from its sales of condo units in the project and
from sales of insurance policies, it should be able to credit such input VAT and not charge it as
part of the construction cost.

St. Francis finally notes that Malayan admitted that it can apply for refund or issuance of tax
credit for excess input tax, and will thus benefit twice from charging input VAT as part of the
construction cost. Since input VAT had already been claimed by Malayan, and its audited
financial statements show the offsetting of input VAT against output VAT, then justice and equity
dictate that it should not be allowed to claim it as part of the ARCC.

The Court finds no compelling reason to disturb the consistent findings of the CA and the CIAC
that Input VAT should be allowed to remain in the ARCC. As aptly pointed out by the CA and the
CIAC, ARCC refers to the actual expenditures made by Malayan to complete the project. The
Court thus agrees with Malayan that in determining whether input VAT should be included as
ARCC, the issue is not the technical classification of taxes under accounting rules, but whether
such tax was incurred and paid as part of the construction cost. Given that input VAT is, strictly
speaking, a financial cost and not a direct construction cost, it cannot be denied that Malayan had
to pay input VAT as part of the contract price of goods and properties purchased, and services
procured in order to complete the project. Moreover, that the burden of such tax was shifted to
Malayan by its suppliers and contractors is evident from the photocopies of cash vouchers and
official receipts on record,39 which separately indicated the VAT component in accordance with
Section 113(B)40 of the Tax Code.41

Anent the claim that it would be unjust and inequitable if Malayan would be allowed to include
its input VAT in the ARCC, as well as to offset such tax against its output tax, the Court finds that
such coincidence does not result in unjust enrichment at the expense of St. Francis. Unjust
enrichment claims do not lie simply because one party benefits from the efforts or obligations of
others, but instead it must be shown that a party was unjustly enriched in the sense that the term
unjustly could mean illegally or unlawfully.42 In offsetting its input VAT against output VAT,
Malayan is merely availing of the benefits of the tax credit provisions of the law, and it cannot be
said to have benefitted at the expense or to the damage of St. Francis. After all, Malayan is
justified in including in the ARCC the input VAT it had paid as part of the contract price of the
goods, properties and services it had procured to complete the project.

At any rate, St. Francis would also be entitled to avail of the same tax credit provisions upon the
eventual sale of its proportionate share of the reserved units allocated and transferred to it by
Malayan. It bears emphasis that the allocation of and transfer of such units to St. Francis is
subject to output VAT which Malayan could offset against its input VAT. In turn, St. Francis
would incur input VAT which it may later offset against its output VAT upon the sale of the said
units. This is in accordance with the tax credit method of computing the VAT of a taxpayer
whereby the input tax shifted by the seller to the buyer is credited against the buyers output
taxes when it in turn sells the taxable goods, properties or services.43

IV. Comprehensive All Risk Insurance (CARI)

St. Francis claims that the CARI should be disallowed from being part of the ARCC because
there is no proof of expense on the part of Malayan, and only official receipts were presented.
However, the first official receipt in the amount of P2,814,672.81 is not even readable, while in
the second receipt, the description of the contract for the CARI appears to be a different project.
Considering that the assured in the receipts is not just Malayan but jointly with LANDEV
(project manager), St. Francis adds that Malayan must prove that it actually paid for this
expense.

It bears stressing that both the CIAC and the CA agreed that the CARI should be allowed as part
of the ARCC, but differed as to the amount. Due to St. Francis admission that it would allow
inclusion of P1,000,000.00, and considering that no basis has been suggested on how the said
amount was arrived at, the CIAC decided to split the amount contested (P2,814,678.80,
excluding premium for renewals, per Malayan) into equal shares, and allowed the CARI in the
amount of P1,407,336.40 as part of the ARCC. On the other hand, the CA allowed CARI in the
amount of P2,168,035.66 as part of ARCC, after reviewing the official receipts44 issued by Tokio
Marine Insurance Co., and finding that the total amount of the CARI should be P4,336,071.32
which should be split between Malayan and St. Francis.

The Court holds that CARI in the amount of P4,361,291.34 is supported by official
receipts;45 hence, such amount should be allowed to remain in the ARCC. Although the official
receipts of the CARI appear to have been issued in the name of Malayan and/or LANDEV, the
minutes of the December 20, 2002 Bids and Awards Committee Meeting, of which St. Francis
President Luke Roxas was a member, proves that it was unanimously agreed upon that the CARI
would be secured directly by the owner, Malayan. The official receipts and the said minutes
prove that the premium of the policy, as well as the renewals thereof, were shouldered by
Malayan as the owner of the project. Against the said substantial evidence of Malayan, the CA
and the CIAC have no basis in ruling why the CARI should be split between Malayan and St.
Francis. As to the conflict between the CARI premium payments shown in Exhibit "C-3" (Cost
to Complete as of August 10, 2006) in the total amount of P4,006,634.85 and Exhibit "R-48-M-
series" (Item 5.0 Project Insurance, Tokio Marine Malayan Insurance Co. Inc.) in the total
amount of P4,361,291.34, the latter should prevail as it is supported by official receipts.46

V. Allocation of Reserved Units

St. Francis asserts that the correct ARCC supported by receipts is only P514,179,217.94,47and
after making all the necessary deductions, the excess ARCC over the warranted RCC
[P452,424,849.00] would only be around P16,446,014.66, thus entitling it to the value of the
reserved units of around P159,410,310.39, as well as the income therefrom. On the other hand,
Malayan insists that St. Francis would no longer be entitled to any reserved units,and it would
still be liable for P19,038,339.91, as the ARCC and the RCC exceeded the aggregate value of the
reserved and the total aggregate value of the reserved units by such amount.

The CIAC held that the ARCC based on Exhibit "C-3" is P614,593,565.96, and that after
deducting the total disallowances of P52,864,385.00, as well as the amount of the RCC, the
excess ARCC will be P109,304,331.96 which is equivalent to Malayans 62.2% share in the total
aggregate value of the reserved units (P175,856,325.05). Meanwhile, the remaining 37.8% is the
proportionate share of St. Francis in the said units.

Modifying the ruling of the CIAC, the CA ruled that based on Exhibit "C-3", "Exhibit R-24" and
Exhibit "R-48-series," the total ARCC is P615,880,672.47. After excluding the deductions in the
total amount of P15,135,166.51 and the amount of the RCC, the excess ARCC will be
P148,320,656.96 which is equal to Malayans 84% share in the total aggregate value of the
reserved units. The remaining 16% is the proportionate share of St. Francis in the said units.

After a circumspect review of the records, the Court finds that the 30% of the reserved units
should be allocated to Malayan, while 70% should be allocated to St. Francis. Below is the
computation of the parties proportionate share in the said units:

P505,391,573.63 [Net ARCC] - P452,424,849.00 [RCC] = P52,966,724.63 [Excess ARCC]

P52,966,724.63 [Excess ARCC]/P175,856,323.05 [Total Aggregate Value of Reserved Units] = .


3011 or 30% - share of Malayan

P122,889,598.42/P175,856,323.05 = .6988 or 70% - share of St. Francis.

Prolongation Costs and Extended Overhead


The CIAC held that Prolongation Costs and Extended Overhead in the amount of P6,000,000.00
should be excluded as part of the ARCC because it would be unfair and unjust for Malayan to
pass on its liability to St. Francis after having been found responsible for the delay. The CIAC
pointed out that the resolution of this issue hinges upon whose fault the delay in the construction
that gave rise to prolongation costs may be attributed to, and this was resolved in CIAC Case No
27-2007 entitled "Total Ventures and Project, Inc. vs. Malayan Insurance Company, Inc." where
the arbitral tribunal awarded in favor of claimant TVI the sum of P7,743,278.89 to compensate
for the delay in the completion of construction which has been caused essentially by Malayan.

On the contrary, the CA held that it is but proper to include in the ARCC the amount of
P21,948,852.39 which Malayan had paid to Total Ventures, Inc. (TVI) for the settlement in the
CIAC Case No. 27-2007.

St. Francis points out that without consideration of its arguments and contrary to CIACs finding,
the CA held that Malayan had paid TVI P21,948,852.39 which should be included in the ARCC.
St. Francis states that, assumingarguendo, that such settlement in the arbitration case can be
considered part of the ARCC, the entire amount thereof cannot be included because the
combined total amount of the award of prolongation costs and extended overhead
(P7,743,278.89), and the interest (P1,430,127.50) is only (P9,173,405.94). It adds that it is very
clear in the decision of the arbitral tribunal that the causes for the delay of TVI that warranted the
grant of overhead expenses are actually attributable to Malayan, to wit:

Based on the foregoing documentary evidence and the testimony of the witnesses, delays in the
project implementation was mainly attributed to the reconfiguration of the room layout of the
building at Discovery side and delay in the award by MICO [Malayan] of the subcontract
packages for other trade disciplines plus, the delayed delivery of material which had a domino
effect on the work of the succeeding packages, and eventually to the overall project completion
date which had to be extended to August 31, 2005.48

The CA grossly erred in ruling that the full amount of P21,948,852.39 paid by Malayan to TVI
should be included in the ARCC. A careful review of the decision of the arbitral tribunal in CIAC
Case No. 27-2007 shows that such full amount consists of net amount due (P20,518,725.94) to
TVI after offsetting its various claims against the counterclaims of Malayan, plus the accrued
interest of P1,430,127.05.49Based on the said decision and the amount which St. Francis itself has
conceded it may be held liable for, the Court holds that the prolongation costs and extended
overhead for the period of January 2005 to August 2005 (P6,313,846.43) and September 1, 2005
to August 31, 2005 (P1,429,432.46) in the total amount P7,743,278.89,50 as well as the accrued
interest in the amount of P539,695.93,51 or a total amount of P8,282,974.82, should be included
as part of the ARCC.

The Court agrees with Malayan that the cause of the delay in the completion of TVIs
construction works was the reconfiguration of the room layout of the building along the side
facing Discovery Suites hotel. Such delay was, in turn, caused by St. Francis deviation from the
original April 12, 1996 floor plans for the 9th to 31st floors of the project, which resulted in units
that were more typical of a high-density, low-cost condominium project. Indeed, Malayan had to
reconfigure the said layout of several units that St. Francis had constructed as they were smaller
and narrower than those provided in the original floor plans, and in order to meet St. Francis
commitment to the buyers of pre-sold units to create a prestigious building and collaborative
masterpiece that only the best in interior design, landscape planning and architecture can truly
offer, as well as to avoid possible liability under Section 1952of the Subdivision and
Condominium Buyers Protective Decree (Presidential Decree No. 957).

The Court will now discuss jointly the first three interrelated issues raised by Malayan.

A. Whether St. Francis had never disputed and therefore admitted that Malayan
had incurred the ARCC.

B. Whether the CA erred in allowing St. Francis to belatedly change its theory in its
Draft Decision and in its Appeal.

C. Whether the CA erred in disregarding the uncontroverted testimonial evidence,


and focusing solely on documentary evidence.

According to Malayan, the CA overlooked the fact that St. Francis objected only to the perceived
impropriety of including certain costs in the ARCC. That Malayan incurred these costs was never
in issue during the arbitral proceedings. In view of the rule that all facts not in issue are admitted,
and that all facts judicially admitted do not require proof, Malayan claims that it should not bear
the burden to prove that it had actually incurred its ARCC.

Malayan also notes that St. Francis CIAC complaint contained no allegation that Malayan had
not actually incurred the costs in its ARCC, nor was there any claim that specific costs items in
the ARCC lacked evidentiary basis, or were otherwise fictitious or fabricated. Malayan argues
that if its alleged failure to substantiate the ARCC was enough basis to question costs included
therein, it follows that St. Francis would already have disputed in its complaint the entire amount
of the ARCC. Yet, St. Francis only chose to object to selected items in the ARCC, and not
because of the alleged lack of substantiation.

Malayan adds that from the time St. Francis filed its complaint, up to the conclusion of trial, it
had the same theory, i.e., although Malayan had indeed spent for its ARCC, some costs items
ought to be excluded as they could not be considered part of the ARCC. It was only belatedly in
its Draft Decision and its Petition before the CA that St. Francis argued for the first time that new
cost items should also be deducted from the ARCC because they were allegedly unsubstantiated
or not fully supported by official receipts. In light of the rule that a party cannot change his
theory on appeal when a party adopts a certain theory in the court below, Malayan faults the CA
for excluding new cost items from the ARCC due to lack of substantiation. Besides, Malayan
claims that its entire ARCC as of February 29, 2009 was expressly affirmed by its witnesses who
are competent to testify due to their involvement in the preparation and monitoring of the
projects budget.

Stating that it did not have the burden of proving that it incurred the costs in its ARCC because
this was never in issue, Malayan concludes that the CA should have held St. Francis to its
original theory that Malayan had actually incurred all the items in its ARCC of P647,319,513.96,
instead of examining each item included therein and accepting only P615,880,672.47 as
supported by documentary evidence. Finally, Malayan insists that there can be no dispute that it
incurred the ARCC of P647,319,513.96 based on the unrebutted testimony of its witnesses and
the voluminous documents it introduced at trial.

Malayans contentions are misplaced.

Contrary to the claim that St. Francis admitted that Malayan had incurred the ARCC of
P647,319,513.96, the allegations in St. Francis complaint and the Amended Terms of Reference
would show that the substantiation of the cost items included in the ARCC and the exact amount
thereof arethe core issues of the construction arbitration before the CIAC.

For one, the contention that St. Francis complaint contained no allegation that Malayan had not
actually incurred the costs in its ARCC, nor was there any claim that specific costs items in the
ARCC lacked evidentiary basis, is belied by the following allegations in same complaint:

2.9 Sometime in August of 2006, [Malayan] presented a cost to complete construction of the
Project in the amount of SIX HUNDRED FOURTEEN MILLION FIVE HUNDRED NINETY
THREE THOUSAND FIVE HUNDRED SIXTY FIVE PESOS and 96/100
(P614,593,565.96). Said cost to complete however was a mere tabulation with a listing of
items and appurtenant costs.There was no independent proof or basis as well as evidence
that claimant incurred these costs, much less, if these costs conform with the actual
construction cost as the same is understood under the MOA. xxx53

For another, one of the admitted facts in the Amended Terms of Reference states that "[d]espite
the completion of the Project and the turnover of the units to [St. Francis], [Malayan], and other
buyers of units, the issue of actual cost of construction has not been resolved to the mutual
satisfaction of the parties."54 Not to mention, one of the issues raised before the CIAC is "[w]hat
is the actual remaining construction cost to complete the Project spent by [Malayan] as of today
in excess of [St. Francis] estimate RCC?"55 Clearly, there is no merit in the claim that St. Francis
admitted that Malayan had incurred the ARCC of P647,319,513.96 as of October 2008. It can be
gathered from the complaint that, as early as August 2006 when the ARCC was just
P614,593,565.96, St. Francis already disputed such amountfor lack of independent proof or
evidence that Malayan incurred these costs

Anent Malayans claim that St. Francis argued belatedly in its Draft Decision and its petition
before the CA that new cost items should also be deducted from the ARCC because they were
allegedly unsubstantiated or not fully supported by official receipts, suffice it to state that
whether such cost items should be excluded from the ARCC is impliedly included in the issue of
"[w]hat is the actual remaining construction cost to complete the Project spent by [Malayan] as
of today in excess of [St. Francis] estimate RCC?"56

Moreover, in an action arising out of cost overruns on a construction project, the builder who has
exclusive control of the project and is in a better position to know what other factors, if any,
caused the increases, has the burden of segregating the overruns attributable to its own conduct
from overruns due to other causes.57 As the co-owner and developer who assumed the general
supervision, management and control over the project, and the one in possession of all the
checks, vouchers, official receipts and other relevant documents, Malayan bears the burden of
proving that it incurred ARCC in excess of the RCC and the total aggregate value of the reserved
units, in which case St. Francis would no longer be entitled to a proportionate share in the
reserved units pursuant to the MOA.

In view of the foregoing discussion, the Court finds no merit in Malayans contentions (1) that it
did not have the burden of proving that it incurred the costs in its ARCC because this was never
in issue; and (2) that there can be no dispute that it had incurred the ARCC of P647,319,513.96
based on the unrebutted testimony of its witnesses and the voluminous documents it introduced
at trial.

D. Erroneous Cost Exclusions from the ARCC

D.1. Change Orders due to Reconfiguration

The CIAC held that costs of reconfiguration should be allowed to remain as part of the ARCC on
account of the greater savings generated. It found that Malayan has sufficiently established that
the reconfiguration did not result in additional costs, and net savings were realized. Since St.
Francis only concern was to minimize costs and maximize savings, there is no longer any basis
to object to the reconfiguration and the change order that were approved as a results thereof.

In contrast, the CA ruled that the CIAC erred in allowing the increased cost of P7,434,129.85 to
be included in the ARCC because it is immaterial whether there were net savings generated from
the reconfiguration, and the fact remains that there was an increase in the budgeted construction
cost, which Malayan alone should bear.

Finding substantial evidence on record to support the CIAC ruling, the Court reverses the CA
ruling and upholds the CIAC that the increased costs of P7,434,129.52 should be included in the
ARCC.The Court sustains the CIACs observation that although such reconfiguration was not
really necessary for the completion of the project and was undertaken only to make the units
more saleable, St. Francis had consented thereto on the condition that it would result in savings
rather than additional costs.58 No persuasive reason was shown to disturb the CIAC finding that
despite the increased costs of P7,434,129.52 as claimed by St. Francis, and even including the
consultants fees in the aggregate amount of P3,081,725.00, the savings amounting to
P14,096,239.07 due to reconfiguration, would still be in excess of the costs of additive change
orders.59 In arriving at such computation, the CIAC went over the disputed change orders due to
reconfiguration, and proceeded to calculate whether the cost of the additive works exceeded the
savings realized from the deductive works. Notably, no similar effort was exerted by the CA in
arriving at its ruling. Without stating any reason, the CA reversed the CIAC ruling that net
savings were generated on account of change orders due to reconfiguration,

D.2. Change Order not due to Reconfiguration

With respect to change orders not due to reconfiguration amounting to P971,796.29, the CIAC
held that such costs should be excluded from the computation of the ARCC because they were
clearly not within the scope of the original work covered by the MOA, but were plainly additive
works ordered by Malayan to improve or enhance the project. It also found no legal or equitable
reason to allow Malayan to pass on the costs of such unnecessary improvements or
enhancementsto St. Francis.

The CA deemed it unnecessary to disturb the CIACs findings on the change of orders not due to
reconfiguration, as the latter had extensively discussed the issue. According to the CA, the CIAC
correctly ruled that the change orders not due to reconfiguration cannot be considered as part of
the ARCC as these were not within the scope of the work agreed upon by the parties in the
MOA. It also noted that it is clear from Section 5 of the MOA that Malayan shall undertake,
among other things, to construct, develop and complete the Project based on the general
specifications already agreed upon by the parties and as set forth in the Schedule 6 of the MOA,
with full powers to enter into agreement with contractors, subcontractors, and suppliers for the
completion of the various phases of work. It concluded that when Malayan undertook additional
works, improvements or enhancements not within the specifications agreed upon, it presupposes
that it shall bear the costs thereof.

Since the findings of the CIAC and the CA on this issue are consistent, the Court perceives no
cogent reason to overturn such findings which are supported by substantial evidence. Besides,
the Court takes issue with Malayans claim that the CA gravely erred in rigidly applying the
specifications in Schedule 6 of the MOA, considering that they were "general" in character and
"for reference" purposes only. It is noteworthy that Schedule 660 not only provides for the
Schedule of Finishes and Materials of ASB Malayan Tower as of 26 October 2000, covering
Exterior Works, Interior Works, Elevators, Intercom, Fire Alarm System, Standby Generator Set,
Lightning Protection and Pumps, among other things,but also includes the project floor plans
from Basement 2 to 6, and levels 4, 5, 7 to 12, 14 to 18, 20, 22 to 31, 33 to 35, penthouse and
upper penthouse. When a building contract refers to the plans and specifications and so makes
them a part of itself, the contract is to be construed as to its terms and scope together with the
plans and specifications.61 When the plans and specifications are by express terms made part of
the contract, the terms of the plans and specifications will control with the same force as if they
were physically incorporated in the very contract itself.62 Malayan cannot, therefore, brush aside
Schedule 6 as "general" and "for reference only" matters in the interpretation of the MOA.

As to the costs incurred due to the supposed reasonable deviations from specifications in the
exercise of its sound discretion as the developer, Malayan would do well to bear in mind that if
the terms of a contract are clear and leave no doubt upon the intention of the contracting parties,
the literal meaning of its stipulations shall control.63 Under Section 5 of the MOA, Malayan
undertook to construct, develop and complete the project based on the general specifications
already agreed upon by the parties and set forth in Schedule 6 thereof. As duly pointed out by the
CIAC, since the parties to the MOA had agreed on the specifications that will control the
construction and completion of the project, anything that alters or adds to these specifications
which adds to the costs, should not be part of the ARCC.

D.3. Half of Costs for Narra Parquet Works


The CIAC allowed only half of the increased flooring costs [P4,982,798.44] in the amount of
P2,491,399.22, plus the original budgeted expense for this item in the amount of P12,770,000.00,
or a total amount of P15,261,399.22, as part of the ARCC. According to the CIAC, since the
cause of change in flooring material and the increased cost was a force majeure (government log
ban) for which no one can be blamed, it is but fair that both parties will equally share the
increased cost.

The CA ruled that the CIAC did not err in dividing the increased cost between the parties. It
stressed that the dispute pertains to the proportionate entitlement of the parties to the reserved
units after determining the actual construction cost. Thus, both parties should share in the
reserved units, as it is but fair that the increased cost should also be equally divided between
them, and half of the increased amount should be included in the computation of the ARCC.

Although the findings of the CA and the CIAC on this issue are consistent, the Court finds their
reasoning contrary to the MOA. The construction cost increase due to the change from Narra
parquet to Kendall laminated flooring is undisputedly due to the government logging ban which
is a force majeure. However, the equal sharing of such cost increase is contrary tothe MOA
which provides for the proportionate entitlement of the parties to the reserved units, depending
on the excess ARCC over the RCC and the total aggregate value of the reserved units. In
addition, such increased cost due to force majeure falls under the category of "Contingencies"
under Schedule 9 of the MOA, which term is defined as an amount of money, included in the
budget for building construction, that is uncommitted for any purpose, intended to cover the cost
of unforeseen factors related to the construction which are not specifically addressed in the
budget.64 The Court therefore holds that the entire increased cost of P4,982,798.44 due to the
unforeseen necessity of change in flooring materials, should be included in the computation of
the ARCC.

D.4. Half of Costs for CARI

As discussed above, the CARI in the amount of P4,361,291.3465 is supported by official receipts;
hence, such amount should be allowed to remain in the ARCC. Although the official receipts of
the CARI appear to have been issued in the name of Malayan and/or LANDEV, the minutes of
the December 20, 2002 Bids and Awards Committee Meeting, of which St. Francis President
Luke Roxas was a member, proves that it was unanimously agreed upon that the CARI would be
secured directly by the owner, Malayan. The official receipts and the said minutes prove that the
premium of the policy, as well as the renewals thereof, were shouldered by Malayan as the owner
of the project. Against the said substantial evidence of Malayan, the CA and CIAC have no basis
in ruling why the CARI should be split equally between Malayan and St. Francis.

D.5. Half of Costs for Interior Design Works

In resolving this issue, the CIAC noted that it is crucial to determine whether the disputed
amount was spent to improve the original design or to comply with St. Francis commitments to
the buyers. According to the CIAC,force majeure (government log ban) also justified the change
of flooring materials from wood parquet to homogenous tiles and marble flooring. However, the
difficulty in resolving this issue is that the increased cost is not only because of the change of
flooring materials, but also due to the change of specifications and the inclusion of gym
equipment. Thus, it is impossible to separate the increased cost arising from flooring change and
those from causes other than gym equipment which is worth P962,250.00 and the underlay of
plywood and rubber pads worth P96,967.73.

The CIAC noted that the budgeted amount for this item of P5,600,000.00 made by St. Francis
was increased to P9,000,000.00 in Malayans budget, and that the difference of P3,400,000.00
reflects the increase from unspecified causes such as supervening price increase. It added that
both parties agreed on the increase due to cost of glass doors, hardware and plumbing fixtures
amounting to P2,100,415.00. It was convinced that what is being contested by St. Francis is the
increase in the actual cost (P14,150,324.73) vis--vis the Effective Budget for Interior Design
Works of P11,100,415.00 or a net increase of P3,049,909.73.

In view of the above stated difficulty in resolving this issue, the CIAC held that the total increase
of P3,049,909.73 as cost of interior design works should be equally shared by both parties
(P1,524,954.86 each), as well as the cost of the gym equipment (P962,250.00) and the underlay
of plywood and rubber pads (P96,967.73), both amounting to P1,059,217.73. In sum, it allowed
only P2,054,563.73 or half of the total cost increase (P4,109,127.46) of such works to be
included in the ARCC

Upon review of the records under Exhibit "R-48-series," the CA found that the official receipts
show that the total payment due was P12,642,152.52. It agreed with the CIAC that the increased
cost for this item should be divided equally between the parties, but reduced the amount to
P1,508,172.2166 (or P754,086.10 each), instead of P3,049,909.73. The CA did not also disturb
the CIACs ruling on the disallowance of one-half of the cost of gym equipment and the underlay
of plywood, and rubber pads. Having noted a discrepancy in the total amount of P962,250.00
stated in Exhibit "C-3" [Cost to Complete as of 10 August 2006], the adjusted contract price of
P987,250.00, and the official receipts showing the total payment of P978,275.01, the CA
determined that the share of each of the parties should be P493,625.00.

Malayan claims that no explanation was given why the costs for interior design works had to be
divided equally between the parties. In any event, the said works were awarded in accordance
with the MOA and St. Francis original marketing representations to the buyers of the pre-sold
units, and they were proper and necessary for the completion of the project. As regards the costs
incurred for the gym equipment and the underlay of plywood and rubber pads, they should be
included in full in the ARCC because: (1) Section 6 of the MOA provides that the project must
have a "Gym/Lounge/Childrens Play Area"; (2) the general specifications of the project lists as
one of the amenities a gym with equipment; and (3) St. Francis included such amenities in the
marketing brochures and fliers it gave to buyers of the pre-sold units.

The Court agrees with the CA and the CIAC rulings that the costs for interior design works
should be included in the computation of the ARCC, and that what is being contested is whether
the net increase of P3,049,909.73 from the original budget of P11,100,415.00. As correctly found
by the CA based on the official receipts, the net increase should only be P1,508,172.21. The
Court also sustains the CA that such increase should be equally divided between the parties
(P754,086.10 each) due to the impossibility of separating the increased cost arising from flooring
change and those from causes (change of specifications) other than gym equipment and the
underlay of plywood and rubber pads.

However, there being no valid reason to extend such equal sharing of costs with respect to the
gym items, the Court reverses the CA and the CIAC in ruling that costs of the gym equipment
(P962,250.00) and the underlay of plywood and rubber (P96,967.73) amounting to
P1,059,217.73 should be equally shared by the parties. The Court, thus, holds that the full
amount thereof should be included in the computation of the ARCC.

D.6. Contingency Costs

The CIAC disallowed the amount of P2,000,000.00 in contingency costs to be included in the
ARCC as they are not directly related to the completion of the project.1wphi1 The CIAC noted
that what was included in the ARCC is the amount of P631,154.39 as payment for professional
services and various expenses connected with the claim for damages to the car that was hit by
falling construction debris, but Malayan included the amount of P2,000,000.00 in the ARCC. It
added that Malayan, being insured under the CARI, should assert its claim against the insurance
company. If Malayan failed to do so, or if it was able to recover less than what it had claimed, it
would be unfair to pass on (to St. Francis) the amount it failed to claim by adding it as part of the
ARCC.

The CA upheld the CIACs ruling that contingency costs in the amount of P631,154.39 should
not be passed on to St. Francis, considering that what was paid as damages and expenses was a
consequence of an incident that occurred when a falling debris hit the Volvo car owned by
Celestra. The CA noted that Malayan should assert its claim against the insurer to recover
whatever damages it incurred in the course of the construction project. It added that legal fees
paid to lawyers who defended Malayan against the claim of one Tan-Yee, cannot be considered
actual construction cost, as no evidence was submitted relative thereto.

Malayan claims that the incident which led to the payment of contingency costs was
construction-related because a case was filed against it as a result of the incident and that a
temporary restraining order (TRO) was issued enjoining further construction works; hence, the
engagement of lawyers was necessary to ensure the immediate resumption of the construction
project.

The Court sustains the CA in ruling that the contingency costs in the amount of P631,154.39
should not be included in the computation of the ARCC. As duly noted by the CIAC and the CA,
legal fees cannot be considered as part of the ARCC, as they are not directly related to the
completion of the project. Despite the allegation that a TRO was issued, no proof of such order
was presented by Malayan. Hence, such costs should not be included as part of the ARCC, but
should be charged against the party responsible for the incident, or Malayan as the one
responsible for the general supervision, management, control over the project.

D.7. Costs Incurred/Paid after June 2006


The CIAC found it is unnecessary to resolve the issue: "What is the actual remaining
construction cost to complete the Project spend by [Malayan] as of today [20 January 2009] in
excess of St. Francis estimated RCC?" Instead, it resolved the same issue based on Exhibit "C-
3" which is the ARCC amounting to P614,593,565.96 as of August 10, 2006. Noting that
Exhibit "C-3" was prepared by Malayan itself and submitted to St. Francis, and was close
enough to June 7, 2006 when the project was completed, the CIAC used such evidence as the
basis upon which disallowances were to be made, in order to arrive at the ARCC of
P561,729,180.96.

The CA agreed with the CIAC that it is important to determine when the project was completed,
as costs incurred after the cut-off date should no longer be included in the computation of the
ARCC, and that the incontrovertible proof that the project was completed on June 7, 2006 is the
Certificate of Occupancy67 submitted by C.E. Manzanero, the duly-licensed architect of Malayan.

The Court finds no compelling reason to disturb the CA and the CIAC rulings that are consistent
with Section 5 of the MOA which expressly states that the project "shall be deemed complete,
and the obligation of Malayan fulfilled, if the construction and development of Project is finished
as certified by the architect of the Project." Indeed, costs and expenses incurred after completion
of the project cannot be considered as part of the ARCC.

E. Entitlement to Reserved Units

As discussed and computed above, the Court holds that 30% of the reserved units should be
allocated to Malayan, while 70% should be allocated to St. Francis.

F. Income from Reserved Units

The CIAC held that income realized from rental of the reserved units during the period from
June 7, 2006 and the present date, should be determined as having been received by Malayan in
trust for such party that would be determined to be the owner/s thereof. Considering its
determination of the excess ARCC over the RCC, the CIAC stated that the said income should be
proportionately shared as follows: 37.8% for St. Francis and 62.2% for Malayan. According to
the CIAC, based on Sections 4 (a), (ii) (C)68 and 4 (b),69 ownership of the reserved units is in
doubt during the intervening period from completion of the project and final determination of
costs because of the phrases "shall be delivered to ASB" and "Malayan shall be entitled." Clearly,
that the ownership of the reserved units shall be determined only upon completion of the project
and the determination of the ARCC, because only then could it be computed if there is an excess
ARCC over the RCC.

The CIAC observed that had the computation been done on the completion date of the project on
June 7, 2006, there would already have been an allocation of ownership over the reserved units.
Since the determination of the ARCC was doneonly almost three (3) years later during the
arbitration proceedings, the issue had arisen as to who between the parties is entitled to the rental
income from the reserved units which are deposited in the account of Malayan.
The CA agreed with the CIACs ruling but modified the proportionate sharing of the reserved
units, thus: 84% for Malayan and 16% for St. Francis. The CA explained that the income realized
from rentals and sales of reserved units from June 7, 2006 until the finality of this case shall be
considered as having been received by Malayan; thus, it must be subject to proper accounting in
order to arrive at the proper sharing in accordance with the general principles of equity, and
pursuant to the said proportionate sharing ratio.

Malayan contends that as the owner of the project, it is entitled to all of the civil fruits, including
the rents from the lease of the reserved units. With respect to the accruing fruits, Malayan
invokes Article 118770 of the New Civil Code, and claims that it is entitled to appropriate all the
fruits and interests realized from the reserved units prior to the happening of two (2) suspensive
conditions, i.e., the completion of the project and the determination of the ARCC. Malayan adds
that it is iniquitous to award St. Francis a share in the income from the reserved units without
making it share in the expenses and upkeep thereof.

The Court finds that Malayans obligation to give the reserved units is unilateral because it was
subject to 2 suspensive conditions, i.e., the completion of the project and the determination of the
ARCC, the happening of which are entirely dependent upon Malayan, without any equivalent
prestation on the part of St. Francis. Even if the obligation is unilateral, Malayan cannot
appropriate all the civil fruits received because it could be inferred from the nature and
circumstances of the obligation that the intention of the person constituting the same was
different. Section 9(b) of the MOA states that in the event that Malayan shall pay additional cost
and expenses in excess of the RCC, it shall be entitled to such net saleable areas indicated in
Schedule 4 that corresponds to the increase in the remaining construction costs, while St. Francis
shall be entitled to such remaining areas, if any.

As aptly noted by the CIAC, the determination of the ARCC should have been made upon the
date of completion of the project on June 7, 2006, but it was only about 3 years later during the
arbitration proceedings that such determination was done. Not until now has the issue of the
correct computation of the ARCC been finally resolved. Such long delay in the determination of
the ARCC and the proportionate distribution of units in the project could not have been the
intention of the parties. The Court, therefore, sustains the CA and the CIAC rulings that the
income realized from the reserved units from the completion date until present, should be
considered as having been received by Malayan in trust for such party that shall be determined to
be the owner thereof. In light of the determination of the excess of the ARCC over the RCC, the
income should be proportionately shared as follows: 30% for Malayan and 70% for St. Francis.
Subject to proper accounting, upkeep expenses for the reserved units should also be shared by
the parties in the same proportion.

G. Counterclaims, Attorneys fees and Arbitration costs

Counterclaims

Having determined above that the ARCC does not exceed the RCC and the total aggregate value
of the reserved units, the Court joins the CA and the CIAC in ruling that Malayan is not entitled
to its counterclaims.
Attorneys fees

The CIAC denied for lack of factual or legal basis the parties respective claims and
counterclaims for the award of attorneys fees. It noted that the parties failed to point out the
contractual stipulation on attorneys fees and expenses of litigation in support of their respective
claims therefor. According to the CIAC, based on its extensive discussions made in disposing the
claims and counterclaims of the parties, it is clear that the two exceptions71under Article 2208 of
the New Civil Code cited by St. Francis and Malayan do not obtain in this case. The CIAC
explained that Malayans denial of St. Francis claims cannot be characterized as made in gross
and evident bad faith, and that the disallowances of the ARCC in favor of St. Francis disprove
that the filing of the arbitration case was "clearly unfounded." The CA affirmed the CIAC.

Finding that none of the exceptions under Article 220872 of the New Civil Code is present in this
case, the Court agrees with the CA and the CIAC that the parties claims for attorneys fees must
be denied. As held in ABS-CBN Broadcasting Corporation v. Court of Appeals:73

The general rule is that attorneys fees cannot be recovered as part of damages because of the
policy that no premium should be placed on the right to litigate. They are not to be awarded
every time a party wins a suit. The power of the court to award attorneys fees under Article 2208
demands factual, legal, and equitable justification. Even when a claimant is compelled to litigate
with third persons or to incur expenses to protect his rights, still attorneys fees may not be
awarded where no sufficient showing of bad faith could be reflected in a partys persistence in a
case other than an erroneous conviction of the righteousness of his cause.

Arbitration costs

The CIAC held that arbitration costs shall be maintained at the same level as initially shared
based on the pro ratasharing in accordance with the amounts claimed and counterclaimed by the
parties. Stating that Section 1, Rule 14274 of the Rules of Court suppletorily applies to arbitration
proceedings since there is no corresponding provision in the CIAC rules of procedure, the CIAC
ruled that there are good reasons to maintain their initial pro rata sharing thereof, considering
that their respective claims and counterclaims have merits. Thus, it is just and equitable that both
Malayan and St. Francis pay for their respective shares based on proportionate cost or amount of
the claim. In contrast, the CA ruled that arbitration costs shall be maintained pro rata in
accordance with the parties respective shares in the reserved units.

After reviewing the conflicting rulings of the CIAC and the CA on arbitration costs, the Court
finds the one rendered by CIAC to be in accord with law. Unlike the CAs ruling which is based
only on the MOA provision on distribution and disposition of reserved units, the CIACs ruling is
based on the Amended Terms of Reference (TOR) which specifically provides that the costs of
arbitration shall be on a pro rata basis subject to the determination of the CIAC which of the
parties shall eventually shoulder such costs or the mode of sharing thereof.75

Citing Section 1, Rule 142 of the Rules of Court, the CIAC found it just and equitable that both
Malayan and St. Francis pay for their respective shares based on the pro rata sharing in
accordance with the amounts claimed and counterclaimed by the parties. Under the amended
TOR, the Summary of Claims/Counterclaims and the arbitration expenses are as follows:

CLAIMANT [St. Francis]


Value of Reserved Units P 139,519,969.17
being claimed 41,190.550.59

P 180,710,519.76
Income 21,150,659.33
Attorneys fees 300,000.00

P 202,161,179.09
RESPONDENT [Malayan]
Actual damages P24,653,196.08
Attorneys fees 2,000,000.00

P 26,653,196.08
TOTAL SUM IN DISPUTE P 228,814,375.17

xxxx

IX ARBITRATION EXPENSES BASED ON A SUM IN DISPUTE OF P228,814,375.17

Filing Fee P 91,009.98


Administrative Fee 92,329.98
Arbitrators Fees 629,566.60
ADF 214,566.60
TOTAL P 1,064,517.3876

Based on the parties claims and counterclaims involving the total disputed sum of
P228,814,375.17, the arbitration expenses in the total amount of P1,064,517.38 should be shared
in the following proportion:

1. St. Francis:P202,161,179.09/P228,814,375.17=0.88 x P1,064,517.38 = P 936,775.29


2. Malayan: P26,653,196.08/P228,814,375.17=0.12xP1,064,517.38 = 127,742.09
Total Arbitration Expenses = P1,064,517.38

WHEREFORE, premises considered, the Court of Appeals Decision dated January 27, 2011 in
CA-G.R. SP Nos. 109286 and 109298, is AFFIRMED with the following MODIFICATIONS:

1) The total amount of P57,474,561.39 should be deducted and excluded from the gross
Actual Remaining Construction Cost (ARCC) of P562,866,135.02 to arrive at the net
ARCC of P505,391,573.63;
2) Malayan is entitled to 30% ownership over the reserved units
(P52,966,724.63/P175,856,325.05), together with the corresponding interest in the
income realized thereon in the same proportion; while St. Francis is entitled to 70%
(P122,889,598.42/P175,856,325.05) ownership of the said units, as well as to its
corresponding share in the said income. The distribution of the parties proportionate
share in the units shall be made by drawing of lots;

3) Malayan is directed to deliver possession and transfer title over the reserved units in
the proportion above stated, to pay St. Francis its proportionate share of the income from
the reserved units reckoned from the date of the completion of the project on June 7,
2006 up to the finality of this decision, and to render full accounting of all the upkeep
expenses, rentals and such other income derived from the reserved units so awarded to St.
Francis;

4) Arbitration costs are maintained pursuant to the pro rata sharing that the parties had
initially shared in accordance with the amounts claimed and counterclaimed by them,
namely, St. Francis: P936,775.29; and Malayan: P127,742.09;

5) Malayan and all others claiming rights under it, are enjoined from exercising acts of
ownership over the reserved units relative to the proportionate share awarded to St.
Francis;

6) The Register of Deeds of Pasig City is directed to immediately reinstate the name of
St. Francis Square Realty Corporation (formerly ASB Realty Corporation) as the
registered owner in the corresponding Condominium Certificates of Title covering the
reserved units awarded to St. Francis; and

7) All other awards granted by CIAC in its Award dated May 27, 2009 which are not
affected by the above modifications are affirmed. No costs.

SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice

WE CONCUR:

PRESBITERO J. VELASCO, JR.


Associate Justice
Chairperson

MARTIN S. VILLARAMA, JR. BIENVENIDO L. REYES


Associate Justice Associate Justice

FRANCIS H. JARDELEZA
Associate Justice
AT T E S T AT I O N

I attest that the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Court's Division.

PRESBITERO J. VELASCO, JR.


Associate Justice
Chairperson, Third Division

C E R T I F I C AT I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's
Attestation, I certify that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Court's Division.

MARIA LOURDES P.A. SERENO


Chief Justice

CERTIFIED TRUE COPY


WILFREDO V. LAPITAN
Division Clerk of Court
Third Division
February 16, 2016

Footnotes
1
Penned by Associate Justice Stephen C. Cruz, with Associate Justices Isaias P. Dicdican
and Jane Aurora C. Lantion, concurring. .
2
Rendered by the Arbitral Tribunal composed of Alfredo F. Tadiar, Chairman, and Victor
P. Lazatin and Ricardo B. San Juan, as Members.
3
Rollo (G.R. Nos. 198916-17), Vol. 1, pp. 178-179. (Citations omitted)
4
Rollo (G.R. Nos. 198916-17), Vol. 1, pp. 180-181.
5
Rollo (G.R. Nos. 198920-21), p. 618. (Emphasis in the original)
6
Rollo (G.R. Nos. 198916-17), Vol. 1, pp. 134-135.
7
Rollo (G.R. Nos. 198920-21), p. 89.
8
Rollo (G.R. Nos. 198916-17), Vol. 1, pp. 62-63.
9
Shinryo (Philippines) Company, Inc. v. RRN, Incorporated, G.R. No. 172525, October
20, 2010, 634 SCRA 123, 130, citing IBEX International, Inc. v. Government Service
Insurance System, 618 Phil. 304, 313 (2009).
10
IBEX International, Inc. v. Government Service Insurance System, Ibid, citing Uniwide
Sales Realty and Resources Corporation v. Titan-Ikeda Construction and Development
Corporation, 540 Phil. 350 (2009) and David v. Construction Industry and Arbitration
Commission, 479 Phil. 578 (2004).
11
Estimated Cost to Complete

I. Balance to Complete Existing Contracts Php 161,098,039.86


II. Unawarded Contracts 2 24,045,419.16
III. Professional Fee 4,138,108.08
IV. Contingencies 63,143,281.10

Php 452,424,849.10
12
Section 2. Investment of Malayan. Subject to the provisions of Section 9 below,
Malayan shall invest the amount necessary to complete the Project and the following
amounts:

a. P65,804,381 representing payment by Malayan, on behalf of ASB, of the


principal amount as of signing hereof of the loan obtained by ASB from the Rizal
Commercial Banking Corporation to finance the Project; and

b. P38,176,725 representing payment by Malayan, on behalf of ASB, of ASBs


outstanding obligations to contractors of the Project as of signing hereof, (i) by
offsetting from said obligations the legally compensable 25,463,771 total
advances of said contractors from ASB as set forth in Section 5 (g) and (ii) by
paying the net payable to contractors/suppliers in the amount of P12,712,954.
13
Cyril M. Harris, McGraw-Hill, Dictionary of Architecture and Construction (Fourth
Edition), p. 251.
14
Section 2. Investment of Malayan. Subject to the provisions of Section 9 below,
Malayan shall invest the amount necessary to complete the Project and the following
amounts:

a. P65,804,381 representing payment by Malayan, on behalf of ASB, of the


principal amount as of signing hereof of the loan obtained by ASB from the Rizal
Commercial Banking Corporation to finance the Project; and

b. P38,176,725 representing payment by Malayan, on behalf of ASB, of ASBs


outstanding obligations to contractors of the Project as of signing hereof, (i) by
offsetting from said obligations the legally compensable 25,463,771 total
advances of said contractors from ASB as set forth in Section 5 (g) and (ii) by
paying the net payable to contractors/suppliers in the amount of P12,712,954.
(Emphasis added)
15
New Civil Code, Art. 1377.
16
Cyril M. Harris, McGraw-Hill, Dictionary of Architecture and Construction (Fourth
Edition), p. 251.
17
Rollo (G.R. Nos. 198920-21), pp. 341-345.
18
Id. at 346-371.
19
Emphasis added.
20
Memorandum of Agreement dated April 30, 2002, Sec. 19.
21
Section 6. Responsibilities of ASB [now, St. Francis]. [St. Francis] undertakes to do the
following obligations:

a. Within ninety (90) days from date hereof or within such extended period as
may be agreed upon by the parties, obtain, whether on its own behalf or for the
benefit of Malayan, from local or national government agencies (including, but
not limited to, the Housing and Land Use Regulatory Board, the Securities and
Exchange Commission, and the Bureau of Internal Revenue) or any other entity
or person any and all permits, licenses, approvals or consents necessary to
implement the transactions contemplated herein, including, but not limited to, the
following final and executory approvals;

i. approval by the Securities and Exchange Commission of the transactions


contemplated hereunder; and

ii. approval by the Housing and Land Use Regulatory Board of the
transactions contemplated hereunder, including any changes or
amendments to the Master Deed of Restrictions, License to Sell, or any
other document relating to the Project as Malayan may deem necessary or
appropriate and as Malayan shall relay to [St. Francis] prior to the date of
signing hereof, such as the change of the name of the Project to "Malayan
Tower" or any other name that Malayan may adopt, or the right of
Malayan to convert the units to a condotel/apartelle. For this purpose,
Malayan shall grant [St. Francis] a special power of attorney to follow up
the processing of said approval;

b. Upon terms and conditions acceptable to Malayan, (i) assign the construction
contracts and the amount of P36,731,086 advanced to contractors of the Project
set forth in Section 5 (g) to help the parties reduce the cash requirement to
complete the Project, with the contractors conformity and confirmation of the
amount of their net advances from [St. Francis] as set forth in Section 5 (g),
and/or (ii) obtain the renewal of expiring or expired construction contracts of
these contractors;

c. Within thirty (30) days from date hereof, obtain from each contractor with a net
claim against [St. Francis] as set forth in Section 5 (g) an irrevocable undertaking
to execute the waiver of all its claims against the Project, upon payment by
Malayan of its net claim. Such undertaking and waiver shall conform to the
undertaking and waiver attached hereto as Schedule 7. [St. Francis] represents and
warrant to Malayan that (a) the contractors listed in Section 5 (g) are the only
contractors with claims against the Project and (b) their aggregate net claims do
not exceed P12,712,954;

d. Within fifteen (15) days from procurement of all approvals mentioned in


Section 6 (a) above, transfer to Malayan complete and unhampered possession of
the Project and turn over and deliver to Malayan all architectural, engineering and
other plans; records and other documents of the Project as set forth in Schedule 8
hereof;

xxx
22
Section 4. Distribution and Disposition of Units. x x x As of the date of the execution
hereof, and on the basis of the total costs incurred to date in relation to the Remaining
Construction Cost (as defined in Section 9(a) hereof), the parties shall respectively be
entitled to the following (which entitlement shall be conditioned on, and subject to
adjustments as provided in sub-paragraph (b) of Section 4 in the event that the actual
remaining construction cost exceeds the Remaining Construction Cost): x x x
23
Section 9. Remaining Construction Cost. (a) [St. Francis] represents and warrant to
Malayan that Malayan can complete the Project at a cost not exceeding Four Hundred
Fifty-Two Million Four Hundred Twenty-Four Thousand Eight Hundred Forty-Nine
Pesos (452,424,849[.00]) (the "Remaining Construction Cost") as set forth in [St.
Francis] Construction Budget Report attached hereto and made integral part hereof as
Schedule 9, x x x.

(b) Malayan shall pay for any additional costs and expenses that may be incurred
in excess of the Remaining Construction Cost. In such event, it shall be entitled to
such net saleable area as indicated in Schedule 4 that corresponds to the increase
in remaining construction costs. [St. Francis] shall be entitled to such net saleable
area, if any, remaining in the aforesaid Schedule 4.
24
Memorandum of Agreement dated April 30, 2002, Sec. 2.
25
Id., Sec. 3.
26
Cyril M. Harris, McGraw-Hill, Dictionary of Architecture and Construction (Fourth
Edition), p. 251.
27
Rollo (G.R. Nos. 198916-17), Vols. II & IV, pp. 1370-3600.
28
Id. at 1371 (G.R. Nos. 198916-17) , Vol. II, Exhibit "R-48-A-series."
29
Id. at 1661, Id, Exhibit "R-48-E-4-series."
30
Id. at 1787, Id, Exhibit "R-48-E-20-series."
31
Id. at 2349, Id, Exhibit "R-48-F-27-series."
32
Id. at 2477, Id, Exhibit "R-48-F-43-series."
33
Id. at 2520, Id, Exhibit "R-48-F-47-series."
34
P5,100,000.00 [Item 6.12.3 per CA] - P2,702,952.11 [Item 6.12.3 per Exhibit "R-48-F-
47-series."] = P2,397,047.89
35
Rollo (G.R. Nos. 198916-17), p. 3523, Vol. IV, Exhibit "R-48-U-series."
36
Id. at 3169, Id, Exhibit "R-48-H-series."
37
Id. at 3265, Id, Exhibit "R-48-H-6-series."
38
SEC. 110. Tax Credits. -

A. Creditable Input Tax. -

(1) Any input tax evidenced by a VAT invoice or official receipt issued in
accordance with Section 113 hereof on the following transactions shall be
creditable against the output tax:

(a) Purchase or importation of goods:

(i) For sale; or

(ii) For conversion into or intended to form part of a


finished product for sale including packaging materials; or

(iii) For use as supplies in the course of business; or

(iv) For use as materials supplied in the sale of service; or


(v) For use in trade or business for which deduction for
depreciation or amortization is allowed under this Code,
except automobiles, aircraft and yachts.

(b) Purchase of services on which a value-added tax has been


actually paid.

(2) The input tax on domestic purchase of goods or properties shall be


creditable:

(a) To the purchaser upon consummation of sale and on


importation of goods or properties; and

(b) To the importer upon payment of the value-added tax prior to


the release of the goods from the custody of the Bureau of
Customs.

However, in the case of purchase of services, lease or use of properties,


the input tax shall be creditable to the purchaser, lessee or licensee upon
payment of the compensation, rental, royalty or fee.

(3) A VAT-registered person who is also engaged in transactions not


subject to the value-added tax shall be allowed tax credit as follows:

(a) Total input tax which can be directly attributed to transactions


subject to value-added tax; and

(b) A ratable portion of any input tax which cannot be directly


attributed to either activity.

The term "input tax" means the value-added tax due from or paid by a
VAT-registered person in the course of his trade or business on importation
of goods or local purchase of goods or services, including lease or use of
property, from a VAT-registered person. It shall also include the
transitional input tax determined in accordance with Section 111 of this
Code.

The term "output tax" means the value-added tax due on the sale or lease
of taxable goods or properties or services by any person registered or
required to register under Section 236 of this Code.

(B) Excess Output or Input Tax. - If at the end of any taxable quarter the
output tax exceeds the input tax, the excess shall be paid by the Vat-
registered person. If the input tax exceeds the output tax, the excess shall
be carried over to the succeeding quarter or quarters. Any input tax
attributable to the purchase of capital goods or to zero-rated sales by a
VAT-registered person may at his option be refunded or credited against
other internal revenue taxes, subject to the provisions of Section 112.

(C) Determination of Creditable Input Tax. - The sum of the excess input
tax carried over from the preceding month or quarter and the input tax
creditable to a VAT-registered person during the taxable month or quarter
shall be reduced by the amount of claim for refund or tax credit for value-
added tax and other adjustments, such as purchase returns or allowances
and input tax attributable to exempt sale.

The claim for tax credit referred to in the foregoing paragraph shall include not
only those filed with the Bureau of Internal Revenue but also those filed with
other government agencies, such as the Board of Investments the Bureau of
Customs.
39
Rollo (G.R. G.R. Nos. 198916-17), Vols. II & IV, pp. 1370-3600, Exhibit "R-48-
series."
40
SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons.

xxxx

(B) Information Contained in the VAT Invoice or VAT Official Receipt. - The
following information shall be indicated in the VAT invoice or VAT official
receipt:

(1) A statement that the seller is a VAT-registered person, followed by his


taxpayer's identification number (TIN);

(2) The total amount which the purchaser pays or is obligated to pay to the
seller with the indication that such amount includes the value-added
tax: Provided, That:

(a) The amount of the tax shall be shown as a separate item in the
invoice or receipt;

(b) If the sale is exempt from value-added tax, the term "VAT-
exempt sale" shall be written or printed prominently on the invoice
or receipt;

(c) If the sale is subject to zero percent (0%) value-added tax, the
term "zero-rated sale" shall be written or printed prominently on
the invoice or receipt;

"(d) If the sale involves goods, properties or services some of


which are subject to and some of which are VAT zero-rated or
VAT-exempt, the invoice or receipt shall clearly indicate the
breakdown of the sale price between its taxable, exempt and zero-
rated components, and the calculation of the value-added tax on
each portion of the sale shall be shown on the invoice or receipt:
"Provided, That the seller may issue separate invoices or receipts
for the taxable, exempt, and zero-rated components of the sale. x x
x
41
As amended by R.A. 9337 (Effective July 1, 2005).
42
University of the Philippines v. Philab Industries, Inc., 482 Phil. 693, 709 (2004).
43
National Internal Revenue Code, Secs. 105 and 110(A).
44
Rollo, (G.R. Nos. 198916-17), Vol. II, pp. 2815-2821.
45
Id., Vol. IV, pp. 3327-3333.
46
Id. at 3329-3333.
47
Exhibit "C-50."
48
Rollo (G.R. Nos. 198916-17), p. 917, Vol. 1. CIAC Decision in Case 27-2007, p. 64 of
68.
49
Id. at 920-921; Id. at 67 of 68.
50
Id. at 919; Id. at 66 of 68. Accordingly. The amount of Php 20,518,725.34 adjudged in
TVIs favor shall earn interest based on the 30-day regular loan rate of the Land Bank of
the Philippines prevailing on thedue date until the filing of this case with the CIAC.

As of October 30 2006, the prevailing Prime Lending Rate as certified by Land


Bank of the Philippines was 8.00% p.a. Time lapsed from October 31, 2006 (date
of certification) to September 14, 2007 (filing of case with CIAC) is 318 days.
TVI is, therefore, entitled to accrued interest computed as
follows: Php20,518,725.34(principal amount) x .08 (interest rate)
x 318/365 (days elapsed) or Php 1,430,127.05. (Emphasis in the original)
51
(P7,743,278.89x.08x318/365)
52
Section 19. Advertisements. Advertisements that may be made by the owner or
developer through newspaper, radio, television, leaflets, circulars or any other form about
the subdivision or the condominium or its operations or activities must reflect the real
facts and must be presented in such manner that will not tend to mislead or deceive the
public.
The owner or developer shall answerable and liable for the facilities,
improvements, infrastructures or other forms of development represented or
promised in brochures, advertisements and other sales propaganda disseminated
by the owner or developer or his agents and the same shall form part of the sales
warranties enforceable against said owner or developer, jointly and severally.
Failure to comply with these warranties shall also be punishable in accordance
with the penalties provided for in this Decree.
53
Rollo (G.R. Nos. 198920-21), p. 263. (Emphasis added.)
54
Rollo (G.R. Nos. 198916-17), Vol. 1, p. 179.
55
Id. at 180.
56
Id.
57
13 Am Jur 2d 122, Building, Etc. Contracts.
58
Rollo (G.R. Nos. 198920-21), p. 605.
59
Id. at 608.
60
Rollo (G.R. Nos. 198916-17), Vol. 1, pp. 212-237.
61
13 Am Jur 2 d 13, Building, Etc. Contracts.
62
Id.
63
New Civil Code , Art. 1370.
64
Cyril M. Harris, McGraw-Hill, Dictionary of Architecture and Construction (Fourth
Edition), p. 251.
65
Rollo (G.R. Nos. 198916-17), Vol. IV, pp. 3329-3333.
66
P14,150,324.73 (actual cost) - P12,642,152.52 (total payment) = P1,508,172.21
67
Exhibit "C-33."
68
Section 4. Distribution and Disposition of Units. (a) As a return of its capital
investment in the Project, each party shall be entitled to such portion of all the net
saleable area of the Building that their respective contributions to the Project bear to the
actual construction cost. As of the date of the execution hereof, and on the basis of the
total costs incurred to date in relation to the Remaining Construction Cost (as defined in
Section 9(a) hereof), the parties shall respectively be entitled to the following (which
entitlement shall be conditioned on, and subject to, adjustments as provided in sub-
paragraph (b) of Section 4 in the event that the actual remaining construction cost
exceeds the Remaining Construction Cost):

xxxx

(ii) ASB the following net saleable area:

xxxx

(C) provided that the actual remaining construction cost do not exceed the
Remaining Construction Cost, the net saleable area, particularly described in
Schedule 4 hereof shall be delivered to ASB[St. Francis] upon completion of the
Project and determination of its actual construction costs. If the actual remaining
construction costs exceed the Remaining Construction Cost, sub-paragraph (b) of
this Section 4 shall apply. (Emphasis added).
69
Id. (b) In the event that the actual remaining construction costs exceed the Remaining
Construction Cost as represented and warranted by [St. Francis] to Malayan under
Section 9(a) hereof, and Malayan pays for such excess, the pro rata sharing in the net
saleable area of the Building, as provided in sub-paragraph (a) of this Section 4 shall be
adjusted accordingly. In such event, Malayan shall be entitled to such net saleable area
in Schedule 4 that corresponds to the excess of the actual remaining costover the
Remaining Construction Cost. (Emphasis added).
70
ART. 1187. The effects of a conditional obligation to give, once the condition has been
fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when
the obligation imposes reciprocal prestations upon the parties, then fruits and interests
during the pendency of the condition shall be deemed to have been mutually
compensated. If the obligation is unilateral, the debtor shall appropriate the fruits and
interests received, unless from the nature and circumstances of the obligation it should be
inferred that the intention of the person constituting the same was different.
71
Article 2208. In the absence of stipulation, attorneys fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:

xxxx

(4) In case of clearly unfounded civil action or proceeding against the plaintiff;

(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy
the plaintiffs plainly valid, just and demandable claim;

xxxx
72
Art. 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other
than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded;

(2) When the defendant's act or omission has compelled the plaintiff to litigate
with third persons or to incur expenses to protect his interest;

(3) In criminal cases of malicious prosecution against the plaintiff;

(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;

(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy
the plaintiff's plainly valid, just and demandable claim;

(6) In actions for legal support;

(7) In actions for the recovery of wages of household helpers, laborers and skilled
workers;

(8) In actions for indemnity under workmen's compensation and employer's


liability laws;

(9) In a separate civil action to recover civil liability arising from a crime;

(10) When at least double judicial costs are awarded;

(11) In any other case where the court deems it just and equitable that attorney's
fees and expenses of litigation should be recovered.

In all cases, the attorney's fees and expenses of litigation must be reasonable.
73
361 Phil. 499, 529 (1999).
74
SECTION 1. Costs ordinarily follow results of suit.- Unless otherwise provided in these
rules, costs shall be allowed to the prevailing party as a matter of course, but the court
shall have power, for special reasons, adjudge that either party shall pay the costs of an
action, or that the same be divided, as may be equitable. x x x
75
Rollo (G.R. Nos. 198916-17), Vol. 1, p. 182.
76
Id. at 181-182.
SECOND DIVISION

G.R. No. 201264, January 11, 2016

FLORANTE VITUG, Petitioner, v. EVANGELINE A. ABUDA, Respondent.

DECISION

LEONEN, J.:chanRoblesvirtualLawlibrary

Parties who have validly executed a contract and have availed themselves of its benefits may not,
to escape their contractual obligations, invoke irregularities in its execution to seek its
invalidation.

This is a Petition for Review on Certiorari under Rule 45 assailing the Court of Appeals' October
26, 2011 Decision and its March 8, 2012 Resolution. The Court of Appeals affirmed the Regional
Trial Court's December 19, 2008 Decision upholding the validity of the mortgage contract
executed by petitioner Florante Vitug (Vitug) and respondent Evangeline A. Abuda (Abuda).

On March 17, 1997, Abuda loaned P250,000.00 to Vitug and his wife, Narcisa Vitug.1 As
security for the loan, Vitug mortgaged to Abuda his property in Tondo Foreshore along R-10,
Block A-50-3, Del Pan to Kagitingan Streets, Tondo, Manila.2 The property was then subject of a
conditional Contract to Sell between the National Housing Authority and Vitug. Pertinent
portions of the mortgage deed reads

That, Mortgagor, is the owner, holder of a Conditional Contract to Sell of the National Housing
Authority (NHA) over a piece of property located at the Tondo Foreshore along R-10, Block "A-
50-3, Delpan to Kagitingan Streets in the district of Tondo, Manila;

That, with the full consent of wife Narcisa Vitug, hereby mortgage to Evangeline A. Abuda, with
full consent of husband Paulino Abuda, said property for TWO HUNDRED FIFTY
THOUSAND PESOS ONLY (P250,000.00), in hand paid by Mortgagee and in hand received to
full satisfaction by Mortgagor, for SIX MONTHS (6) within which to pay back the full amount
plus TEN PERCENT (10%) agreed interest per month counted from the date stated hereon;

That, upon consummation and completion of the sale by the NHA of said property, the title-
award thereof, shall be received by the Mortgagee by virtue of a Special Power of Attorney,
executed by Mortgagor in her favor, authorizing Mortgagee to expedite, follow-up, cause the
release and to received [sic] and take possession of the title award of the said property from the
NHA, until the mortgage amount is fully paid for and settled[.]3ChanRoblesVirtualawlibrary
cralawlawlibrary

On November 17, 1997, the parties executed a "restructured"4 mortgage contract on the property
to secure the amount of P600,000.00 representing the original P250,000.00 loan, additional
loans,5 and subsequent credit accommodations6 given by Abuda to Vitug with an interest of five
(5) percent per month.7 By then, the property was covered by Transfer Certificate of Title No.
234246 under Vitug's name.8

Spouses Vitug failed to pay their loans despite Abuda's demands.9

On November 21, 2003, Abuda filed a Complaint for Foreclosure of Property before the
Regional Trial Court of Manila.10

On December 19, 2008, the Regional Trial Court promulgated a Decision in favor of
Abuda.11The dispositive portion of the Decision reads

WHEREFORE, judgment is rendered in favor of the plaintiffs [sic] and against the defendant

1. Ordering the defendant to pay unto the court and/or to the judgment debtor within the
reglementary period of Ninety (90) days the principal sum of P600,000.00 with interest at 5%
per month from May 31, 2002 to actual date of payment plus P20,000.00 as and for attorney's
fees;

2. Upon default of the defendant to fully pay the aforesaid sums, the subject mortgaged property
shall be sold at public auction to pay off the mortgage debt and its accumulated interest plus
attorney's fees, expenses and costs; and

3. After the confirmation of the sale, ordering the defendant and all persons claiming rights under
her [sic] to immediately vacate the subject premises.

SO ORDERED.12cralawlawlibrary

Vitug appealed the December 19, 2008 Regional Trial Court Decision before the Court of
Appeals.13 He contended that the real estate mortgage contract he and Abuda entered into was
void on the grounds of fraud and lack of consent under Articles 1318, 1319, and 1332 of the
Civil Code.14 He alleged that he was only tricked into signing the mortgage contract, whose
terms he did not really understand. Hence, his consent to the mortgage contract was vitiated.15

On October 26, 2011, the Court of Appeals promulgated a Decision,16 the dispositive portion of
which reads

WHEREFORE, the instant appeal is PARTIALLY GRANTED. The Decision of the RTC
dated December 19, 2008 in Civil Case No. 03-108470 in favor of the appellee and against the
appellant is AFFIRMED with the MODIFICATION that an interest rate of 1% per month or
12% per annum shall be applied to the principal loan of P600,000.00, computed from the date of
judicial demand, i.e., November 21, 2003; and 12% interest per annum on the amount due from
the date of the finality of the Decision until fully paid.

SO ORDERED.17ChanRoblesVirtualawlibrary
cralawlawlibrary

The Court of Appeals found that Vitug failed to pay his obligation within the stipulated six-
month period under the March 17, 1997 mortgage contract.18 As a result of this failure, the
parties entered into a restructured mortgage contract on November 17, 1997.19 The new mortgage
contract was signed before a notary public by Vitug, his wife Narcisa, and witnesses Rolando
Vitug, Ferdinand Vitug, and Emily Vitug.20

The Court of Appeals also found that all the elements of a valid mortgage contract were present
in the parties' mortgage contract.21 The mortgage contract was also clear in its termsthat failure
to pay the P600,000.00 loan amount, with a 5% interest rate per month from November 17, 1997
to November 17, 1998, shall result in the foreclosure of Vitug's mortgaged property.22 No
evidence on record showed that Vitug was defrauded when he entered into the agreement with
Abuda.23

However, the Court of Appeals found that the interest rates imposed on Vitug's loan were
"iniquitous, unconscionable[,] and exorbitant."24 It instead ruled that a legal interest of 1% per
month or 12% per annum should apply from the judicial demand on November 21,
2003.25cralawred

On November 23, 2011, Vitug moved for the reconsideration of the Court of Appeals' October
26, 2011 Decision.26 He pointed out that not all the requisites of a valid mortgage contract were
present since he did not have free disposal of his property when he mortgaged it to Abuda. His
transfer certificate of title had an annotation by the National Housing Authority, which restricted
his right to dispose or encumber the property.27 The restriction clause provided that the National
Housing Authority's consent must first be obtained before he may dispose or encumber his
property.28

Abuda, according to Vitug, failed to get the National Housing Authority's consent before the
property was mortgaged to him.

Vitug also argued in his Motion for Reconsideration that the property was exempt from
execution because it was constituted as a family home before its mortgage.

In the Resolution promulgated on March 8, 2012,29 the Court of Appeals denied Vitug's Motion
for Reconsideration.

Vitug filed this Petition for Review on Certiorari under Rule 45 to assail the Court of Appeals'
October 26, 2011 Decision and its March 8, 2012 Resolution.

Vitug raises the following issues:chanRoblesvirtualLawlibrary


First, whether petitioner Florante Vitug may raise in this Petition issues regarding the National
Housing Authority's alleged lack of consent to the mortgage, as well as the exemption of his
property from execution;

Second, whether the restriction clause in petitioner's title rendered invalid the real estate
mortgage he and respondent Evangeline Abuda executed; and

Lastly, whether petitioner's property is a family home that is free from execution, forced sale, or
attachment under the Family Code.30

We deny the Petition.

Petitioner argues that not all the requisites of a valid mortgage are present.31 A mortgagor must
have free disposal of the mortgaged property.32 The existence of a restriction clause33 in his title
means that he does not have free disposal of his property.34 The restriction clause does not allow
him to mortgage the property without the National Housing Authority's approval.35 Since the
National Housing Authority never gave its consent to the mortgage,36 the mortgage contract
between him and respondent is invalid.37

On the other hand, respondent argues that the only issue in this case should be the validity of the
real estate mortgage executed by petitioner in her favor.38 Petitioner raised other issues, such as
the alleged lack of written consent by the National Housing Authority (and the property's
exemption from execution), only in his Motion for Reconsideration before the Court of
Appeals.39

Respondent also argues that the National Housing Authority issued a Permit to Mortgage the
property. This was formally offered in evidence before the Regional Trial Court as Exhibit
"E."40 The National Housing Authority even accepted respondent's personal checks to settle
petitioner's mortgage obligations to the National Housing Authority.41 The National Housing
Authority would have already foreclosed petitioner's property if not for the loan that respondent
extended to petitioner.42

Petitioner counters that the Permit to Mortgage cited by respondent was only valid for 90 days
and was subject to the conditions that respondent failed to fulfill. These conditions are

(1) The Mortgage Contract must provide that

"In the event of foreclosure, the NHA shall be notified of the date, time and place of the auction
sale so that it can participate in the foreclosure sale of the property."
(2) The mortgage contract must be submitted to NHA for verification and final approval[.]43
Thus, according to petitioner, there was neither written consent nor approval by the National
Housing Authority of the mortgage contracts.44cralawlawlibrary

Petitioner further contends that the alleged lack of NHA consent on the mortgage (and, being a
family home, his property's exemption from execution) was raised in his Answer to respondent's
complaint for foreclosure filed before the Regional Trial Court, thus

20. Similarly, defendant has constituted their family home over said mortgage property and
should that property be sold, defendant and his family will be left with no place to reside with
[sic] within Metro Manila, hence, for humanitarian reason[s], the defendant prayed that he be
given ample time within which to settle his obligation with the plaintiff;

21. Lastly, the Memorandum of Encumbrances contained at the back of defendant's title prohibits
her from selling, encumbering, mortgaging, leasing, sub-leasing or in any manner altering or
disposing the lot or right thereon, in whole or in part within the period often (10) years from the
time of issuance of said title without first obtaining the consent of the NHA. As reflected in the
title, the same was issued on 25 June 1997 hence, the mortgage executed even prior to the
issuance of said title should be declared void.45ChanRoblesVirtualawlibrary
cralawlawlibrary

Due process46 dictates that arguments not raised in the trial court may not be considered by the
reviewing court.47

Petitioner may raise in his Petition the issues of lack of the National Housing Authority's consent
to the mortgage and his property's alleged exemption from execution.

The records show that petitioner mentioned these issues as early as in his Answer to respondent's
Complaint48 and Pre-trial Brief.49 The trial court acknowledged these issues, but found that his
defenses based on these grounds could not be given credence

The defendant further stated that he is willing to pay the obligation is unconscionable. Further,
the said property constituted their family home. The defendant claimed that Memorandum of
Encumbrance prohibits her from selling, encumbering, mortgaging, leasing, subleasing or in any
manner altering or disposing the lot or right thereon in whole or in part within ten (10) years
from the time of issuance of the said title without obtaining the consent of the NHA.

. . . The court opines that the defendant has failed to raise a legitimate and lawful ground in order
to bar the herein plaintiff from asserting its lawful right under the law.

The contention of the defendant that the subject mortgaged property is their family home is
irrelevant as the debt secured by mortgages on the premises before or after the constitution of the
family home does not exempt the same from execution (Rule 106 of the Rules of
Court).50cralawlawlibrary

Whether these arguments seasonably raised are valid is, however, a different matter.

II

All the elements of a valid mortgage contract were present. For a mortgage contract to be valid,
the absolute owner of a property must have free disposal of the property.51 That property must be
used to secure the fulfillment of an obligation.52 Article 2085 of the Civil Code provides

Art. 2085. The following requisites are essential to contracts of pledge and mortgage

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the purpose.

....
cralawlawlibrary

Petitioner, who held under his name a transfer certificate of title to the property, mortgaged the
property to respondent to secure the payment of his loan of P600,000.00.

Petitioner claims that he only borrowed P250,000.00 and that he was only made to sign another
mortgage contract whose terms he did not agree to.

These claims were already found by the trial court and the Court of Appeals to be unsupported
by evidence. Petitioner's consent to the mortgage contract dated November 17, 1997 was not
vitiated. He voluntarily signed it in the presence of a notary public, his wife, and other
witnesses.53

Further, the amount of P600,000.00 under the November 17, 1997 mortgage contract represented
the initial loan of P250,000.00 and the subsequent loan amounts, which were found to have been
actually released to petitioner. The November 17, 1997 mortgage contract reflected the changes
in the parties' obligations after they executed the March 17, 1997 mortgage contract.

This court is not a trier of facts. As a general rule, findings of fact of the lower court and of the
Court of Appeals are not reviewable and are binding upon this court54 unless the circumstances of
the case are shown to be covered by the exceptions.55 Petitioner failed to show any ground for
this court to review the trial court's and the Court of Appeals' finding that petitioner mortgaged
his property in consideration of a loan amounting to P600,000.00.

Petitioner's undisputed title to and ownership of the property is sufficient to give him free
disposal of it. As owner of the property, he has the right to enjoy all attributes of ownership
including jus disponendi or the right to encumber, alienate, or dispose his property "without
other limitations than those established by law."56

Petitioner's claim that he lacks free disposal of the property stems from the existence of the
restrictions imposed on his title by the National Housing Authority. These restrictions were
annotated on his title, thus

Entry No. 4519/V-013/T-234246 -RESTRICTION-that the Vendee shall not sell, encumber,
mortgage, lease, sub-let or in any manner, alter or dispose the lot or right therein at any time, in
whole or in part without obtaining the written consent of the Vendor. Other restrictions set forth
in Doc. No. 287; Page No. 59; Book No. 250; SERIES of 1997 of Notary Public for Quezon
City, Liberty S. Perez.

Date of instrument - June 24, 1997


Date of inscription- June 25, 1997- 11:39 a.m.57ChanRoblesVirtualawlibrary
cralawlawlibrary

The National Housing Authority's restrictions were provisions in a contract it executed with
petitioner. This contract bound petitioner to certain conditions before transferring or
encumbering the property. Specifically, when the National Housing Authority sold the property
to petitioner, petitioner became obligated not to sell, encumber, mortgage, lease, sublease, alter,
or dispose the property without the National Housing Authority's consent.

These restrictions do not divest petitioner of his ownership rights. They are mere burdens or
limitations on petitioner's jus disponendi. Thus, petitioner may dispose or encumber his property.
However, the disposition or encumbrance of his property is subject to the limitations and to the
rights that may accrue to the National Housing Authority. When annotated to the title, these
restrictions serve as notice to the whole world that the National Housing Authority has claims
over the property, which it may enforce against others.

Contracts entered into in violation of restrictions on a property owner's rights do not always have
the effect of making them void ab initio.58 This has been clarified as early as 1956
in Municipality of Camiling v. Lopez.59

The Municipality of Camiling sought to collect from Diego Z. Lopez payments for the lease of
"certain fisheries." As. a defense, Diego Z. Lopez invoked the alleged nullity of the lease contract
he entered into with the Municipality of Camiling.

Citing Municipality of Hagonoy v. Evangelista,60 the trial court ruled that the lease contract
between the Municipality of Camiling and Diego Z. Lopez was void since it "was not approved
by the provincial governor in violation of section 2196 of the Revised Administrative
Code."61 This court reversed the trial court's Decision and noted the incorrect interpretation
in Municipality of Hagonoy of the term "nulos" under Article 4 of the then Civil Code: "Son
nulos los actos ejecutados contra lo dispuesto en la ley, salvo los casos en que la naisma ley or
dene su validez."62

In Municipality of Camiling, this court explained that void acts declared in Article 4 of the Old
Civil Code63 refer to those made in violation of the law. Not all those acts are void from the
beginning. Void acts may be "those that are ipso facto void and those which are merely
voidable."64

The lease contract executed by the Municipality of Camiling and Diego Z. Lopez was not treated
asipso facto void. Section 2196 of the Administrative Code required the provincial governor's
approval before the municipal council entered into contracts. However, the same provision did
not prohibit the municipal council from entering into contracts involving the properties of the
municipality.65 The municipal council's exercise of power to enter into these contracts might have
been limited, but its power was recognized. This court found that aside from the lack of approval,
the contract had no badge of illegality that would make it ipso facto void. The execution of the
contract was not tainted with violation of public order, morality, or public policy. The contract
could have been ratified. Hence, this court said that it was "merely voidable at the option of the
party who in law is granted the right to invoke its invalidity."66

The same doctrine was repeated in Sarmiento v. Salud,67 which involved a property in Kamuning,
Quezon City. The property was sold by Philippine Homesite and Housing Corp. to Spouses
Francisco and Marcelina Sarmiento. The transfer certificate of title that covered the property
contained an annotation stating that the property was sold on the condition that it could not be
resold within 25 years from contract date. Sale could be made within the period only to People's
Homesite and Housing Corporation.68 Spouses Sarmiento later mortgaged the property to Jorge
Salud. Because Spouses Sarmiento failed to redeem the property, the sheriff auctioned and sold
the property to Jorge Salud, who was issued a certificate of sale.

Spouses Sarmiento sought to prevent the foreclosure of the property by filing an action for
annulment of the foreclosure proceedings, sale, and certificate of sale on the ground that the
prohibition against sale of the property within 25 years was violated.

This court did not declare the contract void for violating the condition that the property could not
be resold within 25 years. Instead, it recognized People's Homesite and Housing Corporation's
right to cause the annulment of the contract. Since the condition was made in favor of People's
Homesite and Housing Corporation, it was the Corporation, not Spouses Sarmiento, who had a
cause of action for annulment.69 In effect, this court considered the contract between Spouses
Sarmiento and Jorge Salud as merely voidable at the option of People's Homesite and Housing
Corporation.

Thus, contracts that contain provisions in favor of one party may be void ab initio or
voidable.70Contracts that lack consideration,71 those that are against public order or public
policy,72 and those that are attended by illegality73 or immorality74 are void ab initio.
Contracts that only subject a property owner's property rights to conditions or limitations but
otherwise contain all the elements of a valid contract are merely voidable by the person in whose
favor the conditions or limitations are made.75

The mortgage contract entered into by petitioner and respondent contains all the elements of a
valid contract of mortgage. The trial court and the Court of Appeals found no irregularity in its
execution. There was no showing that it was attended by fraud, illegality, immorality, force or
intimidation, and lack of consideration.

At most, therefore, the restrictions made the contract entered into by the parties voidable76 by the
person in whose favor they were madein this case, by the National Housing
Authority.77 Petitioner has no actionable right or cause of action based on those restrictions.78

Having the right to assail the validity of the mortgage contract based on violation of the
restrictions, the National Housing Authority may seek the annulment of the mortgage
contract.79 Without any action from the National Housing Authority, rights and obligations,
including the right to foreclose the property in case of non-payment of the secured loan, are still
enforceable between the parties that executed the mortgage contract.

The voidable nature of contracts entered into in violation of restrictions or conditions necessarily
implies that the person in whose favor the restrictions were made has two (2) options. It may
either: (1) waive80 its rights accruing from such restrictions, in which case, the duly executed
subsequent contract remains valid; or (2) assail the subsequent contract based on the breach of
restrictions imposed in its favor.

In Sarmiento, this court recognized that the right to waive follows from the right to invoke any
violation of conditions under the contract. Only the person who has the right to invoke this
violation has the cause of action for annulment of contract. The validity or invalidity of the
contract on the ground of the violation is dependent on whether that person will invoke this right.
Hence, there was effectively a waiver on the part of People's Homesite and Housing Corporation
when it did not assail the validity of the mortgage in that case

It follows that on the assumption that the mortgage to appellee Salud and the foreclosure sale
violated the condition in the Sarmiento contract, only the PHHC was entitled to invoke the
condition aforementioned, and not the Sarmientos. The validity or invalidity of the sheriffs
foreclosure sale to appellant Salud thus depended exclusively on the PHHC; the latter could
attack the sale as violative of its right of exclusive reacquisition; but it (PHHC) also could waive
the condition and treat the sale as good, in which event, the sale can not be assailed [for] breach
of the condition aforestated. Since it does not appear anywhere in the record that the PHHC
treated the mortgage and foreclosure sale as an infringement of the condition, the validity of the
mortgage, with all its consequences, including its foreclosure and sale thereat, can not be an issue
between the parties to the present case. In the last analysis, the appellant, as purchaser at the
foreclosure sale, should be regarded as the owner of the lot, subject only to the right of PHHC to
have his acquisition of the land set aside if it so desires.81cralawlawlibrary

There is no showing that the National Housing Authority assailed the validity of the mortgage
contract on the ground of violation of restrictions on petitioner's title. The validity of the
mortgage contract based on the restrictions is not an issue between the parties. Petitioner has no
cause of action against respondent based on those restrictions. The mortgage contract remains
binding upon petitioner and respondent.

In any case, there was at least substantial compliance with the consent requirement given the
National Housing Authority's issuance of a Permit to Mortgage. The Permit reads

25 November 1997

MR. FLORANTE VITUG


901 Del Pan Street
Tondo, Manila

PERMIT TO MORTGAGE

Dear Mr. Vitug,

Please be informed that your request dated 20 November 1997 for permission to mortgage
Commercial Lot 5, Block 1, Super Block 3, Area I, Tondo Foreshore Estate Management Project
covered by TCT No. 234246 is hereby GRANTED subject to the following terms and conditions

1. The Mortgage Contract must provide that

"In the event of foreclosure, the NHA shall be notified of the date, time and place of the auction
sale so that it can participate in the foreclosure sale of the property."

2. The mortgage contract must be submitted to NHA for verification and final approval; and

3. This permit shall be good only for a period of ninety (90) days from date of receipt hereof.

Very truly yours,


(Signed)
Mariano M. Pineda
General Manager82
cralawlawlibrary

Petitioner insists that the Permit cannot be treated as consent by the National Housing Authority
because of respondent's failure to comply with its conditions.

However, a reading of the mortgage contract executed by the parties on November 17, 1997
shows otherwise. The November 17, 1997 mortgage contract had references to the above
conditions imposed by the National Housing Authority, thus

It is the essence of this Contract, that if and should the Mortgagor fails to comply and pay the
principal obligations hereon within the period of the Contract, the Mortgage shall be foreclosed
according to law and in which case the NHA shall be duly notified of the matter.

That this mortgage contract shall be submitted to the NHA for verifixation [sic] and final
approval in accordance with NHA permit to mortgage the property.83(Emphasis
supplied)cralawlawlibrary

Assuming there was non-compliance with the conditions set forth in the Permit, petitioner cannot
blame respondent. The restrictions were part of the contract between the National Housing
Authority and petitioner. It was petitioner, not respondent, who had the obligation to notify and
obtain the National Housing Authority's consent within the prescribed period before sale or
encumbrance of the property.

Petitioner cannot invoke his own mistake to assail the validity of a contract he voluntarily
entered into.84

III

Even if the mortgage contract were illegal or wrongful, neither of the parties may assail the
contract's validity as against the other because they were equally at fault.85 This is the principle
of in pari delicto(or in delicto) as embodied in Articles 1411 and 1412 of the Civil Code

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract,
and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no
action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal
Code relative to the disposal of effects or instruments of a crime shall be applicable to the things
or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may
claim what he has given, and shall not be bound to comply with his promise.

Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed

(1) When the fault is on the part of both contracting parties, neither may recover what he has
given by virtue of the contract, or demand the performance of the other's undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment of what has been promised him. The other, who
is not at fault, may demand the return of what he has given without any obligation to comply his
promise.cralawlawlibrary

Under this principle, courts shall not aid parties in their illegal acts.86 The court shall leave them
as they are.87 It is an equitable principle that bars parties from enforcing their illegal acts,
assailing the validity of their acts, or using its invalidity as a defense.88

In the 1906 case of Batarra v. Marcos,89 this court declared that a person cannot enforce a
promise to marry based on the consideration of "carnal connection." This court ruled that
whether or not such consideration was a crime, neither of the parties can recover because the acts
"were common to both parties."90

In Bough v. Cantiveros,91 this court refused to enforce in favor of the guilty parties a contract of
sale that was not only simulated but also executed to defeat any attempt by a husband to recover
properties from his wife.

Another case, Liguez v. Court of Appeals,92 involves a party's claim over a property based on a
deed of donation executed in her favor when she was 16 years old. The heirs of the donor
assailed the donation on the ground of having an illicit causa.

The donor in that case was found to have had sexual relations with the claimant. The donation
was done to secure the claimant's continuous cohabitation with the donor, as well as to gratify the
donor's sexual impulses. At the time of the donation, the donor was married to another woman.
The donated property was part of their conjugal property.

This court held that the donation was founded on an illicit causa. While this court found the
principle ofin pari delicto inapplicable in that case given the claimant's minority at the time of
donation, it had the occasion to say that the parties were barred "from pleading the illegality of
the bargain either as a cause of action or as a defense."93 The claimant was declared entitled to
the donated property, without prejudice to the share and legitimes of the donor's forced heirs.

In the later case of Villegas v. Rural Bank of Tanjay, Inc.,94 this court ruled that the petitioners in
that case were not entitled to relief because they did not come to court with clean hands.

This court found that they "readily participated in a ploy to circumvent the Rural Banks Act and
offered no objection when their original loan of P350,000.00 was divided into small separate
loans not exceeding P50,000.00 each."95 They and respondent bank were in pari delicto. They
could not be given affirmative relief against each other.96 Hence, Spouses Villegas may not seek
the annulment of the loan and mortgage contracts they voluntarily executed with respondent
bank on the ground that these contracts were simulated to make it appear that the loans were
sugar crop loans, allowing respondent bank to approve it pursuant to Republic Act No. 720,
otherwise known as the Rural Banks Act.

The principle of in pari delicto admits exceptions. It does not apply when the result of its
application is clearly against statutory law, morals, good customs, and public policy.97

In Philippine Banking Corporation, representing the Estate of Justina Santos v. Lui She,98 this
court refused to apply the principle of in pari delicto. Applying the principle meant that this
court had to declare as valid between the parties a 50-year lease contract with option to buy,
which was executed by a Filipino and a Chinese citizen. This court ruled that the policy to
conserve land in favor of Filipinos would be defeated if the principle of in pari delicto was
applied instead of setting aside the contracts executed by the parties.99

Petitioner in this case did not come to this court with clean hands. He was aware of the
restrictions in his title when he executed the loan and mortgage contracts with respondent. He
voluntarily executed the contracts with respondent despite this knowledge. He also availed
himself of the benefits of the loan and mortgage contract. He cannot now assail the validity of
the mortgage contract to escape the obligations incurred because of it.100

Petitioner also failed to show that upholding the validity of the mortgage contract would be
contrary to law, morals, good customs, and public policy.

Petitioner's contract with the National Housing Authority is not a law prohibiting the transfer or
encumbrance of his property. It does not render subsequent transactions involving the property a
violation of morals, good customs, and public policy. Violation of its terms does not render
subsequent transactions involving the property void ab initio.101 It merely provides the National
Housing Authority with a cause of action to annul subsequent transactions involving the
property.

IV

Petitioner argues that the property should be exempt from forced sale, attachment, and execution,
based on Article 155 of the Family Code.102 Petitioner and his family have been neighbors with
respondent since 1992, before the execution of the mortgage contract.103

Even though petitioner's property has been constituted as a family home, it is not exempt from
execution. Article 155 of the Family Code explicitly provides that debts secured by mortgages
are exempted from the rule against execution, forced sale, or attachment of family home

Art. 155. The family home shall be exempt from execution, forced sale or attachment except

(3) For debts secured by mortgages on the premises before or after such
constitution[.]cralawlawlibrary

Since petitioner's property was voluntarily used by him as security for a loan he obtained from
respondent, it may be subject to execution and attachment.
V

The Court of Appeals correctly found that the interest rates of 5% or 10% per month imposed on
petitioner's loan were unconscionable.

Parties are free to stipulate interest rates in their loan contracts in view of the suspension of the
implementation of the Usury Law ceiling on interest effective January 1, 1983.104

The freedom to stipulate interest rates is granted under the assumption that we have a perfectly
competitive market for loans where a borrower has many options from whom to borrow. It
assumes that parties are on equal footing during bargaining and that neither of the parties has a
relatively greater bargaining power to command a higher or lower interest rate. It assumes that
the parties are equally in control of the interest rate and equally have options to accept or deny
the other party's proposals. In other words, the freedom is granted based on the premise that
parties arrive at interest rates that they are willing but are not compelled to take either by force of
another person or by force of circumstances.105

However, the premise is not always true. There are imperfections in the loan market. One party
may have more bargaining power than the other. A borrower may be in need of funds more than a
lender is in need of lending them. In that case, the lender has more commanding power to set the
price of borrowing than the borrower has the freedom to negotiate for a lower interest rate.

Hence, there are instances when the state must step in to correct market imperfections resulting
from unequal bargaining positions of the parties.

Article 1306 of the Civil Code limits the freedom to contract to promote public morals, safety,
and welfare106chanroblesvirtuallawlibrary

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions
as they may deem convenient, provided they are not contrary to law, morals, good customs,
public order, or public policy.cralawlawlibrary

In stipulating interest rates, parties must ensure that the rates are neither iniquitous nor
unconscionable. Iniquitous or unconscionable interest rates are illegal and, therefore, void for
being against public morals.107 The lifting of the ceiling on interest rates may not be read as
"grant[ing] lenders carte blanche [authority] to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets."108

Voluntariness of stipulations on interest rates is not sufficient to make the interest rates
valid.109 InCastro v. Tan
110
chanroblesvirtuallawlibrary

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of man. It has no support in
law, in principles of justice, or in the human conscience nor is there any reason whatsoever
which may justify such imposition as righteous and as one that may be sustained within the
sphere of public or private morals.111cralawlawlibrary

Thus, even if the parties voluntarily agree to an interest rate, courts are given the discretionary
power to equitably reduce it if it is later found to be iniquitous or unconscionable.112 Courts
approximate what the prevailing market rate would have been under the circumstances had the
parties had equal bargaining power.

An interest rate is not inherently conscionable or unconscionable. Interest rates become


unconscionable in light of the context in which they were imposed or applied. In Medel v. Court
of Appeals,113 this Court ruled that the stipulated interest of 5.5% or 66% per annum was
unconscionable and contrary to morals. It was declared void. This court reduced the interest rate
to 1% per month or 12% per annum.114

This court also ruled that the interest rates of 3%, 5%, and 10% per month were unconscionable,
thus justifying the need to reduce the interest rates to 12% per annum.115

On the other hand, despite rulings that interest rates of 3% and 5% per month are
unconscionable, this court in Toledo v. Hydenu116 found that the interest rate of 6% to 7% per
month was notunconscionable. This court noted circumstances that differentiated that case
from Medel and found that the borrower in Toledo was not in dire need of money when she
obtained a loan; this implied that the interest rates were agreed upon by the parties on equal
footing. This court also found that it was the borrower in Toledo who was guilty of inequitable
acts

Noteworthy is the fact that in Medel, the defendant-spouses were never able to pay their
indebtedness from the very beginning and when their obligations ballooned into a staggering
sum, the creditors filed a collection case against them. In this case, there was no urgency of the
need for money on the part of Jocelyn, the debtor, which compelled her to enter into said loan
transactions. She used the money from the loans to make advance payments for prospective
clients of educational plans offered by her employer. In this way, her sales production would
increase, thereby entitling her to 50% rebate on her sales. This is the reason why she did not
mind the 6% to 7% monthly interest. Notably too, a business transaction of this nature between
Jocelyn and Marilou continued for more than five years. Jocelyn religiously paid the agreed
amount of interest until she ordered for stop payment on some of the checks issued to
Marilou. The checks were in fact sufficiently funded when she ordered the stop payment and then
filed a case questioning the imposition of a 6% to 7% interest rate for being allegedly iniquitous
or unconscionable and, hence, contrary to morals.

It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same
carried with it an interest rate of 6% to 7% per month, yet she did not complain. In fact, when
she availed of said loans, an advance interest of 6% to 7% was already deducted from the loan
amount, yet she never uttered a word of protest.

After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per
month and paying for the same, Jocelyn cannot now go to court to have the said interest rate
annulled on the ground that it is excessive, iniquitous, unconscionable, exorbitant, and absolutely
revolting to the conscience of man. "This is so because among the maxims of equity are (1) he
who seeks equity must do equity, and (2) he who comes into equity must come with clean hands.
The latter is a frequently stated maxim which is also expressed in the principle that he who has
done inequity shall not have equity. It signifies that a litigant may be denied relief by a court of
equity on the ground that his conduct has been inequitable, unfair and dishonest, or fraudulent, or
deceitful as to the controversy in issue."

We are convinced that Jocelyn did not come to court for equitable relief with equity or with clean
hands. It is patently clear from the above summary of the facts that the conduct of Jocelyn can by
no means be characterized as nobly fair, just, and reasonable.This Court likewise notes certain
acts of Jocelyn before filing the case with the RTC. In September 1998, she requested Marilou
not to deposit her checks as she can cover the checks only the following month. On the next
month, Jocelyn again requested for another extension of one month. It turned out that she was
only sweet-talking Marilou into believing that she had no money at that time. But as testified by
Serapio Romarate, an employee of the Bank of Commerce where Jocelyn is one of their clients,
there was an available balance of P276,203.03 in the latter's account and yet she ordered for the
stop payments of the seven checks which can actually be covered by the available funds in said
account. She then caught Marilou by surprise when she surreptitiously filed a case for
declaration of nullity of the document and for damages.117 (Emphases supplied, citations
omitted)cralawlawlibrary

Under the circumstances of this case, we find no reason to uphold the stipulated interest rates of
5% to 10% per month on petitioner's loan. Petitioner obtained the loan out of extreme necessity.
As pointed out by respondent, the property would have been earlier foreclosed by the National
Housing Authority if not for the loan. Moreover, it would be unjust to impose a heavier burden
upon petitioner, who would already be losing his and his family's home. Respondent would not
be unjustly deprived if the interest rate is reduced. After all, respondent still has the right to
foreclose the property. Thus, we affirm the Court of Appeals Decision to reduce the interest rate
to 1% per month or 12% per annum.

However, we modify the rates in accordance with the guidelines set forth in Nacar v. Gallery
Frames
118
chanroblesvirtuallawlibrary

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be
6% per annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court
at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated
claims or damages, except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable certainty, the
interest
shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code), but when such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date the judgment of the
court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 6% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1,
2013, shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein.119cralawlawlibrary

Thus, the interest rate for petitioner's loan should be further reduced to 6% per annum from July
1, 2013 until full satisfaction.

WHEREFORE, the Petition is DENIED. The Court of Appeals Decision dated October 26,
2011 and its Resolution dated March 8, 2012 are AFFIRMED. The interest rate for the loan of
P600,000.00 is further reduced to 6% per annum from July 1, 2013 until fully paid.

SO ORDERED.chanroblesvirtuallawlibrary

Carpio, (Chairperson), Brion, Del Castillo, and Mendoza, JJ., concur.

Endnotes

1
Rollo, p. 27.
2
Id.
3
Id. at 27-28.
4
Id. at 29.
5
Id. at 27. The Regional Trial Court Decision dated December 19, 2008 was penned by Judge
Zenaida R. Daguna.
6
Id. at 28.
7
CA rollo, p. 128.
8
Rollo, p. 28.
9
Id.
10
Id.
11
Id.
12
Id. at 27.
13
Id. at 28.
14
Id. at 29.
15
Id.
16
Id. at 26-34. The Decision was penned by Associate Justice Marlene B. Gonzales-Sison and
concurred in by Associate Justices Noel G. Tijam and Edwin D. Sorongon of the Special Tenth
Division, Court of Appeals Manila.
17
Id. at 33.
18
Id. at 29-30.
19
Id.
20
Id.
21
Id. at 30.
22
Id. at 31.
23
Id. at 33.
24
Id.
25
Id.
26
Id. at 65.
27
Id. at 65-66.
28
Id. at 66.
29
Id. at 15
30
Id. at 16.
31
Id. at 17.
32
Id.
33
Id. at 17-18. The Restriction reads: "Entry No. 4519/V-103/T-234246 -RESTRICTION-that the
Vendee shall not sell, encumber, mortgage, lease, sub-let or in any manner, alter or dispose the
lot or right therein at any time, in whole or in part without obtaining the written consent of the
Vendor. Other restrictions set forth in Doc. No. 287; Page No. 59; Book No. 250; SERIES of
1997 of Notary Public for Quezon City, Liberty S. Perez.

Date of instrument - June 24, 1997


Date of inscription-June 25, 1997- 11:39 a.m.
EXPEDITO A. JAVIER
Register of Deeds"
34
Id. at 17.
35
Id. at 17-18.
36
Id. at 18.
37
Id. at 17.
38
Id. at 91.
39
Id.
40
Id. at 92.
41
Id. at 143.
42
Id.
43
Id. at 96.
44
Id. at 97.
45
Id. at 97-98.
46
See Del Rosario v. Bonga, 402 Phil. 949 (2001) [Per J. Panganiban, Third Division],
citing Keng Hua v. Court of Appeals, 349 Phil. 925 (1998) [Per J. Panganiban, Third
Division]; Arcelona v. Court of Appeals, 345 Phil. 250 (1997) [Per J. Panganiban, Third
Division]; Mendoza v. Court of Appeals, 340 Phil. 634 (1997) [Per J. Panganiban, Third
Division]; Remman Enterprises, Inc., v. Court of Appeals, 335 Phil. 1150 (1997) [Per J.
Panganiban, Third Division].

1997 RULES OF CIV. PROC, Rule 44, sec. 15. Questions that may be raised on appeal. Whether
or not the appellant has filed a motion for new trial in the court below, he may include in his
assignment of errors any question of law or fact that has been raised in the court below and
which is within the issues framed by the parties.
47
See Del Rosario v. Bonga, 402 Phil. 949 (2001) [Per J. Panganiban, Third Division].
48
RTC rollo, pp. 15-19.
49
Id. at 76-79.
50
Id. at 158.
51
Civil Code, art. 2085.
52
Civil Code, art. 2085.
53
Rollo, p. 30.
54
See Ramos, Sr. v. Gatchalian Realty, Inc., 238 Phil. 689 (1987) [Per J. Gutierrez, Jr., Third
Division].
55
See Ramos, Sr. v. Gatchalian Realty, Inc., 238 Phil. 689 (1987) [Per J. Gutierrez, Jr., Third
Division]. See also Cristobal v. Court of Appeals, 353 Phil. 318 (1998) [Per J. Bellosillo, First
Division] and Bank of the Philippine Islands v. Sarabia Manor Hotel, G.R. No. 175844, July 29,
2013, 702 SCRA 432, 444 [Per J. Perlas-Bernabe, Second Division]: "(a) when the findings are
grounded entirely on speculations, surmises, or conjectures; (b) when the inference made is
manifestly mistaken, absurd, or impossible; (c) when there is a grave abuse of discretion; (d)
when the judgment is based on misappreciation of facts; (e) when the findings of fact are
conflicting; (f) when in making its findings, the same are contrary to the admissions of both
parties; (g) when the findings are contrary to those of the trial court; (h) when the findings are
conclusions without citation of specific evidence on which they are based; (i) when the facts set
forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the
respondent; and (j) when the findings of fact are premised on the supposed absence of evidence
and contradicted by the evidence on record."
56
CIVIL CODE, art. 428. The owner has the right to enjoy and dispose of a thing, without other
limitations than those established by law.

The owner has also a right of action against the holder and possessor of the thing in order to
recover it. See also Philippine Banking Corporation v. Lui She, 129 Phil. 526 (1967) [Per J.
Castro, En Banc].
57
Regional Trial Court Rollo, Exch. "F-l", p. 123-124.
58
See Municipality of Camiling v. Lopez, 99 Phil. 187, 189-191 (1956) [Per J. Labrador, En
Banc]. See also Sarmiento v. Salud, 150-A Phil. 566 (1972) [Per J. J.B.L. Reyes, First
Division]; Flora v. Prado, 465 Phil. 334 (2004) [Per Ynares-Santiago, J., First Division].
59
99 Phil. 187 (1956) [Per J. Labrador, En Banc].
60
73 Phil. 586 (1942) [Per J. Bocobo, En Banc].
61
Municipality of Camiling v. Lopez, 99 Phil. 187, 188 (1956) [Per J. Labrador, En Banc].
62
Id at 189. This provision has been reproduced in our current Civil Code, thus

Article 5. Acts executed against the provisions of mandatory or prohibitory laws shall be void,
except when the law itself authorizes their validity.
63
Id.
64
Municipality of Camiling v. Lopez, 99 Phil. 187, 188 (1956) [Per J. Labrador, En Banc].
65
Id.
66
Id. at 190.
67
150-A Phil. 566 (1972) [Per J. J.B.L. Reyes, Second Division].
68
Id. at 568.
69
Id.
70
See Municipality of Camiling v. Lopez, 99 Phil. 187, 189-191 (1956) [Per J. Labrador, En
Bane].
71
Civil Code, art. 1318. There is no contract unless the following requisites concur . . . .

(3) Cause of the obligation which is established.


72
CIVIL CODE, art. 1306. The contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.
73
CIVIL CODE, art. 1306. The contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.
74
CIVIL CODE, art. 1306. The contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.
75
Municipality of Camiling v. Lopez, 99 Phil. 187, 189-191 (1956) [Per J. Labrador, Second
Division]; Sarmiento v. Salud, 150-A Phil. 566 (1972) [Per J. J.B.L. Reyes, Second
Division]. See also San Agustin v. Court of Appeals, 422 Phil., 686 (2001) [Per J. Quisumbing,
Second Division]; Flora v. Prado, 465 Phil. 334 (2004) [Per J. Ynares-Santiago, First Division].
76
Municipality of Camiling v. Lopez, 99 Phil. 187, 189-191 (1956) [Per J. Labrador, Second
Division].
77
Sarmiento v. Salud, 150-A Phil. 566 (1972) [Per J. J.B.L. Reyes, Second Division].
78
See Sarmiento v. Salud, 150-A Phil. 566 (1972) [Per J. J.B.L. Reyes, Second Division].
79
Lalicon and Lalicon v. National Housing Authority, 669 Phil. 231 (2011) [Per J. Abad, Third
Division].
80
See Sarmiento v. Salud, 150-A Phil. 566 (1972) [Per J. J.B.L. Reyes, Second Division].
81
Id. at 568-569.
82
RTC rollo, p. 122. "Exh E", November 25, 1997.
83
Id. at 5.
84
CIVIL CODE, art. 1397. The action for the annulment of contracts may be instituted by all
who are thereby obliged principally or subsidiarily. However, persons who are capable cannot
allege the incapacity of those with whom they contracted; nor can those who exerted
intimidation, violence, or undue influence or employed fraud, or caused mistake base their
actions upon these flaws of the contract.
85
Sarmiento v. Salud, 150-A Phil. 566 (1972) [Per J. J.B.L. Reyes, Second Division]. See
also Toledo v. Hyden, 652 Phil. 70 (2010) [Per J. Del Castillo, First Division].
86
Bough and Bough v. Cantiveros and Hanopol, 40 Phil. 210 (1919) [Per J. Malcolm, En Banc].
87
Pajuyo v. Court of Appeals, G.R. No. 146364, June 3, 2004, 430 SCRA 492, 514-516 [Per J.
Carpio, First Division]; Top-Weld Manufacturing Inc. v. ECED, S.A., et al., 222 Phil. 424 (1985)
[Per J. Gutierrez, Jr., First Division].
88
See Liguez v. Court of Appeals, 102 Phil. 577, 581 (1957) [Per J. J.B.L. Reyes, First Division].
89
7 Phil. 156(1906) [Per J. Willard, Second Division].
90
Id. at 157-158.
91
40 Phil. 210 (1919) [Per J. Malcolm, En Banc].
92
102 Phil. 577 (1957) [Per J. J.B.L. Reyes, First Division].
93
Id.
94
606 Phil. 427 (2009) [Per J. Nachura, Third Division].
95
Id. at 437.
96
Id.
97
See Pilipinas Hino, Inc. v. Court of Appeals, 393 Phil. 1 (2000) [Per J. Kapunan, First
Division], citing Mencliola v. Court of Appeals, 327 Phil. 1156 (1996) [Per J. Hermosisima, Jr.,
First Division]. See also Rellosa v. Gaw Chee Hun, 93 Phil. 827, 831 (1953) [Per J. Bautista
Angelo, En Banc].
98
129 Phil. 526 (1967) [Per J. Castro, En Banc].
99
Id.
100
Sarmiento v. Salud, 150-A Phil. 566 (1972) [Per J. J.B.L. Reyes, Second Division].
101
See also Del Rosario v. Bonga, 402 Phil. 949 (2001) [Per J. Panganiban, Third Division].
102
Rollo, V. 19.

CIVIL CODE, art. 155. The family home shall be exempt from execution, forced sale or
attachment except

(1) For non-payment of taxes;


(2) For debts incurred prior to the constitution of the family home;
(3) For debts secured by mortgages on the premises before or after such constitution; and
(4) For debts due to labourers, mechanics, architects, builders, materialmen and others who have
rendered service or furnished material for the construction of the building.
103
Rollo, p. 20.
104
See Toledo v. Hyden, 652 Phil. 70 (2010) [Per J. Del Castillo, First Division], citing Central
Bank Circular No. 905 s. 1982; Almeda v. Court of Appeals, 326 Phil. 309 (1996) [Per J.
Kapunan, First Division].
105
Cf. the definition of fair market value: "that sum of money which a person desirous, but is not
compelled to buy, and an owner, willing, but not compelled to sell, would agree on as a price to
be given and received for such property." In Association of Small Landowners v. Secretary of
Agrarian Reform, 256 Phil. 777 (1989) [Per J. Cruz, En Bane], citing JM Tuazon & Co. v. Land
Tenure Administration, G.R. No. L-21064, February 18, 1970, 31 SCRA 413 [Per J. Fernando,
Second Division],
106
Bough and Bough v. Cantiveros and Hanopol, 40 Phil. 210 (1919) [Per J. Malcolm, En Bane].
107
Castro v. Tan, 620 Phil. 239 (2009) [Per J. Del Castillo, Second Division]. See alsoSvendsen
v. People, 570 Phil. 243 (2008) [Per J. Carpio-Morales, Second Division], citingSolangon v.
Salazar, 412 Phil. 816, 822 (2001) [Per J. Sandoval-Gutierrez, Third Division]; Ruiz v. Court of
Appeals, 449 Phil. 419 (2003) [Per J. Puno, Third Division].
108
Svendsen v. People, 412 Phil. 816, 822 (2001) [Per J. Sandoval-Gutierrez, Third
Division]; Almeda v. Court of Appeals, 326 Phil. 309, 319 (1996) [Per J. Kapunan, First
Division].
109
Menchavez v. Bermudez, G.R. No. 185368, October 11, 2012, 684 SCRA 168 [Per J. Velasco,
Third Division].
110
620 Phil. 239 (2009) [Per J. Del Castillo, Second Division].
111
Id. at 242-243.
112
Menchavez v. Bermudez, G.R. No. 185368, October 11, 2012, 684 SCRA 168, 178-179 [Per J.
Velasco, Third Division].
113
359 Phil. 820 (1998) [Per J. Pardo, Third Division].
114
Id.
115
Ruiz v. Court of Appeals, 449 Phil. 419 (2003) [Per J. Puno, Third Division]; Castro v. Tan, 620
Phil. 239 (2009) [Per J. Del Castillo, Second Division]; Menchavez v. Bermudez,G.R. No.
185368, October 11, 2012, 684 SCRA 168 [Per J. Velasco, Third Division];Svendsen v.
People, 412 Phil. 816 (2001) [Per J. Sandoval-Gutierrez, Third Division].
116
652 Phil. 70 (2010) [Per J. Del Castillo, First Division].
117
Id. at 79-81.
118
G.R. No. 189871, August 13, 2013, 703 SCRA 439 [Per J. Peralta, En Banc].
119
Id. at 457-458.
FIRST DIVISION

G.R. No. 168078, January 13, 2016

FABIO CAHAYAG AND CONRADO RIVERA, Petitioners, v. COMMERCIAL CREDIT


CORPORATION, REPRESENTED BY ITS PRESIDENT, LEONARDO B. ALEJANDRO;
TERESITA T. QUA, ASSISTED BY HER HUSBAND ALFONSO MA. QUA; AND THE
REGISTER OF DEEDS OF LAS PINAS, METRO MANILA, DISTRICT IV, Respondents.

G.R. NO. 168357

DULOS REALTY & DEVELOPMENT CORPORATION, REPRESENTED BY ITS


PRESIDENT, JUANITO C. DULOS; AND MILAGROS E. ESCALONA, AND
ILUMINADA D. BALDOZA, Petitioners, v.COMMERCIAL CREDIT CORPORATION,
REPRESENTED BY ITS PRESIDENT, LEONARDO B. ALEJANDRO; TERESITA T.
QUA, ASSISTED BY HER HUSBAND ALFONSO MA. QUA; AND THE REGISTER OF
DEEDS OF LAS PINAS, METRO MANILA, DISTRICT IV, Respondents.

DECISION

SERENO, C.J.:

Before us are consolidated Rule 45 Petitions1 seeking to nullify the Court of Appeals (CA)
Decision dated 2 November 20042 and Resolution dated 10 May 20053 in CA-G.R. CV No.
47421. The CA Decision reversed and set aside the Decision dated 6 July 1992 issued by the
Regional Trial Court (RTC), Branch 65 of Makati.4

Factual Antecedents

Petitioner Dulos Realty was the registered owner of certain residential lots covered by Transfer
Certificate of Title (TCT) Nos. S-39767, S-39775, S-28335, S-39778 and S-29776, located at
Airmen's Village Subdivision, Pulang Lupa II, Las Pinas, Metro Manila.

On 20 December 1980, Dulos Realty obtained a loan from respondent CCC in the amount of
F300,000. To secure the loan, the realty executed a Real Estate Mortgage over the subject
properties in favor of respondent. The mortgage was duly annotated on the certificates of title on
3 February 1981.5

On 29 March 1981, Dulos Realty entered into a Contract to Sell with petitioner Cahayag over the
lot covered by TCT No. S-39775.6

On 12 August 1981, Dulos Realty entered into another Contract to Sell, this time with petitioner
Rivera over the lot covered by TCT No. S-28335.7
Dulos Realty defaulted in the payment of the mortgage loan, prompting respondent CCC to
initiate extrajudicial foreclosure proceedings. On 17 November 1981, the auction sale was held,
with respondent CCC emerging as the highest bidder.8

On 23 November 1981, a Certificate of Sale covering the properties, together with all the
buildings and improvements existing thereon, was issued in favor of CCC.9 The Certificate of
Sale was annotated on the corresponding titles to the properties on 8 March 1982.10

Thereafter, or on 13 January 1983, Dulos Realty entered into a Contract to Sell with petitioner
Escalona over the house and lot covered by TCTNo. S-29776.11

On 10 November 1983, an Affidavit of Consolidation in favor of respondent CCC dated 26


August 1983 was annotated on the corresponding titles to the properties.12 By virtue of the
affidavit, TCT Nos. S-39775, S-28335, S-39778 and S-29776 all in the name of Dulos Realty
were cancelled and TCT Nos. 74531, 74532, 74533 and 74534 were issued in the name of
respondent CCC on the same day.13

On 10 December 1983, Dulos Realty entered into a Deed of Absolute Sale with petitioner
Baldoza over the property covered by TCT No. S-39778, together with the improvements
existing thereon.14

On 21 December 1983, respondent CCC, through a Deed of Absolute Sale, sold to respondent
Qua the same subject properties, now covered by TCT Nos. 74531, 74532, 74533 and 74534,
which were in the name of respondent CCC. The sale was duly annotated on the corresponding
titles to the properties on 5 January 1984.15

Accordingly, TCT Nos. 74531, 74532, 74533 and 74534 were cancelled; and TCT Nos. 77012,
77013, 77014 and 770015 were issued to respondent Qua on 5 January 1984.16

Subsequently, respondent Qua filed ejectment suits individually against petitioners Dulos
Realty,17 Cahayag,18 Escalona,19 and Rivera20 before the Metropolitan Trial Court (MTC) of Las
Pinas, Metro Manila.

The MTC rendered Decisions in favor of respondent Qua. It ordered Dulos Realty, Escalona,
Cahayag, and Rivera to vacate the properties.

On 8 March 1988, the MTC issued a Writ of Execution to enforce its Decision dated 20 October
1986 in Civil Case No. 2257 against Dulos Realty "and all persons claiming right under
defendant."21 The subject of the writ of execution was Lot 11 Block II,22 which was the lot sold
by Dulos Realty to petitioner Baldoza.

COMPLAINT FOR ANNULMENT OF


SHERIFF'S SALE AND OTHER DOCUMENTS

On 5 December 1988, petitioners filed a Complaint against respondents for the "Annulment of
Sheriff['s] Sale and Other Documents with Preliminary Injunction and/or Temporary Restraining
Order" before the RTC of Makati City, where it was docketed as Civil Case No. 88-2599.23
The Complaint24 alleged that petitioners Cahayag, Rivera, Escalona and Baldoza were owners of
the properties in question by virtue of Contracts of Sale individually executed in their favor, and
that the Real Estate Mortgage between Dulos Realty and defendant-appellant CCC did not
include the houses, but merely referred to the lands themselves."25 Thus, the inclusion of the
housing units in the Deed of Sale executed by respondent CCC in favor of respondent Qua was
allegedly illegal.26

Respondents failed to file an answer within the reglementary period. Subsequently, they were
declared in default. They appealed the order of default but their appeal was dismissed on 8
February 1990.27

On 6 July 1992, the RTC rendered a Decision,28 which ruled that the houses were not included in
the Real Estate Mortgage; and that the foreclosure of the mortgage over the subject lots, as well
as the housing units, was not valid.29 The trial court held that this conclusion was established by
the plaintiffs' evidence, which went unrefuted when defendants were declared in default.30

THE CA DECISION

Respondents proceeded to the CA, where they secured a favorable ruling. In its Decision
rendered on 2 November 2004,31 the appellate court held that the extrajudicial foreclosure was
valid, since the Real Estate Mortgage clearly included the buildings and improvements on the
lands, subject of the mortgage.

After establishing the inclusion of the housing units in the Real Estate Mortgage, the CA
determined the rights of the buyers in the Contracts to Sell/Contract of Sale vis-a-vis those of the
mortgagee and its successor-in-interest.

In the cases of petitioners Cahayag, Rivera and Escalona, the CA pointed to lack of evidence
establishing full payment of the price. As supporting reason, it stated that even if there were full
payment of the purchase price, the mortgagee and the latter's successor-in-interest had a better
right over the properties. The CA anchored this conclusion on the fact that the Real Estate
Mortgage was annotated at the back of the titles to the subject properties before the execution of
the Contracts to Sell. It said that the annotation constituted sufficient notice to third parties that
the property was subject to an encumbrance. With the notice, Cahayag, Rivera and Escalona
should have redeemed the properties within the one-year redemption period, but they failed to do
so. Consequently, the right of respondent CCC over the properties became absolute, and the
transfer to respondent Qua was valid.

As regards Baldoza, though the case involved a Contract of Sale, and not a mere Contract to Sell,
the CA declared the transaction null and void on the purported ground that Dulos was no longer
the owner at the time of the sale.

The CA accordingly reversed and set aside the RTC Decision, dismissed the case for lack of
merit, and ordered petitioners to surrender possession of the properties to respondent Qua.

THE RULE 45 PETITIONS


On 30 May 2005, petitioners Cahayag and Rivera filed their Rule 45 Petition with this
Court.32 For their part, petitioners Dulos Realty, Baldoza and Escalona filed their Rule 45
Petition on 19 July 2005.33

In the Petition under G.R. No. 168357, it is argued, among others, that the Deed of Absolute Sale
in favor of petitioner Baldoza was the culmination of a Contract to Sell between her and Dulos
Realty. She claims that the Contract to Sell, marked as Exhibit "L" during the trial, was executed
on 10 January 1979, which preceded the execution of the Deed of Real Estate Mortgage and the
registration of the mortgage on 3 February 1981.34 After full payment of the price under the
Contract to Sell, Dulos Realty executed the Deed of Absolute Sale. In other words, Baldoza is
arguing that she has a better title to the property than respondent Qua since the unregistered
contract to sell in her favor was executed before the registration of the mortgage. But the CA
ignored Exhibit "L" and merely stated that there was only a Deed of Absolute Sale in favor of
Baldoza.

THE ARGUMENTS

The arguments of petitioners, as stated in their respective Memoranda, are summarized as


follows:chanRoblesvirtualLawlibrary

Coverage of the Mortgage

Initially, petitioners attempt to stave off the effects of the extrajudicial foreclosure by attacking
the coverage of the Real Estate Mortgage with respect to its subject-matter.35 They draw attention
to the fact that the List of Properties attached to the Deed of Real Estate Mortgage refers merely
to the lands themselves and does not include the housing units found thereon.36 Petitioners also
contend that doubts should be resolved against the drafter inasmuch as the agreement is a
contract of adhesion, having been prepared by the mortgagee.37

As backup argument for the theory that the houses are outside the coverage of the mortgage
agreement, petitioners argue that the improvements were not owned by Dulos Realty, the
mortgagor, but by its buyers under the Contracts to Sell and Contracts of Sale; hence, those
improvements are excluded from the coverage of the real estate mortgage.

Validity of the Mortgage

Petitioners next challenge the validity of the foreclosure sale on the ground that the mortgage
executed by the mortgagor (petitioner Dulos Realty) and the mortgagee (respondent CCC) was
null and void.38 Petitioners claim that Dulos Realty was no longer the owner of the properties it
had mortgaged at the time of the execution of the mortgage contract, as they were sold under
existing Contracts to Sell and Deed of Absolute Sale.39

Petitioners Cahayag, Rivera and Escalona lean on the unregistered Contracts to Sell they had
individually executed with Dulos Realty as vendor. For his part, petitioner Baldoza points to the
Deed of Absolute Sale executed by Dulos Realty in his favor.
Better Right over the Properties

Petitioners claim that respondent CCC cannot claim to be a mortgagee in good faith, since it is a
financial institution.40 As such, respondent CCC knew that it was dealing with a subdivision
developer, which was in the business of selling subdivision lots.41Dela Merced v. GSIS42 which
states that the general rule that a mortgagee need not look beyond the title cannot benefit banks
and other financial institutions, as a higher due diligence requirement is imposed on them.

They also raise the contention that lack of full payment of the purchase price under the Contracts
to Sell on the part of Cahayag, Rivera and Escalona was due to respondent Qua's "harassment
and unlawful actuations.43

Petitioners further state that respondent Qua is a mere transferee of respondent CCC and that,
like a stream, she cannot rise higher than her source. They also argue that Qua is not an innocent
purchaser for value, since she is a former investor of respondent CCC and one of its principal
stockholders.44

No Prior Written HLURB


Approval of the Mortgage

Finally, petitioners allege that the mortgage contract in this case was not approved by the
HLURB, which violates Section 18 of P.D. 95745 and results in the nullity of the mortgage.

Exhibit "L" as Evidence of a Prior


Contract to Sell

The matter of CA ignoring Exhibit "L" as evidence of a prior unregistered Contract to Sell was
not included in the Memoranda of petitioners.

THE ISSUES

Based on the foregoing facts and arguments raised by petitioners, the threshold issues to be
resolved are the following:chanRoblesvirtualLawlibrary

1. Whether the real mortgage covers the lands only, as enumerated in the Deed of Real
Estate Mortgage or the housing units as well;

2. Whether Dulos Realty was the owner of the properties it had mortgaged at the time of its
execution in view of the various Contracts to Sell and Deed of Absolute Sale respectively
executed in favor of petitioners Cahayag, Rivera, Escalona and Cahayag;

3. Who, as between petitioners-buyers and respondent Qua, has a better right over the
properties?

4. Whether the Deed of Absolute Sale in favor of Baldoza was not preceded by a Contract to
Sell and full payment of the purchase price; and
5. Whether the mortgage is void on the ground that it lacked the prior written approval of
the HLURB.

OUR RULING

We deny the Petition for reasons as follows.

Attack on the Subject-matter of


the Real Estate Mortgage
It is true that the List of Properties attached to the Deed of Real Estate Mortgage refers merely to
the lands themselves and does not include the housing units found thereon. A plain reading of the
Real Estate Mortgage, however, reveals that it covers the housing units as well. We quote the
pertinent provision of the agreement:chanRoblesvirtualLawlibrary

[T]he MORTGAGOR has transferred and conveyed and, by these presents, do hereby transfer
and convey by way of FIRST MORTGAGE unto the MORTGAGEE, its successors and assigns
the real properties described in the list appearing at the back of this document and/or in a
supplemental document attached hereto as Annex "A" and made and integral part
hereof, together with all the buildings and/or other improvements now existing or which
may hereafter be place[d] or constructed thereon, all of which the MORTGAGOR hereby
warrants that he is the absolute owner and exclusive possessor thereof, free from all liens and
encumbrances of whatever kind and nature, xxx.47 (Emphasis Ours)cralawlawlibrary

Thus, the housing units would fall under the catch-all phrase "together with all the buildings
and/or other improvements now existing or which may hereafter be placed or constructed
thereon."

The contra proferentem rule finds no application to this case. The doctrine provides that in the
interpretation of documents, ambiguities are to be construed against the drafter.48 By its very
nature, the precept assumes the existence of an ambiguity in the contract, which is why contra
proferentem is also called the ambiguity doctrine.49 In this case, the Deed of Real Estate
Mortgage clearly establishes that the improvements found on the real properties listed therein are
included as subject-matter of the contract. It covers not only the real properties, but the buildings
and improvements thereon as well.

Challenge to the Foreclosure


Sale with Regard to the
Ownership of the Mortgaged Properties

To begin with, the Contracts to Sell and Deed of Absolute Sale could not have posed an
impediment at all to the mortgage, given that these contracts had yet to materialize when the
mortgage was constituted. They were all executed after the constitution of the Real Estate
Mortgage on 20 December 1980.

As regards Cahayag, the Contract to Sell in his favor was executed on 29 March 1981, more than
three months after the execution of the mortgage contract.50 This is taken from the Contract to
Sell itself, which forms part of the records of this case.51

At this juncture, we note that the CA, for reasons unknown, specified 29 September 1980,52] and
not 29 March 1981, as the date of the execution of the Contract to Sell in its Decision.
Respondent Qua has raised this point in her Memorandum filed with us. This Court cannot be
bound by the factual finding of the CA with regard to the date of the Contract to Sell in favor of
Cahayag. The general rule that the Court is bound by the factual findings of the CA must yield in
this case, as it falls under one of the exceptions: when the findings of the CA are contradicted by
the evidence on record.53 In this case, there is nothing in the records to support the CA's
conclusion that the Contract to Sell was executed on 29 September 1980. The evidence on
record, however, reveals that the correct date is 29 March 1981.

In the case of petitioner Rivera, the corresponding Contract to Sell in his favor was executed
only on 12 August 1981, or almost eight months after the perfection of the mortgage contract on
20 December 1980.

The Contract to Sell in favor of Escalona was executed on 13 January 1983, almost two years
after the constitution of the mortgage on 20 December 1980.

Lastly, Dulos Realty executed the Deed of Absolute Sale in favor of petitioner Baldoza on 10
December 1983, which was almost three years from the time the mortgage contract was executed
on 20 December 1980.

There was neither a contract to sell nor a deed of absolute sale to speak of when the mortgage
was executed.

Petitioners equate a contract to sell to a contract of sale, in which the vendor loses ownership
over the property upon its delivery.54 But a contract to sell, standing alone, does not transfer
ownership.55 At the point of perfection, the seller under a contract to sell does not even have the
obligation to transfer ownership to the buyer.56 The obligation arises only when the buyer fulfills
the condition: full payment of the purchase price.57 In other words, the seller retains ownership at
the time of the execution of the contract to sell.58

There is no evidence to show that any of petitioners Cahayag, Rivera and Escalona were able to
effect full payment of the purchase price, which could have at least given rise to the obligation to
transfer ownership. Petitioners Cahayag and Rivera even admit that they defaulted on their
obligations under their respective Contracts to Sell, although they attribute the default to
respondent Qua's "harassment and unlawful actuations."59 The statement, though, was a mere
allegation that was left unsubstantiated and, as such, could not qualify as proof of anything.60

Who Has a Better Right over the Properties

Registration of the mortgage bound the


buyers under the Contracts to Sell
Registration of the mortgage establishes a real right or lien in favor of the mortgagee, as
provided by Articles 131261 and 212662 of the Civil Code.63 Corollary to the rule, the lien has
been treated as "inseparable from the property inasmuch as it is a right in rem."64 In other words,
it binds third persons to the mortgage.

The purpose of registration is to notify persons other than the parties to the contract that a
transaction concerning the property was entered into.65 Ultimately, registration, because it
provides constructive notice to the whole world, makes the certificate of title reliable, such that
third persons dealing with registered land need only look at the certificate to determine the status
of the property.66

In this case, the Real Estate Mortgage over the property was registered on 3 February 1981. On
the other hand, the Contracts to Sell were all executed after the registration of the mortgage. The
Contract to Sell in favor of petitioner Cahayag was executed on 29 March 1981, or almost two
monthsafter the registration of the mortgage. The corresponding Contract to Sell in favor of
Rivera was executed only on 12 August 1981, roughly six months after the registration of the
mortgage contract. Lastly, the Contract to Sell in favor of Escalona was executed on 13 January
1983, or nearly two yearsafter the registration of the mortgage on 3 February 1981.

Consequently, petitioners Cahayag, Rivera and Escalona, were bound to the mortgage executed
between mortgagor Dulos Realty and mortgagee CCC, by virtue of its registration. Definitely,
the buyers each had constructive knowledge of the existence of the mortgage contract when they
individually executed the Contracts to Sell.

Dela Merced v. GSIS not applicable

Petitioner invokes the above case. Dela Merced involved a clash between an unrecorded contract
to sell and a registered mortgage contract. The contract to sell between the mortgagors (Spouses
Zulueta) and the buyer (Francisco Dela Merced) was executed before the former's constitution of
the mortgage in favor of GSIS. Because the Zuluetas defaulted on their loans, the mortgage was
foreclosed; the properties were sold at public auction to GSIS as the highest bidder; and the titles
were consolidated after the spouses' failure to redeem the properties within the one-year
redemption period. GSIS later sold the contested lot to Elizabeth D. Manlongat and Ma. Therese
D. Manlongat. However, Dela Merced was able to fully pay the purchase price to Spouses
Zulueta, who executed a Deed of Absolute Sale in his favor prior to the foreclosure sale.

This Court stated therein the general rule that the purchaser is not required to go beyond the
Torrens title if there is nothing therein to indicate any cloud or vice in the ownership of the
property or any encumbrance thereon. The case nonetheless provided an exception to the general
rule. The exception arises when the purchaser or mortgagee has knowledge of a defect in the
vendor's title or lack thereof, or is aware of sufficient facts to induce a reasonably prudent person
to inquire into the status of the property under litigation. The Court applied the exception, taking
into consideration the fact that GSIS, the mortgagee, was a financing institution.

But Dela Merced is not relevant here. Dela Merced involved a Contract to Sell that was
executed priorto the mortgage, while the Contracts to Sell in this case were all executed after the
constitution and registration of the mortgage.
In Dela Merced, since GSIS had knowledge of the contract to sell, this knowledge was
equivalent to the registration of the Contract to Sell. Effectively, this constitutes registration
canceled out the subsequent registration of the mortgage. In other words, the buyer under the
Contract to Sell became the first to register. Following the priority in time rule in civil law, the
lot buyer was accorded preference or priority in right in Dela Merced.

In this case, the registration of the mortgage, which predated the Contracts to Sell, already bound
the buyers to the mortgage. Consequently, the determination of good faith does not come into
play.

Dela Merced materially differs from this case on another point. The Contract to Sell in favor of
Dela Merced was followed by full payment of the price and execution of the Deed of
Absolute Sale. In this case, the Contract to Sell in favor of each of petitioners Cahayag, Rivera
and Escalona, is not coupled with full payment and execution of a deed of absolute sale.

This case also needs to be distinguished from Luzon Development Bank v. Enriquez.67 In that
case, the unregistered Contract to Sell was executed after the execution of the mortgage. Instead
of resorting to foreclosure, the owner/developer and the bank entered into a dacion en pago. The
Court declared that the bank was bound by the Contract to Sell despite the non-registration of the
contract. It reasoned that the bank impliedly assumed the risk that some of the units might have
been covered by contracts to sell. On the other hand, the Court pronounced the mortgage to be
void, as it was without the approval of the Housing and Land Use Regulatory Board (HLURB).
The Court consequently ordered the unit buyer in that case to pay the balance to the bank, after
which the buyer was obliged to deliver a clean title to the property.

There are points of distinction between the case at bar and Luzon Development Bank. First, there
is a definite finding in Luzon Development Bank that the mortgage was without prior HLURB
approval, rendering the mortgage void. In the present case, as will be discussed later, there is no
proof from the records on whether the HLURB did or did not approve the mortgage. Second,
Luzon Development Bank did not even reach the foreclosure stage of the mortgage. This case,
however, not only reached the foreclosure stage; it even went past the redemption period,
consolidation of the title in the owner, and sale of the property by the highest bidder to a third
person.

The first distinction deserves elaboration. The absence of prior written approval of the mortgage
by the HLURB rendered it void. This effectively wiped out any discussion on whether
registration bound the installment buyer. In fact, Luzon Development Bank did not even bother to
state whether the mortgage was registered or not. More important, the tables were turned
when Luzon Development Bank held that the bank was bound to the Contract to Sell in view of
the latter's constructive notice of the Contract to Sell. Stated differently, the actually unregistered
Contract to Sell became fictionally registered, making it binding on the bank.

In this case, on account of its registration, and the fact that the contracts were entered into after
it, the mortgage is valid even as to petitioners.

No Redemption within One Year from


the Foreclosure Sale

When it comes to extrajudicial foreclosures, the law68 grants mortgagors or their successors-in-
interest an opportunity to redeem the property within one year from the date of the sale. The one-
year period has been jurisprudentially held to be counted from the registration of the foreclosure
sale with the Register of Deeds.69 An exception to this rule has been carved out by Congress for
juridical mortgagors. Section 47 of the General Banking Law of 2000 shortens the redemption
period to within three months after the foreclosure sale or until the registration of the certificate
of sale, whichever comes first.70 The General Banking Law of 2000 came into law on 13 June
2000.

If the redemption period expires and the mortgagors or their successors-in-interest fail to redeem
the foreclosed property, the title thereto is consolidated in the purchaser.71 The consolidation
confirms the purchaser as the owner of the property; concurrently, the mortgagorfor failure to
exercise the right of redemption within the periodloses all interest in the property.72

We now apply the rules to this case.

As the foreclosure sale took place prior to the advent of the General Banking Law of 2000, the
applicable redemption period is one year. In this case, because the Certificate of Sale in favor of
respondent CCC was registered on 8 March 1982, the redemption period was until 8 March
1983. It lapsed without any right of redemption having been exercised by Dulos Realty.
Consequently, the right of respondent CCC, as purchaser of the subject lots, became absolute. As
a matter of right, it was entitled to the consolidation of the titles in its name and to the possession
of those lots. Further, the right of respondent CCC over the lots was transferred to respondent
Qua by virtue of the Deed of Sale executed between them.

Given the foregoing considerations, respondent Qua, who now has title to the properties subject
of the various Contracts to Sell, is the lawful owner thereof.

Foreclosure Sale vs. Contract of Sale

When Dulos Realty executed a Deed of Absolute Sale covering the real property registered under
TCT No. S-39778 in favor of petitioner Baldoza on 10 December 1983, it was no longer the
owner of the property. Titles to the subject properties, including the one sold to Baldoza, had
already been consolidated in favor of respondent CCC as early as 10 November 1983. In fact, on
the same date, the titles to the subject lots in the name of Dulos Realty had already been
cancelled and new ones issued to respondent CCC.

The fact that Dulos Realty was no longer the owner of the real property at the time of the sale led
the CA to declare that the Contract of Sale was null and void. On this premise, the appellate court
concluded that respondent Qua had a better title to the property over petitioner Baldoza.

We find no error in the conclusion of the CA that respondent Qua has a better right to the
property. The problem lies with its reasoning. We therefore take a different route to reach the
same conclusion.
Proper place of nemo dat quod non
habet in the Law on Sales

Undeniably, there is an established rule under the law on sales that one cannot give what one
does not have (Nemo dat quod non habet).73 The CA, however, confuses the application of this
rule with respect to time. It makes the nemo dat quod non habet rule a requirement for
the perfection of a contract of sale, such that a violation thereof goes into the validity of the sale.
But the Latin precept has been jurisprudentially held to apply to a contract of sale at its
consummation stage, and not at the perfection stage.74

Cavite Development Bank v. Spouses Syrus Lim75 puts nemo dat quod non habet in its proper
place. Initially, the Court rules out ownership as a requirement for the perfection of a contract of
sale. For all that is required is a meeting of the minds upon the object of the contract and the
price. The case then proceeds to give examples of the rule. It cites Article 1434 of the Civil Code,
which provides that in case the seller does not own the subject matter of the contract at the time
of the sale, but later acquires title to the thing sold, ownership shall pass to the buyer. The Court
also refers to the rule as the rationale behind Article 1462, which deals with sale of "future
goods."

Cavite Development Bank thereafter turns to Article 1459, which requires ownership by the seller
of the thing sold at the time of delivery or consummation stage of the sale. The Court explains
that if the rule were otherwise, the seller would not be able to comply with the latter's obligation
to transfer ownership to the buyer under a perfected contract of sale. The Court ends the
discourse with the conclusion that "[i]t is at the consummation stage where the principle of nemo
dat quod non habetapplies."76

Case law also provides that the fact that the seller is not the owner of the subject matter of the
sale at the time of perfection does not make the sale void.77

Hence, the lesson: for title to pass to the buyer, the seller must be the owner of the thing sold at
theconsummation stage or at the time of delivery of the item sold. The seller need not be the
owner at the perfection stage of the contract, whether it is of a contract to sell or a contract of
sale. Ownership is not a requirement for a valid contract of sale; it is a requirement for a valid
transfer of ownership.

Consequently, it was not correct for the CA to consider the contract of sale void. The CA
erroneously considered lack of ownership on the part of the seller as having an effect on the
validity of the sale. The sale was very much valid when the Deed of Absolute Sale between the
parties was executed on 10 December 1983, even though title to the property had earlier been
consolidated in favor of respondent CCC as early as 10 November 1983. The fact that Dulos
Realty was no longer the owner of the property in question at the time of the sale did not affect
the validity of the contract.

On the contrary, lack of title goes into the performance of a contract of sale. It is therefore
crucial to determine in this case if the seller was the owner at the time of delivery of the object of
the sale. For this purpose, it should be noted that execution of a public instrument evidencing a
sale translates to delivery.78 It transfers ownership of the item sold to the buyer.79

In this case, the delivery coincided with the perfection of the contract ^The Deed of Absolute
Sale covering the real property in favor of petitioner Baldoza was executed on 10 December
1983. As already mentioned, Dulos Realty was no longer the owner of the property on that date.
Accordingly, it could not have validly transferred ownership of the real property it had sold to
petitioner.

Thus, the correct conclusion that should be made is that while there was a valid sale, there was
no valid transfer of title to Baldoza, since Dulos Realty was no longer the owner at the time of
the execution of the Deed of Absolute Sale.

No Bad Faith on Qua

The contention that Qua is a stockholder and former member of the Board of Directors of
respondent CCC and therefore she is not exactly a stranger to the affairs of CCC is not even
relevant.

An innocent purchaser for value is one who "buys the property of another without notice that
some other person has a right to or interest in it, and who pays a full and fair price at the time of
the purchase or before receiving any notice of another person's claim."80 The concept thus
presupposes that there must be an adverse claim or defect in the title to the property to be
purchased by the innocent purchaser for value.

Respondent Qua traces her title to respondent CCC, whose acquisition over the property
proceeded from a foreclosure sale that was valid. As there is no defect in the title of respondent
CCC to speak of in this case, there is no need to go into a discussion of whether Qua is an
innocent purchaser for value.

Dispute as to the Factual


Finding of the CA that the
Deed of Absolute Sale in
Favor of Baldoza was not
Preceded by a Contract to
Sell and Full Payment of
the Purchase Price
We absolutely discard the argument. We can think of at least four reasons why. First, Exhibit
UL" was not formally offered in evidence. Second, it was not even incorporated into the
records. Third, the argument is irrelevant. Fourth, it was even abandoned in the Memoranda filed
by petitioners with us.Last, we are not a trier of facts and thus we yield to the finding of the CA.

Exhibit "L " not formally offered

A perusal of the records shows that the Contract to Sell that Baldoza referred to had in fact been
marked as Exhibit "L" during her direct examination in court.81 Even so, Exhibit "L" was never
formally offered as evidence. For this reason, we reject her contention. Courts do not consider
evidence that has not been formally offered.82 This explains why the CA never mentioned the
alleged Contract to Sell in favor of Baldoza.

The rationale behind the rule rests on the need for judges to confine their factual findings and
ultimately their judgment solely and strictly to the evidence offered by the parties to a suit.83 The
rule has a threefold purpose. It allows the trial judge to know the purpose of the evidence
presented; affords opposing parties the opportunity to examine the evidence and object to its
admissibility when necessary; and facilitates review, given that an appellate court does not have
to review documents that have not been subjected to scrutiny by the trial court.84

Exhibit "L" not incorporated into the records

The rule, of course, admits an exception. Evidence not formally offered may be admitted and
considered by the trial court so long as the following requirements obtain: (1) the evidence is
dulyidentified by testimony duly recorded; and (2) the evidence is incorporated into the records
of the case.

The exception does not apply to the case of Baldoza. While she duly identified the Contract to
Sell during her direct examination, which was duly recorded, Exhibit "L" was not incorporated
into the records.

Exhibit "L " not relevant

Be that as it may, the contention that a Contract to Sell in favor of Baldoza preceded the sale in
her favor is irrelevant. It must be stressed that the sale to Baldoza made by Dulos Realty took
place after the lapse of the redemption period and after consolidation of title in the name of
respondent CCC on 10 November 1983, one month prior to the sale to Baldoza on 10 December
1983. Dulos Realty still would have lost all interest over the property mortgaged.

The fact that Dulos Realty ceased to be the owner of the property and therefore it could no longer
effect delivery of the property at the time the Deed of Absolute Sale in favor of Baldoza was
executed is the very reason why the case of Baldoza cannot be compared with Dela Merced. In
the case, the buyer in the Contract to Sell was able to effect full payment of the purchase price
and to execute a Deed of Absolute Sale in his favor before the foreclosure sale. In this case, the
full payment of the purchase price and the execution of a Deed of Absolute Sale in favor of
Baldoza was done after the foreclosure sale.

Issue over Exhibit "L" not


included in the Memorandum

Equally important is the fact that petitioners failed to include the issue over Exhibit "L" in any of
the Memoranda they filed with us. The omission is fatal. Issues raised in previous pleadings
but not included in the memorandum are deemed waived or abandoned (A.M. No. 99-2-04-
SC). As they are "a summation of the parties' previous pleadings, the memoranda alone may be
considered by the Court in deciding or resolving the petition."85 Thus, even as the issue was
raised in the Petition, the Court may not consider it in resolving the case on the ground of failure
of petitioners to include the issue in the Memorandum. They have either waived or abandoned it.

Issue of HLURB's Non-Approval


of the Mortgage
Petitioners allege before the Court that the mortgage contract in this case was not approved by
the HLURB. They claim that this violates Section 18 of P.D. 95786 and results in the nullity of the
mortgage. Respondents have disputed the claim and counter-argue that the allegation of the
petitioners is not supported by evidence. Respondents likewise aver that the argument was raised
for the first time on appeal.87

It is rather too late in the day for petitioners to raise this argument. Parties are not permitted to
change their theory of a case at the appellate stage.88 Thus, theories and issues not raised at the
trial level will not be considered by a reviewing court on the ground that they cannot be raised
for the first time on appeal.89 Overriding considerations of fair play, justice and due process
dictate this recognized rule.90 This Court cannot even receive evidence on this matter.

Petitioners' original theory of the case is the nullity of the mortgage on the grounds previously
discussed. If petitioners are allowed to introduce their new theory, respondents would have no
more opportunity to rebut the new claim with contrary evidence, as the trial stage has already
been terminated. In the interest of fair play and justice, the introduction of the new argument
must be barred.91

Exceptions Not Applicable

The Court is aware that the foregoing is merely a general rule. Exceptions are written in case
law.first, an issue of jurisdiction may be raised at any time, even on appeal, for as long as the
exercise thereof will not result in a mockery of the demands of fair play;92second, in the interest
of justice and at the sound discretion of the appellate court, a party may be allowed to change its
legal theory on appeal, but only when the factual bases thereof would not require further
presentation of evidence by the adverse party for the purpose of addressing the issue raised in the
new theory;93 and last, which is actually a bogus exception, is when the question falls within the
issues raised at the trial court.94

The exceptions do not apply to the instant case. The new argument offered in this case concerns a
factual matter prior approval by the HLURJB. This prerequisite is not in any way related to
jurisdiction, and so the first exception is not applicable. There is nothing in the record to allow us
to make any conclusion with respect to this new allegation.

Neither will the case fall under the second exception. Evidence would be required of the
respondents to disprove the new allegation that the mortgage did not have the requisite prior
HLURB approval. Besides, to the mind of this court, to allow petitioners to change their theory
at this stage of the proceedings will be exceedingly inappropriate.

Petitioners raised the issue only after obtaining an unfavorable judgment from the CA.
Undoubtedly, if we allow a change of theory late in the game, so to speak, we will unjustifiably
close our eyes to the fundamental right of petitioners to procedural due process. They will lose
the opportunity to meet the challenge, because trial has already ended. Ultimately, we will be
throwing the Constitutional rulebook out the window.

WHEREFORE, premises considered, the Petitions are DENIED, and the Court of Appeals
Decision dated 2 November 2004 and Resolution dated 10 May 2005 in CA-G.R. CV No. 47421
are herebyAFFIRMED.

SO ORDERED.

Leonardo-De Castro, Bersamin, Perez, and Perlas-Bernabe, JJ., concur.

Endnotes:

1
Under Rule 45 of the Rules of Court; rollo (G.R. No. 168078), pp. 3-31; (G.R. No. 168357) pp.
11-47.
2
Penned by Perlita J. Tria-Tirona, Associate Justice and Chairperson, Fifth Division, and
concurred in by Associate Justice and Chairperson Jose C. Reyes, Jr. and Associate Justice
Ruben Reyes, rollo (G.R. No. 168078), pp. 33-58.
3
Id. at 61-62.
4
Penned by Judge Salvador S. Abad Santos; records, pp. 492-493.
5
Id. at 20-23.
6
Records, pp. 36-38.
7
CA rollo, p. 121.
8
Records, p. 210.
9
Id. at 210-211.
10
Id. at 209.
11
Id. at pp. 87-88.
12
Id. at 209.
13
Id. at pp. 214-217.
14
Id. at 84.
15
Id. at 213.
16
Records, pp. 218-220.
17
Docketed as Civil Case No. 2257.
18
Civil Case No. 2203
19
Civil Case No. 2205
20
Civil Case No. 2206
21
Records, p. 112.
22
Id.
23
Id. at 4.
24
Id.
25
Id. at 9, 11-12.
26
Id.
27
Id. at 492.
28
Supra note 4.
29
Id.
30
Id.
31
Supra note 2.
32
Rollo (G.R. No. 168078), p. 3.
33
Rollo (G.R. No. 168357), p. 11.
34
Rollo (G.R. No. 168357), pp. 39-40.
35
Rollo (G.R. No. 168357) p.201; Rollo (G.R. No. 168078), p. 294.
36
Id.
37
Rollo (G.R. No. 168357) p.204; Rollo (G.R. No. 168078), p.297.
38
For purposes of validity of a mortgage, Article 2085 of the New Civil Code requires, among
other things, ownership of the subject-matter of the mortgage by the mortgagor. See Torbela v.
Spouses Rosario, G.R. Nos. 140528 & 140553, 7 December 2011, 661 SCRA 633. Further,
Article 2085 of the New Civil Code reads:chanRoblesvirtualLawlibrary

Art. 2085. The following requisites are essential to the contracts of pledge and
mortgage:chanRoblesvirtualLawlibrary

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal of their property,
and in the absence thereof, that they be legally authorized for the purpose.

Third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property.
39
Rollo (G.R. No. 168078), p.300.
40
Rollo (G.R. No. 168357), pp. 2 12-2 15.
41
Rollo (G.R. No. 168078), pp. 21-26.
42
417 Phil. 324(2001).
43
Rollo (G.R. No. 168357), p. 208.
44
Rollo(G.R. No. 168078), p. 301.
45
Section 18. of the Subdivision and Condominium Buyers' Protective Decree, issued on 12 July
1976, states:
Section 18. Mortgages. No mortgage on any unit or lot shall be made by the owner or
developer without prior written approval of the Authority. Such approval shall not be granted
unless it is shown that the proceeds of the mortgage loan shall be used for the development of the
condominium or subdivision project and effective measures have been provided to ensure such
utilization. The loan value of each lot or unit covered by the mortgage shall be determined and
the buyer thereof, if any, shall be notified before the release of the loan. The buyer may, at his
option, pay his installment for the lot or unit directly to the mortgagee who shall apply the
payments to the corresponding mortgage indebtedness secured by the particular lot or unit being
paid for, with a view to enabling said buyer to obtain title over the lot or unit promptly after full
payment thereto. (Emphasis supplied)
46
Rollo (G.R. No. 168078), pp. 299-301.
47
Records, p. 16.
48
Black's Law Dictionary 995 (8th ed. 2004).
49
Black's Law Dictionary, supra.
50
Supra note 8.
51
Id.
52
CA Decision, p. 2. CA rollo, p. 120.
53
Benito v. People, G.R. No. 204644, 11 February 2015.
54
Spouses Flancia v. Court of Appeals, 496 PHIL 693-703 (2005).
55
A contract to sell is an agreement stipulating that the seller shall execute a deed of sale only
upon or after full payment of the purchase price. It is not a contract of sale. The stipulation to
execute a deed of sale upon full payment of the purchase price signifies that the vendor reserves
title to the property until full payment. (Diego v. Diego, G.R. No. 179965, 20 February 2013, 691
SCRA 361.)
56
Luzon Development Bank v. Enriquez, 654 Phil. 315 (201 1), sheds light on the nature of a
contract to sell:chanRoblesvirtualLawlibrary

[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 prospective buyer." It does not, by itself, transfer ownership to the buyer.
(Emphasis supplied) "id.
58
Id.
59
See Petition dated 28 May 2005, rollo (G.R. No. 168078), p. 20.
60
Real v. Bella, 542 Phil. 109-127 (2007).
61
Article 1312 of the New Civil Code (NCC) states:
Art. 1312. In contracts creating real rights, third persons who come into possession of the object
of the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land
Registration laws.
62
Article 2126 of the NCC slates:
Art. 2126. The mortgage directly and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it
was constituted.
63
Spouses Paderes v. Court of Appeals, 502 Phil 76 (2005).
64
Garcia v. Villar, G.R. No. 158891, 27 June 2012, 675 SCR A 92.
65
Gutierrez v. Mendoza-Plaza, 622 Phil. 844-858 (2009).
66
People v. Reyes, 256 Phil. 1015-1027 (1989).
67
Supra note 58.
68
Section 6 of Act No. 3 135, as amended.
69
See also UCPB v. Lumbo, G.R. No. 162757, 11 December 2013,712 SCRA 217.
70
The second paragraph of Section 47 of the General Banking Law of 2000 reads:
Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the right to redeem the property in accordance with this
provision until, but not after, the registration of the certificate of foreclosure sale with the
applicable Register of Deeds which in no case shall be more than three (3) months after
foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale
prior to the effectivity of this Act shall retain their redemption rights until their expiration.
71
Id.
72
Id.
73
Noel v. Court of Appeals, 240 SCRA 78 (1995); Nool v. Court of Appeals, 342 Phil. 106-124,
(1997); Tangalin v. Court of Appeals, 422 Phil 358-366 (2001); Naval v. Court of Appeals, 518
Phil 271-285 (2006); Midway Maritime and Technological Foundation v. Castro, G.R. No.
189061, 6 August 2014 732 SCRA 192.
74
Cavite Development Bank v. Spouses Lim, 381 Phil. 355, 365-366 (2000).
75
Id.
76
Id.
77
Nool v. Court of Appeals, 342 Phil. 106-124 (1997).
78
Article 1498 of the Civil Code. See also Velarde v. Cowl of Appeals 413 Phil. 360-376
79
Id.
80
Leong v. Sec, G.R. No. 194077, 3 December 2014.
81
Records, p. 537.
82
Heirs of Saves v. Heirs of Saves, 646 Phil. 536. 544 (2010).
83
Id.
84
Id.
85
De Castro v. Liberty Broadcasting Network, Inc., G.R. No. 165 153, 25 August 2010, 629
SCRA 77, 86.
86
The Subdivision and Condominium Buyers' Protective Decree, issued on 12 July 1976.
87
Rollo (G.R. No. 168357), p. 251.
88
Ramos v. PNB, G.R. No. 178218, 14 December 2011, 662 SCRA 479.
89
Id.
90
Id.
91
Maxicare PCIB CIGNA Healthcare v. Conireras, G.R. No. 194352, 30 January 2013, 689
SCRA 763.
93
Id.
92
Ramos v. PNB, G.R. No. 178218, 14 December 2011, 662 SCRA 479.
93
Id.
94
Farolan v. Court of Appeals, 441 Phil. 377-385 (2002).

LEONEN, J.:

There is no mutuality of contract when the interest rate in a loan agreement is set at the sole
discretion of one party. Nor is there any mutuality when there is no reasonable means by which
the other party can determine the applicable interest rate. These types of interest rates stipulated
in the loan agreement are null and void. However, the nullity of the stipulated interest rate does
not automatically nullify the provision requiring payment of interest. Certainly, it does not
nullify the obligation to pay the principal loan obligation.

These consolidated cases arose from three related actions filed before the trial courts of Davao
City.
In 1993, Spouses Robert Alan L. Limso and Nancy Lee Limso (Spouses Limso)1 and Davao
Sunrise Investment and Development Corporation (Davao Sunrise) took out a loan secured by
real estate mortgages from Philippine National Bank.2

The loan was in the total amount of P700 million, divided into two (2) kinds of loan
accommodations: a revolving credit line of P300 million, and a seven-year long-term loan of
P400 million.3

To secure the loan, real estate mortgages were constituted on four (4) parcels of land registered
with the Registry of Deeds of Davao City.4 The parcels of land covered by TCT Nos. T-147820,
T-151138, and T-147821 were registered in the name of Davao Sunrise, while the parcel of land
covered by TCT No. T-140122 was registered in the name of Spouses Limso.5

In 1995, Spouses Limso sold the parcel of land covered by TCT No. T-140122 to Davao
Sunrise.6

Spouses Limso and Davao Sunrise had difficulty in paying their loan. In 1999, they requested
that their loan be restructured. After negotiations, Spouses Limso, Davao Sunrise, and Philippine
National Bank executed a Conversion, Restructuring and Extension Agreement.7

The principal obligation in the restructured agreement totalled 1.067 billion. This included
217.15 million unpaid interest.8

The restructured loan was divided into two (2) parts. Loan I was for the principal amount of
583.18 million, while Loan II was for the principal amount of 483.78 million.9 The
restructured loan was secured by the same real estate mortgage over four (4) parcels of land in
the original loan agreement. All the properties were registered in the name of Davao Sunrise.10

The terms of the restructured loan agreement state:

SECTION 1. TERMS OF THE CONVERSION, RESTRUCTURING AND EXTENSION

1.01 The Conversion/Restructuring/Extension. Upon compliance by the Borrowers with the


conditions precedent provided herein, the Obligations shall be converted, restructured and/or its
term extended effective January 1, 1999 (the "Effectivity Date") in the form of term loans (the
"Loans") as follows:

(a) The Credit Line portion of the Obligations is hereby converted and
restructured into a Seven-Year Long Term Loan (the "Loan I") in the principal
amount of 583.18 Million;

(b) The original term of the Loan is hereby extended for another four (4) years
(from September 1, 2001 to December 31, 2005), and interest portion of the
Obligations (including the interest accruing on the Credit Line and Loan up to
December 31, 1998 estimated at 49.83 Million) are hereby capitalized.
Accordingly, both the Loan and Interest portions of the Obligations are hereby
consolidated into a Term Loan (the "Loan II") in the aggregate principal amount
of 483.78 Million;

SECTION 2. TERMS OF LOAN I

2.01 Amount of Loan I. Loan I shall be in the principal amount not exceeding
PESOS: FIVE HUNDRED EIGHTY THREE MILLION ONE HUNDRED
EIGHTY THOUSAND (583,180,000.00).

2.02 Promissory Note. Loan I shall be evidenced by a promissory note (the "Note
I") to be issued by the Borrowers in favor of the Bank in form and substance
satisfactory to the Bank.

2.03 Principal Repayment. The Borrowers agree to repay Loan I within a period
of seven (7) years (inclusive of a one (1) year grace period) in monthly
amortizations with the first amortization to commence on January 2000 and a
balloon payment on or before the end of the 7th year on December 2005.

2.04 Interest. (a) The Borrowers agree to pay the Bank interest on Loan I from the
Effective Date, until the date of full payment thereof at the rate per annum to be
set by the Bank. The interest rate shall be reset by the Bank every month.

(b) The interest provided in clause (a) above shall be payable monthly in
arrears to commence on January, 1999.

SECTION 3. TERMS OF LOAN II

3.01 Amount of Loan II. Loan II shall be in the principal amount not exceeding
PESOS: FOUR HUNDRED EIGHTY THREE MILLION SEVEN HUNDRED
EIGHTY THOUSAND (483,780,00.00).

3.02 Promissory Note. Loan II shall be evidenced by a promissory note (the "Note
II") to be issued by the Borrowers in favor of the Bank in form and substance
satisfactory to the Bank.

3.03 Principal Repayment. The Borrowers agree to repay Loan II within a period
of seven (7) years (inclusive of a one (1) year grace period) in monthly
amortizations with the first amortization to commence on January 2000 and a
balloon payment on or before December 2005.

3.04 Interest. (a) The Borrowers agree to pay the Bank interest on Loan II from
the Effective Date, until the date of full payment thereof at the rate per annum to
be set by the Bank. The interest rate shall be reset by the Bank every month.

(b) The interest provided in clause (a) above shall be payable monthly in
arrears to commence on January 1999.11 (Emphasis provided)
Spouses Limso and Davao Sunrise executed promissory notes, both dated January 5, 1999, in
Philippine National Banks favor. The promissory notes bore the amounts of 583,183,333.34
and 483,811,798.93.12 The promissory note for Loan II includes interest charges because one of
the preambular clauses of the Conversion, Restructuring and Extension Agreement states that:

WHEREAS, the Borrowers acknowledge that they have outstanding obligations (the
"Obligations") with the Bank broken down as follows:

(i) Credit Line 583.18 Million (as of September 30, 1998);

(ii) Loan 266.67 Million (as of September 30, 1998); and

(iii) Interest 217.15 Million (as of December 31, 1998)[.]13

Spouses Limso and Davao Sunrise encountered financial difficulties. Despite the restructuring of
their loan, they were still unable to pay.14 Philippine National Bank sent demand letters. Still,
Spouses Limso and Davao Sunrise failed to pay.15

On August 21, 2000, Philippine National Bank filed a Petition for Extrajudicial Foreclosure of
Real Estate Mortgage before the Sheriffs Office in Davao City.16 The Notice of Foreclosure was
published. The bank allegedly complied with all the other legal requirements under Act No.
3135.17 The auction sale was held on October 26, 2000. Ball Park Realty Corporation, through its
representative Samson G. To, submitted its bid in the amount of 1,521,045,331.49.18 Philippine
National Banks bid was in the amount of 1,521,055,331.49. Thus, it was declared the highest
bidder.19

After the foreclosure sale, but before the Sheriff could issue the Provisional Certificate of
Sale,20 Spouses Limso and Davao Sunrise filed a Complaint for Reformation or Annulment of
contract against Philippine National Bank, Atty. Marilou D. Aldevera, in her capacity as Ex-
Officio Provincial Sheriff of Davao City, and the Register of Deeds of Davao City.21 The
Complaint was filed on October 30, 2000, raffled to Branch 17 of the Regional Trial Court of
Davao City, and docketed as Civil Case No. 28,170-2000.22 It prayed for:

[the] declaration of nullity of unilateral imposition and increases of interest rates, crediting of
illegal interests collected to [Spouses Limso and Davao Sunrises] account; elimination of all
uncollected illegal interests; reimposition of new interest rates at 12% per annum only from date
of filing of Complaint, total elimination of penalties; elimination also of attorneys fees or its
reduction; declaration of nullity of auction sale and the foreclosure proceedings; reduction of
both loan accounts; reformation or annulment of contract, reconveyance, damages and injunction
and restraining order.23

Immediately after the Complaint was filed, the Executive Judge24 of the Regional Trial Court of
Davao City issued a 72-hour restraining order preventing Philippine National Bank from taking
possession and selling the foreclosed properties.25
Spouses Limso subsequently filed an amended Complaint.26 The prayer in the amended
Complaint stated:

PRAYER

WHEREFORE, it is respectfully prayed that judgment issue in favor of plaintiffs and against the
defendants:

ON THE TEMPORARY RESTRAINING ORDER

1. That, upon the filing of the above-entitled case, a TEMPORARY


RESTRAINING ORDER be maintained enjoining the defendants from executing
the provisional Certificate of Sale and final Deed of Absolute Sale; confirmation
of such sale; taking immediate possession thereof and from selling to third parties
those properties covered by TCT Nos. T-147820, T-147821,T-246386 and T-
247012 and its improvements nor to mortgage or pledge the same prior to the
final outcome of the above-entitled case, including other additional acts of
foreclosure;.

2. That, plaintiffs application for the issuance of the [Writ of Preliminary


Injunction] be concluded within the 20 days lifetime period of the [Temporary
Restraining Order], and

AFTER TRIAL ON THE MERITS

3. To declare the injunction as final;

4. Declaring that the unilateral increases of interest rates imposed by the


defendant bank over and above the stipulated interest rates provided for in the
Promissory Notes, be also considered as null and void and thereafter lowering the
same to 12% per annum only, from the date of the filing of the Complaint;

5. Declaring also that all illegally imposed interest rates and penalty charges be
considered eliminated and/or deducted from any account balance of plaintiffs;

6. Declaring also either the complete elimination of attorneys fees, or in the


alternative, reducing the same to P500,000.00 only;

7. Declaring the reduction of the loan account balance to P827,012,149.50 only;

8. That subsequent thereto, ordering a complete reformation of the loan agreement


and Real Estate Mortgage which will now embody the lawful terms and
conditions adjudicated by this Honorable Court, or in the alternative, ordering its
annulment, as may be warranted under the provision of Article 1359 of the New
Civil Code;
9. Ordering the defendant Register of Deeds to refrain from issuing a new title in
favor of third parties, and to execute the necessary documents necessary for the
reconveyance of the properties now covered by TCT Nos. T-147820, T-147821, T-
246386 and T-247012 from the defendant bank in favor of the plaintiffs upon
payment of the recomputed loan accounts;

10. Ordering also the defendant bank to pay to the plaintiffs the sum of at least
P500,000.00 representing business losses and loss of income by the later [sic]
arising from the improvident and premature institution of extrajudicial foreclosure
proceedings against the plaintiffs;

11. Ordering again the defendant bank to pay to the plaintiffs the sum of
P400,000.00 as attorneys fees and the additional sum of P100,000.00 for
expenses incident to litigation; and

12. To pay the costs and for such other reliefs just and proper under the
circumstances.27(Underscoring in the original)

Through the Order28 dated November 20, 2000, Branch 17 of the Regional Trial Court of Davao
City denied Spouses Limsos application for the issuance of a writ of preliminary injunction.29

Spouses Limso moved for reconsideration. On December 4, 2000, Branch 17 of the Regional
Trial Court of Davao City set aside its November 20, 2000 Order and issued a writ of
preliminary injunction.30

Philippine National Bank then moved for reconsideration of the trial courts December 4, 2000
Order. The banks Motion was denied on December 21, 2000. Hence, Philippine National Bank
filed before the Court of Appeals a Petition for Certiorari assailing the December 4, 2000 and
December 21, 2000 Orders of the trial court. This was docketed as CA G.R. SP. No. 63351.31

In the meantime, Branch 17 continued with the trial of the Complaint for Reformation or
Annulment of Contract with Damages.32

On January 10, 2002, the Court of Appeals issued the Decision33 in CA G.R. SP. No. 63351
setting aside and annulling the Orders dated December 4, 2000 and December 21, 2000 and
dissolving the writ of preliminary injunction.34

Spouses Limso and Davao Sunrise moved for reconsideration of the Court of Appeals January 2,
2002 Resolution in CA G.R. SP No. 63351 but the motion was denied.35 They then filed a
Petition for Review on Certiorari before this court.36 Their Petition was docketed as G.R. No.
152812, which was denied on procedural grounds.37

In view of the dissolution of the writ of preliminary injunction, Acting Clerk of Court and Ex-
officio Provincial Sheriff Rosemarie T. Cabaguio issued the Sheriffs Provisional Certificate of
Sale dated February 4, 2002 in the amount of 1,521,055,331.49.38 However, the Sheriffs
Provisional Certificate of Sale39 did not state the applicable redemption period and the
redemption price payable by the mortgagor or redemptioner.40

On the same date, Philippine National Bank presented the Sheriffs Provisional Certificate of
Sale to the Register of Deeds of Davao City in order that the title to the foreclosed properties
could be consolidated and registered in Philippine National Banks name. The presentation was
recorded in the Primary Entry Book of Davao Citys Registry of Deeds under Act No. 496 and
entered as Entry Nos. 4762 to 4765.41

On February 5, 2002, the registration of the Certificate of Sale was elevated en consulta by Atty.
Florenda T. Patriarca (Atty. Patriarca) , Acting Register of Deeds of Davao City, to the Land
Registration Authority in Manila. This was docketed as Consulta No. 3405.42

Acting on the consulta, the Land Registration Authority issued the Resolution dated May 21,
2002, which states:43

"WHEREFORE, in view of the foregoing, the Sheriffs Provisional Certificate of Sale dated
February 4, 2002 is registrable on TCT Nos. T-147820, T-147386, T-247012 provided all other
registration requirements are complied with."44

Meanwhile, on March 25, 2002, the Spouses Limso filed a Petition for Declaratory Relief with
Prayer for Temporary Restraining Order/Injunction on March 25, 2002 against Philippine
National Bank, Atty. Rosemarie T. Cabaguio, in her capacity as Ex-Officio Provincial Sheriff,
and the Register of Deeds of Davao City (Petition for Declaratory Relief). The Sheriffs
Provisional Certificate of Sale allegedly did not state any redemption price and period for
redemption. This case was raffled to Branch 14 of the Regional Trial Court of Davao City and
docketed as Civil Case No. 29,036-2002.45

The Petition for Declaratory Relief was filed while the Complaint for Reformation or Annulment
with Damages was still pending before Branch 17 of the Regional Trial Court of Davao City.

Spouses Limso subsequently filed an Amended Petition for Declaratory Relief, alleging:

6. That Petitioners with the continuing crisis and the unstable interest rates imposed by
respondent PNB admittedly failed to pay their loan, the demand letters were sent to both debtors-
mortgagors separately, one addressed to the Petitioners and another addressed to DSIDC, the last
of which was dated April 12, 2000 xxx;

7. That on August 21, 200(0), respondent PNB filed a Petition for Extrajudicial Foreclosure of
the mortgaged properties against the petitioners-mortgagors-debtors and DSIDC;

8. That on October 26, 2000, the mortgaged properties were auctioned with the respondent PNB
as the highest bidder;

9. That on February 4, 2002, a Sheriffs Provisional Certificate of Sale was issued by respondent
Sheriff who certified xxxx
10. That the said Sheriffs Provisional Certificate of Sale did not contain a provision usually
contained in a regular Sheriffs Provisional Certificate of Sale as regards the period of
redemption and the redemption price to be raised within the ONE (1) YEAR redemption period
in accordance with Act 3135, under which same law the extrajudicial petition for sale was
conducted as mentioned in the Certificate;

11. That the Sheriffs Provisional Certificate of Sale has not yet been registered with the office of
respondent Register of Deeds yet; that petitioners and DSIDC are still in actual possession of the
subject properties;

12. That sometime in the middle part of year 2000, Republic Act No. 8791 otherwise known as
General Banking Laws of 2000 was approved and finally passed on April 12, 2000 and took
effect sometime thereafter;

13. That among the provisions of the said law particularly, Section 47 dealt with Foreclosure of
Real Estate Mortgage, quoted verbatim hereunder as follows:

"Sec. 47. Foreclosure of Real Estate Mortgage. In the event of foreclosure, whether judicially
or extrajudicially, or any mortgage on real estate which is security for any loan or other credit
accommodation granted, the mortgagor or debtor whose real property has been sold for the full
or partial payment of his obligation shall have the right within one year after the sale of the real
estate, to redeem the property by paying the amount due under the mortgage deed, with interest
thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or
institution from the sale and custody of said property less the income derived therefrom.
However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial
foreclosure shall have the right to enter upon and take possession of such property immediately
after the date of the confirmation of the auction sale and administer the same in accordance with
law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted
pursuant to this provision shall be given due course only upon the filing by the petitioner of a
bond in an amount fixed by the court conditioned that he will pay all the damages which the
bank may suffer by the enjoining or the restraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the right to redeem the property in accordance with this
provision until, but not after, the registration of the certificate of foreclosure sale with the
applicable Register of Deeds which in no case shall be more than three (3) months after
foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale
prior to the effectivity of this Act shall retain their redemption rights until their expiration."

14. That it is clear and evident that the absence of provisions as to redemption period and price in
the Sheriffs Provisional Certificate of Sale issued by respondent Sheriff, that respondent PNB
and Sheriff intended to apply the provisions of Section 47 of Republic Act No. 8791 which
reduced the period of redemption of a juridical person whose property is being sold pursuant to
an extrajudicial foreclosure sale until but not after the registration of the Certificate of Sale with
the applicable Register of Deeds which in no case shall be more than three (3) months after
foreclosure, whichever is earlier;
15. That Petitioners in this subject mortgage are Natural Persons who are principal mortgagors-
debtors and at the same time registered owners of some properties at the time of the mortgage;

16. That the provisions of Republic Act No. 8791 do not make mention nor exceptions to this
situation where the Real Estate Mortgage is executed by both Juridical and Natural Persons;
hence, the need to file this instant case of Declaratory Relief under Rule 63 of the Revised Rules
of Court of the Philippines;

....

PRAYER

WHEREFORE, it is respectfully prayed that judgment in favor of petitioners and against the
respondent-PNB;

1. That upon the filing of the above-entitled case, a TEMPORARY RESTRAINING


INJUNCTION be issued immediately ordering a status quo, enjoining the Register of Deeds and
defendant-PNB from registering the subject Provisional Certificate of Sale from consolidating
the title of the property covered by Transfer Certificate of Title Nos. T-147820, T-147821, T-
246386, T-24712 and Land Improvement, Etc.

2. That petitioners application of the issuance of the Writ of Preliminary Injunctions be


considered and granted within 20 days lifetime period of the TRO.

AFTER TRIAL ON THE MERITS

3. To declare the injunction as final;

4. Ordering the Register of Deeds to refrain from registering the Sheriffs Certificate of Sale and
further from consolidating the titles of the said properties in its name and offering to sell the
same to interested buyers during the pendency of the above entitled case, while setting the date
of hearing on the propriety of the issuance of such Writ of Preliminary Injunction.

ON THE MAIN CASE

5. To declare the petitioners right as principal mortgagors/owner jointly with a juridical person
to redeem within a period of 1 year the properties foreclosed by respondent PNB still protected
and covered by Act 3135.

6. To declare the provisions on Foreclosure of Real Estate Mortgage under Republic Act 8791 or
General Banking Laws of 2000 discriminating and therefore unconstitutional.

OTHER RELIEFS AND REMEDIES are likewise prayed for.46


Branch 14 of the Regional Trial Court of Davao City issued a temporary restraining order47 on
April 10, 2002. This temporary restraining order enjoined the Register of Deeds from registering
the Sheriffs Provisional Certificate of Sale.48

The temporary restraining order was issued without first hearing the parties to the case. Hence,
the temporary restraining order was recalled by the same trial court in the Order49 dated April 16,
2002.

During the hearing for the issuance of a temporary restraining order in the Petition for
Declaratory Relief, Spouses Limso presented several exhibits, which included: Philippine
National Banks demand letter dated April 12, 2000; Philippine National Banks letter to the
Acting Register of Deeds of Davao City dated February 4, 2002 requesting the immediate
registration of the Sheriffs Provisional Certificate of Sale; and the Notice of Foreclosure dated
September 5, 2000.50

Counsel for Philippine National Bank objected to the purpose of the presentation of the exhibits
and argued that since Spouses Limso were Davao Sunrises co-debtors, they "were notified as a
matter of formality[.]"51

On May 3, 2002, Branch 14 granted the prayer for the issuance of the writ of preliminary
injunction enjoining the registration of the Sheriffs Provisional Certificate of Sale.52

Branch 14 reasoned as follows:

This Court finds no merit in the claims advanced by private respondent Bank for the following
reasons:

1. That the primary ground why the Court of Appeals dissolved the preliminary
injunction granted by Branch 17 of this Court was because the ground upon which
the same was issued was based on a pleading which was not verified;

2. That Civil Case No. 28,170-2000 and Civil Case No. 29,036-2002 while
involving substantially the same parties, the same do not involved [sic] the same
issues as the former involves nullity of unilateral imposition and increases of
interest rates, etc. nullity of foreclosure proceedings, reduction of both loan
accounts, reformation or annulment of contract, reconveyance and damages,
whereas the issues raised in the instant petition before this Court is the right and
duty of the petitioners under the last paragraph of Sec. 47, Republic Act No. 8791
and whether the said section of said law is applicable to the petitioners
considering that the mortgage contract was executed when Act No. 3135 was the
controlling law and was in fact made part of the contract;

3. That the petition, contrary to the claim of private respondent Bank, clearly
states a cause of action; and
4. That since petitioners are parties to the mortgage contract they, therefore, have
locus standi to file the instant petition.

If Section 7 of Republic Act 8791 were made to apply to the petitioners, the latter would have a
shorter period of three (3) months to exercise the right of redemption after the registration of the
Certificate of Sale, hence, the registration of the Sheriffs Provisional Certificate of Sale would
cause great and irreparable injury to them as their rights to the properties sold at public auction
would be lost forever if the registration of the same is not enjoined.53

Spouses Limso posted an injunction bond that was approved by the trial court in the Order dated
May 6, 2002. Thus, the writ of preliminary prohibitory injunction was issued.54

Philippine National Bank moved for reconsideration of the Orders dated May 3, 2002 and May
6, 2002.55

Around this time, Judge William M. Layague (Judge Layague), Presiding Judge of Branch 14,
was on leave.56Philippine National Banks Motion for Reconsideration was granted by the
Pairing Judge, Judge Jesus V. Quitain (Judge Quitain),57 and the writ of preliminary prohibitory
injunction was dissolved in the Order dated May 23, 2002.58

On May 30, 2002, Philippine National Banks lawyers went to the Register of Deeds of Davao
City "to inquire on the status of the registration of the Sheriffs Provisional Certificate of Sale."59

Philippine National Banks lawyers were informed that the documents they needed "could not be
found and that the person in charge thereof, Deputy Register of Deeds Jorlyn Paralisan, was
absent."60

Philippine National Bank contacted Jorlyn Paralisan at her residence. She informed Philippine
National Bank that the documents they were looking for were all inside Atty. Patriarcas office.61

Subsequently, Atty. Patriarca informed the representatives of Philippine National Bank that the
Register of Deeds "would not honor certified copies of [Land Registration Authority] resolutions
even if an official copy of the [Land Registration Authority] Resolution was already received by
that Office through mail."62

On May 31, 2002, Philippine National Banks representatives returned to the Register of Deeds
of Davao City and learned that Atty. Patriarca, the Acting Register of Deeds, had not affixed her
signature, which was necessary to complete the registration of the Sheriffs Certificate of Sale.63

Subsequently, Judge Layague reinstated the writ of preliminary prohibitory injunction in the
Order64 dated June 24, 2002.

Aggrieved, Philippine National Bank filed before the Court of Appeals a Petition for Certiorari,
Prohibition and Mandamus with Prayer for Temporary Restraining Order and Writ of
Preliminary Injunction, both Prohibitory and Mandatory, docketed as CA G.R. SP No. 71527.
The Petition assailed the June 24, 2002 Order of Branch 14 of the Regional Trial Court, which
reinstated the writ of preliminary prohibitory injunction.65

On July 3, 2002, Philippine National Bank inspected the titles and found that correction fluid had
been applied over Atty. Patriarcas signature on the titles.66

Also on July 3, 2002, Philippine National Bank filed before the Regional Trial Court of Davao
City a Petition for Issuance of the Writ of Possession under Act No. 3135, as amended, and
Section 47 of Republic Act No. 8791.67This was docketed as Other Case No. 124-2002 and
raffled to Branch 15 of the Regional Trial Court of Davao City, presided by Judge Quitain.68

Davao Sunrise filed a Motion to Expunge and/or Dismiss Petition for Issuance of Writ of
Possession dated July 12, 2002.69 In the Motion to Expunge, Davao Sunrise pointed out that
Branch 1470 (in the Petition for Declaratory Relief docketed as Civil Case No. 29,036-2002)
issued a writ of preliminary injunction "enjoining the Provincial Sheriff, the Register of Deeds of
Davao City[,] and [Philippine National Bank] from registering the Sheriffs Provisional
Certificate of Sale and, if registered, enjoining [Philippine National Bank] to refrain from
consolidating the title of the said property in its name and/or offering to sell the same to
interested buyers during the pendency of the case."71

On July 18, 2002, Spouses Limso filed a Motion to Intervene72 in Other Case No. 124-2002.73

In the Resolution dated August 13, 2002, the Court of Appeals granted the temporary restraining
order prayed for by Philippine National Bank (in CA G.R. SP No. 71527) enjoining the
implementation of Judge Layagues Orders dated May 3, 2002 and June 24, 2002. These Orders
pertained to the writ of preliminary injunction enjoining the registration of the Sheriffs
Provisional Certificate of Sale.74

Spouses Limso filed a Motion for Reconsideration with Prayers for the Dissolution of Temporary
Restraining Order and to Post Counter Bond.75

The Court of Appeals granted Philippine National Banks Petition for Certiorari in the
Decision76 dated December 11, 2002. The dispositive portion of the Decision states:

WHEREFORE, premises considered, the writ prayed for in the herein petition is GRANTED and
the assailed Orders of respondent judge dated May 3 and June 24, 2002 granting the writ of
preliminary injunction are SET ASIDE. Civil Case No. 29,036-2002 is hereby ordered
DISMISSED and respondent Register of Deeds of Davao City is hereby ordered to register
petitioner PNBs Sheriffs Provisional Certificate of Sale and cause its annotation on TCT Nos.
T-147820, T-147821, T-246386 and T-247012.77

Spouses Limso filed a Motion to Reconsider Decision and To Call Case For Hearing on Oral
Argument, which was opposed by Philippine National Bank.78 Oral arguments were conducted
on March 19, 2003.79

On June 10, 2003, the Court of Appeals denied Spouses Limsos Motion for Reconsideration.80
Spouses Limso then filed a Petition for Review on Certiorari81 before this court, questioning the
Decision in CA G.R. SP No. 71527, which ordered the Register of Deeds to register the Sheriffs
Provisional Certificate of Sale. This was docketed as G.R. No. 158622.82

With regard to the Complaint for Reformation or Annulment of Contract with Damages, Branch
17 of the Regional Trial Court of Davao City promulgated its Decision83 on June 19, 2002.

Branch 17 ruled in favor of Spouses Limso and Davao Sunrise. It found the interest rate
provisions in the loan agreement to be unreasonable and unjust because the imposable interest
rates were to be solely determined by Philippine National Bank. The arbitrary imposition of
interest rates also had the effect of increasing the total loan obligation of Spouses Limso and
Davao Sunrise to an amount that would be beyond their capacity to pay.84

The dispositive portion of the Decision in the Complaint for Reformation or Annulment with
Damages states:

WHEREFORE, finding the evidence of plaintiffs corporation through counsel, more than
sufficient, to constitute a preponderance to prove the various unilateral impositions of increased
interest rates by defendant bank, such usurious, unreasonable, arbitrary, unilateral imposition of
interest rates, are declared, null and void.

Accordingly, decision is issued in favor of the defendant bank, in a reduced amount based on the
following:

1. The amount of One Hundred Twenty Seven Million, One Hundred Fifty Thousand
(P127,150,000.00) Pesos, representing illegal interest rate, the amount of One Hundred
Seventy Six Million, Ninety Eight Thousand, Forty Five and 95/100 (P176,098,045.95)
Pesos, representing illegal penalty charges and the amount of One Hundred Thirty Six
Million, Nine Hundred Thousand, Nine Hundred Twenty Eight and 85/100
(P136,900,928.85) Pesos, as unreasonable 10% Attorneys fees or in the total amount of
Four Hundred Forty Million, One Hundred Forty Eight Thousand, Nine Hundred Seventy
Four and 79/100 (P440,148,974.79) Pesos, are declared null and void, rescending [sic]
and/or altering the loan agreement of parties, on the ground of fraud, collusion, mutual
mistake, breach of trust, misconduct, resulting to gross inadequacy of consideration, in
favor of plaintiffs corporation, whose total reduced and remaining principal loan
obligation with defendant bank, shall only be the amount of Eight Hundred Eighty Two
Million, Twelve Thousand, One Hundred Forty Nine and 50/100 (P882,012,149.50)
Pesos, as outstanding remaining loan obligation of plaintiffs corporation, with defendant
bank, to be deducted from the total payments so far paid by plaintiffs corporation with
defendant bank as already stated in this decision.

2. That thereafter, the above-amount as ordered reduced, shall earn an interest of 12% per
annum, the lawful rate of interest that should legitimately be imposed by defendant bank
to the outstanding remaining reduced principal loan obligation of plaintiffs corporation.
3. Notwithstanding, defendant bank, is entitled to a reduced Attorneys fees of Five
Hundred Thousand (P500,000.00) Pesos, as a reasonable Attorneys fees, subject to
subsequent pronouncement as to the real status of defendant bank, on whether or not, said
institution is now a private agency or still a government instrumentality in its capacity to
be entitled or not of the said Attorneys fees.

4. The prayer of defendant bank for award of moral damages and exemplary damages, are
denied, for lack of factual and legal basis.

SO ORDERED.85 (Emphasis in the original)

Philippine National Bank moved for reconsideration of the Decision, while Spouses Limso and
Davao Sunrise filed a Motion for partial clarification of the Decision.86

Branch 17 of the Regional Trial Court of Davao City subsequently issued the Order87 dated
August 13, 2002 clarifying the correct amount of Spouses Limso and Davao Sunrises obligation,
thus:

WHEREFORE, finding the motion for reconsideration of defendant bank through counsel, to
the decision of the court, grossly bereft of merit, merely a reiteration and rehash of the arguments
already set forth during the hearing, including therein matters not proved during the trial on the
merits, and considered admitted, is denied.

To provide a clarification of the decision of this court, relative to plaintiffs motion for partial
clarification with comment of defendant bank through counsel, the correct remaining balance of
plaintiffs account with defendant bank, pursuant to the decision of this court, in pages 17 and 18,
dated June 19, 2002, is Two Hundred Five Million Eighty Four Thousand Six Hundred Eighty
Two Pesos & 61/100 (P205,084,682.61), as above-clarified.

SO ORDERED.88

Philippine National Bank appealed the Decision and Order in the Complaint for Reconstruction
or Annulment with Damages by filing a Notice of Appeal on August 16, 2002.89 The Notice of
Appeal was approved by the trial court in the Order dated September 25, 2002.90 The appeal was
docketed as CA-G.R. CV No. 79732.91

On August 20, 2002,92 Spouses Limso and Davao Sunrise filed, in Other Case No. 124-2002
(Petition for Issuance of Writ of Possession), a Motion to Inhibit the Presiding Judge (referring to
Judge Quitain, before whom the Petition for Issuance of Writ of Possession was pending)
because his wife, Gladys Isla Quitain, was a long-time Philippine National Bank employee who
had retired.93 Spouses Limso and Davao Sunrise also heard rumors that Gladys Isla Quitain had
been serving as consultant for Philippine National Bank even after retirement.94 Davao Sunrise
also filed a Motion to Expunge and/or Dismiss Petition and argued that the person who signed
for Philippine National Bank was not authorized because no Board Resolution was attached to
the Verification and Certification against Forum Shopping.
In the Order95 dated March 21, 2003, Judge Quitain denied three motions:

(1) The Motion to Intervene filed by Spouses Robert Alan Limso and Nancy Limso;

(2) The Motion to Expunge and/or Dismiss Petition for the Issuance of Writ of Possession
filed by Davao Sunrise Investment and Development Corporation; and

(3) The Motion for Voluntary Inhibition filed by Davao Sunrise Investment and
Development Corporation.96

Judge Quitain denied the Motion to Inhibit on the ground that the allegations against him were
mere suspicions and conjectures.97 The Motion to Intervene was denied on the ground that
Spouses Limso have no interest in the case, not being the owners of the property.98

The Motion to Expunge and/or Dismiss filed by Davao Sunrise was also denied for lack of merit.
Judge Quitain ruled that "PNB Vice President Leopoldo is clearly clothed with authority to
represent and sign in behalf of the petitioner [referring to Philippine National Bank] as shown by
the Verification and Certification of the said petition as well as the Secretarys Certificate."99

Spouses Limso and Davao Sunrise filed a Motion for Reconsideration100 of the Order dated
March 21, 2003. Judge Quitain denied the Motion for Reconsideration in an Order dated
September 1, 2003, only with regard to the Motion to Intervene and Motion for Voluntary
Inhibition. The Motion to Expunge and/or Dismiss was not mentioned in the September 1, 2003
Order.101

Spouses Limso and Davao Sunrise questioned the denial of the Motion for Inhibition by filing a
Petition for Certiorari before the Court of Appeals on September 26, 2003. This was docketed as
CA G.R. SP No. 79500.102Spouses Limso and Davao Sunrise subsequently filed a Supplemental
Petition for Certiorari before the Court of Appeals on October 3, 2003.103

In the meantime, Other Case No. 124-2002 (Petition for Issuance of Writ of Possession) was set
for an ex-parte hearing on October 10, 2003.104

However, on October 8, 2003, the Court of Appeals granted the prayer for the issuance of a
temporary restraining order in CA G.R. SP No. 79500 "enjoining public respondent Judge
Quitain from proceeding with Other Case No. 124-2002 for a period of sixty (60) days from
receipt by respondents thereof."105

The temporary restraining order was effective from October 10, 2003 to December 9, 2003.106

On December 12, 2003, Judge Quitain issued the Order allowing Philippine National Bank to
present evidence ex-parte on December 18, 2003 despite the pendency of other incidents to be
resolved.107

Spouses Limso and Davao Sunrise filed an Urgent Motion for Cancellation of the December 18,
2003 hearing due to the pendency of CA G.R. SP No. 79500.108
Judge Quitain reset the hearing for Other Case No. 124-2002 to January 23, 2004. The hearing
was subsequently reset to January 30, 2004. In the January 30, 2004 hearing, Judge Quitain
heard the arguments of parties regarding the Urgent Motion to Cancel Hearing.109

In the Order dated March 12, 2004, Judge Quitain "resolved the pending Urgent Motion to
Cancel Hearing and [Davao Sunrises] Motion to Re-schedule Newly Scheduled Hearing
Date."110

The March 12, 2004 Order also stated that "the Spouses Limso have no right to intervene
because they are no longer owners of the subject foreclosed property."111

Spouses Limso treated the March 12, 2004 Order as a denial of their Motion for Reconsideration
regarding their Motion to Intervene. Thus, they, together with Davao Sunrise, filed a Petition for
Certiorari before the Court of Appeals, which was docketed as CA G.R. SP No. 84279.112

CA G.R. SP No. 84279 was denied by the Court of Appeals in the Decision113 dated September
20, 2004.

Spouses Limso and Davao Sunrise filed a Motion for Reconsideration114 dated September 13,
2004, which was denied in the Resolution115 dated July 8, 2005.

Spouses Limso and Davao Sunrise then filed a Petition for Review on Certiorari dated July 26,
2005 before this court. This was docketed as G.R. No. 168947.116

Despite the pendency of Spouses Limso and Davao Sunrises Motion for Reconsideration of the
Order denying Davao Sunrises Motion to Expunge and/or Dismiss, Philippine National Bank
filed a Motion for Reception of Evidence and/or Resume Hearing dated March 30, 2004 in Other
Case No. 124-2002.117

Judge Quitain granted the Motion "and set the hearing for reception of petitioners evidence on
06 April 2004 at 2:00 p.m."118

Spouses Limso and Davao Sunrise filed an Extremely Urgent Manifestation and Motion dated
April 5, 2004. They prayed for the cancellation of the hearing for the reason that the March 12,
2004 Order was not yet final and that Davao Sunrise had a pending Motion for Reconsideration
of the Order denying its Motion to Expunge and/or Dismiss.119

Judge Quitain cancelled the April 6, 2004 hearing due to the Manifestation and Motion filed by
Spouses Limso and Davao Sunrise.120

Spouses Limso filed a Motion for Reconsideration of the March 12, 2004 Order because it
addressed issues other than those raised in the Motion for Intervention.121

On April 20, 2004, Judge Quitain issued the Order and reset the case for hearing to May 7, 2004,
even though the Motion for Reconsideration of the Order denying the Motion to Expunge and/or
Dismiss had not been acted upon.122
During the May 7, 2004 hearing, counsel for Spouses Limso and Davao Sunrise pointed out to
Judge Quitain the pendency of the Motion for Reconsideration of the Order denying the Motion
to Expunge and/or Dismiss.123

Judge Quitain issued the Order dated July 5, 2004 denying Spouses Limso and Davao Sunrises
Motion for Reconsideration to the March 12, 2004 Order (referring to the denial of Spouses
Limsos Motion to Intervene).

Judge Quitain also set hearing dates on August 4 and 5, 2004 for the reception of Philippine
National Banks evidence. Once again, the hearings were scheduled even though the Motion to
Expunge and/or Dismiss had yet to be resolved.124

Davao Sunrise then filed a Motion to Transfer Case or in the Alternative to Dismiss the Same on
July 30, 2004. Davao Sunrise reiterated the arguments in its Motion to Expunge and/or
Dismiss.125

Subsequently, Spouses Limso and Davao Sunrise filed an Extremely Urgent Manifestation and
Motion dated August 3, 2004 asking that the hearings scheduled for August 4 and 5, 2004 be
cancelled, considering that Davao Sunrises Motion to Dismiss/Expunge the Petition was still
unresolved.126

On August 4, 2004, Judge Quitain took cognizance of the Extremely Urgent Manifestation and
Motion dated August 3, 2004 and a Very Urgent Motion for Intervention filed by a third party.
Thus, Judge Quitain cancelled the hearings scheduled on August 4 and 5, 2004, reset the hearing
to August 11, 2004, and "impressed upon the parties that he would be able to resolve all pending
incidents by that time."127

Spouses Limso and Davao Sunrise alleged that the pending incidents were hastily acted upon by
Judge Quitain, as follows:

[O]n 11 August 2004, at around 11:45 a.m., petitioners counsel was furnished a copy of public
respondents Order allegedly dated 06 August 2004 which declared as submitted for resolution
the following incidents, to wit: (a) petitioner DSIDCs Motion to Transfer the Case to Branch 17;
(b) Petitioner DSIDCs Motion to Postpone Hearing; (c) Motion for Intervention filed by a
certain Karlan Lou Ong; (d) petitioners (DSIDC and Spouses Limso) Extremely Urgent
Manifestation and Motion; and (e) Petitioner DSIDCs Manifestation.

. . . And then, at around 2:10 p.m. of the same day, 11 August 2004, when petitioners counsel
was already in court for the said hearing, he was furnished by a staff of public respondent Judge
Quitain a copy of an Order dated 11 August 2004 and consisting of two (2) pages, the dispositive
portion of which reads as follows:

"WHEREFOREM(sic), the Court hereby resolves the following motions: 1) DSIDCs motion to
transfer case to Branch 17 or dismiss the same is denied for lack of merit. 2) DSIDCs (sic)
motion to postpone the hearing is denied for lack of merit. 3) The motion of Karla Ong to
intervene is denied for lack of merit. 4) The August 5 manifestation of DSIDC is
noted."128 (Emphasis in the original)

Spouses Limso and Davao Sunrise also claimed that the Order dated August 11, 2004 was done
hastily so that Philippine National Bank would be able to present its evidence without
objection.129

Spouses Limso and Davao Sunrise alleged that the August 11, 2004 Order contained factual
findings not supported by the record. When counsel for Spouses Limso and Davao Sunrise
pointed out the errors, Judge Quitain acknowledged the mistake and reset the August 11, 2004
hearing to August 27, 2004.130

Because of Judge Quitains actions, Spouses Limso and Davao Sunrise filed a Motion for
Compulsory Disqualification on the ground that Judge Quitain was biased in Philippine National
Banks favor.131

In the Order132 dated March 10, 2005, Judge Quitain denied the Motion for Compulsory
Disqualification.

Spouses Limso and Davao Sunrise moved for reconsideration of the March 10, 2005 Order,
while Philippine National Bank filed an Opposition to the Motion for Reconsideration.133

The August 11, 2004 Order also denied Davao Sunrises Motion to Transfer Case to Branch 17 or
Dismiss the Same. Since the Motion to Transfer is a rehash of Davao Sunrises Motion to
Expunge and/or Dismiss Petition, the denial of the Motion to Transfer is tantamount to the denial
of Davao Sunrises Motion to Expunge and/or Dismiss.134 The August 11, 2004 Order did not
specifically state that Spouses Limso and Davao Sunrises Motion for Reconsideration dated
March 28, 2003 was denied, but since the issues raised in the Motion to Reconsideration were
also raised in the Motion to Expunge, the August 11, 2004 Order also effectively denied the
Motion for Reconsideration.135

Thus, Spouses Limso and Davao Sunrise filed a Petition136 for Certiorari before the Court of
Appeals, which was docketed as CA G.R. SP No. 85847.137 Spouses Limso and Davao Sunrise
assailed the March 21, 2003 Order denying Davao Sunrises Motion to Expunge and/or Dismiss
Petition for Issuance of Writ of Possession, as well as the August 11, 2004 Order denying Davao
Sunrises Motion to Dismiss.138

On September 1, 2004, the Court of Appeals promulgated its Decision139 in CA G.R. No.
79500140 denying Spouses Limso and Davao Sunrises Petition, which assailed Judge Quitains
denial of their Motion to Inhibit.141The Court of Appeals ruled that Judge Quitains reversal of
Judge Layagues Orders "may constitute an error of judgment . . . but it is not necessarily an
evidence of bias and partiality."142

Spouses Limso and Davao Sunrise moved for reconsideration on September 23, 2004. The
Motion was denied in the Resolution143 dated August 11, 2005.144
While the cases between Spouses Limso, Davao Sunrise, and Philippine National Bank were
pending, Philippine National Bank, through counsel, filed administrative145 and criminal
complaints146 against Atty. Patriarca.

The administrative case against Atty. Patriarca was docketed as Administrative Case No. 02-
13.147

In the Resolution148 dated January 12, 2005, the Land Registration Authority found Atty.
Patriarca guilty of grave misconduct and dismissed her from the service.149 Included in the
Resolution are the following pronouncements:

The registration of these documents became complete when respondent affixed her signature
below these annotations. Whatever information belatedly gathered thereafter relative to the
circumstances as to the registrability of these documents, respondent cannot unilaterally take
judicial notice thereof and proceed to lift at her whims and caprices what has already been
officially in force and effective, by erasing thereon her signature. With her years of experience in
the Registry, not to mention her being a lawyer, respondent should have taken the appropriate
steps in filing a query to this Authority regarding the matter or should have consulted Section
117 of PD 1529 in relation to Section 12 of Rule 43. The deplorable act of Respondent was
fraught with partiality to favor the DSIDC and Sps. Limso.150

Atty. Asteria E. Cruzabra (Atty. Cruzabra) replaced Atty. Patriarca as Register of Deeds of Davao
City.151 Philippine National Bank wrote a letter to Atty. Cruzabra, arguing "that the Sheriffs
Provisional Certificate of Sale was already validly registered[,]"152 and the unauthorized
application of correction fluid153 to cover the original signature of the Acting Register of Deeds
"did not deprive the Bank of its rights under the registered documents."154

Meanwhile, on February 10, 2005, as CA-G.R. CV No. 79732, which was an appeal from Civil
Case No. 28,170-2000 (Petition for Reformation and Annulment of Contract with Damages), was
still pending, Philippine National Bank filed the following applications before the Court of
Appeals Nineteenth Division:155

a. Application to Hold Davao Sunrise Investment and Development Corporation, the


Spouses Robert Alan L. Limso and Nancy Lee Limso and Wellington Insurance
Company, Inc. Jointly and Severally liable for Damages on the Injunction Bond; and

b. Application for the Appointment of PNB as Receiver[.]156

Spouses Limso and Davao Sunrise filed their opposition to Philippine National Banks
application on March 29, 2005.157 Philippine National Bank filed its Reply to the Opposition on
May 5, 2005.158

On March 2, 2006, the Court of Appeals denied Philippine National Banks applications,
reasoning that:
It is a settled rule that the procedure for claiming damages on account of an injunction
wrongfully issued shall be the same as that prescribed in Section 20 of Rule 57 of the Revised
Rules of Court. Section 20 provides:

Sec. 20. Claim for damages on account of improper, irregular or excessive attachment. - An
application for damages on account of improper, irregular or excessive attachment must be filed
before the trial or before appeal is perfected or before the judgment becomes executory, with due
notice to the attaching obligee or his surety or sureties, setting forth the facts showing his right to
damages and the amount thereof. Such damages may be awarded only after proper hearing and
shall be included in the judgment on the main case.

If the judgment of the appellate court be favorable to the party against whom the attachment was
issued, he must claim damages sustained during the pendency of the appeal by filing an
application in the appellate court with notice to the party in whose favor the attachment was
issued or his surety or sureties, before the judgment of the appellate court becomes executory.
The appellate court may allow the application to be heard and decided by the trial court.

Nothing herein contained shall prevent the party against whom the attachment was issued from
recovering in the same action the damages awarded to him from any property of the attaching
obligee not exempt from execution should the bond or deposit given by the latter be insufficient
or fail to fully satisfy the award.

Records show that when this Court annulled the RTCs order of injunction, Davao Sunrise
thereafter elevated the matter to the Supreme Court. On July 24, 2002, the Supreme Court denied
its petition for having been filed out of time and an Entry of Judgment was issued on Sept. 11,
2002.

PNBs instant application however was filed only on February 17, 2005 and/or in the course of
its appeal on the main case about two (2) years and five (5) months after the judgment
annulling the injunction order attained finality.

Clearly, despite that it already obtained a favorable judgment on the injunction matter, PNB
failed to file (before the court a quo) an application for damages against the bond before
judgment was rendered in the main case by the court a quo. Thus, even for this reason alone,
Davao Sunrise and its bondsman are relieved of further liability thereunder.159 (Citations omitted)

The Court of Appeals also denied Philippine National Banks application to be appointed as
receiver for failure to fulfill the requirements to be appointed as receiver and for failure to prove
the grounds for receivership.160 It discussed that to appoint Philippine National Bank as receiver
would violate the rule that "neither party to a litigation should be appointed as receiver without
the consent of the other because a receiver should be a person indifferent to the parties and
should be impartial and disinterested."161 The Court of Appeals noted that Philippine National
Bank was not an impartial and disinterested party, and Davao Sunrise objected to Philippine
National Banks appointment as receiver.162
In addition, Rule 59, Section 1(a)163 of the 1997 Rules of Court requires that the "property or
fund involved is in danger of being lost, removed, or materially injured." The Court of Appeals
found that the properties involved were "not in danger of being lost, removed[,] or materially
injured."164 Further, Philippine National Banks application was premature since the loan
agreement was still pending appeal and "a receiver should not be appointed to deprive a party
who is in possession of the property in litigation."165

The dispositive portion of the Court of Appeals Resolution166 states:

WHEREFORE, above premises considered, the Philippine National Banks Application to Hold
Davao Sunrise Investment and Development Corporation, the Spouses Robert Alan L. Limso and
Nancy Lee Limso and Wellington Insurance Company, Inc. Jointly and Severally Liable for
Damages on the Injunction Bond and its Application for the Appointment of PNB as Receiver
are hereby both DENIED. And, for the reasons above set forth, the Plaintiff-Appellees Motion to
Dismiss is likewise DENIED.

With the filing of the Appellants and the Appellees respective Brief(s), this case is considered
SUBMITTED for Decision and ORDERED re-raffled to another justice for study and report.

SO ORDERED.167

Philippine National Bank filed a Motion for Reconsideration on March 28, 2006, which was
denied in the Resolution168 dated May 26, 2006.169

Thus, on July 21, 2006, Philippine National Bank filed before this

court a Petition for Review170 on Certiorari questioning the Court of

Appeals denial of its applications.171 This was docketed as G.R. No. 173194.172

On February 16, 2007, Philippine National Banks Ex-Parte Petition for Issuance of a Writ of
Possession docketed as Other Case No. 124-2002 was dismissed173 based on the following
grounds:

(1) For purposes of the issuance of the writ of possession, Petitioner should complete the
entire process in extrajudicial foreclosure . . .

(2) The records disclose the [sic] contrary to petitioners claim, the Certificate of Sale
covering the subject properties has not been registered with the Registry of Deeds of
Davao City as the Court finds no annotation thereof. As such, the sale is not considered
perfected to entitled petitioner to the writ of possession as a matter of rights [sic].174

Philippine National Bank filed a Motion for Reconsideration with Motion for Evidentiary
Hearing.175
Acting on the Motion for Reconsideration, the trial court required the Registry of Deeds to
comment on the matter.176

The trial court eventually denied the Motion for Reconsideration.177

Philippine National Bank appealed the trial court Decision dismissing the Petition for Issuance of
a Writ of Possession by filing a Rule 41 Petition before the Court of Appeals, which was
docketed as CA-G.R. CV No. 01464-MIN.178

Meanwhile, when CA-G.R. CV No. 79732 was re-raffled,179 it was redocketed as CA-G.R. CV
No. 79732-MIN.180

In CA-G.R. CV No. 79732-MIN, the Court of Appeals resolved the issue of "whether or not
there has been mutuality between the parties, based on their essential equality, on the subject
imposition of interest rates on plaintiffs-appellees loan obligation, i.e., the original loan and the
restructured loan."181

On August 13, 2009, the Court of Appeals promulgated its Decision182 in CA-G.R. CV No.
79732-MIN. It held that there was no mutuality between the parties because the interest rates
were unilaterally determined and imposed by Philippine National Bank.183

The Court of Appeals further explained that the contracts between Spouses Limso and Davao
Sunrise, on one hand, and Philippine National Bank, on the other, did not specify the applicable
interest rates. The contracts merely stated the interest rate to be "at a rate per annum that is
determined by the bank[;]"184 "at the rate that is determined by the Bank to be the Banks prime
rate in effect at the Date of Drawdown[;]"185 and "at the rate per annum to be set by the Bank.
The interest rate shall be reset by the Bank every month."186 In addition, the interest rate would
depend on the prime rate, which was "to be determined by the bank[.]"187 It was also discussed
that:

But it even gets worse. After appellant bank had unilaterally determined the imposable interest
on plaintiffs-appellees loans and after the latter had been notified thereof, appellant bank
unilaterally increased the interest rates. Further aggravating the matter, appellant bank did not
increase the interest rate only once but on numerous occasions. Appellant bank unilaterally and
arbitrarily increased the already arbitrarily imposed interest rate within intervals of only seven
(7) days and/or one (1) month.

....

The interests imposed under the Conversion, Restructuring and Extension Agreement, is not a
valid imposition. DSIDC and Spouses Limso have no choice except to assent to the conditions
therein as they are heavily indebted to PNB. In fact, the possibility of the foreclosure of their
mortgage securities is right in their doorsteps. Thus it cannot be considered "contracts" between
the parties, as the borrowers participation thereat has been reduced to an unreasonable
alternative that is to "take it or leave it." It has been used by PNB to raise interest rates to levels
which have enslaved appellees or have led to a hemorrhaging of the latters assets. Hence, for
being an exploitation of the weaker party, the borrower, the alleged letter-contracts should also
be struck down for being violative of the principle of mutuality of contracts under Article
1308.188 (Emphasis in the original)

Thus, the Court of Appeals nullified the interest rates imposed by Philippine National Bank:

We reiterate that since the unilateral imposition of rates of interest by appellant bank is not only
violative of the principle of mutuality of contracts, but also were found to be unconscionable,
iniquitous and unreasonable, it is as if there was no express contract thereon. Thus, the interest
provisions on the (a) revolving credit line in the amount of three hundred (300) million pesos, (b)
seven-year long term loan in the amount of four hundred (400) million pesos; and (c)
Conversions, Restructuring and Extension Agreement, Real Estate Mortgage, promissory notes,
and all other loan documents executed contemporaneous with or subsequent to the execution of
the said agreements are hereby declared null and void.

Such being the case, We apply the ruling of the Supreme Court in the case of United Coconut
Planters Bank vs. Spouses Samuel and Odette Beluso which stated:

"We see, however, sufficient basis to impose a 12% legal interest in favor of
petitioner in the case at bar, as what we have voided is merely the stipulated rate
of interest and not the stipulation that the loan shall earn interest."189 (Citation
omitted)

As to the trial courts reduction of the penalty charges and attorneys fees, the Court of Appeals
affirmed the trial courts ruling and stated that Article 1229190 of the Civil Code allows for the
reduction of penalty charges that are unconscionable.191 The Court of Appeals discussed that:

The penalties imposed by PNB are clearly unconscionable. Any doubt as to this fact can be
removed by simply glancing at the penalties charged by defendant-appellant which . . . already
amounted to an incredibly huge amount of P176,098,045.94 despite payments that already
exceeded the amount of the loan as of 1998.

With respect to attorneys fees, the Supreme Court had consistently and invariably ruled that
even with the presence of an agreement between the parties, the court may nevertheless reduce
attorneys fees though fixed in the contract when the amount thereof appears to be
unconscionable or unreasonable. Again, the fact that the attorneys fees imposed by PNB are
unconscionable and unreasonable can clearly be seen. The attorneys fees imposed similarly
points to an incredibly huge sum of P136,900,928.85 as of October 30, 2000. Therefore, its
reduction in the assailed decision is well-grounded.192 (Citation omitted)

The dispositive portion of the Court of Appeals Decision states:

WHEREFORE, the assailed Decision dated June 19, 2002 and Order dated August 13, 2002 of
the Regional Trial Court of Davao City, Branch 17 in Civil Case No. 28,170-2000 declaring the
unilateral imposition of interest rates by defendant-appellant PNB as null and void appealed from
areAFFIRMED with the MODIFICATION that the obligation of plaintiffs-appellees arising
from the Loan and Revolving Credit Line and subsequent Conversion, Restructuring and
Extension Agreement as Loan I and Loan II shall earn interest at the legal rate of twelve percent
(12%) per annum computed from September 1, 1993, until fully paid and satisfied.

SO ORDERED.193 (Emphasis in the original)

Philippine National Bank moved for reconsideration on September 3, 2009,194 arguing that the
interest rates were "mutually agreed upon[;]"195 that Spouses Limso and Davao Sunrise "never
questioned the . . . interest rates[;]"196and that they "acknowledged the total amount of their debt
(inclusive of loan principal and accrued interest) to [Philippine National Bank] in the
Conversion, Restructuring and Extension Agreement which restructured their obligation to
[Philippine National Bank] in the amount of P1.067 Billion[.]"197

Spouses Limso and Davao Sunrise moved for partial reconsideration on September 9,
2009,198 pointing out that their obligation to Philippine National Bank was only 205,084,682.61,
as stated in the trial courts Order dated August 13, 2002 in Civil Case No. 28,170-2000.199

Both Motions were denied by the Court of Appeals in the Resolution200 dated May 18, 2011.

The Court of Appeals held that Philippine National Banks Motion for Reconsideration raised
issues that were a mere rehash of the issues already ruled upon.201

With regard to Spouses Limso and Davao Sunrises Motion for Partial

Reconsideration, the Court of Appeals ruled that:

Since the appellees did not appeal from the decision of the lower court, they are not entitled to
any award of affirmative relief. It is well settled that an appellee who has not himself appealed
cannot obtain from the appellate court any affirmative relief other than those granted in the
decision of the court below. The appellee can only advance any argument that he may deem
necessary to defeat the appellants claim or to uphold the decision that is being disputed. . . .
Thus, the lower courts finding that the appellees have an unpaid obligation with PNB, and not
the other way around, should stand. It bears stressing that appellees even acknowledged their
outstanding indebtedness with the PNB when they filed their "Urgent Motion for Execution
Pending Appeal" of the August 13, 2002 Order of the lower court decreeing that appellees
remaining obligation with PNB is P205,084,682.61. They cannot now claim that PNB is the one
indebted to them in the amount of P15,915,588.89.202

Philippine National Bank filed a Petition for Review on Certiorari203 assailing the Decision in
CA-G.R. CV No. 79732-MIN. Philippine National Bank argues that there was mutuality of
contracts between the parties, and that the interest rates imposed were valid in view of the
escalation clauses in their contract.204 Philippine National Banks Petition for Review was
docketed as G.R. No. 196958.205

Spouses Limso and Davao Sunrise also filed a Petition for Review206 on Certiorari questioning
the ruling of the Court of Appeals in CA-G.R. CV No. 79732-MIN that their outstanding
obligation was 803,185,411.11.207Spouses Limso and Davao Sunrise argue that they "made
overpayments in the amount of P15,915,588.89."208This was docketed as G.R. No. 197120.209

On January 21, 2013, the Court of Appeals dismissed Philippine National Banks appeal
docketed as CA-G.R. CV No. 01464-MIN (referring to the Petition for the Issuance of a Writ of
Possession) on the ground that Philippine National Bank availed itself of the wrong
remedy.210 What the Philippine National Bank should have filed was a "petition for review under
Rule 45 and not an appeal under Rule 41[.]"211

On March 15, 2013, the Philippine National Bank filed a Petition for Review on Certiorari212
before this court, assailing the dismissal of its appeal before the Court of Appeals and praying
that the Decision of the trial courtthat the Sheriffs Provisional Certificate of Sale was not
signed by the Register of Deeds and was not registeredbe reversed and set aside. The Petition
was docketed as G.R. No. 205463.213

G.R. No. 158622 was filed on July 1, 2003;214 G.R. No. 169441 was filed on September 14,
2005;215 G.R. No. 172958 was filed on June 26, 2006;216 G.R. No. 173194 was filed on July 21,
2006;217 G.R. No. 196958 was filed on June 17, 2011;218 G.R. No. 197120 was filed on June 22,
2011;219 and G.R. No. 205463 was filed on March 15, 2013.220

Docket Original Case Assailed Order/Decision


Number

G.R. No.
158622 Petition for Declaratory Relief with Court of Appeals Decision dated
Prayer for the Issuance of December 11, 2002 dismissing the
Preliminary Injunction and Petition for Certiorari filed by
Application for Temporary Philippine National Bank. The
Restraining Order221 Petition for Certiorari questioned
the issuance of a writ of
preliminary injunction in favor of
Spouses Limso and Davao
Sunrise.222

G.R. No.
169441 Ex-Parte Petition223 for Issuance of Court of Appeals Decision dated
Writ of Possession under Act No. September 1, 2004 and Resolution
3135 filed by Philippine National dated August 11, 2005.224 Spouses
Bank, praying that it be granted Limso and Davao Sunrise filed a
possession over four (4) parcels of Motion to Inhibit Judge Quitain,
land owned by Davao Sunrise which was denied by Judge
Quitain. Thus, Spouses Limso and
Davao Sunrise questioned the
denial of their Motion before the
Court of Appeals.225

G.R. No.
172958 Ex-Parte Petition226 for Issuance of Court of Appeals Decision227 dated
the Writ of Possession under Act September 1, 2005 and
No. 3135 filed by Philippine Resolution228 dated May 26, 2006.
National Bank, praying that it be The Petition for Certiorari and
granted possession over four (4) Prohibition filed by Spouses Limso
parcels of land owned by Davao and Davao Sunrise assailed two
Sunrise Orders of Judge Quitain, which
denied their Motion to Expunge
and/or Dismiss Petition for
Issuance of Writ of Possession.229

G.R. No.
173194 Petition for Reformation or Court of Appeals
Annulment of Contract with Resolution231dated March 2, 2006,
Damages filed by Spouses Limso which denied Philippine National
and Davao Sunrise230 Banks (1) Application to Hold
[Spouses Limso and Davao
Sunrise] and the Surety Bond
Company Jointly and Severally
Liable for Damages on the
Injunction Bond, and (2)
Application for the Appointment of
[Philippine National Bank] as
Receiver. Also assailed was the
Court of Appeals
Resolution232dated May 26, 2006,
which denied the Motion for
Reconsideration filed by Philippine
National Bank.

G.R. No.
196958 Petition for Reformation or Court of Appeals Decision234 dated
Annulment of Contract with August 13, 2009 and Court of
Damages filed by Davao Sunrise Appeals Resolution235 dated May
and Spouses Limso233 18, 2011 docketed as CA-G.R. CV
No. 79732-Min. The decision
dated August 13, 2009 affirmed
with modification the decision of
the trial court in Civil Case No.
28,170-2000.236 The Resolution
dated May 18, 2011 in CA-G.R.
CV No. 79732-Min denied the
Motion for Reconsideration filed
by Philippine National Bank and
also denied the Motion for Partial
Reconsideration filed by Spouses
Limso and Davao Sunrise.237 The
Rule 41 appeal was filed by
Philippine National Bank.238

G.R. No.
197120 Petition239 for Reformation or Court of Appeals Decision240 dated
Annulment of Contract with August 13, 2009 and Court of
Damages filed by Spouses Limso Appeals Resolution241 dated May
and Davao Sunrise 18, 2011. Spouses Limso and
Davao Sunrise assailed the portion
of the Court of Appeals Decision
stating that their outstanding
obligation was 803,185,411.11.242

G.R. No.
205463 Ex-Parte Petition for Issuance of Court of Appeals Decision244 dated
the Writ of Possession under Act January 21, 2013 dismissing the
No. 3135 filed by Philippine appeal under Rule 41 filed by
National Bank, praying that it be Philippine National Bank for being
granted possession over four the wrong remedy.
parcels of land owned by Davao
Sunrise243

In the Manifestation and Motion245 dated May 26, 2006, Davao Sunrise prayed that it be allowed
to withdraw G.R. No. 169441 since the issues in the Petition had become moot and academic.

In the Resolution246 dated August 7, 2006, this court consolidated G.R. Nos. 172958, 173194,
and 169441, with G.R. No. 158622 as the lowest-numbered case.

Davao Sunrises Manifestation and Motion dated May 26, 2006, which prayed that it be allowed
to withdraw G.R. No. 169441, was granted in the Resolution247 dated October 16, 2006. Thus,
G.R. No. 169441 was deemed closed and terminated as of October 16, 2006.248
In the Resolution249 dated March 7, 2007 in G.R. No. 173194, this court required respondents
Spouses Limso and Davao Sunrise to file their comment.

In the Resolution250 dated July 4, 2011, G.R. No. 197120 was consolidated with G.R. No.
196958.

On May 17, 2012, counsel for Spouses Limso and Davao Sunrise notified this court of the death
of Robert Alan L. Limso.251

On October 9, 2013, Spouses Limso and Davao Sunrise filed a Motion to Withdraw Petitions in
G.R. Nos. 172958, 169441 and 158622.252 Davao Sunrise and Spouses Limso, through counsel,
explained that G.R. No. 169441 had been mooted by Judge Quitains voluntary inhibition from
hearing and deciding Other Case No. 124-2002.253

After Judge Quitain had inhibited, Other Case No. 124-2002 was re-raffled to Branch 16 of the
Regional Trial Court of Davao City.254 Other Case No. 124-2002 was dismissed in the
Order255 dated February 16, 2007. Since Other Case No. 124-2002 was dismissed, G.R. No.
172958 was mooted as well.256

With regard to G.R. No. 158622, counsel for Spouses Limso and Davao Sunrise explained:

It is clear, however, that the ruling of the Regional Trial Court of Davao City in Civil Case No.
28,170-2000 and the Court of Appeals in CA G.R. No. 79732 already rendered Civil Case No.
29,036-2002 moot and academic. Under the premises, there is no need for this Honorable Court
to rule on the propriety of the dismissal of the said action for Declaratory Relief as the loan
agreements --- from which the entire case stemmed --- had already been declared NULL AND
VOID.257 (Emphasis in the original)

In the Resolution258 dated March 12, 2014, this court granted the Motion to Withdraw Petitions
with regard to G.R. Nos. 172958 and 158622. The prayer for the withdrawal of G.R. No. 169441
was noted without action since G.R. No. 169441 was deemed closed and terminated in this
courts Resolution dated October 16, 2006.259

On April 2, 2014, Spouses Limso and Davao Sunrise filed an "Omnibus Motion for Leave [1] To
Intervene; [2] To File/ Admit Herein Attached Comment-in-Intervention; and [3] To Consolidate
Cases"260 in G.R. No. 205463.

Spouses Limso and Davao Sunrise argue that they were allowed to participate in Other Case No.
124-2002, and that Philippine National Bank was in bad faith when it did not furnish Nancy
Limso and Davao Sunrise copies of the Petition for Review it had filed.261

In the Resolution262 dated April 2, 2014, this court gave due course to the Petition and required
the parties to submit their memoranda.

On April 15, 2014, Spouses Limso and Davao Sunrise filed a Motion to Dismiss the Petition in
G.R. No. 173194 on the ground that the issues raised by Philippine National Bank are moot and
academic. Spouses Limso and Davao Sunrise also reiterated that Philippine National Bank
availed of the wrong remedy.263

In the Resolution264 dated July 9, 2014, this court recommended the consolidation of G.R. No.
205463 with G.R. Nos. 158622, 169441, 172958, 173194, 196958, and 197120.

In the Resolution265 dated October 13, 2014, this court noted and granted the Omnibus Motion
for Leave to Intervene filed by counsel for Nancy Limso and Davao Sunrise.266 This court also
noted the memoranda filed by counsel for Philippine National Bank, the Office of the Solicitor
General, and counsel for Spouses Limso and Davao Sunrise.267

The remaining issues for resolution are those raised in G.R. Nos. 173194, 196958, 197120, and
205463, which are:

First, whether the Philippine National Banks Petition for Review on Certiorari in G.R. No.
173194 is the wrong remedy to assail the March 2, 2006 Court of Appeals Resolution,268 which
denied Philippine National Banks (1) Application to Hold [Spouses Limso and Davao Sunrise]
and the Surety Bond Company Jointly and Severally Liable for Damages on the Injunction Bond,
and (2) Application for the Appointment of [Philippine National Bank] as Receiver;

Second, whether Philippine National Bank committed forum shopping when it filed an ex-parte
Petition for the Issuance of a Writ of Possession and an Application to be Appointed as Receiver;

Third, whether the Court of Appeals erred in ruling that the interest rates imposed by Philippine
National Bank were usurious and unconscionable;

Fourth, whether the Conversion, Restructuring and Extension Agreement executed in 1999
novated the original Loan and Credit Agreement executed in 1993;

Fifth, whether the Court of Appeals erred in dismissing the appeal under Rule 41 filed by
Philippine National Bank, which assailed the Court of Appeals Decision dated January 21, 2013
in CA-G.R. CV No. 01464-MIN, for being the wrong remedy;

Sixth, whether the Sheriffs Provisional Certificate of Sale should be considered registered in
view of the entry made by the Register of Deeds in the Primary Entry Book; and

Lastly, whether Philippine National Bank is entitled to a writ of possession.

The Petition for Review in G.R. No. 173194 should be denied.

The Petition docketed as G.R. No. 173194, filed by Philippine National Bank, questions the
Court of Appeals Resolutions in CA- G.R. CV No. 79732-MIN dated March 2, 2006 and May
26, 2006, which denied Philippine National Banks applications for damages on the injunction
bond and to be appointed as receiver.269
The assailed Resolutions in G.R. No. 173194 are interlocutory orders and are not appealable.

Rule 41, Section 1270 of the Rules of Court provides:

SECTION 1. Subject of Appeal. An appeal may be taken from a judgment or final order that
completely disposes of the case, or of a particular matter therein when declared by these Rules to
be appealable.

No appeal may be taken from:

....

(b) An interlocutory order;

....

In any of the foregoing circumstances, the aggrieved party may file an appropriate special civil
action as provided in Rule 65.

In addition, Rule 45, Section 1 of the Rules of Court provides:

SECTION 1. Filing of Petition with Supreme Court. A party desiring to appeal by


certiorari from a judgment, final order or resolution of the Court of Appeals, the Sandiganbayan,
the Court of Tax Appeals, the Regional Trial Court or other courts, whenever authorized by law,
may file with the Supreme Court a verified petition for review on certiorari[.] (Emphasis
supplied)

The difference between an interlocutory order and a final order was discussed in United
Overseas Bank v. Judge Ros:271

The word interlocutory refers to something intervening between the commencement and the end
of the suit which decides some point or matter but is not a final decision of the whole
controversy. This Court had the occasion to distinguish a final order or resolution from an
interlocutory one in the case of Investments, Inc. v. Court of Appeals, thus:

x x x A "final" judgment or order is one that finally disposes of a case, leaving nothing more to
be done by the Court in respect thereto, e.g., an adjudication on the merits which, on the basis of
the evidence presented on the trial, declares categorically what the rights and obligations of the
parties are and which party is in the right; or a judgment or order that dismisses an action on the
ground, for instance, of res judicata or prescription. Once rendered, the task of the Court is
ended, as far as deciding the controversy or determining the rights and liabilities of the litigants
is concerned. Nothing more remains to be done by the Court except to await the parties next
move (which among others, may consist of the filing of a motion for new trial or reconsideration,
or the taking of an appeal) and ultimately, of course, to cause the execution of the judgment once
it becomes "final" or, to use the established and more distinctive term, "final and executory."
xxx xxx xxx

Conversely, an order that does not finally dispose of the case, and does not end the Court's task
of adjudicating the parties contentions and determining their rights and liabilities as regards each
other, but obviously indicates that other things remain to be done by the Court, is
"interlocutory" e.g., an order denying motion to dismiss under Rule 16 of the Rules, or granting
of motion on extension of time to file a pleading, or authorizing amendment thereof, or granting
or denying applications for postponement, or production or inspection of documents or
things, etc. Unlike a "final" judgment or order, which is appealable, as above pointed out, an
"interlocutory" order may not be questioned on appeal except only as part of an appeal that may
eventually be taken from the final judgment rendered in the case.272 (Citations omitted)

The Resolutions denying Philippine National Banks applications were interlocutory orders since
the Resolutions did not dispose of the merits of the main case.

CA-G.R. CV No. 79732-MIN originated from Civil Case No. 28,170-2000, which involved the
issues regarding the interest rates imposed by Philippine National Bank. Hence, the denial of
Philippine National Banks applications did not determine the issues on the interest rates
imposed by Philippine National Bank.

The proper remedy for Philippine National Bank would have been to file a petition for certiorari
under Rule 65 or, in the alternative, to await the outcome of the main case and file an appeal,
raising the denial of its applications as an assignment of error.

In any case, we continue to resolve the arguments raised in G.R. No. 173194.

Philippine National Bank argues in its Petition for Review docketed as G.R. No. 173194 that its
application to hold the injunction bond liable for damages was filed on time. It points out that the
phrase "before the judgment becomes executory" found in Section 20273 of Rule 57 refers to the
judgment in the main case, which, in this case, refers to CA-G.R. CV No. 79732.274

Philippine National Bank also argues that the Court of Appeals erred in denying its application to
be appointed as receiver because although the Sheriffs Provisional Certificate of Sale was not
registered, the Certificate of Sale "provides the basis for [Philippine National Bank] to claim
ownership over the foreclosed properties."275 As the highest bidder, Philippine National Bank had
the right to receive the rental income of the foreclosed properties.276

Spouses Limso and Davao Sunrise filed their Comment,277 countering that the Court of Appeals
did not err in denying Philippine National Banks applications to hold the injunction bond liable
for damages and to be appointed as receiver.278 They cite San Beda College v. Social Security
System,279 where this court ruled that "the claim for damages for wrongful issuance of injunction
must be filed before the finality of the decree dissolving the questioned writ."280

They highlight Philippine National Banks admission that the writ of preliminary injunction was
dissolved in January 2002, and that the Decision281 dissolving the writ attained finality on
September 11, 2002.282
Spouses Limso and Davao Sunrise further point out that while CA-G.R. CV No. 79732 was still
pending before the Court of Appeals, "the decree dissolving the questioned Writ of Preliminary
Injunction had already become final."283 Thus, Philippine National Bank filed its application out
of time.284

They argue that in any case, Philippine National Bank cannot claim damages on the injunction
bond since it was unable to secure a judgment in its favor in Civil Case No. 28,170-2000.285

They further argue that the Court of Appeals was correct in denying Philippine National Banks
application to be appointed as receiver on the ground that Philippine National Bank is a party to
the case and hence, it cannot be appointed as receiver.286

Spouses Limso and Davao Sunrise then allege that Philippine National Bank is guilty of forum
shopping. They argue that Philippine National Banks ex-parte Petition for the issuance of a writ
of possession, docketed as Other Case No. 124-2002, and the application to be appointed as
receiver have the same purpose: to obtain possession of the properties.287

Philippine National Bank, through counsel, filed its Reply, countering that San Beda College was
decided when the 1964 Rules of Court was still in effect.288 It argues that the cited case is no
longer applicable because the 1964 Rules was superseded by the 1997 Rules of Civil
Procedure.289 The applicable case is Hanil Development Co., Ltd. v. Intermediate Appellate
Court,290 where this court ruled that "the judgment against the attachment bond could be included
in the final judgment of the main case."291

Philippine National Bank also argued that under the 1997 Rules of Civil Procedure, the applicant
for damages does not have to be the winning party.292

Philippine National Bank further argues that it did not commit forum shopping since "there is no
identity of parties between CA G.R. CV No. 79732 . . . and Other Case No. 124-2002."293 The
causes of action and reliefs sought in the two cases are different.294 It points out that its
application to be appointed as receiver is a provisional remedy under Rule 59 of the 1997 Rules
of Civil Procedure, while its prayer for the issuance of a writ of possession in Other Case No.
124-2002 is based on its right to possess the properties involved.295

We rule that the Court of Appeals properly denied Philippine National Banks application to hold
the injunction bond liable for damages and be appointed as receiver. We also rule that no forum
shopping was committed by Philippine National Bank. However, the Court of Appeals erred in
ruling that Philippine National Bank filed its application to hold the injunction bond liable for
damages out of time.

The Court of Appeals, in its Resolution dated March 2, 2006, explained:

Records show that when this Court annulled the RTCs order of injunction, Davao Sunrise
thereafter elevated the matter to the Supreme Court. On July 24, 2002, the Supreme Court denied
its petition for having been filed out of time and an Entry of Judgment was issued on
Sept[ember] 11, 2002.
PNBs instant application however was filed only on February 17, 2005 and/or in the course of
its appeal on the main case about two (2) years and five (5) months after the judgment
annulling the injunction order attained finality.

Clearly, despite that it already obtained a favorable judgment on the injunction matter, PNB
failed to file (before the court a quo) an application for damages against the bond before
judgment was rendered in the main case by the court a quo. Thus, even for this reason alone,
Davao Sunrise and its bondsman are relieved of further liability thereunder.296 (Citations omitted)

The Petition referred to by the Court of Appeals in the quoted Resolution was docketed as G.R.
No. 152812 and was entitled Davao Sunrise Investment and Development Corporation, et al. v.
Court of Appeals, et al.297 G.R. No. 152812 originated from CA G.R. SP No. 63351.298 CA G.R.
SP No. 63351 was a Petition for Certiorari filed by Philippine National Bank, which questioned
the issuance of a writ of preliminary injunction in Civil Case No. 28,170-2000.299

In the Decision300 dated January 10, 2002, the Court of Appeals granted Philippine National
Banks Petition for Certiorari and held that:

In the case at bar, respondents claim to a right to preliminary injunction based on PNBs
purported unilateral imposition of interest rates and subsequent increases thereof, is not a right
warranting the issuance of an injunction to halt the foreclosure proceedings. On the contrary, it is
petitioner bank which has proven its right to foreclose respondents mortgaged properties,
especially since respondents have admitted their indebtedness to PNB and merely questioning
the interest rates imposed by the bank. . . .

....

Above all, the core and ultimate issue raised in the main case below is the interest stipulation in
the loan agreements between the petitioner and private respondents, the validity of which is still
to be determined by the lower court. Injunctive relief cannot be made to rest on the assumption
that said interest stipulation is void as it would preempt the merits of the main case.

WHEREFORE, premises considered, the assailed Orders of respondent judge dated December 4
and 21, 2000 are hereby ANNULLED and SET ASIDE, and the Order dated November 20, 2000
denying private respondents prayer for the issuance of a writ of preliminary injunction is
REINSTATED.

SO ORDERED.301

Spouses Limso and Davao Sunrise assailed the Decision in CA-G.R. SP No. 63351 and filed
before this court a Petition for Review, docketed as G.R. No. 152812. However, the Petition for
Review was denied in the Resolution302 dated July 24, 2002 for being filed out of time, and Entry
of Judgment303 was made on September 11, 2002.
The issuance of the writ of preliminary injunction in Civil Case No. 28,170-2000 was an
interlocutory order, and was properly questioned by Philippine National Bank through a Petition
for Certiorari.

However, the Court of Appeals erred in ruling that Philippine National Banks application was
filed out of time.

Section 20 of Rule 57 of the Rules of Civil Procedure provides: SECTION 20. Claim for
Damages on Account of Improper, Irregular or Excessive Attachment. An application for
damages on account of improper, irregular or excessive attachment must be filed before the trial
or before appeal is perfected or before the judgment becomes executory, with due notice to the
attaching party and his surety or sureties, setting forth the facts showing his right to damages and
the amount thereof. Such damages may be awarded only after proper hearing and shall be
included in the judgment on the main case.

If the judgment of the appellate court be favorable to the party against whom the attachment was
issued, he must claim damages sustained during the pendency of the appeal by filing an
application in the appellate court, with notice to the party in whose favor the attachment was
issued or his surety or sureties, before the judgment of the appellate court becomes executory.
The appellate court may allow the application to be heard and decided by the trial court.

Nothing herein contained shall prevent the party against whom the attachment was issued from
recovering in the same action the damages awarded to him from any property of the attaching
party not exempt from execution should the bond or deposit given by the latter be insufficient or
fail to fully satisfy the award.

The judgment referred to in Section 20 of Rule 57 should mean the judgment in the main case.
In Carlos v. Sandoval:304

Section 20 essentially allows the application to be filed at any time before the judgment
becomes executory. It should be filed in the same case that is the main action, and cannot
be instituted separately. It should be filed with the court having jurisdiction over the case
at the time of the application. The remedy provided by law is exclusive and by failing to
file a motion for the determination of the damages on time and while the judgment is still
under the control of the court, the claimant loses his right to damages.305 (Citations
omitted)

In this case, Philippine National Bank filed its application306 during the pendency of the appeal
before the Court of Appeals. The application was dated January 12, 2005,307 while the appeal in
the main case, docketed as CA-G.R. CV No. 79732-MIN, was decided on August 13,
2009.308 Hence, Philippine National Banks application to hold the injunction bond liable for
damages was filed on time.

The Court of Appeals properly denied Philippine National Banks application to be appointed as
a receiver.
Rule 59, Section 1 provides the grounds when a receiver may be appointed:

SECTION 1. Appointment of Receiver. Upon a verified application, one or more receivers of


the property subject of the action or proceeding may be appointed by the court where the action
is pending, or by the Court of Appeals or by the Supreme Court, or a member thereof, in the
following cases:

(a) When it appears from the verified application, and such other proof as the
court may require, that the party applying for the appointment of a receiver has an
interest in the property or fund which is the subject of the action or proceeding,
and that such property or fund is in danger of being lost, removed, or materially
injured unless a receiver be appointed to administer and preserve it;

(b) When it appears in an action by the mortgagee for the foreclosure of a


mortgage that the property is in danger of being wasted or dissipated or materially
injured, and that its value is probably insufficient to discharge the mortgage debt,
or that the parties have so stipulated in the contract of mortgage;

(c) After judgment, to preserve the property during the pendency of an appeal, or
to dispose of it according to the judgment, or to aid execution when the execution
has been returned unsatisfied or the judgment obligor refuses to apply his property
in satisfaction of the judgment, or otherwise to carry the judgment into effect;

(d) Whenever in other cases it appears that the appointment of a receiver is the
most convenient and feasible means of preserving, administering, or disposing of
the property in litigation.

During the pendency of an appeal, the appellate court may allow an application for the
appointment of a receiver to be filed in and decided by the court of origin and the receiver
appointed to be subject to the control of said court.

In Commodities Storage & Ice Plant Corporation v. Court of Appeals:309

The general rule is that neither party to a litigation should be appointed as receiver without the
consent of the other because a receiver should be a person indifferent to the parties and should be
impartial and disinterested. The receiver is not the representative of any of the parties but of all
of them to the end that their interests may be equally protected with the least possible
inconvenience and expense.310 (Citations omitted)

The Court of Appeals cited Spouses Limso and Davao Sunrises

objection to Philippine National Banks application to be appointed as

receiver as one of the grounds why the application should fail.311


Also, the Court of Appeals found that the mortgaged properties of Spouses Limso and Davao
Sunrise were earning approximately 12,000,000.00 per month. This proves that the properties
were being administered properly and did not require the appointment of a receiver. Also, to
appoint Philippine National Bank as receiver would be premature since the trial courts Decision
was pending appeal.312

Philippine National Bank did not commit forum shopping when it filed an ex-parte Petition for
the issuance of a writ of possession and an application for appointment as receiver.

The elements of forum shopping are:

(a) identity of parties, or at least such parties as represent the same interests in both
actions;

(b) identity of rights asserted and relief prayed for, the relief being founded on the same
facts; and

(c) the identity of the two preceding particulars, such that any judgment rendered in the
other action will, regardless of which party is successful, amount to res judicata in the
action under consideration.313 (Citation omitted)

There is no identity of parties because the party to the Petition for Issuance of Writ of Possession
is Philippine National Bank only, while there are two parties to application for appointment as
receiver: Philippine National Bank on one hand, and Spouses Limso and Davao Sunrise on the
other.

The causes of action are also different. In the Petition for Issuance of Writ of Possession,
Philippine National Bank prays that it be granted a writ of possession over the foreclosed
properties because it is the winning bidder in the foreclosure sale.314 On the other hand,
Philippine National Banks application to be appointed as receiver is for the purpose of
preserving these properties pending the resolution of CA-G.R. CV No. 79732.315 While the
issuance of a writ of possession or the appointment as receiver would have the same result of
granting possession of the foreclosed properties to Philippine National Bank, Philippine National
Banks right to possess these properties as the winning bidder in the foreclosure sale is different
from its interest as creditor to preserve these properties.

II

There is no mutuality of contracts when the determination or imposition of interest rates is at the
sole discretion of a party to the contract. Further, escalation clauses in contracts are void when
they allow the creditor to unilaterally adjust the interest rates without the consent of the debtor.

The Petitions docketed as G.R. Nos. 196958 and 197120 assail the Decision in CA-G.R. CV No.
79732-MIN.316
Philippine National Bank argues that the principle of mutuality of contracts was not violated
because Spouses Limso and Davao Sunrise were notified as to the applicable interest rates, and
their consent was obtained before the effectivity of the agreement.317 There was no unilateral
imposition of interest rates since the rates were dependent on the prevailing market rates.318

Philippine National Bank also argues that Spouses Limso and Davao Sunrise were regularly
informed by Philippine National Bank of the interest rates imposed on their loan, as shown by
Robert Alan L. Limsos signatures on the letters sent by Philippine National Bank.319

Philippine National Bank further argues that loan agreements with escalation clauses, by their
nature, "would not indicate the exact rate of interest applicable to a loan precisely because it is
made to depend by the parties to external factors such as market indicators and/or government
regulations affecting the cost of money."320

Philippine National Bank cites Solidbank Corp., (now Metropolitan Bank and Trust Company) v.
Permanent Homes, Incorporated,321 where this court held that "contracts with escalation clause
do not violate the principle of mutuality of contracts."322

Philippine National Bank contends that the Conversion, Restructuring and Extension Agreement
novated the previous contracts with Spouses Limso and Davao Sunrise. In addition, the alleged
infirmities in the previous contracts were set aside upon the execution of the Conversion,
Restructuring and Extension Agreement. 323

On the other hand, Spouses Limso and Davao Sunrise argue that the Court of Appeals did not err
in ruling that the interest rates were imposed unilaterally. Spouses Limso and Davao Sunrise
allege that the interest rates were not stipulated in writing, in violation of Article 1956 of the
Civil Code.324 Also, the Court of Appeals did not err in reducing the penalties and attorneys fees
since Article 2227 of the Civil Code states:325

Article 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be


equitably reduced if they are iniquitous or unconscionable.

Spouses Limso and Davao Sunrise add that the letters sent by Philippine National Bank to Davao
Sunrise were not agreements but mere notices that the interest rates were increased by Philippine
National Bank.326 Moreover, the letters were received by Davao Sunrises employees who were
not authorized to receive such letters.327 Some of the letters did not even appear to have been
received by anyone at all.328

Spouses Limso and Davao Sunrise allege that Philippine National Bank admitted that the
penalties stated in the agreements were in the nature of liquidated damages.329 Nevertheless,
Spouses Limso and Davao Sunrise question the Court of Appeals ruling insofar as it held that
their remaining obligation to Philippine National Bank is 803,185,411.11 as of September 1,
2008. According to Spouses Limso and Davao Sunrise, they have overpaid Philippine National
Bank in the amount of 15,915,588.89.330
Philippine National Bank counters that Davao Sunrise and Spouses Limsos promissory notes
had a provision stating:

[T]he rate of interest shall be set at the start of every Interest Period. For this purpose, I/We agree
that the rate of interest herein stipulated may be increased or decreased for the subsequent
Interest Periods, with PRIOR NOTICE TO THE BORROWER in the event of changes in the
interest rate prescribed by law or the Monetary Board of Central Bank of the Philippines or in the
Banks overall cost of funds. I/We hereby agree that IN THE EVENT I/WE ARE NOT
AGREEABLE TO THE INTEREST RATE FIXED FOR ANY INTEREST PERIOD, I/WE
HAVE THE OPTION TO PREPAY THE LOAN OR CREDIT FACILITY WITHOUT
PENALTY within ten (10) calendar days from the Interest Setting Date.331 (Emphasis in the
original)

As to the letters sent by Philippine National Bank, these letters were received by the Chief
Finance Officer, Chairman, and President of Davao Sunrise. In addition, assuming that the
employees who allegedly received the letters were not authorized to do so, the unauthorized acts
were ratified by Spouses Limso and Davao Sunrise when they used the proceeds of the loan.332

We rule that there was no mutuality of contract between the parties since the interest rates
imposed were based on the sole discretion of Philippine National Bank.333 Further, the
escalation clauses in the real estate mortgage "[did] not specify a fixed or base
interest[.]"334 Thus, the interest rates are invalid.

The principle of mutuality of contracts is stated in Article 1308 of the Civil Code as follows:

Article 1308. The contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them.

The importance of the principle of mutuality of contracts was discussed in Juico v. China
Banking Corporation:335

The binding effect of any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties;
and (2) that there must be mutuality between the parties based on their essential equality. Any
contract which appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance of the
contract which is left solely to the will of one of the parties, is likewise, invalid.336 (Citation
omitted)

When there is no mutuality between the parties to a contract, it means that the parties were not
on equal footing when the terms of the contract were negotiated. Thus, the principle of mutuality
of contracts dictates that a contract must be rendered void when the execution of its terms is
skewed in favor of one party.337

The Court of Appeals also noted that since the interest rates imposed were at the sole discretion
of Philippine National Bank, and that Spouses Limso and Davao Sunrise were merely notified
when there were changes in the interest rates, Philippine National Bank violated the principle of
mutuality of contracts.338 The Court of Appeals ruled that:

We cannot subscribe to appellant banks allegation that plaintiffs-appellees agreed to these


interest rates by receiving various letters from PNB. Those letters cannot be construed as
agreements as a simple reading of those letters would show that they are mere notices informing
plaintiffs-appellees that the bank, through its top management, had already imposed interest rates
on their loan. The uniform wordings of the said letters go this way:

This refers to your existing credit facility in the principal amount of P850.0 MM granted by the
Philippine National Bank by and under the terms and conditions of that Credit Agreement dated
12.2.97 (Renewal of Credit Facility).

We wish to advise you that the top management has approved an interest rate of 20.756% which
will be used in computing the interest due on your existing peso and redenominated availments
against the credit facility for the period July 20 to August 19, 1998.

If you are amenable to this arrangement, please signify your conformity on the space provided
below and return to us the original copy of the document. If we receive no written objection by
the end of 10 days from date of receipt of this letter, we will take it to mean that you agree to the
new interest rate we quote. On the other hand, if you disagree with the quoted rate, you will have
to pay the loan in full within the same ten-day period otherwise, the entire loan will be
considered due and demandable.339(Citation omitted)

The contents of the letter quoted by the Court of Appeals show that there was no room for
negotiation among Philippine National Bank, Spouses Limso, and Davao Sunrise when it came
to the applicable interest rate. Since there was no room for negotiations between the parties with
regard to the increases of the rates of interest, the principle of mutuality of contracts was
violated. There was no meeting of the minds between Spouses Limso, Davao Sunrise, and
Philippine National Bank because the increases in the interest rates were imposed on them
unilaterally.

Meeting of the minds between parties to a contract is manifested when the elements of a valid
contract are all present.340 Article 1318 of the Civil Code provides:

Article 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

When one of the elements is wanting, no contract can be perfected.341 In this case, no consent
was given by Spouses Limso and Davao Sunrise as to the increase in the interest rates.
Consequently, the increases in the interest rates are not valid.
Even the promissory notes contained provisions granting Philippine National Bank the sole
discretion to set the interest rate:

[Promissory Note] NO. 0015138516350115 . . .

....

. . . I/We, jointly and severally, promise to pay to the order of the Philippine National Bank (the
Bank) at its office in cm recto avenue davao city [sic], Philippines, the sum of PHILIPPINE
PESOS:583,183,333.34 (P583,183,333.34) together with interest thereon for the current Interest
Period at a rate of to be set by mgt. [management]. Interest Period shall mean the period
commencing on the date hereof and having a duration not exceeding monthly (____) days and
each similar period thereafter commencing upon the expiry of the immediately preceding Interest
Period. The rate of interest shall be set at the start of every Interest Period. For this purpose, I/We
agree that the rate of interest herein stipulated may be increased or decreased for the subsequent
Interest Periods, with prior notice to the Borrower in the event of changes in interest rate
prescribed by law or the Monetary Board of the Central Bank of the Philippines, or in the Banks
overall cost of funds. I/We hereby agree that in the event I/We are not agreeable to the interest
rate fixed for any Interest Period, I/we shall have the option to prepay the loan or credit facility
without penalty within ten (10) calendar days from the Interest Setting Date.342

Promissory Note No. 0015138516350116343 contained the same provisions, differing only as to
the amount of the obligation.

Assuming that Davao Sunrise and Spouses Limso agreed to the increase in interest rates, the
interest rates are still null and void for being unreasonable.344

This court has held that while the Usury Law was suspended by Central Bank Circular No. 905,
Series of 1982, unconscionable interest rates may be declared illegal.345 The suspension of the
Usury Law did not give creditors an unbridled right to impose arbitrary interest rates. To
determine whether an interest rate is unconscionable, we are guided by the following
pronouncement:

In determining whether the rate of interest is unconscionable, the mechanical application of pre-
established floors would be wanting. The lowest rates that have previously been considered
unconscionable need not be an impenetrable minimum. What is more crucial is a consideration
of the parties contexts. Moreover, interest rates must be appreciated in light of the fundamental
nature of interest as compensation to the creditor for money lent to another, which he or she
could otherwise have used for his or her own purposes at the time it was lent. It is not the default
vehicle for predatory gain. As such, interest need only be reasonable. It ought not be a supine
mechanism for the creditors unjust enrichment at the expense of another.346

A reading of the interest provisions in the original agreement and the Conversion, Restructuring
and Extension Agreement shows that the interest rates imposed by Philippine National Bank
were usurious and unconscionable.
In the original credit and loan agreements executed in 1993, the interest provisions provide:

CREDIT AGREEMENT

....

1.04 Interest on Availments. (a) The Borrowers agree to pay interest on each availment from date
of each availment up to, but not including the date of full payment thereof at a rate per annum
that is determined by the Bank to be equivalent to the Banks prime rate less 1.0% in effect as of
the date of the relevant Availment, subject to quarterly review and to maintenance of deposits
with ADB of at least 5% of the amount availed in its savings and current account. Non
compliance of ADB requirement shall subject the credit line to regular interest rate which is the
prime rate plus applicable spread.347

LOAN AGREEMENT

....

1.03 Interest. (a) The Borrowers hereby agree to pay interest on the loan from the date of
Drawdown up to Repayment Date at the rate that is determined by the Bank to be the Banks
prime rate in effect at the Date of Drawdown less 1.0% and which shall be reset every 90 days to
coincide with interest payments.

(b) The determination by the Bank of the amount of interest due and payable hereunder shall be
conclusive and binding on the borrower in the absence of manifest error in the
computation.348(Emphasis supplied, underscoring in the original)

In the Conversion, Restructuring and Extension Agreement, the interest provisions state:

SECTION 2. TERMS OF LOAN I

....

2.04 Interest. (a) The Borrowers agree to pay the Bank interest on Loan I from the Effective
Date, until the date of full payment thereof at the rate per annum to be set by the Bank. The
interest rateshall be reset by the Bank every month.

....

SECTION 3. TERMS OF LOAN II

....

3.04 Interest. (a) The Borrowers agree to pay the Bank interest on Loan II from the Effective
Date, until the date of full payment thereof at the rate per annum to be set by the Bank. The
interest rate shall be reset by the Bank every month.349 (Emphasis supplied, underscoring in the
original)

From the terms of the loan agreements, there was no way for Spouses Limso and Davao Sunrise
to determine the interest rate imposed on their loan because it was always at the discretion of
Philippine National Bank.

Nor could Spouses Limso and Davao Sunrise determine the exact amount of their obligation
because of the frequent changes in the interest rates imposed.

As found by the Court of Appeals, the loan agreements merely stated that interest rates would be
imposed. However, the specific interest rates were not stipulated, and the subsequent increases in
the interest rates were all at the discretion of Philippine National Bank.350

Also invalid are the escalation clauses in the real estate mortgage and promissory notes. The
escalation clause in the real estate mortgage states:

"(k) INCREASE OF INTEREST RATE:

"The rate of interest charged on the obligation secured by this mortgage as well as the interest on
the amount which may have been advanced by the mortgagee, in accordance with the provisions
hereof shall be subject during the life of this contract to such an increase within the rate allowed
by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors."351

The escalation clause in the promissory notes352 states:

For this purpose, I/We agree that the rate of interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary Board or the Central Bank of the
Philippines, or in the Banks overall cost of funds.353

Banco Filipino Savings and Mortgage Bank v. Judge Navarro354 defined an escalation clause as
"one which the contract fixes a base price but contains a provision that in the event of specified
cost increases, the seller or contractor may raise the price up to a fixed percentage of the base."355

This court has held that escalation clauses are not always void since they serve "to maintain
fiscal stability and to retain the value of money in long term contracts."356 However:

[A]n escalation clause "which grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the debtor of the right to assent to an
important modification in the agreement" is void. A stipulation of such nature violates the
principle of mutuality of contracts. Thus, this Court has previously nullified the unilateral
determination and imposition by creditor banks of increases in the rate of interest provided in
loan contracts.

....
. . . [W]e hold that the escalation clause is . . . void because it grants respondent the power to
impose an increased rate of interest without a written notice to petitioners and their written
consent. Respondents monthly telephone calls to petitioners advising them of the prevailing
interest rates would not suffice. A detailed billing statement based on the new imposed interest
with corresponding computation of the total debt should have been provided by the respondent to
enable petitioners to make an informed decision. An appropriate form must also be signed by the
petitioners to indicate their conformity to the new rates. Compliance with these requisites is
essential to preserve the mutuality of contracts. For indeed, one-sided impositions do not have
the force of law between the parties, because such impositions are not based on the parties'
essential equality.357 (Citations omitted)

The interest rate provisions in Philippine National Banks loan agreements and real estate
mortgage contracts have been nullified by this court in several cases. Even the escalation clauses
in Philippine National Banks contracts were noted to be violative of the principle of mutuality of
contracts.358

The original loan agreement in this case was executed in 1993. Prior

to the execution of the original loan agreement, this court promulgated a Decision in 1991 ruling
that "the unilateral action of the [Philippine National Bank] in increasing the interest rate on the
private respondents loan, violated the mutuality of contracts ordained in Article 1308 of the
Civil Code[.]"359

In Philippine National Bank v. Court of Appeals,360 the interest rate provisions were nullified
because these allowed Philippine National Bank to unilaterally increase the interest rate.361 The
nullified interest rate provisions were worded as follows:

"The Credit Agreement provided inter alia, that

(a) The BANK reserves the right to increase the interest rate within the limits allowed by law at
any time depending on whatever policy it may adopt in the future: Provided, that the interest rate
on this accommodation shall be correspondingly decreased in the event that the applicable
maximum interest is reduced by law or by the Monetary Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in
the maximum interest rate.

"The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time
without notice, beyond the stipulated rate of 12% but only within the limits allowed by law.

The Real Estate Mortgage contract likewise provided that

(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by
this mortgage as well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provision hereof, shall be subject during the life of this
contract to such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.362
This court explained that:

Similarly, contract changes must be made with the consent of the contracting parties. The minds
of all the parties must meet as to the proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the
rate of interest is always a vital component, for it can make or break a capital venture. Thus, any
change must be mutually agreed upon, otherwise, it is bereft of any binding effect.363

In a subsequent case364 also involving Philippine National Bank, this court likewise nullified the
interest rate provisions of Philippine National Bank and discussed:

In this case no attempt was made by PNB to secure the conformity of private respondents to the
successive increases in the interest rate. Private respondents assent to the increases cannot be
implied from their lack of response to the letters sent by PNB, informing them of the increases.
For as stated in one case, no one receiving a proposal to change a contract is obliged to answer
the proposal.365 (Citation omitted)

However, only the interest rate imposed is nullified; hence, it is deemed not written in the
contract. The agreement on payment of interest on the principal loan obligation remains. It is a
basic rule that a contract is the law between contracting parties.366 In the original loan agreement
and the Conversion, Restructuring and Extension Agreement, Spouses Limso and Davao Sunrise
agreed to pay interest on the loan they obtained from Philippine National Bank. Such obligation
was not nullified by this court. Thus, their obligation to pay interest in their loan obligation
subsists.367

Spouses Abella v. Spouses Abella368 involved a simple loan with an agreement to pay interest.
Unfortunately, the applicable interest rate was not stipulated by the parties. This court discussed
that in cases where the parties fail to specify the applicable interest rate, the legal rate of interest
applies. This court also discussed that the applicable legal rate of interest shall be the prevailing
rate at the time when the agreement was entered into:369

This is so because interest in this respect is used as a surrogate for the parties intent, as
expressed as of the time of the execution of their contract. In this sense, the legal rate of interest
is an affirmation of the contracting parties intent; that is, by their contracts silence on a specific
rate, the then prevailing legal rate of interest shall be the cost of borrowing money. This rate,
which by their contract the parties have settled on, is deemed to persist regardless of shifts in the
legal rate of interest. Stated otherwise, the legal rate of interest, when applied as conventional
interest, shall always be the legal rate at the time the agreement was executed and shall not be
susceptible to shifts in rate.370

Further, Spouses Abella cited Article 2212371 of the Civil Code and the ruling in Nacar v. Gallery
Frames,372 which both state that "interest due shall itself earn legal interest from the time it is
judicially demanded:"373
[T]he interest due on conventional interest shall be at the rate of 12% per annum from [date of
judicial demand] to June 30, 2013. Thereafter, or starting July 1, 2013, this shall be at the rate of
6% per annum.374

In this case, the Conversion, Restructuring and Extension Agreement was executed on January
28, 1999. Thus, the applicable interest rate on the principal loan obligation (conventional
interest) is at 12% per annum. With regard to the interest due on the conventional interest,
judicial demand was made on August 21, 2000 when Philippine National Bank filed a
Petition375 for Extrajudicial Foreclosure of Real Estate Mortgage.376 Thus, from August 21, 2000
to June 30, 2013, the interest rate on conventional interest shall be at 12%. From July 1, 2013
until full payment, the applicable interest rate on conventional interest shall be at 6%.

III

The Conversion, Restructuring and Extension Agreement novated the original agreement
executed in 1993. However, the nullified interest rate provisions in the original loan agreement
cannot be deemed as having been legitimized, ratified, or set aside.

Philippine National Bank argues that the Conversion, Restructuring and Extension Agreement
novated the original loan agreement and that the novation effectively set aside the infirmities in
the original loan agreement.377

The Civil Code provides that:

Article 1292. In order that an obligation may be extinguished by another which substitutes the
same, it is imperative that it be so declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other.

Novation has been defined as:

Novation may either be express, when the new obligation declares in unequivocal terms that the
old obligation is extinguished, or implied, when the new obligation is on every point
incompatible with the old one. The test of incompatibility lies on whether the two obligations can
stand together, each one with its own independent existence.

For novation, as a mode of extinguishing or modifying an obligation, to apply, the following


requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.378 (Citations omitted)


The original Credit Agreement379 was executed on September 1, 1993,380 while the Conversion,
Restructuring and Extension Agreement381 was executed on January 28, 1999.382

Pertinent portions of the Conversion, Restructuring and Extension Agreement state:

WITNESSETH: That

....

WHEREAS, the Borrowers [referring to DSIDC and spouses Limso] acknowledge that they
have outstanding obligations (the "Obligations") with the Bank broken down as follows:

(i) Credit Line 583.18 Million (as of September 30, 1998);

(ii) Loan 266.67 Million (as of September 30, 1998); and

(iii) Interest 217.15 Million (as of December 31, 1998);

WHEREAS, at the request of the Borrowers, the Bank has approved (a) the conversion and
restructuring of the Credit Line portion of the Obligations into a term loan, (b) the extension of
the term of the Loan for another four (4) years, (c) the capitalization on accrued interest (up to
December 31, 1998) on the Obligations, (d) the waiver of the penalties charges (if any) accruing
on the Obligations, and (e) the partial release of chattel mortgage on stock inventories, subject to
the terms and conditions hereinafter set forth;

....

SECTION 2. TERMS OF LOAN I

2.01 Amount of Loan I. Loan I shall be in the principal amount not exceeding PESOS: FIVE
HUNDRED EIGHTY THREE MILLION ONE HUNDRED EIGHTY THOUSAND
(583,180,000.00)

....

SECTION 3. TERMS OF LOAN II

3.01 Amount of Loan II. Loan II shall be in the principal amount not exceeding PESOS: FOUR
HUNDRED EIGHTY THREE MILLION SEVEN HUNDRED EIGHTY THOUSAND
(483,780,000.00).383

In this case, the previous valid obligation of Spouses Limso and Davao Sunrise was the payment
of a loan in the total amount of 700 million, plus interest.

Upon the request of Spouses Limso and Davao Sunrise, Philippine National Bank agreed to
restructure the original loan agreement.384
Philippine National Bank summarized the Conversion, Restructuring and Extension Agreement
as follows:

(a) The conversion of the Revolving Credit Line into a Term Loan in the principal
amount of 583.18 Million and denominated as "Loan I".

(b) The Extension for another four (4) years of the original long term loan (from 01
September 2001 to 31 December 2005);

(c) The capitalization of the accrued interest on both the Revolving Credit Line and the
Long Term Loan up to 31 December 1998;

(d) The consolidation of the accrued interest and the outstanding obligation of the original
Long Term Loan to form "Loan 2" with the total principal amount of P483.82 Million;

(e) Waiver of penalty charges;

(f) Partial release of chattel mortgage on the stock inventories;

(g) Both "Loan I" and "Loan II" were made payable within seven (7) years in monthly
amortization and a balloon payment on or before December 2005.385

When the loan agreement was restructured, the principal obligation of Spouses Limso and Davao
Sunrise became 1.067 billion.

The Conversion, Restructuring and Extension Agreement novated the original credit agreement
because the principal obligation itself changed.

Important provisions of the original agreement were altered. For example, the penalty charges
were waived and the terms of payment were extended.

Further, the preambular clauses of the Conversion, Restructuring and Extension Agreement show
that Spouses Limso and Davao Sunrise sought to change the terms of the original agreement and
that they themselves acknowledged their obligation to be 1.067 billion. They are now estopped
from claiming that their obligation should be based on the original agreement when it was
through their own actions that the loan was restructured.

Thus, the Court of Appeals in CA-G.R. CV No. 79732-MIN erred in not declaring that the
Conversion, Restructuring and Extension Agreement novated the original agreement and in
computing Spouses Limso and Davao Sunrises obligation based on the original agreement.

Since the Conversion, Restructuring and Extension Agreement novated the original credit
agreement, we modify the Court of Appeals Decision in that the outstanding obligation of
Spouses Limso and Davao Sunrise should be computed on the basis of the Conversion,
Restructuring and Extension Agreement.
In the Court of Appeals Decision dated August 13, 2009:

Computing the interest at 12% per annum on the principal amount of 700 Million Pesos, the
interest should be 84 Million Pesos per annum. Multiplying 84 Million Pesos by 15 years from
September 1, 1993 to September 1, 2008, the interest for the 15-year period would be One
Billion Two Hundred Sixty Million Pesos (P1,260,000,000.00). Then, by adding the interest of
P1,260,000,000.00 to the principal amount of 700 Million Pesos, the total obligation of
plaintiffs-appellees would be One Billion Nine Hundred Sixty Million Pesos
(P1,960,000,000.00) by September 1, 2008. And since plaintiffs-appellees has paid a total
amount of One Billion One Hundred Fifty Six Million Eight Hundred Fourteen Thousand Five
Hundred Eighty Eight Pesos and 89/100 (P1,156,814,588.89) to appellant PNB as of December
5, 1998, as per PNBs official computation of payments per official receipts, then, plaintiffs-
appellees would still have an outstanding balance of about Eight Hundred Three Million One
Hundred Eighty Five Thousand Four Hundred Eleven and 11/100 Pesos (P 803,185,411.11) as of
September 1, 2008. The amount of P 803,185,411.11 will earn interest at the legal rate of 12%
per annum from September 1, 2008 until fully paid.

....

WHEREFORE, the assailed Decision dated June 19, 2002 and Order dated August 13, 2002 of
the Regional Trial Court of Davao City, Branch 17 in Civil Case No. 28,170-2000 declaring the
unilateral imposition of interest rates by defendant-appellant PNB as null and void appealed from
areAFFIRMED with the MODIFICATION that the obligation of plaintiffs-appellees arising
from the Loan and Revolving Credit Line and subsequent Conversion, Restructuring and
Extension Agreement as Loan I and Loan II shall earn interest at the legal rate of twelve percent
(12%) per annum computed from September 1, 1993, until fully paid and satisfied.

SO ORDERED.386

Notably, in the body of the Court of Appeals Decision, Spouses Limso and Davao Sunrises
obligation was computed on the basis of the original loan agreement, while in the dispositive
portion, the Court of Appeals cited both the original loan agreement and the Conversion,
Restructuring and Extension Agreement.

The general rule is that:

Where there is a conflict between the dispositive part and the opinion of the court contained in
the text or body of the decision, the former must prevail over the latter on the theory that the
dispositive portion is the final order, while the opinion is merely a statement ordering
nothing.387 (Citation omitted)

To avoid confusion, we also rule that the interest rate provisions and the escalation clauses in the
Conversion, Restructuring and Extension Agreement are nullified insofar as they allow
Philippine National Bank to unilaterally determine and increase the imposable interest rates.
Article 1409388 of the Civil Code provides that void contracts cannot be ratified. Hence, the void
interest rate provisions in the original loan agreement could not have been ratified by the
execution of the Conversion, Restructuring and Extension Agreement.

IV

The proper remedy to assail a decision on pure questions of law is to file a petition for review on
certiorari under Rule 45, not an appeal under Rule 41 of the 1997 Rules of Civil Procedure.

One of the issues raised by Philippine National Bank in G.R. No. 205463 is the dismissal of its
appeal under Rule 41 by the Court of Appeals in its Decision dated January 21, 2013.389

Philippine National Bank, through counsel, argues that Rule 41 is the proper remedy because its
Petition raises questions of fact and of law.390 For example, the issue of whether there is an
annotation of encumbrance on the titles of the mortgaged properties is a question of fact.391

Denying Philippine National Banks appeal under Rule 41, the Court of Appeals stated that:

[Philippine National Bank] simply takes issue against the conclusions made by the court a quo
which pertains to the matter of whether mere entry in the Primary Entry Book, sans the signature
of the registrar, already completes registration. It does not question the weight and probative
value of the fact that the signature of Atty. Patriarcha [sic] was previously entered in the records
then revoked by her. What PNB seeks, therefore, is a review of the decision of the court a quo
dismissing its petition, without delving into the weight of the evidence, but on the correctness of
the court a quos conclusions based on the evidence presented before it. This is clearly a question
of law.

....

To the mind of this Court, PNB seeks to harp repeatedly on the issue of the court a quos failure
to consider that the certificate of sale has been duly registered on February 4, 2002 upon mere
entry in the Primary Entry Book, even without the signature of the then register of deeds. Though
couched in different creative presentations, all the errors assigned by PNB point to one vital
question: What completes registration? To answer it, this Court is not asked to calibrate the
evidence presented, or gauge the truth or falsity, but to apply the appropriate law to the situation.
This is clearly a question of law.392 (Emphasis in the original)

In Land Bank of the Philippines v. Yatco Agricultural Enterprises,393 this court discussed the
difference between questions of law and questions of fact:

As a general rule, the Courts jurisdiction in a Rule 45 petition is limited to the review of pure
questions of law. A question of law arises when the doubt or difference exists as to what the law
is on a certain state of facts. Negatively put, Rule 45 does not allow the review of questions of
fact. A question of fact exists when the doubt or difference arises as to the truth or falsity of the
alleged facts.
The test in determining whether a question is one of law or of fact is "whether the appellate court
can determine the issue raised without reviewing or evaluating the evidence, in which case, it is a
question of law[.]" Any question that invites calibration of the whole evidence, as well as their
relation to each other and to the whole, is a question of fact and thus proscribed in a Rule 45
petition.394(Citations omitted)

Based on the foregoing, there was no error on the part of the Court of Appeals when it dismissed
Philippine National Banks Petition for being the wrong remedy. Indeed, Philippine National
Bank was not questioning the probative value of the evidence. Instead, it was questioning the
conclusion of the trial court that registration had not been perfected based on the evidence
presented.

The registration of the Sheriffs Provisional Certificate of Sale was completed.

Philippine National Bank argues that the registration was completed, and restates the doctrine
in National Housing Authority v. Basa, Jr., et al.:395

Once the Certificate of Sale is entered in the Primary Book of Entry of the Registry of Deeds
with the registrant having paid all the required fees and accomplished all that is required of him
under the law to cause registration, the registration is complete.396

Philippine National Bank further argues that "[t]he records of all the transactions are recorded in
the Primary Entry Book and the annotation on the titles of the transaction do not control
registration. It is the recording in the Primary Entry Book which controls registration."397

Philippine National Bank adds that though the annotation of a certificate of sale at the back of
the certificates of title is immaterial in the perfection of registration, the evidence shows that the
Certificate of Sale was annotated.398

Philippine National Bank alleges that registration was completed because Atty. Patriarca, the
Register of Deeds at that time, affixed her signature but would later erase it.399

Philippine National Bank cites Atty. Cruzabras Comment, which alleges that the Sheriffs
Provisional Certificate of Sale and other documents relative to the sale were registered in the
Primary Entry Book of the Registry of Deeds of Davao City.400 The Comment also states that:

3. The Sheriffs Provisional Certificate of Sale was annotated at the back of the aforementioned
titles but it does not bear the signature of the former Registrar of Deeds. Noted however is that
the portion below the annotation of the Provisional Sheriffs [sic] Certificate of Sale there
appears to be erasures ("snowpake"), and [Atty. Cruzabra] is not in a position to conclude as to
the circumstances [relative to said erasures], for lack of personal knowledge as to what transpired
at that time.401 (Citation omitted)
Philippine National Bank also cites the Decision in Administrative Case No. 02-13 dated January
12, 2005, which was the case against Atty. Patriarca for Grave Misconduct and Conduct
Unbecoming of a Public Official. In the Decision, the Land Registration Authority found that:

Respondent herein likewise admits that she finally signed the PNB transaction annotated on the
subject titles when she was informed that the motion for reconsideration was denied by this
Authority, but she subsequently erased her signature when she subsequently found out that an
appeal was filed by the Limso spouses.

....

The registration of these documents became complete when respondent affixed her signature
below these annotations. Whatever information belatedly gathered thereafter relative to the
circumstances as to the registrability of these documents, respondent can not unilaterally take
judicial notice thereof and proceed to lift at her whims and caprices what has already been
officially in force and effective, by erasing thereon her signature.402

In addition, Philippine National Bank argues that the erasure of Atty. Patriarcas signature using
correction fluid could not have revoked, cancelled, or annulled the registration since under
Section 108 of Presidential Decree 1529, only a court order can revoke registration.403

Philippine National Bank alleges that it has complied with the requirements under Section 7 of
Act No. 3135 and Section 47 of Republic Act No. 8791.404 Thus, it is entitled to a writ of
possession.405

The Office of the Solicitor General filed its Comment,406 quoting the dispositive portion of the
Land Registration Authoritys Consulta No. 3405 dated May 21, 2002:407

WHEREFORE, in view of the foregoing, the Sheriffs Provisional Certificate of Sale dated
February 04, 2002 is registerable on TCT Nos. T-147820, T-147386, and T-247012, provided all
other registration requirements are complied with.408 (Emphasis supplied)

The Office of the Solicitor General also quotes the dispositive portion of the Land Registration
Authoritys Resolution in the Motion for Reconsideration:409

WHEREFORE, in view of the foregoing[,] the Sheriffs Provisional Certificate of Sale dated
February 4, 2002 is registrable on TCT Nos. T-147820, T-147821, T-147386 and T-247012,
provided all other registration requirements are complied with.410 (Emphasis supplied)

The Office of the Solicitor General then cites National Housing Authority and Autocorp Group
and Autographics, Inc. v. Court of Appeals411 and discusses that when all the requirements for
registration of annotation has been complied with, it is ministerial upon the Register of Deeds to
register the annotation.412 The Register of Deeds is not authorized "to make an appraisal of proofs
outside of the documents sought to be registered."413
For the Office of the Solicitor General, the Register of Deeds refusal to affix the annotation on
the foreclosed properties titles "should not preclude the completion of the registration of any
applicant who has complied with the requirements of the law to register its right or interest in
registered lands."414

Spouses Limso and Davao Sunrise, as intervenors-oppositors, filed a Memorandum.415 They cite
Section 117416 of Presidential Decree No. 1529417 and argue that registration of the Certificate of
Sale in the Primary Entry Book is a preliminary step in registration.418 Since Philippine National
Bank withdrew the documents it submitted to the Register of Deeds of Davao City, the Sheriffs
Provisional Certificate of Sale was not registered.419

Further, Philippine National Banks argument that "entry . . . in the Primary Entry Book is
equivalent to registration"420 is not in accordance with Section 56421 of Presidential Decree No.
1529.422 Moreover, "[t]he signature of the Register of Deeds is crucial to the completeness of the
registration process."423

Spouses Limso and Davao Sunrise posit that Philippine National Bank admitted that the
Certificate of Sale is not registered in various hearings.424

These admissions are judicial admissions that should be binding on Philippine National Bank.425

Spouses Limso and Davao Sunrise allege that during the oral arguments held on March 19, 2003
at the Court of Appeals in CA G.R. SP No. 71527, counsel for Philippine National Bank stated:426

ATTY. [BENILDA A.] TEJADA:

Yes, we can show the documents which we are going to file your Honors.

We would like to state also your Honors the fact of why no registration was ever made in this
case. Counsel forgot to mention that the fact of no registration is simply because the Register of
Deeds refused to register our Certificate of Sale. We have a pending case against them Sir before
the LRA and before the Ombudsman fore [sic] refusal to register our Certificate of Sale. Now,
we have filed this case because inspite [sic] of the fact the Register of Deeds addressed a
consulta to the Land Registration Authority on the registerity of the Certificate of Sale your
Honors[,] [i]t was at their instance that there was a consulta.

And then, the Land Registration Authority has already rendered its opinion that the document is
registrable. Despite that your Honors, the document has never been registered. So that was the
subject of our case against them. We do not understand the intransigencies we do not understand
the refusal.427

In addition, the Court of Appeals correctly dismissed Philippine National Banks appeal because
the issue raised involved a question of law, specifically "whether or not mere entry in the
Primary Entry Book is considered as registration of the subject Certificate of Sale."428

Section 56 of Presidential Decree No. 1529 states:


SECTION 56. Primary Entry Book; Fees; Certified Copies. Each Register of Deeds shall keep
a primary entry book in which, upon payment of the entry fee, he shall enter, in the order of their
reception, all instruments including copies of writs and processes filed with him relating to
registered land. He shall, as a preliminary process in registration, note in such book the date,
hour and minute of reception of all instruments, in the order in which they were received. They
shall be regarded as registered from the time so noted, and the memorandum of each instrument,
when made on the certificate of title to which it refers, shall bear the same date: Provided, that
the national government as well as the provincial and city governments shall be exempt from the
payment of such fees in advance in order to be entitled to entry and registration. (Emphasis
supplied)

In this case, Philippine National Bank filed the Sheriffs Provisional Certificate of Sale, which
was duly approved by the Executive Judge, before the Registry of Deeds of Davao City. Entries
were made in the Primary Entry Book. Hence, the Sheriffs Provisional Certificate of Sale should
be considered registered.

Autocorp Group and Autographics, Inc. involved an extrajudicial foreclosure of mortgaged


property and the registration of a Sheriffs Certificate of Sale. Autocorp sought the issuance of a
writ of injunction "to prevent the register of deeds from registering the subject certificate of
sale[.]"429

This court explained that a Sheriffs Certificate of Sale is an involuntary instrument and that a
writ of injunction will no longer lie because of the following reasons:

[F]or the registration of an involuntary instrument, the law does not require the presentation of
the owners duplicate certificate of title and considers the annotation of such instrument upon
the entry book, as sufficient to affect the real estate to which it relates.

...

....

It is a ministerial duty on the part of the Register of Deeds to annotate the instrument on the
certificate of sale after a valid entry in the primary entry book.1awp++i1 P.D. No. 1524
provides:

SEC. 63. Foreclosure of Mortgage. x x x

(b) If the mortgage was foreclosed extrajudicially, a certificate of sale executed by the officer
who conducted the sale shall be filed with the Register of Deeds who shall make a brief
memorandum thereof on the certificate of title.

In fine, petitioners prayer for the issuance of a writ of injunction, to prevent the register of deeds
from registering the subject certificate of sale, had been rendered moot and academic by the valid
entry of the instrument in the primary entry book. Such entry is equivalent to
registration.430 (Emphasis supplied, citation omitted)
Based on the records of this case, the Sheriffs Certificate of Sale filed by Philippine National
Bank was already recorded in the Primary Entry Book.

The refusal of the Register of Deeds to annotate the registration on the titles of the properties
should not affect Philippine National Banks right to possess the properties.

As to the argument that Philippine National Bank admitted in open court that the Certificate of
Sale was not registered, it is evident from Spouses Limso and Davao Sunrises Memorandum
that Philippine National Bank immediately explained that the non-registration was due to the
Register of Deeds refusal. Thus, the alleged non-registration was not due to Philippine National
Banks fault.

It appears on record that Philippine National Bank already complied with the requirements for
registration. Thus, there was no reason for the Register of Deeds to persistently refuse the
registration of the Certificate of Sale.

At any rate, the Land Registration Authority stated in its Resolution in Administrative Case No.
02-13 that Atty. Patriarca herself admitted that she already affixed her signature on the annotation
at the back of the certificate of titles, and that she subsequently erased her signature.431 This
finding of fact in the administrative case supports the argument of Philippine National Bank and
the opinion of the Office of the Solicitor General that the Certificate of Sale should be considered
registered.

With regard to the issue of whether Philippine National Bank is entitled to a writ of possession,
the trial court in Other Case No. 124 2002 denied the application for the writ of possession and
explained:

Portion of Sec. 47 of RA No. 8791 is quoted:

x x x the purchaser at the auction sale concerned whether in a judicial or extra judicial
foreclosure shall have the right to enter upon and take possession of such property immediately
after the date of the confirmation of the auction sale and administer the same in accordance with
law x x x.

From the quoted provision, one can readily conclude that before the sale is confirmed, it is not
considered final or perfected to entitle the purchaser at the auction sale to the writ of possession
as a matter of right. .

...

In extra-judicial foreclosure, there is technically no confirmation of the auction sale in the


manner provided for by Sec. 7 of Rule 68. The process though involves an application,
preparation of the notice of extrajudicial sale, the extra-judicial foreclosure sale, issuance of the
certificate of sale, approval of the Executive Judge or in the latters absence, the Vice-Executive
Judge and the registration of the certificate of sale with the Register of Deeds.
While it may be true that as found by the CA in the case earlier cited that DSIDC had only until
January 24, 2001 to redeem its properties and that the registration of the certificate of foreclosure
sale is no longer relevant in the reckoning of the redemption period, for purposes of the issuance
of the writ of possession, petitioner to this Courts belief should complete the entire process in
extra-judicial foreclosure. Otherwise the sale may not be considered perfected and the
application for writ of possession may be denied.

The records disclose that contrary to petitioners claim, the Certificate of Sale covering the
subject properties has not been registered with the Registry of Deeds of Davao City as the Court
finds no annotation thereof. As such, the sale is not considered perfected to entitle petitioner to
the writ of possession as a matter of right.

Accordingly, for reason stated, the petition is DISMISSED. With the dismissal of the petition,
PNBs Motion for Reception and Admission of PNBs Ex-parte Testimonial and Documentary
Evidence isDENIED.

SO ORDERED.432

However, Philippine National Bank is applying for the writ of possession on the ground that it is
the winning bidder during the auction sale, and not because it consolidated titles in its name. As
such, the applicable provisions of law are Section 47 of Republic Act No. 8791433 and Section 7
of Act No. 3135.434

Section 47 of Republic Act No. 8791 provides:

SECTION 47. Foreclosure of Real Estate Mortgage. In the event of foreclosure, whether
judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other
credit accommodation granted, the mortgagor or debtor whose real property has been sold for the
full or partial payment of his obligation shall have the right within one year after the sale of the
real estate, to redeem the property by paying the amount due under the mortgage deed, with
interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by
the bank or institution from the sale and custody of said property less the income derived
therefrom. However, the purchaser at the auction sale concerned whether in a judicial or
extrajudicial foreclosure shall have the right to enter upon and take possession of such property
immediately after the date of the confirmation of the auction sale and administer the same in
accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure
proceedings instituted pursuant to this provision shall be given due course only upon the filing
by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the
damages which the bank may suffer by the enjoining or the restraint of the foreclosure
proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the right to redeem the property in accordance with this
provision until, but not after, the registration of the certificate of foreclosure sale with the
applicable Register of Deeds which in no case shall be more than three (3) months after
foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale
prior to the effectivity of this Act shall retain their redemption rights until their expiration.
(Emphasis supplied)

Section 7 of Act No. 3135 provides:

SECTION 7. In any sale made under the provisions of this Act, the purchaser may petition the
Court of First Instance of the province or place where the property or any part thereof is situated,
to give him possession thereof during the redemption period, furnishing bond in an amount
equivalent to the use of the property for a period of twelve months, to indemnify the debtor in
case it be shown that the sale was made without violating the mortgage or without complying
with the requirements of this Act. Such petition shall be made under oath and filed in form of an
ex parte motion in the registration or cadastral proceedings if the property is registered, or in
special proceedings in the case of property registered under the Mortgage Law or under section
one hundred and ninety-four of the Administrative Code, or of any other real property
encumbered with a mortgage duly registered in the office of any register of deeds in accordance
with any existing law, and in each case the clerk of the court shall, upon the filing of such
petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act
Numbered Four hundred and ninety-six, as amended by Act Numbered Twenty-eight hundred
and sixty-six, and the court shall, upon approval of the bond, order that a writ of possession
issue, addressed to the sheriff of the province in which the property is situated, who shall execute
said order immediately.1avvphi1

The rule under Section 7 of Act No. 3135 was restated in Nagtalon v. United Coconut Planters
Bank:435

During the one-year redemption period, as contemplated by Section 7 of the above-mentioned


law, a purchaser may apply for a writ of possession by filing an ex parte motion under oath in the
registration or cadastral proceedings if the property is registered, or in special proceedings in
case the property is registered under the Mortgage Law. In this case, a bond is required before
the court may issue a writ of possession.436

On the other hand, a writ of possession may be issued as a matter of right when the title has been
consolidated in the buyers name due to nonredemption by the mortgagor. Under this situation,
the basis for the writ of possession is ownership of the property.437

The Sheriffs Provisional Certificate of Sale should be deemed registered. However, Philippine
National Bank must still file a bond before the writ of possession may be issued.

VI

To fully dispose of all the issues in these consolidated cases, this court shall also rule on one of
the issues raised in G.R. No. 158622. In G.R. No. 158622, Spouses Limso and Davao Sunrise
allege that the Sheriffs Provisional Certificate of Sale does not state the appropriate redemption
period; thus, they filed a Petition for Declaratory Relief, which was docketed as Civil Case No.
29,036-2002.438
In the loan agreement, natural and juridical persons are co-debtors, while the properties
mortgaged to secure the loan are owned by Davao Sunrise.

Act No. 3135 provides that the period of redemption is one (1) year after the sale.439 On the other
hand, Republic Act No. 8791 provides a shorter period of three (3) months to redeem in cases
involving juridical persons.440

We rule that the period of redemption for this case should be not more than three (3) months in
accordance with Section 47 of Republic Act No. 8791. The mortgaged properties are all owned
by Davao Sunrise. Section 47 of Republic Act No. 8791 states: "the mortgagor or debtor whose
real property has been sold" and "juridical persons whose property is being sold[.]" Clearly, the
law itself provides that the right to redeem belongs to the owner of the property mortgaged. As
the mortgaged properties all belong to Davao Sunrise, the shorter period of three (3) months is
the applicable redemption period.

The policy behind the shorter redemption period was explained in Goldenway Merchandising
Corporation v. Equitable PCI Bank:441

The difference in the treatment of juridical persons and natural persons was based on the
nature of the properties foreclosedwhether these are used as residence, for which the
more liberal one-year redemption period is retained, or used for industrial or commercial
purposes, in which case a shorter term is deemed necessary to reduce the period of
uncertainty in the ownership of property and enable mortgagee-banks to dispose sooner
of these acquired assets. It must be underscored that the General Banking Law of 2000,
crafted in the aftermath of the 1997 Southeast Asian financial crisis, sought to reform the
General Banking Act of 1949 by fashioning a legal framework for maintaining a safe and
sound banking system. In this context, the amendment introduced by Section 47
embodied one of such safe and sound practices aimed at ensuring the solvency and
liquidity of our banks.442 (Citation omitted)

To grant a longer period of redemption on the ground that a co-debtor is a natural person defeats
the purpose of Republic Act No. 8791. In addition, the real properties mortgaged by Davao
Sunrise appear to be used for commercial purposes.443

WHEREFORE, the Petition for Review on Certiorari in G.R. No. 173194 is DENIED.

The Petition docketed as G.R. No. 196958 is PARTIALLY GRANTED, while the Petition
docketed as G.R. No. 197120 is DENIED.

The Decision of the Court of Appeals in CA-G.R. CV No. 79732-MIN is AFFIRMED with
MODIFICATION.

The Conversion, Restructuring and Extension Agreement executed in 1999 is deemed to have
novated the Credit Agreement and Loan Agreement executed in 1993. Thus, the principal loan
obligation of Davao Sunrise Investment and Development Corporation and Spouses Robert Alan
and Nancy Limso shall be computed on the basis of the amounts indicated in the Conversion,
Restructuring and Extension Agreement.

Interest on the principal loan obligation shall be at the rate of 12% per annum and computed
from January 28, 1999, the date of the execution of the Conversion, Restructuring and Extension
Agreement. Interest rate on the conventional interest shall be at the rate of 12% per annum from
August 21, 2000, the date of judicial demand, to June 30, 2013. From July 1, 2013 until full
satisfaction, the interest rate on the conventional interest shall be computed at 6% per annum in
view of this courts ruling in Nacar v. Gallery Frames.444

This case is ordered REMANDED to Branch 17 of the Regional Trial Court of Davao City for
the computation of the total amount of Davao Sunrise Investment and Development Corporation
and Spouses Robert Alan and Nancy Limso's remaining obligation.

The Petition docketed as G.R. No. 205463 is PARTIALLY GRANTED. The Sheriffs
Provisional Certificate of Sale is deemed to have been registered. In view of the facts of this
case, the applicable period of redemption shall be three (3) months as provided under Republic
Act No. 8791.

In case the final computation shows that Davao Sunrise Investment and Development
Corporation and Spouses Robert Alan and Nancy Limso overpaid Philippine National Bank,
Philippine National Bank must return the excess amount.

The writ of possession prayed for by Philippine National Bank may only be issued after all the
requirements for the issuance of a writ of possession are complied with.

SO ORDERED.

MARVIC M.V.F. LEONEN


Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
Chairperson

ARTURO D. BRION DIOSDADO M. PERALTA*


Associate Justice Associate Justice

MARIANO C. DEL CASTILLO


Associate Justice

ATT E S TAT I O N
I attest that the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Court's Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division

C E R T I F I C AT I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's
Attestation, I certify that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Court's Division.

MARIA LOURDES P.A. SERENO


Chief Justice

G.R. No. 172919

TIMOTEO BACALSO and DIOSDADA BACALSO, Petitioners,


vs.
GREGORIA B. ACA-AC, EUTIQUIA B. AGUILA, JULIAN BACUS and EVELYN
SYCHANGCO, Respondents.

DECISION

REYES, J.:

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court
seeking to annul and set aside the Decision2 dated December 14, 2005 and the Resolution3 dated
May 30, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 67516. The CA affirmed the
Decision dated April 19, 2000 of the Regional Trial Court (RTC) of Cebu City, Branch 11, in
Civil Case No. CEB-17994. The RTC ruled that the Deed of Absolute Sale elated October 15,
1987 between herein respondents Gregoria B. Aca-Ac, Eutiguia B. Aguila and Julian Bacus
(Julian) (Bacus siblings) and herein petitioner Timoteo Bacalso (Timoteo) was void for want of
consideration.

The Facts

The Bacus siblings were tbe registered owners of a parcel of land described as Lot No. 1809-G-2
located in San Roque, Talisay, Cebu with an area of 1,200 square meters and covered by Transfer
Certificate of Title (TCT) No. 59260. The Bacus siblings inherited the said property from their
mother Matea Bacalso (Matea).4
On October 15, 1987, the Bacus siblings executed a Deed of Absolute Sale conveying a portion
of Lot No. 1809-G-2 with an area of 271 sq m, described as Lot No. 1809-G-2-C, in favor of
their cousin, Timoteo for and in consideration of the amount of P8,000.00.5

On March 4, 1988, however, Timoteo, together with his sisters Lucena and Victoria and some of
his cousins filed a complaint for declaration of nullity of documents, certificates of title,
reconveyance of real property and damages against the Bacus siblings and four other persons
before the RTC of Cebu City, Branch 12, and was docketed as Civil Case No. CEB-6693. They
claimed that they are co-owners of the three-fourths portion of Lot No. 1809-G (which Lot No.
1809-G-2-C was originally part of) as Matea had paid for the said property for and in behalf of
her brother Alejandro (father of petitioner Timoteo) and sisters Perpetua and Liberata, all
surnamed Bacalso.6

On November 29, 1989, the RTC found that Matea was the sole owner of Lot No. 1809-G and
affirmed the validity of the conveyances of portions of Lot No. 1809-G made by her children.
The same was aflirmed by the CA in a Decision dated March 23, 1992 and became final and
executory on April 15, 1992.7

Undaunted, Timoteo and Diosdada Bacalso (petitioners) filed on October 26, 1995, a complaint
for declaration of nullity of contract and certificates of title, reconveyance and damages against
the Bacus siblings, this time claiming ownership over Lot No. 1809-G-2-C by virtue of the Deed
of Absolute Sale dated October 15, 1987. They claimed, however, that the Bacus siblings
reneged on their promise to cause the issuance of a new TCT in the name of the petitioners.8

Moreover, the petitioners alleged that the Bacus siblings have caused the subdivision of Lot No.
1809-G-2 into four lots and one of which is Lot No. 1809-G-2-C which is now covered by TCT
No. 70783. After subdividing the property, the Bacus siblings, on February 11, 1992, without
knowledge of the petitioners, sold Lot No. 1809-G-2-C again to respondent Evelyn Sychangco
(Sychangco) and that TCT No. 74687 covering the same property was issued in her name.9

In their answer, the Bacus siblings denied the allegations of the petitioners and claimed that the
alleged sale of Lot No. 1809-G-2-C in favor of the petitioners did not push through because the
petitioners failed to pay the purchase price thereof.10

For her part, Sychangco averred that she is a buyer in good faith and for value as she relied on
what appeared in the certificate of title of the property which appeared to be a clean title as no
lien or encumbrance was annotated therein.11

On April 19, 2000, the RTC issued a Decision declaring the Deed of Absolute Sale dated October
15, 1987 void for want of consideration after finding that the petitioners failed to pay the price of
the subject property. Moreover, the RTC held that even granting that the sale between the Bacus
siblings and the petitioners was valid, the petitioners still cannot ask for the rescission of the sale
of the disputed portion to Sychangco as the latter was a buyer in good faith, thus has a better
right to the property. 12
Aggrieved by the foregoing disquisition of the RTC, the petitioners interposed an appeal with the
CA. On December 14, 2005, however, the CA affirmed the ruling of the RTC. The petitioners
sought a reconsideration13 of the CA decision but it was denied in a Resolution dated May 30,
2006.

The Issues

The petitioners assign the following errors of the CA:

I.

THE [CA] SERIOUSLY ERRED WHEN IT RELIED TOO MUCH ON THE RESPECTIVE
ORAL TESTIMONIES OF RESPONDENTS JULIAN BACUS AND EVELYN SYCHANGCO
UTTERLY DISREGARDING THE ORAL TESTIMONIES OF PETITIONER TIMOTEO
BACALSO AND THE LATTER'S WITNESS ROBERTO YBAS AND THE DOCUMENTARY
EVIDENCE OF THE PETITIONERS, THE DULY EXECUTED AND NOTARIZED DEED OF
ABSOLUTE SALE COVERING THE SUBJECT LOT NO. 1809-G-2-C.

II

THE [CA] SERIOUSLY ERRED WHEN IT RULED THAT THE DEED OF ABSOLUTE SALE
DATED 15 OCTOBER 1987 IS NULL AND VOID AB INITIO FOR FAILURE OR WANT OF
CONSIDERATION.

III

THE [CA] SERIOUSLY ERRED WHEN IT DID NOT CONSIDER TI-IE FACT THAT THE
DEED OF ABSOLUTE SALE DATED 15 OCTOBER 1987 WAS NOTARIZED, HENCE, A
PUBLIC DOCUMENT WHICH ENJOYS THE PRESUMPTION OF REGULARITY.

IV

THE [CA] SERIOUSLY ERRED WHEN IT DID NOT RULE THAT ON 15 OCTOBER 1987,
THE [BACUS SIBLINGS] WERE NO LONGER OWNERS AND POSSESSORS OF Tl-IE
SUBJECT LOT AS THE SAME WAS ALREADY TRANSFERRED TO TI-IE PETITIONERS
BY REASON OF THE MERE EXECUTION OF A DEED OF SALE IN A PUBLIC
DOCUMENT, AS IN THIS CASE.14

Essentially, the issues presented to the Court for resolution could be reduced into whether the CA
erred in holding that the Deed of Absolute Sale dated October 15, 1987 is void for want of
consideration.

Ruling of the Court

The petition is bereft of merit.


The central issue to be resolved in the present controversy is the validity of the Deed of Absolute
Sale between the petitioners and the Bacus siblings. "Such issue involves a question of fact and
settled jurisprudence dictates that, subject to a few exceptions, only questions of law may be
brought before the Court via a petition for review on certiorari."15

The Court has repeatedly held that it is not necessitated to examine, evaluate or weigh the
evidence considered in the lower courts all over again. "This is especially true where the trial
court's factual findings are adopted and affirmed by the CA as in the present case. Factual
findings of the trial court, afiirmed by the CA, are final and conclusive and may not be reviewed
on appeal."16

Although the Court recognized several exceptions to the limitation of an appeal by certiorari to
only questions of law, including: (1) when the findings are grounded entirely on speculation,
surmises, or conjectures; (2) when the interference made is manifestly mistaken, absurd, or
impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of fact are conflicting; (6) when in making its
findings, the CA went beyond the issues of the case, or its findings are contrary to the admissions
of both the appellant and the appellee; (7) when the findings are contrary to those of the trial
court; (8) when the findings are conclusions without citation of specific evidence on which they
are based; (9) when the facts set forth in the petition as well as in the petitioner's main and reply
briefs are not disputed by the respondent; and (10) when the findings of fact are premised on the
supposed absence of evidence and contradicted by the evidence on record,17 the present appeal
does not come under any of the exceptions.

In any event, the Court has carefully reviewed the records of the instant case and found no reason
to disturb the findings of the RTC as affirmed by the CA.

Under the Civil Code, a contract is a meeting of minds, with respect to the other, to give
something or to render some service. Article 1318 provides:

Art. 1318. There is no contract unless the following requisites concur:

(l) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

In the case at bar, the petitioners argue that the Deed of Absolute Sale has all the requisites of a
valid contract. The petitioners contend that there is no lack of consideration that would prevent
the existence of a valid contract. They assert that the testimonies of Timoteo and witness Roberto
Ybas sufficiently established that the purchase price of P5,000.00 for Lot No. 1809-G-2-C was
paid to Julian at Sto. Nifio Church in Cebu City before the execution of the Deed of Absolute
Sale. They also claim that even assuming that they failed to pay the purchase price, such failure
does not render the sale void for being fictitious or simulated, rather, there is only non-payment
of the consideration within the period agreed upon for payment.18
The Court does not agree.

Contrary to the petitioners' claim, this is not merely a case of failure to pay the purchase price
which can only amount to a breach of obligation with rescission as the proper remedy. As
correctly observed by the RTC, the disputed sale produces no effect and is considered void ab
initio for failure to or want of consideration since the petitioner failed to pay the consideration
stipulated in the Deed of Absolute Sale. The trial court's discussion on the said issue, as affirmed
by the CA, is hereby quoted:

To begin with, the Court hereby states that, from the totality of the evidence adduced in this case
which it scrutinized and evaluated, it has come up with a finding that there was failure or want of
consideration of the Deed of Sale of Lot 1809-G-2-C executed in favor of the [petitioners] on
October 15, 1987. The Court is morally and sufficiently convinced that [Timoteo] had not paid to
the [Bacus siblings] the price for the said land. This fact has been competently and
preponderantly established by the testimony in court of [Julian]. [Julian] made the following
narration in his testimony:

Sometime in October 1987, he and his two sisters agreed to sell to the [petitioners] Lot No.
1809-G-2-C because they needed money for the issuance of the titles to the four lots into which
Lot 1809-G-2 was subdivided. [Timoteo] lured him and his sisters into selling the said land by
his promise and representation that money was coming from his sister, Lucena Bacalso, from
Jolo, Sulu. Timoteo Bacalso asked for two weeks within which to produce the said money.
However, no such money came. To the shock and surprise of him and his sisters, a complaint was
filed in Court against them in Civil Case No. CEB-6693 by [Timoteo], together with nine others,
when Lucena Bacalso arrived from Jolo, Sulu, wherein they claimed as theirs Lot 1809-G.
Instead of being paid, he and his sisters were sued in Court. From then on, [Timoteo] never cared
anymore to pay for Lot 1809-G-2-C. He and his sisters just went through the titling of Lots 1809-
G-A, 1809-G-2-B, Lot 1809-G-2-C and 1809-G-2-D on their own.

On his part, [Timoteo] himself acted in such a manner as to confirm that he did not anymore give
significance or importance to the Deed of Sale of Lot 1809-G-2-C which, in turn, creates an
impression or conclusion that he did not pay Jor the consideration or price thereof. Upon being
cross-examined in Court on his testimony, he made the following significant admissions and
statements:

1. That he did not let [Julian] sign a receipt for the sum of P8,000.00 purportedly given
by him to the latter as payment for the land in question;

2. That the alleged payment of the said sum of P8,000.00 was made not in the presence of
the notary public who notarized the document but in a place near Sto. Nino Church in
Cebu City;

3. That it was only [Julian] who appeared before the notary public, but he had no special
power of attorney from his two sisters;
4. That the Deed of Sale of Lot 1809-G-2-C was already in his possession before Civil
Case No. CEB-6693 was filed in court;

5. That he did not however show the said Deed of Sale to his lawyer who filed for the
plaintiffs the complaint in Civil Case No. CEB 6693, as in fact he suppressed the said
document from others;

6. That he did not bother to cause the segregation of Lot 1809-G-2-C from the rest of the
lots even after he had already bought it already;

7. That it was only after he lost in Civil Case No. CEB-6693 that he decided to file the
present case;

8. That he did not apply for building permits for the three houses that he purportedly
caused to be built on the land in question;

9. That he did not also declare for taxation purposes the said alleged houses;

10. That he did not declare either for taxation purposes the land in question in his name or
he had not paid taxes therefore; and

11. That he did not bother to register with the Registry of Deeds for the Province of Cebu
the Deed of Sale of the lot.1a\^/phi1

To the mind of the Court, [Timoteo] desisted from paying to [the Bacus siblings] the price
for Lot 1809-G-2-C when he, together with nine others, filed in Court the complaint in
Civil Case No. CEB-6693. He found it convenient to just acquire the said land as
supposed co-owners of Lot 1809-G of which the land in question is merely a part of xx x:

xxxx

Thus, it is evident from all the foregoing circumstances that there was a failure to or want of
consideration of the supposed sale of the land in question to the [petitioners] on October 15,
1987. So, the said sale could not be given effect. Article 1352 of the New Civil Code of the
Philippines is explicit in providing that 'contracts without cause produce no effect whatsoever'. If
there is no cause, the contract is void. x x x There being no price paid, there is no cause or
consideration; hence, the contract is void as a sale. x x x Consequently, in the case at bench, the
plaintiffs have not become absolute owners of Lot 1809-G-2-C of Psd-07-022093 by virtue of
the Deed of Sale thereof which was executed on October 15, 1987 by the [Bacus siblings] in
their favor.19 (Citations omitted)

It is clear from the factual findings of the RTC that the Deed of Absolute Sale entirely lacked
consideration and, consequently, void and without effect. No portion of the P8,000.00
consideration indicated in the Deed of Absolute Sale was ever paid by the petitioners.1wphi1
The Court also finds no compelling reason to depart from the court a quo's finding that the Deed
of Absolute Sale executed on October 15, 1987 is null and void ab initio for lack of
consideration, thus:

It must be stressed that the present case is not merely a case of failure to pay the purchase price,
as [the petitioners] claim, which can only amount to a breach of obligation with rescission as the
proper remedy. What we have here is a purported contract that lacks a cause - one of the three
essential requisites of a valid contract. Failure to pay the consideration is different from lack of
consideration. The former results in a right to demand the fulfillment or cancellation of the
obligation under an existing valid contract while the latter prevents the existence of a valid
contract. Consequently, we rule that the October 15, 1987 Deed of Sale is null and void ab
initio for lack of consideration.20 (Citation omitted)

Well-settled is the rule that where there is no consideration, the sale is null and void ab
initio. In Sps. Lequin v. Sps. Vizconde,21 the Court ruled that:

There can be no doubt that the contract of sale or Kasulatan lacked the essential element of
consideration.1wphi1 It is a well-entrenched rule that where the deed of sale states that the
purchase price has been paid but in fact has never been paid, the clcecl of sale is null and void ab
initio for lack of consideration.22 (Citation omitted)

WHEREFORE, petition is DENIED and the Decision dated December 14, 2005 of the Court of
Appeals in CA-G.R. CV No. 67516 is AFFIRMED.

SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

WE CONCUR:

PRESBITERO J. VELASCO, JR.


Associate Justice
Acting Chairperson

DIOSDADO M. PERALTA MARTIN S. VILLARAMA, JR.


Associate Justice Associate Justice

FRANCIS H. JARDELEZA
Associate Justice

AT T E S T AT I O N

I attest that the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Court's Division.
PRESBITERO J. VELASCO, JR.
Associate Justice
Chairperson

C E R T I F I C AT I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's
Attestation, I certify that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Court's Division.

MARIA LOURDES P. A. SERENO


Chief Justice

CERTIFIED TRUE COPY


WILFREDO V. LAPITAN
Division Clerk of Court
Third Division
February 18, 2016

Footnotes
1
Rollo, pp. 13-23.
2
Penned by Associate Justice Ramon M. Bato, Jr., with Associate Justices Arsenio J.
Magpale and Apolinario D. Brnselas, Jr. concurring; id. at 27-39.
3
Id. at 46.
4
Id. at 27.
5
Id. at 28.
6
Id. at 28-29.
7
Id. at 29.
8
Id.
9
Id. at 29-30.
10
Id. at 30.
11
Id.
12
Id.
13
Id. at 41-44.
14
Id. at 17-18.
15
Sps. Cmpio v. Sebastian, et al., 635 Phil. 1, 8 (2010).
16
Spouses Pascual v. Spouses Coronel, 554 Phil. 351, 360 (2007).
17
Citibank, NA. v. Sabeniano, 535 Phil. 384, 410-4 l l (2006).
18
Rollo, pp. 32-33.
19
Id. at 33-37.
20
Id. at 38-39.
21
618 Phil. 409 (2009).
22
Id. at 426.

SECOND DIVISION

G.R. No. 206147, January 13, 2016

MICHAEL C. GUY, Petitioner, v. ATTY. GLENN C. GACOTT, Respondent.

DECISION

MENDOZA, J.:

Before this Court is a petition for review on certiorari under Rule 45 of the Rules of Court filed
by petitioner Michael C. Guy (Guy), assailing the June 25, 2012 Decision1 and the March 5,
2013 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 94816, which affirmed the
June 28, 20093and February 19, 20104 Orders of the Regional Trial Court, Branch 52, Puerto
Princesa City, Palawan (RTC), in Civil Case No. 3108, a case for damages. The assailed RTC
orders denied Guy's Motion to Lift Attachment Upon Personalty5 on the ground that he was not a
judgment debtor.

The Facts
It appears from the records that on March 3, 1997, Atty. Glenn Gacott (Gacott) from Palawan
purchased two (2) brand new transreceivers from Quantech Systems Corporation (QSC) in
Manila through its employee Rey Medestomas (Medestomas), amounting to a total of PI
8,000.00. On May 10, 1997, due to major defects, Gacott personally returned the transreceivers
to QSC and requested that they be replaced. Medestomas received the returned transreceivers
and promised to send him the replacement units within two (2) weeks from May 10, 1997.

Time passed and Gacott did not receive the replacement units as promised. QSC informed him
that there were no available units and that it could not refund the purchased price. Despite
several demands, both oral and written, Gacott was never given a replacement or a refund. The
demands caused Gacott to incur expenses in the total amount of P40,936.44. Thus, Gacott filed a
complaint for damages. Summons was served upon QSC and Medestomas, afterwhich they filed
their Answer, verified by Medestomas himself and a certain Elton Ong (Ong). QSC and
Medestomas did not present any evidence during the trial.6

In a Decision,7 dated March 16, 2007, the RTC found that the two (2) transreceivers were
defective and that QSC and Medestomas failed to replace the same or return Gacott's money. The
dispositive portion of the decision reads:chanRoblesvirtualLawlibrary

WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendants to
jointly and severally pay plaintiff the following:chanRoblesvirtualLawlibrary

1. Purchase price plus 6% per annum from March 3,1997 up to and until fully paid
-------------------------------------------------------- P 18,000.00
2. Actual Damages ----------------------------------- 40,936.44
3. Moral Damages ----------------------------------- 75,000.00
4. Corrective Damages ---------------------------- 100,000.00
5. Attorney's Fees ------------------------------------ 60,000.00
6. Costs.

SO ORDERED.
cralawlawlibrary

The decision became final as QSC and Medestomas did not interpose an appeal. Gacott then
secured a Writ of Execution,8 dated September 26, 2007.

During the execution stage, Gacott learned that QSC was not a corporation, but was in fact a
general partnership registered with the Securities and Exchange Commission (SEC). In the
articles of partnership,9 Guy was appointed as General Manager of QSC.

To execute the judgment, Branch Sheriff Ronnie L. Felizarte (Sheriff Felizarte) went to the main
office of the Department of Transportation and Communications, Land Transportation Office
(DOTC-LTO), Quezon City, and verified whether Medestomas, QSC and Guy had personal
properties registered therein.10 Upon learning that Guy had vehicles registered in his name,
Gacott instructed the sheriff to proceed with the attachment of one of the motor vehicles of Guy
based on the certification issued by the DOTC-LTO.11

On March 3, 2009, Sheriff Felizarte attached Guy's vehicle by virtue of the Notice of
Attachment/Levy upon Personalty12 served upon the record custodian of the DOTC-LTO of
Mandaluyong City. A similar notice was served to Guy through his housemaid at his residence.

Thereafter, Guy filed his Motion to Lift Attachment Upon Personalty, arguing that he was not a
judgment debtor and, therefore, his vehicle could not be attached.13 Gacott filed an opposition to
the motion.

The RTC Order

On June 28, 2009, the RTC issued an order denying Guy's motion. It explained that considering
QSC was not a corporation, but a registered partnership, Guy should be treated as a general
partner pursuant to Section 21 of the Corporation Code, and he may be held jointly and severally
liable with QSC and Medestomas. The trial court wrote:chanRoblesvirtualLawlibrary

All persons who assume to act as a corporation knowing it to be without authority to do so shall
be liable as general partners for all debts, liabilities and damages incurred or arising as a result
thereof x x x. Where, by any wrongful act or omission of any partner acting in the ordinary
course of the business of the partnership x x x, loss or injury is caused to any person, not being a
partner in the partnership, or any penalty is incurred, the partnership is liable therefore to the
same extent as the partner so acting or omitting to act. All partners are liable solidarity with the
partnership for everything chargeable to the partnership under Article 1822 and
1823.14cralawlawlibrary

Accordingly, it disposed:chanRoblesvirtualLawlibrary

WHEREFORE, with the ample discussion of the matter, this Court finds and so holds that the
property of movant Michael Guy may be validly attached in satisfaction of the liabilities
adjudged by this Court against Quantech Co., the latter being an ostensible Corporation and the
movant being considered by this Court as a general partner therein in accordance with the order
of this court impressed in its decision to this case imposing joint and several liability to the
defendants. The Motion to Lift Attachment Upon Personalty submitted by the movant is
therefore DENIED for lack of merit.

SO ORDERED.15cralawlawlibrary

Not satisfied, Guy moved for reconsideration of the denial of his motion. He argued that he was
neither impleaded as a defendant nor validly served with summons and, thus, the trial court did
not acquire jurisdiction over his person; that under Article 1824 of the Civil Code, the partners
were only solidarily liable for the partnership liability under exceptional circumstances; and that
in order for a partner to be liable for the debts of the partnership, it must be shown that all
partnership assets had first been exhausted.16

On February 19, 2010, the RTC issued an order17 denying his motion.
The denial prompted Guy to seek relief before the CA.

The CA Ruling

On June 25, 2012, the CA rendered the assailed decision dismissing Guy's appeal for the same
reasons given by the trial court. In addition thereto, the appellate court
stated:chanRoblesvirtualLawlibrary

We hold that Michael Guy, being listed as a general partner of QSC during that time, cannot
feign ignorance of the existence of the court summons. The verified Answer filed by one of the
partners, Elton Ong, binds him as a partner because the Rules of Court does not require that
summons be served on all the partners. It is sufficient that service be made on the "president,
managing partner, general manager, corporate secretary, treasurer or in-house counsel." To Our
mind, it is immaterial whether the summons to QSC was served on the theory that it was a
corporation. What is important is that the summons was served on QSC's authorized officer
xxx.18ChanRoblesVirtualawlibrary
cralawlawlibrary

The CA stressed that Guy, being a partner in QSC, was bound by the summons served upon QSC
based on Article 1821 of the Civil Code. The CA further opined that the law did not require a
partner to be actually involved in a suit in order for him to be made liable. He remained
"solidarity liable whether he participated or not, whether he ratified it or not, or whether he had
knowledge of the act or omission."19

Aggrieved, Guy filed a motion for reconsideration but it was denied by the CA in its assailed
resolution, dated March 5, 2013.

Hence, the present petition raising the following

ISSUE

THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN


HOLDING THAT PETITIONER GUY IS SOLIDARILY LIABLE WITH THE
PARTNERSHIP FOR DAMAGES ARISING FROM THE BREACH OF THE
CONTRACT OF SALE WITH RESPONDENT GACOTT.20ChanRoblesVirtualawlibrary
cralawlawlibrary

Guy argues that he is not solidarity liable with the partnership because the solidary liability of the
partners under Articles 1822, 1823 and 1824 of the Civil Code only applies when it stemmed
from the act of a partner. In this case, the alleged lapses were not attributable to any of the
partners. Guy further invokes Article 1816 of the Civil Code which states that the liability of the
partners to the partnership is merely joint and subsidiary in nature.

In his Comment,21 Gacott countered, among others, that because Guy was a general and
managing partner of QSC, he could not feign ignorance of the transactions undertaken by QSC.
Gacott insisted that notice to one partner must be considered as notice to the whole partnership,
which included the pendency of the civil suit against it.
In his Reply,22 Guy contended that jurisdiction over the person of the partnership was not
acquired because the summons was never served upon it or through any of its authorized office.
He also reiterated that a partner's liability was joint and subsidiary, and not solidary.

The Court's Ruling

The petition is meritorious.

The service of summons was


flawed; voluntary appearance
cured the defect

Jurisdiction over the person, or jurisdiction in personam - the power of the court to render a
personal judgment or to subject the parties in a particular action to the judgment and other
rulings rendered in the action - is an element of due process that is essential in all actions, civil as
well as criminal, except in actions in rem or quasi in rem.23 Jurisdiction over the person of the
plaintiff is acquired by the mere filing of the complaint in court. As the initiating party, the
plaintiff in a civil action voluntarily submits himself to the jurisdiction of the court. As to the
defendant, the court acquires jurisdiction over his person either by the proper service of the
summons, or by his voluntary appearance in the action.24

Under Section 11, Rule 14 of the 1997 Revised Rules of Civil Procedure, when the defendant is a
corporation, partnership or association organized under the laws of the Philippines with a
juridical personality, the service of summons may be made on the president, managing partner,
general manager, corporate secretary, treasurer, or in-house counsel. Jurisprudence is replete with
pronouncements that such provision provides an exclusive enumeration of the persons
authorized to receive summons for juridical entities.25cralawred

The records of this case reveal that QSC was never shown to have been served with the
summons through any of the enumerated authorized persons to receive such, namely: president,
managing partner, general manager, corporate secretary, treasurer or in-house counsel. Service of
summons upon persons other than those officers enumerated in Section 11 is invalid. Even
substantial compliance is not sufficient service of summons. The CA was obviously mistaken
when it opined that it was immaterial whether the summons to QSC was served on the theory
that it was a corporation.27

Nevertheless, while proper service of summons is necessary to vest the court jurisdiction over
the defendant, the same is merely procedural in nature and the lack of or defect in the service of
summons may be cured by the defendant's subsequent voluntary submission to the court's
jurisdiction through his filing a responsive pleading such as an answer. In this case, it is not
disputed that QSC filed its Answer despite the defective summons. Thus, jurisdiction over its
person was acquired through voluntary appearance.

A partner must be separately


and distinctly impleaded before
he can be bound by a judgment

The next question posed is whether the trial court's jurisdiction over QSC extended to the person
of Guy insofar as holding him solidarity liable with the partnership. After a thorough study of the
relevant laws and jurisprudence, the Court answers in the negative.

Although a partnership is based on delectus personae or mutual agency, whereby any partner can
generally represent the partnership in its business affairs, it is non sequitur that a suit against the
partnership is necessarily a suit impleading each and every partner. It must be remembered that a
partnership is a juridical entity that has a distinct and separate personality from the persons
composing it.28

In relation to the rules of civil procedure, it is elementary that a judgment of a court is conclusive
and binding only upon the parties and their successors-in-interest after the commencement of the
action in court.29 A decision rendered on a complaint in a civil action or proceeding does not bind
or prejudice a person not impleaded therein, for no person shall be adversely affected by the
outcome of a civil action or proceeding in which he is not a party.30 The principle that a person
cannot be prejudiced by a ruling rendered in an action or proceeding in which he has not been
made a party conforms to the constitutional guarantee of due process of law.31

In Muoz v. Yabut, Jr.,32 the Court declared that a person not impleaded and given the
opportunity to take part in the proceedings was not bound by the decision declaring as null and
void the title from which his title to the property had been derived. The effect of a judgment
could not be extended to non-parties by simply issuing an alias writ of execution against them,
for no man should be prejudiced by any proceeding to which he was a stranger.

In Aguila v. Court of Appeals33 the complainant had a cause of action against the partnership.
Nevertheless, it was the partners themselves that were impleaded in the complaint. The Court
dismissed the complaint and held that it was the partnership, not its partners, officers or agents,
which should be impleaded for a cause of action against the partnership itself. The Court added
that the partners could not be held liable for the obligations of the partnership unless it was
shown that the legal fiction of a different juridical personality was being used for fraudulent,
unfair, or illegal purposes.34

Here, Guy was never made a party to the case. He did not have any participation in the entire
proceeding until his vehicle was levied upon and he suddenly became QSC's "co-defendant
debtor" during the judgment execution stage. It is a basic principle of law that money judgments
are enforceable only against the property incontrovertibly belonging to the judgment
debtor.35 Indeed, the power of the court in executing judgments extends only to properties
unquestionably belonging to the judgment debtor alone. An execution can be issued only against
a party and not against one who did not have his day in court. The duty of the sheriff is to levy
the property of the judgment debtor not that of a third person. For, as the saying goes, one man's
goods shall not be sold for another man's debts.36

In the spirit of fair play, it is a better rule that a partner must first be impleaded before he could
be prejudiced by the judgment against the partnership. As will be discussed later, a partner may
raise several defenses during the trial to avoid or mitigate his obligation to the partnership
liability. Necessarily, before he could present evidence during the trial, he must first be
impleaded and informed of the case against him. It would be the height of injustice to rob an
innocent partner of his hard-earned personal belongings without giving him an opportunity to be
heard. Without any showing that Guy himself acted maliciously on behalf of the company,
causing damage or injury to the complainant, then he and his personal properties cannot be made
directly and solely accountable for the liability of QSC, the judgment debtor, because he was not
a party to the case.

Further, Article 1821 of the Civil Code does not state that there is no need to implead a
partner in order to be bound by the partnership liability. It provides
that:chanRoblesvirtualLawlibrary

Notice to any partner of any matter relating to partnership affairs, and the knowledge of
the partner acting in the particular matter, acquired while a partner or then present to his
mind, and the knowledge of any other partner who reasonably could and should have
communicated it to the acting partner, operate as notice to or knowledge of the partnership,
except in the case of fraud on the partnership, committed by or with the consent of that partner.

[Emphases and Underscoring Supplied]


cralawlawlibrary

A careful reading of the provision shows that notice to any partner, under certain circumstances,
operates as notice to or knowledge to the partnership only. Evidently, it does not provide for the
reverse situation, or that notice to the partnership is notice to the partners. Unless there is an
unequivocal law which states that a partner is automatically charged in a complaint against the
partnership, the constitutional right to due process takes precedence and a partner must first be
impleaded before he can be considered as a judgment debtor. To rule otherwise would be a
dangerous precedent, harping in favor of the deprivation of property without ample notice and
hearing, which the Court certainly cannot countenance.

Partners' liability is subsidiary


and generally joint; immediate levy
upon the property of a partner
cannot be made

Granting that Guy was properly impleaded in the complaint, the execution of judgment would be
improper. Article 1816 of the Civil Code governs the liability of the partners to third persons,
which states that:chanRoblesvirtualLawlibrary

Article 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.

[Emphasis supplied]
cralawlawlibrary

This provision clearly states that, first, the partners' obligation with respect to the partnership
liabilities is subsidiary in nature. It provides that the partners shall only be liable with their
property after all the partnership assets have been exhausted. To say that one's liability is
subsidiary means that it merely becomes secondary and only arises if the one primarily liable
fails to sufficiently satisfy the obligation. Resort to the properties of a partner may be made only
after efforts in exhausting partnership assets have failed or that such partnership assets are
insufficient to cover the entire obligation. The subsidiary nature of the partners' liability with the
partnership is one of the valid defenses against a premature execution of judgment directed to a
partner.

In this case, had he been properly impleaded, Guy's liability would only arise after the properties
of QSC would have been exhausted. The records, however, miserably failed to show that the
partnership's properties were exhausted. The report37 of the sheriff showed that the latter went to
the main office of the DOTC-LTO in Quezon City and verified whether Medestomas, QSC and
Guy had personal properties registered therein. Gaeott then instructed the sheriff to proceed with
the attachment of one of the motor vehicles of Guy.38 The sheriff then served the Notice of
Attachment/Levy upon Personalty to the record custodian of the DOTC-LTO of Mandaluyong
City. A similar notice was served to Guy through his housemaid at his residence.

Clearly, no genuine efforts were made to locate the properties of QSC that could have been
attached to satisfy the judgment - contrary to the clear mandate of Article 1816. Being
subsidiarily liable, Guy could only be held personally liable if properly impleaded and after all
partnership assets had been exhausted.

Second, Article 1816 provides that the partners' obligation to third persons with respect to the
partnership liability is pro rata or joint. Liability is joint when a debtor is liable only for the
payment of only a proportionate part of the debt. In contrast, a solidary liability makes a debtor
liable for the payment of the entire debt. In the same vein, Article 1207 does not presume
solidary liability unless: 1) the obligation expressly so states; or 2) the law or nature
requires solidarity. With regard to partnerships, ordinarily, the liability of the partners is not
solidary.39 The joint liability of the partners is a defense that can be raised by a partner impleaded
in a complaint against the partnership.

In other words, only in exceptional circumstances shall the partners' liability be solidary in
nature. Articles 1822, 1823 and 1824 of the Civil Code provide for these exceptional conditions,
to wit:chanRoblesvirtualLawlibrary

Article 1822. Where, by any wrongful act or omission of any partner acting in the ordinary
course of the business of the partnership or with the authority of his co-partners, loss or injury is
caused to any person, not being a partner in the partnership, or any penalty is incurred, the
partnership is liable therefor to the same extent as the partner so acting or omitting to act.

Article 1823. The partnership is bound to make good the loss:chanRoblesvirtualLawlibrary

(1) Where one partner acting within the scope of his apparent authority receives money or
property of a third person and misapplies it; and

(2) Where the partnership in the course of its business receives money or property of a third
person and the money or property so received is misapplied by any partner while it is in the
custody of the partnership.

Article 1824. All partners are liable solidarity with the partnership for everything chargeable to
the partnership under Articles 1822 and 1823.

[Emphases Supplied]
cralawlawlibrary

In essence, these provisions articulate that it is the act of a partner which caused loss or injury
to a third person that makes all other partners solidarity liable with the partnership because of the
words "any wrongful act or omission of any partner acting in the ordinary course of the
business, " "one partner acting within the scope of his apparent authority" and "misapplied by
any partner while it is in the custody of the partnership." The obligation is solidary because the
law protects the third person, who in good faith relied upon the authority of a partner, whether
such authority is real or apparent.40

In the case at bench, it was not shown that Guy or the other partners did a wrongful act or
misapplied the money or property he or the partnership received from Gacott. A third person who
transacted with said partnership can hold the partners solidarity liable for the whole obligation if
the case of the third person falls under Articles 1822 or 1823.41 Gacott's claim stemmed from
the alleged defective transreceivers he bought from QSC, through the latter's employee,
Medestomas. It was for a breach of warranty in a contractual obligation entered into in the name
and for the account of QSC, not due to the acts of any of the partners. For said reason, it is the
general rule under Article 1816 that governs the joint liability of such breach, and not the
exceptions under Articles 1822 to 1824. Thus, it was improper to hold Guy solidarity liable for
the obligation of the partnership.

Finally, Section 21 of the Corporation Code,42 as invoked by the RTC, cannot be applied to
sustain Guy's liability. The said provision states that a general partner shall be liable for all debts,
liabilities and damages incurred by an ostensible corporation. It must be read, however, in
conjunction with Article 1816 of the Civil Code, which governs the liabilities of partners against
third persons. Accordingly, whether QSC was an alleged ostensible corporation or a duly
registered partnership, the liability of Guy, if any, would remain to be joint and subsidiary
because, as previously stated, all partners 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.

WHEREFORE, the petition is GRANTED. The June 25, 2012 Decision and the March 5, 2013
Resolution of the Court of Appeals in CA-G.R. CV No. 94816 are hereby REVERSED and SET
ASIDE. Accordingly, the Regional Trial Court, Branch 52, Puerto Princesa City, is ORDERED
TO RELEASEMichael C. Guy's Suzuki Grand Vitara subject of the Notice of Levy/Attachment
upon Personalty.
SO ORDERED.chanroblesvirtuallawlibrary

Carpio, (Chairperson), Brion, Del Castillo, and Leonen, JJ., concur.

SECOND DIVISION

G.R. No. 167615, January 11, 2016

SPOUSES ALEXANDER AND JULIE LAM, DOING BUSINESS UNDER THE NAME
AND STYLE "COLORKWIK LABORATORIES" AND "COLORKWIK PHOTO
SUPPLY", Petitioners, v. KODAK PHILIPPINES, LTD., Respondent.

DECISION

LEONEN, J.:

This is a Petition for Review on Certiorari filed on April 20, 2005 assailing the March 30, 2005
Decision1and September 9, 2005 Amended Decision2 of the Court of Appeals, which modified
the February 26, 1999 Decision3 of the Regional Trial Court by reducing the amount of damages
awarded to petitioners Spouses Alexander and Julie Lam (Lam Spouses).4

The Lam Spouses argue that respondent Kodak Philippines, Ltd.'s breach of their contract of sale
entitles them to damages more than the amount awarded by the Court of Appeals.5

On January 8, 1992, the Lam Spouses and Kodak Philippines, Ltd. entered into an agreement
(Letter Agreement) for the sale of three (3) units of the Kodak Minilab System 22XL6 (Minilab
Equipment) in the amount of P1,796,000.00 per unit,7 with the following
terms:chanRoblesvirtualLawlibrary

This confirms our verbal agreement for Kodak Phils., Ltd. to provide Colorkwik Laboratories,
Inc. with three (3) units Kodak Minilab System 22XL . . . for your proposed outlets in Rizal
Avenue (Manila), Tagum (Davao del Norte), and your existing Multicolor photo counter in
Cotabato City under the following terms and conditions:chanRoblesvirtualLawlibrary

1. Said Minilab Equipment packages will avail a total of 19% multiple order discount based on
prevailing equipment price provided said equipment packages will be purchased not later than
June 30, 1992.

2. 19% Multiple Order Discount shall be applied in the form of merchandise and delivered in
advance immediately after signing of the contract.
* Also includes start-up packages worth P61,000.00.
3. NO DOWNPAYMENT.

4. Minilab Equipment Package shall be payable in 48 monthly installments at THIRTY FIVE


THOUSAND PESOS (P35,000.00) inclusive of 24% interest rate for the first 12 months; the
balance shall be re-amortized for the remaining 36 months and the prevailing interest shall be
applied.

5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at ONE MILLION
SEVEN HUNDRED NINETY SIX THOUSAND PESOS.

6. Price is subject to change without prior notice.


* Secured with PDCs; 1st monthly amortization due 45 days after installation[.]8cralawlawlibrary

On January 15, 1992, Kodak Philippines, Ltd. delivered one (1) unit of the Minilab Equipment in
Tagum, Davao Province.9 The delivered unit was installed by Noritsu representatives on March
9, 1992.10 The Lam Spouses issued postdated checks amounting to P35,000.00 each for 12
months as payment for the first delivered unit, with the first check due on March 31, 1992.11

The Lam Spouses requested that Kodak Philippines, Ltd. not negotiate the check dated March
31, 1992 allegedly due to insufficiency of funds.12 The same request was made for the check due
on April 30, 1992. However, both checks were negotiated by Kodak Philippines, Ltd. and were
honored by the depository bank.13 The 10 other checks were subsequently dishonored after the
Lam Spouses ordered the depository bank to stop payment.14

Kodak Philippines, Ltd. canceled the sale and demanded that the Lam Spouses return the unit it
delivered together with its accessories.15 The Lam Spouses ignored the demand but also
rescinded the contract through the letter dated November 18, 1992 on account of Kodak
Philippines, Ltd.'s failure to deliver the two (2) remaining Minilab Equipment units.16

On November 25, 1992, Kodak Philippines, Ltd. filed a Complaint for replevin and/or recovery
of sum of money. The case was raffled to Branch 61 of the Regional Trial Court, Makati
City.17 The Summons and a copy of Kodak Philippines, Ltd.'s Complaint was personally served
on the Lam Spouses.18

The Lam Spouses failed to appear during the pre-trial conference and submit their pre-trial brief
despite being given extensions.19 Thus, on July 30, 1993, they were declared in default.20 Kodak
Philippines, Ltd. presented evidence ex-parte.21 The trial court issued the Decision in favor of
Kodak Philippines, Ltd. ordering the seizure of the Minilab Equipment, which included the lone
delivered unit, its standard accessories, and a separate generator set.22 Based on this Decision,
Kodak Philippines, Ltd. was able to obtain a writ of seizure on December 16, 1992 for the
Minilab Equipment installed at the Lam Spouses' outlet in Tagum, Davao Province.23 The writ
was enforced on December 21, 1992, and Kodak Philippines, Ltd. gained possession of the
Minilab Equipment unit, accessories, and the generator set.24

The Lam Spouses then filed before the Court of Appeals a Petition to Set Aside the Orders issued
by the trial court dated July 30, 1993 and August 13, 1993. These Orders were subsequently set
aside by the Court of Appeals Ninth Division, and the case was remanded to the trial court for
pre-trial.25cralawred

On September 12, 1995, an Urgent Motion for Inhibition was filed against Judge Fernando V.
Gorospe, Jr.,26 who had issued the writ of seizure.27 The ground for the motion for inhibition was
not provided. Nevertheless, Judge Fernando V. Gorospe Jr. inhibited himself, and the case was
reassigned to Branch 65 of the Regional Trial Court, Makati City on October 3, 1995.28

In the Decision dated February 26, 1999, the Regional Trial Court found that Kodak Philippines,
Ltd. defaulted in the performance of its obligation under its Letter Agreement with the Lam
Spouses.29 It held that Kodak Philippines, Ltd.'s failure to deliver two (2) out of the three (3)
units of the Minilab Equipment caused the Lam Spouses to stop paying for the rest of the
installments.30 The trial court noted that while the Letter Agreement did not specify a period
within which the delivery of all units was to be made, the Civil Code provides "reasonable time"
as the standard period for compliance:chanRoblesvirtualLawlibrary

The second paragraph of Article 1521 of the Civil Code provides:chanRoblesvirtualLawlibrary

Where by a contract of sale the seller is bound to send the goods to the buyer, but no time for
sending them is fixed, the seller is bound to send them within a reasonable time.
cralawlawlibrary

What constitutes reasonable time is dependent on the circumstances availing both on the part of
the seller and the buyer. In this case, delivery of the first unit was made five (5) days after the
date of the agreement. Delivery of the other two (2) units, however, was never made despite the
lapse of at least three (3) months.31cralawlawlibrary

Kodak Philippines, Ltd. failed to give a sufficient explanation for its failure to deliver all three
(3) purchased units within a reasonable time.32

The trial court found:chanRoblesvirtualLawlibrary

Kodak would have the court believe that it did not deliver the other two (2) units due to the
failure of defendants to make good the installments subsequent to the second. The court is not
convinced. First of all, there should have been simultaneous delivery on account of the
circumstances surrounding the transaction. . . . Even after the first delivery ... no delivery was
made despite repeated demands from the defendants and despite the fact no installments were
due. Then in March and in April (three and four months respectively from the date of the
agreement and the first delivery) when the installments due were both honored, still no delivery
was made.

Second, although it might be said that Kodak was testing the waters with just one delivery -
determining first defendants' capacity to pay - it was not at liberty to do so. It is implicit in the
letter agreement that delivery within a reasonable time was of the essence and failure to so
deliver within a reasonable time and despite demand would render the vendor in default.
....
Third, at least two (2) checks were honored. If indeed Kodak refused delivery on account of
defendants' inability to pay, non-delivery during the two (2) months that payments were honored
is unjustified.33cralawlawlibrary

Nevertheless, the trial court also ruled that when the Lam Spouses accepted delivery of the first
unit, they became liable for the fair value of the goods received:chanRoblesvirtualLawlibrary

On the other hand, defendants accepted delivery of one (1) unit. Under Article 1522 of the Civil
Code, in the event the buyer accepts incomplete delivery and uses the goods so delivered, not
then knowing that there would not be any further delivery by the seller, the buyer shall be liable
only for the fair value to him of the goods received. In other words, the buyer is still liable for the
value of the property received. Defendants were under obligation to pay the amount of the unit.
Failure of delivery of the other units did not thereby give unto them the right to suspend payment
on the unit delivered. Indeed, in incomplete deliveries, the buyer has the remedy of refusing
payment unless delivery is first made. In this case though, payment for the two undelivered units
have not even commenced; the installments made were for only one (1) unit.

Hence, Kodak is right to retrieve the unit delivered.34cralawlawlibrary

The Lam Spouses were under obligation to pay for the amount of one unit, and the failure to
deliver the remaining units did not give them the right to suspend payment for the unit already
delivered.35However, the trial court held that since Kodak Philippines, Ltd. had elected to cancel
the sale and retrieve the delivered unit, it could no longer seek payment for any deterioration that
the unit may have suffered while under the custody of the Lam Spouses.36

As to the generator set, the trial court ruled that Kodak Philippines, Ltd. attempted to mislead the
court by claiming that it had delivered the generator set with its accessories to the Lam Spouses,
when the evidence showed that the Lam Spouses had purchased it from Davao Ken Trading, not
from Kodak Philippines, Ltd.37 Thus, the generator set that Kodak Philippines, Ltd. wrongfully
took from the Lam Spouses should be replaced.38

The dispositive portion of the Regional Trial Court Decision reads:chanRoblesvirtualLawlibrary

PREMISES CONSIDERED, the case is hereby dismissed. Plaintiff is ordered to pay the
following:chanRoblesvirtualLawlibrary

1) PHP 130,000.00 representing the amount of the generator set, plus legal interest at 12% per
annum from December 1992 until fully paid; and

2) PHP 1,300,000.00 as actual expenses in the renovation of the Tagum, Davao and Rizal Ave.,
Manila outlets.

SO ORDERED.39ChanRoblesVirtualawlibrary
cralawlawlibrary

On March 31, 1999, the Lam Spouses filed their Notice of Partial Appeal, raising as an issue the
Regional Trial Court's failure to order Kodak Philippines, Ltd. to pay: (1) P2,040,000 in actual
damages; (2) P50,000,000 in moral damages; (3) P20,000,000 in exemplary damages; (4)
P353,000 in attorney's fees; and (5) P3 00,000 as litigation expenses.40 The Lam Spouses did not
appeal the Regional Trial Court's award for the generator set and the renovation expenses.41

Kodak Philippines, Ltd. also filed an appeal. However, the Court of Appeals42 dismissed it on
December 16, 2002 for Kodak Philippines, Ltd.'s failure to file its appellant's brief, without
prejudice to the continuation of the Lam Spouses' appeal.43 The Court of Appeals' December 16,
2002 Resolution denying Kodak Philippines, Ltd.'s appeal became final and executory on
January 4, 2003.44

In the Decision45 dated March 30, 2005, the Court of Appeals Special Fourteenth Division
modified the February 26, 1999 Decision of the Regional Trial
Court:chanRoblesvirtualLawlibrary

WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26 February 1999


of the Regional Trial Court, Branch 65 in Civil Case No. 92-3442 is
hereby MODIFIED.Plaintiff-appellant is ordered to pay the following:

1. P130,000.00 representing the amount of the generator set, plus legal interest at 12% per
annum from December 1992 until fully paid; and

2. P440.000.00 as actual damages;

3. P25,000.00 as moral damages; and

4. P50,000.00 as exemplary damages.

SO ORDERED.46 (Emphasis supplied)


cralawlawlibrary

The Court of Appeals agreed with the trial court's Decision, but extensively discussed the basis
for the modification of the dispositive portion.

The Court of Appeals ruled that the Letter Agreement executed by the parties showed that their
obligations were susceptible of partial performance. Under Article 1225 of the New Civil Code,
their obligations are divisible:chanRoblesvirtualLawlibrary

In determining the divisibility of an obligation, the following factors may be considered, to wit:
(1) the will or intention of the parties, which may be expressed or presumed; (2) the objective or
purpose of the stipulated prestation; (3) the nature of the thing; and (4) provisions of law
affecting the prestation.

Applying the foregoing factors to this case, We found that the intention of the parties is to be
bound separately for each Minilab Equipment to be delivered as shown by the separate purchase
price for each of the item, by the acceptance ofSps. Lam of separate deliveries for the first
Minilab Equipment and for those of the remaining two and the separate payment arrangements
for each of the equipment. Under this premise, Sps. Lam shall be liable for the entire amount of
the purchase price of the Minilab Equipment delivered considering that Kodak had already
completely fulfilled its obligation to deliver the same.. ..

Third, it is also evident that the contract is one that is severable in character as demonstrated by
the separate purchase price for each of the minilab equipment. "If the part to be performed by
one party consists in several distinct and separate items and the price is apportioned to each of
them, the contract will generally be held to be severable. In such case, each distinct stipulation
relating to a separate subject matter will be treated as a separate contract." Considering this,
Kodak's breach of its obligation to deliver the other two (2) equipment cannot bar its recovery
for the full payment of the equipment already delivered. As far as Kodak is concerned, it had
already fully complied with its separable obligation to deliver the first unit of Minilab
Equipment.47 (Emphasis supplied)
cralawlawlibrary

The Court of Appeals held that the issuance of a writ of replevin is proper insofar as the
delivered Minilab Equipment unit and its standard accessories are concerned, since Kodak
Philippines, Ltd. had the right to possess it:48chanroblesvirtuallawlibrary

The purchase price of said equipment is P1,796,000.00 which, under the agreement is payable
with forty eight (48) monthly amortization. It is undisputed that Sps. Lam made payments which
amounted to Two Hundred Seventy Thousand Pesos (P270,000.00) through the following
checks: Metrobank Check Nos. 00892620 and 00892621 dated 31 March 1992 and 30 April
1992 respectively in the amount of Thirty Five Thousand Pesos (P35,000.0O) each, and BPI
Family Check dated 31 July 1992 amounting to Two Hundred Thousand Pesos (P200,000.00).
This being the case, Sps. Lam are still liable to Kodak in the amount of One Million Five
Hundred Twenty Six Thousand Pesos (P1,526,000.00), which is payable in several monthly
amortization, pursuant to the Letter Agreement. However, Sps. Lam admitted that sometime in
May 1992, they had already ordered their drawee bank to stop the payment on all the other
checks they had issued to Kodak as payment for the Minilab Equipment delivered to them.
Clearly then, Kodak hafdj the right to repossess the said equipment, through this replevin suit.
Sps. Lam cannot excuse themselves from paying in full the purchase price of the equipment
delivered to them on account of Kodak's breach of the contract to deliver the other two (2)
Minilab Equipment, as contemplated in the Letter Agreement.49 (Emphasis
supplied)cralawlawlibrary

Echoing the ruling of the trial court, the Court of Appeals held that the liability of the Lam
Spouses to pay the remaining balance for the first delivered unit is based on the second sentence
of Article 1592 of the New Civil Code.50 The Lam Spouses' receipt and use of the Minilab
Equipment before they knew that Kodak Philippines, Ltd. would not deliver the two (2)
remaining units has made them liable for the unpaid portion of the purchase price.51

The Court of Appeals noted that Kodak Philippines, Ltd. sought the rescission of its contract
with the Lam Spouses in the letter dated October 14, 1992.52 The rescission was based on Article
1191 of the New Civil Code, which provides: "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."53 In its letter, Kodak Philippines, Ltd. demanded that the Lam Spouses surrender the lone
delivered unit of Minilab Equipment along with its standard accessories.54

The Court of Appeals likewise noted that the Lam Spouses rescinded the contract through its
letter dated November 18, 1992 on account of Kodak Philippines, Inc.'s breach of the parties'
agreement to deliver the two (2) remaining units.55

As a result of this rescission under Article 1191, the Court of Appeals ruled that "both parties
must be restored to their original situation, as far as practicable, as if the contract was never
entered into."56The Court of Appeals ratiocinated that Article 1191 had the effect of extinguishing
the obligatory relation as if one was never created:57chanroblesvirtuallawlibrary

To rescind is to declare a contract void in its inception and to put an end to it as though it never
were. It is not merely to terminate it and to release parties from further obligations to each other
but abrogate it from the beginning and restore parties to relative positions which they would have
occupied had no contract been made.58cralawlawlibrary

The Lam Spouses were ordered to relinquish possession of the Minilab Equipment unit and its
standard accessories, while Kodak Philippines, Ltd. was ordered to return the amount of
P270,000.00, tendered by the Lam Spouses as partial payment.59

As to the actual damages sought by the parties, the Court of Appeals found that the Lam Spouses
were able to substantiate the following:chanRoblesvirtualLawlibrary

Incentive fee paid to Mr. Ruales in the amount of P100,000.00; the rider to the contract of lease
which made the Sps. Lam liable, by way of advance payment, in the amount of P40,000.00, the
same being intended for the repair of the flooring of the leased premises; and lastly, the payment
of P300,000.00, as compromise agreement for the pre-termination of the contract of lease with
Ruales.60cralawlawlibrary

The total amount is P440,000.00. The Court of Appeals found that all other claims made by the
Lam Spouses were not supported by evidence, either through official receipts or check
payments.61

As regards the generator set improperly seized from Kodak Philippines, Ltd. on the basis of the
writ of replevin, the Court of Appeals found that there was no basis for the Lam Spouses' claim
for reasonable rental of P5,000.00. It held that the trial court's award of 12% interest, in addition
to the cost of the generator set in the amount of P130,000.00, is sufficient compensation for
whatever damage the Lam Spouses suffered on account of its improper seizure.62

The Court of Appeals also ruled on the Lam Spouses' entitlement to moral and exemplary
damages, as well as attorney's fees and litigation expenses:chanRoblesvirtualLawlibrary

In seeking recovery of the Minilab Equipment, Kodak cannot be considered to have manifested
bad faith and malevolence because as earlier ruled upon, it was well within its right to do the
same. However, with respect to the seizure of the generator set, where Kodak misrepresented to
the court a quo its alleged right over the said item, Kodak's bad faith and abuse of judicial
processes become self-evident. Considering the off-setting circumstances attendant, the amount
of P25,000.00 by way of moral damages is considered sufficient.

In addition, so as to serve as an example to the public that an application for replevin should not
be accompanied by any false claims and misrepresentation, the amount of P50,000.00 by way of
exemplary damages should be pegged against Kodak.

With respect to the attorney's fees and litigation expenses, We find that there is no basis to award
Sps. Lam the amount sought for.63cralawlawlibrary

Kodak Philippines, Ltd. moved for reconsideration of the Court of Appeals Decision, but it was
denied for lack of merit.64 However, the Court of Appeals noted that the Lam Spouses'
Opposition correctly pointed out that the additional award of P270,000.00 made by the trial court
was not mentioned in the decretal portion of the March 30, 2005
Decision:chanRoblesvirtualLawlibrary

Going over the Decision, specifically page 12 thereof, the Court noted that, in addition to the
amount of Two Hundred Seventy Thousand (P270,000.00) which plaintiff-appellant should
return to the defendants-appellants, the Court also ruled that defendants-appellants should, in
turn, relinquish possession of the Minilab Equipment and the standard accessories to plaintiff-
appellant. Inadvertently, these material items were not mentioned in the decretal portion of the
Decision. Hence, the proper correction should herein be made.65cralawlawlibrary

The Lam Spouses filed this Petition for Review on April 14, 2005. On the other hand, Kodak
Philippines, Ltd. filed its Motion for Reconsideration66 before the Court of Appeals on April 22,
2005.

While the Petition for Review on Certiorari filed by the Lam Spouses was pending before this
court, the Court of Appeals Special Fourteenth Division, acting on Kodak Philippines, Ltd.'s
Motion for Reconsideration, issued the Amended Decision67 dated September 9, 2005. The
dispositive portion of the Decision reads:chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, this Court resolved that:chanRoblesvirtualLawlibrary

A. Plaintiff-appellant's Motion for Reconsideration is hereby DENIED for lack of merit.

B. The decretal portion of the 30 March 2005 Decision should now read as follows:
"WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26 February 1999 of
the Regional Trial Court, Branch 65 in Civil Cases No. 92-3442 is hereby MODIFIED. Plaintiff-
appellant is ordered to pay the following:
a. P270,000.00 representing the partial payment made on the Minilab equipment.

b. P130,000.00 representing the amount of the generator set, plus legal interest at 12% per
annum from December 1992 until fully paid;

c. P440,000.00 as actual damages;

d. P25,000.00 as moral damages; and


e. P50,000.00 as exemplary damages.
Upon the other hand, defendants-appellants are hereby ordered to return to plaintiff-appellant the
Minilab equipment and the standard accessories delivered by plaintiff-appellant.

SO ORDERED."
SO ORDERED.68 (Emphasis in the original)
cralawlawlibrary

Upon receiving the Amended Decision of the Court of Appeals, Kodak Philippines, Ltd. filed a
Motion for Extension of Time to File an Appeal by Certiorari under Rule 45 of the 1997 Rules of
Civil Procedure before this court.69

This was docketed as G.R. No. 169639. In the Motion for Consolidation dated November 2,
2005, the Lam Spouses moved that G.R. No. 167615 and G.R. No. 169639 be consolidated since
both involved the same parties, issues, transactions, and essential facts and circumstances.70

In the Resolution dated November 16, 2005, this court noted the Lam Spouses' September 23 and
September 30, 2005 Manifestations praying that the Court of Appeals' September 9, 2005
Amended Decision be considered in the resolution of the Petition for Review on Certiorari.71 It
also granted the Lam Spouses' Motion for Consolidation.72

In the Resolution73 dated September 20, 2006, this court deconsolidated G.R No. 167615 from
G.R. No. 169639 and declared G.R. No. 169639 closed and terminated since Kodak Philippines,
Ltd. failed to file its Petition for Review.

II

We resolve the following issues:chanRoblesvirtualLawlibrary

First, whether the contract between petitioners Spouses Alexander and Julie Lam and respondent
Kodak Philippines, Ltd. pertained to obligations that are severable, divisible, and susceptible of
partial performance under Article 1225 of the New Civil Code; and

Second, upon rescission of the contract, what the parties are entitled to under Article 1190 and
Article 1522 of the New Civil Code.

Petitioners argue that the Letter Agreement it executed with respondent for three (3) Minilab
Equipment units was not severable, divisible, and susceptible of partial performance.
Respondent's recovery of the delivered unit was unjustified.74

Petitioners assert that the obligations of the parties were not susceptible of partial performance
since the Letter Agreement was for a package deal consisting of three (3) units.75 For the delivery
of these units, petitioners were obliged to pay 48 monthly payments, the total of which
constituted one debt.76Having relied on respondent's assurance that the three units would be
delivered at the same time, petitioners simultaneously rented and renovated three stores in
anticipation of simultaneous operations.77 Petitioners argue that the divisibility of the object does
not necessarily determine the divisibility of the obligation since the latter is tested against its
susceptibility to a partial performance.78 They argue that even if the object is susceptible of
separate deliveries, the transaction is a indivisible if the parties intended the realization of all
parts of the agreed obligation.79

Petitioners support the claim that it was the parties' intention to have an indivisible agreement by
asserting that the payments they made to respondent were intended to be applied to the whole
package of three units.80 The postdated checks were also intended as initial payment for the
whole package.81 The separate purchase price for each item was merely intended to particularize
the unit prices, not to negate the indivisible nature of their transaction.82 As to the issue of
delivery, petitioners claim that their acceptance of separate deliveries of the units was solely due
to the constraints faced by respondent, who had sole control over delivery matters.83

With the obligation being indivisible, petitioners argue that respondent's failure to comply with
its obligation to deliver the two (2) remaining Minilab Equipment units amounted to a breach.
Petitioners claim that the breach entitled them to the remedy of rescission and damages under
Article 1191 of the New Civil Code.84

Petitioners also argue that they are entitled to moral damages more than the P50,000.00 awarded
by the Court of Appeals since respondent's wrongful act of accusing them of non-payment of
their obligations caused them sleepless nights, mental anguish, and wounded feelings.85 They
further claim that, to serve as an example for the public good, they are entitled to exemplary
damages as respondent, in making false allegations, acted in evident bad faith and in a wanton,
oppressive, capricious, and malevolent manner.86

Petitioners also assert that they are entitled to attorney's fees and litigation expenses under Article
2208 of the New Civil Code since respondent's act of bringing a suit against them was baseless
and malicious. This prompted them to engage the services of a lawyer.87

Respondent argues that the parties' Letter Agreement contained divisible obligations susceptible
of partial performance as defined by Article 1225 of the New Civil Code.88 In respondent's view,
it was the intention of the parties to be bound separately for each individually priced Minilab
Equipment unit to be delivered to different outlets:89chanroblesvirtuallawlibrary

The three (3) Minilab Equipment are intended by petitioners LAM for install[a]tion at their
Tagum, Davao del Norte, Sta. Cruz, Manila and Cotabato City outlets. Each of these units [is]
independent from one another, as many of them may perform its own job without the other.
Clearly the objective or purpose of the prestation, the obligation is divisible.

The nature of each unit of the three (3) Minilab Equipment is such that one can perform its own
functions, without awaiting for the other units to perform and complete its job. So much so, the
nature of the object of the Letter Agreement is susceptible of partial performance, thus the
obligation is divisible.90cralawlawlibrary

With the contract being severable in character, respondent argues that it performed its obligation
when it delivered one unit of the Minilab Equipment.91 Since each unit could perform on its own,
there was no need to await the delivery of the other units to complete its job.92 Respondent then
is of the view that when petitioners ordered the depository bank to stop payment of the issued
checks covering the first delivered unit, they violated their obligations under the Letter
Agreement since respondent was already entitled to full payment.93

Respondent also argues that petitioners benefited from the use of the Minilab Equipment for 10
monthsfrom March to December 1992 despite having paid only two (2) monthly
installments.94Respondent avers that the two monthly installments amounting to P70,000.00
should be the subject of an offset against the amount the Court of Appeals awarded to
petitioners.95

Respondent further avers that petitioners have no basis for claiming damages since the seizure
and recovery of the Minilab Equipment was not in bad faith and respondent was well within its
right.96

III

The Letter Agreement contained an indivisible obligation.

Both parties rely on the Letter Agreement97 as basis of their respective obligations. Written by
respondent's Jeffrey T. Go and Antonio V. Mines and addressed to petitioner Alexander Lam, the
Letter Agreement contemplated a "package deal" involving three (3) units of the Kodak Minilab
System 22XL, with the following terms and conditions:chanRoblesvirtualLawlibrary

This confirms our verbal agreement for Kodak Phils., Ltd. to provide Colorkwik Laboratories,
Inc. with three (3) units Kodak Minilab System 22XL . . . for your proposed outlets in Rizal
Avenue (Manila), Tagum (Davao del Norte), and your existing Multicolor photo counter in
Cotabato City under the following terms and conditions:chanRoblesvirtualLawlibrary

1. Said Minilab Equipment packages will avail a total of 19% multiple order discount based on
prevailing equipment price provided said equipment packages will be purchased not later than
June 30, 1992.

2. 19% Multiple Order Discount shall be applied in the form of merchandise and delivered in
advance immediately after signing of the contract.
* Also includes start-up packages worth P61,000.00.

3. NO DOWNPAYMENT.

4. Minilab Equipment Package shall be payable in 48 monthly installments at THIRTY FIVE


THOUSAND PESOS (P35,000.00) inclusive of 24% interest rate for the first 12 months; the
balance shall be re-amortized for the remaining 36 months and the prevailing interest shall be
applied.

5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at ONE MILLION
SEVEN HUNDRED NINETY SIX THOUSAND PESOS.
6. Price is subject to change without prior notice.
*Secured with PDCs; 1st monthly amortization due 45 days after installation[.]98cralawlawlibrary

Based on the foregoing, the intention of the parties is for there to be a single transaction covering
all three (3) units of the Minilab Equipment. Respondent's obligation was to deliver all products
purchased under a "package," and, in turn, petitioners' obligation was to pay for the total
purchase price, payable in installments.

The intention of the parties to bind themselves to an indivisible obligation can be further
discerned through their direct acts in relation to the package deal. There was only one agreement
covering all three (3) units of the Minilab Equipment and their accessories. The Letter
Agreement specified only one purpose for the buyer, which was to obtain these units for three
different outlets. If the intention of the parties were to have a divisible contract, then separate
agreements could have been made for each Minilab Equipment unit instead of covering all three
in one package deal. Furthermore, the 19% multiple order discount as contained in the Letter
Agreement was applied to all three acquired units.99The "no downpayment" term contained in the
Letter Agreement was also applicable to all the Minilab Equipment units. Lastly, the fourth
clause of the Letter Agreement clearly referred to the object of the contract as "Minilab
Equipment Package."

In ruling that the contract between the parties intended to cover divisible obligations, the Court
of Appeals highlighted: (a) the separate purchase price of each item; (b) petitioners' acceptance
of separate deliveries of the units; and (c) the separate payment arrangements for each
unit.100However, through the specified terms and conditions, the tenor of the Letter Agreement
indicated an intention for a single transaction. This intent must prevail even though the articles
involved are physically separable and capable of being paid for and delivered individually,
consistent with the New Civil Code:chanRoblesvirtualLawlibrary

Article 1225. For the purposes of the preceding articles, obligations to give definite things and
those which are not susceptible of partial performance shall be deemed to be indivisible.

When the obligation has for its object the execution of a certain number of days of work, the
accomplishment of work by metrical units, or analogous things which by their nature are
susceptible of partial performance, it shall be divisible.

However, even though the object or service may be physically divisible, an obligation is
indivisible if so provided by law or intended by the parties. (Emphasis supplied)cralawlawlibrary

In Nazareno v. Court of Appeals,101 the indivisibility of an obligation is tested against whether it


can be the subject of partial performance:chanRoblesvirtualLawlibrary

An obligation is indivisible when it cannot be validly performed in parts, whatever may be the
nature of the thing which is the object thereof. The indivisibility refers to the prestation and not
to the object thereof. In the present case, the Deed of Sale of January 29, 1970 supposedly
conveyed the six lots to Natividad. The obligation is clearly indivisible because the performance
of the contract cannot be done in parts, otherwise the value of what is transferred is diminished.
Petitioners are therefore mistaken in basing the indivisibility of a contract on the number of
obligors.102 (Emphasis supplied, citation omitted)cralawlawlibrary

There is no indication in the Letter Agreement that the units petitioners ordered were covered by
three (3) separate transactions. The factors considered by the Court of Appeals are mere incidents
of the execution of the obligation, which is to deliver three units of the Minilab Equipment on the
part of respondent and payment for all three on the part of petitioners. The intention to create an
indivisible contract is apparent from the benefits that the Letter Agreement afforded to both
parties. Petitioners were given the 19% discount on account of a multiple order, with the discount
being equally applicable to all units that they sought to acquire. The provision on "no
downpayment" was also applicable to all units. Respondent, in turn, was entitled to payment of
all three Minilab Equipment units, payable by installments.

IV

With both parties opting for rescission of the contract under Article 1191, the Court of Appeals
correctly ordered for restitution.

The contract between the parties is one of sale, where one party obligates himself or herself to
transfer the ownership and deliver a determinate thing, while the other pays a certain price in
money or its equivalent.103 A contract of sale is perfected upon the meeting of minds as to the
object and the price, and the parties may reciprocally demand the performance of their respective
obligations from that point on.104

The Court of Appeals correctly noted that respondent had rescinded the parties' Letter Agreement
through the letter dated October 14, 1992.105 It likewise noted petitioners' rescission through the
letter dated November 18, 1992.106 This rescission from both parties is founded on Article 1191
of the New Civil Code:chanRoblesvirtualLawlibrary

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 fulfilment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission, even after he has chosen
fulfilment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period.
cralawlawlibrary

Rescission under Article 1191 has the effect of mutual restitution.107 In Velarde v. Court of
Appeals:108chanroblesvirtuallawlibrary

Rescission abrogates the contract from its inception and requires a mutual restitution of benefits
received.
....
Rescission creates the obligation to return the object of the contract. It can be carried out only
when the one who demands rescission can return whatever he may be obliged to restore. To
rescind is to declare a contract void at its inception and to put an end to it as though it never
was. It is not merely to terminate it and release the parties from further obligations to each other,
but to abrogate it from the beginning and restore the parties to their relative positions as if no
contract has been made. (Emphasis supplied, citations omitted)cralawlawlibrary

The Court of Appeals correctly ruled that both parties must be restored to their original situation
as far as practicable, as if the contract was never entered into. Petitioners must relinquish
possession of the delivered Minilab Equipment unit and accessories, while respondent must
return the amount tendered by petitioners as partial payment for the unit received. Further,
respondent cannot claim that the two (2) monthly installments should be offset against the
amount awarded by the Court of Appeals to petitioners because the effect of rescission under
Article 1191 is to bring the parties back to their original positions before the contract was entered
into. Also in Velarde:chanRoblesvirtualLawlibrary

As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal
obligation, not a violation of the terms and conditions of the mortgage contract. Therefore, the
automatic rescission and forfeiture of payment clauses stipulated in the contract does not apply.
Instead, Civil Code provisions shall govern and regulate the resolution of this controversy.

Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual
restitution is required to bring back the parties to their original situation prior to the inception of
the contract. Accordingly, the initial payment of P800.000 and the corresponding mortgage
payments in the amounts of P27,225, P23.000 and P23.925 (totaling P874,150.00) advanced by
petitioners should be returned by private respondents, lest the latter unjustly enrich themselves
at the expense of the former.110](Emphasis supplied)cralawlawlibrary

When rescission is sought under Article 1191 of the Civil Code, it need not be judicially invoked
because the power to resolve is implied in reciprocal obligations.111 The right to resolve allows an
injured party to minimize the damages he or she may suffer on account of the other party's
failure to perform what is incumbent upon him or her.112 When a party fails to comply with his or
her obligation, the other party's right to resolve the contract is triggered.113 The resolution
immediately produces legal effects if the non-performing party does not question the
resolution.114 Court intervention only becomes necessary when the party who allegedly failed to
comply with his or her obligation disputes the resolution of the contract.115 Since both parties in
this case have exercised their right to resolve under Article 1191, there is no need for a judicial
decree before the resolution produces effects.

The issue of damages is a factual one. A petition for review on certiorari under Rule 45 shall only
pertain to questions of law.116 It is not the duty of this court to re-evaluate the evidence adduced
before the lower courts.117 Furthermore, unless the petition clearly shows that there is grave abuse
of discretion, the findings of fact of the trial court as affirmed by the Court of Appeals are
conclusive upon this court.118 In Lorzano v. Tabayag, Jr.:119chanroblesvirtuallawlibrary
For a question to be one of law, the same must not involve an examination of the probative value
of the evidence presented by the litigants or any of them. The resolution of the issue must rest
solely on what the law provides on the given set of circumstances. Once it is clear that the issue
invites a review of the evidence presented, the question posed is one of fact.
....

For the same reason, we would ordinarily disregard the petitioner's allegation as to the
propriety of the award of moral damages and attorney's fees in favor of the respondent as it is a
question of fact. Thus, questions on whether or not there was a preponderance of evidence to
justify the award of damages or whether or not there was a causal connection between the given
set of facts and the damage suffered by the private complainant or whether or not the act from
which civil liability might arise exists are questions of fact.

Essentially, the petitioner is questioning the award of moral damages and attorney's fees in favor
of the respondent as the same is supposedly not fully supported by evidence. However, in the
final analysis, the question of whether the said award is fully supported by evidence is a factual
question as it would necessitate whether the evidence adduced in support of the same has any
probative value. For a question to be one of law, it must involve no examination of the probative
value of the evidence presented by the litigants or any of them.120 (Emphasis supplied, citations
omitted)cralawlawlibrary

The damages awarded by the Court of Appeals were supported by documentary


evidence.121Petitioners failed to show any reason why the factual determination of the Court of
Appeals must be reviewed, especially in light of their failure to produce receipts or check
payments to support their other claim for actual damages.122

Furthermore, the actual damages amounting to P2,040,000.00 being sought by petitioners123 must
be tempered on account of their own failure to pay the rest of the installments for the delivered
unit. This failure on their part is a breach of their obligation, for which the liability of respondent,
for its failure to deliver the remaining units, shall be equitably tempered on account of Article
1192 of the New Civil Code.124 In Central Bank of the Philippines v. Court of
Appeals:125chanroblesvirtuallawlibrary

Since both parties were in default in the performance of their respective reciprocal
obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the entire
loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt
within 3 years as stipulated, they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of
their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the
courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire
loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and
surcharges, for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino
for interest on his P17,000.00 debt shall not be included in offsetting the liabilities of both
parties. Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just
that he should account for the interest thereon.126 (Emphasis supplied)cralawlawlibrary
The award for moral and exemplary damages also appears to be sufficient. Moral damages are
granted to alleviate the moral suffering suffered by a party due to an act of another, but it is not
intended to enrich the victim at the defendant's expense.127 It is not meant to punish the culpable
party and, therefore, must always be reasonable vis-a-vis the injury caused.128 Exemplary
damages, on the other hand, are awarded when the injurious act is attended by bad faith.129 In this
case, respondent was found to have misrepresented its right over the generator set that was
seized. As such, it is properly liable for exemplary damages as an example to the public.130

However, the dispositive portion of the Court of Appeals Amended Decision dated September 9,
2005 must be modified to include the recovery of attorney's fees and costs of suit in favor of
petitioners. In Sunbanun v. Go:131chanroblesvirtuallawlibrary

Furthermore, we affirm the award of exemplary damages and attorney's fees. Exemplary
damages may be awarded when a wrongful act is accompanied by bad faith or when the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner which
would justify an award of exemplary damages under Article 2232 of the Civil Code. Since the
award of exemplary damages is proper in this case, attorney's fees and cost of the suit may also
be recovered as provided under Article 2208 of the Civil Code.132 (Emphasis supplied, citation
omitted)cralawlawlibrary

Based on the amount awarded for moral and exemplary damages, it is reasonable to award
petitioners P20,000.00 as attorney's fees.

WHEREFORE, the Petition is DENIED. The Amended Decision dated September 9, 2005
is AFFIRMED with MODIFICATION. Respondent Kodak Philippines, Ltd. is ordered to pay
petitioners Alexander and Julie Lam:chanRoblesvirtualLawlibrary

(a) P270,000.00, representing the partial payment made on the Minilab Equipment;
(b) P130,000.00, representing the amount of the generator set, plus legal interest at 12%
per annum from December 1992 until fully paid;
(c) P440,000.00 as actual damages;
(d) P25,000.00 as moral damages;
(e) P50,000.00 as exemplary damages; and
(f) P20,000.00 as attorney's fees.

Petitioners are ordered to return the Kodak Minilab System 22XL unit and its standard
accessories to respondent.

SO ORDERED.chanroblesvirtuallawlibrary

Carpio, (Chairperson), Brion, Del Castillo, and Mendoza, JJ., concur.


SECOND DIVISION

January 11, 2016

G.R. No. 194964-65

UNIVERSITY OF MINDANAO, INC., Petitioner,


vs.
BANGKO SENTRAL NG PILIPINAS, ET AL., Respondents.

DECISION

LEONEN, J.:

Acts of an officer that are not authorized by the board of directors/trustees do not bind the
corporation unless the corporation ratifies the acts or holds the officer out as a person with
authority to transact on its behalf.

This is a Petition for Review on Certiorari1 of the Court of Appeals' December 17, 2009
Decision2 and December 20, 2010 Resolution.3 The Court of Appeals reversed the Cagayan De
Oro City trial courts and the Iligan City trial courts Decisions to nullify mortgage contracts
involving University of Mindanaos properties.4

University of Mindanao is an educational institution. For the year 1982, its Board of Trustees
was chaired by Guillermo B. Torres. His wife, Dolores P. Torres, sat as University of Mindanaos
Assistant Treasurer.5

Before 1982, Guillermo B. Torres and Dolores P. Torres incorporated and operated two (2) thrift
banks: (1) First Iligan Savings & Loan Association, Inc. (FISLAI); and (2) Davao Savings and
Loan Association, Inc. (DSLAI). Guillermo B. Torres chaired both thrift banks. He acted as
FISLAIs President, while his wife, Dolores P. Torres, acted as DSLAIs President and FISLAIs
Treasurer.6

Upon Guillermo B. Torres request, Bangko Sentral ng Pilipinas issued a P1.9 million standby
emergency credit to FISLAI. The release of standby emergency credit was evidenced by three (3)
promissory notes dated February 8, 1982, April 7, 1982, and May 4, 1982 in the amounts of
P500,000.00, P600,000.00, and P800,000.00, respectively. All these promissory notes were
signed by Guillermo B. Torres, and were co-signed by either his wife, Dolores P. Torres, or
FISLAIs Special Assistant to the President, Edmundo G. Ramos, Jr.7
On May 25, 1982, University of Mindanaos Vice President for Finance, Saturnino Petalcorin,
executed a deed of real estate mortgage over University of Mindanaos property in Cagayan de
Oro City (covered by Transfer Certificate of Title No. T-14345) in favor of Bangko Sentral ng
Pilipinas.8 "The mortgage served as security for FISLAIs P1.9 Million loan[.]"9 It was allegedly
executed on University of Mindanaos behalf.10

As proof of his authority to execute a real estate mortgage for University of Mindanao, Saturnino
Petalcorin showed a Secretarys Certificate signed on April 13, 1982 by University of
Mindanaos Corporate Secretary, Aurora de Leon.11 The Secretarys Certificate stated:

That at the regular meeting of the Board of Trustees of the aforesaid corporation [University of
Mindanao] duly convened on March 30, 1982, at which a quorum was present, the following
resolution was unanimously adopted:

"Resolved that the University of Mindanao, Inc. be and is hereby authorized, to mortgage
real estate properties with the Central Bank of the Philippines to serve as security for the
credit facility of First Iligan Savings and Loan Association, hereby authorizing the
President and/or Vice-president for Finance, Saturnino R. Petalcorin of the University of
Mindanao, Inc. to sign, execute and deliver the covering mortgage document or any other
documents which may be proper[l]y required."12

The Secretarys Certificate was supported by an excerpt from the minutes of the January 19,
1982 alleged meeting of University of Mindanaos Board of Trustees. The excerpt was certified
by Aurora de Leon on March 13, 1982 to be a true copy of University of Mindanaos records on
file.13 The excerpt reads:

3 Other Matters:

(a) Cagayan de Oro and Iligan properties: Resolution No. 82-1-8

Authorizing the Chairman to appoint Saturnino R. Petalcorin, Vice-President for Finance, to


represent the University of Mindanao to transact, transfer, convey, lease, mortgage, or otherwise
hypothecate any or all of the following properties situated at Cagayan de Oro and Iligan City and
authorizing further Mr. Petalcorin to sign any or all documents relative thereto:

1. A parcel of land situated at Cagayan de Oro City, covered and technically described in
TRANSFER CERTIFICATE OF TITLE No. T-14345 of the Registry of Deeds of
Cagayan de Oro City;

2. A parcel of land situated at Iligan City, covered and technically described in


TRANSFER CERTIFICATE OF TITLE NO. T-15696 (a.t.) of the Registry of Deeds of
Iligan City; and
3. A parcel of land situated at Iligan City, covered and technically described in
TRANSFER CERTIFICATE OF TITLE NO. T-15697 (a.f.) of the Registry of Deeds of
Iligan City.14

The mortgage deed executed by Saturnino Petalcorin in favor of Bangko Sentral ng Pilipinas was
annotated on the certificate of title of the Cagayan de Oro City property (Transfer Certificate of
Title No. 14345) on June 25, 1982. Aurora de Leons certification was also annotated on the
Cagayan de Oro City propertys certificate of title (Transfer Certificate of Title No. 14345).15

On October 21, 1982, Bangko Sentral ng Pilipinas granted FISLAI an additional loan of
P620,700.00. Guillermo B. Torres and Edmundo Ramos executed a promissory note on October
21, 1982 to cover that amount.16

On November 5, 1982, Saturnino Petalcorin executed another deed of real estate mortgage,
allegedly on behalf of University of Mindanao, over its two properties in Iligan
City.1wphi1 This mortgage served as additional security for FISLAIs loans. The two Iligan
City properties were covered by Transfer Certificates of Title Nos. T-15696 and T-15697.17

On January 17, 1983, Bangko Sentral ng Pilipinas mortgage lien over the Iligan City properties
and Aurora de Leons certification were annotated on Transfer Certificates of Title Nos. T-15696
and T-15697.18 On January 18, 1983, Bangko Sentral ng Pilipinas mortgage lien over the Iligan
City properties was also annotated on the tax declarations covering the Iligan City properties.19

Bangko Sentral ng Pilipinas also granted emergency advances to DSLAI on May 27, 1983 and
on August 20, 1984 in the amounts of P1,633,900.00 and P6,489,000.00, respectively.20

On January 11, 1985, FISLAI, DSLAI, and Land Bank of the Philippines entered into a
Memorandum of Agreement intended to rehabilitate the thrift banks, which had been suffering
from their depositors heavy withdrawals. Among the terms of the agreement was the merger of
FISLAI and DSLAI, with DSLAI as the surviving corporation. DSLAI later became known as
Mindanao Savings and Loan Association, Inc. (MSLAI).21

Guillermo B. Torres died on March 2, 1989.22

MSLAI failed to recover from its losses and was liquidated on May 24, 1991.23

On June 18, 1999, Bangko Sentral ng Pilipinas sent a letter to University of Mindanao, informing
it that the bank would foreclose its properties if MSLAIs total outstanding obligation of
P12,534,907.73 remained unpaid.24

In its reply to Bangko Sentral ng Pilipinas June 18, 1999 letter, University of Mindanao, through
its Vice President for Accounting, Gloria E. Detoya, denied that University of Mindanaos
properties were mortgaged. It also denied having received any loan proceeds from Bangko
Sentral ng Pilipinas.25

On July 16, 1999, University of Mindanao filed two Complaints for nullification and
cancellation of mortgage. One Complaint was filed before the Regional Trial Court of Cagayan
de Oro City, and the other Complaint was filed before the Regional Trial Court of Iligan City.26

University of Mindanao alleged in its Complaints that it did not obtain any loan from Bangko
Sentral ng Pilipinas. It also did not receive any loan proceeds from the bank.27

University of Mindanao also alleged that Aurora de Leons certification was anomalous. It never
authorized Saturnino Petalcorin to execute real estate mortgage contracts involving its properties
to secure FISLAIs debts. It never ratified the execution of the mortgage contracts. Moreover, as
an educational institution, it cannot mortgage its properties to secure another persons debts.28

On November 23, 2001, the Regional Trial Court of Cagayan de Oro City rendered a Decision in
favor of University of Mindanao,29 thus:

WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff and


against defendants:

1. DECLARING the real estate mortgage Saturnino R. Petalcorin executed in favor of


BANGKO SENTRAL NG PILIPINAS involving Lot 421-A located in Cagayan de Oro
City with an area of 482 square meters covered by TCT No. T-14345 as annuled [sic];

2. ORDERING the Register of Deeds of Cagayan de Oro City to cancel Entry No. 9951
and Entry No. 9952 annotated at the back of said TCT No. T-14345, Registry of Deeds of
Cagayan de Oro City;

Prayer for attorneys fee [sic] is hereby denied there being no proof that in demanding payment
of the emergency loan, defendant BANGKO SENTRAL NG PILIPINAS was motivated by
evident bad faith,

SO ORDERED.30 (Citation omitted)

The Regional Trial Court of Cagayan de Oro City found that there was no board resolution
giving Saturnino Petalcorin authority to execute mortgage contracts on behalf of University of
Mindanao. The Cagayan de Oro City trial court gave weight to Aurora de Leons testimony that
University of Mindanaos Board of Trustees did not issue a board resolution that would support
the Secretarys Certificate she issued. She testified that she signed the Secretarys Certificate
only upon Guillermo B. Torres orders.31
Saturnino Petalcorin testified that he had no authority to execute a mortgage contract on
University of Mindanaos behalf. He merely executed the contract because of Guillermo B.
Torres request.32

Bangko Sentral ng Pilipinas witness Daciano Pagui, Jr. also admitted that there was no board
resolution giving Saturnino Petalcorin authority to execute mortgage contracts on behalf of
University of Mindanao.33

The Regional Trial Court of Cagayan de Oro City ruled that Saturnino Petalcorin was not
authorized to execute mortgage contracts for University of Mindanao. Hence, the mortgage of
University of Mindanaos Cagayan de Oro City property was unenforceable. Saturnino
Petalcorins unauthorized acts should be annulled.34

Similarly, the Regional Trial Court of Iligan City rendered a Decision on December 7, 2001 in
favor of University of Mindanao.35 The dispositive portion of the Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against the defendants, as follows:

1. Nullifying and canceling [sic] the subject Deed of Real Estate Mortgage dated
November 5, 1982 for being unenforceable or void contract;

2. Ordering the Office of the Register of Deeds of Iligan City to cancel the entries on
TCT No. T-15696 and TCT No. T-15697 with respect to the aforesaid Deed of Real
Estate Mortgage dated November 5, 1982 and all other entries related thereto;

3. Ordering the defendant Bangko Sentral ng Pilipinas to return the owners duplicate
copies of TCT No. T-15696 and TCT No. 15697 to the plaintiff;

4. Nullifying the subject [f]oreclosure [p]roceedings and the [a]uction [s]ale conducted by
defendant Atty. Gerardo Paguio, Jr. on October 8, 1999 including all the acts subsequent
thereto and ordering the Register of Deeds of Iligan City not to register any Certificate of
Sale pursuant to the said auction sale nor make any transfer of the corresponding titles,
and if already registered and transferred, to cancel all the said entries in TCT No. T-15696
and TCT No. T-15697 and/or cancel the corresponding new TCTs in the name of
defendant Bangko Sentral ng Pilipinas;

5. Making the Preliminary Injunction per Order of this Court dated October 13, 2000
permanent.

No pronouncement as to costs.36 (Citation omitted)


The Iligan City trial court found that the Secretarys Certificate issued by Aurora de Leon was
fictitious37 and irregular for being unnumbered.38 It also did not specify the identity, description,
or location of the mortgaged properties.39

The Iligan City trial court gave credence to Aurora de Leons testimony that the University of
Mindanaos Board of Trustees did not take up the documents in its meetings. Saturnino
Petalcorin corroborated her testimony.40

The Iligan City trial court ruled that the lack of a board resolution authorizing Saturnino
Petalcorin to execute documents of mortgage on behalf of University of Mindanao made the real
estate mortgage contract unenforceable under Article 140341 of the Civil Code.42 The mortgage
contract and the subsequent acts of foreclosure and auction sale were void because the mortgage
contract was executed without University of Mindanaos authority.43

The Iligan City trial court also ruled that the annotations on the titles of University of
Mindanaos properties do not operate as notice to the University because annotations only bind
third parties and not owners.44 Further, Bangko Sentral ng Pilipinas right to foreclose the
University of Mindanaos properties had already prescribed.45

Bangko Sentral ng Pilipinas separately appealed the Decisions of both the Cagayan de Oro City
and the Iligan City trial courts.46

After consolidating both cases, the Court of Appeals issued a Decision on December 17, 2009 in
favor of Bangko Sentral ng Pilipinas, thus:

FOR THE REASONS STATED, the Decision dated 23 November 2001 of the Regional Trial
Court of Cagayan de Oro City, Branch 24 in Civil Case No. 99-414 and the Decision dated 7
December 2001 of the Regional Trial Court of Iligan City, Branch 1 in Civil Case No. 4790
are REVERSED and SET ASIDE. The Complaints in both cases before the trial courts
are DISMISSED. The Writ of Preliminary Injunction issued by the Regional Trial Court of
Iligan City, Branch 1 in Civil Case No. 4790 is LIFTEDand SET ASIDE.

SO ORDERED.47

The Court of Appeals ruled that "[a]lthough BSP failed to prove that the UM Board of Trustees
actually passed a Board Resolution authorizing Petalcorin to mortgage the subject real
properties,"48 Aurora de Leons Secretarys Certificate "clothed Petalcorin with apparent and
ostensible authority to execute the mortgage deed on its behalf[.]"49 Bangko Sentral ng Pilipinas
merely relied in good faith on the Secretarys Certificate.50 University of Mindanao is estopped
from denying Saturnino Petalcorins authority.51
Moreover, the Secretarys Certificate was notarized. This meant that it enjoyed the presumption
of regularity as to the truth of its statements and authenticity of the signatures.52 Thus, "BSP
cannot be faulted for relying on the [Secretarys Certificate.]"53

The Court of Appeals also ruled that since University of Mindanaos officers, Guillermo B.
Torres and his wife, Dolores P. Torres, signed the promissory notes, University of Mindanao was
presumed to have knowledge of the transaction.54 Knowledge of an officer in relation to matters
within the scope of his or her authority is notice to the corporation.55

The annotations on University of Mindanaos certificates of title also operate as constructive


notice to it that its properties were mortgaged.56 Its failure to disown the mortgages for more than
a decade was implied ratification.57

The Court of Appeals also ruled that Bangko Sentral ng Pilipinas action for foreclosure had not
yet prescribed because the due date extensions that Bangko Sentral ng Pilipinas granted to
FISLAI extended the due date of payment to five (5) years from February 8, 1985.58 The banks
demand letter to Dolores P. Torres on June 18, 1999 also interrupted the prescriptive period.59

University of Mindanao and Bangko Sentral ng Pilipinas filed a Motion for


Reconsideration60 and Motion for Partial Reconsideration respectively of the Court of Appeals
Decision. On December 20, 2010, the Court of Appeals issued a Resolution, thus:

Acting on the foregoing incidents, the Court RESOLVES to:

1. GRANT the appellants twin motions for extension of time to file comment/opposition
and NOTE the Comment on the appellees Motion for Reconsideration it subsequently
filed on June 23, 2010;

2. GRANT the appellees three (3) motions for extension of time to file
comment/opposition and NOTE the Comment on the appellants Motion for Partial
Reconsideration it filed on July 26, 2010;

3. NOTE the appellants "Motion for Leave to File Attached Reply Dated August 11,
2010" filed on August 13, 2010 and DENY the attached "Reply to Comment Dated July
26, 2010";

4. DENY the appellees Motion for Reconsideration as it does not offer any arguments
sufficiently meritorious to warrant modification or reversal of the Courts 17 December
2009 Decision. The Court finds that there is no compelling reason to reconsider its ruling;
and
5. GRANT the appellants Motion for Partial Reconsideration, as the Court finds it
meritorious, considering that it ruled in its Decision that "BSP can still foreclose on the
UMs real property in Cagayan de Oro City covered by TCT No. T-14345." It then
follows that the injunctive writ issued by the RTC of Cagayan de Oro City, Branch 24
must be lifted. The Courts 17 December 2009 Decision is
accordingly MODIFIED and AMENDED to read as follows:

"FOR THE REASONS STATED, the Decision dated 23 November 2001 of the
Regional Trial Court of Cagayan de Oro City, Branch 24 in Civil Case No. 99-414
and the Decision dated 7 December 2001 of the Regional Trial Court of Iligan
City, Branch 1 in Civil Case No. 4790 are REVERSED and SET ASIDE. The
Complaints in both cases before the trial courts are DISMISSED. The Writs of
Preliminary Injunction issued by the Regional Trial Court of Iligan City, Branch 1
in Civil Case No. 4790 and in the Regional Trial Court of Cagayan de Oro City,
Branch 24 in Civil Case No. 99-414 are LIFTED and SET ASIDE."

SO ORDERED.61 (Citation omitted)

Hence, University of Mindanao filed this Petition for Review.

The issues for resolution are:

First, whether respondent Bangko Sentral ng Pilipinas action to foreclose the mortgaged
properties had already prescribed; and

Second, whether petitioner University of Mindanao is bound by the real estate mortgage
contracts executed by Saturnino Petalcorin.

We grant the Petition.

Petitioner argues that respondents action to foreclose its mortgaged properties had already
prescribed.

Petitioner is mistaken.

Prescription is the mode of acquiring or losing rights through the lapse of time.62 Its purpose is
"to protect the diligent and vigilant, not those who sleep on their rights."63
The prescriptive period for actions on mortgages is ten (10) years from the day they may be
brought.64 Actions on mortgages may be brought not upon the execution of the mortgage contract
but upon default in payment of the obligation secured by the mortgage.65

A debtor is considered in default when he or she fails to pay the obligation on due date and,
subject to exceptions, after demands for payment were made by the creditor. Article 1169 of the
Civil Code provides:

ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his
power to perform.

Article 1193 of the Civil Code provides that an obligation is demandable only upon due date. It
provides:

ART. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable
only when that day comes.

Obligations with a resolutory period take effect at once, but terminate upon arrival of the day
certain.

A day certain is understood to be that which must necessarily come, although it may not be
known when.

If the uncertainty consists in whether the day will come or not, the obligation is conditional, and
it shall be regulated by the rules of the preceding Section.

In other words, as a general rule, a person defaults and prescriptive period for action runs when
(1) the obligation becomes due and demandable; and (2) demand for payment has been made.
The prescriptive period neither runs from the date of the execution of a contract nor does the
prescriptive period necessarily run on the date when the loan becomes due and
demandable.66 Prescriptive period runs from the date of demand,67 subject to certain exceptions.

In other words, ten (10) years may lapse from the date of the execution of contract, without
barring a cause of action on the mortgage when there is a gap between the period of execution of
the contract and the due date or between the due date and the demand date in cases when demand
is necessary.68

The mortgage contracts in this case were executed by Saturnino Petalcorin in 1982. The maturity
dates of FISLAIs loans were repeatedly extended until the loans became due and demandable
only in 1990.69Respondent informed petitioner of its decision to foreclose its properties and
demanded payment in 1999.

The running of the prescriptive period of respondents action on the mortgages did not start when
it executed the mortgage contracts with Saturnino Petalcorin in 1982.

The prescriptive period for filing an action may run either (1) from 1990 when the loan became
due, if the obligation was covered by the exceptions under Article 1169 of the Civil Code; (2) or
from 1999 when respondent demanded payment, if the obligation was not covered by the
exceptions under Article 1169 of the Civil Code.

In either case, respondents Complaint with cause of action based on the mortgage contract was
filed well within the prescriptive period.

Given the termination of all traces of FISLAIs existence,70 demand may have been rendered
unnecessary under Article 1169(3)71 of the Civil Code. Granting that this is the case, respondent
would have had ten (10) years from due date in 1990 or until 2000 to institute an action on the
mortgage contract.

However, under Article 115572 of the Civil Code, prescription of actions may be interrupted by
(1) the filing of a court action; (2) a written extrajudicial demand; and (3) the written
acknowledgment of the debt by the debtor.

Therefore, the running of the prescriptive period was interrupted when respondent sent its
demand letter to petitioner on June 18, 1999. This eventually led to petitioners filing of its
annulment of mortgage complaints before the Regional Trial Courts of Iligan City and Cagayan
De Oro City on July 16, 1999.

Assuming that demand was necessary, respondents action was within the ten (10)-year
prescriptive period. Respondent demanded payment of the loans in 1999 and filed an action in
the same year.
II

Petitioner argues that the execution of the mortgage contract was ultra vires. As an educational
institution, it may not secure the loans of third persons.73 Securing loans of third persons is not
among the purposes for which petitioner was established.74

Petitioner is correct.

Corporations are artificial entities granted legal personalities upon their creation by their
incorporators in accordance with law. Unlike natural persons, they have no inherent powers.
Third persons dealing with corporations cannot assume that corporations have powers. It is up to
those persons dealing with corporations to determine their competence as expressly defined by
the law and their articles of incorporation.75

A corporation may exercise its powers only within those definitions. Corporate acts that are
outside those express definitions under the law or articles of incorporation or those "committed
outside the object for which a corporation is created"76 are ultra vires.

The only exception to this rule is when acts are necessary and incidental to carry out a
corporations purposes, and to the exercise of powers conferred by the Corporation Code and
under a corporations articles of incorporation.77 This exception is specifically included in the
general powers of a corporation under Section 36 of the Corporation Code:

SEC. 36. Corporate powers and capacity.Every corporation incorporated under this Code has
the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of this Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal
the same in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and the
Constitution;

8. To enter into merger or consolidation with other corporations as provided in this Code;

9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;

10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and

11. To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in its articles of incorporation. (Emphasis supplied)

Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc.78 stated the test to determine if a
corporate act is in accordance with its purposes:

It is a question, therefore, in each case, of the logical relation of the act to the corporate purpose
expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited,
is done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of
those ends, in a substantial, and not in a remote and fanciful, sense, it may fairly be considered
within charter powers. The test to be applied is whether the act in question is in direct and
immediate furtherance of the corporations business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise,
not.79(Emphasis supplied)

As an educational institution, petitioner serves:

a. To establish, conduct and operate a college or colleges, and/or university;

b. To acquire properties, real and/or personal, in connection with the establishment and
operation of such college or colleges;

c. To do and perform the various and sundry acts and things permitted by the laws of the
Philippines unto corporations like classes and kinds;
d. To engage in agricultural, industrial, and/or commercial pursuits in line with
educational program of the corporation and to acquire all properties, real and personal[,]
necessary for the purposes[;]

e. To establish, operate, and/or acquire broadcasting and television stations also in line
with the educational program of the corporation and for such other purposes as the Board
of Trustees may determine from time to time;

f. To undertake housing projects of faculty members and employees, and to acquire real
estates for this purpose;

g. To establish, conduct and operate and/or invest in educational foundations; [As


amended on December 15, 1965][;]

h. To establish, conduct and operate housing and dental schools, medical facilities and
other related undertakings;

i. To invest in other corporations. [As amended on December 9, 1998]. [Amended


Articles of Incorporation of the University of Mindanao, Inc. the Petitioner].80

Petitioner does not have the power to mortgage its properties in order to secure loans of other
persons. As an educational institution, it is limited to developing human capital through formal
instruction. It is not a corporation engaged in the business of securing loans of others.

Hiring professors, instructors, and personnel; acquiring equipment and real estate; establishing
housing facilities for personnel and students; hiring a concessionaire; and other activities that can
be directly connected to the operations and conduct of the education business may constitute the
necessary and incidental acts of an educational institution.

Securing FISLAIs loans by mortgaging petitioners properties does not appear to have even the
remotest connection to the operations of petitioner as an educational institution. Securing loans is
not an adjunct of the educational institutions conduct of business.81 It does not appear that
securing third-party loans was necessary to maintain petitioners business of providing
instruction to individuals.

This court upheld the validity of corporate acts when those acts were shown to be clearly within
the corporations powers or were connected to the corporations purposes.

In Pirovano, et al. v. De la Rama Steamship Co.,82 this court declared valid the donation given to
the children of a deceased person who contributed to the growth of the corporation.83 This court
found that this donation was within the broad scope of powers and purposes of the corporation to
"aid in any other manner any person . . . in which any interest is held by this corporation or in the
affairs or prosperity of which this corporation has a lawful interest."84

In Twin Towers Condominium Corporation v. Court of Appeals, et al.,85 this court declared valid
a rule by Twin Towers Condominium denying delinquent members the right to use condominium
facilities.86 This court ruled that the condominiums power to promulgate rules on the use of
facilities and to enforce provisions of the Master Deed was clear in the Condominium Act,
Master Deed, and By-laws of the condominium.87 Moreover, the promulgation of such rule was
"reasonably necessary" to attain the purposes of the condominium project.88

This court has, in effect, created a presumption that corporate acts are valid if, on their face, the
acts were within the corporations powers or purposes. This presumption was explained as early
as in 1915 in Coleman v. Hotel De France89 where this court ruled that contracts entered into by
corporations in the exercise of their incidental powers are not ultra vires.90

Coleman involved a hotels cancellation of an employment contract it executed with a gymnast.


One of the hotels contentions was the supposed ultra vires nature of the contract. It was
executed outside its express and implied powers under the articles of incorporation.91

In ruling in favor of the contracts validity, this court considered the incidental powers of the
hotel to include the execution of employment contracts with entertainers for the purpose of
providing its guests entertainment and increasing patronage.92

This court ruled that a contract executed by a corporation shall be presumed valid if on its face
its execution was not beyond the powers of the corporation to do.93 Thus:

When a contract is not on its face necessarily beyond the scope of the power of the corporation
by which it was made, it will, in the absence of proof to the contrary, be presumed to be valid.
Corporations are presumed to contract within their powers. The doctrine of ultra vires, when
invoked for or against a corporation, should not be allowed to prevail where it would defeat the
ends of justice or work a legal wrong.94

However, this should not be interpreted to mean that such presumption applies to all cases, even
when the act in question is on its face beyond the corporations power to do or when the evidence
contradicts the presumption.

Presumptions are "inference[s] as to the existence of a fact not actually known, arising from its
usual connection with another which is known, or a conjecture based on past experience as to
what course human affairs ordinarily take."95 Presumptions embody values and revealed
behavioral expectations under a given set of circumstances.

Presumptions may be conclusive96 or disputable.97


Conclusive presumptions are presumptions that may not be overturned by evidence, however
strong the evidence is.98 They are made conclusive not because there is an established uniformity
in behavior whenever identified circumstances arise. They are conclusive because they are
declared as such under the law or the rules. Rule 131, Section 2 of the Rules of Court identifies
two (2) conclusive presumptions:

SEC. 2. Conclusive presumptions. The following are instances of conclusive presumptions:

(a) Whenever a party has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing true, and to act upon such belief, he
cannot, in any litigation arising out of such declaration, act or omission, be permitted to
falsify it;

(b) The tenant is not permitted to deny the title of his landlord at the time of the
commencement of the relation of landlord and tenant between them.

On the other hand, disputable presumptions are presumptions that may be overcome by contrary
evidence.99They are disputable in recognition of the variability of human behavior. Presumptions
are not always true. They may be wrong under certain circumstances, and courts are expected to
apply them, keeping in mind the nuances of every experience that may render the expectations
wrong.

Thus, the application of disputable presumptions on a given circumstance must be based on the
existence of certain facts on which they are meant to operate. "[P]resumptions are not
allegations, nor do they supply their absence[.]"100 Presumptions are conclusions. They do not
apply when there are no facts or allegations to support them.

If the facts exist to set in motion the operation of a disputable presumption, courts may accept the
presumption. However, contrary evidence may be presented to rebut the presumption.

Courts cannot disregard contrary evidence offered to rebut disputable presumptions. Disputable
presumptions apply only in the absence of contrary evidence or explanations. This court
explained in Philippine Agila Satellite Inc. v. Usec. Trinidad-Lichauco:101

We do not doubt the existence of the presumptions of "good faith" or "regular performance of
official duty," yet these presumptions are disputable and may be contradicted and overcome by
other evidence. Many civil actions are oriented towards overcoming any number of these
presumptions, and a cause of action can certainly be geared towards such effect. The very
purpose of trial is to allow a party to present evidence to overcome the disputable presumptions
involved. Otherwise, if trial is deemed irrelevant or unnecessary, owing to the perceived
indisputability of the presumptions, the judicial exercise would be relegated to a mere
ascertainment of what presumptions apply in a given case, nothing more. Consequently, the
entire Rules of Court is rendered as excess verbiage, save perhaps for the provisions laying down
the legal presumptions.

If this reasoning of the Court of Appeals were ever adopted as a jurisprudential rule, no public
officer could ever be sued for acts executed beyond their official functions or authority, or for
tortious conduct or behavior, since such acts would "enjoy the presumption of good faith and in
the regular performance of official duty." Indeed, few civil actions of any nature would ever
reach the trial stage, if a case can be adjudicated by a mere determination from the complaint or
answer as to which legal presumptions are applicable. For example, the presumption that a
person is innocent of a wrong is a disputable presumption on the same level as that of the regular
performance of official duty. A civil complaint for damages necessarily alleges that the defendant
committed a wrongful act or omission that would serve as basis for the award of damages. With
the rationale of the Court of Appeals, such complaint can be dismissed upon a motion to dismiss
solely on the ground that the presumption is that a person is innocent of a wrong.102 (Emphasis
supplied, citations omitted)

In this case, the presumption that the execution of mortgage contracts was within petitioners
corporate powers does not apply. Securing third-party loans is not connected to petitioners
purposes as an educational institution.

III

Respondent argues that petitioners act of mortgaging its properties to guarantee FISLAIs loans
was consistent with petitioners business interests, since petitioner was presumably a FISLAI
shareholder whose officers and shareholders interlock with FISLAI. Respondent points out that
petitioner and its key officers held substantial shares in MSLAI when DSLAI and FISLAI
merged. Therefore, it was safe to assume that when the mortgages were executed in 1982,
petitioner held substantial shares in FISLAI.103

Parties dealing with corporations cannot simply assume that their transaction is within the
corporate powers. The acts of a corporation are still limited by its powers and purposes as
provided in the law and its articles of incorporation.

Acquiring shares in another corporation is not a means to create new powers for the acquiring
corporation. Being a shareholder of another corporation does not automatically change the nature
and purpose of a corporations business. Appropriate amendments must be made either to the law
or the articles of incorporation before a corporation can validly exercise powers outside those
provided in law or the articles of incorporation. In other words, without an amendment, what is
ultra vires before a corporation acquires shares in other corporations is still ultra vires after such
acquisition.
Thus, regardless of the number of shares that petitioner had with FISLAI, DSLAI, or MSLAI,
securing loans of third persons is still beyond petitioners power to do. It is still inconsistent with
its purposes under the law104 and its articles of incorporation.105

In attempting to show petitioners interest in securing FISLAIs loans by adverting to their


interlocking directors and shareholders, respondent disregards petitioners separate personality
from its officers, shareholders, and other juridical persons.

The separate personality of corporations means that they are "vest[ed] [with] rights, powers, and
attributes [of their own] as if they were natural persons[.]"106 Their assets and liabilities are their
own and not their officers, shareholders, or another corporations. In the same vein, the assets
and liabilities of their officers and shareholders are not the corporations. Obligations incurred by
corporations are not obligations of their officers and shareholders. Obligations of officers and
shareholders are not obligations of corporations.107 In other words, corporate interests are
separate from the personal interests of the natural persons that comprise corporations.

Corporations are given separate personalities to allow natural persons to balance the risks of
business as they accumulate capital. They are, however, given limited competence as a means to
protect the public from fraudulent acts that may be committed using the separate juridical
personality given to corporations.

Petitioners key officers, as shareholders of FISLAI, may have an interest in ensuring the
viability of FISLAI by obtaining a loan from respondent and securing it by whatever means.
However, having interlocking officers and stockholders with FISLAI does not mean that
petitioner, as an educational institution, is or must necessarily be interested in the affairs of
FISLAI.

Since petitioner is an entity distinct and separate not only from its own officers and shareholders
but also from FISLAI, its interests as an educational institution may not be consistent with
FISLAIs.

Petitioner and FISLAI have different constituencies. Petitioners constituents comprise persons
who have committed to developing skills and acquiring knowledge in their chosen fields by
availing the formal instruction provided by petitioner. On the other hand, FISLAI is a thrift bank,
which constituencies comprise investors.

While petitioner and FISLAI exist ultimately to benefit their stockholders, their constituencies
affect the means by which they can maintain their existence. Their interests are congruent with
sustaining their constituents needs because their existence depends on that. Petitioner can exist
only if it continues to provide for the kind and quality of instruction that is needed by its
constituents. Its operations and existence are placed at risk when resources are used on activities
that are not geared toward the attainment of its purpose. Petitioner has no business in securing
FISLAI, DSLAI, or MSLAIs loans. This activity is not compatible with its business of
providing quality instruction to its constituents.

Indeed, there are instances when we disregard the separate corporate personalities of the
corporation and its stockholders, directors, or officers. This is called piercing of the corporate
veil.

Corporate veil is pierced when the separate personality of the corporation is being used to
perpetrate fraud, illegalities, and injustices.108 In Lanuza, Jr. v. BF Corporation:109

Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used
as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, or to confuse legitimate issues." It is also warranted in
alter ego cases "where a corporation is merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation."110

These instances have not been shown in this case. There is no evidence pointing to the possibility
that petitioner used its separate personality to defraud third persons or commit illegal acts.
Neither is there evidence to show that petitioner was merely a farce of a corporation. What has
been shown instead was that petitioner, too, had been victimized by fraudulent and unauthorized
acts of its own officers and directors.

In this case, instead of guarding against fraud, we perpetuate fraud if we accept respondents
contentions.

IV

Petitioner argues that it did not authorize Saturnino Petalcorin to mortgage its properties on its
behalf. There was no board resolution to that effect. Thus, the mortgages executed by Saturnino
Petalcorin were unenforceable.111

The mortgage contracts executed in favor of respondent do not bind petitioner. They were
executed without authority from petitioner.

Petitioner must exercise its powers and conduct its business through its Board of Trustees.
Section 23 of the Corporation Code provides:

SEC. 23. The board of directors or trustees.Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for one (1) year and until their successors
are elected and qualified.

Being a juridical person, petitioner cannot conduct its business, make decisions, or act in any
manner without action from its Board of Trustees. The Board of Trustees must act as a body in
order to exercise corporate powers. Individual trustees are not clothed with corporate powers just
by being a trustee. Hence, the individual trustee cannot bind the corporation by himself or
herself.

The corporation may, however, delegate through a board resolution its corporate powers or
functions to a representative, subject to limitations under the law and the corporations articles of
incorporation.112

The relationship between a corporation and its representatives is governed by the general
principles of agency.113Article 1317 of the Civil Code provides that there must be authority from
the principal before anyone can act in his or her name:

ART. 1317. No one may contract in the name of another without being authorized by the latter,
or unless he has by law a right to represent him.

Hence, without delegation by the board of directors or trustees, acts of a personincluding those
of the corporations directors, trustees, shareholders, or officersexecuted on behalf of the
corporation are generally not binding on the corporation.114

Contracts entered into in anothers name without authority or valid legal representation are
generally unenforceable. The Civil Code provides:

ART. 1317. . . .

A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified,
expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked
by the other contracting party.

....

ART. 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no authority or
legal representation, or who has acted beyond his powers[.]
The unenforceable status of contracts entered into by an unauthorized person on behalf of
another is based on the basic principle that contracts must be consented to by both
parties.115 There is no contract without meeting of the minds as to the subject matter and cause of
the obligations created under the contract.116

Consent of a person cannot be presumed from representations of another, especially if


obligations will be incurred as a result. Thus, authority is required to make actions made on his
or her behalf binding on a person. Contracts entered into by persons without authority from the
corporation shall generally be considered ultra vires and unenforceable117 against the corporation.

Two trial courts118 found that the Secretarys Certificate and the board resolution were either non-
existent or fictitious. The trial courts based their findings on the testimony of the Corporate
Secretary, Aurora de Leon herself. She signed the Secretarys Certificate and the excerpt of the
minutes of the alleged board meeting purporting to authorize Saturnino Petalcorin to mortgage
petitioners properties. There was no board meeting to that effect. Guillermo B. Torres ordered
the issuance of the Secretarys Certificate. Aurora de Leons testimony was corroborated by
Saturnino Petalcorin.

Even the Court of Appeals, which reversed the trial courts decisions, recognized that "BSP
failed to prove that the UM Board of Trustees actually passed a Board Resolution authorizing
Petalcorin to mortgage the subject real properties[.]"119

Well-entrenched is the rule that this court, not being a trier of facts, is bound by the findings of
fact of the trial courts and the Court of Appeals when such findings are supported by evidence on
record.120 Hence, not having the proper board resolution to authorize Saturnino Petalcorin to
execute the mortgage contracts for petitioner, the contracts he executed are unenforceable against
petitioner. They cannot bind petitioner.

However, personal liabilities may be incurred by directors who assented to such unauthorized
act121 and by the person who contracted in excess of the limits of his or her authority without the
corporations knowledge.122

Unauthorized acts that are merely beyond the powers of the corporation under its articles of
incorporation are not void ab initio.

In Pirovano, et al., this court explained that corporate acts may be ultra vires but not
void.123 Corporate acts may be capable of ratification:124

[A] distinction should be made between corporate acts or contracts which are illegal and those
which are merely ultra vires. The former contemplates the doing of an act which is contrary to
law, morals, or public order, or contravene some rules of public policy or public duty, and are,
like similar transactions between individuals, void. They cannot serve as basis of a court action,
nor acquire validity by performance, ratification, or estoppel. Mere ultra vires acts, on the other
hand, or those which are not illegal and void ab initio, but are not merely within the scope of the
articles of incorporation, are merely voidable and may become binding and enforceable when
ratified by the stockholders.125

Thus, even though a person did not give another person authority to act on his or her behalf, the
action may be enforced against him or her if it is shown that he or she ratified it or allowed the
other person to act as if he or she had full authority to do so. The Civil Code provides:

ART. 1910. The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not bound
except when he ratifies it expressly or tacitly.

ART. 1911. Even when the agent has exceeded his authority, the principal is solidarily liable with
the agent if the former allowed the latter to act as though he had full powers. (Emphasis
supplied)

Ratification is a voluntary and deliberate confirmation or adoption of a previous unauthorized


act.126 It converts the unauthorized act of an agent into an act of the principal.127 It cures the lack
of consent at the time of the execution of the contract entered into by the representative, making
the contract valid and enforceable.128 It is, in essence, consent belatedly given through express or
implied acts that are deemed a confirmation or waiver of the right to impugn the unauthorized
act.129 Ratification has the effect of placing the principal in a position as if he or she signed the
original contract. In Board of Liquidators v. Heirs of M. Kalaw, et al.:130

Authorities, great in number, are one in the idea that "ratification by a corporation of an
unauthorized act or contract by its officers or others relates back to the time of the act or contract
ratified, and is equivalent to original authority;" and that "[t]he corporation and the other party to
the transaction are in precisely the same position as if the act or contract had been authorized at
the time." The language of one case is expressive: "The adoption or ratification of a contract by a
corporation is nothing more nor less than the making of an original contract. The theory of
corporate ratification is predicated on the right of a corporation to contract, and any ratification
or adoption is equivalent to a grant of prior authority."131 (Citations omitted)

Implied ratification may take the form of silence, acquiescence, acts consistent with approval of
the act, or acceptance or retention of benefits.132 However, silence, acquiescence, retention of
benefits, and acts that may be interpreted as approval of the act do not by themselves constitute
implied ratification. For an act to constitute an implied ratification, there must be no acceptable
explanation for the act other than that there is an intention to adopt the act as his or her
own.133 "[It] cannot be inferred from acts that a principal has a right to do independently of the
unauthorized act of the agent."134

No act by petitioner can be interpreted as anything close to ratification. It was not shown that it
issued a resolution ratifying the execution of the mortgage contracts. It was not shown that it
received proceeds of the loans secured by the mortgage contracts. There was also no showing
that it received any consideration for the execution of the mortgage contracts. It even appears
that petitioner was unaware of the mortgage contracts until respondent notified it of its desire to
foreclose the mortgaged properties.

Ratification must be knowingly and voluntarily done.135 Petitioners lack of knowledge about the
mortgage executed in its name precludes an interpretation that there was any ratification on its
part.

Respondent further argues that petitioner is presumed to have knowledge of its transactions with
respondent because its officers, the Spouses Guillermo and Dolores Torres, participated in
obtaining the loan.136

Indeed, a corporation, being a person created by mere fiction of law, can act only through natural
persons such as its directors, officers, agents, and representatives. Hence, the general rule is that
knowledge of an officer is considered knowledge of the corporation.

However, even though the Spouses Guillermo and Dolores Torres were officers of both the thrift
banks and petitioner, their knowledge of the mortgage contracts cannot be considered as
knowledge of the corporation.

The rule that knowledge of an officer is considered knowledge of the corporation applies only
when the officer is acting within the authority given to him or her by the corporation.
In Francisco v. Government Service Insurance System:137

Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of


his employment, and in relation to matters within the scope of his authority, is notice to the
corporation, whether he communicates such knowledge or not.138

The public should be able to rely on and be protected from the representations of a corporate
representative acting within the scope of his or her authority. This is why an authorized officers
knowledge is considered knowledge of corporation. However, just as the public should be able to
rely on and be protected from corporate representations, corporations should also be able to
expect that they will not be bound by unauthorized actions made on their account.
Thus, knowledge should be actually communicated to the corporation through its authorized
representatives. A corporation cannot be expected to act or not act on a knowledge that had not
been communicated to it through an authorized representative. There can be no implied
ratification without actual communication. Knowledge of the existence of contract must be
brought to the corporations representative who has authority to ratify it. Further, "the
circumstances must be shown from which such knowledge may be presumed."139

The Spouses Guillermo and Dolores Torres knowledge cannot be interpreted as knowledge of
petitioner. Their knowledge was not obtained as petitioners representatives. It was not shown
that they were acting for and within the authority given by petitioner when they acquired
knowledge of the loan transactions and the mortgages. The knowledge was obtained in the
interest of and as representatives of the thrift banks.

VI

Respondent argues that Saturnino Petalcorin was clothed with the authority to transact on behalf
of petitioner, based on the board resolution dated March 30, 1982 and Aurora de Leons
notarized Secretarys Certificate.140According to respondent, petitioner is bound by the mortgage
contracts executed by Saturnino Petalcorin.141

This court has recognized presumed or apparent authority or capacity to bind corporate
representatives in instances when the corporation, through its silence or other acts of recognition,
allowed others to believe that persons, through their usual exercise of corporate powers, were
conferred with authority to deal on the corporations behalf.142

The doctrine of apparent authority does not go into the question of the corporations competence
or power to do a particular act. It involves the question of whether the officer has the power or is
clothed with the appearance of having the power to act for the corporation. A finding that there is
apparent authority is not the same as a finding that the corporate act in question is within the
corporations limited powers.

The rule on apparent authority is based on the principle of estoppel. The Civil Code provides:

ART. 1431. Through estoppel an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person relying thereon.

....

ART. 1869. Agency may be express, or implied from the acts of the principal, from his silence or
lack of action, or his failure to repudiate the agency, knowing that another person is acting on his
behalf without authority.
Agency may be oral, unless the law requires a specific form.

A corporation is estopped by its silence and acts of recognition because we recognize that there is
information asymmetry between third persons who have little to no information as to what
happens during corporate meetings, and the corporate officers, directors, and representatives who
are insiders to corporate affairs.143

In Peoples Aircargo and Warehousing Co. Inc. v. Court of Appeals,144 this court held that the
contract entered into by the corporations officer without a board resolution was binding upon the
corporation because it previously allowed the officer to contract on its behalf despite the lack of
board resolution.145

In Francisco, this court ruled that Franciscos proposal for redemption of property was accepted
by and binding upon the Government Service Insurance System. This court did not appreciate the
Government Service Insurance Systems defense that since it was the Board Secretary and not
the General Manager who sent Francisco the acceptance telegram, it could not be made binding
upon the Government Service Insurance System. It did not authorize the Board Secretary to sign
for the General Manager. This court appreciated the Government Service Insurance Systems
failure to disown the telegram sent by the Board Secretary and its silence while it accepted all
payments made by Francisco for the redemption of property.146

There can be no apparent authority and the corporation cannot be estopped from denying the
binding affect of an act when there is no evidence pointing to similar acts and other
circumstances that can be interpreted as the corporation holding out a representative as having
authority to contract on its behalf. In Advance Paper Corporation v. Arma Traders
Corporation,147 this court had the occasion to say:

The doctrine of apparent authority does not apply if the principal did not commit any acts or
conduct which a third party knew and relied upon in good faith as a result of the exercise of
reasonable prudence. Moreover, the agents acts or conduct must have produced a change of
position to the third partys detriment.148 (Citation omitted)

Saturnino Petalcorins authority to transact on behalf of petitioner cannot be presumed based on a


Secretarys Certificate and excerpt from the minutes of the alleged board meeting that were
found to have been simulated. These documents cannot be considered as the corporate acts that
held out Saturnino Petalcorin as petitioners authorized representative for mortgage transactions.
They were not supported by an actual board meeting.149

VII
Respondent argues that it may rely on the Secretarys Certificate issued by Aurora de Leon
because it was notarized.

The Secretarys Certificate was void whether or not it was notarized.

Notarization creates a presumption of regularity and authenticity on the document. This


presumption may be rebutted by "strong, complete and conclusive proof"150 to the contrary.
While notarial acknowledgment "attaches full faith and credit to the document concerned[,]"151 it
does not give the document its validity or binding effect. When there is evidence showing that
the document is invalid, the presumption of regularity or authenticity is not applicable.

In Basilio v. Court of Appeals,152 this court was convinced that the purported signatory on a deed
of sale was not as represented, despite testimony from the notary public that the signatory
appeared before him and signed the instrument.153 Apart from finding that there was
forgery,154 this court noted:

The notary public, Atty. Ruben Silvestre, testified that he was the one who notarized the
document and that Dionisio Z. Basilio appeared personally before him and signed the instrument
himself. However, he admitted that he did not know Dionisio Z. Basilio personally to ascertain if
the person who signed the document was actually Dionisio Z. Basilio himself, or another person
who stood in his place. He could not even recall whether the document had been executed in his
office or not.

Thus, considering the testimonies of various witnesses and a comparison of the signature in
question with admittedly genuine signatures, the Court is convinced that Dionisio Z. Basilio did
not execute the questioned deed of sale. Although the questioned deed of sale was a public
document having in its favor the presumption of regularity, such presumption was adequately
refuted by competent witnesses showing its forgery and the Courts own visual analysis of the
document.155 (Emphasis supplied, citations omitted)

In Suntay v. Court of Appeals,156 this court held that a notarized deed of sale was void because it
was a mere sham.157 It was not intended to have any effect between the parties.158 This court said:

[I]t is not the intention nor the function of the notary public to validate and make binding an
instrument never, in the first place, intended to have any binding legal effect upon the parties
thereto.159

Since the notarized Secretarys Certificate was found to have been issued without a supporting
board resolution, it produced no effect. It is not binding upon petitioner. It should not have been
relied on by respondent especially given its status as a bank.

VIII
The banking institution is "impressed with public interest"160 such that the publics faith is "of
paramount importance."161 Thus, banks are required to exercise the highest degree of diligence in
their transactions.162 In China Banking Corporation v. Lagon,163 this court found that the bank
was not a mortgagee in good faith for its failure to question the due execution of a Special Power
of Attorney that was presented to it in relation to a mortgage contract.164 This court said:

Though petitioner is not expected to conduct an exhaustive investigation on the history of the
mortgagors title, it cannot be excused from the duty of exercising the due diligence required of a
banking institution. Banks are expected to exercise more care and prudence than private
individuals in their dealings, even those that involve registered lands, for their business is
affected with public interest.165 (Citations omitted)

For its failure to exercise the degree of diligence required of banks, respondent cannot claim
good faith in the execution of the mortgage contracts with Saturnino Petalcorin. Respondents
witness, Daciano Paguio, Jr., testified that there was no board resolution authorizing Saturnino
Petalcorin to act on behalf of petitioner.166Respondent did not inquire further as to Saturnino
Petalcorins authority.

Banks cannot rely on assumptions. This will be contrary to the high standard of diligence
required of them.

VI

According to respondent, the annotations of respondents mortgage interests on the certificates of


titles of petitioners properties operated as constructive notice to petitioner of the existence of
such interests.167 Hence, petitioners are now estopped from claiming that they did not know about
the mortgage.

Annotations of adverse claims on certificates of title to properties operate as constructive notice


only to third partiesnot to the court or the registered owner.1wphi1 In Sajonas v. Court of
Appeals:168

[A]nnotation of an adverse claim is a measure designed to protect the interest of a person over a
piece of real property where the registration of such interest or right is not otherwise provided for
by the Land Registration Act or Act 496 (now [Presidential Decree No.] 1529 or the Property
Registration Decree), and serves a warning to third parties dealing with said property that
someone is claiming an interest on the same or a better right than that of the registered owner
thereof.169 (Emphasis supplied)

Annotations are merely claims of interest or claims of the legal nature and incidents of
relationship between the person whose name appears on the document and the person who
caused the annotation. It does not say anything about the validity of the claim or convert a
defective claim or document into a valid one. 170 These claims may be proved or disproved
during trial.

Thus, annotations are not conclusive upon courts or upon owners who may not have reason to
doubt the security of their claim as their properties' title holders.

WHEREFORE, the Petition is GRANTED. The Court of Appeals' Decision dated December
17, 2009 is REVERSED and SET ASIDE. The Regional Trial Courts' Decisions of November
23, 2001 and December 7, 2001 are REINSTATED.

SO ORDERED.

MARVIC M.V.F. LEONEN


Associate Justice

WE CONCUR:

G.R. No. 176986

NISSAN CAR LEASE PHILS., INC., Petitioner,


vs.
LICA MANAGEMENT, INC. and PROTON PILIPINAS, INC., Respondents.

DECISION

JARDELEZA, J.:
This is a Petition for Review on Certiorari1 filed by Nissan Car Lease Philippines, Inc. (NCLPI)
to assail the Decision2 and Resolution3 dated September 27, 2006 and March 8, 2007,
respectively, of the Court of Appeals (CA) in CA-G.R. CV No. 75985. The CA affirmed with
modification the Decision4 of the Regional Trial Court dated June 7, 2002 and ruled that there
was a valid extrajudicial rescission of the lease contract between NCLPI and Lica Management,
Inc. (LMI). It also ordered NCLPI to pay its unpaid rentals and awarded damages in favor of
LMI and third-party respondent Proton Pilipinas, Inc. (Proton).

The Facts

LMI is the absolute owner of a property located at 2326 Pasong Tamo Extension, Makati City
with a total area of approximately 2,860 square meters.5 On June 24, 1994, it entered into a
contract with NCLPI for the latter to lease the property for a term of ten (10) years (or from July
1, 1994 to June 30, 2004) with a monthly rental of 308,000.00 and an annual escalation rate of
ten percent (10%).6 Sometime in September 1994, NCLPI, with LMIs consent, allowed its
subsidiary Nissan Smartfix Corporation (NSC) to use the leased premises.7

Subsequently, NCLPI became delinquent in paying the monthly rent, such that its total rental
arrearages8amounted to 1,741,520.85.9 In May 1996, Nissan and Lica verbally agreed to
convert the arrearages into a debt to be covered by a promissory note and twelve (12) postdated
checks, each amounting to 162,541.95 as monthly payments starting June 1996 until May
1997.10

While NCLPI was able to deliver the postdated checks per its verbal agreement with LMI, it
failed to sign the promissory note and pay the checks for June to October 1996. Thus, in a letter
dated October 16, 1996, which was sent on October 18, 1996 by registered mail, LMI informed
NCLPI that it was terminating their Contract of Lease due to arrears in the payment of rentals. It
also demanded that NCLPI (1) pay the amount of 2,651,570.39 for unpaid rentals11 and (2)
vacate the premises within five (5) days from receipt of the notice.12

In the meantime, Proton sent NCLPI an undated request to use the premises as a temporary
display center for "Audi" brand cars for a period of ten (10) days. In the same letter, Proton
undertook "not to disturb [NCLPI and LMIs] lease agreement and ensure that [NCLPI] will not
breach the same [by] lending the premises x x x without any consideration."13 NCLPI acceded to
this request.14

On October 11, 1996, NCLPI entered into a Memorandum of Agreement with Proton whereby
the former agreed to allow Proton "to immediately commence renovation work even prior to the
execution of the Contract of Sublease x x x."15 In consideration, Proton agreed to transmit to
NCLPI a check representing three (3) months of rental payments, to be deposited only upon the
due execution of their Contract of Sublease.16
In a letter dated October 24, 1996, NCLPI, through counsel, replied to LMIs letter of October
16, 1996 acknowledging the arrearages incurred by it under their Contract of Lease. Claiming,
however, that it has no intention of abandoning the lease and citing efforts to negotiate a possible
sublease of the property, NCLPI requested LMI to defer taking court action on the matter.17

LMI, on November 8, 1996, entered into a Contract of Lease with Proton over the subject
premises.18

On November 12, 1996, LMI filed a Complaint19 for sum of money with damages seeking to
recover from NCLPI the amount of 2,696,639.97, equivalent to the balance of its unpaid
rentals, with interest and penalties, as well as exemplary damages, attorneys fees, and costs of
litigation.20

On November 20, 1996, NCLPI demanded Proton to vacate the leased premises.21 However,
Proton replied that it was occupying the property based on a lease contract with LMI.22 In a letter
of even date addressed to LMI, NCLPI asserted that its failure to pay rent does not automatically
result in the termination of the Contract of Lease nor does it give LMI the right to terminate the
same.23 NCLPI also informed LMI that since it was unlawfully ousted from the leased premises
and was not deriving any benefit therefrom, it decided to stop payment of the checks issued to
pay the rent.24

In its Answer25 and Third-Party Complaint26 against Proton, NCLPI alleged that LMI and Proton
"schemed" and "colluded" to unlawfully force NCLPI (and its subsidiary NSC) from the
premises. Since it has not abandoned its leasehold right, NCLPI asserts that the lease contract
between LMI and Proton is void for lack of a valid cause or consideration.27 It likewise prayed
for the award of: (1) 3,000,000.00, an amount it anticipates to lose on account of LMI and
Protons deprivation of its right to use and occupy the premises; (2) 1,000,000.00 as exemplary
damages; and (3) 500,000.00 as attorneys fees, plus 2,000.00 for every court appearance.28

The trial court admitted29 the third-party complaint over LMIs opposition.30

Subsequently, or on April 17, 1998, Proton filed its Answer with Compulsory Counterclaim
against NCLPI.31According to Proton, the undated letter-request supposedly sent by Proton to
NCLPI was actually prepared by the latter so as to keep from LMI its intention to sublease the
premises to Proton until NCLPI is able to secure LMIs consent.32 Denying NCLPIs allegation
that its use of the lease premises was made without any consideration, Proton claims that it
"actually paid [NCLPI] rental of 200,000.00 for the use of subject property for 10 days x x x."33

Proton further asserted that NCLPI had vacated the premises as early as during the negotiations
for the sublease and, in fact, authorized the former to enter the property and commence
renovations.34 When NCLPI ultimately failed to obtain LMIs consent to the proposed sublease
and its lease contract was terminated, Proton, having already incurred substantial expenses
renovating the premises, was constrained to enter into a Contract of Lease with LMI. Thus,
Proton prayed for the dismissal of the Third-Party Complaint, and asked, by way of
counterclaim, that NCLPI be ordered to pay exemplary damages, attorneys fees, and costs of
litigation.35

Ruling of the Trial Court

On June 7, 2002, the trial court promulgated its Decision,36 the decretal portion of which reads:

WHEREFORE, in view of the foregoing, judgment is rendered in plaintiff LICA


MANAGEMENT INCORPORATEDs favor. As a consequence of this, defendant NISSAN
CAR LEASE PHILIPPINES, INC. is directed to pay plaintiff the following:

1.) []2,696,639.97 representing defendants unpaid rentals inclusive of interest and


penalties up to 12 November 1996, plus interest to be charged against said amount at the
rate of twelve percent (12%) beginning said date until the amount is fully paid.

2.) Exemplary damages and attorneys fees amounting to Two Hundred Thousand Pesos
([]200,000.00) and litigation expenses amounting to Fifty Thousand Pesos
([]50,000.00).

The third party complaint filed by defendant is DENIED for lack of merit and in addition to the
foregoing and as prayed for, defendant NISSAN is ordered to pay third party defendant
PROTON PILIPINAS INC. the sum of Two Hundred Thousand Pesos ([]200,000.00)
representing exemplary damages and attorneys fees due.

SO ORDERED.37

The trial court found that NCLPI purposely violated the terms of its contract with LMI when it
failed to pay the required rentals and contracted to sublease the premises without the latters
consent.38 Under Article 1191 of the Civil Code, LMI was therefore entitled to rescind the
contract between the parties and seek payment of the unpaid rentals and damages.39 In addition,
the trial court ruled that LMIs act of notifying NCLPI of the termination of their lease contract
due to non-payment of rentals is expressly sanctioned under paragraphs 1640 and 1841 of their
contract.42

Contrary to NCLPIs claim that it was "fooled" into allowing Proton to occupy the premises for a
limited period after which the latter unilaterally usurped the premises for itself, the trial court
found that it was NCLPI "which misrepresented itself to [Proton] as being a lessee of good
standing, so that it could induce the latter to occupy and renovate the premises when at that time
the negotiations were underway the lease between [LMI] and [NCLPI] had already been
terminated."43

Aggrieved, NCLPI filed a Petition for Review with the CA. In its Appellants Brief,44 it argued
that the trial court erred in: (1) holding that there was a valid extrajudicial rescission of its lease
contract with LMI; and (2) dismissing NCLPIs claim for damages against LMI and Proton while
at the same time holding NCLPI liable to them for exemplary damages and attorneys fees.45

Ruling of the Court of Appeals

The CA denied NCLPIs appeal and affirmed the trial courts decision with modification. The
decretal portion of the CAs Decision46 reads:

WHEREFORE, the appealed Decision dated June 7, 2002 of the trial court is affirmed, subject
to modification that:

(1) The award of exemplary damages of 100,000.00 each in favor of plaintiff-appellee


and third-party defendant-appellee is reduced to 50,000.00 each;

(2) The award of attorneys fees of 100,000.00 each in favor of plaintiff-appellee and
third-party defendantappellee is reduced to 50,000.00 each;

(3) The amount of unpaid rentals is reduced from 2,696,639.97 to 2,365,569.61,


exclusive of interest; and,

(4) Plaintiff-appellee is ordered to return the balance of the security deposit amounting to
883,253.72 to defendant-appellant.

The Decision dated June 7, 2002 is affirmed in all other respects.

SO ORDERED.47

NCLPI sought for a reconsideration48 of this decision. LMI, on the other hand, filed a motion to
clarify whether the amount of 2,365,569.61 representing unpaid rentals was inclusive of
interest.49 The CA resolved both motions, thus:

WHEREFORE, the motion for reconsideration filed by defendant-appellant Nissan Car Lease is
denied for lack of merit.

With respect to the motion for clarification filed by plaintiff-appellee Lica Management, Inc.,
paragraph (3) of the dispositive portion of the Decision is hereby clarified to read as follows:
(3) The amount of unpaid rentals is reduced from 2,696,639.97 to 2,365,569.61, inclusive of
interest and penalties up to November 12, 1996, plus interest to be charged against said amount
at the rate of twelve per cent (12%) beginning said date until the amount is fully paid.

SO ORDERED.50

Hence, this petition.

The Petition

NCLPI, in its Petition, raises the following questions:

1. May a contract be rescinded extrajudicially despite the absence of a special contractual


stipulation therefor?

2. Do the prevailing facts warrant the dismissal of [LMI]s claims and the award of
NCLPIs claims?

3. How much interest should be paid in the delay of the release of a security deposit in a
lease contract?51

The Courts Ruling

We deny the Petition for lack of merit.

Before going into the substantive merits of the case, however, we shall first resolve the technical
issue raised by LMI in its Comment52 dated August 22, 2007.

According to LMI, NCLPIs petition must be denied outright on the ground that Luis Manuel T.
Banson (Banson), who caused the preparation of the petition and signed the Verification and
Certification against Forum Shopping, was not duly authorized to do so. His apparent authority
was based, not by virtue of any NCLPI Board Resolution, but on a Special Power of Attorney
(SPA) signed only by NCLPIs Corporate Secretary Robel C. Lomibao.53

As a rule, a corporation has a separate and distinct personality from its directors and officers and
can only exercise its corporate powers through its board of directors. Following this rule, a
verification and certification signed by an individual corporate officer is defective if done
without authority from the corporations board of directors.54

The requirement of verification being a condition affecting only the form of the pleading,55 this
Court has, in a number of cases, held that:
[T]he following officials or employees of the company can sign the verification and
certification without need of a board resolution: (1) the Chairperson of the Board of Directors,
(2) the President of a corporation, (3) the General Manager or Acting General Manager, (4)
Personnel Officer, and (5) an Employment Specialist in a labor case.

x x x [T]he determination of the sufficiency of the authority was done on a case to case
basis. The rationale applied in the foregoing cases is to justify the authority of corporate
officers or representatives of the corporation to sign x x x, being "in a position to verify the
truthfulness and correctness of the allegations in the

petition."56 (Emphasis and underscoring supplied)

In this case, Banson was President of NCLPI at the time of the filing of the petition.57 Thus, and
applying the foregoing ruling, he can sign the verification and certification against forum
shopping in the petition without the need of a board resolution.58

Having settled the technical issue, we shall now proceed to discuss the substantial issues.

Validity of Extrajudicial Rescission of Lease Contract

It is clear from the records that NCLPI committed substantial breaches of its Contract of Lease
with LMI.

Under Paragraph 2, NCLPI bound itself to pay a monthly rental of 308,000.00 not later than the
first day of every month to which the rent corresponds. NCLPI, however, defaulted on its
contractual obligation to timely and properly pay its rent, the arrearages of which, as of October
16, 1996, amounted to 2,651,570.39.59 This fact was acknowledged and admitted by NCLPI.60

Aside from non-payment of rentals, it appears that NCLPI also breached its obligations under
Paragraphs 461 and 562 of the Contract of Lease which prohibit it from subleasing the premises or
introducing improvements or alterations thereon without LMIs prior written consent. The trial
court found:

As revealed from the evidence presented by PROTON however, even before [NCLPI]
represented that it would try to negotiate a possible sub-lease of the premises, it had, without
any semblance of authority from [LMI,]already effectively subleased the subject premises
to PROTON and allowed the latter not only to enter the premises but to renovate the same.

[NCLPI]s assertion that they only allowed PROTON to utilize the premises for ten days as a
display center for Audi cars on the occasion of the historic visit of Chancellor Helmut Kohl of
Germany to the Philippines is belied by the evidence offered by PROTON that by virtue of a
Memorandum of Agreement [NCLPI] had already permitted PROTON "to immediately
commence renovation work even prior to the execution of the Contract of Sublease" and
had accepted a check from PROTON representing the rental deposit under the yet to be
executed Contract of Sublease. x x x

xxxx

Besides, the court is not inclined to show [NCLPI] any sympathy x x x because it came to court
with unclean hands when it accused [LMI] and PROTON of being guilty parties when they
supposedly connived with each other to oust [NCLPI] from the leased premises when in
truth and in fact, [NCLPI]s lease was already terminated when it pursued negotiations to
sub-lease the premises to PROTON then giving the latter the assurance they would be able to
obtain [LMI]s consent to the sublease when this was very remote, in light of [NCLPI]s failure
to update its rental payments.63 (Emphasis and underscoring supplied)

This factual finding was affirmed by the CA:

There is no merit in [NCLPI]s claim for damages allegedly arising from [LMI]s failure to
maintain it in peaceful possession of the leased premises. It was [NCLPI] who breached the
lease contract by defaulting in the payment of lease rentals, entering into a sublease contract
with [Proton] and allowing [Proton] to introduce renovations on the leased premises
without the consent of [LMI].64 x x x (Emphasis supplied)

Factual findings of the CA are binding and conclusive on the parties and upon this Court and will
not be reviewed or disturbed on appeal. While the rule admits of certain exceptions,65 NCLPI
failed to prove that any of the exceptions applies in this case.

The crux of the controversy rather revolves around the validity of LMIs act of extrajudicially
rescinding its Contract of Lease with NCLPI.

NCLPI maintains that while a lessor has a right to eject a delinquent lessee from its property,
such right must be exercised in accordance with law:

6.15. In this case, [LMI] did not comply with the requirement laid down in Section 2 of Rule 70
of the Rules of Court, in unceremoniously ejecting [NCLPI] from the property. The said Rule
explicitly provides that the lessor shall serve a written notice of the demand to pay or comply
with the conditions of the lease and to vacate or post such notice on the premises if no person is
found thereon, giving the lessee 15 days to comply with the demand. [LMI]s demand letter
dated 16 October 1996 provides only a period of five days for [NCLPI] to comply with such
demand and, thus, defective.66 (Emphasis and underscoring supplied)

NCLPIs reliance on Section 2, Rule 7067 in this case is misplaced.


Rule 70 of the Rules of Court sets forth the procedure in relation to the filing of suits for forcible
entry and unlawful detainer. The action filed by LMI against NCLPI, however, is one for the
recovery of a sum of money. Clearly, Section 2 of Rule 70 is not applicable.

In fact, it does not appear that it was even necessary for LMI to eject NCLPI from the leased
premises. NCLPI had already vacated the same as early as October 11, 1996 when it surrendered
possession of the premises to Proton, by virtue of their Memorandum of Agreement, so that the
latter can commence renovations.68

NCLPI also maintains that LMI cannot unilaterally and extrajudicially rescind their Contract of
Lease in the absence of an express provision in their Contract to that effect.69 According to
NCLPI:

6.1. The power to rescind is judicial in nature x x x

6.2. Nevertheless, the Supreme Court has allowed extrajudicial rescission if such remedy is
specifically provided for in the contract. A provision granting the nondefaulting party merely a
right to rescind would be superfluous because by law, it is inherent in such contract [see by
analogy Villanueva, PHILIPPINE LAW ON SALES, P. 238 (1998)].

xxxx

6.4. [Paragraph 16],70 however, cannot be construed as an authority for either party to unilaterally
and extrajudicially rescind the Lease Contract in case of breach by the other party. All that
[Paragraph] 16 affords the aggrieved party is merely the right to rescind the lease contract,
which is the very same right already granted under Article 1191 of the Civil Code.71 (Emphasis
and underscoring in the original)

It is true that NCLPI and LMIs Contract of Lease does not contain a provision expressly
authorizing extrajudicial rescission. LMI can nevertheless rescind the contract, without prior
court approval, pursuant to Art. 1191 of the Civil Code.

Art. 1191 provides that the power to rescind is implied in reciprocal obligations, in cases where
one of the obligors should fail to comply with what is incumbent upon him. Otherwise stated, an
aggrieved party is not prevented from extrajudicially rescinding a contract to protect its interests,
even in the absence of any provision expressly providing for such right.72 The rationale for this
rule was explained in the case of University of the Philippines v. De los Angeles73 wherein this
Court held:

[T]he law definitely does not require that the contracting party who believes itself injured must
first file suit and wait for a judgment before taking extrajudicial steps to protect its
interest. Otherwise, the party injured by the other's breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until the final judgment of
rescission is rendered when the law itself requires that he should exercise due diligence to
minimize its own damages (Civil Code, Article 2203). (Emphasis and underscoring supplied)

We are aware of this Courts previous rulings in Tan v. Court of Appeals,74 Iringan v. Court of
Appeals,75 and EDS Manufacturing, Inc. v. Healthcheck International, Inc.,76 for example,
wherein we held that extrajudicial rescission of a contract is not possible without an express
stipulation to that effect.77

The seeming "conflict" between this and our previous rulings, however, is more apparent than
real.

Whether a contract provides for it or not, the remedy of rescission is always available as a
remedy against a defaulting party. When done without prior judicial imprimatur, however, it may
still be subject to a possible court review. In Golden Valley Exploration, Inc. v. Pinkian Mining
Company,78 we explained:

This notwithstanding, jurisprudence still indicates that an extrajudicial rescission based on


grounds not specified in the contract would not preclude a party to treat the same as
rescinded. The rescinding party, however, by such course of action, subjects himself to the risk
of being held liable for damages when the extrajudicial rescission is questioned by the opposing
party in court. This was made clear in the case of U.P. v. De los Angeles, wherein the Court held
as follows:

Of course, it must be understood that the act of a party in treating a contract as cancelled or
resolved on account of infractions by the other contracting party must be made known to
the other and is always provisional, being ever subject to scrutiny and review by the proper
court. If the other party denies that rescission is justified, it is free to resort to judicial
action in its own behalf, and bring the matter to court.Then, should the court, after due
hearing, decide that the resolution of the contract was not warranted, the responsible party
will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the
consequent indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its own risk.
For it is only the final judgment of the corresponding court that will conclusively and
finally settle whether the action taken was or was not correct in law. x x x (Emphasis and
underscoring in the original)

The only practical effect of a contractual stipulation allowing extrajudicial rescission is "merely
to transfer to the defaulter the initiative of instituting suit, instead of the rescinder."79
In fact, the rule is the same even if the parties contract expressly allows extrajudicial rescission.
The other party denying the rescission may still seek judicial intervention to determine whether
or not the rescission was proper.80

Having established that LMI can extrajudicially rescind its contract with NCLPI even absent an
express contractual stipulation to that effect, the question now to be resolved is whether this
extrajudicial rescission was proper under the circumstances.

As earlier discussed, NCLPIs non-payment of rentals and unauthorized sublease of the leased
premises were both clearly proven by the records.1avvphi1 We thus confirm LMIs rescission of
its contract with NCLPI on account of the latters breach of its obligations.

Rental Arrearages and Interest

Having upheld LMIs extrajudicial rescission of its Contract of Lease, we hold that NCLPI is
required to pay all rental arrearages owing to LMI, computed by the CA as follows:

In its appellants brief, [NCLPI] admitted that it had rental arrears of 1,300,335.60 as of May
1996.1wphi1 Additionally, the statement of account submitted by [LMI] showed that from June
1996 to October 1996 the rental arrears of [NCLPI] amounted to 1,065,234.01. Hence, the
total of said rental arrears not disputed by the parties is 2,365,569.61 x x x.81 (Emphasis
and underscoring supplied)

The Contract of Lease shows that the parties did not stipulate an applicable interest rate in case
of default in the payment of rentals. Thus, and following this Courts ruling in Nacar v. Gallery
Frames,82 the foregoing amount of rental arrearages shall earn interest at the rate of six percent
(6%) per annum computed from October 18, 1996, the date of LMIs extrajudicial
demand,83 until the date of finality of this judgment. The total amount shall thereafter earn
interest at the rate of six percent (6%) per annum from such finality of judgment until its
satisfaction.

Security Deposit

NCLPI also argues that, assuming LMI could validly rescind their Contract of Lease, the security
deposit must be returned, with interest at the rate of twelve percent (12%) per annum, the
obligation to return being in the nature of a forbearance of money.84

NCLPI is partly correct.

Paragraph 385 of the Contract of Lease provides that, in case of termination of the lease, the
balance of the security deposit must be returned to NCLPI within seven (7) days. Since "there is
no question that [LMI] is retaining the security deposit" in the amount of 883,253.72 (after
deduction of the expenses for water and telephone services),86 LMI must return the same to
NCLPI, with interest.

Considering, however, that the Contract of Lease does not stipulate an applicable interest rate,
again following our ruling in Nacar, the rate shall be six percent (6%) from the time of judicial
or extrajudicial demand. The records of this case show that the first time NCLPI raised the issue
on the security deposit was in its Brief dated March 25, 2003 filed with the CA.87 Thus, the
interest should be computed starting only on said date until the finality of this Decision, after
which the total amount shall earn interest at the rate of six percent (6%) from the finality of this
Decision until satisfaction by LMI.88

Improvements

In its Petition, NCLPI also prayed for the return of "all the equipment installed and the other
improvements on the property, or their value, pursuant to the mandate of mutual restitution."89

NCLPI errs.

Under Paragraph 5 of the Contract of Lease, NCLPI is entitled only to the return of those
improvements introduced by it which can be removed without causing damage to the leased
premises.90 Considering, however, that the issue of ownership of the improvements within the
premises appears to be subject of another case initiated by NCLPIs subsidiary, NSC,91 this Court
will not rule on the same.

Denial of NCLPIs claim and award of damages in favor of LMI and Proton proper

Both the trial court and CA found that NCLPI breached the Contract of Lease. In sustaining the
denial of NCLPIs claim for damages, the CA held:

There is no merit in [NCLPI]s claim for damages allegedly arising from [LMI]s failure to
maintain it in peaceful possession of the leased premises. It was [NCLPI] who breached the lease
contract x x x Moreover, the lease contract between [LMI] and [Proton] was entered into only on
November 8, 1996 x x x after the lease contract between [LMI] and [NCLPI] had been
terminated. As aptly noted by the trial court:

xxxx

In other words, while in its responsive pleading [NCLPI] claims [that] it was fooled into
allowing [Proton] to occupy the subject premises for a limited period, after which the latter, in
alleged collusion with [LMI] unilaterally usurped the premises for itself, the evidence shows
that it was [NCLPI] which misrepresented itself to PROTON as being a lessee of good
standing, so that it could induce the latter to occupy and renovate the premises when at
that time the negotiations were underway, the lease between [LMI] and [NCLPI] had
already been terminated.92 (Emphasis and underscoring supplied)

Contrary to NCLPl's claims of an unlawful "scheme" devised by LMJ and Proton to force it out
of the leased premises, we find that it was NCLPI who was in bad faith and itself provided the
bases for the cancellation of its Contract of Lease with LMI and its eventual ejectment from the
leased premises. Accordingly, we affirm (1) the award of exemplary damages and attorney's fees
in favor of LMI and Proton and (2) the denial of NCLPI's claim for damages.93

WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision dated
September 27, 2006 and the Resolution dated March 8, 2007 rendered by the CA in CA-G.R. CV
No. 75985 are, however, MODIFIED as follows:

(1) NCLP I is ordered to pay LMI and Proton exemplary damages of P50,000.00 and
attorney's fees of P50,000.00, each;

(2) NCLPI is ordered to pay the amount of P2,365,569.61 unpaid rentals, with interest at
the rate of six percent ( 6%) per annum computed from October 18, 1996 until the date of
finality of this judgment. The total amount shall thereafter earn interest at the rate of six
percent (6%) per annum from the finality of judgment until its satisfaction;

(3) LMI is ordered to return to NCLPI the balance of the security deposit amounting to
P883,253.72, with interest at the rate of six percent ( 6o/o) starting March 25, 2003 until
the finality of this Decision, after which the total amount shall earn interest at the rate of
six percent (6%) from the finality of this Decision until satisfaction by LMI.94

SO ORDERED.

FRANCIS H. JARDELEZA
Associate Justice

WE CONCUR:

FIRST DIVISION

G.R. No. 214752, March 09, 2016

EQUITABLE SAVINGS BANK, (NOW KNOWN AS THE MERGED ENTITY "BDO


UNIBANK, INC.")Petitioner, v. ROSALINDA C. PALCES, Respondent.

DECISION

PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated February 13, 2014 and
the Resolution3 dated October 8, 2014 of the Court of Appeals (CA) in CA-G.R. CV No. 96008,
which partially affirmed the Decision4 dated May 20, 2010 of the Regional Trial Court of Pasay
City, Branch 114 (RTC) in Civil Case No. 07-03 86-CFM and ordered petitioner Equitable
Savings Bank, now BDO Unibank, Inc. (petitioner), to reimburse respondent Rosalinda C. Palces
(respondent) the installments she made in March 2007 amounting to P103,000.00.

The Facts

On August 15, 2005, respondent purchased a Hyundai Starex GRX Jumbo (subject vehicle)
through a loan granted by petitioner in the amount of P1,196,100.00. In connection therewith,
respondent executed a Promissory' Note with Chattel Mortgage5 in favor of petitioner,
stating, inter alia, that: (a) respondent shall pay petitioner the aforesaid amount in 36-monthly
installments of P33,225.00 per month, beginning September 18, 2005 and every 18th of the
month thereafter until full payment of the loan; (b) respondent's default in paying any installment
renders the remaining balance due and payable; and (c) respondent's failure to pay any
installments shall give petitioner the right to declare the entire obligation due and payable and
may likewise, at its option, x x x foreclose this mortgage; or file an ordinary civil action for
collection and/or such other action or proceedings as may be allowed under the law.6

From September 18, 2005 to December 21, 2006, respondent paid the monthly installment of
P33,225.00 per month. However, she failed to pay the monthly installments in January and
February 2007, thereby triggering the acceleration clause contained in the Promissory Note with
Chattel Mortgage7 and prompting petitioner to send a demand letter8 dated February 22, 2007 to
compel respondent to pay the remaining balance of the loan in the amount of P664,500.00.9 As
the demand went unheeded, petitioner filed on March 7, 2007 the instant Complaint for
Recovery of Possession with Replevin with Alternative Prayer for Sum of Money and
Damages10 against respondent before the RTC, praying that the court a quo: (a) issue a writ of
replevin ordering the seizure of the subject vehicle and its delivery to petitioner; or (b) in the
alternative as when the recovery of the subject vehicle cannot be effected, to render judgment
ordering respondent to pay the remaining balance of the loan, including penalties, charges, and
other costs appurtenant thereto.11

Pending respondent's answer, summons12 and a writ of replevin13 were issued and served to her
personally on April 26, 2007, and later on, a Sheriffs Return14 dated May 8, 2007 was submitted
as proof of the implementation of such writ.15

In her defense,16 while admitting that she indeed defaulted on her installments for January and
February 2007, respondent nevertheless insisted that she called petitioner regarding such delay in
payment and spoke to a bank officer, a certain Rodrigo Dumagpi, who gave his consent thereto.
Respondent then maintained that in order to update her installment payments, she paid petitioner
the amounts of P70,000.00 on March 8, 2007 and P33,000.00 on March 20, 2007, or a total of
P103,000.00. Despite the aforesaid payments, respondent was surprised when petitioner filed the
instant complaint, resulting in the sheriff taking possession of the subject vehicle.17

The RTC Ruling


In a Decision18 dated May 20, 2010, the RTC ruled in petitioner's favor and, accordingly,
confirmed petitioner's right and possession over the subject vehicle and ordered respondent to
pay the former the amount of P15,000.00 as attorney's fees as well as the costs of suit.19

The RTC found that respondent indeed defaulted on her installment payments in January and
February 2007, thus, rendering the entire balance of the loan amounting to P664,500.00 due and
demandable. In this relation, the RTC observed that although respondent made actual payments
of the installments due, such payments were all late and irregular, and the same were not enough
to fully pay her outstanding obligation, considering that petitioner had already declared the entire
balance of the loan due and demandable. However, since the writ of replevin over the subject
vehicle had already been implemented, the RTC merely confirmed petitioner's right to possess
the same and ruled that it is no longer entitled to its alternative prayer, i.e., the payment of the
remaining balance of the loan, including penalties, charges, and other costs appurtenant thereto.20

Respondent moved for reconsideration,21 but was denied in an Order22 dated August 31, 2010.
Dissatisfied, respondent appealed23 to the CA, contending that petitioner acted in bad faith in
seeking to recover more than what is due by attempting to collect the balance of the loan and, at
the same time, recover the subject vehicle.24

The CA Ruling

In a Decision25 dated February 13, 2014, the CA affirmed the RTC ruling with modification: (a)
ordering petitioner to return the amount of P103,000.00 to respondent; and (b) deleting the award
of attorney's fees in favor of petitioner for lack of sufficient basis. It held that while respondent
was indeed liable to petitioner under the Promissory Note with Chattel Mortgage, petitioner
should not have accepted respondent's late partial payments in the aggregate amount of
P103,000.00. In this regard, the CA opined that by choosing to recover the subject vehicle via a
writ of replevin, petitioner already waived its right to recover any unpaid installments, pursuant
to Article 1484 of the Civil Code. As such, the CA concluded that respondent is entitled to the
recovery of the aforesaid amount.26

Aggrieved, petitioner moved for partial reconsideration27 - specifically praying for the setting
aside of the order to return the amount of P103,000.00 to respondent - which was, however,
denied in a Resolution28 dated October 8, 2014; hence, this petition.

The Issues Before The Court

The issues raised for the Court's resolution are whether or not the CA correctly: (a) ordered
petitioner to return to respondent the amount of P103,000.00 representing the latter's late
installment payments; and (b) deleted the award of attorney's fees in favor of petitioner.

The Court's Ruling

The petition is partly meritorious.

Citing Article 1484 of the Civil Code, specifically paragraph 3 thereof, the CA ruled that
petitioner had already waived its right to recover any unpaid installments when it sought - and
was granted - a writ of replevin in order to regain possession of the subject vehicle. As such,
petitioner is no longer entitled to receive respondent's late partial payments in the aggregate
amount of P103,000.00.

The CA is mistaken on this point.

Article 1484 of the Civil Code, which governs the sale of personal properties in installments,
states in full:
chanRoblesvirtualLawlibrary
Article 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:

(1) Exact fulfilment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should
the vendee's failure to pay cover two or more installments. In this case, he shall have no further
action against the purchaser to recover any unpaid balance of the price. Any agreement to the
contrary shall be void. (Emphases and underscoring supplied)
In this case, there was no vendor-vendee relationship between respondent and petitioner. A
judicious perusal of the records would reveal that respondent never bought the subject vehicle
from petitioner but from a third party, and merely sought financing from petitioner for its full
purchase price. In order to document the loan transaction between petitioner and respondent, a
Promissory Note with Chattel Mortgage29 dated August 18, 2005 was executed wherein, inter
alia, respondent acknowledged her indebtedness to petitioner in the amount of P1,196,100.00
and placed the subject vehicle as a security for the loan.30 Indubitably, a loan contract with the
accessory chattel mortgage contract - and not a contract of sale of personal property in
installments - was entered into by the parties with respondent standing as the debtor-mortgagor
and petitioner as the creditor-mortgagee. Therefore, the conclusion of the CA that Article 1484
finds application in this case is misplaced, and thus, must be set aside.

The Promissory Note with Chattel Mortgage subject of this case expressly stipulated, among
others, that: (a) monthly installments shall be paid on due date without prior notice or
demand;31 (b) in case of default, the total unpaid principal sum plus the agreed charges shall
become immediately due and payable;32 and (c) the mortgagor's default will allow the mortgagee
to exercise the remedies available to it under the law. In light of the foregoing provisions,
petitioner is justified in filing his Complaint33 before the RTC seeking for either the recovery of
possession of the subject vehicle so that it can exercise its rights as a mortgagee, i.e., to conduct
foreclosure proceedings over said vehicle;34 or in the event that the subject vehicle cannot be
recovered, to compel respondent to pay the outstanding balance of her loan.35 Since it is
undisputed that petitioner had regained possession of the subject vehicle, it is only appropriate
that foreclosure proceedings, if none yet has been conducted/concluded, be commenced in
accordance with the provisions of Act No. 1508,36 otherwise known as "The Chattel Mortgage
Law," as intended. Otherwise, respondent will be placed in an unjust position where she is
deprived of possession of the subject vehicle while her outstanding debt remains unpaid, either in
full or in part, all to the undue advantage of petitioner - a situation which law and equity will
never permit.37

Further, there is nothing in the Promissory Note with Chattel Mortgage that bars petitioner from
receiving any late partial payments from respondent. If at all, petitioner's acceptance of
respondent's late partial payments in the aggregate amount of P103,000.00 will only operate to
reduce her outstanding obligation to petitioner from P664,500.00 to P561,500.00. Such a
reduction in respondent's outstanding obligation should be accounted for when petitioner
conducts the impending foreclosure sale of the subject vehicle. Once such foreclosure sale has
been made, the proceeds thereof should be applied to the reduced amount of respondent's
outstanding obligation, and the excess of said proceeds, if any, should be returned to her.38

In sum, the CA erred in ordering petitioner to return the amount of P103,000.00 to respondent. In
view of petitioner's prayer for and subsequent possession of the subject vehicle in preparation for
its foreclosure, it is only proper that petitioner be ordered to commence foreclosure proceedings,
if none yet has been conducted/concluded, over the vehicle in accordance with the provisions of
the Chattel Mortgage Law, i.e., within thirty (30) days from the finality of this Decision.39

Finally, anent the issue of attorney's fees, it is settled that attorney's fees "cannot be recovered as
part of damages because of the policy that no premium should be placed on the right to litigate.
They are not to be awarded every time a party wins a suit. The power of the court to award
attorney's fees under Article 220840 of the Civil Code demands factual, legal, and equitable
justification. Even when a claimant is compelled to litigate with third persons or to incur
expenses to protect his rights, still, attorney's fees may not be awarded where no sufficient
showing of bad faith could be reflected in a party's persistence in a case other than an erroneous
conviction of the righteousness of his cause."41In this case, suffice it to say that the CA correctly
ruled that the award of attorney's fees and costs of suit should be deleted for lack of sufficient
basis.chanrobleslaw

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated February 13, 2014
and the Resolution dated October 8, 2014 of the Court of Appeals in CA-G.R. CV No. 96008 are
hereby SET ASIDE. In case foreclosure proceedings on the subject chattel mortgage has not yet
been conducted/concluded, petitioner Equitable Savings Bank, now BDO Unibank, Inc.,
is ORDERED to commence foreclosure proceedings on the subject vehicle in accordance with
the Chattel Mortgage Law, i.e., within thirty (30) days from the finality of this Decision. The
proceeds therefrom should be applied to the reduced outstanding balance of respondent
Rosalinda C. Palces in the amount of P561,500.00, and the excess, if any, should be returned to
her.

SO ORDERED.cralawlawlibrary

Sereno, C.J., (Chairperson), Leonardo-De Castro, Bersamin, and Caguioa, JJ.,


concur.chanroblesvirtuallawli
G.R. No. 199282, March 14, 2016

TRAVEL & TOURS ADVISERS, INCORPORATED, Petitioner, v. ALBERTO CRUZ, SR.,


EDGAR HERNANDEZ AND VIRGINIA MUOZ, Respondents.

DECISION

PERALTA, J.:

For resolution of this Court is the Petition for Review on Certiorari under Rule 45 of the Revised
Rules of Court dated December 28, 2011, of petitioner Travel & Tours Advisers, Inc. assailing
the Decision1dated May 16, 2011 and Resolution2 dated November 10, 2011 of the Court of
Appeals (CA), affirming with modifications the Decision3 dated January 30, 2008 of the
Regional Trial Court (RTC), Branch 61, Angeles City finding petitioner jointly and solidarity
liable for damages incurred in a vehicular accident.

The facts follow.

Respondent Edgar Hernandez was driving an Isuzu Passenger Jitney (jeepney) that he owns with
plate number DSG-944 along Angeles-Magalang Road, Barangay San Francisco, Magalang,
Pampanga, on January 9, 1998, around 7:50 p.m. Meanwhile,. a Daewoo passenger bus (RCJ
Bus Lines) with plate number NXM-116, owned by petitioner Travel and Tours Advisers, Inc.
and driven by Edgar Calaycay travelled in the same direction as that of respondent Edgar
Hernandez vehicle. Thereafter, the bus bumped the rear portion of the jeepney causing it to ram
into an acacia tree which resulted in the death of Alberto Cruz, Jr. and the serious physical
injuries of Virginia Muoz.

Thus, respondents Edgar Hernandez, Virginia Muoz and Alberto Cruz, Sr., father of the
deceased Alberto Cruz, Jr., filed a complaint for damages, docketed as Civil Case No. 9006
before the RTC claiming that the collision was due to the reckless, negligent and imprudent
manner by which Edgar Calaycay was driving the bus, in complete disregard to existing traffic
laws, rules and regulations, and praying that judgment be rendered ordering Edgar Calaycay and
petitioner Travel & Tours Advisers, Inc. to pay the following:
chanRoblesvirtualLawlibrary

1. For plaintiff Alberto Cruz, Sr.

a. The sum of P140,000.00 for the reimbursement of the expenses incurred for coffin, funeral
expenses, for vigil, food, drinks for the internment (sic) of Alberto Cruz, Jr. as part of actual
damages;

b. The sum of P300,000.00, Philippine Currency, as moral, compensatory and consequential


damges.

c. The sum of P6,000.00 a month as lost of (sic) income from January 9, 1998 up to the time the
Honorable Court may fixed (sic);

2. For plaintiff Virginia Muoz:

a. The sum of P40,000.00, Philippine Currency, for the reimbursement of expenses for
hospitalization, medicine, treatment and doctor's fee as part of actual damages;

b. The sum of P150,000.00 as moral, compensatory and consequential damages;

3. For plaintiff Edgar Hernandez:

a. The sum of P42,400.00 for the damage sustained by plaintiffs Isuzu Passenger Jitney as part of
actual damages, plus P500.00 a day as unrealized net income for four (4) months;

b. The sum of P150,000.00, Philippine Currency, as moral, compensatory and consequential


damages;

4. The sum of P50,000.00 pesos, Philippine Currency, as attorney's fees, plus P1,000.00 per
appearance fee in court;

5. Litigation expenses in the sum of P30,000.00; and

6. To pay the cost of their suit.

Other reliefs just and equitable are likewise prayed for.4ChanRoblesVirtualawlibrary


For its defense, the petitioner claimed that it exercised the diligence of a good father of a family
in the selection and supervision of its employee Edgar Calaycay and further argued that it was
Edgar Hernandez who was driving his passenger jeepney in a reckless and imprudent manner by
suddenly entering the lane of the petitioner's bus without seeing to it that the road was clear for
him to enter said lane. In addition, petitioner alleged that at the time of the incident, Edgar
Hernandez violated his franchise by travelling along an unauthorized line/route and that the
jeepney was overloaded with passengers, and the deceased Alberto Cruz, Jr. was clinging at the
back thereof.

On January 30, 2008, after trial on the merits, the RTC rendered judgment in favor of the
respondents, the dispositive portion of the decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, judgment is hereby rendered ordering the defendants Edgar
Calaycay Ranese and Travel & Tours Advisers, Inc. to jointly and solidarity pay the following:
chanRoblesvirtualLawlibrary
I. 1. To plaintiff Alberto Cruz, Sr. and his family -
a) the sum of P50,000.00 as actual and compensatory damages;

b) the sum of P250,000.00 for loss of earning capacity of the decedent Alberto Cruz, Jr. and;

c) the sum of P50,000.00 as moral damages.


2. To plaintiff Virginia Muoz -
a) the sum of P16,744.00 as actual and compensatory damages; and

b) the sum of P150,000.00 as moral damages.


3. To Edgar Hernandez -
a) the sum of P50,000.00 as actual and compensatory damages.
II. The sum of P50,000.00 as attorney's fees, and

III. The sum of P4,470.00 as cost of litigation


SO ORDERED.

Angeles City, Philippines, January 30, 2008.5ChanRoblesVirtualawlibrary


Petitioner filed its appeal with the CA, and on May 16, 2011, the appellate court rendered its
decision, the decretal portion of which reads as follows:
chanRoblesvirtualLawlibrary
WHEREFORE, the instant appeal is PARTLY GRANTED. The assailed Decision of the RTC,
Branch 61, Angeles City, dated January 30, 2008, is AFFIRMED with MODIFICATIONS. The
defendants are ordered to pay, jointly and severally, the following:

1. To plaintiff Alberto Cruz, Sr. and family -

a) the sum of P25,000.00 as actual damages;

b) the sum of P250.000.00 for the loss of earning capacity of the decedent Alberto Cruz, Jr.;
c) the sum of P50,000.00 as civil indemnity for the death of Alberto Cruz, Jr.;

d) the sum of P50,000.00 as moral damages.

2. To plaintiff Virginia Muoz -

a) the sum of P16,744.00 as actual damages; and

b) the sum of P30,000.00 as moral damages.

3. To plaintiff Edgar Hernandez -

a) The sum of P40,200.00 as actual damages.

4. The award of attorney's fees (P50,000.00) and cost of litigation (P4,470.00) remains.

SO ORDERED.6ChanRoblesVirtualawlibrary
Hence, the present petition wherein the petitioner assigned the following errors:
chanRoblesvirtualLawlibrary
I.

THE PETITIONER'S BUS WAS NOT "OUT OF LINE;"

II.

THE FACT THAT THE JEEPNEY WAS BUMPED ON ITS LEFT REAR PORTION DOES
NOT PREPONDERANTLY PROVE THAT THE DRIVER OF THE BUS WAS THE
NEGLIGENT PARTY;

III.

THE DECEASED ALBERTO CRUZ, JR. WAS POSITIONED AT THE RUNNING BOARD
OF THE JEEPNEY;

IV.

THE BUS DRIVER WAS NOT SPEEDING OR NEGLIGENT WHEN HE FAILED TO STEER
THE BUS TO A COMPLETE STOP;

V.

THE PETITIONER EXERCISED EXTRAORDINARY DILIGENCE OF A GOOD FATHER


OF A FAMILY IN ITS SELECTION AND SUPERVISION OF DRIVER CALAYCAY; AND

VI.
THERE IS NO FACTUAL AND LEGAL BASIS FOR THE VARIOUS AWARDS OF
MONETARY DAMAGES.7ChanRoblesVirtualawlibrary
According to petitioner, contrary to the declaration of the RTC, the petitioner's passenger bus
was not "out-of-line" and that petitioner is actually the holder of a PUB (public utility bus)
franchise for provincial operation from Manila-Ilocos Norte/Cagayan-Manila, meaning the
petitioner's passenger bus is allowed to traverse any point between Manila-Ilocos
Norte/Cagayan-Manila. Petitioner further asseverates that the fact that the driver of the passenger
bus took the Magalang Road instead of the Bamban Bridge is of no moment because the bridge
was under construction due to the effects of the lahar; hence closed to traffic and the Magalang
Road is still in between the points of petitioner's provincial operation. Furthermore, petitioner
claims that the jeepney was traversing a road way out of its allowed route, thus, the presumption
that respondent Edgar Hernandez was the negligent party.

Petitioner further argues that respondent Edgar Hernandez failed to observe that degree of care,
precaution and vigilance that his role as a public utility called for when he allowed the deceased
Alberto Cruz, Jr., to hang on to the rear portion of the jeepney.

After due consideration of the issues and arguments presented by petitioner, this Court finds no
merit to grant the petition.

Jurisprudence teaches us that "(a)s a rule, the jurisdiction of this Court in cases brought to it from
the Court of Appeals x x x is limited to the review and revision of errors of law allegedly
committed by the appellate court, as its findings of fact are deemed conclusive. As such, this
Court is not duty-bound to analyze and weigh all over again the evidence already considered in
the proceedings below.8 This rule, however, is not without exceptions."9 The findings of fact of
the Court of Appeals, which are, as a general rule, deemed conclusive, may admit of review by
this Court:10
(1) when the factual findings of the Court of Appeals and the trial court are contradictory;

(2) when the findings are grounded entirely on speculation, surmises, or conjectures;

(3) when the inference made by the Court of Appeals from its findings of fact is manifestly
mistaken, absurd, or impossible;

(4) when there is grave abuse of discretion in the appreciation of facts;

(5) when the appellate court, in making its findings, goes beyond the issues of the case, and such
findings are contrary to the admissions of both appellant and appellee;

(6) when the judgment of the Court of Appeals is premised on a misapprehension of facts;

(7) when the Court of Appeals fails to notice certain relevant facts which, if properly considered,
will justify a different conclusion;

(8) when the findings of fact are themselves conflicting;


(9) when the findings of fact are conclusions without citation of the specific evidence on which
they are based; and

(10) when the findings of fact of the Court of Appeals are premised on the absence of evidence
but such findings are contradicted by the evidence on record.
The issues presented are all factual in nature and do not fall under any of the exceptions upon
which this Court may review. Moreover, well entrenched is the prevailing jurisprudence that only
errors of law and not of facts are reviewable by this Court in a petition for review
on certiorari under Rule 45 of the Revised Rules of Court, which applies with greater force to
the Petition under consideration because the factual findings by the Court of Appeals are in full
agreement with what the trial court found.11

Nevertheless, a review of the issues presented in this petition would still lead to the finding that
petitioner is still liable for the damages awarded to the respondents but with certain
modifications.

The RTC and the CA are one in finding that both vehicles were not in their authorized routes at
the time of the incident. The conductor of petitioner's bus admitted on cross-examination that the
driver of the bus veered off from its usual route to avoid heavy traffic. The CA thus observed:
chanRoblesvirtualLawlibrary
First. As pointed out in the assailed Decision, both vehicles were not in their authorized routes at
the time of the mishap. FRANCISCO TEJADA, the conductor of defendant-appellant's bus,
admitted on cross-examination that the driver of the bus passed through Magalang Road instead
of Sta. Ines, which was the usual route, thus:

xxx

Q: What route did you take from Manila to Laoag, Ilocos Sur?
A: Instead of Sta. Ines, we took Magalang Road, sir.

Q: So that is not your usual route that you are taking?


A: No, sir, it so happened that there was heavy traffic at Bamban, Tarlac, that is why we
took the Magalang Road.

xxx

The foregoing testimony of defendant-appellant's own witness clearly belies the contention that
its driver took the Magalang Road instead of the Bamban Bridge because said bridge was closed
and under construction due to the effects of lahar. Regardless of the reason, however, the
irrefutable fact remains that defendant-appellant's bus likewise veered from its usual
route.12ChanRoblesVirtualawlibrary
Petitioner now claims that the bus was not out of line when the vehicular accident happened
because the PUB (public utility bus) franchise that the petitioner holds is for provincial operation
from Manila-Ilocos Norte/Cagayan-Manila, thus, the bus is allowed to traverse any point
between Manila-Ilocos Norte/Cagayan-Manila. Such assertion is correct. "Veering away from the
usual route" is different from being "out of line." A public utility vehicle can and may veer away
from its usual route as long as it does not go beyond its allowed route in its franchise, in this
case, Manila-Ilocos Norte/Cagayan-Manila. Therefore, the bus cannot be considered to have
violated the contents of its franchise. On the other hand, it is indisputable that the jeepney was
traversing a road out of its allowed route. Necessarily, this case is not that of "in pari delicto"
because only one party has violated a traffic regulation. As such, it would seem that Article 2185
of the New Civil Code is applicable where it provides that:
chanRoblesvirtualLawlibrary
Art. 2185. Unless there is proof to the contrary, it is presumed that a person driving a motor
vehicle has been negligent if at the time of the mishap, he was violating any traffic regulation.
The above provision, however, is merely a presumption. From the factual findings of both the
RTC and the CA based on the evidence presented, the proximate cause of the collision is the
negligence of the driver of petitioner's bus. The jeepney was bumped at the left rear portion.
Thus, this Court's past ruling,13 that drivers of vehicles who bump the rear of another vehicle are
presumed to be the cause of the accident, unless contradicted by other evidence, can be applied.
The rationale behind the presumption is that the driver of the rear vehicle has full control of the
situation as he is in a position to observe the vehicle in front of him.14 Thus, as found by the CA:
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Second. The evidence on record preponderantly shows that it was the negligence of defendant-
appellant's driver, EDGAR CALAYCAY, that was the proximate cause of the collision.

Even without considering the photographs (Exhibit "N", " " and "N-2") showing the damage to
the jeepney, it cannot be denied that the said vehicle was bumped in its left rear portion by
defendant-appellant's bus. The same was established by the unrebutted testimonies of
plaintiffs-appellees EDGAR HERNANDEZ and VIRGINIA MUOZ, as follows:
chanRoblesvirtualLawlibrary
EDGAR HERNANDEZ

xxx

Q: Now, according to you, you were not able to reach the town proper of Magalang because your
vehicle was bumped. In what portion of your vehicle was it bumped, Mr. Witness?
A: At the left side edge portion of the vehicle, sir.

Q: When it was bumped on the rear left side portion, what happened to your vehicle?
A: It was bumped strongly, sir, and then, "sinulpit ya", sir.

Q: When your vehicle was "sinulpit" and hit an acacia tree, what happened to the acacia tree?
A: The jeepney stopped and Alberto Cruz died and some of my passengers were injured, sir.

xxx

VIRGINIA MUOZ

xxx
Q: what portion of the vehicle wherein you were boarded that was hit by the Travel Tours Bus?
A: The rear portion of the jeep, sir.

Q: It was hit by the Travel Tours Bus?


A: Yes, sir.

Q: What happened to you when the vehicle was bumped?


A: I was thrown off the vehicle, sir.

xxx
It has been held that drivers of vehicles "who bump the rear of another vehicle" are presumed to
be "the cause of the accident, unless contradicted by other evidence." The rationale behind the
presumption is that the driver of the rear vehicle has full control of the situation as he is in a
position to observe the vehicle in front of him.

In the case at bar, defendant-appellant failed to overturn the foregoing presumption.


FRANCISCO TEJADA, the conductor of the bus who was admittedly "seated in front, beside the
driver's seat," and thus had an unimpeded view of the road, declared on direct examination that
the jeepney was about 10 to 15 meters away from the bus when he first saw said vehicle on the
road. Clearly, the bus driver, EDGAR CALAYCAY, would have also been aware of the presence
of the jeepney and, thus, was expected to anticipate its movements.

However, on cross-examination, TEJADA claimed that the jeepney "suddenly appeared" before
the bus, passing it diagonally, and causing it to be hit in its left rear side. Such uncorroborated
testimony cannot be accorded credence by this Court because it is inconsistent with the physical
evidence of the actual damage to the jeepney. On this score, We quote with approval the
following disquisition of the trial court:
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x x x (F)rom the evidence presented, it was established that it was the driver of the RCJ Line Bus
which was negligent and recklessly driving the bus of the defendant corporation.

Francisco Tejada, who claimed to be the conductor of the bus, testified that it was the passenger
jeepney coming from the pavement which suddenly entered diagonally the lane of the bus
causing the bus to hit the rear left portion of the passenger jeepney. But such testimony is belied
by the photographs of the jeepney (Exhs. N and N-1). As shown by Exh. N-1, the jeepney was hit
at the rear left portion and not when the jeepney was in a diagonal position to the bus otherwise,
it should have been the left side of the passenger jeepney near the rear portion that could have
been bumped by the bus. It is clear from Exh. N-1 and it was even admitted that the rear left
portion of the passenger jeepney was bumped by the bus. Further, if the jeepney was in diagonal
position when it was hit by the bus, it should have been the left side of the body of the jeepney
that could have sustained markings of such bumping. In this case, it is clear that it is the left rear
portion of the jeepney that shows the impact of the markings of the bumping. The jeepney
showed that it had great damage on the center of the front portion (Exh. N-2). It was the center of
the front portion that hit the acacia tree (Exh. N). As admitted by the parties, both vehicles were
running along the same direction from west to east. As testified to by Francisco Tejada, the
jeepney was about ten (10) to fifteen (15) meters away from the bus when he noticed the jeepney
entering diagonally the lane of the bus. If this was so, the middle left side portion of the jeepney
could have been hit, not the rear portion. The evidence is clear that the bus was in fast running
condition, otherwise, it could have stopped to evade hitting the jeepney. The hitting of the acacia
tree by the jeepney, and the damages caused on the jeepney in its front (Exh. N-2) and on its rear
left side show that the bus was running very fast.

xxxx
Assuming ex gratia argumenti that the jeepney was in a "stop position," as claimed by
defendant-appellant, on the pavement of the road 10 to 15 meters ahead of the bus before
swerving to the left to merge into traffic, a cautious public utility driver should have stepped on
his brakes and slowed down. The distance of 10 to 15 meters would have allowed the bus with
slacked speed to give way to the jeepney until the latter could fully enter the lane. Obviously, as
correctly found by the court a quo, the bus was running very fast because even if the driver
stepped on the brakes, it still made contact with the jeepney with such force that sent the latter
vehicle crashing head-on against an acacia tree. In fact, FRANCISCO TEJADA effectively
admitted that the bus was very fast when he declared that the driver "could not suddenly apply
the break (sic) in full stop because our bus might turn turtle xxx." Incidentally, the allegation in
the appeal brief that the driver could not apply the brakes with force because of the possibly that
the bus might turn turtle "as they were approaching the end of the gradient or the decline of the
sloping terrain or topography of the roadway" was only raised for the first time in this appeal
and, thus, may not be considered. Besides, there is nothing on record to substantiate the same.

Rate of speed, in connection with other circumstances, is one of the principal considerations in
determining whether a motorist has been reckless in driving a vehicle, and evidence of the extent
of the damage caused may show the force of the impact from which the rate of speed of the
vehicle may be modestly inferred. From the evidence presented in this case, it cannot be denied
that the bus was running very fast. As held by the Supreme Court, the very fact of speeding is
indicative of imprudent behavior, as a motorist must exercise ordinary care and drive at a
reasonable rate of speed commensurate with the conditions encountered, which will enable him
to keep the vehicle under control and avoid injury to others using the
highway.15ChanRoblesVirtualawlibrary
From the above findings, it is apparent that the proximate cause of the accident is the petitioner's
bus and that the petitioner was not able to present evidence that would show otherwise. Petitioner
also raised the issue that the deceased passenger, Alberto Cruz, Jr. was situated at the running
board of the jeepney which is a violation of a traffic regulation and an indication that the jeepney
was overloaded with passengers. The CA correctly ruled that no evidence was presented to show
the same, thus:
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That the deceased passenger, ALBERTO CRUZ, JR., was clinging at the back of the jeepney at
the time of the mishap cannot be gleaned from the testimony of plaintifff-appellee VIRGINIA
MUOZ that it was she who was sitting on the left rearmost of the jeepney.

VIRGINIA MUOZ herself testified that there were only about 16 passengers on board the
jeepney when the subject incident happened. Considering the testimony of plaintiff-appellee
EDGAR HERNANDEZ that the seating capacity of his jeepney is 20 people, VIRGINIA'S
declaration effectively overturned defendant-appellant's defense that plaintiff-appellee
overloaded his jeepney and allowed the deceased passenger to cling to the outside railings. Yet,
curiously, the defense declined to cross-examine VIRGINIA, the best witness from whom
defendant-appellant could have extracted the truth about the exact location of ALBERTO CRUZ,
JR. in or out of the jeepney. Such failure is fatal to defendant-appellant's case. The only other
evidence left to support its claim is the testimony of the conductor, FRANCISCO TEJADA,
that there were 3 passengers who were clinging to the back of the jeepney, and it was the
passenger clinging to the left side that was bumped by the bus. However, in answer to the
clarificatory question from the court a quo, TEJADA admitted that he did not really see
what happened, thus:
Q: What happened to the passenger clinging to the left side portion?
A: He was bumped, your Honor.

Q: Why, the passenger fell?


A: I did not really see what happened, Mam [sic], what I know he was bumped.
This, despite his earlier declaration that he was seated in front of the bus beside the driver's seat
and knew what happened to the passengers who were clinging to the back of the jeepney.
Indubitably, therefore, TEJADA was not a credible witness, and his testimony is not worthy of
belief.16ChanRoblesVirtualawlibrary
Consequently, the petitioner, being the owner of the bus and the employer of the driver, Edgar
Calaycay, cannot escape liability. Article 2176 of the Civil Code provides:
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Whoever by act or omission causes damage to another, there being fault or negligence, is obliged
to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual
relation between the parties, is called a quasi-delict and is governed by the provisions of this
Chapter.
Complementing Article 2176 is Article 2180 which states the following:
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The obligation imposed by Article 2176 is demandable not only for one's own acts or omissions,
but also for those of persons for whom one is responsible x x x.

Employers shall be liable for the damages caused by their employees and household helpers
acting within the scope of their assigned tasks, even though the former are not engaged in any
business or industry x x x.

The responsibility treated of in this article shall cease when the persons herein mentioned prove
that they observed all the diligence of a good father of a family to prevent damage.
Article 2180, in relation to Article 2176, of the Civil Code provides that the employer of a
negligent employee is liable for the damages caused by the latter. When an injury is caused by
the negligence of an employee there instantly arises a presumption of the law that there was
negligence on the part of the employer either in the selection of his employee or in the
supervision over him after such selection. The presumption, however, may be rebutted by a clear
showing on the part of the employer that it had exercised the care and diligence of a good father
of a family in the selection and supervision of his employee. Hence, to escape solidary liability
for quasi-delict committed by an employee, the employer must adduce sufficient proof that it
exercised such degree of care.17 In this case, the petitioner failed to do so. The RTC and the CA
exhaustively and correctly ruled as to the matter, thus:
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Thus, whenever an employee's (defendant EDGAR ALAYCAY) negligence causes- damage or
injury to another, there instantly arises a presumption that the employer (defendant-appellant)
failed to exercise the due diligence of a good father of the family in the selection or supervision
of its employees. To avoid liability for a quasi-delict committed by its employee, an employer
must overcome the presumption by presenting convincing proof that it exercised the care and
diligence of a good father of a family in the selection and supervision of its employee. The
failure of the defendant-appellant to overturn this presumption was meticulously explained by
the court a quoas follows:
chanRoblesvirtualLawlibrary
The position of the defendant company that it cannot be held jointly and severally liable for such
damages because it exercised the diligence of a good father of a family, that (sic) does not merit
great credence.

As admitted, Edgar Calaycay was duly authorized by the defendant company to drive the bus at
the time of the incident. Its claim that it has issued policies, rules and regulation's to be followed,
conduct seminars and see to it that their drivers and employees imbibe such policies, rules and
regulations, have their drivers and conductors medically checked-up and undergo drug-testing,
did not show that all these rudiments were applied to Edgar Calaycay. No iota of evidence was
presented that Edgar Calaycay had undergone all these activities to ensure that he is a safe and
capable drivers [sic]. In fact, the defendant company did not put up a defense on the said driver.
The defendant company did not even secure a counsel to defend the driver. It did not present any
evidence to show it ever counseled such driver to be careful in his driving. As appearing from the
evidence of the defendant corporation, the driver at the time of the incident was Calaycay
Francisco (Exh. 9) and the conductor was Tejada. This shows that the defendant corporation does
not exercise the diligence of a good father of a family in the selection and supervision of the
employees. It does not even know the correct and true name of its drivers. The testimony of
Rolando Abadilla, Jr. that they do not have the records of Edgar Calaycay because they ceased
operation due to the death of his father is not credible. Why only the records of Edgar Calaycay?
It has the inspection and dispatcher reports for January 9, 1998 and yet it could not find the
records of Edgar Calaycay. As pointed out by the Supreme Court in a line of cases, the evidence
must not only be credible but must come from a credible witness. No proof was submitted that
Edgar Calaycay attended such alleged seminars and examinations. Thus, under Art. 2180 of the
Civil Code, Employers shall be liable for the damage caused by their employees and household
helper acting within the scope of their assigned tasks, even though the former are not engaged in
any business or industry. The liability of the employer for the tortuous acts or negligence of its
employer [sic] is primary and solidary, direct and immediate, and not conditional upon the
insolvency of prior recourse against the negligent employee. The cash voucher for the alleged
lecture on traffic rules and regulations (Exh. 12) presented by the defendant corporation is for
seminar allegedly conducted on May 20 and 21, 1995 when Edgar Calaycay was not yet in the
employ of the defendant corporation. As testified to by Rolando Abadilla, Jr., Edgar Calaycay
stated his employment with the company only in 1996. Rolando Abadilla, Jr. testified that copies
of the manual (Exh. 8) are given to the drivers and conductors for them to memorize and know
the same, but no proof was presented that indeed Edgar Calaycay was among the recipients.
Nobody testified categorically that indeed Edgar Calaycay underwent any of the training before
being employed by the defendant company. All the testimonies are generalizations as to the
alleged policies, rules and regulations but no concrete evidence was presented that indeed Edgar
Calaycay underwent such familiarization, trainings and seminars before he got employed and
during that time that he was performing his duties as a bus driver of the defendant corporation.
Moreover, the driver's license of the driver was not even presented. These omissions did not
overcome the liability of the defendant corporation under Article 2180 of the Civil Code. x x x
The observation of the court a quo that defendant-appellant failed to show proof that EDGAR
CALAYCAY did in fact undergo the seminars conducted by it assumes greater significance when
viewed in the light of the following admission made by ROLANDO ABADILLA, JR., General
Manager of the defendant-appellant corporation, that suggest compulsory attendance of said
seminars only among drivers and conductors in Manila, thus:
chanRoblesvirtualLawlibrary
xxxx

Q: How many times does (sic) the seminars being conducted by your company a year?
A: Normally, it is a minimum of two (2) seminars per year, sir.

Q: In these seminars that you conduct, are all drivers and conductors obliged to attend?
A: Yes, sir, if they are presently in Manila.

Q: It is only in Manila that you conduct seminars?


A: Yes, sir.

xxx
Moreover, with respect to the selection process, ROLANDO ABADILLA, JR. categorically
admitted in open court that EDGAR CALAYCAY was not able to produce the clearances
required by defendant-appellant upon employment, thus:
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xxxx

Q: By the way, Mr. Witness, do you know this Edgar Calaycay who was once employed by your
company as a driver?
A: Yes, sir.

Q: Have you seen the application of Edgar Calaycay?


A: Yes, sir.

Q: From what I have seen, what documents did he submit in applying as a driver in your
business?

Atty. De Guzman: Very leading, your Honor.

Q: Before a driver could be accepted, what document is he required to submit?


A: The company application form; NBI clearance; police clearance; barangay clearance; mayor's
clearance and other clearances, sir.
Q: Was he able to reproduce these clearances by Mr. Calaycay?
A: No, sir.

x x x18ChanRoblesVirtualawlibrary
In the selection of prospective employees, employers are required to examine them as to their
qualifications, experience, and service records.19 On the other hand, due diligence in the
supervision of employees includes the formulation of suitable rules and regulations for the
guidance of employees, the issuance of proper instructions intended for the protection of the
public and persons with whom the employer has relations through his or its employees and the
imposition of necessary disciplinary measures upon employees in case of breach or as may be
warranted to ensure the performance of acts indispensable to the business of and beneficial to
their employer. To this, we add that actual implementation and monitoring of consistent
compliance with said rules should be the constant concern of the employer, acting through
dependable supervisors who should regularly report on their supervisory functions.20 In this case,
as shown by the above findings of the RTC, petitioner was not able to prove that it exercised the
required diligence needed in the selection and supervision of its employee.

Be that as it may, this doesn't erase the fact that at the time of the vehicular accident, the jeepney
was in violation of its allowed route as found by the RTC and the CA, hence, the owner and
driver of the jeepney likewise, are guilty of negligence as defined under Article 2179 of the Civil
Code, which reads as follows:
chanRoblesvirtualLawlibrary
When the plaintiffs negligence was the immediate and proximate cause of his injury, he cannot
recover damages. But if his negligence was only contributory, the immediate and proximate
cause of the injury being the defendant's lack of due care, the plaintiff may recover damages, but
the courts shall mitigate the damages to be awarded.
The petitioner and its driver, therefore, are not solely liable for the damages caused to the
victims. The petitioner must thus be held liable only for the damages actually caused by his
negligence.21 It is, therefore, proper to mitigate the liability of the petitioner and its driver. The
determination of the mitigation of the defendant's liability varies depending on the circumstances
of each case.22 The Court had sustained a mitigation of 50% in Rakes v. AG & P;23 20%
in Phoenix Construction, Inc. v. Intermediate Appellate Court24 and LBC Air Cargo, Inc. v. Court
of Appeals;25 and 40% in Bank of the Philippine Islands v. Court of Appeals26 and Philippine
Bank of Commerce v. Court of Appeals.27cralawred

In the present case, it has been established that the proximate cause of the death of Alberto Cruz,
Jr. is the negligence of petitioner's bus driver, with the contributory negligence of respondent
Edgar Hernandez, the driver and owner of the jeepney, hence, the heirs of Alberto Cruz, Jr. shall
recover damages of only 50% of the award from petitioner and its driver. Necessarily, 50% shall
be bourne by respondent Edgar Hernandez. This is pursuant to Rakes v. AG & P and after
considering the circumstances of this case.

In awarding damages for the death of Alberto Cruz, Jr., the CA ruled as follows:
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For the death of ALBERTO CRUZ, JR. the court a quo awarded his heirs P50,000.00 as actual
and compensatory damages; P250,000.00 for loss of earning capacity; and another P50,000.00 as
moral damages. However, as pointed out in the assailed Decision dated January 30, 2008, only
the amount paid (P25,000.00) for funeral services rendered by Magalena Memorial Home was
duly receipted (Exhibit "E-1"). It is settled that actual damages must be substantiated by
documentary evidence, such as receipts, in order to prove expenses incurred as a result of the
death of the victim. As such, the award for actual damages in the amount of P50,000.00 must be
modified accordingly.

Under Article 2206 of the Civil Code, the damages for death caused by a quasi-delictshall, in
addition to the indemnity for the death itself which is fixed by current jurisprudence at
P50,000.00 and which the court a quo failed to award in this case, include loss of the earning
capacity of the deceased and moral damages for mental anguish by reason of such death. The
formula for the computation of loss of earning capacity is as follows:

Net earning capacity = Life expectancy x [Gross Annual Income - Living Expenses (50% of
gross annual income)], where life expectancy = 2/3 (80 - the age of the deceased)

Evidence on record shows that the deceased was earning P6,000.00 a month as smoke house
operator at Pampanga's Best, Inc., as per Certification (Exhibit "K") issued by the company's
Production Manager, Enrico Ma. O. Hizon, on March 18, 1998, His gross income therefore
amounted to P72,000.00 [P6,000.00 x 12]. Deducting 50% therefrom (P36,000.00) representing
the living expenses, his net annual income amounted to P36,000.00. Multiplying this by his life
expectancy of 40.67 years [2/3(80-19)] having died at the young age of 19, the award for loss of
earning capacity should have been P1,464,000.00. Considering, however, that his heirs
represented by his father, ALBERTO CRUZ, SR., no longer appealed from the assailed Decision
dated January 30, 2008, and no discussion thereon was even attempted in plaintiffs-appellees'
appeal brief, the award for loss of earning capacity in the amount of P250,000.00 stands.

Moral damages in the amount of P50,000.00 is adequate and reasonable, bearing in mind that the
purpose for making such award is not to enrich the heirs of the victim but to compensate them
however inexact for injuries to their feelings.

xxx28ChanRoblesVirtualawlibrary
In summary, the following were awarded to the heirs of Alberto Cruz, Jr.:
chanRoblesvirtualLawlibrary
1) P25,000.00 as actual damages;

2) P250,000.00 for the loss of earning;

3) P50,000.00 as civil indemnity for the death of Alberto Cruz, Jr.; and

4) P50,000.00 as moral damages


Petitioner contends that the CA erred in awarding an amount for the loss of earning capacity of
Alberto Cruz, Jr. It claims that the certification from the employer of the deceased stating that
when he was still alive - he earned P6,000.00 per month was not presented and identified in open
court.
In that aspect, petitioner is correct. The records are bereft that such certification was presented
and identified during the trial. It bears stressing that compensation for lost income is in the nature
of damages and as such requires due proof of the damages suffered; there must be unbiased proof
of the deceased's average income.29

Therefore, applying the above disquisitions, the heirs of Alberto Cruz, Jr. shall now be awarded
the following:
chanRoblesvirtualLawlibrary
1) P12,500.00 as actual damages;

2) P25,000.00 as civil indemnity for the death of Alberto Cruz, Jr., and

3) P25,000.00 as moral damages.


In the same manner, petitioner is also partly responsible for the injuries sustained by respondent
Virginia Muoz hence, of the P16,744.00 actual damages and P30,000.00 moral damages
awarded by the CA, petitioner is liable for half of those amounts. Anent respondent Edgar
Hernandez, due to his contributory negligence, he is only entitled to receive half the amount
(P40,200.00) awarded by the CA as actual damages which is P20,100.00.

As to the award of attorney's fees, it is settled that the award of attorney's fees is the exception
rather than the general rule; counsel's fees are not awarded every time a party prevails in a suit
because of the policy that no premium should be placed on the right to litigate. Attorney's fees, as
part of damages, are not necessarily equated to the amount paid by a litigant to a lawyer. In the
ordinary sense, attorney's fees represent the reasonable compensation paid to a lawyer by his
client for the legal services he has rendered to the latter; while in its extraordinary concept, they
may be awarded by the court as indemnity for damages to be paid by the losing party to the
prevailing party. Attorney's fees as part of damages are awarded only in the instances specified in
Article 220830 of the Civil Code. As such, it is necessary for the court to make findings of fact
and law that would bring the case within the ambit of these enumerated instances to justify the
grant of such award, and in all cases it must be reasonable.31 In this case, the RTC, in awarding
attorney's fees, reasoned out that[w]hile there is no document submitted to prove that the
plaintiffs spent attorney's fees, it is clear that they paid their lawyer in the prosecution of this
case for which they are entitled to the same.32Such reason is conjectural and does not justify the
grant of the award, thus, the attorney's fees should be deleted. However, petitioner shall still have
to settle half of the cost of the suit.chanrobleslaw

WHEREFORE, the Petition for Review on Certiorari under Rule 45, dated December 28, 2011,
of petitioner Travel & Tours Advisers, Inc. is DENIED. However, the Decision dated May 16,
2011 of the Court of Appeals is MODIFIED as follows:

The petitioner and Edgar Calaycay are ORDERED to jointly and severally PAY the following:
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1. To respondent Alberto Cruz, Sr. and family:
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a) P12,500.00 as actual damages;
b) P25,000.00 as civil indemnity for the death of Alberto Cruz, Jr., and

c) P25,000.00 as moral damages.


2. To respondent Virginia Muoz:
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a) P8,372.00 as actual damages;

b) P15,000.00 as moral damages.


3. To respondent Edgar Hernandez:
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a) P20,100.00 as actual damages, and
4. The sum of P2,235.00 as cost of litigation.
Respondent Edgar Hernandez is also ORDERED to PAY the following:
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1. To respondent Alberto Cruz, Sr. and family:
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a) P12,500.00 as actual damages;

b) P25,000.00 as civil indemnity for the death of Alberto Cruz, Jr., and

c) P25,000.00 as moral damages.


2. To respondent Virginia Muoz:
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a) P8,372.00 as actual damages;

b) P15,000.00 as moral damages, and


3. The sum of P2,235.00 as cost of litigation.
SO ORDERED.

Velasco, Jr., (Chairperson), Perez, Reyes, and Jardeleza, JJ., concur.chanroblesvirtuall

SECOND DIVISION

G.R. No. 205206, March 16, 2016


BANK OF THE PHILIPPINE ISLANDS AND FGU INSURANCE CORPORATION
(PRESENTLY KNOWN AS BPI/MS INSURANCE
CORPORATION), Petitioners, v. YOLANDA LAINGO, Respondent.

DECISION

CARPIO, J.:

The Case

This is a petition for review on certiorari1 assailing the Decision dated 29 June 20122 and
Resolution dated 11 December 20123 of the Court of Appeals in CA-G.R. CV No. 01575.

On 20 July 1999, Rheozel Laingo (Rheozel), the son of respondent Yolanda Laingo (Laingo),
opened a "Platinum 2-in-1 Savings and Insurance" account with petitioner Bank of the Philippine
Islands (BPI) in its Claveria, Davao City branch. The Platinum 2-in-1 Savings and Insurance
account is a savings account where depositors are automatically covered by an insurance policy
against disability or death issued by petitioner FGU Insurance Corporation (FGU Insurance),
now known as BPI/MS Insurance Corporation. BPI issued Passbook No. 50298 to Rheozel
corresponding to Savings Account No. 2233-0251-11. A Personal Accident Insurance Coverage
Certificate No. 043549 was also issued by FGU Insurance in the name of Rheozel with Laingo as
his named beneficiary.

On 25 September 2000, Rheozel died due to a vehicular accident as evidenced by a Certificate of


Death issued by the Office of the Civil Registrar General of Tagum City, Davao del Norte. Since
Rheozel came from a reputable and affluent family, the Daily Mirror headlined the story in its
newspaper on 26 September 2000.

On 27 September 2000, Laingo instructed the family's personal secretary, Alice Torbanos (Alice)
to go to BPI, Claveria, Davao City branch and inquire about the savings account of Rheozel.
Laingo wanted to use the money in the savings account for Rheozel's burial and funeral
expenses.

Alice went to BPI and talked to Jaime Ibe Rodriguez, BPI's Branch Manager regarding Laingo's
request. Due to Laingo's credit standing and relationship with BPI, BPI accommodated Laingo
who was allowed to withdraw P995,000 from the account of Rheozel. A certain Ms. Laura
Cabico, an employee of BPI, went to Rheozel's wake at the Cosmopolitan Funeral Parlor to
verify some information from Alice and brought with her a number of documents for Laingo to
sign for the withdrawal of the P995,000.

More than two years later or on 21 January 2003, Rheozel's sister, Rhealyn Laingo-Concepcion,
while arranging Rheozel's personal things in his room at their residence in Ecoland, Davao City,
found the Personal Accident Insurance Coverage Certificate No. 043549 issued by FGU
Insurance. Rhealyn immediately conveyed the information to Laingo.

Laingo sent two letters dated 11 September 2003 and 7 November 2003 to BPI and FGU
Insurance requesting them to process her claim as beneficiary of Rheozel's insurance policy. On
19 February 2004, FGU Insurance sent a reply-letter to Laingo denying her claim. FGU
Insurance stated that Laingo should have filed the claim within three calendar months from the
death of Rheozel as required under Paragraph 15 of the Personal Accident Certificate of
Insurance which states:
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15. Written notice of claim shall be given to and filed at FGU Insurance Corporation within three
calendar months of death or disability.
On 20 February 2004, Laingo filed a Complaint4 for Specific Performance with Damages and
Attorney's Fees with the Regional Trial Court of Davao City, Branch 16 (trial court) against BPI
and FGU Insurance.

In a Decision5 dated 21 April 2008, the trial court decided the case in favor of respondents. The
trial court ruled that the prescriptive period of 90 days shall commence from the time of death of
the insured and not from the knowledge of the beneficiary. Since the insurance claim was filed
more than 90 days from the death of the insured, the case must be dismissed. The dispositive
portion of the Decision states:
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PREMISES CONSIDERED, judgment is hereby rendered dismissing both the complaint and the
counterclaims.

SO ORDERED.6ChanRoblesVirtualawlibrary
Laingo filed an appeal with the Court of Appeals.

The Ruling of the Court of Appeals

In a Decision dated 29 June 2012, the Court of Appeals reversed the ruling of the trial court. The
Court of Appeals ruled that Laingo could not be expected to do an obligation which she did not
know existed. The appellate court added that Laingo was not a party to the insurance contract
entered into between Rheozel and petitioners. Thus, she could not be bound by the 90-day
stipulation. The dispositive portion of the Decision states:
chanRoblesvirtualLawlibrary
WHEREFORE, the Appeal is hereby GRANTED. The Decision dated April 21, 2008 of the
Regional Trial Court, Branch 16, Davao City, is hereby REVERSED and SET ASIDE.

Appellee Bank of the Philippine Islands and FGU Insurance Corporation are DIRECTED to PAY
jointly and severally appellant Yolanda Laingo Actual Damages in the amount of P44,438.75 and
Attorney's Fees in the amount of P200,000.00.

Appellee FGU Insurance Corporation is also DIRECTED to PAY appellant the insurance
proceeds of the Personal Accident Insurance Coverage of Rheozel Laingo with legal interest of
six percent (6%) per annum reckoned from February 20, 2004 until this Decision becomes final.
Thereafter, an interest of twelve percent (12%) per annumshall be imposed until fully paid.

SO ORDERED.7ChanRoblesVirtualawlibrary
Petitioners filed a Motion for Reconsideration which was denied by the appellate court in a
Resolution dated 11 December 2012.
Hence, the instant petition.

The Issue

The main issue for our resolution is whether or not Laingo, as named beneficiary who had no
knowledge of the existence of the insurance contract, is bound by the three calendar month
deadline for filing a written notice of claim upon the death of the insured.

The Court's Ruling

The petition lacks merit.

Petitioners contend that the words or language used in the insurance contract, particularly under
paragraph 15, is clear and plain or readily understandable by any reader which leaves no room
for construction. Petitioners also maintain that ignorance about the insurance policy does not
exempt respondent from abiding by the deadline and petitioners cannot be faulted for
respondent's failure to comply.

Respondent, on the other hand, insists that the insurance contract is ambiguous since there is no
provision indicating how the beneficiary is to be informed of the three calendar month claim
period. Since petitioners did not notify her of the insurance coverage of her son where she was
named as beneficiary in case of his death, then her lack of knowledge made it impossible for her
to fulfill the condition set forth in the insurance contract.

In the present case, the source of controversy stems from the alleged non-compliance with the
written notice of insurance claim to FGU Insurance within three calendar months from the death
of the insured as specified in the insurance contract. Laingo contends that as the named
beneficiary entitled to the benefits of the insurance claim she had no knowledge that Rheozel
was covered by an insurance policy against disability or death issued by FGU Insurance that was
attached to Rheozel's savings account with BPI. Laingo argues that she dealt with BPI after her
son's death, when she was allowed to withdraw funds from his savings account in the amount of
P995,000. However, BPI did not notify her of the attached insurance policy. Thus, Laingo
attributes responsibility to BPI and FGU Insurance for her failure to file the notice of insurance
claim within three months from her son's death.

We agree.

BPI offered a deposit savings account with life and disability insurance coverage to its customers
called the Platinum 2-in-1 Savings and Insurance account. This was a marketing strategy
promoted by BPI in order to entice customers to invest their money with the added benefit of an
insurance policy. Rheozel was one of those who availed of this account, which not only included
banking convenience but also the promise of compensation for loss or injury, to secure his
family's future.

As the main proponent of the 2-in-1 deposit account, BPI tied up with its affiliate, FGU
Insurance, as its partner. Any customer interested to open a deposit account under this 2-in-1
product, after submitting all the required documents to BPI and obtaining BPI's approval, will
automatically be given insurance coverage. Thus, BPI acted as agent of FGU Insurance with
respect to the insurance feature of its own marketed product.

Under the law, an agent is one who binds himself to render some service or to do something in
representation of another. In Doles v. Angeles, we held that the basis of an agency is
representation. The question of whether an agency has been created is ordinarily a question
which may be established in the same way as any other fact, either by direct or circumstantial
evidence. The question is ultimately one of intention. Agency may even be implied from the
words and conduct of the parties and the circumstances of the particular case. For an agency to
arise, it is not necessary that the principal personally encounter the third person with whom the
agent interacts. The law in fact contemplates impersonal dealings where the principal need not
personally know or meet the third person with whom the agent transacts: precisely, the purpose
of agency is to extend the personality of the principal through the facility of the agent.

In this case, since the Platinum 2-in-1 Savings and Insurance account was BPI's commercial
product, offering the insurance coverage for free for every deposit account opened, Rheozel
directly communicated with BPI, the agent of FGU Insurance. BPI not only facilitated the
processing of the deposit account and the collection of necessary documents but also the
necessary endorsement for the prompt approval of the insurance coverage without any other
action on Rheozel's part. Rheozel did not interact with FGU Insurance directly and every
transaction was coursed through BPI.

In Eurotech Industrial Technologies, Inc. v. Cuizon,10 we held that when an agency relationship is
established, the agent acts for the principal insofar as the world is concerned. Consequently, the
acts of the agent on behalf of the principal within the scope of the delegated authority have the
same legal effect and consequence as though the principal had been the one so acting in the given
situation.

BPI, as agent of FGU Insurance, had the primary responsibility to ensure that the 2-in-1 account
be reasonably carried out with full disclosure to the parties concerned, particularly the
beneficiaries. Thus, it was incumbent upon BPI to give proper notice of the existence of the
insurance coverage and the stipulation in the insurance contract for filing a claim to Laingo, as
Rheozel's beneficiary, upon the latter's death.

Articles 1884 and 1887 of the Civil Code state:


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Art. 1884. The agent is bound by his acceptance to carry out the agency and is liable for the
damages which, through his non-performance, the principal may suffer.

He must also finish the business already begun on the death of the principal, should delay entail
any danger.

Art. 1887. In the execution of the agency, the agent shall act in accordance with the instructions
of the principal.
In default, thereof, he shall do all that a good father of a family would do, as required by the
nature of the business.
The provision is clear that an agent is bound to carry out the agency. The relationship existing
between principal and agent is a fiduciary one, demanding conditions of trust and confidence. It
is the duty of the agent to act in good faith for the advancement of the interests of the principal.
In this case, BPI had the obligation to carry out the agency by informing the beneficiary, who
appeared before BPI to withdraw funds of the insured who was BPI's depositor, not only of the
existence of the insurance contract but also the accompanying terms and conditions of the
insurance policy in order for the beneficiary to be able to properly and timely claim the benefit.

Upon Rheozel's death, which was properly communicated to BPI by his mother Laingo, BPI, in
turn, should have fulfilled its duty, as agent of FGU Insurance, of advising Laingo that there was
an added benefit of insurance coverage in Rheozel's savings account. An insurance company has
the duty to communicate with the beneficiary upon receipt of notice of the death of the insured.
This notification is how a good father of a family should have acted within the scope of its
business dealings with its clients. BPI is expected not only to provide utmost customer
satisfaction in terms of its own products and services but also to give assurance that its business
concerns with its partner entities are implemented accordingly.

There is a rationale in the contract of agency, which flows from the "doctrine of representation,"
that notice to the agent is notice to the principal,11 Here, BPI had been informed of Rheozel's
death by the latter's family. Since BPI is the agent of FGU Insurance, then such notice of death to
BPI is considered as notice to FGU Insurance as well. FGU Insurance cannot now justify the
denial of a beneficiary's insurance claim for being filed out of time when notice of death had
been communicated to its agent within a few days after the death of the depositor-insured. In
short, there was timely notice of Rheozel's death given to FGU Insurance within three months
from Rheozel's death as required by the insurance company.

The records show that BPI had ample opportunity to inform Laingo, whether verbally or in
writing, regarding the existence of the insurance policy attached to the deposit account. First,
Rheozel's death was headlined in a daily major newspaper a day after his death. Second, not only
was Laingo, through her representative, able to inquire about Rheozel's deposit account with BPI
two days after his death but she was also allowed by BPI's Claveria, Davao City branch to
withdraw from the funds in order to help defray Rheozel's funeral and burial expenses. Lastly, an
employee of BPI visited Rheozel's wake and submitted documents for Laingo to sign in order to
process the withdrawal request. These circumstances show that despite being given many
opportunities to communicate with Laingo regarding the existence of the insurance contract, BPI
neglected to carry out its duty.

Since BPI, as agent of FGU Insurance, fell short in notifying Laingo of the existence of the
insurance policy, Laingo had no means to ascertain that she was entitled to the insurance claim. It
would be unfair for Laingo to shoulder the burden of loss when BPI was remiss in its duty to
properly notify her that she was a beneficiary.

Thus, as correctly decided by the appellate court, BPI and FGU Insurance shall bear the loss and
must compensate Laingo for the actual damages suffered by her family plus attorney's fees.
Likewise, FGU Insurance has the obligation to pay the insurance proceeds of Rheozel's personal
accident insurance coverage to Laingo, as Rheozel's named beneficiary.chanrobleslaw

WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 29 June 2012 and
Resolution dated 11 December 2012 of the Court of Appeals in CA-G.R. CV No. 01575.

SO ORDERED.cralawlawlibrary

Del Castillo, and Mendoza, JJ., concur.


Brion, J., on leave.
Leonen, J., on official leave.chanroblesvirtuallawlibrary

G.R. No. 214567

DRA. MERCEDES OLIVER, Petitioner,


vs.
PHILIPPINE SAVINGS BANK and LILIA CASTRO, Respondents.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari seeking to reverse and set aside the October 25, 2013
Decision1 and the September 12, 2014 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV
No. 95656, which reversed the July 22, 2010 Order3 of the Regional Trial Court, Branch 276,
Muntinlupa City (RTC) in Civil Case No. 99-278, a case for injunction and damages.

Petitioner Mercedes Oliver (Oliver) was a depositor of respondent Philippine Savings


Bank (PSBank) with account number 2812-07991-6. dent Lilia Castro (Castro) was the
Assistant Vice President of the Acting Branch Manager of PSBank San Pedro, Laguna.

Olivers Position

In her Complaint,4 dated October 5, 1999, Oliver alleged that sometime in 1997, she made an
initial deposit of P12 million into her PSBank account. During that time, Castro convinced her to
loan out her deposit as interim or bridge financing for the approved loans of bank borrowers who
were waiting for the actual release of their loan proceeds.

Under this arrangement, Castro would first show the approved loan documents to Oliver.
Thereafter, Castro would withdraw the amount needed from Olivers account. Upon the actual
release of the loan by PSBank to the borrower, Castro would then charge the rate of 4% a month
from the loan proceeds as interim or bridge financing interest. Together with the interest income,
the principal amount previously withdrawn from Olivers bank account would be deposited back
to her account. Meanwhile, Castro would earn a commission of 10% from the interest.

Their arrangement went on smoothly for months. Due to the frequency of bank transactions,
Oliver even entrusted her passbook to Castro. Because Oliver earned substantial profit, she was
further convinced by Castro to avail of an additional credit line in the amount of P10 million.
The said credit line was secured by a real estate mortgage on her house and lot in Ayala Alabang
covered by Transfer Certificate of Title (TCT) No. 137796.5

Oliver instructed Castro to pay P2 million monthly to PSBank starting on September 3, 1998 so
that her credit line for P10 million would be fully paid by January 3, 1999.

Beginning September 1998, Castro stopped rendering an accounting for Oliver. The latter then
demanded the return of her passbook. When Castro showed her the passbook sometime in late
January or early February 1995, she noticed several erasures and superimpositions therein. She
became very suspicious of the many erasures pertaining to the December 1998 entries so she
requested a copy of her transaction history register from PSBank.

When her transaction history register6 was shown to her, Oliver was surprised to discover that the
amount of P4,491,250.00 (estimated at P4.5 million) was entered into her account on December
21, 1998. While a total of P7 million was withdrawn from her account on the same day, Oliver
asserted that she neither applied for an additional loan of P4.5 million nor authorized the
withdrawal of P7 million. She also discovered another loan for P1,396,310.45, acquired on
January 5, 1999 and allegedly issued in connection with the P10 million credit line.

In Olivers passbook, 7 there were no entries from December 17, 1998 to December 27, 1998.
The transaction history register, however, showed several transactions on these very same dates
including the crediting of P4.5 million and the debiting of P7 million on December 21, 1998.
Oliver then learned that the additional P4.5 million and P1,396,310.45 loans were also secured
by the real estate mortgage,8 dated January 8, 1998, covering the same property in Ayala
Alabang. Oliver received two collection letters,9 dated May 13, 1999 and June 18, 1999, from
PSBank referring to the non-payment of unpaid loans, to wit: (1) P4,491,250.00 from the
additional loan and (2) P1,396,310.45 from the P10 million credit line.10 In response, Oliver
protested that she neither availed of the said loans nor authorized the withdrawal of P7 million
from her account.11 She also claimed that the P10 million loan from her credit line was already
paid in full.12

On July 14, 1999, a final demand letter13 was sent to Oliver by PSBank, requiring her to pay the
unpaid loans. Oliver, however, still refused to pay. Subsequently, Oliver received a notice of
sale14 involving the property in Ayala Alabang, issued by Notary Public Jose Celestino Torres on
September 15, 1999. The said notice informed her of the impending extra-judicial foreclosure
and sale of her house and lot to be held on October 21, 1999.

As a result, Oliver filed the subject complaint against PSBank and Castro.

Castros Position

In her Answer,15 Castro admitted that she and Oliver agreed that the latter would lend out money
to borrowers at 4% to 5% interest per month provided that the former would screen them. She
also acknowledged having been instructed by Oliver to pay the bank P2 million every month to
settle the P10 million credit line. Nonetheless, Castro informed Oliver that the payment thereof
was subject to the availability of funds in her account. She disclosed that she made some
alterations and erasures in Olivers passbook so as to reconcile the passbook with the computer
printout of the bank, but denied any attempt to hide the passbook as she was able to return it
sometime in January 1999.

Castro also denied the deceit imputed against her. She asserted that their arrangement was not
"interim or bridge financing" inasmuch as the loans were entirely new and distinct from that
granted by PSBank. When Olivers clients multiplied, Castro advised her to apply for a credit
line of P10 million. The said credit line was first approved in December 1997 with a term of one
year.16
Sometime in August 1998, Castro informed Oliver about the impending expiration of her credit
line. Subsequently, Oliver applied for another loan in the amount of P4.5 million as evidenced by
a promissory note,17 dated December 21, 1998. On January 5, 1999, another promissory
note18 was executed by Oliver to cover a loan in the amount of P1,396,310.45.

Castro asserted that, on December 21, 1998, upon Olivers instruction, a total of P7 million was
withdrawn from the latters account and was then deposited to the account of one Ben
Lim (Lim) on the same date. Lim was a businessman who borrowed money from Oliver. Castro
knew him because he was also a depositor and borrower of PSBank San Pedro Branch.19

As to the amount of P1,396,310.45, Castro explained that it was a separate and personal loan
obtained by her from Oliver. To secure the payment of such obligation, Castro mortgaged a
property located in Camella Homes III in Tunasan, Muntinlupa City.

Castro admitted that on October 19, 1999, she was terminated by PSBank because of certain
problems regarding client accommodation and loss of confidence.20

PSBanks Position

In its defense, PSBank averred that Oliver applied for a credit line of P10 million which was
granted by the bank and which secured by a real estate mortgage. Because Oliver failed to pay
the P10 million loan, she obtained another loan in the amount of P4.5 million, as evidenced by a
promissory note. Days later, she again acquired a separate loan amounting to P1,396,310.45 as
shown by another promissory note. Both loans were secured by a real estate mortgage, dated
January 8, 1998, and the proceeds thereof were issued as proved by the release tickets,21 dated
December 21, 1998 and January 5, 1999, respectively.22

The RTC Decision

In its March 30, 2010 Decision,23 the RTC dismissed the complaint and rendered judgment in
favor of PSBank and Castro. According to the RTC, PSBank and Castro should not be held liable
for the loan of P4.5 million and the withdrawal of the P7 million. Castro was able to submit the
Debit Credit Memo24 and the Savings Account Check Deposit Slip25 to prove that there were
some previous loan transactions between Oliver and Lim. Considering that neither PSBank nor
Castro obtained the P7 million, there was no obligation on their part to return the amount.

Moreover, the trial court stated that Oliver failed to controvert PSBanks allegation that she had
unpaid loan obligations. Thus, it concluded that PSBank had the right to foreclose the mortgaged
property. The fallo reads:

WHEREFORE, finding lack of merit, the instant case is hereby DISMISSED. Accordingly, the
Writ of Preliminary Injunction is hereby LIFTED and SET ASIDE.
SO ORDERED.26

Oliver seasonably filed her motion for reconsideration.27 She insisted that the P7 million was
unlawfully withdrawn. She claimed that what happened in this case was a "cash savings
withdrawal" and that there should have been a corresponding withdrawal slip for such
transaction. Also, if indeed the P7 million was withdrawn from her account and was credited to
the account of Lim, the deposit slip for his account should have been presented.

The RTC Order

On July 22, 2010, the RTC resolved the motion and issued an order reversing its earlier decision.
According to the RTC, Olivers assertion that the withdrawal was made without her consent
prevailed in the absence of any proof to the contrary. The cash savings withdrawal slips should
have been offered in evidence by either PSBank or Castro to settle the issue of whether the
amount of P7 million was actually withdrawn by Oliver or by her authorized representative or
agent.

The RTC also rejected the position of PSBank and Castro that the erasures and alterations in
Olivers passbook were made simply to reconcile the same with the transaction history register
of the bank because even after the alleged corrections, the said documents still contained
different entries. Although Oliver and Lim had previous transactions, none of them pertained to
the P7 million purportedly transferred on December 21, 1998.

With regard to PSBank, the RTC stated that it failed to exercise utmost diligence in safekeeping
Olivers deposit. Had it not been for the unauthorized, withdrawal which was attributable to the
bank and Castro, the P4.5 million and the P1,396,310.45 loans would not have remained
outstanding, considering that the improperly withdrawn P7 million was more than sufficient to
discharge those liabilities.28 The dispositive portion of the order reads:

WHEREFORE, premises considered, the Motion for Reconsideration is hereby GRANTED. The
Decision dated March 30, 2010 is hereby reconsidered and set aside. In lieu thereof, a new one is
hereby rendered ordering the defendants Lilia Castro and Philippine Savings Bank to jointly and
solidarily pay plaintiff Dra. Mercedes Oliver, the sums of

1. P1,111,850.77 as actual damages;

2. P100,000.00 as moral damages;

3. P100,000.00 as attorneys fees; and

4. P100,000.00 as exemplary damages


Moreover, the Writ of Preliminary Injunction is hereby made permanent.

SO ORDERED.29

Aggrieved, Castro and PSBank appealed before the CA.

The CA Decision

On October 25, 2013, the CA granted the appeal. It reversed the July 22, 2010 of the RTC order
and reinstated its March 30, 2010 decision. The appellate court found no compelling evidence to
prove that fraud attended the processing and release of the P4.5 million loan as well as the
withdrawal of P7 million from Olivers account. The CA found that Oliver admitted signing the
loan documents, the promissory notes and the release tickets pertaining to the obligations that
she had contracted with PSBank. In addition, the CA stated that Oliver also failed to establish her
assertion that she was manipulated and defrauded into signing the said loan documents.

The CA also found that PSBank exercised extraordinary diligence in handling Olivers account,
thus, the awards of damages were deleted. The dispositive portion of the CA decision reads:

WHEREFORE, the Appeal is hereby GRANTED. The Order dated 22 July 2010 of the Regional
Trial Court of Muntinlupa City, Branch 276, is REVERSED and SET ASIDE, and another one
entered REINSTATING the Decision dated March 30, 2010, in Civil Case No. 99-278.

SO ORDERED.30

Oliver filed her motion for reconsideration but the same was denied in the CA Resolution, dated
September 12, 2014.

Hence, this petition.

ISSUES

WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN RULING


THAT THE PETITIONER FAILED TO SHOW COMPELLING EVIDENCE TO PROVE
THAT FRAUD ATTENDED THE PROCESSING AND RELEASE OF THE LOAN OF
P4.5 MILLION AS WELL AS THE WITHDRAWAL OF P7 MILLION PESOS FROM
HER ACCOUNT.

II
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED WHEN IT
RULED THAT THERE WAS NO EVIDENCE TO PROVE THAT THE SUM OF P7
MILLION WAS DEBITED FROM THE ACCOUNT OF PETITIONER SANS HER
AUTHORIZATION.

III

WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED WHEN IT


RULED THAT THE RESPONDENTS TREATED THE PETITIONERS ACCOUNT
WITH EXTRAORDINARY DILIGENCE.

IV

WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED WHEN IT


FAILED TO HOLD THAT THE RESPONDENTS ARE JOINTLY AND SEVERALLY
LIABLE TO THE PETITIONER FOR DAMAGES.31

In her petition for review,32 Oliver insisted that she had no knowledge of any loan released
because she never availed of any new loan from PSBank. Neither the P4.5 million loan nor the
cash withdrawal of P7 million was reflected in her passbook.

Oliver further argued that the burden of proving that the withdrawal was made with her authority
would lie on the part of PSBank and Castro. The cash savings withdrawal slip containing the
signature of Oliver should have been presented in court. While the respondents claimed that the
amount withdrawn was lent to Lim, the latter was never called to the witness stand as PSBank
and Castro opted not to present him in court. Castro, aside from her self-serving testimony, failed
to present any concrete proof to show that Oliver indeed lent the withdrawn P7 million cash to
Lim.

Finally, Oliver averred that the erasures and alterations in her passbook undeniably established
that Castro manipulated the same to conceal the loan release and the cash withdrawal from her
account.

In her Comment,33 Castro countered that the CA had more opportunity and facilities to examine
the facts. Hence, there was no reason to depart from the rule that the findings of fact of the CA
were final and conclusive and could not be reviewed on appeal. She asserted that there was no
proof that the P7 million was withdrawn without Olivers authority. She added that Oliver was an
astute businesswoman who knew her clients and bank deposits and who was knowledgeable of
her bank transactions and was aware of her loaned amounts from the bank.
In its Comment,34 PSBank asserted that the issues and arguments propounded by Oliver had been
judiciously passed upon. On the stated facts alone, the petition, which was akin to a motion for
reconsideration, should be denied outright for being pro forma.

In her Reply,35 Oliver faulted PSBank and Castro for failing to present the cash withdrawal slip
which would show her signature to prove that the money was withdrawn with her authority. She
also reiterated that Lim should have been presented as a witness to substantiate their defense that
he actually received the amount of P7 million.

The Courts Ruling

The petition is impressed with merit.

There was an implied agency


between Oliver and Castro; the
loans were properly acquired

A contract of agency may be inferred from all the dealings between Oliver and Castro. Agency
can be express or implied from the acts of the principal, from his silence or lack of action, or his
failure to repudiate the agency knowing that another person is acting on his behalf without
authority.36 The question of whether an agency has been created is ordinarily a question which
may be established in the same way as any other fact, either by direct or circumstantial evidence.
The question is ultimately one of intention.37

In this case, Oliver and Castro had a business agreement wherein Oliver would obtain loans from
the bank, through the help of Castro as its branch manager; and after acquiring the loan proceeds,
Castro would lend the acquired amount to prospective borrowers who were waiting for the actual
release of their loan proceeds. Oliver would gain 4% to 5% interest per month from the loan
proceeds of her borrowers, while Castro would earn a commission of 10% from the interests.
Clearly, an agency was formed because Castro bound herself to render some service in
representation or on behalf of Oliver, in the furtherance of their business pursuit.38

For months, the agency between Oliver and Castro benefited both parties. Oliver, through
Castros representations, was able to obtain loans, relend them to borrowers, and earn interests;
while Castro acquired commissions from the transactions. Oliver even gave Castro her passbook
to facilitate the transactions.

Accordingly, the laws on agency apply to their relationship. Article 1881 of the New Civil Code
provides that the agent must act within the scope of his authority. He may do such acts as may be
conducive to the accomplishment of the purpose of the agency. Thus, as long as the agent acts
within the scope of the authority given by his principal, the actions of the former shall bind the
latter.

Oliver claims that the P4.5 million loan, released on December 21, 1998, and the P1,396,310.45
loan, released on January 5, 1999, were not acquired with her consent. Castro and PSBank, on
the other hand, countered that these loans were obtained with Olivers full consent. The Court
finds that the said loans were acquired with Olivers authority. The promissory notes39 and the
release tickets40 for the said loans bore her signatures. She failed to prove that her signatures
appearing on the loan documents were forged. Hence, the loan documents were reliable and
these proved that the loans were processed by Castro within the scope of her authority. As the
loans were validly obtained, PSBank correctly stated that Oliver had incurred a debt of P4.5
million and P1,396,310.45, or a total of P5,888,149.33.

P7 million was
improperly withdrawn;
agent acted beyond her
scope of authority

Although it was proven that Oliver authorized the loans, in the aggregate amount of
P5,888,149.33, there was nothing in the records which proved that she also allowed the
withdrawal of P7 million from her bank account. Oliver vehemently denied that she gave any
authority whatsoever to either Castro or PSBank to withdraw the said amount. In her judicial
affidavit before the RTC, Castro initially claimed that Oliver authorized the withdrawal of P7
million from her bank account, to wit:

Q: Do you know when was this 4.5 million pesos loan was credited to plaintiffs deposit
account?

A: Based on the Transaction Ledge of PS Bank, the 4.5 million pesos was credit to plaintiffs
deposit account on 21 December 21 1998

Q: What happened after the 4.5 million pesos loan was credited to plaintiffs account?

A: Upon plaintiffs instruction, 7 million was withdrawn from her account including her loaned
amount to be deposited at Mr. Ben Lims account at PS Bank, San Pedro Branch.41

[Emphasis Supplied]

During her cross-examination, however, Castro could no longer remember whether Oliver gave
her the authority to withdraw the P7 million from her account. The transcript of stenographic
notes reads:
Q: You said here, your statement here, "Upon Plaintiffs instruction". So, my question is, who did
the Plaintiff instruct you, was it you?

A: I cannot remember, sir.

Q: You are not definite? Your statement here it is categorical. Its on page 9 of 17 in the Judicial
Affidavit, the question is "What happened after the 4.5 million Pesos loan was credited to the
Plaintiffs account" And your answer was, "Upon Plaintiffs instruction Seven (7) million was
withdrawn from her account. My question is, this phrase, upon plaintiffs instruction, who did
the Plaintiffs (sic) instruct, was it you?

A: I cannot remember, sir because I still have other officers other than me, who were assisting
me during that time, so it could be the instruction even I said upon the instruction of the plaintiff,
but I cannot remember if I was the one who received the instruction from the plaintiff. It
could be other officers of mine during that time, sir.

Q: May I remind you, this is Seven (7) million Pesos?

A: Yes, sir.42

[Emphasis Supplied]

Verily, Castro, as agent of Oliver and as branch manager of PS Bank, utterly failed to secure the
authorization of Oliver to withdraw such substantial amount. As a standard banking practice
intended precisely to prevent unauthorized and fraudulent withdrawals, a bank manager must
verify with the client-depositor to authenticate and confirm that he or she has validly authorized
such withdrawal.43

Castros lack of authority to withdraw the P7 million on behalf of Oliver became more apparent
when she altered the passbook to hide such transaction. It must be remembered that Oliver
entrusted her passbook to Castro. In the transaction history register for her account, it was clear
that there was a series of dealings from December 17, 1998 to December 23, 1998. When
compared with Olivers passbook, the latter showed that the next transaction from December 16,
1998 was on December 28, 1998. It was also obvious to the naked eye that the December 28,
1998 entry in the passbook was altered. As aptly observed by the RTC, nowhere in the testimony
of Castro could be gathered that she made a detailed, plausible and acceptable explanation as to
why she had to make numerous corrections in the entries in the passbook.44 Even after the
corrections allegedly done to reconcile the records, the passbook and the transaction history
register still contained different entries.

Curiously, though she asserts that Oliver obtained a loan of P4.5 million and authorized the
withdrawal of P7 million,45 Castro could not explain why these transactions were not reflected in
the passbook which was in her possession. Bearing in mind that the alleged unauthorized
withdrawal happened on December 21, 1998, while Castro was questionably withholding the
passbook, the Court is of the impression that she manipulated the entries therein to conceal the
P7 million withdrawal.

Further, Castro claims that Oliver instructed her to withdraw the P7 million from her bank
account and to deposit the same in Lims account. Glaringly, Lim was not presented as a witness
to substantiate her defense. Even though she testified that the P7 million transfer from Olivers
account to Lims was duly documented, Castro never presented a single documentary proof of
that specific transaction.

The Court is convinced that Castro went beyond the scope of her authority in withdrawing the P7
million from Olivers bank account. Her flimsy excuse that the said amount was transferred to
the account of a certain Lim deserves scant consideration. Hence, Castro must be held liable for
prejudicing Oliver.46

PSBank failed to
exercise the highest
degree of diligence
required of banking
institutions

Aside from Castro, PSBank must also be held liable because it failed to exercise utmost diligence
in the improper withdrawal of the P7 million from Olivers bank account.

In the case of banks, the degree of diligence required is more than that of a good father of a
family. Considering the fiduciary nature of their relationship with their depositors, banks are duty
bound to treat the accounts of their clients with the highest degree of care. 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.47

In Simex International v. Court of Appeals,48 the Court held that the depositor expected the bank
to treat his account with the utmost fidelity, whether such account consisted only of a few
hundred pesos or of millions. The bank must record every single transaction accurately, down to
the last centavo, and as promptly as possible. This has to be done if the account is to reflect at
any given time the amount of money the depositor can dispose of as he sees fit, confident that the
bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the
dishonor of a check without good reason, can cause the depositor not a little embarrassment if
not also financial loss and perhaps even civil and criminal litigation.49
Time and again, the Court has emphasized that the bank is expected to ensure that the depositors
funds shall only be given to him or his authorized representative. In Producers Bank of the Phil.
v. Court of Appeals,50 the Court held that the usual banking procedure was that withdrawals of
savings deposits could only be made by persons whose authorized signatures were in the
signature cards on file with the bank. In the said case, the bank therein allowed an unauthorized
person to withdraw from its depositors savings account, thus, it failed to exercise the required
diligence of banks and must be held liable.

With respect to withdrawal slips, the Court declared in Philippine National Bank v. Pike51 that
"[o]rdinarily, banks allow withdrawal by someone who is not the account holder so long as the
account holder authorizes his representative to withdraw and receive from his account by signing
on the space provided particularly for such transactions, usually found at the back of withdrawal
slips." There, the bank violated its fiduciary duty because it allowed a withdrawal by a
representative even though the authorization portion of the withdrawal slip was not signed by the
depositor.

Finally, in Cagungun v. Planters Development Bank,52 a case very similar to the present one, the
depositors therein entrusted their passbook to the bank employees for some specific transactions.
The bank employees went beyond their authority and were able to withdraw from the depositors
account without the latters consent. The bank was held liable therein for the acts of its
employees because it failed to safeguard the accounts of its depositors.

In the case at bench, it must be determined whether the P7 million was withdrawn from the bank
with the authority of Oliver. As testified to by Castro, every withdrawal from the bank was duly
evidenced by a cash withdrawal slip, a copy of which is given both to the bank and to its
client.53 Contrary to the position of the CA and that of the respondents, Oliver cannot be required
to produce the cash withdrawal slip for the said transaction because, precisely, she consistently
denied giving authority to withdraw such amount from her account.

Necessarily, the party that must have access to such crucial document would either be PSBank or
Castro. They must present the said cash withdrawal slip, duly signed by Oliver, to prove that the
withdrawal of P7 million was indeed sanctioned. Unfortunately, both PSBank and Castro failed
to present the cash withdrawal slip.

During the trial, the counsel of PSBank conceded that the cash withdrawal slip for the P7 million
transaction could not be located, to quote:

ATTY DEJARESCO: Your Honor, excuse me just a comment for the record we asked for two (2)
years, Your Honor to subpoena this from the bank, the bank never produce (sic) the withdrawal
slip two (2) years (sic), Your Honor, this case was delayed by the previous Court for two (2)
years. Your Honor, no withdrawal slip was produced by the bank, Your Honor. I would just like
to place it on record.

COURT: Were there subpoenas issued by the bank, was there an order?

ATTY. DEJARESCO: Yes Your Honor, I think the good counsel was the counsel at that time
would you able to confirm that it took us two (2) years to subpoena and subpoena (sic) this
withdrawal slip because there must be an authority to withdraw, and it there is a signature of the
plaintiff, we will admit that.

ATTY. CORPUZ: I remember having manifested that the withdrawal slip cannot be
located.

ATTY. DEJARESCO: Lets put that on record, Your Honor.

ATTY. CORPUS: (sic) I remember having made that manifestation, Your Honor.

COURT: Thats the reason why no document was produced in Court by the PS Bank?

ATTY. CORPUS: (sic) With respect to the withdrawal slip only, Your Honor on December 21.

ATTY. DEJARESCO: Of that Seven (7) million from the account.

COURT: Make that on record.

ATTY. CORPUS: Yes, Your Honor.54

[Emphasis Supplied]

Castro, as agent of Oliver, could not produce either the said withdrawal slip allegedly authorizing
the withdrawal of the P7 million, her testimony is quoted as follows:

ATTY. DEJARESCO:

Q: Can you show poof of the withdrawal slip?

A: The withdrawal slip.

Q: Im asking you do you have proof?

A: None, sir.

Q: You cannot produce in Court in support of your Judicial Affidavit?


A: None.

Q: And you cannot produce that in Court?

A: As far as the withdrawal slip as for myself, none.55

[Emphasis Supplied]

From the foregoing, there was a clear showing of PSBanks failure to exercise the degree of
diligence that it ought to have exercised in dealing with its clients. It could not prove that the
withdrawal of P7 million was duly authorized by Oliver. As a banking institution, PSBank was
expected to ensure that such substantial amount should only be transacted with the consent and
authority of Oliver. PSBank, however, reneged on its fiduciary duty by allowing an
encroachment upon its depositors account without the latters permission. Hence, PSBank must
be held liable for such improper transaction.

PSBank and Castro


failed to discharge their
burden and must be held
solidarily liable

The party who alleges a fact has the burden of proving it. Section 1, Rule 131 of the Rules of
Court defines "burden of proof" as "the duty of a party to present evidence on the facts in issue
necessary to establish his claim or defense by the amount of evidence required by law." In civil
cases, the burden of proof rests upon the plaintiff, who is required to establish his case by a
preponderance of evidence. Once the plaintiff establishes his case, the burden of evidence shifts
to the defendant, who, in turn, bears the burden to establish his defense.56

Here, Oliver alleged that she did not authorize the withdrawal of P7 million from her account. To
establish her allegation, Oliver presented the following: (1) the transaction history register which
showed the withdrawal of P7 million from her account on December 21, 1998; (2) the passbook
which contained alterations to conceal the withdrawal on December 21, 1998 while in the
possession of Castro; and (3) testimonial evidence that she did not allow the withdrawal of the
said amount.57 The Court is of the view that Oliver had sufficiently discharged her burden in
proving that P7 million was withdrawn from her account without her authorization. Hence, the
burden was shifted to the respondents to refute the allegation of Oliver.

As discussed above, both Castro and PSBank failed to establish the burden of their defense. They
failed to present proof that Oliver authorized the said transaction. They could have presented
either the cash withdrawal slip for the P7 million on December 21, 1999 or Lims testimony to
prove the transfer of funds to the latters account, but they did neither. Without an iota of proof to
substantiate the validity of the said transaction, the respondents unlawfully deprived Oliver of
her funds.

Indeed, the bank should be solidarily liable with its employee for the damages committed to its
depositor.58 Under Article 2180 of the Civil Code, employers shall be held primarily and
solidarily liable for damages caused by their employees acting within the scope of their assigned
tasks.

Castro, as acting branch manager of PSBank ,was able to facilitate the questionable transaction
as she was also entrusted with Olivers passbook. In other words, Castro was the representative
of PSBank, and, at the same time, the agent of Oliver, earning commissions from their
transactions. Oddly, PSBank, either consciously or through sheer negligence, allowed the double
dealings of its employee with its client. Such carelessness and lack of protection of the depositors
from its own employees led to the unlawful withdrawal of the P7 million from Olivers account.
Although Castro was eventually terminated by PSBank because of certain problems regarding
client accommodation and loss of confidence, the damage to Oliver had already been done. Thus,
both Castro and PSBank must be held solidarily liable.

Award of damages;
invalid foreclosure

To recapitulate, the loans of Oliver from PSBank which were secured by real estate mortages
amounted to P5,888,149.33. Finding PSBank and Castro solidarily liable to Oliver in the amount
of P7 million because it was improperly withdrawn from her bank account, the Court agrees with
the RTC that had it not been for the said unauthorized withdrawal, Olivers debts amounting to
P5,888,149.33 would have been satisfied.

Consequently, PSBanks foreclosure of the real estate mortgage covering the two (2) loans in the
total amount of P5,888,149.33 was improper. With PSBank being found liable to Oliver for P7
million, after offsetting her loans would have PSBank and Castro still owing her P1,111,850.77,
which must be suitably paid in the form of actual damages.

The award of moral damages must also be upheld. Specifically, in culpa contractual or breach of
contract, like in the present case, moral damages are recoverable only if the defendant has acted
fraudulently or in bad faith, or is found guilty of gross negligence amounting to bad faith, or in
wanton disregard of his contractual obligations. Verily, the breach must be wanton, reckless,
malicious, or in bad faith, oppressive or abusive.59

Here, Castro and PSBank were utterly reckless in allowing the withdrawal of a huge amount
from Oliver's account without her consent.1wphi1 The bank's negligence is a result of lack of
due care and caution required of managers and employees of a firm engaged in a business so
sensitive and demanding.60 Hence, the award of Pl00,000.00 as moral damages is warranted.

The award of exemplary damages is also proper due to the failure of Castro and PSBank to
prevent the unauthorized withdrawal from Oliver's account. The law allows the grant of
exemplary damages to set an example for public good.61 The Court, however, finds that the
amount of exemplary damages must be decreased to P50,000.00.

Finally; the Court agrees with the RTC that Castro and PSBank should be held solidarily liable
for attorney's fees. Article 2208 of the Civil Code is clear that attorney's fees may be recovered
when exemplary damages are awarded or when the plaintiff, through the defendant's act or
omission, has been compelled to litigate with thirds persons. A decreased amount of P50,000.00
attorney's fees should be sufficient.

WHEREFORE, the petition is GRANTED. The October 25, 2013 Decision and the September
12, 2014 Resolution of the Court of Appeals in CA-G.R. CV No. 95656 are REVERSED and
SET ASIDE. The July 22, 2010 Order of the Regional Trial Court, Branch 276, Muntinlupa City
in Civil Case No. 99-278 is hereby REINSTATED with theMODIFICATION that the award of
exemplary damages and attorney's fees be decreased to P50,000.00 each.

All awards shall earn interests at the rate of six percent (6%) per annum from the finality of this
decision.

SO ORDERED.

THIRD DIVISION

G.R. No. 211098, April 20, 2016

THE WELLEX GROUP, INC., Petitioner, v. SHERIFF EDGARDO A. URIETA OF THE


SANDIGANBAYAN SECURITY AND SHERIFF SERVICES, THE SANDIGANBAYAN
SECURITY AND SHERIFF SERVICES, AND BDO UNIBANK, INC. (FORMERLY
EQUITABLE PCI BANK, INC.),Respondents.

DECISION

PEREZ, J.:

Before this Court is a Petition,1 on pure questions of law, assailing the Order dated 9 January
2012 of the Regional Trial Court of Makati City, Branch 132 (trial court) in Civil Case No. 09-
399,2 with a prayer for the issuance of a temporary restraining order and preliminary injunction
against respondents, enjoining them and persons acting under their authority from selling
450,000,000 shares of Waterfront Philippines Inc. (WPI shares) that are owned and registered in
the name of petitioner The Wellex Group, Inc. (Wellex).3

In resolving the prayer of Wellex for the issuance of injunctive relief, this Court is constrained to
examine the merits of the Petition and at once notes' that this case is essentially intertwined with
G.R. 187951,4 a landmark case, wherein this Court declared, among others, that the WPI shares
are included among those assets of Investment Management Agreement with Account No. 101-
78056-1, under the name of Jose Velarde, (IMA Account) formerly managed by respondent BDO
Unibank, Inc., previously Equitable PCI Bank, Inc. (BDO). The said account was duly forfeited
in favor of the State by virtue of the Resolution dated 24 September 2008 of the Sandiganbayan
in Criminal Case No. 26558, the case for plunder against former President Joseph Ejercito
Estrada.

The material facts of this case, as culled from the records,5 are as follows:

On 4 February 2000, Wellex obtained a loan in the principal amount of P500,000,000.00 from
the IMA Account with BDO. As security for the loan, Wellex mortgaged the WPI shares.

By the time the loan obligation matured on 29 January 2001, Wellex was not able to settle the
same; however, BDO, as investment manager of the IMA Account did not institute any
foreclosure proceeding against the WPI shares.

Thereafter, BDO, through a Letter dated 14 March 2001, informed Wellex that it shall cease to
manage the IMA Account effective 2 May 2001. In the same letter, BDO informed Wellex tha't
on 29 January 2000, the Bureau of Internal Revenue (BIR) issued a Notice of Constructive
Distraint against the IMA Account, which effectively froze all goods, chattels or personal
property owned by Jose Velarde, including the WPI shares, which BDO could consequently
neither remove nor dispose of without the express authority of the BIR.

Subsequently, Wellex alleged that considering that BDO had relinquished its authority to act as
the investment manager of the IMA Account, and that Wellex had supposedly settled its loan
obligation in full directly with Jose Velarde, BDO, as the principal of the IMA Account, should
return the WPI shares to Wellex. BDO, however, did not.

In the meantime, on 12 September 2007, the Sandiganbayan in Criminal Case No. 26558 found
former President Estrada guilty of the crime of plunder. The conviction ultimately carried with it
the penalty of forfeiture,6 wherein all ill-gotten wealth amassed by former President Estrada,
including the IMA Account and the assets therein, were forfeited in favor of the State.

Former President Estrada was, thereafter, pardoned by former President Gloria Macapagal-
Arroyo on 25 October 2007; nonetheless, the said forfeiture remained in force.

Consequently, the Sandiganbayan, in the same case, issued a Resolution dated 24 September
2008 directing the Sheriff of the Sandiganbayan to cause the forfeiture of, among others, the
IMA Account, including the WPI shares in favor of the State.
Wellex sought to intervene in Criminal Case No. 26558 and moved for the reconsideration of the
above-mentioned Resolution dated 24 September 2008. Wellex argued that the WPI shares
should be excluded from the forfeiture order. However, the Sandiganbayan, in a Resolution dated
02 April 2009, denied the said reconsideration sought by Wellex.

By virtue of the foregoing resolutions, respondent Sheriff Edgardo A. Urieta (Urieta) of the
Sandiganbayan issued to BDO a Notice to Deliver dated 20 April 2009. BDO delivered to Urieta,
among others, the WPI shares, which shares Urieta subsequently scheduled7 for sale at a public
auction on 15 May 2009.

As mentioned above, Wellex filed G.R. No 187951 to question the inclusion of the WPI shares
among the forfeited assets; however, this Court affirmed the inclusion of the WPI shares as part
of the assets covered by the forfeiture order.

Subsequently, Wellex filed Civil Case No. 09-399 with the trial court for the recovery of the
possession of the WPI shares. In essence, Wellex claims that it is the owner of the WPI Shares,
that it fully paid its loan obligation and that it is entitled to the return thereof. Wellex prayed that
the trial court issue a temporary restraining order and a writ of preliminary injunction against the
Sandiganbayan to enjoin them from selling the WPI shares at a public auction. Wellex alleged
that it instituted the case as a third (3rd) party claimant because the Sandiganbayan failed to
observe the requirements under Section 16, Rule 39 of the Rules of Court,8 and that Wellex was
left with no recourse but to file an action with a competent court to recover ownership of the
WPI shares by virtue of the extinguishment of the obligation through payment.

With the filing of the foregoing case, Urieta and the Sandiganbayan Security and Sheriff Services
agreed to maintain status quo and to defer the public auction of the WPI shares until the
resolution of the case.

Thereafter, Urieta and the Sandiganbayan Security and Sheriff Services, as well as BDO, filed
their respective motions to dismiss in Civil Case No. 09-399, which motions were granted by the
trial court in its Order dated 9 January 2012. The aforestated order of the trial court directed the
dismissal of Civil Case No. 09-399 on the grounds of lack of jurisdiction based on the principle
of hierarchy of courts, and failure to state a cause of action.

Wellex moved for the reconsideration of the above-mentioned order dated 9 January 2012, which
was, however, denied by the trial court in its Resolution dated 15 January 2014.

Hence, Wellex comes to this Court via the instant Petition, on pure questions of law.

Wellex contends that the trial court erred in its ruling dismissing Civil Case No. 09-399 because
it can take cognizance of the same by determining the existence of legal and formal requirements
for executing on a security, particularly on the WPI shares. Thus, Wellex seeks that this Court set
aside the dismissal order and direct the resumption of proceedings.

We clarify.
Before delving into the merits of the Petition, this Court recognizes the crucial need to emphasize
that as per the Decision in G.R. 187951, this Court had already declared with absolute finality
that the WPl shares were and should rightfully be included among the forfeited assets in favor of
the State. Therefore, this matter is beyond cavil. This Court aptly and succinctly ruled "[i]t is
beyond doubt that IMA Trust Account No. 101-78056-1 and its assets were traceable to the
account adjudged as ill-gotten. As such, the trust account and its assets were indeed within the
scope of the forfeiture Order issued by the Sandiganbayan in the plunder case"9 against former
President Estrada.

However, this Court is cognizant of the fact that the issues in this case are, while novel,
unambiguous: whether the Sandiganbayan may proceed to sell outright, at public auction, the
forfeited WPI shares; and whether the trial court may take cognizance of Civil Case No. 09-399.

To resolve these issues, there is a need to first establish the nature of the WPI shares.

In its final and executory Decision in G.R. No. 187951, this Court had already ruled that:

There is no dispute that the subject shares of stock were mortgaged by petitioner Wellex as
security for its loan. These shares being the subject of a contract that was accessory to the Wellex
loan and being an asset of the forfeited IMA Trust Account, the said shares necessarily follow the
fate of the trust account and are forfeited as well.However, the forfeiture . of the said trust
account, tofiether with all its assets and receivables, does not affect the validity of the loan
transaction between BDO the creditor and Wellex the debtor. The loan continues to be valid
despite the forfeiture by the government of the IMA Trust Account and is considered as an asset.

Consequently, the forfeiture had the effect of subrogating the state to the rights of the trust
account as creditor.10 (Underscoring supplied)

Thus, this Court reiterates that the WPI shares assume the character of a security for a valid and
existing loan obligation, which is included in the. IMA Account. Stated in simpler terms, one (1)
of the assets in the IMA Account is a receivable secured by a chattel mortgage, more particularly
the valid and existing loan obligation between BDO and petitioner, secured by the WPI shares.

Consequently, considering that the loan obligation of petitioner is valid and existing, it
necessarily follows that BDO, the creditor, or its successor-in-interest, cannot be allowed to
unilaterally sell the chattel securing the loan and apply the proceeds thereof as payment, full or
partial, to the said loan. This would constitute a clear case of pactum commissorium, which is
expressly prohibited by Article 208811 of the Civil Code.12

In line with our holding in The Wellex Group, Inc. v. Sandigfinbayan,13 that "the forfeiture had
the effect x x x as creditor," the state has stepped into the shoes of the BDO. As this Court has
consistently ruled, "[sjubrogation is the substitution of one person by another with reference to a
lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation
to a debt or claim, including its remedies or securities, x x x It contemplates full substitution such
that it places the party subrogated in the shoes of the creditor, and he may use all means that the
creditor could employ to enforce payment."14 Given that the subrogee merely steps into the shoes
of the creditor, he acquires no right greater than those of the latter.

Considering that the WPI shares serves as security to an acknowledged valid and existing loan
obligation, the subrogee, in this case the State, is obliged to avail of the very same remedies
available to the original creditor to collect the loan obligation, which is to first demand from the
original debtor to pay the same, and if not paid despite demand, institute either foreclosure
proceedings, or the appropriate action for collection before the proper forum. In either case, the
debtor will be afforded the opportunity to pay the obligation, or to assert any claim or defense,
which the debtor may have against the original creditor. This is the essence of constitutional right
to due process. In this case, the action of public respondent in offering for sale, at public auction,
the WPI shares would unavoidably trample upon a constitutionally enshrined right.

This Court is well aware that the Sandiganbayan had earlier asserted in Criminal Case No. 26558
that as regards the BDO loan, Wellex is considered a delinquent debtor. However, the
pronouncement cannot be an excuse to omit the steps needed to be taken regarding the
mortgaged WPI shares. It is a fact that Wellex was not impleaded as a party to the said case,
ergo, the effect of the pronouncement cannot be extended to it. It is axiomatic that no man shall
be affected by any proceeding to which he is a stranger, and strangers to a case are not bound by
any judgment rendered by the court.15 Thus, only those who have had their day in court are
considered the real parties in interest in an action, and it is they who are bound by the judgment
therein and by writs of execution issued pursuant thereto.16

Even more important, this Court notes that the subject matter of controversy brought forth by
Wellex is purely civil in nature. This involves the third (3rd) party claim of Wellex against the
WPI shares vis-a-vis the loan obligation per se, which should be properly lodged before and
heard by the regular trial courts. To the mind of this Court, it is clear that the same does not
pertain to the jurisdiction of the Sandiganbayan. Jurisdiction, which is the authority to hear and
the right to act in a case, is conferred by the Constitution and by law. Although the
Sandiganbayan, a constitutionally-mandated court, is a regular court, it has, nevertheless, only a
special or limited jurisdiction.17

While this Court has time and again affirmed18 that the Sandiganbayan has jurisdiction over the
civil aspect of criminal cases, as conferred to it by law, the case before the trial court does not
involve the civil aspect of Criminal Case No. 26558. The same has nothing to do with the
ownership of the IMA Account and/or any of its financial assets, which, as stated above, has
been adjudged forfeited in favor of the State. In contrast, the said case is an ordinary civil case
entailing the propriety of the actions of a creditor in proceeding against the security for its loan,
which necessitates the application of the provisions of the Civil Code, therefore falling under the
exclusive jurisdiction of the Regional Trial Courts.19

Given that the cause of action of Wellex in Civil Case No. 09-399 partakes of a valid third (3rd)
party claim sanctioned by the Rules of Court, affording Wellex the opportunity to assert its claim
or defense against its creditor, presently the State, the latter should likewise avail of this avenue
to affirm its own claims, as creditor, against the loan and/or mortgage securing the said loan,
paving the way to the realization of any of the fruits of plunder. Thus, this Court deems it proper
to remand this case to the trial court for further proceedings, where all the civil issues may
properly be ventilated.

At this point, this Court commends the trial court for acting cautiously and exercising prudence
in applying the principle of hierarchy of courts when it issued its Order dated 9 January 2012 and
Resolution dated 15 January 2014. As a consequence of the rulings rendered in this case, that is,
that the State, acting through the Sandiganbayan, may not sell the WPI shares outright without
first complying with the requirements set by law, the prayer of petitioner for injunctive relief
against the Sandiganbayan is now rendered moot and academic. And as previously stated, given
the fact that the State has validly substituted BDO as the creditor of Wellex, the cause of action
of Wellex against BDO is, likewise, rendered moot and academic.chanrobleslaw

WHEREFORE, premises considered, JUDGMENT is hereby rendered GRANTING the


instant Petition and SETTING ASIDE the Order dated 9 January 2012 and Resolution dated 15
January 2014 of the Regional Trial Court of Makati City, Branch 132 in Civil Case No. 09-399.
This case is hereby remanded to the trial court for further proceedings.

SO ORDERED.cralawlawlibrary

Velasco, Jr., (Chairperson), Reyes, and Jardeleza, JJ., concur.


Leonen,* J., see dissenting opinion.

THIRD DIVISION

April 18, 2016

G.R. No. 195552

ACS DEVELOPMENT & PROPERTY MANAGERS, INC., Petitioner,


vs.
MONTAIRE REALTY AND DEVELOPMENT CORPORATION, Respondent.

RE S O LUTI ON

REYES, J.:

Before the Court is a Petition for Certiorari1 filed by ACS Development & Property Managers,
Inc. (ADPROM) against Mont-Aire2 Realty and Development Corporation (MARDC) to assail
the Decision3 dated March 28, 2000 and Resolution4 dated November 9, 2010 of the Court of
Appeals (CA) in CA-G.R. SP No. 48805, which affirmed with modification the Decision5 dated
August 17, 1998 of the Construction Industry Arbitration Commission (CTAC) in CTAC Case
No. 32'-97.
ADPROM and MARDC were parties to a Construction Agreement6 executed on April 25, 1996,
whereby ADPROM, as contractor, was to construct 17 units of MARDC's Villa Fresca
Townhomes in Barangay

Kaybagal, Tagaytay City. The total consideration for the contract was P39,500,000.00, inclusive
of labor, materials, supervision and taxes. ADPROM was to be paid periodically based on
monthly progress billings, less 10% retention. 7 Angel Lazaro & Associates (ALA) was hired by
MARDC as the project's constn1ction manager.8

The parties later amended their Construction Agreement, reducing the number of units to be
erected to 11 and the total contract price to P25,500,000.00. On May 2, 1996, ADPROM
commenced with the construction of the townhouses. 9

MARDC fully satisfied ADPROM'S Progress Billing Nos. 1 to 8 for a total amount of
P23,169,l83.43. In Progress Billing No. 9 for work performed in February 1997, ADPROM
demanded from MARDC the amount of Pl ,495,345.24. 10 ALA, however, approved the payment
of only P94,460.28, as it disputed specific amounts in the billing, including cost
additives. 11 ADPROM refused to allow a reduction in its demanded amount. In a letter12dated
March 14, 1997, it even insisted on MARDC's acceptance of the accomplishments identified in
Progress Billing No. 9 before it could proceed further with constn1ction works. Beginning
March 18, 1997, when Progress Billing No. 9 remained unpaid, ADPROM decided on a work
Stoppage.13

The stoppage prompted MARDC to serve upon ADPROM on March 20, 1997 a notice of
default. 14 After several meetings among the parties and ADPROM's issuance of consolidated
Progress Billing Nos. 9 and 1015 intended to supersede the contested Progress Billing No. 9, ALA
still advised MARDC to defer the payment of ADPROM's demand. 16 ADPROM's consolidated
billing of Pl, 778,682.06 was still greater than ALA 's approved amount of P1,468,348.60. 17

On June 5, 1997, MARDC decided to terminate the subject Construction Agreement. 18 It


demanded from ADPROM the return of alleged overpayments amounting to Pl 1,188,539.69,
after it determined from ALA that ADPROM's accomplished work constituted only 54.67%. An
evaluation by another firm hired by MARDC, TCGI Engineers, also provided that ADPROM'S
work accomplishment was only at 46.98%. 19 Feeling aggrieved, ADPROM instituted with the
CIAC a case for sum of money against MARDC, which in turn filed its own counterclaim
against AD PROM.

On August 17, 1998, the CIAC rendered its Decision20 that concluded with the following awards:

IX. SUMMARY OF A WARD


The Tribunal therefore makes the summary of award as follows:

A. FOR [ADPROM)

Claims Award

1. Unpaid Billings Pl,468,348.60 Pl,468,348.60

2. Interest on Billings 19,755.23 109,824.43*

3. Refund of accumulated 10% retention 2,806,814.00 2,806,814.00

202,396.71 0.00
4. Interest on retention
---------------------- ----------------------

Total P4,497,314.54 P4,384,987.03

[* computed at 6% per annum from 19 May 1997 up to 17 August 1998,


the date of the promulgation of this award]

B. FOR [MARDC]

1. Refund for overpayment Pl1,188,539.69 0.00

2. Interest on overpayment 167,828.10 0.00

6,517,500.00 0.00
3. Liquidated Damages
---------------------- ----------------------

Total Pl 7,873,867.79 0.00

C. NET AWARD for CLAIMANT P4,384,987.03

NET AWARD P4,384,987.03

X.AWARD

[MARDC] therefore is ordered to pay [ADPROM] the amount of PESOS FOUR


MILLION [THREE] HUNDRED [EIGHTY-FOUR] THOUSAND [NINE] HUNDRED
[EIGHTY-SEVEN] AND [03]/100 (P4,384,987.03) within fifteen (15) days from receipt
of notice hereof. Interest of twelve percent (12%) per annum shall be charged on said
amount or any balance thereof from the time due until fully paid. 21

Ruling of the CA

Dissatisfied, MARDC appealed the CIAC decision to the CA via a petition for review. On March
28, 2000, the CA rendered its Decision22 deleting the award of interest on unpaid billings, and
holding ADPROM liable to MARDC for liquidated damages at P39,500.00 per calendar clay
from March 20, 1997 until September 1, 1997. Thus, the dispositive portion of the CA decision
reads:

WHEREFORE, premises considered, the assailed Decision of [CIAC] is hereby MODIFIED. It


is affirmed in part, insofar as it awards [AD PROM] its unpaid billings and the refund of its
retention. The award of interest on the unpaid billings is set aside for lack of merit. Finally,
[ADPROM] is hereby held liable to [MARDC] for liquidated damages in the amount of
Thirty[-]Nine Thousand Five Hundred Pesos (Php 39,500.00) per calendar clay, computed from
March 20, 1997, the elate ADPROM was served a notice of default for unjustified work
stoppage, until September 1, 1997, when [MARDC] contracted another construction corporation,
the Ulanday Contractors, Inc., to complete the project.

SO ORDERED.23

ADPROM filed a motion for reconsideration while MARDC filed a motion for partial
reconsideration. Both motions were denied by the CA in its Resolution24 dated November 9,
2010.

Unyielding, ADPROM filed the Petition for Certiorari before this Court arguing that the CA
gravely abused its discretion in deleting the award of interest on unpaid billings and in ordering it
to pay liquidated damages.

Ruling of the Court

The Court dismisses the petition.

At the outset, the Court emphasizes that ADPROM availed of the wrong remedy when it filed
with the Court a petition for certiorari to question the CA decision that reviewed the CIAC's
rulings. Instead of filing a petition forcertiorari under Rule 65 of the Rules of Court, AD PROM
should have filed a petition for review under Rule 45. 25In Spouses Leynes v. Former Tenth
Division of the CA, et al.,26 the Court emphasized:

The proper remedy of a party aggrieved by a decision of the [CA] is a petition for review under
Rule 45 which is not similar to a petition for certiorari under Rule 65 of the Rules of Court. As
provided in Rule 45 of the Rules of Court~ decisions, final orders, or resolutions of the [CA] in
any case, i.e., regardless of the nature of the action or proceedings involved, may be appealed to
us by filing a petition for review, which would be but a continuation of the appellate process over
the original case. A special civil action under Rule 65 is an independent action based on the
specific grounds therein provided and, as a general rule, cannot be availed of as a substitute for
the lost remedy of an ordinary appeal, including that under Rule 45. Accordingly, when a party
adopts an improper remedy, his petition may be dismissed outright. 27

Even granting that the Court adopts a liberal application of the rules and treats the present
petition as a petition for review, there still exists no cogent reason for a reversal of the rulings
made by the CA.

The appellate court sufficiently explained its bases in modifying the CIAC's monetary awards.
As regards the deletion of the interest on the unpaid billings, the CA explained that with the
parties' agreement that ALA would have to first approve ADPROM's progress billings before
MARDC would be obligated to pay, the latter did not incur any delay in the payment of AD
PROM' s demands. On the award of liquidated damages, the CA cited AD PROM' s unjustified
work stoppage that resulted in MARDC's clear disadvantage. Even the non-payment of its
demands upon MARDC failed to justify ADPROM's decision, given its own refusal to adjust its
billings in accordance with the :findings of ALA. Moreover, the subject Construction Agreement
provided that in case of disputes that would arise from the contract, the parties should strive to
resolve them through an amicable settlement.28

The foregoing pronouncements of the CA were in accord with the pertinent provisions of the
parties' Construction Agreement. First, ADPROM was not entitled to CIAC's awarded interest of
P109,824.43, which was supposedly computed based on the unpaid billings at six percent
(6%) per annum from May 19, 1997 up to the date of promulgation of the CIAC
decision.29 Specifically on the accrual of MARDC's obligation to pay for work performed by
ADPROM, the parties deemed necessary the prior approval by ALA of the billings to be paid, as
recognized in the following stipulations:

Article III

SCOPE or OWNER'S RESPONSIBILITY

3.1 [MARDC] shall make payments directly to [ADPROM] based on the latter's progress
billing as approved by [ALA].

Article IV
CONTRACT PRICE AND TERMS OF PAYMENT

xxxx

4.2 Terms of Payment

xxxx
4.2.3 [MARDC] shall pay [AD PROM] within seven (7) working days from receipt of the
progress billing submitted by [ADPROM], duly approved by [ALA].

xxxx

4.2.5 All payments/releases shall be effected strictly in accordance with the "Scope of Works,
Cost Breakdown and Weight Percentage for Billing" attached as Annexes A and C and the
stipulations herein provided and upon presentment by [AD PROM] of a written certification
certifying as to the percentage of completion and accompanied by a certificate attesting to the
said percentage of completion and recommending approval by [ALA] for the appropriate
payment thereof, subject to the warranties and obligations of [ADPROM].30 (Emphasis ours)

Clearly, given its consent to the foregoing conditions, ADPROM could not have compelled
MARDC to satisfy the unpaid billings unless and until its progress billings had been approved by
ALA. In the same vein, no default could be attributed to MARDC in the absence of such action
from ALA. Records indicate that as of May 9, 1997, pending the settlement of the disputed
matters between the parties, ALA only recommended payment by MARDC of the reduced
amount of Pl,468,348.60. 31 ADPROM then could neither fault nor penalize MARDC for its
deferment of the demanded amounts. On the other hand, in withholding approval, ALA made
clear its grounds for refusing to agree on the full amount of ADPROM's claim.

Contrary to the statement of ADPROM in its petition that ALA later approved on April 4, 1997
the payment of the consolidated Progress Billing Nos. 9 and 10, the minutes of the meeting
among representatives of MARDC, ADPROM and ALA on even date indicated that the
consolidated billings were then still subject to evaluation. 32Records even show that as of May 9,
1997, there were still items in the billings that were being contested by ALA, already made
known to ADPROM.33

The CA's award of liquidated damages upon MARDC was also supported by sufficient bases. In
justifying the award, the appellate court correctly cited the unjustified decision of ADPROM to
cease in its construction of MARDC's townhouse project.1awp++i1 The pending conflict
between the parties on the unpaid billings was not a sufficient ground for such recourse. Article
XIII, Section 13.1 of the Construction Agreement even provided that "[t]he parties shall attempt
to settle any dispute arising from the Agreement amicably."34

The Court reiterates that MARDC was allowed under the parties' contract to rely on the findings
of ALA on the percentage of completion and the appropriate payment that should be given
therefor, and to act in accordance with such findings. However, beginning March 18, 1997, at a
time when no approval for full payment was as yet issued by ALA, ADPROM proceeded with its
threat to cease working on the townhouse project already conveyed in its letter dated March 14,
1997. Such work stoppage by ADPROM was not based on justifiable grounds, and thus rendered
applicable the following agreement of the parties on liability for liquidated damages:

Article IX
LIQUID A TED DAMAGES

9.1. [AD PROM] acknowledges that time is of the essence of this Agreement and that any
unexcused day of delay as determined in accordance with [S]ection 5.1 hereof as defined in the
general conditions of this Agreement will result in injury or damages to [MARDC], in view of
which, the parties have hereto agreed that for every calendar day of unexcused delay in the
completion of its Work under this Agreement, [ADPROM] shall pay [MARDC] the sum of
Thirty[-]Nine Thousand Five Hundred (P39,500.00) per calendar day as liquidated damages.
Said amount is equivalent to 1110 of 1 % of the Total Contract Price. Liquidated damages under
this provision may be deducted by [MARDC] from the stipulated Contract Price or any balance
thereof, or to any progress billings clue [ADPROM].35

Section 5.1 of Article V referred to in the aforequoted prov1s1on provides that the townhouse
project shall be completed within 180 calendar days, to be effective from the date of the
agreement's execution, MARDC 's payment of the required down payment and the issuance of a
Notice to Proceed. 36 Based on records, the parties agreed on an extension of the period to
complete the project until April 30, 1997.37

There clearly was an unexcused delay in the completion of the project because of ADPROM's
decision on a work stoppage. Given the terms of the Construction Agreement, ADPROM neither
had the authority to terminate their contract, nor to unilaterally decide to discontinue a prompt
performance of its duties under the agreement, especially after no default could as yet be
attributed to MARDC. Records indicate that MARDC had been prompt in the payment of
Progress Billing Nos. l to 8 for the period covering June 1996 to January 1997, having already
paid a total amount of P23,169,183.43 for the construction of the townhouses. The dispute only
arose from the February 1997 billing. ADPROM's unilateral and hasty decision to cease
constructing, and the consequent delay in the project's completion, then made it liable for the
stipulated liquidated damages. In Philippine Charter Insurance Corporation v. Petroleum
Distributors & Services Corporation,38 the Court reiterated:

Article 2226 of the Civil Code allows the parties to a contract to stipulate on liquidated damages
to be paid in case of breach. It is attached to an obligation in order to insure performance and has
a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force
of the obligation by the threat of greater responsibility in the event of breach. As a general rule,
contracts constitute the law between the parties, and they are bound by its stipulations. For as
long as they are not contrary to law, morals, good customs, public order or public policy, the
contracting parties may establish such stipulations, clauses, terms and conditions as they may
deem convenient.39 (Citations omitted)

Subsequent to the execution of the 'Construction Agreement, the parties decided to vary the
terms of their contract by reducing the project's number of units and the corresponding contract
price. There was nonetheless no indication that they resolved to reduce the amount of liquidated
damages to be paid by ADPROM in the event of its unexcused delay. The foregoing
circumstances also do not affect ADPROM's entitlement to the unpaid billings of Pl ,468,348.60,
after it was established before the CIAC and by the CA that work for such value had been
completed by the company.40 MARDC then rightly had to compensate AD PROM for such
amount, together with the l0% retention of P2,806,814.00.

The imposable interest on the monetary awards after their finality must however be clarified, as
the CA made no pronouncement on the CIA C's award of interest on the total money judgment,
pegged by the CIAC at the rate of 12% per annum from the time they become due until full
payment. To be consistent with prevailing jurisprudence, this must be modified in that all
monetary awards shall bear interest at the rate of only six percent (6%) per annum, and to be
computed from the time the awards attain finality until full payment thereof. 41

WHEREFORE, the petition is DISMISSED. The Decision dated March 28, 2000 and
Resolution dated November 9, 2010 of the Court of Appeals in CA-G.R. SP No. 48805
are AFFIRMED with MODIFICATION in that the monetary awards to the parties shall bear
interest at the rate of six percent ( 6%) per annum from the time the awards become final until
full satisfaction thereof.

SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

SECOND DIVISION

G.R. No. 200274, April 20, 2016

MELECIO DOMINGO, Petitioner, v. SPOUSES GENARO MOLINA AND ELENA B.


MOLINA, SUBSTITUTED BY ESTER MOLINA, Respondents.

DECISION

BRION, J.:
We resolve the petition for review on certiorari1 filed by the petitioner Melecio Domingo
(Melecio) assailing the August 9, 2011 decision2 and January 10, 2012 resolution3 of the Court of
Appeals (CA) in CA-G.R. CV No. 94160.

THE FACTS

In June 15, 1951, the spouses Anastacio and Flora Domingo bought a property in Camiling,
Tarlac, consisting of a one-half undivided portion over an 18,164 square meter parcel of land.
The sale was annotated on the Original Certificate of Title (OCT) No. 16354 covering the subject
property.

During his lifetime, Anastacio borrowed money from the respondent spouses Genaro and Elena
Molina (spouses Molina). On September 10, 1978 or 10 years after Flora's death4, Anastacio sold
his interest over the land to the spouses Molina to answer for his debts. The sale to the spouses
Molina was annotated at the OCT of the subject property.5 In 1986, Anastacio died.6

In May 19, 1995, the sale of Anastacio's interest was registered under Transfer Certificate of Title
(TCT) No. 2729677 and transferred the entire one-half undivided portion of the land to the
spouses Molina.

Melecio, one of the children of Anastacio and Flora, learned of the transfer and filed a Complaint
for Annulment of Title and Recovery of Ownership (Complaint) against the spouses Molina on
May 17, 1999.8

Melecio claims that Anastacio gave the subject property to the spouses Molina to serve as
collateral for the money that Anastacio borrowed. Anastacio could not have validly sold the
interest over the subject property without Flora's consent, as Flora was already dead at the time
of the sale.

Melecio also claims that Genaro Molina must have falsified the document transferring Anastacio
and Flora's one-half undivided interest over the land. Finally, Melecio asserts that he occupied
the subject property from the time of Anastacio's death up to the time he filed the Complaint.9

Melecio presented the testimonies of the Records Officer of the Register of Deeds of Tarlac, and
of Melecio's nephew, George Domingo (George).10

The Records Officer testified that he could not locate the instrument that documents the transfer
of the subject property ownership from Anastacio to the spouses Molina. The Records Officer
also testified that the alleged sale was annotated at the time when Genaro Molina's brother was
the Register of Deeds for Camiling, Tarlac.11

George, on the other hand, testified that he has been living on the subject property owned by
Anastacio since 1986. George testified, however, that aside from himself, there were also four
other occupants on the subject property, namely Jaime Garlitos, Linda Sicangco, Serafio
Sicangco and Manuel Ramos.12

The spouses Molina asserted that Anastacio surrendered the title to the subject property to
answer for his debts and told the spouses Molina that they already own half of the land. The
spouses Molina have been in possession of the subject property before the title was registered
under their names and have religiously paid the property's real estate taxes.

The spouses Molina also asserted that Melecio knew of the disputed sale since he accompanied
Anastacio several times to borrow money. The last loan was even used to pay for Melecio's
wedding. Finally, the spouses Molina asserted that Melecio built his nipa hut on the subject
property only in 1999, without their knowledge and consent.13

The spouses Molina presented Jaime Garlitos (Jaime) as their sole witness and who is one of the
occupants of the subject lot.

Jaime testified that Elena Molina permitted him to build a house on the subject property in 1993.
Jaime, together with the other tenants, planted fruit bearing trees on the subject property and
gave portions of their harvest to Elena Molina without any complaint from Melecio. Jaime
further testified that Melecio never lived on the subject property and that only George Domingo,
as the caretaker of the spouses Molina, has a hut on the property.

Meanwhile, the spouses Molina died during the pendency of the case and were substituted by
their adopted son, Cornelio Molina.14

THE RTC RULING

The Regional Trial Court (RTC) dismissed15 the case because Melecio failed to establish his
claim that Anastacio did not sell the property to the spouses Molina.

The RTC also held that Anastacio could dispose of conjugal property without Flora's consent
since the sale was necessary to answer for conjugal liabilities.

The RTC denied Melecio's motion for reconsideration of the RTC ruling. From this ruling,
Melecio proceeded with his appeal to the CA.

THE CA RULING

In a decision dated August 9, 2011, the CA affirmed the RTC ruling in toto.

The CA held that Melecio failed to prove by preponderant evidence that there was fraud in the
conveyance of the property to the spouses Molina. The CA gave credence to the OCT annotation
of the disputed property sale.

The CA also held that Flora's death is immaterial because Anastacio only sold his rights,
excluding Flora's interest, over the lot to the spouses Molina. The CA explained that "[t]here is
no prohibition against the sale by the widower of real property formerly belonging to the
conjugal partnership of gains"16.

Finally, the CA held that Melecio's action has prescribed. According to the CA, Melecio failed to
file the action within one year after entry of the decree of registration.
Melecio filed a motion for reconsideration of the CA Decision. The CA denied Melecio's motion
for reconsideration for lack of merit.17

THE PETITION

Melecio filed the present petition for review on certiorari to challenge the CA ruling.

Melecio principally argues that the sale of land belonging to the conjugal partnership without the
wife's consent is invalid.

Melecio also claims that fraud attended the conveyance of the subject property and the absence
of any document evidencing the alleged sale made the transfer null and void. Finally, Melecio
claims that the action has not yet prescribed.

The respondents, on the other hand, submitted and adopted their arguments in their Appeal
Brief18.

First, Melecio's counsel admitted that Anastacio had given the lot title in payment of the debt
amounting to Php30,000.00. The delivery of the title is constructive delivery of the lot itself
based on Article 1498, paragraph 2 of the Civil Code.

Second, the constructive delivery of the title coupled with the spouses Molina's exercise of
attributes of ownership over the subject property, perfected the sale and completed the transfer of
ownership.

THE ISSUES

The core issues of the petition are as follows: (1) whether the sale of a conjugal property to the
spouses Molina without Flora's consent is valid and legal; and (2) whether fraud attended the
transfer of the subject property to the spouses Molina.

OUR RULING

We deny the petition.

It is well settled that when the trial court's factual findings have been affirmed by the CA, the
findings are generally conclusive and binding upon the Court and may no longer be reviewed on
Rule 45 petitions.19 While mere are exceptions20 to this rule, the Court finds no applicable
exception with respect to the lower courts' finding that the subject property was Anastacio and
Flora's conjugal property. Records before the Court show that the parties did not dispute the
conjugal nature of the property.

Melecio argues that the sale of the disputed property to the spouses Molina is void without
Flora's consent.

We do not find Melecio's argument meritorious.


Anastacio and Flora's conjugal partnership was dissolved upon Flora's death.

There is no dispute that Anastacio and Flora Domingo married before the Family Code's
effectivity on August 3, 1988 and their property relation is a conjugal partnership.21

Conjugal partnership of gains established before and after the effectivity of the Family Code are
governed by the rules found in Chapter 4 (Conjugal Partnership of Gains) of Title IV (Property
Relations Between Husband and Wife) of the Family Code. This is clear from Article 105 of the
Family Code which states:
chanRoblesvirtualLawlibrary
x x x The provisions of this Chapter shall also apply to conjugal partnerships of gains already
established between spouses before the effectivity of this Code, without prejudice to vested
rights already acquired in accordance with the Civil Code or other laws, as provided in Article
256.
The conjugal partnership of Anastacio and Flora was dissolved when Flora died in 1968,
pursuant to Article 175 (1) of the Civil Code22 (now Article 126 (1) of the Family Code).

Article 130 of the Family Code requires the liquidation of the conjugal partnership upon death of
a spouse and prohibits any disposition or encumbrance of the conjugal property prior to the
conjugal partnership liquidation, to quote:
chanRoblesvirtualLawlibrary
Article 130. Upon the termination of the marriage by death, the conjugal partnership property
shall be liquidated in the same proceeding for the settlement of the estate of the deceased.

If no judicial settlement proceeding is instituted, the surviving spouse shall liquidate the conjugal
partnership property either judicially or extra-judicially within one year from the death of the
deceased spouse. If upon the lapse of the six month period no liquidation is made, any
disposition or encumbrance involving the conjugal partnership property of the terminated
marriage shall be void. x x x (emphases supplied)
While Article 130 of the Family Code provides that any disposition involving the conjugal
property without prior liquidation of the partnership shall be void, this rule does not apply since
the provisions of the Family Code shall be "without prejudice to vested rights already acquired in
accordance with the Civil Code or other laws."23

An implied co-ownership among Flora's heirs governed the conjugal properties pending
liquidation and partition.

In the case of Taningco v. Register of Deeds of Laguna,24 we held that the properties of a
dissolved conjugal partnership fall under the regime of co-ownership among the surviving
spouse and the heirs of the deceased spouse until final liquidation and partition. The surviving
spouse, however, has an actual and vested one-half undivided share of the properties, which does
not consist of determinate and segregated properties until liquidation and partition of the
conjugal partnership.

An implied ordinary co-ownership ensued among Flora's surviving heirs, including Anastacio,
with respect to Flora's share of the conjugal partnership until final liquidation and partition;
Anastacio, on the other hand, owns one-half of the original conjugal partnership properties as his
share, but this is an undivided interest.

Article 493 of the Civil Code on co-ownership provides:


chanRoblesvirtualLawlibrary
Article 493. Each co-owner shall have the full ownership of his part and of the fruits and
benefits pertaining thereto, and he may therefore alienate, assign or mortgage it, and even
substitute another person in its enjoyment, except when personal rights are involved. But
the effect of the alienation or the mortgage, with respect to the co-owners, shall be limited to
the portion which may be allotted to him in the division upon the termination of the co-
ownership. (399) (emphases supplied)
Thus, Anastacio, as co-owner, cannot claim title to any specific portion of the conjugal properties
without an actual partition being first done either by agreement or by judicial decree.
Nonetheless, Anastacio had the right to freely sell and dispose of his undivided interest in the
subject property.

The spouses Molina became co-owners of the subject property to the extent of Anastacio's
interest.

The OCT annotation of the sale to the spouses Molina reads that "[o]nly the rights, interests
and participation of Anastacio Domingo, married to Flora Dela Cruz, is hereby sold,
transferred, and conveyed unto the said vendees for the sum of ONE THOUSAND PESOS
(P1,000.00) which pertains to an undivided one-half (1/2) portion and subject to all other
conditions specified in the document x x x"25 (emphases supplied). At the time of the sale,
Anastacio's undivided interest in the conjugal properties consisted of: (1) one-half of the entire
conjugal properties; and (2) his share as Flora's heir on the conjugal properties.

Anastacio, as a co-owner, had the right to freely sell and dispose of his undivided interest, but
not the interest of his co-owners. Consequently, Anastactio's sale to the spouses Molina without
the consent of the other co-owners was not totally void, for Anastacio's rights or a portion thereof
were thereby effectively transferred, making the spouses Molina a co-owner of the subject
property to the extent of Anastacio's interest. This result conforms with the well-established
principle that the binding force of a contract must be recognized as far as it is legally possible to
do so (quando res non valet ut ago, valeat quantum valere potest).26

The spouses Molina would be a trustee for the benefit of the co-heirs of Anastacio in respect of
any portion that might belong to the co-heirs after liquidation and partition. The observations of
Justice Paras cited in the case of Heirs of Protacio Go, Sr. V. Servacio27 are instructive:
chanRoblesvirtualLawlibrary
x x x [I]f it turns out that the property alienated or mortgaged really would pertain to the share of
the surviving spouse, then said transaction is valid. If it turns out that there really would be, after
liquidation, no more conjugal assets then the whole transaction is null and void. But if it turns
out that half of the property thus alienated or mortgaged belongs to the husband as his share in
the conjugal partnership, and half should go to the estate of the wife, then that corresponding to
the husband is valid, and that corresponding to the other is not. Since all these can be determined
only at the time the liquidation is over, it follows logically that a disposal made by the surviving
spouse is not void ab initio. Thus, it has been held that the sale of conjugal properties cannot be
made by the surviving spouse without the legal requirements. The sale is void as to the share of
the deceased spouse (except of course as to that portion of the husband's share inherited by her as
the surviving spouse). The buyers of the property that could not be validly sold become trustees
of said portion for the benefit of the husband's other heirs, the cestui que trust ent. Said heirs
shall not be barred by prescription or by laches.
Melecio's recourse as a co-owner of the conjugal properties, including the subject property, is an
action for partition under Rule 69 of the Revised Rules of Court. As held in the case of Heirs of
Protacio Go, Sr., "it is now settled that the appropriate recourse of co-owners in cases where their
consent were not secured in a sale of the entire property as well as in a sale merely of the
undivided shares of some of the co-owners is an action for PARTITION under Rule 69 of the
Revised Rules of Court."28

The sale of the subject property to the spouses Molina was not attended with fraud.

On the issue of fraud, the lower courts found that there was no fraud in the sale of the disputed
property to the spouses Molina.

The issue of fraud would require the Court to inquire into the weight of evidentiary matters to
determine the merits of the petition and is essentially factual in nature. It is basic that factual
questions cannot be cannot be entertained in a Rule 45 petition, unless it falls under any of the
recognized exceptions29 found in jurisprudence. The present petition does not show that it falls
under any of the exceptions allowing factual review.

The CA and RTC conclusion that there is no fraud in the sale is supported by the evidence on
record.

Melecio's argument that no document was executed for the sale is negated by the CA finding that
there was a notarized deed of conveyance executed between Anastacio and the spouses Molina,
as annotated on the OCT of the disputed property.

Furthermore, Melecio's belief that Anastacio could not have sold the property without his
knowledge cannot be considered as proof of fraud to invalidate the spouses Molina's registered
title over the subject property.30

Prevailing jurisprudence uniformly holds that findings of facts of the trial court, particularly
when affirmed by the Court of Appeals, are binding upon this Court.31

Considering these findings, we find no need to discuss the other issues raised by
Melecio.chanrobleslaw

WHEREFORE, we hereby DENY the petition for review on certiorari. The decision dated
August 9, 2011 of the Court of Appeals in CA-G.R. CV No. 94160 is AFFIRMED.

SO ORDERED.cralawlawlibrary
Carpio, (Chairperson), Del Castillo, Mendoza, and Leonen, JJ., concur.chanroblesvirtualla