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Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. Nos. L-62845-46 November 25, 1983

NATIONAL POWER CORPORATION, petitioner,


vs.
JUDGE ABELARDO M. DAYRIT, Court of First Instance of Manila, Branch 39, and DANIEL R.
ROXAS, doing business as United Veterans Security Agency and Foreign Boats
Watchmen, respondents.

The Solicitor General for petitioner.

William C. Arceno for respondents.

ABAD SANTOS, J.: ñé+.£ª wph!1

This is a petition to set aside the Order, dated September 22, 1982, of the respondent judge. The
prayer is premised on the allegation that the questioned Order was issued with grave abuse of
discretion.

In Civil Case No. 133528 of the defunct Court of First Instance of Manila, DANIEL E. ROXAS, doing
business under the name and style of United Veterans Security Agency and Foreign Boats
Watchmen, sued the NATIONAL POWER CORPORATION (NPC) and two of its officers in Iligan
City. The purpose of the suit was to compel the NPC to restore the contract of Roxas for security
services which the former had terminated.

After several incidents, the litigants entered into a Compromise Agreement on October 14, 1981,
and they asked the Court to approve it. Accordingly, a Decision was rendered on October 30, 1981,
which reads as follows: têñ.£îhqw â£

In order to abbreviate the proceedings in this case, the parties, instead of


going into trial, submitted a compromise agreement, as follows: têñ.£îhqw â£

The parties, DANIEL E. ROXAS, etc. and NATIONAL


POWER CORPORATION, ET AL., represented by its
President Mr. Gabriel Y. Itchon with due and proper authority
under NP Board Resolution No. 81-224, assisted by their
respective counsel, to this Honorable Court respectfully
submit the following compromise agreement:

1. The defendant National Power Corporation shall pay to


plaintiff the sum of P7,277.45, representing the amount due to
plaintiff for the services of one of plaintiff's supervisors;
2. The defendant shall pay plaintiff the value of the line
materials which were stolen but recovered, by plaintiff's
agency which value is to be determined after a joint inventory
by the representatives of both parties;

3. The parties shall continue with the contract of security


services under the same terms and conditions as the
previous contract effective upon the signing thereof;

4. The parties waive all their respective claims and


counterclaims in favor of each other;

5. The parties agree to faithfully comply with the foregoing


agreement.

PRAYER

WHEREFORE, it is respectfully prayed that the Hon. Court approve the


following compromise agreement.'

Examining the foregoing agreement, the Court finds that the same is in
accordance with law and not against morals and public policy.

CONFORMABLY, the Court hereby renders judgment in accordance with the


terms and conditions thereof, enjoining the parties to strictly comply with the
terms and conditions of the compromise agreement, without pronouncement
as to cost. (Rollo, pp. 33-34.)

The judgment was not implemented for reasons which have no relevance here.

On May 14, 1982, the NPC executed another contract for security services with Josette L. Roxas
whose relationship to Daniel is not shown. At any rate Daniel has owned the contract. The NPC
refused to implement the new contract for which reason Daniel filed a Motion for Execution in the
aforesaid civil case which had been re-numbered R-82-10787. The Motion reads: têñ.£îhqw â£

PLAINTIFF, by counsel, respectfully shows:

1. On October 30, 1981, this Honorable Court rendered its decision based on
compromise agreement submitted by the parties, under which it was
provided, among others, that — têñ.£îhqw â£

3. The parties shall continue with the contract of security


services under the same terms and conditions as the
previous contract effective upon the signing thereof;

2. To date, after more than about eight (8) months since the decision of this
Honorable Court, defendant National Power Corporation, through bad faith
by reason of excuses made one after another, has yet to comply with the
aforesaid terms of the decision. It has not reinstated the contract with the
plaintiff in gross violation of the terms of the said compromise agreement
which this Honorable Court approved, 'enjoining the parties to strictly comply
with the terms and conditions of the compromise agreement,

3. Hence, plaintiff is compelled to seek the assistance of this Honorable


Court for the execution of its decision.

PRAYER têñ.£îhqw â£

WHEREFORE, it is respectfully prayed that this Honorable Court order the


issuance of the writ of execution for the enforcement of the aforesaid portion
of its decision. (Rollo, pp. 35-36.)

Acting on the Motion, the respondent judge issued the following Order: têñ.£îhqw â£

Acting on the motion for execution dated July 14, 1982, visibly over the
objection and/or opposition to the motion for execution dated July 19, 1982,
the Court, considering that the decision of October 30, 1981 was based on a
Compromise Agreement entered into by and between the parties which
decidedly, become final and executory, is inclined to grant said action.

CONFORMABLY, let the corresponding writ of execution be issued to be


served by the Deputy Sheriff assigned to this branch. (Rollo, p. 54.)

The NPC assails the Order on the ground that it directs execution of a contract which had been
novated by that of May 14, 1982. Upon the other hand, Roxas claims that said contract was
executed precisely to implement the compromise agreement for which reason there was no
novation.

We sustain the private respondent. Article I of the May 14, 1982, agreement supports his contention.
Said article reads: têñ.£îhqwâ£

ARTICLE I

DOCUMENTS COMPRISING THE CONTRACT

The letter proposal dated September 5, 1981; CORPORATION'S counter-


proposal dated September 11, 1981; Board Resolution No. 81-244 dated
September 28, 1981; the Compromise Agreement and Court Decision dated
October 30, 1981 in Civil Case No. 133528 CFI-Manila; other subsequent
letters and the performance bond of AGENCY to be flied in favor of
CORPORATION in the manner hereinafter provided, are hereby expressly
made integral parts of this contract by reference. (Rollo, pp. 59-60.)

It is elementary that novation is never presumed; it must be explicitly stated or there must be
manifest incompatibility between the old and the new obligations in every aspect. Thus the Civil
Code provides: têñ.£îhqw â£

Art. 1292. In order that an obligation may be extinguished by another which


substitutes the same, it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on every point incompatible
with each other.
In the case at bar there is nothing in the May 14, 1982, agreement which supports the petitioner's
contention. There is neither explicit novation nor incompatibility on every point between the "old" and
the "new" agreements.

WHEREFORE, the petition is denied for lack of merit with costs against the petitioner.

SO ORDERED. 1äw phï1.ñët

Fernando, C.J., Teehankee, Makasiar, Concepcion Jr., Guerrero, De Castro, Melencio-Herrera,


Plana, Escolin, Relova and Gutierrez, Jr., JJ., concur.

Aquino, J., took no part.

SYNOPSIS
Petitioner Quinto took some jewelries from private complainant Amelia Cariaga for
selling purposes. After 6 months, however, Quinto failed to return the jewelries or pay
the value thereof. Hence, a case of estafa was filed against Quinto as a result of which
she was convicted, affirmed by the Court of Appeals.
Quinto admitted that she took some jewelries from Cariaga but she sold the same
to Ms. Camacho and Mrs. Ramos. Unfortunately however, both were unable to pay the
whole amount and promised to pay the balance in installment to Cariaga. Petitioner
thus alleged that the agreement between her and Cariaga was effectively novated when
the latter consented to receive payment on installments directly from Mrs. Camacho
and Mrs. Ramos.
The changes alluded to by petitioner consists only in the manner of payment. There
was really no substitution of debtors since Cariaga merely acquiesced to the payment
but did not give her consent to enter into a new contract. Thus, Caraigas acceptance of
Ramos and Camachos payment on installment basis cannot be construed as a case of
either expromision or delegacion sufficient to justify the attendance of extinctive
novation. Further the defense of novation cannot avoid the incipient criminal liability
for Estafa to which Quinto was found guilty of. It is a public offense which must be
prosecuted and punished by the State on its own. And pursuant to Art. 315,
1st paragraph of the Revised Penal Code, as amended by Presidential Decree 818, the
proper penalty here is an indeterminate penalty of from 2 years 8 months and 1
day prision correccional to 7 years and 1 day of prision mayor.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTINGUISHMENT OF OBLIGATIONS;
NOVATION; KINDS; ELUCIDATED. - Novation, in its broad concept, may either be extinctive or
modificatory. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes
the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains
compatible with the amendatory agreement.
2. ID.; ID.; ID.; ID.; ID.; EXTINCTIVE NOVATION; ELUCIDATED. - An extinctive novation results either by
changing the object or principal conditions (objective or real), or by substituting the person of the debtor or
subrogating a third person in the rights of the creditor (subjective or personal). Under this mode, novation would
have dual functions - one to extinguish an existing obligation, the other to substitute a new one in its place -
requiring a conflux of four essential requisites, (1) a previous valid obligation; (2) an agreement of all parties
concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new
obligation.
3. ID.; ID.; ID.; ID.; HOW EFFECTED; EXPRESSLY OR IMPLIEDLY. -- Novation is never presumed, and
the animus novandi, whether totally or partially, must appear by express agreement of the parties, or by their acts
that are too clear and unequivocal to be mistaken. The extinguishment of the old obligation by the new one is a
necessary element of novation which may be effected either expressly or impliedly. The term expressly means
that the contracting parties incontrovertibly disclose that their object in executing the new contract is to
extinguish the old one. Upon the other hand, no specific form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two contracts. While there is really no hard and fast
rule to determine what might constitute to be a sufficient change that can bring about novation, the touchstone
for contrariety, however, would be an irreconcilable incompatibility between the old and the new obligations.
4. ID.; ID.; ID.; ID.; ID.; IMPLIEDLY; ELUCIDATED. - There are two ways which could indicate, in fine, the
presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes
the same. The firstis when novation has been explicitly stated and declared in unequivocal terms. The second is
when the old and the new obligations are incompatible on every point. The test of incompatibility is whether or
not the two obligations can stand together, each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first. Corollarily, changes that breed incompatibility must be
essential in nature and not merely accidental. The incompatibility must take place in any of the essential elements
of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be merely
modificatory in nature and insufficient to extinguish the original obligation.
5. ID.; ID.; ID.; ID.; ID.; ID.; NOT IN CASE AT BAR. - The changes alluded to by petitioner consists only in the
manner of payment. There was really no substitution of debtors since private complainant merely acquiesced to
the payment but did not give her consent to enter into a new contract.
6. ID.; ID.; ID.; ID.; SUBSTITUTING THE PERSON OF THE DEBTOR;
FORMS; EXPOMISION AND DELEGACION; ELUCIDATED. - There are two forms of novation by
substituting the person of the debtor, depending on whose initiative it comes from, to
wit: expromision and delegacion. In the former, the initiative for the change does not come from the debtor and
may even be made without his knowledge. Since a third person would substitute for the original debtor and
assume the obligation, his consent and that of the creditor would be required. In the latter, the debtor offers, and
the creditor accepts, a third person who consents to the substitution and assumes the obligation, thereby releasing
the original debtor from the obligation, here, the intervention and the consent of all parties thereto would perforce
be necessary. In either of these two modes of substitution, the consent of the creditor, such as can be seen, is an
indispensable requirement.
7. ID.; ID.; ID.; ID.; ID.; ID.; ID.; NOT PRESENT IN CASE AT BAR. -- It is thus easy to see why Cariaga's
acceptance of Ramos and Camacho's payment on installment basis cannot be construed as a case of
either expromision or delegacionsufficient to justify the attendance of extinctive novation. Not too uncommon
is when a stranger to a contract agrees to assume an obligation; and while this may have the effect of adding to
the number of persons liable, it does not necessarily imply the extinguishment of the liability of the first
debtor. Neither would the fact alone that the creditor receives guaranty or accepts payments from a third person
who has agreed to assume the obligation, constitute an extinctive novation absent an agreement that the first
debtor shall be released from responsibility.
8. CRIMINAL LAW; ESTAFA; ELUCIDATED; APPLICATION IN CASE AT BAR. -- Article 315 of the
Revised Penal Code defines estafa and penalizes any person who shall defraud another by misappropriating or
converting, to the prejudice of another, money, goods, or any other personal property received by the offender
in trust or on commission, or for administration, or under any other obligation involving the duty to make delivery
of or to return the same, even though such obligation be totally or partially guaranteed by a bond; or by denying
having received such money, goods, or other property. It is axiomatic that the gravamen of the offense is the
appropriation or conversion of money or property received to the prejudice of the owner. The terms convert and
misappropriate have been held to connote an act of using or disposing of another's property as if it were one's
own or devoting it to a purpose or use different from that agreed upon. The phrase, to misappropriate to one's
own use has been said to include not only conversion to one's personal advantage, but also every attempt to
dispose of the property of another without right. Verily, the sale of the pieces of jewelry on installments in
contravention of the explicit terms of the authority granted to her is deemed to be one of conversion. Thus,
neither the theory of delay in the fulfillment of commission nor that of novation posed by petitioner, can avoid
the incipient criminal liability. The criminal liability for estafa already committed is then not affected by the
subsequent novation of contract, for it is a public offense which must be prosecuted and punished by the State in
its own conation.
9. REMEDIAL LAW; EVIDENCE; FINDINGS OF APPELLATE COURT, RESPECTED. - this Court fails to
see any reversible error, let alone any grave abuse of discretion, in the appreciation of the evidence by the Court
of Appeals which, in fact, hews with those of the trial court. Indeed, under the circumstances, this Court must
be deemed bound by the factual findings of those courts.
10. CRIMINAL LAW; ESTAFA; PROPER PENALTY. - Article 315, lst paragraph, of the Revised Penal Code,
as amended by Presidential Decree No. 818, provides that the penalty of prision correccional in its maximum
period to prision mayor in its minimum period, if the amount of the fraud is over 12,000 but does not exceed
22,000 pesos, and if such amount exceeds the latter sum, the penalty provided in this paragraph shall be imposed
in its maximum period, adding one year for each additional 10,000 pesos; but the total penalty which may be
imposed shall not exceed twenty years. In such case, and in connection with the accessory penalties which may
be imposed and for the purpose of the other provisions of this Code, the penalty shall be termed prision
mayor or reclusion temporal, as the case may be.
SYLLABI/SYNOPSIS

THIRD DIVISION

[G.R. No. 126712. April 14, 1999]

LEONIDA C. QUINTO, petitioner, vs. PEOPLE OF THE


PHILIPPINES, respondent.

DECISION
VITUG, J.:

Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court
is the decision of the Court of Appeals, promulgated on 27 September 1996, in People of
the Philippines vs. Leonida Quinto y Calayan, docketed CA-G.R. CR No. 16567, which
has affirmed the decision of Branch 157 of the Regional Trial Court (RTC), National
Capital Judicial Region, Branch 157, Pasig City, finding Leonida Quinto y Calayan guilty
beyond reasonable doubt of the crime of Estafa.
Leonida Quinto y Calayan, herein petitioner, was indicted for the crime of estafa under
Article 315, paragraph 1(b), of the Revised Penal Code, in an information which read:

"That on or about the 23rd day of March 1977, in the Municipality of Makati,
Metro Manila, Philippines and within the jurisdiction of this Honorable Court,
the above-named accused, received in trust from one Aurelia Cariaga the
following pieces of jewelry, to wit:

One (1) set of marques with briliantitos


valued at .............................................P17,500.00
One (1) solo ring (2 karats & 30 points)
valued at .............................................P16,000.00
One (1) diamond ring (rosetas)
valued at .............................................P 2,500.00

with a total value of P36,000.00 for the purpose of selling the same on
commission basis and with the express obligation on the part of the accused
to turn over the proceeds of sale thereof, or to return the said jewelries (sic), if
not sold, five (5) days after receipt thereof, but the accused once in
possession of the jewelries (sic), far from complying with her obligation, with
intent of gain, gave abuse of confidence and to defraud said Aurelia Cariaga,
did then and there wilfully, unlawfully and feloniously misappropriate, misapply
and convert to her own personal use and benefit the said jewelries (sic) and/or
the proceeds of sale or to return the pieces of jewelry, to the damage and
prejudice of the said Aurelia Cariaga in the aforementioned amount of P
36,000.00.

"Contrary to law "[1]

Upon her arraignment on 28 March 1978, petitioner Quinto pleaded not guilty; trial on
the merits thereupon ensued.
According to the prosecution, on or about 23 March 1977, Leonida went to see Aurelia
Cariaga (private complainant) at the latter's residence in Makati. Leonida asked Aurelia
to allow her have some pieces of jewelry that she could show to prospective
buyers. Aurelia acceded and handed over to Leonida one (1) set of marques
with briliantitos worth P17,500.00, one (1) solo ring of 2.30 karats worth P16,000.00 and
one (1) rosetas ring worth P2,500.00. Leonida signed a receipt (Exhibit "A") therefor, thus:

"RECEIPT

Pinatutunayan ko na tinanggap ko kay Gng. Aurelia B. Cariaga (ang) mga


alahas na nakatala sa ibaba, upang aking ipagbili sa pamamagitan ng BIGAY
PALA o Commission at Kaliwaan lamang. Ako'y hindi pinahihintulutan (na)
ipagbili ang mga ito ng Pautang. Pinananagutan ko na ang mga alahas na ito
ay hindi ko ipagkakaloob o ipagkakatiwala sa kanino pa man upang ilagak o
maipagbili nila, at ang mga ito ay ako ang magbibili sa ilalim ng aking
pangangasiwa at pananagutan sa halagang nakatala sa ibaba. At aking
isasauli ang mga hindi na maipagbili sa loob ng 5 days (sic) araw mula sa
petsa nito o sa kahilingan, na nasa mabuti at malinis na kalagayan katulad ng
tanggapin ko sa petsang ito.

MGA URI NG ALAHAS

1 set marques with titos 17,500.


1 solo 2 karats & 30 points 16,000.
1 ring Rosetas brill 2,500.

Makati, March 23, 1977


(Sgd.)"[2]

When the 5-day period given to her had lapsed, Leonida requested for and was granted
additional time within which to vend the items. Leonida failed to conclude any sale and,
about six (6) months later, Aurelia asked that the pieces of jewelry be returned. She sent
to Leonida a demand letter which the latter ignored. The inexplicable delay of Leonida in
returning the items spurred the filing of the case for estafa against her.
The defense proffered differently. In its version, the defense sought to prove that
Leonida was engaged in the purchase and sale of jewelry. She was used to buying pieces
of jewelry from a certain Mrs. Antonia Ilagan who later introduced her (Leonida) to
Aurelia. Sometime in 1975, the two, Aurelia and Leonida, started to transact business in
pieces of jewelry among which included a solo ring worth P40,000.00 which was sold to
Mrs. Camacho who paid P20,000.00 in check and the balance of P20,000.00 in
installments later paid directly to Aurelia. The last transaction Leonida had-with Mrs.
Camacho involved a "marques" worth P16,000.00 and a ring valued at P4,000.00. Mrs.
Camacho was not able to pay the due amount in full and left a balance of P13,000.00.
Leonida brought Mrs. Camacho to Aurelia who agreed to allow Mrs. Camacho to pay the
balance in installments. Leonida was also able to sell for Aurelia a 2-karat diamond ring
worth P17,000.00 to Mrs. Concordia Ramos who, unfortunately, was unable to pay the
whole amount. Leonida brought Mrs. Ramos to Aurelia and they talked about the terms
of payment. As first payment, Mrs. Ramos gave Leonida a ring valued at P3,000.00. The
next payment made by her was P5,000.00. Leonida herself then paid P2,000.00.
The RTC, in its 25th January 1993 decision, found Leonida guilty beyond reasonable
doubt of the crime of estafa and sentenced her to suffer the penalty of imprisonment of
seven (7) years and one (1) day of prision mayor as minimum to nine (9) years of prision
mayor as maximum and to indemnify private complainant in the amount of P36,000.00.
Leonida interposed an appeal to the Court of Appeals which affirmed, in its 27th
September 1996 decision, the RTC's assailed judgment.
The instant petition before this Court would have it that the agreement between
petitioner and private complainant was effectively novated when the latter consented to
receive payment on installments directly from Mrs. Camacho and Mrs. Ramos.
The petition is bereft of merit.
Novation, in its broad concept, may either be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the creation of a new obligation that
takes the place of the former; it is merely modificatory when the old obligation subsists to
the extent it remains compatible with the amendatory agreement. An extinctive novation
results either by changing the object or principal conditions (objective or real), or by
substituting the person of the debtor or subrogating a third person in the rights of the
creditor (subjective or personal).[3] Under this mode, novation would have dual functions -
one to extinguish an existing obligation, the other to substitute a new one in its
place[4] - requiring a conflux of four essential requisites: (1) a previous valid obligation; (2)
an agreement of all parties concerned to a new contract; (3) the extinguishment of the old
obligation; and (4) the birth of a valid new obligation.[5]
Novation is never presumed,[6] and the animus novandi, whether totally or partially,
must appear by express agreement of the parties, or by their acts that are too clear and
unequivocal to be mistaken.[7]
The extinguishment of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. [8] The term "expressly"
means that the contracting parties incontrovertibly disclose that their object in executing
the new contract is to extinguish the old one.[9] Upon the other hand, no specific form is
required for an implied novation,[10] and all that is prescribed by law would be an
incompatibility between the two contracts. While there is really no hard and fast rule to
determine what might constitute to be a sufficient change that can bring about novation,
the touchstone for contrariety, however, would be an irreconcilable incompatibility
between the old and the new obligations.[11]
There are two ways which could indicate, in fine, the presence of novation and
thereby produce the effect of extinguishing an obligation by another which substitutes the
same. The firstis when novation has been explicitly stated and declared in unequivocal
terms. The second is when the old and the new obligations are incompatible on every
point. The test of incompatibility is whether or not the two obligations can stand together,
each one having its independent existence. If they cannot, they are incompatible and the
latter obligation novates the first.[12] Corollarily, changes that breed incompatibility must be
essential in nature and not merely accidental. The incompatibility must take place in any
of the essential elements of the obligation, such as its object, cause or principal conditions
thereof; otherwise, the change would be merely modificatory in nature and insufficient to
extinguish the original obligation.
The changes alluded to by petitioner consists only in the manner of payment. There
was really no substitution of debtors since private complainant merely acquiesced to the
payment but did not give her consent[13] to enter into a new contract. The appellate court
observed:

"Appellant, however, insists that their agreement was novated when


complainant agreed to be paid directly by the buyers and on installment
basis. She adds that her liability is merely civil in nature.

"We are unimpressed.


"It is to remembered that one of the buyers, Concordia Ramos, was not
presented to testify on the alleged aforesaid manner of payment.

"The acceptance by complainant of partial payment tendered by the buyer,


Leonor Camacho, does not evince the intention of the complainant to have
their agreement novated. It was simply necessitated by the fact that, at that
time, Camacho had substantial accounts payable to complainant, and
because of the fact that appellant made herself scarce to complainant. (TSN,
April 15, 1981, 31-32) Thus, to obviate the situation where complainant would
end up with nothing, she was forced to receive the tender of
Camacho. Moreover, it is to be noted that the aforesaid payment was for the
purchase, not of the jewelry subject of this case, but of some other jewelry
subject of a previous transaction. (Ibid. June 8, 1981, 10-11)"[14]

There are two forms of novation by substituting the person of the debtor, depending
on whose initiative it comes from, to wit: expromision and delegacion. In the former, the
initiative for the change does not come from the debtor and may even be made without
his knowledge. Since a third person would substitute for the original debtor and assume
the obligation, his consent and that of the creditor would be required. In the latter, the
debtor offers, and the creditor accepts, a third person who consents to the substitution
and assumes the obligation, thereby releasing the original debtor from the obligation,
here, the intervention and the consent of all parties thereto would perforce be
necessary.[15] In either of these two modes of substitution, the consent of the creditor, such
as can be seen, is an indispensable requirement.[16]
It is thus easy to see why Cariaga's acceptance of Ramos and Camacho's payment
on installment basis cannot be construed as a case of either expromision or
delegacion sufficient to justify the attendance of extinctive novation. Not too uncommon
is when a stranger to a contract agrees to assume an obligation; and while this may have
the effect of adding to the number of persons liable, it does not necessarily imply the
extinguishment of the liability of the first debtor.[17] Neither would the fact alone that the
creditor receives guaranty or accepts payments from a third person who has
agreed to assume the obligation, constitute an extinctive novation absent an
agreement that the first debtor shall be released from responsibility.[18]
Petitioner's reliance on Candida Mariano vs. People[19] is misplaced. The factual
milieu in Mariano would indicate a clear intention on the part of the parties to release the
accused from her responsibility as an agent and for her to instead assume the obligation
of a guarantor. Unfortunately for petitioner in the case at bar, the factual findings of both
the trial court and the appellate court prove just the opposite which is that there has never
been any animus novandi between or among the parties.
Article 315 of the Revised Penal Code defines estafa and penalizes any person who
shall defraud another by "misappropriating or converting, to the prejudice of another,
money, goods, or any other personal property received by the offender in trust or on
commission, or for administration, or under any other obligation involving the duty to make
delivery of or to return the same, even though such obligation be totally or partially
guaranteed by a bond; or by denying having received such money, goods, or other
property." It is axiomatic that the gravamen of the offense is the appropriation or
conversion of money or property received to the prejudice of the owner. The terms
"convert" and "misappropriate" have been held to connote "an act of using or disposing
of another's property as if it were one's own or devoting it to a purpose or use different
from that agreed upon." The phrase, 'to misappropriate to one's own use" has been said
to include "not only conversion to one's personal advantage, but also every attempt to
dispose of the property of another without right."[20] Verily, the sale of the pieces of jewelry
on installments in contravention of the explicit terms of the authority granted to her in
Exhibit "A" (supra) is deemed to be one of conversion. Thus, neither the theory of "delay
in the fulfillment of commission" nor that of novation posed by petitioner, can avoid the
incipient criminal liability. In People vs. Nery,[21] this Court held:

"It may be observed in this regard that novation is not one of the means
recognized by the Penal Code whereby criminal liability can be extinguished;
hence, the role of novation may only be either to prevent the rise of criminal
liability or to cast doubt on the true nature of the original basic transaction,
whether or not it was such that its breach would not give rise to penal
responsibility ..."

The criminal liability for estafa already committed is then not affected by the subsequent
novation of contract, for it is a public offense which must be prosecuted and punished by
the State in its own conation.[22]
Finally, this Court fails to see any reversible error, let alone any grave abuse of
discretion, in the appreciation of the evidence by the Court of Appeals which, in fact, hews
with those of the trial court. Indeed, under the circumstances, this Court must be deemed
bound by the factual findings of those courts.
Article 315, 1st paragraph, of the Revised Penal Code, as amended by Presidential
Decree No. 818, provides that the penalty of "prision correccional in its maximum period
to prison mayor in its minimum period, if the amount of the fraud is over 12,000 but does
not exceed 22,000 pesos, and if such amount exceeds the latter sum, the penalty
provided in this paragraph shall be imposed in its maximum period, adding one year for
each additional 10,000 pesos; but the total penalty which may be imposed shall not
exceed twenty years. In such case, and in connection with the accessory penalties which
may be imposed and for the purpose of the other provisions of this Code, the penalty shall
be termed prision mayor or reclusion temporal, as the case may be."
In the leading case of People vs. Gabres[23] this Court ruled:

"Under the Indeterminate Sentence Law, the maximum term of the penalty
shall be 'that which, in view of the attending circumstances, could be properly
imposed' under the Revised Penal Code, and the minimum shall be 'within the
range of the penalty next lower to that prescribed' for the offense. The penalty
next lower should be based on the penalty prescribed by the Code for the
offense, without first considering any modifying circumstance attendant to the
commission of the crime. The determination of the minimum penalty is left by
law to the sound discretion of the court and it can be anywhere within the
range of the penalty next lower without any reference to the periods into which
it might be subdivided. The modifying circumstances are considered only in
the imposition of the maximum term of the indeterminate sentence.

"The fact that the amounts involved in the instant case exceed P22,000.00
should not be considered in the initial determination of the indeterminate
penalty; instead, the matter should be so taken as analogous to modifying
circumstances in the imposition of the maximum term of the full indeterminate
sentence. This interpretation of the law accords with the rule that penal laws
should be construed in favor of the accused. Since the penalty prescribed by
law for the estafa charge against accused-appellant is prision
correccional maximum to prision mayorminimum, the penalty next lower would
then be prision correccional minimum to medium. Thus, the minimum term of
the indeterminate sentence should be anywhere within six (6) months and one
(1) day to four (4) years and two (2) months while the maximum term of the
indeterminate sentence should at least be six (6) years and one (1) day
because the amounts involved exceeded P22,000.00, plus an additional one
(1) year for each additional P10,000.00."[24]

The penalty imposed by the trial court, affirmed by the appellate court, should
accordingly be modified.
WHEREFORE, the assailed decision of the Court of Appeals is AFFIRMED except
that the imprisonment term is MODIFIED by now sentencing petitioner to an
indeterminate penalty of from two (2) years, eight (8) months and one (1) day of prison
correccional to seven (7) years and one (1) day of prision mayor. The civil liability of
appellant for P36,000.00 in favor of private complainant is maintained. Costs against
petitioner.
SO ORDERED.
Romero, (Chairman), Panganiban, Purisima, and Gonzaga-Reyes, JJ., concur.

FIRST DIVISION

[G.R. No. 135046. August 17, 1999]


SPOUSES FLORANTE and LAARNI BAUTISTA, petitioners, vs. PILAR
DEVELOPMENT CORPORATION, respondent.

DECISION
PUNO, J.:

This petition for review seeks to reverse and set aside the Decision and Resolution of the Court
of Appeals in CA-G.R. CV No. 51363[1] which reversed the Decision of the Regional Trial Court, Makati,
Branch 138 in Civil Case No. 17702.[2]

The following facts are uncontroverted.


In 1978, petitioner spouses Florante and Laarni Bautista purchased a house and lot in Pilar
Village, Las Pinas, Metro Manila. To partially finance the purchase, they obtained from the Apex
Mortgage & Loan Corporation (Apex) a loan in the amount of P100,180.00. They executed a
promissory note on December 22, 1978 obligating themselves, jointly and severally, to pay the
"principal sum of P100,180.00 with interest rate of 12% and service charge of 3%" for a period of
240 months, or twenty years, from date, in monthly installments of P1,378.83.[3] Late payments were
to be charged a penalty of one and one-half per cent (1 1/2%) of the amount due. In the same promissory note,
petitioners authorized Apex to "increase the rate of interest and/or service charges" without notice to them in the event
that a law, Presidential Decree or any Central Bank regulation should be enacted increasing the lawful rate of interest
and service charges on the loan.[4] Payment of the promissory note was secured by a second mortgage on the house
and lot purchased by petitioners.[5]

Petitioner spouses failed to pay several installments. On September 20, 1982, they executed
another promissory note in favor of Apex. This note was in the amount of P142,326.43 at the
increased interest rate of twenty-one per cent (21%) per annum with no provision for service
charge but with penalty charge of 1 1/2% for late payments. Payment was to be made for a period
of 196 months or 16.33 years in monthly installments of P2,576.68, inclusive of principal and
interest. Petitioner spouses also authorized Apex to "increase/decrease the rate of interest and/or
service charges" on the note in the event any law or Central Bank regulation shall be passed
increasing or decreasing the same.[6]
In November 1983, petitioner spouses again failed to pay the installments. On June 6, 1984,
Apex assigned the second promissory note to respondent Pilar Development Corporation without
notice to petitioners.
On August 31, 1987, respondent corporation, as successor-in-interest of Apex, instituted
against petitioner spouses Civil Case No. 17702 before the Regional Trial Court, Makati, Branch
138. Respondent corporation sought to collect from petitioners the amount of P140,515.11
representing the unpaid balance of the principal debt from November 23, 1983, including interest
at the rate of twenty-one per cent (21%) under the second promissory note, and 25% and 36% per
annum in accordance with Central Bank Circular No. 905, series of 1982. Respondent also sought
payment of ten per cent (10%) of the amount due as attorney's fees.[7]
In their answer, petitioner spouses mainly contended that the terms of the second promissory
note increasing the interest rate to 21% and the escalation clauses authorizing Apex to increase
interest rates pursuant to any law or Central Bank regulation are null and void in the absence of a
de-escalation clause in the same note.[8]
After pre-trial, both parties submitted the case for decision on the sole issue of the interest
rate.
The trial court rendered judgment on September 22, 1995. It ordered petitioner spouses to pay
respondent corporation the sum of P140,515.11, with interest at the rate of 12% per annum, plus
service charge, viz:

"WHEREFORE, judgment is hereby rendered as follows:

(a) Plaintiff is entitled to collect from the defendants the amount of P140,515.11 with
interest at the rate of 12% per annum from November 23, 1983 until the amount is
fully paid plus the stipulated service charge;

(b) Ordering defendants as joint and several obligors to pay plaintiff the amount stated
in paragraph (a) hereof;

(c) Counterclaim is hereby dismissed.

No pronouncement as to costs.

SO ORDERED."[9]

Both parties appealed to the Court of Appeals. In a Decision dated May 14, 1998, the appellate
court reversed the trial court by applying the interest rate of 21% per annum, and adding attorney's
fees of 10%. Thus:

"IN VIEW OF ALL THE FOREGOING, the appealed judgment is hereby


REVERSED and SET ASIDE and a new one entered ordering the defendants to pay
the plaintiffs the amount of P142,326.43, as principal with interest at the rate of 21%
from November 23, 1983 until the amount is fully paid; the sum equivalent to 10% of
the amount due as attorney's fees and the costs of this suit.

SO ORDERED." [10]

Petitioner spouses moved for reconsideration. In a Resolution dated August 18, 1998, the
Court of Appeals denied the motion but reduced the principal amount of the obligation from
P142,326.42 to P140,515.11.[11]
Hence this recourse.
Petitioner spouses claim that the Court of Appeals erred:
I

IN RULING THAT THE TWO (2) PROMISSORY NOTES EXECUTED BY THE


PARTIES ARE INDEPENDENT OF EACH OTHER.
CONVERSELY, IN NOT RULING THAT THE SAID PROMISSORY NOTES
CONSTITUTE A SINGLE-LOAN TRANSACTION.
II

IN RULING THAT THE APPLICABLE RATE OF INTEREST IS 21% PER


ANNUM AS STIPULATED IN THE SECOND PROMISSORY NOTE.

CONVERSELY, IN NOT RULING THAT THE ESCALATION OF INTEREST


RATE FROM 12% PER ANNUM (1ST PROMISSORY NOTE) TO 21% PER
ANNUM (2ND PROMISSORY NOTE) IS UNLAWFUL.
III

IN RULING THAT 10% OF THE AMOUNT DUE IS AWARDABLE AS


ATTORNEY'S FEES.

CONVERSELY, IN NOT RULING THAT THE AWARD OF 10% ATTORNEY'S


FEES IS NOT PROPER UNDER THE CIRCUMSTANCES.
IV

IN RULING THAT NOTICE OF ASSIGNMENT OF CREDIT IS "POINTLESS


AND UNSUSTAINABLE."

CONVERSELY, IN NOT RULING THAT NOTICE TO THE DEBTOR IS


REQUIRED WHEN CREDIT IS ASSIGNED.
V

IN NOT RULING THAT UNDER THE CIRCUMSTANCES PETITIONERS ARE


ENTITLED TO MORAL AND EXEMPLARY DAMAGES.[12]

The controversy in this petition involves the rate of interest respondent creditor is entitled to
collect on petitioners' loan: whether it be 12% under the promissory note of December 22, 1978,
or 21% under the promissory note of September 20, 1982.
Petitioners claim that the interest rate of 12% per annum should be adjudged inasmuch as the
two promissory notes constitute one transaction. Allegedly, the first note defined the terms and
conditions of the loan while the second note is merely an extension of and derives its existence
from the former. Hence, the second note is governed by the stipulations in the first note.[13]
The two promissory notes are identically entitled "Promissory Note with Authority to Assign
Credit." The notes were prepared by Apex in standard form and consist of two (2) pages
each. Except for one or two stipulations, they contain the same provisions and the same blanks for
the amount of the loan and other pertinent data subject of each note. However, on the upper right
portion of the second note, there appears a typewritten entry which reads:

"This cancels PN # A-387-78 dated December 22, 1978."[14]

Correspondingly, on the face of each page of the first promissory note, i.e., PN No. A-387-78 dated
December 22, 1978, the word "Cancelled" is boldly stamped twice with the date "September 16,
1982" and a signature written in a space inside the letters of the word.[15]
The first promissory note was cancelled by the express terms of the second promissory
note. To cancel is to strike out, to revoke, rescind or abandon, to terminate.[16] In fine, the first note was
revoked and terminated. Simply put, it was novated. The extinguishment of an obligation by the substitution or change
of the obligation by a subsequent one which extinguishes or modifies the first is a novation.[17] Novation is made either
by changing the object or principal conditions, referred to as an objective or real novation; or by substituting the person
of the debtor or subrogating a third person to the rights of the creditor, which is known as subjective or personal
novation.[18] In both objective and subjective novation, a dual purpose is achieved-- an obligation is extinguished and
a new one is created in lieu thereof.[19] 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.[20] Express novation takes place when the contracting parties expressly disclose that
their object in making the new contract is to extinguish the old contract, otherwise the old contract remains in force
and the new contract is merely added to it, and each gives rise to an obligation still in force. [21]

Novation has four (4) essential requisites: (1) the existence of a previous valid obligation; (2)
the agreement of all parties to the new contract; (3) the extinguishment of the old contract; and (4)
the validity of the new one.[22] In the instant case, all four requisites have been complied with. The first
promissory note was a valid and subsisting contract when petitioner spouses and Apex executed the second promissory
note. The second promissory note absorbed the unpaid principal and interest of P142,326.43 in the first note which
amount became the principal debt therein, payable at a higher interest rate of 21% per annum. Thus, the terms of the
second promissory note provided for a higher principal, a higher interest rate, and a higher monthly amortization, all
to be paid within a shorter period of 16.33 years. These changes are substantial and constitute the principal conditions
of the obligation.[23] Both parties voluntarily accepted the terms of the second note; and also in the same note, they
unequivocally stipulated to extinguish the first note. Clearly, there was animus novandi, an express intention to
novate.[24] The first promissory note was cancelled and replaced by the second note. This second note became the new
contract governing the parties' obligations.

In their second assigned error, petitioners contend that in the second promissory note, the
escalation of the interest rate from 12% to 21% per annum is unlawful and cannot be imposed for
failure of the escalation provisions to include valid de-escalation clauses. In the absence of de-
escalation clauses, the Court of Appeals allegedly erred in applying Central Bank Circulars Nos.
705, 712 and 905 issued by the Monetary Board of the Central Bank of the Philippines.[25]
At the time the parties executed the first promissory note in 1978, the interest of 12% was the
maximum rate fixed by the Usury Law for loans secured by a mortgage upon registered real
estate.[26] On December 1, 1979, the Monetary Board of the Central Bank of the Philippines [27] issued Circular No.
705 which fixed the effective rate of interest on loan transactions with maturities of more than 730 days to twenty-one
per cent (21%) per annum for both secured and unsecured loans.[28] On January 28, 1980, The Monetary Board issued
Circular No. 712 reiterating the effective interest rate of 21% on said loan transactions. [29] On January 1, 1983, CB
Circular No. 905, series of 1982, took effect. This Circular declared that the rate of interest on any loan or forbearance
of any money, goods or credits, regardless of maturity and whether secured or unsecured, "shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as amended." [30] In short, Circular No. 905 removed the ceiling
on interest rates for secured and unsecured loans, regardless of maturity. [31]
When the second promissory note was executed on September 20, 1982, Central Bank
Circulars Nos. 705 and 712 were already in effect. These Circulars fixed the effective interest rate
for secured loan transactions with maturities of more than 730 days, i.e, two (2) years, at 21% per
annum. The interest rate of 21% provided in the second promissory note was therefore authorized
under these Circulars.
The question of whether the escalation clauses in the second promissory note are valid is
irrelevant. Respondent corporation has signified that it is collecting petitioners' debt only at the
fixed interest rate of 21% per annum, as expressly agreed upon in the second promissory note, not
at the escalated rates authorized under the escalation clauses.[32] The Court of Appeals therefore did not
err in applying the interest rate of 21% to petitioner's loan under the second promissory note.

Neither did the Court of Appeals err in imposing attorney's fees of ten per cent (10%) on the
amount due. The award of attorney's fees is expressly stipulated in the fourth paragraph of the
promissory note itself, viz:

"In case of non-payment of the amount of this note or any portion of it on demand
when given due, or any other amount/s due on account of this note, the entire
obligation shall become due and demandable, and if for the enforcement of the
payment thereof, APEX MORTGAGE AND LOANS CORP. is constrained to entrust
the case to its attorneys, I/We, jointly and severally, bind myself/ourselves to pay
TEN (10%) per cent on the amount due on the note as attorney's fees, such amount in
no case to be less than FIVE HUNDRED (P500.00) PESOS in addition to the legal
fees and other incidental expenses."[33]

Petitioners' lack of bad faith in resisting imposition of the increased interest rate cannot serve
to mitigate their liability for liquidated damages. Petitioner Florante Bautista is a lawyer and he
should have been aware of the effects of the stipulations in the second promissory note and the
pertinent CB Circulars on his obligation. At the same time, there is no showing that the amount of
liquidated damages is iniquitous and unconscionable for this court to equitably reduce the same.[34]
Finally, the fact that petitioners were not notified of the assignment of their credit by Apex to
herein respondent corporation is not material. In the eighth paragraph of the second promissory
note, petitioners expressly waived notice to any assignment of credit, viz:

"It is understood that APEX MORTGAGE AND LOANS CORPORATION has the
right to assign this promissory note, or make use of it as collateral in favor of any third
person whomsoever and this will constitute as an authority therefore waiver of notice
of such action taken [sic]."[35]

The purpose of the notice is only to inform the debtor that from the date of the assignment, payment
should be made to the assignee and not to the original creditor.[36]
IN VIEW WHEREOF, the petition is denied and the Decision and Resolution of the Court
of Appeals in CA-G.R. CV No. 51363 are affirmed.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Kapunan, Pardo, and Ynares -Santiago, JJ., concur.
FIRST DIVISION

[G.R. No. 126891. August 5, 1998]

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

DECISION
PANGANIBAN, J.:

The duty of a corporate secretary to record transfers of stocks is ministerial. However,


he cannot be compelled to do so when the transferees title to said shares has no prima
facie validity or is uncertain. More specifically, a pledgee, prior to foreclosure and sale,
does not acquire ownership rights over the pledged shares and thus cannot compel the
corporate secretary to record his alleged ownership of such shares on the basis merely
of the contract of pledge. Similarly, the SEC does not acquire jurisdiction over a dispute
when a partys claim to being a shareholder is, on the face of the complaint, invalid or
inadequate or is otherwise negated by the very allegations of such complaint. Mandamus
will not issue to establish a right, but only to enforce one that is already established.

Statement of the Case

These are the principles used by this Court in resolving this Petition for Review on
Certiorari before us assailing the October 24, 1996 Decision[1] of the Court of Appeals[2]in
CA-GR SP No. 40832, the dispositive portion of which reads:

IN THE LIGHT OF ALL THE FOREGOING, the Petition at bench is DENIED DUE
COURSE and is hereby DISMISSED. With costs against the [p]etitioner.[3]

By the foregoing disposition, the Court of Appeals effectively affirmed the March 7,
1996 Decision[4] of the Securities and Exchange Commission (SEC) en banc:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered dismissing the
appeal on the ground that mandamus will only issue upon a clear showing of ownership
over the assailed shares of stock, [t]he determination of which, on the basis of the
foregoing facts, is within the jurisdiction of the regular courts and not with the SEC.[5]

The SEC en banc upheld the August 16, 1993 Decision[6] of SEC Hearing Officer
Rolando C. Malabonga, which dismissed the action for mandamus filed by petitioner.
The Facts

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

x x x On January 8, 1980, Respondent-Appellee Sy Guiok secured a loan


from the [p]etitioner in the amount of P40,000 payable within six (6) months.
To secure the payment of the aforesaid loan and interest thereon,
Respondent Guiok executed a Contract of Pledge in favor of the [p]etitioner
whereby he pledged his three hundred (300) shares of stock in the Go Fay &
Company Inc., Respondent Corporation, for brevitys sake. Respondent Guiok
obliged himself to pay interest on said loan at the rate of 10% per annum from
the date of said contract of pledge. On the same date, Alfonso Sy Lim secured
a loan from the [p]etitioner in the amount of P40,000 payable in six (6)
months. To secure the payment of his loan, Sy Lim executed a Contract of
Pledge covering his three hundred (300) shares of stock in Respondent
Corporation. Under said contract, Sy Lim obliged himself to pay interest on his
loan at the rate of 10% per annum from the date of the execution of said
contract.

Under said Contracts of Pledge, Respondent[s] Guiok and Sy Lim


covenanted, inter alia, that:

3. In the event of the failure of the PLEDGOR to pay the amount within a
period of six (6) months from the date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without notice to
the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his
option; and the PLEDGEE is hereby authorized and empowered at his option
to transfer the said shares of stock on the books of the corporation to his own
name and to hold the certificate issued in lieu thereof under the terms of this
pledge, and to sell the said shares to issue to him and to apply the proceeds
of the sale to the payment of the said sum and interest, in the manner
hereinabove provided;

4. In the event of the foreclosure of this pledge and the sale of the pledged
certificate, any surplus remaining in the hands of the PLEDGEE after the
payment of the said sum and interest, and the expenses, if any, connected
with the foreclosure sale, shall be paid by the PLEDGEE to the PLEDGOR;

5. Upon payment of the said amount and interest in full, the PLEDGEE will, on
demand of the PLEDGOR, redeliver to him the said shares of stock by
surrendering the certificate delivered to him by the PLEDGOR or by
retransferring each share to the PLEDGOR, in the event that the PLEDGEE,
under the option hereby granted, shall have caused such shares to be
transferred to him upon the books of the issuing company. (idem, supra)

Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank and
delivered the same to the [p]etitioner.[7]
However, Respondent Guiok and Sy Lim failed to pay their respective loans and the
accrued interests thereon to the [p]etitioner. In October, 1990, the [p]etitioner filed a
Petition for Mandamus against Respondent Corporation, with the SEC entitled Lim Tay
versus Go Fay & Company, Inc., SEC Case No. 03894, praying that:

PRAYER

WHEREFORE, premises considered, it is respectfully prayed that an order be


issued directing the corporate secretary of [R]espondent Go Fay & Co., Inc. to
register the stock transfers and issue new certificates in favor of Lim Tay. It is
likewise prayed that [R]espondent Go Fay & Co., Inc[.] be ordered to pay all
dividends due and unclaimed on the said certificates to [P]laintiff Lim Tay.

Plaintiff further prays for such other relief just and equitable in the premises.
(page 34,Rollo)

The [p]etitioner alleged, inter alia, in his Petition that the controversy between
him as stockholder and the Respondent Corporation was intra-corporate in
view of the obstinate refusal of the corporate secretary of Respondent
Corporation to record the transfer of the shares of stock of Respondent Guiok
and Sy Lim in favor of and under the name of the [p]etitioner and to issue new
certificates of stock to the [p]etitioner.

The Respondent Corporation filed its Answer to the Complaint and alleged, as
Affirmative Defense, that:

AFFIRMATIVE DEFENSE

7. Respondent repleads and incorporates herein by reference the foregoing


allegations.

8. The Complaint states no cause of action against [r]espondent.


9. Complainant is not a stockholder of [r]espondent. Hence, the Honorable
Commission has no jurisdiction to enter the present controversy since their
[sic] is no intracorporate relationship between complainant and respondent.

10. Granting arguendo that a pledge was constituted over the shareholdings
of Sy Guiok in favor of the complainant and that the former defaulted in the
payment of his obligations to the latter, the same did not automatically vest [i]n
complainant ownership of the pledged shares. (page 37, Rollo)

In the interim, Sy Lim died. Respondents Guiok and the Intestate Estate of
Alfonso Sy Lim, represented by Conchita Lim, filed their Answer-In-
Intervention with the SEC alleging, inter alia, that:

xxx

3. Deny specifically the allegation under paragraph 5 of the Complaint that,


failure to pay the loan within the contract period automatically foreclosed the
pledged shares of stocks and that the share of stocks are automatically
purchased by the plaintiff, for being false and distorted, the truth being that
pursuant to the [sic] paragraph 3 of the contract of pledges, Annexes A and B,
it is clear that upon failure to pay the amount within the stipulated period, the
pledgee is authorized to foreclose the pledge and thereafter, to sell the same
to satisfy the loan. [H]owever, to this point in time, plaintiff has not performed
any operative act of foreclosing the shares of stocks of [i]ntervenors in
accordance with the Chattel Mortgage law, [n]either was there any sale of
stocks -- by way of public or private auction -- made after foreclosure in favor
of the plaintiff to speak about, and therefore, the respondent company could
not be force[d] to [sic] by way of mandamus, to transfer the subject shares of
stocks from the name of your [i]ntervenors to that of the plaintiff in the
absence of clear and legal basis for such;

4. DENY specifically the allegations under paragraphs 6, 7 and 8 of the


complaint as to the existence of the alleged intracorporate dispute between
plaintiff and company for being without proper and legal basis. In the first
place, plaintiff is not a stockholder of the respondent corporation; there was no
foreclosure of shares executed in accordance with the Chattel Mortgage Law
whatsoever; there were no sales consumated that would transfer to the
plaintiff the subject shares of stocks and therefore, any demand to transfer the
shares of stocks to the name of the plaintiff has no legal basis. In the second
place, [i]ntervenors had been in the past negotiating possible compromise and
at the same time, had tendered payment of the loan secured by the subject
pledges but plaintiff refused unjustifiably to oblige and accept payment o[r]
even agree on the computation of the principal amount of the loan and
interest on top of a substantial amount offered just to settle and compromise
the indebtedness of [i]ntervenors;

II. SPECIAL AFFIRMATIVE DEFENSES

Intervenors replead by way of reference all the foregoing allegations to form


part of the special affirmative defenses;

5. This Honorable Commission has no jurisdiction over the person of the


respondent and nature of the action, plaintiff having no personality at all to
compel respondent by way of mandamus to perform certain corporate
function[s];

6. The complaint states no cause of action;

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

8. The appropriation of the subject shares of stocks by plaintiff, without


compliance with the formality of law, amounted to [p]actum commis[s]orium
therefore, null and void;

9. Granting for the sake of argument only that there was a valid foreclosure
and sale of the subject st[o]cks in favor of the plaintiff -- which [i]ntervenors
deny -- still paragraph 5 of the contract allows redemption, for which
intervenors are willing to redeem the share of stocks pledged;

10. Even the Chattel Mortgage law allowed redemption of the [c]hattel
foreclosed;

11. As a matter of fact, on several occasions, [i]ntervenors had made


representations with the plaintiff for the compromise and settlement of all the
obligations secured by the subject pledges -- even offering to pay
compensation over and above the value of the obligations, interest[s] and
dividends accruing to the share of stocks but, plaintiff unjustly refused to
accept the offer of payment; (pages 39-42, Rollo)

The [r]espondents-[i]ntervenors prayed the SEC that judgment be rendered in


their favor, as follows:
IV. PRAYER

It is respectfully prayed to this Honorable Commission after due hearing, to


dismiss the case for lack of merit, ordering plaintiff to accept payment for the
loans secured by the subject shares of stocks and to pay plaintiff:

1. The sum of P50,000.00, as moral damages;

2. the sum of P50,000.00, as attorneys fees; and,

3. costs of suit.

Other reliefs just and equitable [are] likewise prayed for. (pages 42-43, Rollo)

After due proceedings, the [h]earing [o]fficer promulgated a Decision


dismissing [p]etitioners Complaint on the ground that although the SEC had
jurisdiction over the action, pursuant to the Decision of the Supreme Court in
the case of Rural Bank of Salinas, et al. versus Court of Appeals, et al.,
210 SCRA 510, he failed to prove the legal basis for the secretary of the
Respondent Corporation to be compelled to register stock transfers in favor of
the [p]etitioner and to issue new certificates of stock under his name (pages
67-77, Rollo). The [p]etitioner appealed the Decision of the [h]earing [o]fficer
to the SEC, but, on March 7, 1996, the SEC promulgated a Decision,
dismissing [p]etitioners appeal on the grounds that: (a) the issue between the
[p]etitioner and the [r]espondents being one involving the ownership of the
shares of stock pledged by Respondent Guiok and Sy Lim, the SEC had no
jurisdiction over the action filed by the [p]etitioner; (b) the latter had no cause
of action for mandamus against the Respondent Corporation, the right of
ownership of the [p]etitioner over the 300 shares of stock pledged by
Respondent Guiok and Sy Lim not having been as yet, established,
preparatory to the institution of said Petition for Mandamus with the SEC.

Ruling of the Court of Appeals

On the issue of jurisdiction, the Court of Appeals ruled:

In ascertaining whether or not the SEC had exclusive jurisdiction over [p]etitioners
action, the [a]ppellate [c]ourt must delve into and ascertain: (a) whether or not there is a
need to enlist the expertise and technical know-how of the SEC in resolving the issue of
the ownership of the shares of stock; (b) the status of the relationships of the parties;
[and] (c) the nature of the question that is the subject of the controversy. Where the
controversy is purely a civil matter resoluble by civil law principles and there is no need
for the application of the expertise and technical know-how of the SEC, then the regular
courts have jurisdiction over the action.[8] [citations omitted]

On the issue of whether mandamus can be availed of by the petitioner, the Court of
Appeals agreed with the SEC, viz.:

x x x [T]he [p]etitioner failed to establish a clear and legal right to the writ of mandamus
prayed for by him. x x x Mandamus will not issue to enforce a right which is in
substantial dispute or to which a substantial doubt exists x x x. The principal function of
the writ of mandamus is to command and expedite, and not to inquire and adjudicate
and, therefore it is not the purpose of the writ to establish a legal right, but to enforce
one which has already been established.[9] [citations omitted]

The Court of Appeals debunked petitioners claim that he had acquired ownership
over the shares by virtue of novation, holding that respondents indorsement and delivery
of the shares were pursuant to Articles 2093 and 2095 of the Civil Code and that
petitioners receipt of dividends was in compliance with Article 2102 of the same Code.
Petitioners claim that he had acquired ownership of the shares by virtue of prescription
was likewise dismissed by Respondent Court in this wise:

The prescriptive period for the action of Respondent[s] Guiok and Sy Lim to recover the
shares of stock from the [p]etitioner accrued only from the time they paid their loans and
the interests thereon and [made] a demand for their return.[10]

Hence, the petitioner brought before us this Petition for Review on Certiorari in
accordance with Rule 45 of the Rules of Court.[11]

Assignment of Errors

Petitioner submits, for the consideration of this Court, these issues: [12]

(a) Whether the Securities and Exchange Commission had jurisdiction over
the complaint filed by the petitioner; and

(b) Whether the petitioner is entitled to the relief of mandamus as against the
respondent Go Fay & Co., Inc.

In addition, petitioner contends that it has acquired ownership of the shares through
extraordinary prescription, pursuant to Article 1132 of the Civil Code, and through
respondents subsequent acts, which amounted to a novation of the contracts of pledge.
Petitioner also claims that there was dacion en pago, in which the shares of stock were
deemed sold to petitioner, the consideration for which was the extinguishment of the loans
and the interests thereon. Petitioner likewise claims that laches bars respondents from
recovering the subject shares.

The Courts Ruling

The petition has no merit.

First Issue: Jurisdiction of the SEC

Claiming that the present controversy is intra-corporate and falls within the exclusive
jurisdiction of the SEC, petitioner relies heavily on Abejo v. De la Cruz,[13] which upheld
the jurisdiction of the SEC over a suit filed by an unregistered stockholder seeking to
enforce his rights. He also seeks support from Rural Bank of Salinas, Inc. v. Court of
Appeals,[14] which ruled that the right of a transferee or an assignee to have stocks
transferred to his name was an inherent right flowing from his ownership of the said
stocks.
The registration of shares in a stockholders name, the issuance of stock certificates,
and the right to receive dividends which pertain to the said shares are all rights that flow
from ownership. The determination of whether or not a shareholder is entitled to exercise
the above-mentioned rights falls within the jurisdiction of the SEC. However, if ownership
of the shares is not clearly established and is still unresolved at the time the action for
mandamus is filed, then jurisdiction lies with the regular courts.
Section 5 of Presidential Decree No. 902-A sets forth the jurisdiction of the SEC as
follows:

SEC. 5. In addition to the regulatory and adjudicative functions of the


Securities and Exchange Commission over corporations, partnerships and
other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:

(a) Devices or schemes employed by or any acts of the board of directors,


business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public
and/or of stockholders, partners, members of associations or organizations
registered with the Commission;

(b) Controversies arising out of intra-corporate or partnership relations,


between and among stockholders, members, or associates; between any or
all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such
corporation, partnership or association and the State insofar as it concerns
their individual franchise or right to exist as such entity;

(c) Controversies in the election or appointment of directors, trustees, officers


or managers of such corporations, partnerships or associations.

(d) Petitions of corporations, partnerships or associations to be declared in the


state of suspension of payments in cases where the corporation, partnership
or association possesses property to cover all its debts but foresees the
impossibility of meeting them when they respectively fall due or in cases
where the corporation, partnership or association has no sufficient assets to
cover its liabilities, but is under the Management Committee created pursuant
to this decree.[15]

Thus, a controversy among stockholders, partners or associates themselves [16] is


intra-corporate in nature and falls within the jurisdiction of the SEC.
As a general rule, the jurisdiction of a court or tribunal over the subject matter is
determined by the allegations in the complaint.[17] In the present case, however,
petitioners claim that he was the owner of the shares of stock in question has no prima
facie basis.
In his Complaint, petitioner alleged that, pursuant to the contracts of pledge, he
became the owner of the shares when the term for the loans expired. The Complaint
contained the following pertinent averments:
xxx

3. On [J]anuary 8, 1990, under a Contract of Pledge, Lim Tay received three


hundred (300) shares of stock of Go Fay & Co., Inc., from Sy Guiok as
security for the payment of a loan of [f]orty [t]housand [p]esos (P40,000.00)
Philippine currency, the sum of which was payable within six (6) months [with
interest] at ten percentum (10%) per annum from the date of the execution of the
contract; a copy of this Contract of Pledge is attached asAnnex A and made part hereof;

4. On the same date January 8, 1980, under a similar Contract of Pledge, Lim
Tay received three hundred (300) shares of stock of Go Fay & Co., Inc. from
Alfonso Sy Lim as security for the payment of a loan of [f]orty [t]housand
[p]esos (P40,000.00) Philippine currency, the sum of which was payable
within six (6) months [with interest] at ten percentum (10%) per annum from
the date of the execution of the contract; a copy of this Contract of Pledge is
attached as Annex B and made part hereof;
5. By the express terms of the agreements, upon failure of the borrowers to
pay the stated amounts within the contract period, the pledge is foreclosed
and the shares of stock are purchased by [p]laintiff, who is expressly
authorized and empowered to transfer the duly endorsed shares of stock on
the books of the corporation to his own name; x x x[18] (underscoring supplied)

However , the contracts of pledge, which were made integral parts of the Complaint,
contain this common proviso:

3. In the event of the failure of the PLEDGOR to pay the amount within a
period of six (6) months from the date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without notice to
the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his
option; and the PLEDGEE is hereby authorized and empowered at his option,
to transfer the said shares of stock on the books of the corporation to his own
name and to hold the certificate issued in lieu thereof under the terms of this
pledge, and to sell the said shares to issue to him and to apply the proceeds
of the sale to the payment of the said sum and interest, in the manner
hereinabove provided;

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

Second Issue: Mandamus Will Not


Issue to Establish a Right

Petitioner prays for the issuance of a writ of mandamus, directing the corporate
secretary of respondent corporation to have the shares transferred to his name in the
corporate books, to issue new certificates of stock and to deliver the corresponding
dividends to him.[20]
In order that a writ of mandamus may issue, it is essential that the person petitioning
for the same has a clear legal right to the thing demanded and that it is the imperative
duty of the respondent to perform the act required. It neither confers powers nor imposes
duties and is never issued in doubtful cases. It is simply a command to exercise a power
already possessed and to perform a duty already imposed. [21]
In the present case, petitioner has failed to establish a clear legal right. Petitioners
contention that he is the owner of the said shares is completely without merit. Quite the
contrary and as already shown, he does not have any ownership rights at all. At the time
petitioner instituted his suit at the SEC, his ownership claim had no prima facie leg to
stand on. At best, his contention was disputable and uncertain. Mandamus will not issue
to establish a legal right, but only to enforce one that is already clearly established.

Without Foreclosure and


Purchase at Auction, Pledgee
Is Not the Owner of Pledged Shares

Petitioner initially argued that ownership of the shares pledged had passed to him,
upon Respondents Sy Guiok and Sy Lims failure to pay their respective loans. But on
appeal, petitioner claimed that ownership over the shares had passed to him, not via the
contracts of pledge, but by virtue of prescription and by respondents subsequent acts
which amounted to a novation of the contracts of pledge. We do not agree.
At the outset, it must be underscored that petitioner did not acquire ownership of the
shares by virtue of the contracts of pledge. Article 2112 of the Civil Code states:

The creditor to whom the credit has not been satisfied in due time, may
proceed before a Notary Public to the sale of the thing pledged. This sale shall
be made at a public auction, and with notification to the debtor and the owner
of the thing pledged in a proper case, stating the amount for which the public
sale is to be held. If at the first auction the thing is not sold, a second one with
the same formalities shall be held; and if at the second auction there is no
sale either, the creditor may appropriate the thing pledged. In this case he
shall be obliged to give an acquaintance for his entire claim.

Furthermore, the contracts of pledge contained a common proviso, which we quote


again for the sake of clarity:

3. In the event of the failure of the PLEDGOR to pay the amount within a
period of six (6) months from the date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without notice to
the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his
option; and the PLEDGEE is hereby authorized and empowered at his option
to transfer the said shares of stock on the books of the corporation to his own
name, and to hold the certificate issued in lieu thereof under the terms of this
pledge, and to sell the said shares to issue to him and to apply the proceeds
of the sale to the payment of the said sum and interest, in the manner
hereinabove provided;[22]

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

Unless the thing pledged is expropriated, the debtor continues to be the owner
thereof.

Nevertheless, the creditor may bring the actions which pertain to the owner of the
thing pledged in order to recover it from, or defend it against a third person.

No Ownership
by Prescription

Petitioner did not acquire the shares by prescription either. The period of prescription
of any cause of action is reckoned only from the date the cause of action accrued.
Since a cause of action requires as an essential element not only a legal right of the
plaintiff and a correlative obligation of the defendant, but also an act or omission of the
defendant in violation of said legal right, the cause of action does not accrue until the
party obligated refuses, expressly or impliedly, to comply with its duty. [23] Accordingly, a
cause of action on a written contract accrues when a breach or violation thereof occurs.
Under the contracts of pledge, private respondents would have a right to ask for the
redelivery of their certificates of stock upon payment of their debts to petitioner, consonant
with Article 2105 of the Civil Code, which reads:

The debtor cannot ask for the return of the thing pledged against the will of the creditor,
unless and until he has paid the debt and its interest, with expenses in a proper case. [24]

Thus, the right to recover the shares based on the written contract of pledge between
petitioner and respondents would arise only upon payment of their respective
loans.Therefore, the prescriptive period within which to demand the return of the thing
pledged should begin to run only after the payment of the loan and a demand for the thing
has been made, because it is only then that respondents acquire a cause of action for
the return of the thing pledged.
Prescription should not begin to run on the action to demand the return of the thing
pledged while the loan still exists. This is because the right to ask for the return of the
thing pledged will not arise so long as the loan subsists. In the present case, the
prescriptive period did not begin to run when the loan became due. On the other hand, it
is petitioners right to demand payment that may be in danger of prescription.
Petitioner contends that he can be deemed to have acquired ownership over the
certificates of stock through extraordinary prescription, as provided for in Article 1132 of
the Civil Code which states:

Art. 1132. The ownership of movables prescribes through uninterrupted


possession for four years in good faith.

The ownership of personal property also prescribes through uninterrupted


possession for eight years, without need of any other condition. x x x.

Petitioners argument is untenable. What is required by Article 1132 is possession in


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

Acquisitive prescription is a mode of acquiring ownership by a possessor


through the requisite lapse of time. In order to ripen into ownership,
possession must be in the concept of an owner, public, peaceful and
uninterrupted. Thus, possession with a juridical title, such as by a usufructory,
a trustee, a lessee, agent or a pledgee, not being in the concept of an owner,
cannot ripen into ownership by acquisitive prescription unless the juridical
relation is first expressly repudiated and such repudiation has been
communicated to the other party.[25]

Petitioner expressly repudiated the pledge, only when he filed his Complaint and
claimed that he was not a mere pledgee, but that he was already the owner of the
shares. Based on the foregoing, petitioner has not acquired the certificates of stock
through extraordinary prescription.

No Novation
in Favor of Petitioner

Neither did petitioner acquire the shares by virtue of a novation of the contract of
pledge. Novation is defined as the extinguishment of an obligation by a subsequent one
which terminates it, either by changing its object or principal conditions, by substituting a
new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor.[26] Novation of a contract must not be presumed. In the absence of an express
agreement, novation takes place only when the old and the new obligations are
incompatible on every point.[27]
In the present case, novation cannot be presumed by (a) respondents indorsement
and delivery of the certificates of stock covering the 600 shares, (b) petitioners receipt of
dividends from 1980 to 1983, and (c) the fact that respondents have not instituted any
action to recover the shares since 1980.
Respondents indorsement and delivery of the certificates of stock were pursuant to
paragraph 2 of the contract of pledge which reads:

2. The said certificates had been delivered by the PLEDGOR endorsed in


blank to be held by the PLEDGEE under the pledge as security for the
payment of the aforementioned sum and interest thereon accruing.[28]

This stipulation did not effect the transfer of ownership to petitioner. It was merely in
compliance with Article 2093 of the Civil Code,[29] which requires that the thing pledged be
placed in the possession of the creditor or a third person of common agreement; and
Article 2095,[30] which states that if the thing pledged are shares of stock, then the
instrument proving the right pledged must be delivered to the creditor.
Moreover, the fact that respondents allowed the petitioner to receive dividends
pertaining to the shares was not meant to relinquish ownership thereof. As stated by
respondent corporation, the same was done pursuant to an agreement between the
petitioner and Respondents Sy Guiok and Sy Lim, following Article 2102 of the Civil Code
which provides:

If the pledge earns or produces fruits, income, dividends, or interests, the


creditor shall compensate what he receives with those which are owing him;
but if none are owing him, or insofar as the amount may exceed that which is
due, he shall apply it to the principal. Unless there is a stipulation to the
contrary, the pledge shall extend to the interest and the earnings of the right
pledged.

Novation cannot be inferred from the mere fact that petitioner has not, since 1980,
instituted any action to recover the shares. Such action is, in fact, premature, as the loan
is still outstanding. Besides, as already pointed out, novation is never presumed or
inferred.

No Dacion en Pago
in Favor of Petitioner

Neither can there be dacion en pago, in which the certificates of stock are deemed
sold to petitioner, the consideration for which is the extinguishment of the loans and the
accrued interests thereon. Dacion en pago is a form of novation in which a change takes
place in the object involved in the original contract. Absent an explicit agreement,
petitioner cannot simply presume dacion en pago.
Laches Not
a Bar to Petitioner

Petitioner submits that the inaction of the individual respondents with respect to the
recovery of the shares of stock serves to bar them from asserting rights over said shares
on the basis of laches.[31]
Laches has been defined as the failure or neglect, for an unreasonable length of time,
to do that which by exercising due diligence could or should have been done earlier; it is
negligence or omission to assert a right within a reasonable time, warranting a
presumption that the party entitled to assert it either has abandoned it or declined to assert
it.[32]
In this case, it is in fact petitioner who may be guilty of laches. Petitioner had all the
time to demand payment of the debt. More important, under the contracts of pledge,
petitioner could have foreclosed the pledges as soon as the loans became due. But for
still unknown or unexplained reasons, he failed to do so, preferring instead to pursue his
baseless claim to ownership.
WHEREFORE, the petition is hereby DENIED and the assailed Decision
isAFFIRMED. Costs against petitioner.
SO ORDERED.
Davide, Jr., (Chairman), Bellosillo, Vitug, and Quisumbing, JJ., concur.

epublic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-18411 December 17, 1966

MAGDALENA ESTATES, INC., plaintiff-appellee,


vs.
ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, defendants-appellants.

Roxas and Sarmiento for plaintiff-appelle.


Somero, Baclig and Savello for defendants-appellants.

REGALA, J.:

Appeal from the decision of the Court of First Instance of Manila ordering the defendants-appellants
to pay jointly and severally to the plaintiff-appellee the sum of P655.89, plus legal interest thereon
from date of the judicial demand, the sum of P100.00 as attorney's fees, and to pay the costs.

The appellants bought from the appellee a parcel of land in Quezon City known as Lot 7-K-2-G, Psd-
26193. In view of an unpaid balance of P5,000.00 on account of the purchase price of the lot, the
appellants executed on January 4, 1957, the following promissory note representing the said
account:

PROMISSORY NOTE

P5,000.00

Manila, January 4, 1957

We, the Spouses ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, jointly and severally
promise to pay the Magdalena Estates, Inc., or order, at its offices in the City of Manila, without any
demand the sum of FIVE THOUSAND PESOS (P5,000.00), Philippine currency, with interest at the rate
of Nine Per Cent 9% per annum, within sixty (60) days from January 7, 1957. The sum of P5,000.00
represents the balance of the purchase price of the parcel of land known as Lot 7-K-2-G, Psd. 26193,
containing an area of 2,191 square meters, Quezon City.

(Sgd.) Antonio A.
Rodriguez
( T ) ANTONIO A.
RODRIGUEZ

(Sgd.) Herminia C.
Rodriguez
( T ) HERMINIA C.
RODRIGUEZ

Signed in the Presence of:

(Sgd.) ILLEGIBLE

(Sgd.) ILLEGIBLE

On the same date, the appellants and the Luzon Surety Co., Inc. executed a bond in favor of the
appellee, the undertaking thereof being embodied therein as follows:

. . . comply with the obligation to pay the amount of P5,000.00 representing balance of the
purchase price of a parcel of land known as Lot 7-K-2-G, Psd-26193, with an area of 2191
square meters, Quezon City, covered by Transfer Certificate of Title No. 13 (6947), Quezon
City, within a period of sixty (60) days from January 7, 1957; That the Surety shall be notified
in writing within Ten (10) days from moment of default otherwise, this undertaking is
automatically null and void.

On June 20, 1958, when the obligation of the appellants became due and demandable, the Luzon
Surety Co., Inc. paid to the appellee the sum of P5,000.00. Subsequently, the appellee demanded
from the appellants the payment of P655.89 corresponding to the alleged accumulated interests on
the principal of P5,000.00. Due to the refusal of the appellants to pay the said interest, the appellee
started this suit in the Municipal Court of Manila to enforce the collection thereof. The said court, on
February 5, 1959, rendered judgment in favor of the appellee and against the appellants, ordering
the latter to pay jointly and severally the appellee the sum of P655.89 with interest thereon at the
legal rate from November 10, 1958, the date of the filing of the complaint, until the whole amount is
fully paid. Not satisfied with that judgment, appellants appealed to the Court of First Instance of
Manila, where the case was submitted for decision on the pleadings. The Court of First Instance of
Manila rendered the judgment stated at the outset of this decision.

On appeal directly to this Court, the following errors are assigned:

I. The lower court erred in concluding as a fact from the pleadings that the plaintiff-appellee
demanded, and the Luzon Surety Co., Inc. refused, the payment of interest in the amount of
P655.89, and in not finding and declaring that said plaintiff-appellee waived or condoned the
said interests.

II. The lower court erred in not finding and declaring that the obligation of the defendants-
appellants in favor of the plaintiff-appellee was totally extinguished by payment and/or
condonation.

III. The lower court erred in not finding and declaring that the promissory note executed by
the defendants-appellants in favor of the plaintiff-appellee was, insofar as the said document
provided for the payment of interests, novated when the plaintiff-appellee unqualifiedly
accepted the surety bond which merely guaranteed payment of the principal in the sum of
P5,000.00.

Appellants claim that the pleadings do not show that there was demand made by the appellee for the
payment of accrued interest and what could be deduced therefrom was merely that the appellee
demanded from the Luzon Surety Co., Inc., in the capacity of the latter as surety, the payment of the
obligation of the appellants, and said appellee accepted unqualifiedly the amount of P5,000.00 as
performance by the obligor and/or obligors of the obligation in its favor. It is further claimed that the
unqualified acceptance of payment made by the Luzon Surety Co., Inc. of P5,000.00 or only the
amount of the principal obligation and without exercising its (appellee's) right to apply a portion of
P655.89 thereof to the payment of the alleged interest due despite its presumed knowledge of its
right to do so, the appellee showed that it waived or condoned the interests due, because Articles
1235 and 1253 of the Civil Code provide:

ART. 1235. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with.

ART. 1253. If the debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been recovered.

We do not agree with the contention of the appellants. It is very clear in the promissory note that the
principal obligation is the balance of the purchase price of the parcel of land known as Lot 7-K-2-G,
Psd-26193, which is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc.
undertook "to pay the amount of P5,000.00 representing balance of the purchase price of a parcel of
land known as Lot 7-K-2-G, Psd-26193, . . . ." The appellee did not protest nor object when it
accepted the payment of P5,000.00 because it knew that that was the complete amount undertaken
by the surety as appearing in the contract. The liability of a surety is not extended, by implication,
beyond the terms of his contract.1 It is for the same reason that the appellee cannot apply a part of
the P5,000.00 as payment for the accrued interest. Appellants are relying on Article 1253 of the Civil
Code, but the rules contained in Articles 1252 to 1254 of the Civil Code apply to a person owing
several debts of the same kind of a single creditor. They cannot be made applicable to a person
whose obligation as a mere surety is both contingent and singular; his liability is confined to such
obligation, and he is entitled to have all payments made applied exclusively to said application and
to no other.2 Besides, Article 1253 of the Civil Code is merely directory, and not
mandatory.3 Inasmuch as the appellee cannot protest for non-payment of the interest when it
accepted the amount of P5,000.00 from the Luzon Surety Co., Inc., nor apply a part of that amount
as payment for the interest, we cannot now say that there was a waiver or condonation on the
interest due.

It is claimed that there was a novation and/or modification of the obligation of the appellants in favor
of the appellee because the appellee accepted without reservation the subsequent agreement set
forth in the surety bond despite its failure to provide that it also guaranteed payment of accruing
interest.

The rule is settled that novation by presumption has never been favored. To be sustained, it needs
to be established that the old and new contracts are incompatible in all points, or that the will to
novate appears by express agreement of the parties or in acts of similar import.4

An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified,
by changing only the terms of payment and adding other obligations not incompatible with the old
one,5 or wherein the old contract is merely supplemented by the new one.6 The mere fact that the
creditor receives a guaranty or accepts payments from a third person who has agreed to assume the
obligation, when there is no agreement that the first debtor shall be released from responsibility does
not constitute a novation, and the creditor can still enforce the obligation against the original debtor.
(Straight v. Haskel, 49 Phil. 614; Pacific Commercial Co. v. Sotto, 34 Phil. 237; Estate of Mota v.
Serra, 47 Phil. 464; Duñgo v. Lopena, supra ). In the instant case, the surety bond is not a new and
separate contract but an accessory of the promissory note.

WHEREFORE, the judgment appealed from should be, as it is hereby, affirmed, with costs against
the appellants.

Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and
Castro, JJ.,concur.

Republic of the Philippines


SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 70451. March 24, 1993.

HENRY H. GAW, petitioner, vs. THE HONORABLE INTERMEDIATE APPELLATE COURT and UY
DIET TAN, respondents.

Ponce Enrile, Cayetano, Reyes & Manalastas for petitioner.

Ireneo R. Clapano, Jr. collaborating counsel for petitioner.

Ambrosio Padilla, Mempin & Reyes Law Office for private respondent.
DECISION

ROMERO, J p:

This is a petition for review on certiorari of the decision 1 of the then Intermediate Appellate Court
reversing the decision 2 of the then Court of First Instance of Rizal Instance at Quezon City, Branch
IX which ordered therein dependant Uy Diet Tan to pay plaintiff Henry Gaw the amount of One
Hundred Twenty Thousand Pesos (P120,000.00) as reasonable actual damages and attorney's fees
of Ten Thousand Pesos (P10,000.00), and ordering instead, Henry Gaw to pay Uy Diet Tan One
Hundred Thousand Pesos (P100,000.00) also as reasonable actual damages plus Twenty
Thousand Pesos (P20,000.00) as attorney's fees.

Henry Gaw is a businessman engaged in the buy and sell of hardware and construction materials.
Through a dealership agreement, on December 12, 1978, his trading firm, the K.H. Gaw Enterprises,
was appointed as one of the four (4) exclusive dealers of white cement of Prime White Cement
Corporation (PWCC for brevity). Among others, the agreement stipulated that for five (5) years, the
dealer would take delivery from PWCC at least 2,600 bags of white cement a month; that in
consideration of the execution of the contract, the dealer would deposit Two Hundred Thousand
Pesos (P200, 000.00) "to be repaid or returned" to the dealer under a scheme set forth in the same
contract, and that the dealer would increase its allocation to 6,5000 bags a month and "increase its
loan" to PWCC to Five Hundred Thousand Pesos (P500,000.00) "in a contract akin, so as to abreast
itself, or cope up with other dealers, within ninety (90) days" from the execution of the agreement. 3

To avail of the provision on the increased volume of monthly delivery of cement, on February 2,
1979, Gaw entered into a marketing agreement with Foundation Commercial, a single
proprietorship, through Uy Diet Tan. Acknowledging that Gaw or the K.H. Gaw Enterprises was one
of the four dealers of PWCC "as evidenced by a Contract hereto attached as Annex 'A' and made
integral part of this Agreement," the parties agreed that:

"1 That the PARTY OF THE SECOND PART (Tan) shall be entitled to get directly from Prime White
Cement Corporation monthly at least 50% of the allocation of white cement of the PARTY OF THE
FIRST PART (Gaw) equivalent to at least 3,250 bags a month and shall pay directly the value of the
cement to Prime White Cement Corporation;

2. That the PARTY OF THE SECOND PART shall deposit to Prime White Cement Corporation the
sum of TWO HUNDRED AND FIFTY THOUSAND PESOS (P250,000.00), Philippine Currency, by
way of deposit and as required in its Contract herein marked as Annex 'A' in the name of the PARTY
OF THE SECOND PART and repayment by Prime White Cement Corporation of the said amount
shall likewise be directly made to the PARTY OF THE SECOND PART at P10,000.00 a month for 30
months,, beginning the month of March, 1979 as a marketing firm of the PARTY OF THE FIRST
PART;

3. That the PARTY OF THE SECOND PART shall pay to the PARTY OF THE FIRST PART the sum
of SEVENTY CENTAVOS (P0.70) per bag for every bag of white cement which the PART OF THE
SECOND PART will withdraw from Prime White Cement Corporation, the said amount to be due and
demandable every first (5) days of the next succeeding months;

4. That the PARTY OF THE SECOND PART shall pay in advance to the PARTY OF THE FIRST
PART the sum of FIVE THOUSAND PESOS (P5,000.00), Philippine Currency, upon the signing of
this Agreement and said amount shall be immediately deductable from the (o.70 per bag premium
paid by the former to the latter until the said amount paid in advance shall have been fully paid;
5. That the PARTY OF THE SECOND PART shall invoice the sale in its own name and shall pay to
Prime White Cement Corporation the value of the cement also in its own name;

6. All taxes due to the PARTY OF THE SECOND PART on all white cement withdrawn from Prime
White Cement Corporation shall be the sole responsibility of the said Second Party;

7. This Contract shall take effect immediately upon signing hereof and co-terminus with the herein
Contract of the PARTY OF THE FIRST PART with Prime White Cement Corporation. In the event
that the said Contract will be extended for another five (5) years by Prime White Cement
Corporation, the duration of this Contract shall Prime White Cement Corporation, the duration of this
Contract shall also extended and co-terminus accordingly with the said extension." 4

Pursuant to the marketing agreement, on February 8, 1979, Tan issued China Banking Corporation
Check No. 456993 in the amount of P250,000.00 payable to PWCC. The latter, however, refused to
accept the deposit for the reason that accept the same in the name of Tan wound be tantamount to
making him an exclusive dealer thereby violating the dealership agreement entered into between
PWCC and Gaw.

Thus, on March 5, 1979, counsel for Tan wrote the Executive Committee of PWCC confirming the
intention of Tan to deposit the P250,000.00 "under the name of Mr. Gaw in compliance with his
dealership agreement" with PWCC. 5 In reply to said letter, the Chairman of the Board and of the
Executive Committee of PWCC, Constacio B. Maglana, informed Tan's counsel the he had written
Tan himself; that "PWCC has already closed the dealership and/or disposition of its white cement
product exclusively to four (4) distributors and/or dealers in Manila and Luzon"; that he was "not in a
position to violate directly or indirectly any of the terms and conditions" of the existing dealership
contracts and that, therefore, the intentions in the letter of Tan's counsel could not be given due
course. 6

Meanwhile, in an apparent effort to save his option to increase his monthly allocation, Gaw entered
into a contract with Mandee Commercial whereby the latter agreed to provide P250,000.00 which
together with the P50,000.00 which would be produced by Gaw, would be added to the initial
P200,000.00 which Gaw had given to PWCC, to reach the total amount of P500,000.00. The
contract was executed on March 9, 1979 with the following terms and conditions: (a) direct sales by
Gaw to Mandee Commercial of 3,250 bags of white cement a month; (b) the contract shall be for
fifty-seven (57) months, specially from April 1, 1979 To December 31, 1983, and (c) Mandee shall
pay Gaw a net mark-up or profit of P2.00 per bag. 7

Consequently, on March 5, 1979, Tan filed a complaint against Gaw for specific performance with
damages and preliminary injunction in the then Court of First Instance of Rizal, Branch IV. Docketed
as Civil Case No. Q-27097, the complaint alleged, among other things, that when Tan tried to
deposit the P250,000.00 at the PWCC office in T.M. Kalaw St., Ermita, Manila, the auditor of PWCC
told him that the amount should be directly deposited in the name of Gaw "to prevent the other
dealers from complaining that plaintiff was made another dealer and not as a marketing arm of
defendant Gaw" and that, even if Tan was willing to make said deposit in the name of Gaw, the latter
"refused to accept the amount proffered and insisted that plaintiff should pay him one peso and fifty
centavos (P1.50) instead of seventy centavos (P0.70) per bag as previously agreed upon" in the
marketing agreement. Thus, Tan prayed that a preliminary injunction be issued "enjoining or
restraining the defendant from negotiating with the other dealers for the assignment of dealership
rights pending the hearing" of the case; that Gaw be ordered to accept the amount of P250,000.00
and to honor and respect his contract with Tan, and that Gaw be directed to pay P50,000.00 in moral
damages, P50,000.00 as exemplary damages and actual or compensatory damages of P100,000.00
plus a total of P75,000.00 as attorney's fees and litigation expenses. 8
Thereafter, Tan filed an urgent ex-parte motion for the issuance of a restraining order to prevent
Gaw disposing of 3,250 bags of white cement which allegedly belonged to Tan by virtue of the
marketing agreement. On March 9, 1979, Judge Ricardo P. Tensuan issued the following Order:

"Acting upon the 'urgent ex-parte motion for the issuance of a restraining order' filed the plaintiff, thru
counsel, and finding the reasons alleged well-taken, the said motion is hereby grated.

WHEREFORE, the parties are hereby ordered to maintain status quo, particularly the defendant to
refrain from continuing the acts complained of. In the meantime, let the application for the issuance
of a writ of preliminary injunction be set for hearing on March 16, 1979 at 8:3 A.M." 9

After having received copy of said Order on march 12, 1979, Gaw then filed a motion to dismiss the
complaint on the grounds of lack of cause of action and that the demand had been extinguished as
he had repudiated the marketing agreement. Forthwith, Tan filed an opposition Gaw filed a reply.

On July 16, 1979, Tan filed a motion to withdraw his complaint on the ground that since he had been
feeling pain in the chest that, "in the long run, (it) might affect his heart condition." 10 Thus, July 25,
1979, Judge Tensuan issued an Order dismissing the complaint. 11

Around four months later or on November 19, 1979, Gaw filed a complaint against Tan for damages
in the then Court of First Instance of Rizal, Branch IX at Quezon City. Docketed as Civil Case No. Q-
28799, the complaint alleged that the restraining order of March 9, 1979 caused him to lose
P370,500.00 which he could have realized as profit out of the 57-month contract with Mandee
Commercial which had refused to honor said contract in view of the soaring cost building materials
and the limited need for white cement. Pointing to the same restraining order as cause of his losses,
Gaw prayed that Tan be ordered to pay the following: (a) P370,500.00 as unrealized profits with
interest at the legal rate until fully paid; (b) P30,000.00 attorney's fees and P5,000.00 litigation and
other expenses in Civil Case No. Q-27097; (c) P50,000.00 attorney's fees, and P5,000.00 litigation
and miscellaneous expenses in the present case plus whatever amount for moral damages as the
court would deem proper. 12

After trial, the lower court, through Judge Jose P. Castro, rendered a decision on February 15, 1982
in favor of Gaw. It is principally based on its finding that the Order issued on March 9, 1979 by Judge
Tensuan was "was just a simple 'status quo' order, but one which restrained Henry Gaw, and
because of such restraining order, the plaintiff herein (defendant in that case) had no alternative but
to obey the Court's order and stopped the implementation of his then existing contract with Mandee
Commercial to his damage and prejudice as it deprived him of a sure profit." 13 The decretal portion
of the decision reads:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, as
follows:

1. Ordering the defendant Uy Diet Tan to pay Henry H. Gaw, the amount of P20,000.00 representing
reasonable actual damages suffered by plaintiff in the form of unrealized profits,, with legal interest
from the filling of the complaint until fully paid;

2. Ordering the defendant to pay the plaintiff the amount of P10,000.00 as and for attorney's fees
and the cost of the suit.

Insofar as moral damages is concerned, the Court holds that the plaintiff is not entitled.
Accordingly, the counter claim of defendant is hereby dismissed.

SO ORDERED." 14

Tan filed a motion for the reconsideration of the decision which was duly opposed by Gaw. After Tan
had filed a reply to the opposition, the lower court, in an Order dated May 19, 1982, denied the
motion for reconsideration on the basis of its finding that there was no "legitimate reason to disturb
the decision." 15

Tan appealed to the then Intermediate Appellate Court, which, as earlier mentioned, reversed the
decision of the lower court. After making its own findings of facts, the appellate court concluded that
the claim for damages should have been ventilated in Civil Case No. Q-27097. Nonetheless, the
appellate court opined, as the claim for damages was anchored on the issuance of the restraining
order, under Aquino v. Socorro, 16 that such claim would not prosper in the absence of allegation or
proof that the restraining order was maliciously procured and without probable cause. Finding the
counter claim of Tan in the amount of P1,452,500.00 "to be high speculative," the appellate court
disposed of the appeal as follows:

"WHEREFORE, the judgment appealed from is hereby set aside and REVERSED and another
decision is hereby entered dismissing the complaint and on the counterclaim:

1. Ordering plaintiff Henry Gaw to pay defendant Uy Diet Tan the amount of P100,000.00
representing the reasonable actual damages suffered in the form of unrealized profits, with legal
interest thereon from the filing of the complaint until fully paid;

2. Ordering plaintiff to pay defendant the amount of P20,000.00 as attorney's fees and cost against
the plaintiff-appellee.

SO ORDERED." 17

Gaw moved for the reconsideration of said decision but in its Resolution of March 26, 1985, the
Intermediate Appellate Court denied it. Hence, the instant petition for review on certiorari interposed
by Gaw which not only errors of law but also errors of fact. 18

As a rule, the jurisdiction of this Court in cases brought to it from the Court of Appeals or the then
Intermediate Appellate Court 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. 19 As such, this Court is not
duty-bound to analyze and weigh all over again the evidence already considered in the proceedings
below. 20 This rule, however, is not without exceptions. 21 One of these exceptions is when there is
a conflict between the factual findings of the Court of Appeals and the trial court which necessitates
a review of such factual findings. 22 This case falls within this exception.

One of the points of disagreement between the appellate court and the lower court is whether or not
the marketing agreement had in fact been implemented. The lower court found that Tan was unable
to make the deposit of P250,000.00 because PWCC refused to accept it on the ground that it would
have virtually made Tan a dealer, thus impelling, PWCC to violate its dealership agreement with
Gaw. Moreover, the lower court in effect laid the blame for the non-implementation of the said
agreement on Tan through his failure to deposit P5,000.00. 23

On the other hand, the appellate court ruled that Gaw himself, by breaching the marketing
agreement was responsible for its non-implementation. It stated:
"There was nothing wrong with defendant's deposit of P250,000.00 in his own name with Prime
White Cement Corporation because that what was expressly stipulated in the Marketing Agreement
(Exh. B) . . .Otherwise stated, defendant's deposit of P250,000.00 with Prime White Cement was
made in defendant's name in compliance with the abovequoted stipulations of the Marketing
Agreement (Exh. B) between plaintiff and defendant and was not the unilateral act of the latter.
Nonetheless, if the manner of deposit as stipulated in the Marketing Agreement was not acceptable
to Prime White Cement, defendant was willing to make the deposit in plaintiff's name as evidenced
by defendant's letter to plaintiff dated February 28, 1979 (Exh. 9) and to Prime White Cement (Exh.
10). But plaintiff did not even choose to answer defendant's letter (Exh. 9). Instead, plaintiff
negotiated and agreed with Mandee Commercial for the sale of 3,250 bags of white cement monthly
under his dealership contract with a mark-up of P2.00 per bag as confirmed by plaintiff's letter to
Mandee Commercial dated March 9, 1979 (Exh. L) without the benefit of even a formal contract. It is
apparent that the Marketing Agreement (Exh. B) between plaintiff and defendant could have been
implemented and/or enforced if plaintiff had intervened and agreed to the proposal of defendant to
deposit the P250,000.00 in plaintiff's name (to comply with Prime White Cement's objection) and if
plaintiff himself had increased his original deposit from P250,000.00 to P250,000.00 to make the
deposit of P500,000.00 in all. If Prime White Cement Corporation does not object to the Agreement
(Exh. 3) between plaintiff and A & A Trading and plaintiff's letter agreement (Exh. L) with Mandee
Commercial, why should it object to the Marketing Agreement of plaintiff and defendant (Exh. B) if
the deposit is made in plaintiff's name and the latter had increased his own deposit to P50,000.00?
As a party to the Dealership Agreement (Exh. A), it was plaintiff's duty to see to it that the Marketing
Agreement (Exh. B) be approved by Prime White Cement and that it be enforced." 24

We find the appellate court's findings to be more in accord with the evidence on record. In paying
directly to PWCC, Tan only observed paragraph two of the Marketing agreement aforequoted which
specifically stated that he was to deposit with PWCC the amount of P250,000.00 in his name. Of
course, Gaw capitalized on the testimony of the former president of PWCC to the effect that while
Tan tendered the said amount, there was no actual deposit. 25 Such an assertion, however, is
belied by the circumstances surrounding the tender of payment, as well as the agreement of the
parties explicitly expressed in the marketing agreement. Thus, after PWCC had refused to accept
Tan's deposit of P250,000.00 and PWCC's auditor had revised Tan to deposit it in the name of Gaw
which Tan accepted, the least that Gaw could have done was to act conformably with such proposal
to show his sincerity and good faith.

It is plain from the facts of this case that the agreement was regarded by Gaw as nothing more that a
scrap of paper which he could choose to ignore at his pleasure. One cannot help but conclude that
he had intentions of abiding by its terms. But in an effort to conceal his real intention, he went to
great lengths to prove to this court that the agreement was prepared by Trazo, the former president
of PWCC, who "induced" him to sign the agreement which had practically the same terms as the
marketing agreement of PWCC with Perpetual Commercial. 26 Furthermore, Gaw asserts that "the
operative provisions of the marketing agreement actually made respondent tan a co-dealer of
petitioner Gaw" because Tan's transactions with PWCC were "separate and independent." 27

Under Section 9, Rule 130 of the Rules of Court, once the terms of an agreement have been
reduced to writing, it is deemed to contain all the terms agreed upon by the parties and no evidence
of such terms other than the contents of the written agreement shall be admissible. 28 Whatever
stipulations, clauses, terms and conditions are include in a contract, as long as they are not contrary
to law, morals, goods customs, public policy or [public order, such contract is the law between the
parties. 29 Thus, in the interpretation of the provisions of a written contract, the literal meaning of its
stipulations must prevail. 30 It therefore, behooves the parties to examine the terms of a contract
thoroughly before signing the same, particularly a businessman like Gaw who may not, by any
stretch of the imagination, be considered to a tyro in these matter. Had he given even an iota's
attention and care to scrutinize the subject contract, he would not have failed to detect that some
provisions thereof contravene the terms and conditions of his exclusive dealership agreement with
PWCC.

While in a sense the marketing agreement between Gaw and Tan is related to the original
dealership agreement between the former and PWCC, as the term of the former is co-terminous with
that latter, we cannot subscribe to petitioner's contention that the marketing agreement was "an
attempted novation" of the dealership agreement. 31 Arguing that "Tan intended to step into the
shoes of petitioner Gaw as debtor of Prime White in respect to the additional deposit of
P250,000.00," Gaw cites Article 1293 of the Civil Code which provides that '(n)ovation which
consists in substituting a new debtor in the place of the original one may even without the knowledge
or against the will of the latter, but not without the consent of the creditor." Yet Gaw fails to prove that
PWCC, the creditor, knew all about the so-called substitution.

It is axiomatic that novation is never presumed. It must be explicitly stated in the contract and there
must be a manifest incompatibility between the old and the new obligation in every aspect. 32 The
fact that the two agreements are co-terminous with each other does not imply that a new obligation
had arisen when the marketing agreement was signed, thus displacing the dealership contract. Not
only was Gaw not released from complying with the terms and conditions of the dealership
agreement but he was, in a sense, already implementing the latter.

Gaw's claim for damages, therefore, had no basis in fact and in law. In the first place, as discussed
above, he is partly to blame for the non implementation of the marketing agreement. Secondly, the
claim for actual damages allegedly resulting from unrealized profits out of his agreement with
Mandee Commercial appears to have been caused by factors other than the issuance of the
restraining order in Civil Case No. Q-27079. The records disclose that he entered into an agreement
with Mandee Commercial on March 9, 1979, three days before he received a copy of the restraining
order on March 12, 1979. Paragraph 14 of the complaint itself in Civil Case No. Q-28799, reveals
that Mandee Commercial refused to honor the agreement with Gaw because "the price of building
materials have gone so high that there are now very much less constructions than before and the
need for white cement is limited." 33

Granting arguendo that the failure of Gaw's agreement with Mandee Commercial was indeed the
offshoot of the issuance of the restraining order in Civil Case No. Q-27079, Gaw may not
successfully claim damages in the absence of proof that Tan maliciously filed Civil Case No. Q-
27079 and that said case was without probable cause. As correctly enunciated by the appellate
Court, the ruling in Aquino v. Socorro applies in this case. The appropriate remedy would have been
for Gaw to hold Tan responsible on the bond that should have been required of him in Civil Case No.
27079. However, since he did not opt for said remedy, in filing the instant case, Gaw is duty-bound
to prove malicious prosecution on the part of Tan and lack of probable cause in prosecuting his
claim. Tan may not be penalized for resorting to court action in an attempt to implement the
marketing agreement. He was within his rights in so doing, and if indeed damage was incurred by
Gaw, it is simply damnum absque injuria. 34

We disagree, however, with the appellate court's award of P100,000.00 representing the reasonable
actual damages suffered by Tan in the form of unrealized profits. Art 2201 of the Civil code entitles a
person to recover all damages which may be attributed to the non performance of an obligation, but
the person claiming the same must prove his case. He must muster the best evidence he can and if
so warranted, he might, with reasonable certainty, have been entitled to recover such damages. 35

Tan, in attempting to justify his claim to the alleged unearned profits, had trenched into the realm of
what is speculative. He even failed to present evidence on the average actual profits earned by his
business and other indicia of profitability.
WHEREFORE, the decision of the then Intermediate Appellate Court is hereby AFFIRMED, subject
to the MODIFICATION that the award of P100,000.00 representing the actual damages suffered by
private respondent Uy Diet Tan in the form of unrealized profits be DELETED.

SO ORDERED.

Feliciano, Davide, Jr. and Melo, JJ., concur.

Gutierrez, Jr., J., On terminal leave.

Bidin, J., No part. I was ponente of IAC decision under review.

SECOND DIVISION

[G.R. No. 123581. August 29, 1997]

RODRIGO B. BANGAYAN, BENJAMIN B. BANGAYAN, ET.


AL.,petitioners, vs. THE HONORABLE COURT OF APPEALS and
ANGELITA OCAMPO LIM, respondents.

DECISION
PUNO, J.:

In this petition for review, petitioners assail the decision of the Court of
Appeals dated February 21, 1995, in CA-G.R. SP No. 136101 reversing and
setting aside the decision of the Regional Trial Court of Manila, Branch 10,
dated February 9, 1994, in Civil Case No. 90-54459.
The facts show that on July 6, 1988, Teofista Ocampo and Petronilla Lingat
entered into a Contract of Lease involving a piece of land with a two storey
building of mixed materials located at 2309 Severino Street, Sta. Cruz, Manila,
at a monthly rental ofP7,000.00. The lease contract contains the following
provisions:
"x x x

"4. The lessee hereby expressly warrants that the leased premises shall be
used exclusively by herfor an automobile supply and parts company and partly as a
dwelling place for her employees only and the lessee is strictly prohibited from using
the said premises for any other purpose without the written consent of the lessor.
"5. The lessee shall not directly or indirectly sublease, assign, transfer, convey,
mortgage or in any manner encumber its (sic) right of lease over the leased premises
or any portion thereof under any circumstances whatsoever.

"8. The lessee hereby expressly acknowledges the right of the lessor to sell the leased
premises, but in the event of the sale, the lessee shall be given by the lessor
the FIRST OPTION to purchase the property. And in the event that it is sold to a
third person, the lessor is duty bound to place a condition on the deed of sale to the
effect that this Lease Contract shall be binding and shall be honored by the vendee.

"x x x"
On January 2, 1990, Atty. Almario Amador, counsel of Petronilla Lingat,
notified Teofista Ocampo by mail that she could exercise her right of first option
within 30 days from receipt of his letter. In response, Ocampo asked Atty.
Amador for the selling price of the property. In a letter dated February 3, 1990,
Atty. Amador informed Ocampo that she should make a written offer to buy and
indicate the price she was willing to pay for the property.
The parties' negotiation appears to have bogged down on who should first
make the offer with a price. In a letter dated February 9, 1990, Ocampo
reiterated to Atty. Amador her desire to buy the property and again inquired
about its price. On February 22, 1990, Atty. Amador terminated the negotiation
by sending the following letter to Ocampo's counsel, viz:

"Since she failed and refused and still failing and refusing to exercise her FIRST
OPTION within the period stated in our letter, our client is now free to offer the
subject property to other interested buyers and to entertain and receive offers for her
consideration. Meanwhile, your client is not precluded to make the offer. Moreover, it
shall now be on a 'FIRST COME, FIRST SERVE' basis as your client has waived her
above mentioned privilege." [1]

In March 1990, Petronilla Lingat agreed to sell the above property to


Rodrigo, Roberto, and Benjamin, Jr., all surnamed Bangayan,
at P1,000,000.00. The Bangayans partially paid the consideration. On April 5,
[2]

1990, Atty. Amador advised Ocampo of the sale of the property to the
Bangayans. He also cancelled the Contract of Lease for breach of its terms and
conditions. Ocampo was asked to vacate the premises and to pay the rentals
in arrears. Ocampo did not heed the demand and an ejectment case against
her was filed by the Bangayans before the Metropolitan Trial Court.
On May 7, 1990, Petronilla Lingat executed a Deed of Absolute Sale
involving the said property to the Bangayans. A new Transfer Certificate of Title
No. 193035 was issued by the Register of Deeds of Manila in favor of the
Bangayans with the adverse claim of Teofista Ocampo annotated therein.
On September 18, 1990, Ocampo filed a complaint against Petronilla Lingat
and the Bangayans for the annulment of their deed of sale, cancellation of title
issued to the Bangayans, reconveyance of title and damages before the
Regional Trial Court of Manila, Branch 10. The case was docketed as Civil
Case No. 90-54459.
While Civil Case No. 90-54459 was pending in the Regional Trial Court, the
ejectment case was decided against Ocampo by the Metropolitan Trial Court
on February 21, 1991. The assailed decision was affirmed by the Regional Trial
Court, the Court of Appeals and by this Court on October 2, 1991.
It appears that Teofista Ocampo died in October 1991. She was substituted
in Civil Case No. 90-54459 by her daughter, Angelita Ocampo Lim. Allegedly,
Teofista Ocampo assigned her right of first option to buy the leased property to
Angelita Ocampo Lim before she died. On February 9, 1994, the Regional Trial
Court of Manila dismissed the case of Ocampo. It found that Teofista Ocampo
[3]

cannot be substituted by her daughter. It held that the death of Ocampo


terminated her lease contract with Lingat and extinguished all her rights therein,
including her right of first option.
Angelita Ocampo Lim appealed to the Court of Appeals. In a Decision dated
February 21, 1995, the appellate court reversed the trial court. The dispositive
portion of the Decision states:
"x x x

"WHEREFORE, this petition is GRANTED. The challenged decision of the Regional


Trial Court of Manila, Branch 10, is hereby REVERSED and SET ASIDE. A new
judgment is entered (1) declaring the deed of absolute sale between Petronilla Lingat
and the Bangayans to be null and void; (2) directing the Register of Deeds of Manila
to cancel Transfer Certificate of Title No. 193035; and (3) ordering Petronilla Lingat
to offer to sell the property to the petitioner in accordance with the above discussion."

In this petition for review, the Bangayans pose the following issues for
resolution: (1) whether or not the termination of the Contract of Lease pursuant
to the decision in the ejectment case extinguished Teofista Ocampo's right of
first option; (2) whether or not Teofista Ocampo's right of first option provided
for under the Contract of Lease was violated by Petronilla Lingat and the
Bangayans; and (3) whether or not the Court of Appeals decided the case in a
way not in accord with the applicable decision of the Supreme Court.
We find merit in the petition.
The threshold issue is whether the late Teofista Ocampo has the right to
assign her right of first option under the lease contract to her daughter, Angelita
Ocampo Lim. If Ocampo's right is assignable, then her daughter, Angelita
Ocampo Lim, can continue Civil Case No. 90-54459.
The respondent Court of Appeals held that the said right of Ocampo is
transmissible,viz:
"x x x

"We found no legal or factual basis for concluding that the lease contract between
Teofista Ocampo and Lingat was automatically extinguished upon the death of the
former. There is no provision in the law which so provides. It also appears from the
pleadings and the decision of the trial court that the lease contract in question does not
provide for such an eventuality.

"Indeed, the right to continue a lease contract either as lessor or lessee is not
automatically extinguished by death of either of the contracting parties without any
express provision either by will or agreement in this regard. It becomes part of the
inheritance so that the heirs of the decedent succeed to the rights and obligations of
the latter arising from the lease contract (III Tolentino: Civil Code of the Philippines
14-15, 1979 ed.; III Paras: Civil Code of the Philippines Annotated 7, 12th ed.)."

We find this ruling erroneous. Firstly, the respondent Court of Appeals


harbored the wrong notion that Angelita Ocampo Lim inherited from Teofista
Ocampo her right of first option upon the latter's death. The evidence, however,
shows that Ocampo assigned her right of first option to Angelita even during
her lifetime. The assignment was made on August 23, 1990. This assignment
has no legal warrant. Article 1311 of the Civil Code is too clear to be
misinterpreted. It provides that "contracts take effect only between the parties,
their assigns and heirs, except in case where the rights and obligations arising
from the contract are not transmissible by their nature, or by stipulation or by
provision of law. x x x" In the case at bar, paragraphs 4 and 5 of the lease
contract specifically provide:

"4. The lessee hereby expressly warrants that the leased premises shall be
used exclusively by herfor an automobile supply and parts company and partly as a
dwelling place for her employees only and the latter is strictly prohibited from using
the said premises for any other purpose without the written consent of the lessor.

"5. The lessee shall not directly or indirectly sublease, assign, transfer, convey,
mortgage or in any manner encumber its (sic) right of lease over the leased premises
or any portion thereof under any circumstances whatsoever."
These stipulations are consistent with Article 1649 of the Civil Code which
provides that "the lessee cannot assign the lease without the consent of the
lessor, unless there is a stipulation to the contrary." We have held that the
consent of the lessor is necessary because the assignment of the lease would
involve the transfer, not only of rights but also of obligations. It constitutes
novation by a substitution of the person of one of the parties. [4]

A reasonable perusal of paragraphs 4 and 5 of the lease contract reveals


the intent of the parties to limit their lease relationship to themselves
alone. Paragraph 4 provides that "the leased premises shall be used
exclusively by her," referring to the late Teofista Ocampo. Paragraph 5 prohibits
Ocampo from directly or indirectly assigning, transferring or conveying her right
of lease over the leased premises or any portion thereof under any
circumstances whatsoever. It cannot be denied that Ocampo's right of first
option to buy the leased property in case of its sale is but part of the bigger right
to lease said property from Lingat. The option was given to Ocampo because
she was the lessee of the subject property. It was a component of the
consideration of the lease. The option was by no means an independent right
which can be exercised by Ocampo. It ought to follow that if Ocampo is barred
by the contract from assigning her right to lease the subject property to any
other party, she is similarly barred from assigning her first option to buy the
leased property to her daughter, Angelita Ocampo Lim. Needless to state,
Angelita Ocampo Lim had no right to substitute her mother, Teofista Ocampo,
in Civil Case No. 90-54459.
IN VIEW WHEREOF, the decision of the respondent Court of Appeals dated
February 21, 1995 is reversed and the decision of the RTC of Manila, Branch
10, dated February 9, 1994 in Civil Case No. 90-54459 is reinstated. No costs.
SO ORDERED.
Romero, Mendoza, and Torres, Jr., JJ., concur.
Regalado, J., (Chairman), on official leave.

epublic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G. R. No. 76431 October 16, 1989

FORTUNE MOTORS, (PHILS.) INC., petitioner,


vs.
THE HONORABLE COURT OF APPEALS, METROPOLITAN BANK and TRUST
COMPANY, respondents.

Quirante & Associates Law Office for petitioner.

Bautista, Cruz & Associates Law Offices for private respondent.

PARAS, J.:

This is a petition for review on certiorari seeking the reversal of: (a) the July 30, 1986 decision of the
Court of Appeals in AC-G.R. SP No. 09255 entitled "Metropolitan Bank & Trust Co. v. Hon. Herminio
C. Mariano, et al."dismissing Civil Case No. 8533218 entitled "Fortune Motors (Phils.) Inc. v.
Metropolitan Bank & Trust Co." filed in the Regional Trial Court of Manila, Branch IV for improper
venue and (b) the resolution dated October 30, 1986 denying petitioner's motion for reconsideration.

The undisputed facts of the case are as follows:

On March 29,1982 up to January 6,1984, private respondent Metropolitan Bank extended various
loans to petitioner Fortune Motors in the total sum of P32,500,000.00 (according to the borrower; or
P34,150,000.00 according to the Bank) which loan was secured by a real estate mortgage on the
Fortune building and lot in Makati, Rizal. (Rollo, pp. 60-62)

Due to financial difficulties and the onslaught of economic recession, the petitioner was not able to
pay the loan which became due. (Rollo, p. 62)

For failure of the petitioner to pay the loans, the respondent bank initiated extrajudicial foreclosure
proceedings. After notices were served, posted, and published, the mortgaged property was sold at
public auction for the price of P47,899,264.91 to mortgagee Bank as the highest bidder. (Rollo, p.
11)

The sheriff's certificate of sale was registered on October 24, 1984 with the one-year redemption
period to expire on October 24,1985. (Rollo, p. 12)

On October 21, 1985, three days before the expiration of the redemption period, petitioner Fortune
Motors filed a complaint for annulment of the extrajudicial foreclosure sale alleging that the
foreclosure was premature because its obligation to the Bank was not yet due, the publication of the
notice of sale was incomplete, there was no public auction, and the price for which the property was
sold was "shockingly low". (Rollo, pp. 60-68)

Before summons could be served private respondent Bank filed a motion to dismiss the complaint
on the ground that the venue of the action was improperly laid in Manila for the realty covered by the
real estate mortgage is situated in Makati, therefore the action to annul the foreclosure sale should
be filed in the Regional Trial Court of Makati. (Rollo, pp. 67-71-A )

The motion was opposed by petitioner Fortune Motors alleging that its action "is a personal action"
and that "the issue is the validity of the extrajudicial foreclosure proceedings" so that it may have a
new one year period to redeem. (Rollo, pp. 72-73)
On January 8, 1986 an order was issued by the lower court reserving the resolution of the Bank's
motion to dismiss until after the trial on the merits as the grounds relied upon by the defendant were
not clear and indubitable. (Rollo, p. 81)

The Bank filed a motion for reconsideration of the order dated January 8, 1986 but it was denied by
the lower court in its order dated May 28, 1986. (Rollo, Annex "L" pp. 93-96; Annex "N" p. 99)

On June 11, 1986 the respondent Bank filed a petition for certiorari and prohibition in the Court of
Appeals. (Rollo, Annex "O" pp. 100-115)

And on July 30, 1986, a decision was issued by the Court of Appeals, the dispositive part of which
reads as follows:

WHEREFORE, the petition for certiorari and prohibition is granted. The complaint in
the Civil Case No. 85-33218 is dismissed without prejudice to its being filed in the
proper venue. Costs against the private respondent.

SO ORDERED. (Rollo, p. 15)

A motion for reconsideration was filed on August 11, 1986 on the said decision and on October 30,
1986 a resolution was issued denying such motion for reconsideration. (Rollo, Annex "O" pp. 121-
123; Annex "S" p. 129)

Hence, the petition for review on certiorari.

On June 10, 1987 the Court gave due course to the petition, required the parties to file their
respective memoranda within twenty (20) days from the notice hereof, and pay deposit for costs in
the amount of P80.40.

Both parties have filed their respective memoranda, and the case was submitted for Court's
resolution in the resolution dated December 14, 1987. (Rollo,Metrobank's Memorandum pp. 45-59;
petitioner's memorandum pp.130-136; Res. p. 138)

The only issue in this case is whether petitioner's action for annulment of the real estate mortgage
extrajudicial foreclosure sale of Fortune Building is a personal action or a real action for venue
purposes.

In a real action, the plaintiff seeks the recovery of real property, or as indicated in Sec. 2 (a) of Rule
4, a real action is an action affecting title to real property, or for the recovery of possession, or for the
partition or condemnation of, or foreclosure of a mortgage on real property. (Comments on the Rules
of Court by Moran, Vol. 1, p. 122)

Real actions or actions affecting title to, or for the recovery of possession, or for the partition or
condemnation of, or foreclosure of mortgage on real property, must be instituted in the Court of First
Instance of the province where the property or any part thereof lies. (Enriquez v. Macadaeg, 84 Phil.
674,1949; Garchitorena v. Register of Deeds, 101 Phil. 1207, 1957)

Personal actions upon the other hand, may be instituted in the Court of First Instance where the
defendant or any of the defendants resides or may be found, or where the plaintiff or any of the
plaintiffs resides, at the election of the plaintiff (Sec. 1, Rule 4, Revised Rules of Court).
A prayer for annulment or rescission of contract does not operate to efface the true objectives and
nature of the action which is to recover real property. (Inton, et al., v. Quintan, 81 Phil. 97, 1948)

An action for the annulment or rescission of a sale of real property is a real action. Its prime objective
is to recover said real property. (Gavieres v. Sanchez, 94 Phil. 760,1954)

An action to annul a real estate mortgage foreclosure sale is no different from an action to annul a
private sale of real property. (Munoz v. Llamas, 87 Phil. 737,1950)

While it is true that petitioner does not directly seek the recovery of title or possession of the property
in question, his action for annulment of sale and his claim for damages are closely intertwined with
the issue of ownership of the building which, under the law, is considered immovable property, the
recovery of which is petitioner's primary objective. The prevalent doctrine is that an action for the
annulment or rescission of a sale of real property does not operate to efface the fundamental and
prime objective and nature of the case, which is to recover said real property. It is a real action.
Respondent Court, therefore, did not err in dismissing the case on the ground of improper venue
(Sec. 2, Rule 4) which was timely raised (Sec. 1, Rule 16). (Punzalan, Jr. v. Vda. de Lacsamana,
121 SCRA 336, [1983]).

Thus, as aptly decided by the Court of Appeals in a decision penned by then Court of Appeals
Associate Justice now Associate Justice of the Supreme Court Carolina C. Griño-Aquino, the
pertinent portion reads: "Since an extrajudicial foreclosure of real property results in a conveyance of
the title of the property sold to the highest bidder at the sale, an action to annul the foreclosure sale
is necessarily an action affecting the title of the property sold. It is therefore a real action which
should be commenced and tried in the province where the property or part thereof lies."

PREMISES CONSIDERED, the instant petition is DENIED for lack of merit and the assailed decision
of the respondent Court of Appeals is AFFIRMED.

SO ORDERED.

Melencio-Herrera (Chairperson), Padilla, Sarmiento and Regalado, JJ., concur.

THIRD DIVISION

[G.R. No. 112191. February 7, 1997]

FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR L.


RODRIGUEZA, petitioners, vs. THE HONORABLE COURT OF
APPEALS and FILINVEST CREDIT CORPORATION, respondents.

DECISION
PANGANIBAN, J.:
To fund their acquisition of new vehicles (which are later retailed or resold
to the general public), car dealers normally enter into wholesale automotive
financing schemes whereby vehicles are delivered by the manufacturer or
assembler on the strength of trust receipts or drafts executed by the car dealers,
which are backed up by sureties. These trust receipts or drafts are then
assigned and/or discounted by the manufacturer to/with financing companies,
which assume payment of the vehicles but with the corresponding right to
collect such payment from the car dealers and/or the sureties. In this manner,
car dealers are able to secure delivery of their stock-in-trade without having to
pay cash therefor; manufacturers get paid without any receivables/collection
problems; and financing companies earn their margins with the assurance of
payment not only from the dealers but also from the sureties. When the vehicles
are eventually resold, the car dealers are supposed to pay the financing
companies -- and the business goes merrily on. However, in the event the car
dealer defaults in paying the financing company, may the surety escape liability
on the legal ground that the obligations were incurred subsequent to the
execution of the surety contract?
This is the principal legal question raised in this petition for review (under
Rule 45 of the Rules of Court) seeking to set aside the Decision of the Court
[1]

of Appeals (Tenth Division) promulgated on September 30, 1993 in CA G.R.


[2]

CV No. 09136 which affirmed in toto the decision of the Regional Trial Court
[3]

of Manila - Branch 11 in Civil Case No. 83-21994, the dispositive portion of


[4]

which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants, by ordering the latter to pay, jointly and severally, the plaintiff the
following amounts:

1. The sum of P1,348,033.89, plus interest thereon at the rate of P922.53 per day
starting April 1, 1985 until the said principal amount is fully paid;

2. The amount of P50,000.00 as attorneys fees and another P50,000.00 as liquidated


damages; and

3. That the defendants, although spared from paying exemplary damages, are further
ordered to pay, in solidum, the costs of this suit.

Plaintiff therein was the financing company and the defendants the car
dealer and its sureties.
The Facts

On or about August 4, 1981, Joseph L. G. Chua and Petitioner Edgar Lee


Rodrigueza (Petitioner Rodrigueza) each executed an undated Surety
Undertaking whereunder they absolutely, unconditionally and solidarily
[5]

guarantee(d) to Respondent Filinvest Credit Corporation (Respondent


Filinvest) and its affiliated and subsidiary companies the full, faithful and prompt
performance, payment and discharge of any and all obligations and agreements
of Fortune Motors (Phils.) Corporation (Petitioner Fortune) under or with respect
to any and all such contracts and any and all other agreements (whether by
way of guaranty or otherwise) of the latter with Filinvest and its affiliated and
subsidiary companies now in force or hereafter made.
The following year or on April 5, 1982, Petitioner Fortune, Respondent
[6]

Filinvest and Canlubang Automotive Resources Corporation (CARCO) entered


into an Automotive Wholesale Financing Agreement (Financing Agreement)
[7]

under which CARCO will deliver motor vehicles to Fortune for the purpose of
resale in the latters ordinary course of business; Fortune, in turn, will execute
trust receipts over said vehicles and accept drafts drawn by CARCO, which will
discount the same together with the trust receipts and invoices and assign them
in favor of Respondent Filinvest, which will pay the motor vehicles for
Fortune. Under the same agreement, Petitioner Fortune, as trustee of the motor
vehicles, was to report and remit proceeds of any sale for cash or on terms to
Respondent Filinvest immediately without necessity of demand.
Subsequently, several motor vehicles were delivered by CARCO to Fortune,
and trust receipts covered by demand drafts and deeds of assignment were
executed in favor of Respondent Filinvest. However, when the demand drafts
matured, not all the proceeds of the vehicles which Petitioner Fortune had sold
were remitted to Respondent Filinvest. Fortune likewise failed to turn over to
Filinvest several unsold motor vehicles covered by the trust receipts. Thus,
Filinvest through counsel, sent a demand letter dated December 12, 1983 to
[8]

Fortune for the payment of its unsettled account in the amount


of P1,302,811.00. Filinvest sent similar demand letters separately to Chua and
[9]

Rodrigueza as sureties. Despite said demands, the amount was not


paid. Hence, Filinvest filed in the Regional Trial Court of Manila a complaint for
a sum of money with preliminary attachment against Fortune, Chua and
Rodrigueza.
In an order dated September 26, 1984, the trial court declared that there
was no factual issue to be resolved except for the correct balance of defendants
account with Filinvest as agreed upon by the parties during pre-
trial. Subsequently, Filinvest presented testimonial and documentary
[10]

evidence. Defendants (petitioners herein), instead of presenting their evidence,


filed a Motion for Judgment on Demurrer to Evidence anchored principally on
[11]

the ground that the Surety Undertakings were null and void because, at the time
they were executed, there was no principal obligation existing. The trial court
denied the motion and scheduled the case for reception of defendants
evidence. On two scheduled dates, however, defendants failed to present their
evidence, prompting the court to deem them to have waived their right to
present evidence. On December 17, 1985, the trial court rendered its decision
earlier cited ordering Fortune, Chua and Rodrigueza to pay Filinvest, jointly and
severally, the sum of P1,348,033.83 plus interest at the rate of P922.53 per day
from April 1, 1985 until fully paid, P50,000.00 in attorneys fees,
another P50,000.00 in liquidated damages and costs of suit.
As earlier mentioned, their appeal was dismissed by the Court of Appeals
(Tenth Division) which affirmed in toto the trial courts decision. Hence, this
recourse.

Issues

Petitioners assign the following errors in the appealed Decision:

1. that the Court of Appeals erred in declaring that surety can exist even if there was
no existing indebtedness at the time of its execution.

2. that the Court of Appeals erred when it declared that there was no novation.

3. that the Court of Appeals erred when it declared, that the evidence was sufficient to prove the
amount of the claim.[12]

Petitioners argue that future debts which can be guaranteed under Article
2053 of the Civil Code refer only to debts existing at the time of the constitution
of the guaranty but the amount thereof is unknown, and that a guaranty being
an accessory obligation cannot exist without a principal obligation. Petitioners
claim that the surety undertakings cannot be made to cover the Financing
Agreement executed by Fortune, Filinvest and CARCO since the latter contract
was not yet in existence when said surety contracts were entered into.
Petitioners further aver that the Financing Agreement would effect a
novation of the surety contracts since it changed the principal terms of the
surety contracts and imposed additional and onerous obligations upon the
sureties.
Lastly, petitioners claim that no accounting of the payments made by
Petitioner Fortune to Respondent Filinvest was done by the latter. Hence, there
could be no way by which the sureties can ascertain the correct amount of the
balance, if any.
Respondent Filinvest, on the other hand, imputes estoppel (by pleadings or
by judicial admission) upon petitioners when in their Motion to Discharge
Attachment, they admitted their liability as sureties thus:

Defendants Chua and Rodrigueza could not have perpetrated fraud because they are
only sureties of defendant Fortune Motors x x x;

x x x The defendants (referring to Rodrigueza and Chua) are not parties to the trust receipts
agreements since they are ONLY sureties x x x.[13]

In rejecting the arguments of petitioners and in holding that they (Fortune


and the sureties) were jointly and solidarily liable to Filinvest, the trial court
declared:

As to the alleged non-existence of a principal obligation when the surety agreement


was signed, it is enought (sic) to state that a guaranty may also be given as security for
future debts, the amount of which is not known (Art. 2053, New Civil Code). In the
case of NARIC vs. Fojas, L-11517, promulgated April 10, 1958, it was ruled that a
bond posted to secure additional credit that the principal debtor had applied for, is not
void just because the said bond was signed and filed before the additional credit was
extended by the creditor. The obligation of the sureties on future obligations of
Fortune is apparent from a proviso under the Surety Undertakings marked Exhs. B
and C that the sureties agree with the plaintiff as follows:

In consideration of your entering into an arrangement with the party (Fortune) named
above, x x x x by which you may purchase or otherwise require from, and or enter
into with obligor x x x trust receipt x x x arising out of wholesale and/or retail
transactions by or with obligor, the undersigned x x x absolutely, unconditionally, and
solidarily guarantee to you x x x the full, faithful and prompt performance, payment
and discharge of any and all obligations x x x of obligor under and with respect to any
and all such contracts and any and all agreements (whether by way of guaranty or
otherwise) of obligor with you x x x now in force or hereafter made. (Underlinings
supplied).

On the matter of novation, this has already been ruled upon when this Court denied
defendants Motion to dismiss on the argument that what happened was really an
assignment of credit, and not a novation of contract, which does not require the
consent of the debtors. The fact of knowledge is enough. Besides, as explained by the
plaintiff, the mother or the principal contract was the Financing Agreement, whereas
the trust receipts, the sight drafts, as well as the Deeds of assignment were only
collaterals or accidental modifications which do not extinguish the original contract
by way of novation. This proposition holds true even if the subsequent agreement
would provide for more onerous terms for, at any rate, it is the principal or mother
contract that is to be followed. When the changes refer to secondary agreements and
not to the object or principal conditions of the contract, there is no novation; such
changes will produce modifications of incidental facts, but will not extinguish the
original obligation (Tolentino, Commentaries on Jurisprudence of the Civil Code of
the Philippines, 1973 Edition, Vol. IV, page 367; cited in plaintiffs Memorandum of
September 6, 1985, p. 3).

On the evidence adduced by the plaintiff to show the status of defendants accounts, which took
into consideration payments by defendants made after the filing of the case, it is enough to state
that a statement was carefully prepared showing a balance of the principal obligation plus
interest totalling P1,348,033.89 as of March 31, 1985 (Exh. M). This accounting has not been
traversed nor contradicted by defendants although they had the opportunity to do so. Likewise,
there was absolute silence on the part of defendants as to the correctness of the previous
statement of account made as of December 16, 1983 (referring to Exh. I), but more important,
however, is that defendants received demand letters from the plaintiff stating that, as of
December 1983 (Exhs. J, K and L), this total amount of obligation wasP1,302,811,00, and yet
defendants were not heard to have responded to said demand letters, let alone have taken any
exception thereto. There is such a thing as evidence by silence (Sec. 23, Rule 130, Revised Rules
of Court).[14]

The Court of Appeals, affirming the above decision of the trial court, further
explained:

x x x In the case at bar, the surety undertakings in question unequivocally state that
Chua and Rodrigueza absolutely, unconditionally and solidarily guarantee to Filinvest
the full, faithful and prompt performance, payment and discharge of any and all
obligations and agreements of Fortune under or with respect to any and all such
contracts and any and all other agreements (whether by way of guaranty or otherwise)
of the latter with Filinvest in force at the time of the execution of the Surety
Undertakings or made thereafter. Indeed, if Chua and Rodrigueza did not intend to
guarantee all of Fortunes future obligation with Filinvest, then they should have
expressly stated in their respective surety undertakings exactly what said surety
agreements guaranteed or to which obligations of Fortune the same were intended to
apply. For another, if Chua and Rodrigueza truly believed that the surety undertakings
they executed should not cover Fortunes obligations under the AWFA, then why did
they not inform Filinvest of such fact when the latter sent them the aforementioned
demand letters (Exhs. K and L) urging them to pay Fortunes liability under the
AWFA. Instead, quite uncharacteristic of persons who have just been asked to pay an
obligation to which they believe they are not liable, Chua and Rodrigueza elected or
chose not to answer said demand letters. Then, too, considering that appellant Chua is
the corporate president of Fortune and a signatory to the AWFA, he should have
simply had it stated in the AWFA or in a separate document that the Surety
Undertakings do not cover Fortunes obligations in the aforementioned AWFA, trust
receipts or demand drafts.

Appellants argue that it was unfair for Filinvest to have executed the AWFA only
after two (2) years from the date of the Surety undertakings because Chua and
Rodrigueza were thereby made to wait for said number of years just to know what
kind of obligation they had to guarantee.

The argument cannot hold water. In the first place, the Surety Undertakings did not provide that
after a period of time the same will lose its force and effect. In the second place, if Chua and
Rodrigueza did not want to guarantee the obligations of Fortune under the AWFA, trust receipts
and demand drafts, then why did they not simply terminate the Surety Undertakings by serving
ten (10) days written notice to Filinvest as expressly allowed in said surety agreements. It is
highly plausible that the reason why the Surety Undertakings were not terminated was because
the execution of the same was part of the consideration why Filinvest and CARCO agreed to
enter into the AWFA with Fortune.[15]

The Courts Ruling

We affirm the decisions of the trial and appellate courts.

First Issue: Surety May Secure Future Obligations

The case at bench falls on all fours with Atok Finance Corporation vs. Court
of Appeals which reiterated our rulings in National Rice and Corn Corporation
[16]

(NARIC) vs. Court of Appeals and Rizal Commercial Banking Corporation vs.
[17]

Arro. In Atok Finance, Sanyu Chemical as principal, and Sanyu Trading along
[18]

with individual private stockholders of Sanyu Chemical, namely, spouses Daniel


and Nenita Arrieta, Leopoldo Halili and Pablito Bermundo, as sureties, executed
a continuing suretyship agreement in favor of Atok Finance as creditor.Under
the agreement, Sanyu Trading and the individual private stockholders and
officers of Sanyu Chemical jointly and severally unconditionally guarantee(d) to
Atok Finance Corporation (hereinafter called Creditor), the full, faithful and
prompt payment and discharge of any and all indebtedness of [Sanyu
Chemical] x x x to the Creditor. Subsequently, Sanyu Chemical assigned its
trade receivables outstanding with a total face value of P125,871.00 to Atok
Finance in consideration of receipt of the amount of P105,000.00. Later,
additional trade receivables with a total face value of P100,378.45 were also
assigned. Due to nonpayment upon maturity, Atok Finance commenced action
against Sanyu Chemical, the Arrieta spouses, Bermundo and Halili to collect
the sum of P120,240.00 plus penalty charges due and payable. The individual
private respondents contended that the continuing suretyship agreement, being
an accessory contract, was null and void since, at the time of its execution,
Sanyu Chemical had no pre-existing obligation due to Atok Finance. The trial
court rendered a decision in favor of Atok Finance and ordered defendants to
pay, jointly and severally, aforesaid amount to Atok.
On appeal, the then Intermediate Appellate Court reversed the trial court
and dismissed the complaint on the ground that there was no proof that when
the suretyship agreement was entered into, there was a pre-existing obligation
which served as the principal obligation between the parties. Furthermore, the
future debts alluded to in Article 2053 refer to debts already existing at the time
of the constitution of the agreement but the amount thereof is unknown, unlike
in the case at bar where the obligation was acquired two years after the
agreement.
We ruled then that the appellate court was in serious error. The distinction
which said court sought to make with respect to Article 2053 (that future debts
referred to therein relate to debts already existing at the time of the constitution
of the agreement but the amount [of which] is unknown and not to debts not yet
incurred and existing at that time) has previously been rejected, citing
the RCBC and NARIC cases. We further said:

x x x Of course, a surety is not bound under any particular principal obligation until
that principal obligation is born. But there is no theoretical or doctrinal difficulty
inherent in saying that the suretyship agreement itself is valid and binding even before
the principal obligation intended to be secured thereby is born, any more than there
would be in saying that obligations which are subject to a condition precedent are
valid and binding before the occurrence of the condition precedent.

Comprehensive or continuing surety agreements are in fact quite commonplace in


present day financial and commercial practice. A bank or financing company which
anticipates entering into a series of credit transactions with a particular company,
commonly requires the projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an agreement, the principal
places itself in a position to enter into the projected series of transactions with its
creditor; with such suretyship agreement, there would be no need to execute a separate
surety contract or bond for each financing or credit accommodation extended to the
principal debtor.
In Dio vs. Court of Appeals, we again had occasion to discourse on
[19]

continuing guaranty/suretyship thus:

x x x A continuing guaranty is one which is not limited to a single transaction, but


which contemplates a future course of dealing, covering a series of transactions,
generally for an indefinite time or until revoked. It is prospective in its operation and
is generally intended to provide security with respect to future transactions within
certain limits, and contemplates a succession of liabilities, for which, as they accrue,
the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which
covers all transactions, including those arising in the future, which are within the
description or contemplation of the contract, of guaranty, until the expiration or
termination thereof. A guaranty shall be construed as continuing when by the terms
thereof it is evident that the object is to give a standing credit to the principal debtor to
be used from time to time either indefinitely or until a certain period; especially if the
right to recall the guaranty is expressly reserved. Hence, where the contract of
guaranty states that the same is to secure advances to be made from time to time the
guaranty will be construed to be a continuing one.

In other jurisdictions, it has been held that the use of particular words and expressions such as
payment of any debt, any indebtedness, any deficiency, or any sum, or the guaranty of any
transaction or money to be furnished the principal debtor at any time, or on such time that the
principal debtor may require, have been construed to indicate a continuing guaranty.[20]

We have no reason to depart from our uniform ruling in the above-cited


cases. The facts of the instant case bring us to no other conclusion than that
the surety undertakings executed by Chua and Rodrigueza were continuing
guaranties or suretyships covering all future obligations of Fortune Motors
(Phils.) Corporation with Filinvest Credit Corporation. This is evident from the
written contract itself which contained the words absolutely, unconditionally and
solidarily guarantee(d) to Respondent Filinvest and its affiliated and subsidiary
companies the full, faithful and prompt performance, payment and discharge of
any and all obligations and agreements of Petitioner Fortune under or with
respect to any and all such contracts and any and all other agreements
(whether by way of guaranty or otherwise) of the latter with Filinvest and its
affiliated and subsidiary companies now in force or hereafter made.
Moreover, Petitioner Rodrigueza and Joseph Chua knew exactly where they
stood at the time they executed their respective surety undertakings in favor of
Fortune. As stated in the petition:

Before the execution of the new agreement, Edgar L. Rodrigueza and Joseph Chua were required
to sign blank surety agreements, without informing them how much amount they would be liable
as sureties.However, because of the desire of petitioners, Chua and Rodrigueza to have the cars
delivered to petitioner, Fortune, they signed the blank promissory notes.[21] (underscoring
supplied)

It is obvious from the foregoing that Rodrigueza and Chua were fully aware
of the business of Fortune, an automobile dealer; Chua being the corporate
president of Fortune and even a signatory to the Financial Agreement with
Filinvest. Both sureties knew the purpose of the surety undertaking which they
[22]

signed and they must have had an estimate of the amount involved at that
time. Their undertaking by way of the surety contracts was critical in enabling
Fortune to acquire credit facility from Filinvest and to procure cars for resale,
which was the business of Fortune. Respondent Filinvest, for its part, relied on
the surety contracts when it agreed to be the assignee of CARCO with respect
to the liabilities of Fortune with CARCO. After benefiting therefrom, petitioners
cannot now impugn the validity of the surety contracts on the ground that there
was no pre-existing obligation to be guaranteed at the time said surety contracts
were executed. They cannot resort to equity to escape liability for their voluntary
acts, and to heap injustice to Filinvest, which relied on their signed word.
This is a clear case of estoppel by deed. By the acts of petitioners, Filinvest
was made to believe that it can collect from Chua and/or Rodrigueza in case of
Fortunes default. Filinvest relied upon the surety contracts when it demanded
payment from the sureties of the unsettled liabilities of Fortune. A refusal to
enforce said surety contracts would virtually sanction the perpetration of fraud
or injustice. [23]

Second Issue: No Novation

Neither do we find merit in the averment of petitioners that the Financing


Agreement contained onerous obligations not contemplated in the surety
undertakings, thus changing the principal terms thereof and effecting a
novation.
We have ruled previously that there are only two ways to effect novation
and thereby extinguish an obligation. First, novation must be explicitly stated
and declared in unequivocal terms. Novation is never presumed. Second, the
old and new obligations must be incompatible on every point. The test of
incompatibility is whether the two obligations can stand together, each one
having its independent existence. If they cannot, they are incompatible and the
latter obligation novates the first. Novation must be established either by the
[24]

express terms of the new agreement or by the acts of the parties clearly
demonstrating the intent to dissolve the old obligation as a consideration for the
emergence of the new one. The will to novate, whether totally or partially, must
appear by express agreement of the parties, or by their acts which are too clear
and unequivocal to be mistaken. [25]

Under the surety undertakings however, the obligation of the sureties


referred to absolutely, unconditionally and solidarily guaranteeing the full,
faithful and prompt performance, payment and discharge of all obligations of
Petitioner Fortune with respect to any and all contracts and other agreements
with Respondent Filinvest in force at that time or thereafter made.There were
no qualifications, conditions or reservations stated therein as to the extent of
the suretyship. The Financing Agreement, on the other hand, merely detailed
the obligations of Fortune to CARCO (succeeded by Filinvest as assignee). The
allegation of novation by petitioners is, therefore, misplaced. There is no
incompatibility of obligations to speak of in the two contracts. They can stand
together without conflict.
Furthermore, the parties have not performed any explicit and unequivocal
act to manifest their agreement or intention to novate their contract. Neither did
the sureties object to the Financing Agreement nor try to avoid liability
thereunder at the time of its execution. As aptly discussed by the Court of
Appeals:

x x x For another, if Chua and Rodrigueza truly believed that the surety undertakings they
executed should not cover Fortunes obligations under the AWFA (Financing Agreement), then
why did they not inform Filinvest of such fact when the latter sent them the aforementioned
demand letters (Exhs. K and L) urging them to pay Fortunes liability under the AWFA. Instead,
quite uncharacteristic of persons who have just been asked to pay an obligation to which they are
not liable, Chua and Rodrigueza elected or chose not to answer said demand letters. Then, too,
considering that appellant Chua is the corporate president of Fortune and a signatory to the
AWFA, he should have simply had it stated in the AWFA or in a separate document that the
Surety Undertakings do not cover Fortunes obligations in the aforementioned AWFA, trust
receipts or demand drafts.[26]

Third Issue: Amount of Claim Substantiated

The contest on the correct amount of the liability of petitioners is a purely


factual issue. It is an oft repeated maxim that the jurisdiction of this Court in
cases brought before it from the Court of Appeals under Rule 45 of the Rules
of Court is limited to reviewing or revising errors of law. It is not the function of
this Court to analyze or weigh evidence all over again unless there is a showing
that the findings of the lower court are totally devoid of support or are glaringly
erroneous as to constitute serious abuse of discretion. Factual findings of the
Court of Appeals are conclusive on the parties and carry even more weight
when said court affirms the factual findings of the trial court.
[27]

In the case at bar, the findings of the trial court and the Court of Appeals
with respect to the assigned error are based on substantial evidence which
were not refuted with contrary proof by petitioners. Hence, there is no necessity
to depart from the above judicial dictum.
WHEREFORE, premises considered, the petition is DENIED and the
assailed Decision of the Court of Appeals concurring with the decision of the
trial court is hereby AFFIRMED.Costs against petitioners.
SO ORDERED.
Melo, and Francisco, JJ., concur.
Narvasa, C.J. (Chairman), took no part due to personal relationship to party.
Davide, Jr., took no part due to close relationship of a party.