PREMIERE DEVELOPMENT BANK v.

CENTRAL SURETY
CENTRAL SURETY AND INSURANCE CO.
Before us is a petition for review on certiorari assailing the Court of Appeals (CA) Decision in
CA-G.R. CV No. 85930, which reversed and set aside the decision of the Regional Trial Court 2nd Floor Universalre Bldg.
(RTC), Branch 132, Makati City in Civil Case No. 0051306. No. 106 Paseo de Roxas, Legaspi Village
Makati City
On August 20, 1999, respondent Central Surety & Insurance Company (Central Surety)
obtained an industrial loan of P6,000,000.00 from petitioner Premiere Development Bank Attention: Mr. Constancio T. Castaneda, Jr.
(Premiere Bank) with a maturity date of August 14, 2000. This P6,000,000.00 loan, evidenced President
by Promissory Note (PN) No. 714-Y, stipulates payment of 17% interest per annum payable Mr. Engracio T. Castaneda
monthly in arrears and the principal payable on due date. In addition, PN No. 714-Y provides Vice President
for a penalty charge of 24% interest per annum based on the unpaid amortization/installment -------------------------------------------------
or the entire unpaid balance of the loan. In all, should Central Surety fail to pay, it would be
liable to Premiere Bank for: (1) unpaid interest up to maturity date; (2) unpaid penalties up to Gentlemen:
maturity date; and (3) unpaid balance of the principal.
This has reference to your overdue loan of P6.0 Million.
To secure payment of the P6,000,000.00 loan, Central Surety executed in favor of Premiere
Bank a Deed of Assignment with Pledge[4] covering Central Surety's Membership Fee We regret to inform you that despite efforts to restructure the same, you have failed up to
Certificate No. 217 representing its proprietary share in Wack Wack Golf and Country Club this time, to submit the required documents and come up with equity necessary to implement
Incorporated (Wack Wack Membership). In both PN No. 714-Y and Deed of Assignment, the restructuring scheme.
Constancio T. Castañeda, Jr. and Engracio T. Castañeda, president and vice-president of
Central Surety, respectively, represented Central Surety and solidarily bound themselves to In view thereof, we regret that unless the above loan is settled on or before five (5) days from
the payment of the obligation. the date hereof, we shall exercise our option to have the Stock Certificate No. 217 with Serial
No. 1793 duly issued by Wack Wack Golf and Country Club, Inc. transferred in the name of
Parenthetically, Central Surety had another commercial loan with Premiere Bank in the Premiere Development Bank in accordance with the terms and conditions of the Deed of
amount of P40,898,000.00 maturing on October 10, 2001. This loan was, likewise, evidenced Assignment with Pledge executed in favor of Premiere Development Bank.
by a PN numbered 376-X[5] and secured by a real estate mortgage over Condominium
Certificate of Title No. 8804, Makati City. PN No. 376-X was availed of through a renewal of We shall appreciate your prompt compliance.
Central Surety's prior loan, then covered by PN No. 367-Z.[6] As with the P6,000,000.00 loan
and the constituted pledge over the Wack Wack Membership, the P40,898,000.00 loan with Very truly yours,
real estate mortgage was transacted by Constancio and Engracio Castañeda on behalf of
Central Surety.
(sgd.)
It appears that on August 22, 2000, Premiere Bank sent a letter to Central Surety demanding IGNACIO R. NEBRIDA, JR.
payment of the P6,000,000.00 loan, to wit: Senior Asst. Vice President/
Business Development Group - Head[7]
August 22, 2000
Posthaste, Central Surety responded and sent the following letter dated August 24, 2000: threatened foreclosure of the loans' respective securities, the pledge and real estate
24 August 2000 mortgage, should Central Surety fail to pay these within ten days from date, thus:

Mr. Ignacio R. Nebrida, Jr. 28 September 2000

Senior Asst. Vice President/
Business Development Group - Head CENTRAL SURETY & INSURANCE CO.
Premiere Bank By: Constancio T. Castañeda Jr. - President
EDSA cor. Magallanes Avenue Engracio T. Castañeda - Vice President
Makati City 2nd Floor Universalre Bldg. No. 106
Paseo de Roxas, Legaspi Village, Makati City

Sir: RE: YOUR COMMERCIAL LOAN OF P40,898,000.00 &

P6,000,000.00 WITH PREMIERE DEVELOPMENT BANK
With reference to this 6.0 Million loan account, we have informed Ms. Evangeline Veloira that UNDER ACCOUNT NOS. COM-367-Z AND COM 714-Y
we are intending to settle the account by the end of September. As of 14 August 2000 we
made payment to your bank as per receipt attached. **************************************************

As you may know, present conditions have been difficult for the insurance industry whose
performance is so closely linked to the nation's economic prosperity; and we are now asking
for some consideration and leeway on your very stiff and immediate demands.
Kindly extend to us your favorable approval.
Very truly yours,
(sgd.)
ENGRACIO T. CASTANEDA
Vice-President[8]
Accordingly, by September 20, 2000, Central Surety issued Bank of Commerce (BC) Check No.
08114[9] dated September 22, 2000 in the amount of P6,000,000.00 and payable to Premiere
Bank. The check was received by Premiere Bank's Senior Account Manager, Evangeline
Veloira, with the notation "full payment of loan-Wack Wack," as reflected in Central Surety's
Disbursement Voucher.[10] However, for undisclosed reasons, Premiere Bank returned BC
Check No. 08114 to Central Surety, and in its letter dated September 28, 2000, demanded
from the latter, not just payment of the P6,000,000.00 loan, but also the P40,898,000.00 loan
which was originally covered by PN No. 367-Z.[11] In the same letter, Premiere Bank
Dear Sirs:
We write on behalf of our client, Premiere Development Bank, in connection with your above-
captioned loan account.
While our client has given you all the concessions, facilities and opportunities to service your
loans, we regret to inform you that you have failed to settle the same despite their past due
status.
In view of the foregoing and to protect the interest of our client, please be advised that unless
the outstanding balances of your loan accounts as of date plus interest, penalties and other
fees and charges are paid in full or necessary arrangements acceptable to our client is made
by you within ten (10) days from date hereof, we shall be constrained much to our regret, to
file foreclosure proceedings against the collateral of the loan mortgaged to the Bank or pursue
such action necessary in the premises.
We trust, therefore, that you will give this matter your preferential attention.
Very truly yours,
(sgd.) (sgd.)
PACITA M. ARAOS[12] EPIFANIO E. CUA
(italics supplied) Counsel for Central Surety & Insurance Company[13]
The very next day, on September 29, 2000, Central Surety, through its counsel, wrote (italics supplied)
Premiere Bank and re-tendered payment of the check: On even date, a separate letter with another BC Check No. 08115 in the amount of
P2,600,000.00 was also tendered to Premiere Bank as payment for the Spouses Engracio and
29 September 2000 Lourdes Castañeda's (Spouses Castañeda's) personal loan covered by PN No. 717-X and
secured by Manila Polo Club, Inc. membership shares.
PREMIERE BANK
EDSA cor. Magallanes Avenue On October 13, 2000, Premiere Bank responded and signified acceptance of Central Surety's
Makati City checks under the following application of payments:

Attention: Mr. Ignacio R. Nebrida, Jr. 13 October 2000

Senior Asst. Vice President/
Business Development Group - Head ATTY. EPIFANIO E. CUA
2/F Universalre Condominium
Re : Promissory Note No. 714-Y 106 Paseo de Roxas
Legaspi Village, Makati City
Sir:
Dear Atty. Cua:
This is further to our client's letter to you dated 24 August 2000, informing you that it would
settle its account by the end of September 2000. Thank you for your two (2) letters both dated 29 September 2000 on behalf of your clients
with the enclosed check nos. 0008114 and 0008115 for the total of P8,600,000.00.
Please be advised that on 20 September 2000 our client delivered to your bank BC cheque no.
08114 payable to Premiere Bank in the amount of SIX MILLION PESOS (P6,000,000.00), which As previously relayed to your client, Premiere Bank cannot accept the two (2) checks as full
was received by your Senior Account Manager, Ms. Evangeline Veloira. However, for settlement of the obligation under Account Nos. PN #714-Y and PN # 717-X, as the amount is
unexplained reasons the cheque was returned to us. insufficient.

We are again tendering to you the said cheque of SIX MILLION PESOS (P6,000,000.00), in In accordance with the terms and conditions of the Promissory Notes executed by your clients
payment of PN#714-Y. Please accept the cheque and issue the corresponding receipt thereof. in favor of Premiere Development Bank, we have applied the two (2) checks to the due
Should you again refuse to accept this cheque, then I shall advise my client to deposit it in obligations of your clients as follows:
court for proper disposition.
1)Account No.: COM 235-Z[14]
Thank you. P1,044,939.45

Very truly yours, 2) Account No.: IND 717-X

P1,459,693.15
 Strongly objecting to Premiere Bank's application of payments, Central Surety's counsel wrote
3) Account No.: COM 367-Z[15] Premiere Bank and reiterated Central Surety's demand for the application of the check
P4,476,200.18 payments to the loans covered by PN Nos. 714-X and 714-Y. Additionally, Central Surety asked
that the Wack Wack Membership pledge, the security for the P6,000,000.00 loan, should be
4) Account No.: COM 714-Y released.
P1,619,187.22
In the final exchange of correspondence, Premiere Bank, through its SAVP/Acting Head-LGC,
TOTAL Atty. Pacita Araos, responded and refused to accede to Central Surety's demand. Premiere
P8,600,000.00 Bank insisted that the PN covering the P6,000,000.00 loan granted Premiere Bank sole
discretion respecting: (1) debts to which payments should be applied in cases of several
========== obligations by an obligor and/or debtor; and (2) the initial application of payments to other
costs, advances, expenses, and past due interest stipulated thereunder.
We are enclosing Xerox copy each of four (4) official receipts covering the above payments.
The originals are with us which your clients or their duly authorized representative may pick- As a result, Central Surety filed a complaint for damages and release of security collateral,
up anytime during office hours. specifically praying that the court render judgment: (1) declaring Central Surety's
P6,000,000.00 loan covered by PN No. 714-Y as fully paid; (2) ordering Premiere Bank to
We shall appreciate the settlement in full of the accounts of your client or necessary release to Central Surety its membership certificate of shares in Wack Wack; (3) ordering
arrangements for settlement thereof be made as soon as possible to put the accounts on up Premiere Bank to pay Central Surety compensatory and actual damages, exemplary damages,
to-date status. attorney's fees, and expenses of litigation; and (4) directing Premiere Bank to pay the cost of
suit.
Thank you.
On July 12, 2005, the RTC rendered a decision dismissing Central Surety's complaint and
Very truly yours, ordering it to pay Premiere Bank P100,000.00 as attorney's fees. The RTC ruled that the
stipulation in the PN granting Premiere Bank sole discretion in the application of payments,
(sgd.) although it partook of a contract of adhesion, was valid. It disposed of the case, to wit:
MS. ELSA M. SAPAPO Now that the issue as to the validity of the stipulation is settled, [Premiere Bank] was right in
Manager contending that it had the right to apply [Central Surety's] payment to the most onerous
Loans Accounting and obligation or to the one it sees fit to be paid first from among the several obligations. The
Control Department[16] application of the payment to the other two loans of Central Surety namely, account nos.
Significantly, the P8,600,000.00 check payments were not applied in full to Central Surety's COM 367-Z and IND 714-Y was within [Premiere Bank's] valid exercise of its right according
P6,000,000.00 loan under PN No. 714-Y and the Spouses Castañeda's personal loan of the stipulation. However, [Premiere Bank] erred in applying the payment to the loan of Casent
P2,600,000.00 under PN No. 717-X. Premiere Bank also applied proceeds thereof to a Realty and to the personal obligation of Mr. Engracio Castañeda despite their connection with
commercial loan under PN No. 235-Z taken out by Casent Realty and Development one another. Therefore, [Premiere Bank] cannot apply the payment tendered by Central
Corporation (Casent Realty),[17] and to Central Surety's loan originally covered by PN No. 367- Surety to the other two entities capriciously and expressly violating the law and pertinent
Z, renewed under PN No. 376-X, maturing on October 20, 2001. Central Bank rules and regulations. Hence, the application of the payment to the loan of
Casent Realty (Account No. COM 236-Z) and to the loan of Mr. Engracio Castañeda (Account
No. IND 717-X) is void and must be annulled.

As to the issue of whether or not [Central Surety] is entitled to the release of Membership Fee
Certificate in the Wack Wack Golf and Country Club, considering now that [Central Surety]
cannot compel [Premiere Bank] to release the subject collateral.
With regard to the issue of damages and attorney's fees, the court finds no basis to grant
[Premiere Bank's] prayer for moral and exemplary damages but deems it just and equitable
to award in its favor attorney's fees in the sum of Php 100,000.00.
WHEREFORE, judgment is hereby rendered dismissing the complaint and ordering [Central
Surety] to pay [Premiere Bank] Php 100,000.00 as attorney's fees.[18] (emphasis supplied)
On appeal by Central Surety, the CA reversed and set aside the trial court's ruling. The
appellate court held that with Premiere Bank's letter dated August 22, 2000 specifically
demanding payment of Central Surety's P6,000,000.00 loan, it was deemed to have waived
the stipulation in PN No. 714-Y granting it the right to solely determine application of
payments, and was, consequently, estopped from enforcing the same. In this regard, with the
holding of full settlement of Central Surety's P6,000,000.00 loan under PN No. 714-Y, the CA
ordered the release of the Wack Wack Membership pledged to Premiere Bank.
Hence, this recourse by Premiere Bank positing the following issues:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE AND
PALPABLE ERROR WHEN IT APPLIED THE PRINCIPLE OF WAIVER AND ESTOPPEL IN THE
PRESENT CASE INSOFAR AS THE DEMAND LETTER SENT TO [CENTRAL SURETY] IS CONCERNED
NULLIFYING THE APPLICATION OF PAYMENTS EXERCISED BY [PREMIERE BANK]
WHETHER OR NOT THE FINDING OF WAIVER AND ESTOPPEL BY THE HONORABLE COURT OF
APPEALS COULD PREVAIL OVER THE CLEAR AND UNMISTAKABLE STATUTORY AND
CONTRACTUAL RIGHT OF [PREMIERE BANK] TO EXERCISE APPLICATION OF PAYMENT AS
WARRANTED BY THE PROMISSORY NOTE
EVEN ASSUMING EX GRATIA THAT THE 6 MILLION SHOULD BE APPLIED TO THE SUBJECT LOAN
OF RESPONDENT, WHETHER OR NOT THE SUBJECT WACK-WACK SHARES COULD BE
RELEASE[D] DESPITE THE CROSS DEFAULT AND CROSS GUARANTEE PROVISIONS OF THE DEED
OF ASSIGNMENT WITH PLEDGE AND RELEVANT REAL ESTATE MORTGAGE CONTRACTS
EXECUTED BY [CENTRAL SURETY], CASENT REALTY AND SPS. CASTAÑEDA.
WHETHER OR NOT THERE IS A VALID TENDER OF PAYMENT AND CONSIGNATION OF THE
SUBJECT TWO CHECK PAYMENTS BY [CENTRAL SURETY].
WHETHER OR NOT, AS CORRECTLY FOUND BY THE COURT A QUO [CENTRAL SURETY] IS
ESTOPPED FROM CONTESTING THE STIPULATIONS OR PROVISIONS OF THE PROMISSORY
NOTES AUTHORIZING [PREMIERE BANK] TO MAKE SUCH APPLICATION OF PAYMENTS
WHETHER OR NOT AS CORRECTLY FOUND BY THE LOWER COURT [PREMIERE BANK] IS
ENTITLED TO AN AWARD OF DAMAGES AS OCCASIONED BY THE MALICIOUS FILING OF THIS
SUIT.[19]
At the outset, we qualify that this case deals only with the extinguishment of Central Surety's
P6,000,000.00 loan secured by the Wack Wack Membership pledge. We do not dispose herein
the matter of the P2,600,000.00 loan covered by PN No. 717-X subject of BC Check No. 08115.
We note that both lower courts were one in annulling Premiere Bank's application of
payments to the loans of Casent Realty and the Spouses Castañeda under PN Nos. 235-Z and
717-X, respectively, thus:
It bears stressing that the parties to PN No. 714-Y secured by Wack Wack membership
certificate are only Central Surety, as debtor and [Premiere Bank], as creditor. Thus, when the
questioned stipulation speaks of "several obligations", it only refers to the obligations of
[Central Surety] and nobody else.
It is plain that [Central Surety] has only two loan obligations, namely: 1.) Account No. 714-Y -
secured by Wack Wack membership certificate; and 2.) Account No. 367-Z - secured by
Condominium Certificate of Title. The two loans are secured by separate and different
collaterals. The collateral for Account No. 714-Y, which is the Wack Wack membership
certificate answers only for that account and nothing else. The collateral for Account No. 367-
Z, which is the Condominium Certificate of Title, is answerable only for the said account.
The fact that the loan obligations of [Central Surety] are secured by separate and distinct
collateral simply shows that each collateral secures only a particular loan obligation and does
not cover loans including future loans or advancements.
As regards the loan covered by Account No. 235-Z, this was obtained by Casent Realty, not by
[Central Surety]. Although Mr. Engracio Castañeda is the vice-president of [Central Surety],
and president of Casent Realty, it does not follow that the two corporations are one and the
same. Both are invested by law with a personality separate and distinct from each other.

Thus, [Central Surety] cannot be held liable for the obligation of Casent Realty, absent
evidence showing that the latter is being used to defeat public convenience, justify wrong,
protect fraud or defend crime; or used as a shield to confuse the legitimate issues, or when it
is merely an adjunct, a business conduit or an alter ego of [Central Surety] or of another
corporation; or used as a cloak to cover for fraud or illegality, or to work injustice, or where
necessary to achieve equity or for the protection of creditors.
Likewise, [Central Surety] cannot be held accountable for the loan obligation of spouses
Castañeda under Account No. IND 717-X. Settled is the rule that a corporation is invested by
law with a personality separate and distinct from those of the persons composing it. The
corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's
debt or credit that of the corporation.
The mere fact that a person is a president of the corporation does not render the property he
owns or possesses the property of the corporation, since that president, as an individual, and
the corporation are separate entities.[20]
In fact, Premiere Bank did not appeal or question the RTC's ruling specifically annulling the
application of the P6,000,000.00 check payment to the respective loans of Casent Realty and
the Spouses Castañeda. Undoubtedly, Premiere Bank cannot be allowed, through this
petition, to surreptitiously include the validity of its application of payments concerning the
loans to Casent Realty and the Spouses Castañeda.
Thus, we sift through the issues posited by Premiere Bank and restate the same, to wit:
Whether Premiere Bank waived its right of application of payments on the loans of Central
Surety.
In the alternative, whether the P6,000,000.00 loan of Central Surety was extinguished by the
encashment of BC Check No. 08114.
Corollarily, whether the release of the Wack Wack Membership pledge is in order.
The Petition is meritorious.
We shall take the first and the second issues in tandem.
Creditor given right to apply payments
At the hub of the controversy is the statutory provision on application of payments,
specifically Article 1252 of the Civil Code, viz.:
Article 1252. He who has various debts of the same kind in favor of one and the same creditor,
may declare at the time of making the payment, to which of them the same must be applied.
Unless the parties so stipulate, or when the application of payment is made by the party for
whose benefit the term has been constituted, application shall not be made as to debts which
are not yet due.
If the debtor accepts from the creditor a receipt in which an application of the payment is
made, the former cannot complain of the same, unless there is a cause for invalidating the
contract.
The debtor's right to apply payment is not mandatory. This is clear from the use of the word
"may" rather than the word "shall" in the provision which reads: "He who has various debts
of the same kind in favor of one and the same creditor, may declare at the time of making the
payment, to which of the same must be applied."
Indeed, the debtor's right to apply payment has been considered merely directory, and not
mandatory, following this Court's earlier pronouncement that "the ordinary acceptation of
the terms `may' and `shall' may be resorted to as guides in ascertaining the mandatory or
directory character of statutory provisions."
Article 1252 gives the right to the debtor to choose to which of several obligations to apply a
particular payment that he tenders to the creditor. But likewise granted in the same provision
is the right of the creditor to apply such payment in case the debtor fails to direct its
application. This is obvious in Art. 1252, par. 2, viz.: "If the debtor accepts from the creditor a
receipt in which an application of payment is made, the former cannot complain of the same."
It is the directory nature of this right and the subsidiary right of the creditor to apply payments
when the debtor does not elect to do so that make this right, like any other right, waivable.
Rights may be waived, unless the waiver is contrary to law, public order, public policy, morals
or good customs, or prejudicial to a third person with a right recognized by law.
A debtor, in making a voluntary payment, may at the time of payment direct an application
of it to whatever account he chooses, unless he has assigned or waived that right. If the debtor
does not do so, the right passes to the creditor, who may make such application as he chooses.
But if neither party has exercised its option, the court will apply the payment according to the
justice and equity of the case, taking into consideration all its circumstances.
Verily, the debtor's right to apply payment can be waived and even granted to the creditor if
the debtor so agrees.[25] This was explained by former Senator Arturo M. Tolentino, an
acknowledged expert on the Civil Code, thus:
The following are some limitations on the right of the debtor to apply his payment:
xxxx
5) when there is an agreement as to the debts which are to be paid first, the debtor cannot
vary this agreement.[26]
Relevantly, in a Decision of the Supreme Court of Kansas in a case with parallel facts, it was
held that:
The debtor requested Planters apply the payments to the 1981 loan rather than to the 1978
loan.Planters refused.Planters notes it was expressly provided in the security agreement on
the 1981 loan that Planters had a legal right to direct application of payments in its sole
discretion.Appellees do not refute this.Hence, the debtors had no right by agreement to direct
the payments.This also precludes the application of the U.S. Rule, which applies only in
absence of a statute or specific agreement.Thus the trial courterred. Planters was entitled to
apply the Hi-Plains payments as it saw fit.[27]
In the case at bench, the records show that Premiere Bank and Central Surety entered into
several contracts of loan, securities by way of pledges, and suretyship agreements. In at least
two (2) promissory notes between the parties, Promissory Note No. 714-Y and Promissory
Note No. 376-X, Central Surety expressly agreed to grant Premiere Bank the authority to apply
any and all of Central Surety's payments, thus:
In case I/We have several obligations with [Premiere Bank], I/We hereby empower [Premiere
Bank] to apply without notice and in any manner it sees fit, any or all of my/our deposits and
payments to any of my/our obligations whether due or not. Any such application of deposits
or payments shall be conclusive and binding upon us.
This proviso is representative of all the other Promissory Notes involved in this case. It is in
the exercise of this express authority under the Promissory Notes, and following Bangko
Sentral ng Pilipinas Regulations, that Premiere Bank applied payments made by Central
Surety, as it deemed fit, to the several debts of the latter.
All debts were due; There was no
waiver on the part of petitioner
Undoubtedly, at the time of conflict between the parties material to this case, Promissory
Note No. 714-Y dated August 20, 1999, in the amount of P6,000,000.00 and secured by the
pledge of the Wack Wack Membership, was past the due and demand stage. By its terms,
Premiere Bank was entitled to declare said Note and all sums payable thereunder immediately
due and payable, without need of "presentment, demand, protest or notice of any kind." The
subsequent demand made by Premiere Bank was, therefore, merely a superfluity, which
cannot be equated with a waiver of the right to demand payment of all the matured
obligations of Central Surety to Premiere Bank.
Moreover, this Court may take judicial notice that the standard practice in commercial
transactions to send demand letters has become part and parcel of every collection effort,
especially in light of the legal requirement that demand is a prerequisite before default may
set in, subject to certain well-known exceptions, including the situation where the law or the
obligations expressly declare it unnecessary.[28]
Neither can it be said that Premiere Bank waived its right to apply payments when it
specifically demanded payment of the P6,000,000.00 loan under Promissory Note No. 714-Y.
It is an elementary rule that the existence of a waiver must be positively demonstrated since
a waiver by implication is not normally countenanced. The norm is that a waiver must not
only be voluntary, but must have been made knowingly, intelligently, and with sufficient
awareness of the relevant circumstances and likely consequences. There must be persuasive
evidence to show an actual intention to relinquish the right. Mere silence on the part of the
holder of the right should not be construed as a surrender thereof; the courts must indulge
every reasonable presumption against the existence and validity of such waiver.[29]
Besides, in this case, any inference of a waiver of Premiere Bank's, as creditor, right to apply
payments is eschewed by the express provision of the Promissory Note that: "no failure on
the part of [Premiere Bank] to exercise, and no delay in exercising any right hereunder, shall
operate as a waiver thereof."
Thus, we find it unnecessary to rule on the applicability of the equitable principle of waiver
that the Court of Appeals ascribed to the demand made by Premiere Bank upon Central Surety
to pay the amount of P6,000,000.00, in the face of both the express provisions of the law and
the agreements entered into by the parties. After all, a diligent creditor should not needlessly
be interfered with in the prosecution of his legal remedies.[30]
When Central Surety directed the application of its payment to a specific debt, it knew it had
another debt with Premiere Bank, that covered by Promissory Note 367-Z, which had been
renewed under Promissory Note 376-X, in the amount of P40.898 Million. Central Surety is
aware that Promissory Note 367-Z (or 376-X) contains the same provision as in Promissory
Note No 714-Y which grants the Premiere Bank authority to apply payments made by Central
Surety, viz.:
In case I/We have several obligations with [Premiere Bank], I/We hereby empower [Premiere
Bank] to apply without notice and in any manner it sees fit, any or all of my/our deposits and
payments to any of my/our obligations whether due or not. Any such application of deposits
or payments shall be conclusive and binding upon us.[31]
Obviously, Central Surety is also cognizant that Promissory Note 367-Z contains the proviso
that:
the bank shall be entitled to declare this Note and all sums payable hereunder to be
immediately due and payable, without need of presentment, demand, protest or notice of
nay kind, all of which I/We hereby expressly waive, upon occurrence of any of the following
events: x x x (ii) My/Our failure to pay any amortization or installment due hereunder; (iii)
My/Our failure to pay money due under any other document or agreement evidencing
obligations for borrowed money x x x.[32]
by virtue of which, it follows that the obligation under Promissory Note 367-Z had become
past due and demandable, with further notice expressly waived, when Central Surety
defaulted on its obligations under Promissory Note No. 714-Y.
Mendoza v. Court of Appeals[33] forecloses any doubt that an acceleration clause is valid and
produces legal effects. In fact, in Selegna Management and Development Corporation v.
United Coconut Planters Bank,[34] we held that:
Considering that the contract is the law between the parties, respondent is justified in
invoking the acceleration clause declaring the entire obligation immediately due and payable.
That clause obliged petitioners to pay the entire loan on January 29, 1999, the date fixed by
respondent.
It is worth noting that after the delayed payment of P6,000,000.00 was tendered by Central
Surety, Premiere Bank returned the amount as insufficient, ostensibly because there was, at
least, another account that was likewise due. Obviously, in its demand of 28 September 2000,
petitioner sought payment, not just of the P6,000,000.00, but of all these past due accounts.
There is extant testimony to support this claim, as the transcript of stenographic notes on the
testimony of Atty. Araos reveals:
Atty. Opinion: Q. But you accepted this payment of Six Million (P6,000,000.00) later on when
together with this was paid another check for 1.8 Million?
Witness: A. We accepted.
Atty. Opinion: Q. And you applied this to four (4) other accounts three (3) other accounts or
to four (4) accounts mentioned in Exhibit "J." Is that correct?
Atty. Tagalog: We can stipulate on that. Your Honor.
Court: This was stipulated?
Atty. Tagalog: Yes, Your Honor. In fact, there is already stipulation that we confirm that those
are the applications of payments made by the defendant Bank on those loan accounts.
Atty. Opinion: Q. Were these accounts due already when you made this application,
distribution of payments?
Witness: A. Yes sir.[35]
Conversely, in its evidence-in-chief, Central Surety did not present any witness to testify on
the payment of its obligations. In fact, the record shows that after marking its evidence,
Central Surety proceeded to offer its evidence immediately. Only on the rebuttal stage did
Central Surety present a witness; but even then, no evidence was adduced of payment of any
other obligation. In this light, the Court is constrained to rule that all obligations of Central
Surety to Premiere Bank were due; and thus, the application of payments was warranted.
Being in receipt of amounts tendered by Central Surety, which were insufficient to cover its
more onerous obligations, Premiere Bank cannot be faulted for exercising the authority
granted to it under the Promissory Notes, and applying payment to the obligations as it
deemed fit. Subject to the caveat that our ruling herein shall be limited only to the
transactions entered into by the parties to this case, the Court will not disturb the finding of
the lower court that Premiere Bank rightly applied the payments that Central Surety had
tendered. Corollary thereto, and upon the second issue, the tender of the amount of
P6,000,000.00 by Central Surety, and the encashment of BC Check No. 08114 did not totally
extinguish the debt covered by PN No. 714-Y.
Release of the pledged
Wack Wack Membership
Contract of Adhesion
To the extent that the subject promissory notes were prepared by the Premiere Bank and
presented to Central Surety for signature, these agreements were, indeed, contracts of
adhesion. But contracts of adhesion are not invalid per se. Contracts of adhesion, where one
party imposes a ready-made form of contract on the other, are not entirely prohibited. The
one who adheres to the contract is, in reality, free to reject it entirely; if he adheres, he gives
his consent.
In interpreting such contracts, however, courts are expected to observe greater vigilance in
order to shield the unwary or weaker party from deceptive schemes contained in ready-made
covenants.[36] Thus, Article 24 of the Civil Code pertinently states:
In all contractual, property or other relations, when one of the parties is at a disadvantage on
account of his moral dependence, ignorance, indigence, mental weakness, tender age or
other handicap, the courts must be vigilant for his protection.
But in this case, Central Surety does not appear so weak as to be placed at a distinct
disadvantage vis-à-vis the bank. As found by the lower court:
Considering that [Central Surety] is a known business entity, the [Premiere Bank] was right in
assuming that the [Central Surety] could not have been cheated or misled in agreeing thereto,
it could have negotiated with the bank on a more favorable term considering that it has
already established a certain reputation with the [Premiere Bank] as evidenced by its
numerous transactions. It is therefore absurd that an established company such as the
[Central Surety] has no knowledge of the law regarding bank practice in loan transactions.
The Dragnet Clause.
The factual circumstances of this case showing the chain of transactions and long-standing
relationship between Premiere Bank and Central Surety militate against the latter's prayer in
its complaint for the release of the Wack Wack Membership, the security attached to
Promissory Note 714-Y.
A tally of the facts shows the following transactions between Premiere Bank and Central
Surety:
Date
Instrument
Amount covered
Stipulation
August 20, 1999
PN 714-Y
P6M
August 29, 1999
Deed of
Assignment
with Pledge
P 15 M
As security for PN 714-Y and/or such Promissory Note/s which the ASSIGNOR / PLEDGOR shall
hereafter execute in favor of the ASSIGNEE/PLEDGEE
From these transactions and the proviso in the Deed of Assignment with Pledge, it is clear
that the security, which peculiarly specified an amount at P15,000,000.00 (notably greater
than the amount of the promissory note it secured), was intended to guarantee not just the
obligation under PN 714-Y, but also future advances. Thus, the said deed is explicit:
As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the
ASSIGNEE/PLEDGEE in the amount of FIFTEEN MILLION PESOS (15,000,000.00) Philippine
Currency in accordance with the Promissory Note attached hereto and made an integral part
hereof as Annex "A" and/or such Promissory Note/s which the ASSIGNOR/PLEDGOR shall
hereafter execute in favor of the ASSIGNEE/PLEDGEE, the ASSIGNOR/PLEDGOR hereby
transfers, assigns, conveys, endorses, encumbers and delivers by way of first pledge unto the
ASSIGNEE/PLEDGEE, its successors and assigns, that certain Membership fee Certificate Share
in Wack Wack Golf and Country Club Incorporate covered by Stock Certificate No. 217 with
Serial No. 1793 duly issue by Wack Wack Golf and Country Club Incorporated on August 27,
1996 in the name of the ASSIGNOR." (Emphasis made in the Petition.)
Then, a Continuing Guaranty/Comprehensive Surety Agreement was later executed by
Central Surety as follows:
Date
Instrument
Amount
Stipulation
Notarized,
Continuing
P40,898,000.00
In consideration of the loan and/or any credit accommodation which you (petitioner) have
extended and/or will extend to Central Surety and Insurance Co.
Sept. 22, 1999
Guaranty/Comprehensive
October 10, 2000
Surety Agreement Promissory Note
376-X (PN 367-Z)
And on October 10, 2000, Promissory Note 376-X was entered into, a renewal of the prior P40,898,000.00
Promissory Note 367-Z, in the amount of P40,898,000.00. In all, the transactions that
transpired between Premiere Bank and Central Surety manifest themselves, thusly: From the foregoing, it is more than apparent that when, on August 29, 1999, the parties
executed the Deed of Assignment with Pledge (of the Wack Wack Membership), to serve as
Date security for an obligation in the amount of P15,000,000.00 (when the actual loan covered by
Instrument PN No. 714-Y was only P6,000,000.00), the intent of the parties was for the Wack Wack
Amount covered Membership to serve as security also for future advancements. The subsequent loan was
Stipulation nothing more than a fulfillment of the intention of the parties. Of course, because the
subsequent loan was for a much greater amount (P40,898,000.00), it became necessary to
put up another security, in addition to the Wack Wack Membership. Thus, the subsequent
surety agreement and the specific security for PN No. 367-X were, like the Wack Wack
Membership, meant to secure the ballooning debt of the Central Surety.
August 20, 1999
PN 714-Y The above-quoted provision in the Deed of Assignment, also known as the "dragnet clause"
P6M in American jurisprudence, would subsume all debts of respondent of past and future origins.
It is a valid and legal undertaking, and the amounts specified as consideration in the contracts
do not limit the amount for which the pledge or mortgage stands as security, if from the four
August 29, 1999 corners of the instrument, the intent to secure future and other indebtedness can be
Deed of Assignment gathered. A pledge or mortgage given to secure future advancements is a continuing security
with Pledge and is not discharged by the repayment of the amount named in the mortgage until the full
P 15 M amount of all advancements shall have been paid.
As security for PN 714-Y and/or such Promissory Note/s which the ASSIGNOR / PLEDGOR shall
hereafter execute in favor of the ASSIGNEE/PLEDGEE Our ruling in Prudential Bank v. Alviar is instructive:
A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is
Notarized, one which is specifically phrased to subsume all debts of past or future origins. Such clauses
Sept. 22, 1999 are "carefully scrutinized and strictly construed." Mortgages of this character enable the
Continuing parties to provide continuous dealings, the nature or extent of which may not be known or
Guaranty/Comprehensive anticipated at the time, and they avoid the expense and inconvenience of executing a new
Surety Agreement security on each new transaction. A "dragnet clause" operates as a convenience and
P40,898,000.00 accommodation to the borrowers as it makes available additional funds without their having
In consideration of the loan and/or any credit accommodation which you (petitioner) have to execute additional security documents, thereby saving time, travel, loan closing costs, costs
extended and/or will extend to Central Surety and Insurance Co. of extra legal services, recording fees, et cetera. Indeed, it has been settled in a long line of
decisions that mortgages given to secure future advancements are valid and legal contracts,
and the amounts named as consideration in said contracts do not limit the amount for which
the mortgage may stand as security if from the four corners of the instrument the intent to
secure future and other indebtedness can be gathered.
The "blanket mortgage clause" in the instant case states:
That for and in consideration of certain loans, overdraft and other credit accommodations
obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter
referred to, irrespective of number, as DEBTOR, and to secure the payment of the same and
those that may hereafter be obtained, the principal or all of which is hereby fixed at Two
Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or
any other obligation owing to the Mortgagee, whether direct or indirect, principal or
secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor
does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or
assigns, the parcels of land which are described in the list inserted on the back of this
document, and/or appended hereto, together with all the buildings and improvements now
existing or which may hereafter be erected or constructed thereon, of which the Mortgagor
declares that he/it isthe absolute owner free from all liens and incumbrances. . . .
xxxx
In the case at bar, the subsequent loans obtained by respondents were secured by other
securities, thus: PN BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on his
foreign currency savings account, while PN BD#76/C-430, executed by respondents for
Donalco Trading, Inc., was secured by "Clean-Phase out TOD CA 3923" and eventually by a
deed of assignment on two promissory notes executed by Bancom Realty Corporation with
Deed of Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various
heavy and transportation equipment. The matter of PN BD#76/C-430 has already been
discussed. Thus, the critical issue is whether the "blanket mortgage" clause applies even to
subsequent advancements for which other securities were intended, or particularly, to PN
BD#76/C-345.
Under American jurisprudence, two schools of thought have emerged on this question. One
school advocates that a "dragnet clause" so worded as to be broad enough to cover all other
debts in addition to the one specifically secured will be construed to cover a different debt,
although such other debt is secured by another mortgage. The contrary thinking maintains
that a mortgage with such a clause will not secure a note that expresses on its face that it is
otherwise secured as to its entirety, at least to anything other than a deficiency after
exhausting the security specified therein, such deficiency being an indebtedness within the
meaning of the mortgage, in the absence of a special contract excluding it from the
arrangement.
The latter school represents the better position. The parties having conformed to the "blanket
mortgage clause" or "dragnet clause," it is reasonable to conclude that they also agreed to an
implied understanding that subsequent loans need not be secured by other securities, as the
subsequent loans will be secured by the first mortgage. In other words, the sufficiency of the
first security is a corollary component of the "dragnet clause." But of course,there is no
prohibition, as in the mortgage contract in issue, against contractually requiring other
securities for the subsequent loans. Thus, when the mortgagor takes another loan for which
another security was given it could not be inferred that such loan was made in reliance solely
on the original security with the "dragnet clause," but rather, on the new security given. This
is the "reliance on the security test."
Hence, based on the "reliance on the security test," the California court in the cited case made
an inquiry whether the second loan was made in reliance on the original security containing
a "dragnet clause." Accordingly, finding a different security was taken for the second loan no
intent that the parties relied on the security of the first loan could be inferred, so it was held.
The rationale involved, the court said, was that the "dragnet clause" in the first security
instrument constituted a continuing offer by the borrower to secure further loans under the
security of the first security instrument, and that when the lender accepted a different
security he did not accept the offer.
In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the
mortgagor to the bank to provide the security of the mortgage for advances of and when they
were made. Thus, it was concluded that the "offer" was not accepted by the bank when a
subsequent advance was made because (1) the second note was secured by a chattel
mortgage on certain vehicles, and the clause therein stated that the note was secured by such
chattel mortgage; (2) there was no reference in the second note or chattel mortgage
indicating a connection between the real estate mortgage and the advance; (3) the mortgagor
signed the real estate mortgage by her name alone, whereas the second note and chattel
mortgage were signed by the mortgagor doing business under an assumed name; and (4)
there was no allegation by the bank, and apparently no proof, that it relied on the security of
the real estate mortgage in making the advance.
Indeed, in some instances, it has been held that in the absence of clear, supportive evidence
of a contrary intention, a mortgage containing a "dragnet clause" will not be extended to
cover future advances unless the document evidencing the subsequent advance refers to the
mortgage as providing security therefor.
It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged
property because of non-payment of all the three promissory notes. While the existence and
validity of the "dragnet clause" cannot be denied, there is a need to respect the existence of
the other security given for PN BD#76/C-345. The foreclosure of the mortgaged property
should only be for the P250,000.00 loan covered by PN BD#75/C-252, and for any amount not
covered by the security for the second promissory note. As held in one case, where deeds
absolute in form were executed to secure any and all kinds of indebtedness that might
subsequently become due, a balance due on a note, after exhausting the special security given
for the payment of such note, was in the absence of a special agreement to the contrary,
within the protection of the mortgage, notwithstanding the giving of the special security. This
is recognition that while the "dragnet clause" subsists, the security specifically executed for
subsequent loans must first be exhausted before the mortgaged property can be resorted to.
The security clause involved in the case at bar shows that, by its terms:
As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the
ASSIGNEE/PLEDGEE in the amount of FIFTEEN MILLION PESOS (15,000,000.00) Philippine
Currency in accordance with the Promissory Note attached hereto and made an integral part
hereof as Annex "A" and/or such Promissory Note/s which the ASSIGNOR/PLEDGOR shall
hereafter execute in favor of the ASSIGNEE/PLEDGEE, the ASSIGNOR/ PLEDGOR hereby
transfers, assigns, conveys, endorses, encumbers and delivers by way of first pledge unto the
ASSIGNEE/PLEDGEE, its successors and assigns, that certain Membership fee Certificate Share
in Wack Wack Golf and Country Club Incorporated covered by Stock Certificate No. 217 with
Serial No. 1793 duly issue by Wack Wack Golf and Country Club Incorporated on August 27,
1996 in the name of the ASSIGNOR."
it is comparable with the security clause in the case of Prudential, viz.:
That for and in consideration of certain loans, overdraft and other credit accommodations
obtained from the Mortgagee by the Mortgagor and/or _______________hereinafter
referred to, irrespective of number, as DEBTOR, and to secure the payment of the same and
those that may hereafter be obtained, the principal or all of which is hereby fixed at Two
Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or
any other obligation owing to the Mortgagee, whether direct or indirect, principal or
secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor
does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or
assigns, the parcels of land which are described in the list inserted on the back of this
document, and/or appended hereto, together with all the buildings and improvements now
existing or which may hereafter be erected or constructed thereon, of which the Mortgagor
declares that he/it isthe absolute owner free from all liens and incumbrances. . . .
and there is no substantive difference between the terms utilized in both clauses securing
future advances.
To recall, the critical issue resolved in Prudential was whether the "blanket mortgage" clause
applies even to subsequent advancements for which other securities were intended. We then
declared that the special security for subsequent loans must first be exhausted in a situation
where the creditor desires to foreclose on the "subsequent" loans that are due. However, the
"dragnet clause" allows the creditor to hold on to the first security in case of deficiency after
foreclosure on the special security for the subsequent loans.
In Prudential, we disallowed the petitioner's attempt at multiple foreclosures, as it foreclosed
on all of the mortgaged properties serving as individual securities for each of the three loans.
This Court then laid down the rule, thus:
where deeds absolute in form were executed to secure any and all kinds of indebtedness that
might subsequently become due, a balance due on a note, after exhausting the special
security given for the payment of such note, was, in the absence of a special agreement to
the contrary, within the protection of the mortgage, notwithstanding the giving of the special
security. This is recognition that while the "dragnet clause" subsists, the security specifically
executed for subsequent loans must first be exhausted before the mortgaged property can
be resorted to.
However, this does not prevent the creditor from foreclosing on the security for the first loan
if that loan is past due, because there is nothing in law that prohibits the exercise of that right.
Hence, in the case at bench, Premiere Bank has the right to foreclose on the Wack Wack
Membership, the security corresponding to the first promissory note, with the deed of
assignment that originated the "dragnet clause." This conforms to the doctrine in Prudential,
as, in fact, acknowledged in the decision's penultimate paragraph, viz.:
Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court
found that respondents have not yet paid the P250,000.00 and gave no credence to their
claim that they paid the said amount when they paid petitioner P2,000,000.00. Thus, the WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed Decision of the Court
mortgaged property could still be properly subjected to foreclosure proceedings for the of Appeals in CA-G.R. CV No. 85930 dated July 31, 2006, as well as its Resolution dated January
unpaid P250,000.00 loan, and as mentioned earlier, for any deficiency after D/A SFDX#129, 4, 2007, are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Makati City,
security for PN BD#76/c-345, has been exhausted, subject of course to defenses which are Branch 132, in Civil Case No. 00-1536, dated July 12, 2005, is REINSTATED with the
available to respondents. MODIFICATION that the award of attorney's fees to petitioner is DELETED. No pronouncement
as to costs.
In any event, even without this Court's prescription in Prudential, the release of the Wack
Wack Membership as the pledged security for Promissory Note 714-Y cannot yet be done as
sought by Central Surety. The chain of contracts concluded between Premiere Bank and
Central Surety reveals that the Wack Wack Membership, which stood as security for
Promissory Note 714-Y, and which also stands as security for subsequent debts of Central
Surety, is a security in the form of a pledge. Its return to Central Surety upon the pretext that
Central Surety is entitled to pay only the obligation in Promissory Note No. 714-Y, will result
in the extinguishment of the pledge, even with respect to the subsequent obligations, because
Article 2110 of the Civil Code provides:
(I)f the thing pledged is returned by the pledgor or owner, the pledge is extinguished. Any
stipulation to the contrary is void.
This is contrary to the express agreement of the parties, something which Central Surety
wants this Court to undo. We reiterate that, as a rule, courts cannot intervene to save parties
from disadvantageous provisions of their contracts if they consented to the same freely and
voluntarily.

Attorney's Fees
The final issue is the propriety of attorney's fees. The trial court based its award on the
supposed malice of Central Surety in instituting this case against Premiere Bank. We find no
malice on the part of Central Surety; indeed, we are convinced that Central Surety filed the
case in the lower court in good faith, upon the honest belief that it had the prerogative to
choose to which loan its payments should be applied.

Malicious prosecution, both in criminal and civil cases, requires the presence of two elements,
to wit: (a) malice and (b) absence of probable cause. Moreover, there must be proof that the
prosecution was prompted by a sinister design to vex and humiliate a person; and that it was
initiated deliberately, knowing that the charge was false and baseless. Hence, the mere filing
of what turns out to be an unsuccessful suit does not render a person liable for malicious
prosecution, for the law could not have meant to impose a penalty on the right to litigate.[40]
Malice must be proved with clear and convincing evidence, which we find wanting in this case.
 MARIO S. ESPINA v. CA and RENE G. DIAZ
The case before the Court is an appeal from a decision of the Court of Appeals[1] reversing
that of the Regional Trial Court, Antipolo, Rizal,[2] affirming in all respects the decision of the
Municipal Trial Court, Antipolo, Rizal,[3] ordering respondent Rene G. Diaz to vacate the
condominium unit owned by petitioner and to pay back current rentals, attorney's fees and
costs.
April 25, 1992
(pp. 59-61, Rollo).
"Subsequently, in a letter dated January 22, 1992, petitioner informed private respondent
that his checking account with PCI Bank has been closed and a new checking account with the
same drawee bank is opened for practical purposes. The letter further stated that the
postdated checks issued will be replaced with new ones in the same drawee bank (p. 63,
Rollo).

The facts, as found by the Court of Appeals, are as follows: "On January 25, 1992, petitioner through Ms. Socorro Diaz, wife of petitioner, paid private
respondent Mario Espina P200,000.00, acknowledged by him as partial payment for the
"Mario S. Espina is the registered owner of a Condominium Unit No. 403, Victoria Valley condominium unit subject of this controversy (p.64, Rollo).
Condominium, Valley Golf Subdivision, Antipolo, Rizal. Such ownership is evidenced by
Condominium Certificate of Title No. N-10 (p. 31, Rollo). "On July 26, 1992, private respondent sent petitioner a "Notice of Cancellation" of the
Provisional Deed of Sale (p. 48, Rollo).
"On November 29, 1991, Mario S. Espina, the private respondent as seller, and Rene G. Diaz,
the petitioner as buyer, executed a Provisional Deed of Sale, whereby the former sold to the "However, despite the Notice of Cancellation from private respondent, the latter accepted
latter the aforesaid condominium unit for the amount of P100,000.00 to be paid upon the payment from petitioner per Metrobank Check No. 395694 dated and encashed on October
execution of the contract and the balance to be paid through PCI Bank postdated checks as 28, 1992 in the amount of P 100,000.00 (p. 64, Rollo).
follows:
"On February 24, 1993, private respondent filed a complaint docketed as Civil Case No. 2104
"1. P400,000.00 for Unlawful Detainer against petitioner before the Municipal Trial Court of Antipolo, Branch
Check No. 301245 1.
January 15, 1992
"2. P200,000.00 "On November 12, 1993, the trial court rendered its decision, the dispositive portion of which
Check No. 301246 reads:
February 1, 1992
"3. P200,000.00 `WHEREFORE, in view of the foregoing consideration, judgment is hereby rendered ordering
Check No. 301247 the defendant and all persons claiming rights under him to vacate unit 403 of the Victoria Golf
February 22, 1992 Valley Condominium, Valley Golf Subdivision, Antipolo, Rizal; to pay the total arrears of
"4. P200,000.00 P126,000.00, covering the period July 1991 up to the filing (sic) complaint, and to pay
Check No. 301248 P7,000.00 every month thereafter as rentals unit (sic) he vacates the premises; to pay the
March 14, 1992 amount of P5,000.00 as and attorney's fees; the amount of P300.00 per appearance, and costs
"5. P200,000.00 of suit.
Check No. 301249
April 4, 1992 `However, the plaintiff may refund to the defendant the balance from (sic) P400,000.00 after
"6. P200,000.00 deducting all the total obligations of the defendant as specified in the decision from receipt
Check No. 301250 of said decision.

`SO ORDERED.' (Decision, Annex "B"; p. 27, Rollo)
"From the said decision, petitioner appealed to the Regional Trial Court Branch 71, Antipolo,
Rizal. On April 29, 1994, said appellate court affirmed in all respects the decision of the trial
court."
On June 14, 1994, petitioner filed with the Court of Appeals a petition for review.
On July 20, 1994, the Court of Appeals promulgated its decision reversing the appealed
decision and dismissing the complaint for unlawful detainer with costs against petitioner
Espina.
On August 8, 1994, petitioner filed a motion for reconsideration of the decision of the Court
of Appeals.
On August 19, 1994, the Court of Appeals denied the motion.
Hence, this appeal via petition for review on certiorari.
The basic issue raised is whether the Court of Appeals erred in ruling that the provisional deed
of sale novated the existing contract of lease and that petitioner had no cause of action for
ejectment against respondent Diaz.
We resolve the issue in favor of petitioner.
According to respondent Diaz, the provisional deed of sale that was subsequently executed
by the parties novated the original existing contract of lease. The contention cannot be
sustained. Respondent originally occupied the condominium unit in question in 1987 as a
lessee.[8] While he occupied the premises as lessee, petitioner agreed to sell the
condominium unit to respondent by installments. The agreement to sell was provisional as
the consideration was payable in installments.
The question is, did the provisional deed of sale novate the existing lease contract? The
answer is no. The novation must be clearly proved since its existence is not presumed. "In this
light, novation is never presumed; it must be proven as a fact either by express stipulation of
the parties or by implication derived from an irreconcilable incompatibility between old and
new obligations or contracts." Novation takes place only if the parties expressly so provide,
otherwise, the original contract remains in force. In other words, the parties to a contract
must expressly agree that they are abrogating their old contract in favor of a new one.[12]
Where there is no clear agreement to create a new contract in place of the existing one,
novation cannot be presumed to take place, unless the terms of the new contract are fully
incompatible with the former agreement on every point. Thus, a deed of cession of the right
to repurchase a piece of land does not supersede a contract of lease over the same property.
In the provisional deed of sale in this case, after the initial down payment, respondent's checks
in payment of six installments all bounced and were dishonored upon presentment for the
reason that the bank account was closed. Consequently, on July 26, 1992, petitioner
terminated the provisional deed of sale by a notarial notice of cancellation.[16] Nonetheless,
respondent Diaz continued to occupy the premises, as lessee, but failed to pay the rentals
due. On October 28, 1992, respondent made a payment of P100,000.00 that may be applied
either to the back rentals or for the purchase of the condominium unit. On February 13, 1993,
petitioner gave respondent a notice to vacate the premises and to pay his back rentals. Failing
to do so, respondent's possession became unlawful and his eviction was proper. Hence, on
February 24, 1993, petitioner filed with the Municipal Trial Court, Antipolo, Rizal, Branch 01
an action for unlawful detainer against respondent Diaz.
Now respondent contends that the petitioner's subsequent acceptance of such payment
effectively withdrew the cancellation of the provisional sale. We do not agree. Unless the
application of payment is expressly indicated, the payment shall be applied to the obligation
most onerous to the debtor. In this case, the unpaid rentals constituted the more onerous
obligation of the respondent to petitioner. As the payment did not fully settle the unpaid
rentals, petitioner's cause of action for ejectment survives. Thus, the Court of Appeals erred
in ruling that the payment was "additional payment" for the purchase of the property.
WHEREFORE, the Court GRANTS the petition for review on certiorari, and REVERSES the
decision of the Court of Appeals. Consequently, the Court REVIVES the decision of the
Regional Trial Court, Antipolo, Rizal, Branch 71, affirming in toto the decision of the Municipal
Trial Court, Antipolo, Rizal, Branch 01.
SPOUSES JUAN CHUY TAN & MARY TAN SUBSTITUTED BY THE SURVIVING HEIRS v. CHINA
BANKING CORPORATION

PEREZ, J.:

For resolution of the Court is the instant Petition for Review on Certiorari[1] filed by petitioner
Spouses Juan Chuy Tan and Mary Tan (deceased) substituted by the surviving heirs, Joel Tan
and Eric Tan, seeking to reverse and set aside the Decision[2] dated 14 October 2011 and
Resolution[3] dated 24 January 2012 of the Court of Appeals (CA) in CA-G.R. CV. No. 87450.
The assailed decision and resolution affirmed with modification the 29 December 2003
Decision[4] of the Regional Trial Court (RTC) of Makati City, Branch 142 by ordering that the
penalty surcharge of 24% per annum as stipulated in the contract of loan is reduced to 12%
per annum.

The Facts

Petitioner Lorenze Realty and Development Corporation (Lorenze Realty) is a domestic

corporation duly authorized by Philippine laws to engage in real estate business. It is
represented in this action by petitioners Joel Tan and Eric Tan as substitutes for their deceased
parents, Spouses Juan Chuy Tan and Mary Tan (Spouses Tan).

Respondent China Banking Corporation (China Bank), on the other hand, is a universal banking
corporation duly authorized by Bangko Sentral ng Pilipinas (BSP) to engage in banking
business.

On several occasions in 1997, Lorenze Realty obtained from China Bank various amounts of
It is expressly stipulated in the Promissory Notes that Lorenze Realty agreed to pay the
loans and credit accommodations in the following amounts:
additional amount of 1/10 of 1% per day of the total amount of obligation due as penalty to
be computed from the day that the default was incurred up to the time that the loan
obligations are fully paid. The debtor also undertook pay an additional 10% of the total
amount due including interests, surcharges and penalties as attorney's fees.

As a security for the said obligations, Lorenze Realty executed Real Estate Mortgages (REM)
over 11 parcels of land covered by Transfer Certificates of Title (TCT) Nos. B-44428, B-44451,
B-44452, V-4J275: V-44276, V-44277, V-44278, V-44280, V-44281, V-44283 and V-44284
registered by the Registry of Deeds of Valenzuela City.
Subsequently, Lorenze Realty incurred in default in the payment of its amortization prompting
China Bank to cause the extra-judicial foreclosure of the REM constituted on the securities
after the latter failed to heed to its demand to settle the entire obligation.
After the notice and publication requirements were complied with, the mortgaged properties
were sold at a public auction wherein China emerged as the highest bidder for the amount of
P85,000,000.0u as evidenced by a certificate of sale.
As shown by the Statement of Account dated 10 August 1998, the indebtedness of Lorenze
Realty already reached the amount P114,258,179.81, broken down as follows:
After deducting from the total amount of loan obligation the P85,000,000.00 proceeds of the
public sale, there remains a balance in the amount of P29,258,179.81. In its effort to collect
the deficiency obligation, China Bank demanded from Lorenze Realty for the payment of the
remaining loan but such demand just went to naught.
Consequently, China Bank initiated an action for the collection of sum of money against the
Lorenze Realty and its officers, namely, Lawrence Ong, Victoria Ong, Juan Chuy Tan and Mary
Tan before the RTC of Makati City, Branch 142. In its Complaint docketed as Civil Case No.
98-3069, China Bank alleged that it is entitled to deficiency judgment because the purchase
price of the securities pledged by the debtor is not sufficient to settle the entire obligation
incurred by the latter including the interest, penalties and surcharges that had accrued from
the time of default. China Bank thus prayed that defendants be ordered to pay the amount of
P29,25 8,179.81, representing the deficiency in its obligation in accordance with the express
terms of the promissory notes.
While conceding that they have voluntarily signed the promissory notes, defendants, for their
part, disclaim liability by alleging that the surety agreements did not express the true intention
of the parties. The officers of the corporation who represented Lorenze Realty below claimed
that they just signed the surety contracts without reading the fine terms stipulated therein
because they were macle to believe by the bank manager that the collaterals they offered to
obtain the loans were already sufficient to cover the entire obligation should they incur in
default. The collection suit for the deficiency obligation came as a surprise to them after China
Bank managed to successfully foreclose the securities of the obligation and purchased for
itself the mortgaged properties at the public sale. In addition, defendants averred that the
penalty in the amount of 1/10 of 1% per day of the total amount due is usurious and shocking
to the conscience and should be nullified by the court. Finally, they prayed that the RTC
declare Lorenze Realty's obligation fully settled on account of the sale of the securities.
On 29 December 2003, the RTC found in favor of China Bank declaring the defendants jointly
and severally liable for the amount of P29,258,179.81 representing the deficiency judgment.
It was held by the trial court that Lorenze Realty, "[a]fter having voluntarily signed the surety
agreements, cannot be discharged from the consequences of the undertaking because the
terms and conditions contained therein is considered to be the law between the parties as
long as it is not contrary to law, morals, good customs and public policy. The mistake,
misapprehension and ignorance of the defendants as to the legal effects of the obligations
are no reason for relieving them of their liabilities." The RTC disposed in this wise:
WHEREFORE, premises considered, judgment is rendered ordering the defendants to pay
[China Bank], jointly and severally, the following:
[T]he amount of £29,258,179.81 representing the deficiency claim as of August 10, 1998
plus penalties accruing thereafter at the rate of 2% per month until fully paid;
5% of the total amount due as Attorney's [F]ees;
Expenses of litigation and cost of suit.
SO ORDERED.
On appeal, the CA affirmed with modification the judgment of the RTC by reducing the rate
of the penalty surcharge from 24% per annum to 12% per annum, and, likewise the award of
attorney's fees was reduced from 5% to 2% of the total amount due. The appellate court
deemed that the rate of penalty agreed by the parties is unconscionable under the
circumstances considering that the obligation was already partially satisfied by the sale of the
securities constituted for the loan and resolved to fairly and equitably reduce it to 12% per
annum. The decretal portion of the appellate court's decision reads:
WHEREFORE, premises considered, the assailed Decision dated December 29, 2003 of the
Regional Trial Court of Makati City, Branch 142 is AFFIRMED with MODIFICATION in that the
penalty surcharge of 2% per month or 24% per annum is reduced to 12% per annum and,
likewise, the award of attorney's fees is reduced from 5% to 2% of the total amount due.
No pronouncement as to costs.
SO ORDERED.
In a Resolution dated 24 January 2012, the CA refused to reconsider its earlier decision by
denying the Motion for Reconsideration interposed by Lorenze Realty.
The Issue
Dissatisfied with the disquisition of the Court of Appeals, Lorenze Realty elevated the matter
before the Court by filing a Petition for Review on Certiorari. For the resolution of the Court
is the sole issue of:
WHETHER LORENZE REALTY'S OBLIGATION IS FULLY SETTLED WHEN THE REAL PROPERTIES
CONSTITUTED AS SECURITIES FOR THE LOAN WERE SOLD AT THE PUBLIC AUCTION FOR
P85,000,000.00.
The Court's Ruling
In assailing the CA Decision, Lorenze Realty argues that it is no longer liable to pay the
deficiency obligation because the proceeds of the sale of the foreclosed properties in the
amount of P85,000,000.00 is more than enough to cover the principal amount of the loan
which is just P71,050,000.00. In fact, it further asserted that after applying the proceeds of
the public sale to the principal amount of loan, there remains a balance of P13,950,000.00
which should more than enough to cover the penalties, interests and surcharges.
For its part, China Bank maintains that the obligation of Lorenze Realty is not extinguished by
the foreclosure and sale of real properties constituted as securities citing Article 1253 of the
New Civil Code which explicitly states that "If the debt produces interest, payment of the
principal shall not be deemed to have been made until the interests have been covered." By
first applying the proceeds of the sale to the interest, penalties and expenses of the sale, there
yields a balance in the principal obligation in the amount of P29,258,179.81.
We resolve to deny the petition.
Obligations are extinguished, among others, by payment or performance, the mode most
relevant to the factual situation in the present case.[6] Under Article 1232 of the Civil Code,
payment means not only the delivery of money but also the performance, in any other
manner, of an obligation.[7] Article 1233 of the Civil Code states that a debt shall not be
understood to have been paid unless the thing or service in which the obligation consists has
been completely delivered or rendered, as the case may be.[8] In contracts of loan, the debtor
is expected to deliver the sum of money due the creditor.[9] These provisions must be read
in relation with the other rules on payment under the Civil Code, such as the application of
payment, to wit:
Art. 1252. He who has various debts of the same kind in favor of one and the same creditor,
may declare at the time of making the payment, to which of them the same must be applied.
Unless the parties so stipulate, or when the application of payment is made by the party for
whose benefit the term has been constituted, application shall not be made as to debts which
are not yet due.
If the debtor accepts from the creditor a receipt in which an application of the payment is
made, the former cannot complain of the same, unless there is a cause for invalidating the
contract.
In interpreting the foregoing provision of the statute, the Court in Premiere Development
Bank v. Central Surety & Insurance Company Inc.[10] held that the right of the debtor to apply
payment is merely directory in nature and must be promptly exercised, lest, such right passes
to the creditor,
viz:
"The debtor[']s right to apply payment is not mandatory. This is clear from the use of the
word [']may['] rather than the word [']shall['] in the provision which reads: [']He who has
various debts of the same kind in favor of one and the same creditor, may declare at the time
of making the payment, to which of the same must be applied.[']
Indeed, the debtor[']s right to apply payment has been considered merely directory, and not
mandatory, following this Court[']s earlier pronouncement that [']the ordinary acceptation of
the terms [']may['] and [']shall['] may be resorted to as guides in ascertaining the mandatory
or directory character of statutory provisions. ['] It is worth mentioning that the appellate court aptly reduced the interest rate to 12%' per
annum which is in consonance to existing jurisprudence. in Albos v. Embisan, [11] MCMP
Article 1252 gives the right to the debtor to choose to which of several obligations to apply a Construction Corp. v. Monark Equipment Corp.,[12] Bognot v. RRI Lending Corporation,[13]
particular payment that he tenders to the creditor. But likewise granted in the same provision and Menchavez v. Bermudez,[14] the Court struck down the stipulated rates of interest for
is the right of the creditor to apply such payment in case the debtor fails to direct its being excessive, iniquitous, unconscionable and exorbitant and uniformly reduced the rates
application. This is obvious in Art. 1252, par. 2, viz.: [']If the debtor accepts from the creditor to 12% per annum.
a receipt in which an application of payment is made, the former cannot complain of the
same.[‘] It is the directory nature of this right and the subsidiary right of the creditor to apply Lorenze Realty's plea to further reduce the interest to 3% per annum has no leg to stand on
payments when the debtor does not elect to do so that make this right, like any other right, and could not be adopted by this Court. On the other hand, the appellate court, consistent
waivable. with the ruling of this Court in a number of cases, correctly pegged the rate of interest at 1%
per month or 12% per annum. We need not unsettle the principle we had affirmed in a
Rights may be waived, unless the waiver is contrary to law, public order, public policy, morals plethora of cases that 12% per annum is the legal rate of interest imposed by this Court on
or good customs, or prejudicial to a third person with a right recognized by law. occasions that we nullified the rates stipulated by parties. While the Court has the power to
nullify excessive interest rates and impose new rates for the parties, such reduction, however,
A debtor, in making a voluntary payment, may at the time of payment direct an application must always be guided by reason and equity.
of it to whatever account he chooses, unless he has assigned or waived that right. If the debtor
does not do so, the right passes to the creditor, who may make such application as he chooses. WHEREFORE, premises considered, the petition is DENIED. The assailed Decision and
But if neither party has exercised its option, the court will apply the payment according to the Resolution of the Court of Appeals are hereby AFFIRMED.
justice and equity of the case, taking into consideration all its circumstances." [Emphasis
supplied, citations omitted.]
In the event that the debtor failed to exercise the right to elect the creditor may choose to
which among the debts the payment is applied as in the case at bar. It is noteworthy that after
the sale of the foreclosed properties at the public auction, Lorenze Realty failed to manifes":
its preference as to which among the obligations that were all due the proceeds of the sale
should be applied. Its silence can be construed as acquiescence to China Bank's application of
the payment first to the interest and penalties and the remainder to the principal which is
sanctioned by Article 1253 of the New Civil Code which provides that:,
Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have
been made until the interests have been covered.
That they assume that the obligation is fully satisfied by the sale of the securities does not
hold any water. Nowhere in our statutes and jurisprudence do they provide that the sale of
the collaterals constituted as security of the obligation results in the extinguishment of the
obligation. The rights and obligations of parties are governed by the terms and conditions of
the contract and not by assumptions and presuppositions of the parties. The amount of their
entire liability should be computed on the basis of the rate of interest as imposed by the CA
minus the proceeds of the sale of the foreclosed properties in public auction.
NUNELON R. MARQUEZ, PETITIONER, VS. ELISAN CREDIT CORPORATION, RESPONDENTS.
We resolve the present petition for review on certiorari assailing the May 17, 2010 decision
and the November 25, 2010 resolution of the Court of Appeals (CA) in CA-G.R. SP No. 102144.
The Factual Antecedents
On December 16, 1991, Nunelon R. Marquez (petitioner) obtained a (first loan) from Elisan
Credit Corporation (respondent) for fifty-three thousand pesos (Php 53,000.00) payable in
one-hundred eighty (180) days.
The petitioner signed a promissory note which provided that it is payable in weekly
installments and subject to twenty-six percent (26%) annual interest. In case of non-payment,
the petitioner agreed to pay ten percent (10%) monthly penalty based on the total amount
unpaid and another twenty-five percent (25%) of such amount for attorney's fees exclusive
of costs, and judicial and extrajudicial expenses.
To further secure payment of the loan, the petitioner executed a chattel mortgage over a
motor vehicle. The contract of chattel mortgage provided among others, that the motor
vehicle shall stand as a security for the first loan and "all other obligations of every kind
already incurred or which may hereafter be incurred."
Both the petitioner and respondent acknowledged the full payment of the first loan.
Subsequently, the petitioner obtained another loan (second loan) from the respondent for
fifty-five thousand pesos (P55,000.00) evidenced by a promissory note and a cash voucher
both dated June 15, 1992.
The promissory note covering the second loan contained exactly the same terms and
conditions as the first promissory note.
When the second loan matured on December 15, 1992, the petitioner had only paid twenty-
nine thousand nine hundred sixty pesos (P29,960.00), leaving an unpaid balance of twenty
five thousand forty pesos (P25,040.00).
Due to liquidity problems, the petitioner asked the respondent if he could pay in daily
installments (daily payments) until the second loan is paid. The respondent granted the
petitioner's request. Thus, as of September 1994 or twenty-one (21) months after the second
loan's maturity, the petitioner had already paid a total of fifty-six thousand four-hundred forty
pesos (P56,440.00), an amount greater than the principal.
Despite the receipt of more than the amount of the principal, the respondent filed a complaint
for judicial foreclosure of the chattel mortgage because the petitioner allegedly failed to settle
the balance of the second loan despite demand.
The respondent further alleged that pursuant to the terms of the promissory note, the
petitioner's failure to fully pay upon maturity triggered the imposition of the ten percent
(10%) monthly penalty and twenty-five percent (25%) attorney's fees.
The respondent prayed that the petitioner be ordered to pay the balance of the second loan
plus accrued penalties and interest.
Before the petitioner could file an answer, the respondent applied for the issuance of a writ
of replevin. The MTC issued the writ and by virtue of which, the motor vehicle covered by the
chattel mortgage was seized from the petitioner and delivered to the respondent.
Trial on the merits thereafter ensued.
The MTC Ruling
The MTC found for the petitioner and held that the second loan was fully extinguished as of
September 1994.
It held that when an obligee accepts the performance or payment of an obligation, knowing
its incompleteness or irregularity and without expressing any protest or objection, the
obligation is deemed fully complied with. The MTC noted that the respondent accepted the
daily payments made by the petitioner without protest. The second loan having been fully
extinguished, the MTC ruled that respondent's claim for interests and penalties plus the
alleged unpaid portion of the principal is without legal basis.
The MTC ordered:
"the plaintiff Elisan Credit Corporation to return/deliver the seized motor vehicle with Plate
No. UV-TDF-193 to the possession of the defendant and in the event its delivery is no longer
possible, to pay the defendant the amount of P30,000.00 corresponding to the value of the
said vehicle;"
"the bonding company People's Trans-East Asia Insurance Corporation to pay the defendant
the amounts of P20,000.00 and P5,000.00 representing the damages and attorney's fees
under P.T.E.A.LC Bond No. JCL (13)-00984;"
"the plaintiff is likewise directed to surrender to the defendant the originals of the documents
evidencing indebtedness in this case so as to prevent further use of the same in another
proceeding."
The RTC Ruling
Except for the MTC's order directed to the bonding company, the RTC initially affirmed the
ruling of the MTC.
Acting on the respondent's motion for reconsideration, the RTC reversed itself. Citing Article
1253 of the Civil Code, it held that "if the debt produces interest, payment of the principal
shall not be deemed to have been made until the interests have been covered." It also
sustained the contention of the respondent that the chattel mortgage was revived when the
petitioner executed the promissory note covering the second loan.
The RTC ordered:
"the defendant to pay the plaintiff the following: a) P25,040.00, plus interest thereon at the
rate of 26% per annum and penalties of 10% per month thereon from due date of the second
promissory note until fully paid, b) 25% of the defendant's outstanding obligation as and for
attorney's fees, c) costs of this suit;"
"the foreclosure of the chattel mortgage dated December 16, 1991 and the sale of the
mortgaged property at a public auction, with the proceeds thereof to be applied as and in
payment of the amounts awarded in a and b above."
The CA Ruling[20]
The CA affirmed the RTC's ruling with modification.
The CA observed that the disparity in the amount loaned and the amount paid by the
petitioner supports the respondent's view that the daily payments were properly applied first
for the payment of interests and not for the principal.
According to the CA, if the respondent truly condoned the payment of interests as claimed by
the petitioner, the latter did not have to pay an amount in excess of the principal. The CA
believed the petitioner knew his payments were first applied to the interests due.
The CA held that Article 1253 of the Civil Code is clear that if debt produces interest, payment
of the principal shall not be deemed made until the interests have been covered. It ruled that
even if the official receipts issued by the respondent did not mention that the payments were
for the interests, the omission is irrelevant as it is deemed by law to be for the payment of
interests first, if any, and then for the payment of the principal amount.
The CA, however, reduced the monthly penalty from ten percent (10%) to two percent (2%)
pursuant to Article 1229 of the Civil Code which gives the courts the power to decrease the
penalty when the principal obligation has been partly or irregularly complied with by the
debtor.
The dispositive portion of the CA decision provides:
"WHEREFORE, premises considered, the Petition is hereby DENIED for lack of merit. The Order
dated 07 May 2007 of the Regional Trial Court, Branch 222, Quezon City is hereby AFFIRMED
with MODIFICATION that the penalty charge should only be two (2%) per month until fully
paid."
The CA denied the petitioner's Motion for Reconsideration dated May 17, 2010 on November
25, 2010 for failing to raise new matters. Hence, this present petition.
The Petition
The petitioner seeks the reversal of the CA's decision and resolution. He argues that he has
fully paid his obligation. Thus, the respondent has no right to foreclose the chattel mortgage.
The petitioner insists that his daily payments should be deemed to have been credited against
the principal, as the official receipts issued by the respondent were silent with respect to the
payment of interest and penalties. He cites Article 1176 of the Civil Code which ordains that
[t]he receipt of the principal by the creditor without reservation with respect to the interest,
shall give rise to the presumption that the interest has been paid. The petitioner invokes
Article 1235 of the Civil Code which states that "[w]hen the obligee accepts the performance
of an obligation, knowing its incompleteness or irregularity, and without expressing any
protest or objection, the obligation is deemed fully complied with."
The petitioner denies having stipulated upon and consented to the twenty-six per cent (26%)
per annum interest charge, ten percent (10%) monthly penalty and twenty-five percent (25%)
attorney's fees. According to the petitioner, he signed the promissory note in blank.
The petitioner likewise disclaims receiving any demand letter from the respondent for the
alleged balance of the second loan after he had paid fifty-six thousand four-hundred forty
pesos (Php56,440.00) as of September 1994, and further argues that the chattel mortgage
could not cover the second loan as it was annulled and voided upon full payment of the first
loan.
The Respondent's Case
The respondent claims that the daily payments were properly credited against the interest
and not against the principal because the petitioner incurred delay in the full payment of the
second loan.
It argues that pursuant to the terms and conditions of the promissory note, the interest and
penalties became due and demandable when the petitioner failed to pay in full upon maturity.
The respondent relies on Article 1253 of the Civil Code which provides that if the debt
produces interest, payment of the principal shall not be deemed to have been made until the
interests have been covered.
The respondent likewise maintains that the chattel mortgage could validly secure the second
loan invoking its provision which provided that it covers "obligations...which may hereafter
be incurred."
Issues
The petitioner raises the following issues for our resolution:
"WHETHER THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE
REGIONAL TRIAL COURT ORDERING THE PETITIONER TO PAY THE RESPONDENT THE AMOUNT
OF PHP24,040.00 PLUS INTEREST AND PENALTY FROM DUE DATE UNTIL FULLY PAID; AND
"WHETHER THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE
REGIONAL TRIAL COURT ORDERING THE FORECLOSURE AND SALE OF THE MORTGAGED
PROPERTY."[22]
In simpler terms, did the respondent act lawfully when it credited the daily payments against
the interest instead of the principal? Could the chattel mortgage cover the second loan?
The Court's Ruling
We find the petition partly meritorious.
We rule that: (1) the respondent acted pursuant to law and jurisprudence when it credited
the daily payments against the interest instead of the principal; and (2) the chattel mortgage
could not cover the second loan.
Rebuttable presumptions; Article 1176 vis-a-vis Article 1253
There is a need to analyze and harmonize Article 1176 and Article 1253 of the Civil Code to
determine whether the daily payments made after the second loan's maturity should be
credited against the interest or against the principal.
Article 1176 provides that:
"The receipt of the principal by the creditor, without reservation with respect to the interest,
shall give rise to the presumption that said interest has been paid.
xxx."
On the other hand, Article 1253 states:
"If the debt produces interest, payment of the principal shall not be deemed to have been
made until the interests have been covered."
The above provisions appear to be contradictory but they in fact support, and are in
conformity with, each other. Both provisions are also presumptions and, as such, lose their
legal efficacy in the face of proof or evidence to the contrary.
Thus, the settlement of the first issue depends on which of these presumptions prevails under
the given facts of the case.
There are two undisputed facts crucial in resolving the first issue: (1) the petitioner failed to
pay the full amount of the second loan upon maturity; and (2) the second loan was subject to
interest, and in case of default, to penalty and attorney's fees.
But before proceeding any further, we first tackle the petitioner's denial of the genuineness
and due execution of the second promissory note. He denies that he stipulated upon and
consented to the interest, penalty and attorney's fees because he purportedly signed the
promissory note in blank.
This allegation deserves scant consideration. It is self-serving and unsupported by evidence.
As aptly observed by the RTC and the CA, the promissory notes securing the first and second
loan contained exactly the same terms and conditions. They were mirror-image of each other
except for the date and amount of principal Thus, we see sufficient basis to believe that the
petitioner knew or was aware of such terms and conditions even assuming that the entries
on the interest and penalty charges were in blank when he signed the promissory note.
Moreover, we find it significant that the petitioner does not deny the genuineness and due
execution of the first promissory note. Only when he failed to pay the second loan did he
impugn the validity of the interest, penalty and attorney's fees. The CA and the RTC also noted
that the petitioner is a schooled individual, an engineer by profession, who, because of these
credentials, will not just sign a document in blank without appreciating the import of his
action.
These considerations strongly militate against the petitioner's claim that he did not consent
to and stipulated on the interest and penalty charges of the second loan. Thus, he did not only
fail to fully pay the second loan upon maturity; the loan was also subject to interest, penalty
and attorney's fees.
Article 1176 in relation to Article 1253
Article 1176 falls under Chapter I (Nature and Effect of Obligations) while Article 1253 falls
under Subsection I (Application of Payments), Chapter IV (Extinguishment of Obligations) of
Book IV (Obligations and Contracts) of the Civil Code.
The structuring of these provisions, properly taken into account, means that Article 1176
should be treated as a general presumption subject to the more specific presumption under
Article 1253. Article 1176 is relevant on questions pertaining to the effects and nature of
obligations in general, while Article 1253 is specifically pertinent on questions involving
application of payments and extinguishment of obligations.
A textual analysis of the above provisions yields the results we discuss at length below:
The presumption under Article 1176 does not resolve the question of whether the amount
received by the creditor is a payment for the principal or interest. Under this article the
amount received by the creditor is the payment for the principal, but a doubt arises on
whether or not the interest is waived because the creditor accepts the payment for the
principal without reservation with respect to the interest. Article 1176 resolves this doubt by
presuming that the creditor waives the payment of interest because he accepts payment for
the principal without any reservation.
On the other hand, the presumption under Article 1253 resolves doubts involving payment of
interest-bearing debts. It is a given under this Article that the debt produces interest. The
doubt pertains to the application of payment; the uncertainty is on whether the amount
received by the creditor is payment for the principal or the interest. Article 1253 resolves this
doubt by providing a hierarchy: payments shall first be applied to the interest; payment shall
then be applied to the principal only after the interest has been fully-paid.
Correlating the two provisions, the rule under Article 1253 that payments shall first be applied
to the interest and not to the principal shall govern if two facts exist: (1) the debt produces
interest (e.g., the payment of interest is expressly stipulated) and (2) the principal remains
unpaid.
The exception is a situation covered under Article 1176, i.e., when the creditor waives
payment of the interest despite the presence of (1) and (2) above. In such case, the payments
shall obviously be credited to the principal.
Since the doubt in the present case pertains to the application of the daily payments, Article
1253 shall apply. Only when there is a waiver of interest shall Article 1176 become relevant.
Under this analysis, we rule that the respondent properly credited the daily payments to the
interest and not to the principal because: (1) the debt produces interest, i.e., the promissory
note securing the second loan provided for payment of interest; (2) a portion of the second
loan remained unpaid upon maturity; and (3) the respondent did not waive the payment of
interest.
There was no waiver of interest
The fact that the official receipts did not indicate whether the payments were made for the
principal or the interest does not prove that the respondent waived the interest.
We reiterate that the petitioner made the daily payments after the second loan had already
matured and a portion of the principal remained unpaid. As stipulated, the principal is subject
to 26% annual interest.
All these show that the petitioner was already in default of the principal when he started
making the daily payments. The stipulations providing for the 10% monthly penalty and the
additional 25% attorney's fees on the unpaid amount also became effective as a result of the
petitioner's failure to pay in full upon maturity.
In other words, the so-called interest for default (as distinguished from the stipulated
monetary interest of 26% per annum) in the form of the 10% monthly penalty accrued and
became due and demandable. Thus, when the petitioner started making the daily payments,
two types of interest were at the same time accruing, the 26% stipulated monetary interest
and the interest for default in the form of the 10% monthly penalty.
Article 1253 covers both types of interest. As noted by learned civilist, Arturo M. Tolentino,
no distinction should be made because the law makes no such distinction. He explained:
"Furthermore, the interest for default arises because of non-performance by the debtor, and
to allow him to apply payment to the capital without first satisfying such interest, would be
to place him in a better position than a debtor who has not incurred in delay. The delay should
worsen, not improve, the position of a debtor."[26] [Emphasis supplied.]
The petitioner failed to specify which of the two types of interest the respondent allegedly
waived. The respondent waived neither.
In Swagman Hotels and Travel Inc. v. Court of Appeals,[27] we applied Article 1253 of the Civil
Code in resolving whether the debtor has waived the payments of interest when he issued
receipts describing the payments as "capital repayment." We held that,
"Under Article 1253 of the Civil Code, if the debt produces interest, payment of the principal
shall not be deemed to have been made until the interest has been covered. In this case, the
private respondent would not have signed the receipts describing the payments made by the
petitioner as "capital repayment" if the obligation to pay the interest was still subsisting.
"There was therefore a novation of the terms of the three promissory notes in that the
interest was waived..."[28] [Emphasis supplied.]
The same ruling was made in an older case where the creditor issued a receipt which
specifically identified the payment as referring to the principal. We held that the interest
allegedly due cannot be recovered, in conformity with Article 1110 of the Old Civil Code, a
receipt from the creditor for the principal, that contains no stipulation regarding interest,
extinguishes the obligation of the debtor with regard thereto when the receipt issued by the
creditor showed that no reservation whatever was made with respect to the interest.
In both of these cases, it was clearly established that the creditors accepted the payment of
the principal. The creditors were deemed to have waived the payment of interest because
they issued receipts expressly referring to the payment of the principal without any
reservation with respect to the interest. As a result, the interests due were deemed waived.
It was immaterial whether the creditors intended to waive the interest or not. The law
presumed such waiver because the creditors accepted the payment of the principal without
reservation with respect to the interest.
In the present case, it was not proven that the respondent accepted the payment of the
principal. The silence of the receipts on whether the daily payments were credited against the
unpaid balance of the principal or the accrued interest does not mean that the respondent
waived the payment of interest. There is no presumption of waiver of interest without any
evidence showing that the respondent accepted the daily installments as payments for the
principal.
Ideally, the respondent could have been more specific by indicating on the receipts that the
daily payments were being credited against the interest. Its failure to do so, however, should
not be taken against it. The respondent had the right to credit the daily payments against the
interest applying Article 1253.
It bears stressing that the petitioner was already in default. Under the promissory note, the
petitioner waived demand in case of non-payment upon due date.[30] The stipulated interest
and interest for default have both accrued. The only logical result, following Article 1253 of
the Civil Code, is that the daily payments were first applied against either or both the
stipulated interest and interest for default.
Moreover, Article 1253 is viewed as having an obligatory character and not merely suppletory.
It cannot be dispensed with except by mutual agreement. The creditor may oppose an
application of payment made by the debtor contrary to this rule.
In any case, the promissory note provided that "interest not paid when due shall be added to,
and become part of the principal and shall likewise bear interest at the same rate,
compounded monthly."
Hence, even if we assume that the daily payments were applied against the principal, the
principal had also increased by the amount of unpaid interest and the interest on such unpaid
interest. Even under this assumption, it is doubtful whether the petitioner had indeed fully
paid the second loan.
Excessive interest, penalty and attorney's fees
Notwithstanding the foregoing, we find the stipulated rates of interest, penalty and attorney's
fees to be exorbitant, iniquitous, unconscionable and excessive. The courts can and should
reduce such astronomical rates as reason and equity demand.
Article 1229 of the Civil Code provides:
"The judge shall equitably reduce the penalty when the principal obligation has been partly
or irregularly complied with by the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable."
Article 2227 of the Civil Code ordains:
"Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable.
More importantly, Article 1306 of the Civil Code is emphatic:
"The contracting parties may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy."
Thus, stipulations imposing excessive rates of interest and penalty are void for being contrary
to morals, if not against the law.
Further, we have repeatedly held that while Central Bank Circular No. 905-82, which took
effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured
and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read
as granting carte blanche authority to lenders to raise interest rates to levels that would be
unduly burdensome, to the point of oppression on their borrowers.
In exercising this power to determine what is iniquitous and unconscionable, courts must
consider the circumstances of each case since what may be iniquitous and unconscionable in
one may be totally just and equitable in another.
In the recent case of MCMP Construction Corp. v. Monark Equipment Corp.,[36] we reduced
the interest rate of twenty-four percent (24%) per annum to twelve percent (12%) per annum;
the penalty and collection charge of three percent (3%) per month, or thirty-six percent (36%)
per annum, to six percent (6%) per annum; and the amount of attorney's fees from twenty-
five percent (25%) of the total amount due to five percent (5%).
Applying the foregoing principles, we hereby reduce the stipulated rates as follows: the
interest of twenty-six percent (26%) per annum is reduced to two percent (2%) per annum;
the penalty charge of ten percent (10%) per month, or one-hundred twenty percent (120%)
per annum is reduced to two percent (2%) per annum; and the amount of attorney's fees from
twenty-five percent (25%) of the total amount due to two percent (2%) of the total amount
due.
We believe the markedly reduced rates are reasonable, equitable and just under the
circumstances.
It is not entirely the petitioner's fault that he honestly, albeit wrongly, believed that the
second loan had been fully paid. The respondent is partly to blame for issuing receipts not
indicating that the daily payments were being applied against the interest.
Moreover, the reduction of the rates is justified in the context of its computation period. In
Trade & Investment Dev't Corp. of the Phil. v. Roblett Industrial Construction Corp.,[37] we
equitably reduced the interest rate because the case was decided with finality sixteen years
after the filing of the complaint. We noted that the amount of the loan swelled to a
considerably disproportionate sum, far exceeding the principal debt.
It is the same in the present case where the complaint was filed almost twenty-years ago.
The Chattel Mortgage could not cover the second loan.
The chattel mortgage could not validly cover the second loan. The order for foreclosure was
without legal and factual basis.
In Acme Shoe, Rubber and Plastic Corp. v. Court of Appeals,[39] the debtor executed a chattel
mortgage, which had a provision to this effect:
"In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal
of the former note, as an extension thereof, or as a new loan, or is given any other kind of
accommodations such as overdrafts, letters of credit, acceptances and bills of exchange,
releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security
for the payment of the said promissory note or notes and/or accommodations without the
necessity of executing a new contract and this mortgage shall have the same force and effect
as if the said promissory note or notes and/or accommodations were existing on the date
thereof."[40] [Emphasis supplied.]
In due time, the debtor settled the loan covered by the chattel mortgage. Subsequently, the
debtor again borrowed from the creditor. Due to financial constraints, the subsequent loan
was not settled at maturity.
On the issue whether the chattel mortgage could be foreclosed due to the debtor's failure to
settle the subsequent loan, we held that,
"contracts of security are either personal or real, x x x In contracts of real security, such as a
pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of
property — in pledge, the placing of movable property in the possession of the creditor; in
chattel mortgage, by the execution of the corresponding deed substantially in the form
prescribed by law; x x x — upon the essential condition that if the principal obligation becomes
due and the debtor defaults, then the property encumbered can be alienated for the payment
of the obligation, but that should the obligation be duly paid, then the contract is
automatically extinguished proceeding from the accessory character of the agreement. As the
law so puts it, once the obligation is complied with, then the contract of security becomes,
ipso facto, null and void."
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately described, a chattel mortgage,
however, can only cover obligations existing at the time the mortgage is constituted. Although
a promise expressed in a chattel mortgage to include debts that are yet to be contracted can
be a binding commitment that can be compelled upon, the security itself, however, does not
come into existence or arise until after a chattel mortgage agreement covering the newly
contracted debt is executed either by concluding a fresh chattel mortgage or by amending the
old contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on
the part of the borrower to execute the agreement so as to cover the after-incurred obligation
can constitute an act of default on the part of the borrower of the financing agreement
whereon the promise is written but, of course, the remedy of foreclosure can only cover the
debts extant at the time of constitution and during the life of the chattel mortgage sought to
be foreclosed."[42] [Emphasis supplied.]
We noted that the Chattel Mortgage Law requires the parties to the contract to attach an
affidavit of good faith and execute an oath that –
" x x x (the) mortgage is made for the purpose of securing the obligation specified in the
conditions thereof, and for no other purposes, and that the same is a just and valid obligation,
and one not entered into for the purposes of fraud."
It is obvious therefore that the debt referred in the law is a current, not an obligation that is
yet merely contemplated.
"x x x in consideration of the credit accommodation granted by the MORTGAGEE to the
MORTGAGOR(S) in the amount of FIFTY-THREE THOUSAND ONLY PESOS (P53,000.00) xxx and
all other obligations of every kind already incurred or which may hereafter be incurred, for or
accommodation of the MORTGAGOR(S), as well as the faithful performance of the terms and
conditions of this mortgage x x x." [Emphasis supplied.]
The only obligation specified in the chattel mortgage contract was the first loan which the
petitioner later fully paid. By virtue of Section 3 of the Chattel Mortgage Law,[47] the payment
of the obligation automatically rendered the chattel mortgage terminated; the chattel
mortgage had ceased to exist upon full payment of the first loan. Being merely an accessory
in nature, it cannot exist independently of the principal obligation.
The parties did not execute a fresh chattel mortgage nor did they amend the chattel mortgage
to comply with the Chattel Mortgage Law which requires that the obligation must be specified
in the affidavit of good faith. Simply put, there no longer was any chattel mortgage that could
cover the second loan upon full payment of the first loan. The order to foreclose the motor
vehicle therefore had no legal basis.
WHEREFORE, in view of the foregoing findings and legal premises, we PARTIALLY GRANT the
petition. We MODIFY the May 17, 2010 Decision and the November 25, 2010 Resolution of
the Court of Appeals in CA G.R. SP No. 102144.
ACCORDINGLY, petitioner Nunelon R. Marquez is ORDERED to pay:
Twenty-five thousand forty pesos (P25,040.00) representing the amount of the unpaid
balance of the second loan;
Interest of two percent (2%) per annum on the unpaid balance to be computed from
December 15, 1992[48] until full payment;
Penalty of two percent (2%) per annum on the unpaid balance to be computed from
December 15, 1992;
Attorney's Fees of two percent (2%) of the total amount to be recovered.
The total amount to be recovered shall further be subject to the legal interest rate of six
percent (6 %) per annum from the finality of this Decision until fully paid.[49]
Respondent Elisan Credit Corporation, on the other hand, is ORDERED to return/deliver the
seized motor vehicle with Plate No. UV-TDF-193, subject of the chattel mortgage, to the
possession of the petitioner; in the event its delivery is no longer possible, to pay the
petitioner the amount of P30,000.00 corresponding to the value of the said vehicle.
No pronouncement as to costs.
FAR EAST BANK v. DIAZ REALTY INC.
For a valid tender of payment, it is necessary that there be a fusion of intent, ability and
capability to make good such offer, which must be absolute and must cover the amount due.
Though a check is not legal tender, and a creditor may validly refuse to accept it if tendered
as payment, one who in fact accepted a fully funded check after the debtor's manifestation
that it had been given to settle an obligation is estopped from later on denouncing the efficacy
of such tender of payment.
The Case
The foregoing principle is used by this Court in resolving the Petition for Review on Certiorari
before us, challenging the January 26, 1999 Decision of the Court of Appeals (CA) in CA-GR CV
No. 45349. The dispositive portion of the assailed Decision reads as follows:
"WHEREFORE, the judgment appealed from is hereby MODIFIED, to read as follows:
`WHEREFORE, JUDGMENT IS HEREBY RENDERED, ORDERING:
`1. The plaintiffs to pay Far East Bank & Trust Company the principal sum of P1,067,000.00
plus interests thereon computed at 12% per annum from July 9, 1988 until fully paid;
`2. The parties to negotiate for a new lease over the subject premises; and
`3. The defendant to pay the plaintiff the sum of fifteen thousand (P15,000.00) pesos as
and for attorney's fees plus the costs of litigation.
"All other claims of the parties against each other are DENIED."
Likewise assailed is the May 4, 1999 CA Resolution, which denied petitioner's Motion for
Reconsideration.
The Facts
The court a quo summarized the antecedents of the case as follows:
"Sometime in August 1973, Diaz and Company got a loan from the former PaBC [Pacific
Banking Corporation] in the amount of P720,000.00, with interest at 12% per annum, later
increased to 14%, 16%, 18% and 20%. The loan was secured by a real estate mortgage over
two parcels of land owned by the plaintiff Diaz Realty, both located in Davao City. In 1981,
Allied Banking Corporation rented an office space in the building constructed on the
properties covered by the mortgage contract, with the conformity of mortgagee PaBC,
whereby the parties agreed that the monthly rentals shall be paid directly to the mortgagee
for the lessor's account, either to partly or fully pay off the aforesaid mortgage indebtedness.
Pursuant to such contract, Allied Bank paid the monthly rentals to PaBC instead of to the
plaintiffs. On July 5, 1985, the Central Bank closed PaBC, placed it under receivership, and
appointed Renan Santos as its liquidator. Sometime in December 1986, appellant FEBTC
purchased the credit of Diaz & Company in favor of PaBC, but it was not until March 23, 1988
that Diaz was informed about it.
"According to the plaintiff as alleged in the complaint and testified to by Antonio Diaz
(President of Diaz & Company and Vice-President of Diaz Realty), on March 23, 1988, he went
to office of PaBC which by then housed FEBTC and was told that the latter had acquired PaBC;
that Cashier Ramon Lim told him that as of such date, his loan was P1,447,142.03; that he
(Diaz) asked the defendant to make an accounting of the monthly rental payments made by
Allied Bank; that on December 14, 1988,[6] Diaz tendered to FEBTC the amount of
P1,450,000.00 through an Interbank check, in order to prevent the imposition of additional
interests, penalties and surcharges on its loan; that FEBTC did not accept it as payment; that
instead, Diaz was asked to deposit the amount with the defendant's Davao City Branch Office,
allegedly pending the approval of Central Bank Liquidator Renan Santos; that in the
meantime, Diaz wrote the defendant, asking that the interest rate be reduced from 20% to
12% per annum, but no reply was ever made; that subsequently, the defendant told him to
change the P1,450,000.00 deposit into a money market placement, which he did; that the
money market placement expired on April 14, 1989; that when there was still no news from
the defendant whether or not it [would] accept his tender of payment, he filed this case at
the Regional Trial Court of Davao City.
"In its responsive pleading, the defendant set up the following special/affirmative defenses:
that sometime in December 1986, FEBTC purchased from the PaBC the account of the
plaintiffs for a total consideration of P1,828,875.00; that despite such purchase, PaBC Davao
Branch continued to collect interests and penalty charges on the loan from January 6, 1987
to July 8, 1988; that it was therefore not FEBTC which collected the interest rates mentioned
in the complaint, but PaBC; that it is not true that FEBTC was trying to impose [exorbitant]
rates of interest; that as a matter of fact, after the transfer of plaintiff's account, it sought to
negotiate with the plaintiffs, and in fact, negotiations were made for a settlement and
possible reduction of charges; that FEBTC has no knowledge of the rates of interest imposed
and collected by PaBC prior to the purchase of the account from the latter, hence it could not
be held responsible for those transactions which transpired prior to the purchase; and that
the defendant acted at the opportune time for the settlement of the account, albeit exercising
prudence in the handling of such account. The rest of the `affirmative defenses' are bare
denials.
"After trial, the court a quo rendered judgment on August 6, 1993, the dispositive portion of
which reads as follows:
`WHEREFORE, judgment is hereby rendered as follows:
`1. The plaintiff and defendant shall jointly compute the interest due on the P1,057,000.00
loan from April 18, 1985 until November 14, 1988 at 12% per annum (IBAA Salazar Case
Supra).
`2. That the parties shall then add the result of the joint computation mentioned in paragraph
one of the dispositive portion to the P1,057,000.00 principal.
`3. The result of the addition of the P1,057,000.00 principal and the interests arrived at shall
then be compared with the P1,450,000.00 deposit and if P1,450,000.00 is not enough, then
the plaintiff shall pay the difference/deficiency between the P1,450,000.00 deposit and what
the parties jointly computed[;] conversely, if the P1,450,000.00 is more than what the parties
have arrived [at] after the computation, the defendant shall return the difference or the
excess to the plaintiffs.
`4. The defendant shall cancel the mortgage.
`5. Paragraph eight of the Lease Contract between Allied Bank and the plaintiffs in which the
defendant's predecessor, Pacific Banking gave its conformity (Exh. `H') is hereby cancelled, so
that the rental should now be paid to the plaintiffs.
`6. The defendant shall pay the plaintiffs the sums:
`6-A. Fifteen thousand pesos as attorney's fees.

`6-B. Three [h]undred [t]housand [p]esos (P300,000.00) as exemplary damages.
`6-C. The cost of suit.
`SO ORDERED."
"Upon a motion for reconsideration filed by defendant FEBTC and after due notice and
hearing, the court a quo issued an order on October 12, 1993, modifying the aforequoted
decision, such that its dispositive portion as amended would now read as follows:
`IN VIEW WHEREOF, the decision rendered last August 6, is modified, accordingly, to wit:
`1. The plaintiff and defendant shall jointly compute the interest due on the P1,167,000.00
loan from April 18, 1985 until November 14, 1988 at 12% per annum.
`2. That the parties shall then add the result of the joint computation mentioned in paragraph
one above to the P1,067,000.00 principal.
`3. The result of the addition of the P1,067,000.00 principal and the interests arrived at shall
then be compared with the P1,450,000.00 money market placement put up by the plaintiff
with the defendant bank if the same is still existing or has not yet matured.
`4. The defendant shall cancel the mortgage.
`5. Paragraph eight of the lease contract between Allied Bank and the plaintiff in which the
defendant[`s predecessor], Pacific Banking gave its conformity (Exh. `H') is hereby cancelled
and deleted, so that the rental should now be paid to the plaintiff.
`6. The defendant shall pay the plaintiff the sums:
`6.A Fifteen [t]housand [p]esos as attorney's fees;
`6.B Cost of suit.'"
The CA Ruling
The CA sustained the trial court's finding that there was a valid tender of payment in the sum
of P1,450,000, made by Diaz Realty Inc. in favor of Far East Bank and Trust Company. The
appellate court reasoned that petitioner failed to effectively rebut respondent's evidence that
it so tendered the check to liquidate its indebtedness, and that petitioner had unilaterally
treated the same as a deposit instead.
The CA further ruled that in the computation of interest charges, the legal rate of 12 percent
per annum should apply, reckoned from July 9, 1988, until full and final payment of the whole
indebtedness. It explained that while petitioner's purchase of respondent's account from
Pacific Banking Corporation (PaBC) was valid, the 20 percent interest stipulated in the
Promissory Note should not apply, because the account transfer was without the knowledge
and the consent of respondent-obligor.
The appellate court, however, sustained petitioner's assertion that the trial court should not
have cancelled the real estate mortgage contract, inasmuch as the principal obligation upon
which it was anchored was yet to be extinguished. As to the lease contract, the CA held that
the same was subject to renegotiation by the parties.
Lastly, the court a quo upheld the trial court's award of attorney's fees, pointing to petitioner's
negligence in not immediately informing respondent of the purchase and transfer of its credit,
and in failing to negotiate in order to avoid litigation.
Issues
Petitioner submits for our resolution the following issues:
"A.
"Whether or not the Court of Appeals correctly ruled that the validity of the tender of
payment was not properly raised in the trial court and could not thus be raised in the appeal.
"B.
"Whether or not the Court of Appeals erred in failing to apply settled jurisprudential principles
militating against the private respondent's contention that a valid tender of payment had
been made by it.
"C.
"Whether or not the Court of Appeals correctly found that the transaction between petitioner
and PaBC was an `ineffective novation' and that the consent of private respondent was
necessary therefor.
"D.
"Whether or not the Court of Appeals erred in refusing to apply the rate of interest freely
stipulated upon by the parties to the respondent's obligation.
"E.
"Whether or not the Court of Appeals committed an irreconcilable error in ordering the
parties to re-negotiate the terms of the contract while finding at the same time that the
mortgage contract containing the lease was valid.
"F.
"Whether or not the petition, as argued by private respondent, raises questions of fact not
reviewable by certiorari."
In the main, the Court will determine (1) the efficacy of the alleged tender of payment made
by respondent, (2) the effect of the transfer to petitioner of respondent's account with PaBC,
(3) the interest rate applicable, and (4) the status of the Real Estate Mortgage.
The Court's Ruling
The Petition is not meritorious.
First Issue:
Tender of Payment
Petitioner resolutely argues that the CA erred in upholding the validity of the tender of
payment made by respondent. What the latter had tendered to settle its outstanding
obligation, it points out, was a check which could not be considered legal tender.
We disagree. The records show that petitioner bank purchased respondent's account from
PaBC in December 1986, and that the latter was notified of the transaction only on March 23,
1988. Thereafter, Antonio Diaz, president of respondent corporation, inquired from
petitioner on the status and the amount of its obligation. He was informed that the obligation
summed up to P1,447,142.03. On November 14, 1988, petitioner received from respondent
Interbank Check No. 81399841 dated November 13, 1988, bearing the amount of P1,450,000,
with the notation "Re: Full Payment of Pacific Bank Account now turn[ed] over to Far East
Bank."[10] The check was subsequently cleared and honored by Interbank, as shown by the
Certification it issued on January 20, 1992.
True, jurisprudence holds that, in general, a check does not constitute legal tender, and that
a creditor may validly refuse it. It must be emphasized, however, that this dictum does not
prevent a creditor from accepting a check as payment. In other words, the creditor has the
option and the discretion of refusing or accepting it.
In the present case, petitioner bank did not refuse respondent's check. On the contrary, it
accepted the check which, it insisted, was a deposit. As earlier stated, the check proved to be
fully funded and was in fact honored by the drawee bank. Moreover, petitioner was in
possession of the money for several months.
In further contending that there was no valid tender of payment, petitioner emphasizes our
pronouncement in Roman Catholic Bishop of Malolos, Inc. v. Intermediate Appellate Court, as
follows:
"Tender of payment involves a positive and unconditional act by the obligor of offering legal
tender currency as payment to the obligee for the former's obligation and demanding that
the latter accept the same.
xxx xxx xxx
"Thus, tender of payment cannot be presumed by a mere inference from surrounding
circumstances. At most, sufficiency of available funds is only affirmative of the capacity or
ability of the obligor to fulfill his part of the bargain. But whether or not the obligor avails
himself of such funds to settle his outstanding account remains to be proven by independent
and credible evidence. Tender of payment presupposes not only that the obligor is able,
ready, and willing, but more so, in the act of performing his obligation. Ab posse ad actu non
vale illatio. `A proof that an act could have been done is no proof that it was actually done.'"

In other words, tender of payment is the definitive act of offering the creditor what is due him
or her, together with the demand that the creditor accept the same. More important, there
must be a fusion of intent, ability and capability to make good such offer, which must be
absolute and must cover the amount due.
That respondent intended to settle its obligation with petitioner is evident from the records
of the case. After learning that its loan balance was P1,447,142.03, it presented to petitioner
a check in the amount of P1,450,000, with the specific notation that it was for full payment of
its Pacific Bank account that had been purchased by petitioner. The latter accepted the check,
even if it now insists that it considered the same as a mere deposit. The check was sufficiently
funded, as in fact it was honored by the drawee bank. When petitioner refused to release the
mortgage, respondent instituted the present case to compel the bank to acknowledge the
tender of payment, accept payment and cancel the mortgage. These acts demonstrate
respondent's intent, ability and capability to fully settle and extinguish its obligation to
petitioner.
That respondent subsequently withdrew the money from petitioner-bank is of no moment,
because such withdrawal would not affect the efficacy or the legal ramifications of the tender
of payment made on November 14, 1988. As already discussed, the tender of payment to
settle respondent's obligation as computed by petitioner was accepted, the check given in
payment thereof converted into money, and the money kept in petitioner's possession for
several months.
Finally, petitioner points out that, in any case, tender of payment extinguishes the obligation
only after proper consignation, which respondent did not do.
The argument does not persuade. For a consignation to be necessary, the creditor must have
refused, without just cause, to accept the debtor's payment. However, as pointed out earlier,
petitioner accepted respondent's check.
To iterate, the tender was made by respondent for the purpose of settling its obligation. It
was incumbent upon petitioner to refuse, or accept it as payment. The latter did not have
the right or the option to accept and treat it as a deposit. Thus, by accepting the tendered
check and converting it into money, petitioner is presumed to have accepted it as payment.
To hold otherwise would be inequitable and unfair to the obligor.
Second Issue:
Nature of the Transfer of Respondent's Account
Petitioner bewails the CA's characterization of the transfer of respondent's account from
Pacific Banking Corporation to petitioner as an "ineffective novation." Petitioner contends
that the transfer was an assignment of credit.
Indeed, the transfer of respondent's credit from PaBC to petitioner was an assignment of
credit. Petitioner's acquisition of respondent's credit did not involve any changes in the
original agreement between PaBC and respondent; neither did it vary the rights and the
obligations of the parties. Thus, no novation by conventional subrogation could have taken
place.
An assignment of credit is an agreement by virtue of which the owner of a credit (known as
the assignor), by a legal cause -- such as sale, dation in payment, exchange or donation -- and
without the need of the debtor's consent, transfers that credit and its accessory rights to
another (known as the assignee), who acquires the power to enforce it, to the same extent as
the assignor could have enforced it against the debtor.
In the present case, it is undisputed that petitioner purchased respondent's loan from PaBC.
In doing so, the former acquired all of the latter's rights against respondent. Thus, petitioner
had the right to collect the full value of the credit from respondent, subject to the terms as
originally agreed upon in the Promissory Note.
Third Issue:
Applicable Interest Rate
Petitioner bank, as assignee of respondent's credit, is entitled to the interest rate of 20
percent in the computation of the debt of private respondent, as stipulated in the August 26,
1983 Promissory Note executed by the latter in favor of PaBC.
However, because there was a valid tender of payment made on November 14, 1988, the
accrual of interest based on the stipulated rate should stop on that date. Thus, respondent
should pay petitioner-bank its principal obligation in the amount of P1,067,000 plus accrued
interest thereon at 20 percent per annum until November 14, 1988, less interest payments
given to PaBC from December 1986 to July 8, 1988. Thereafter, the interest shall be computed
at 12 percent per annum until full payment.

Fourth Issue:
Status of Mortgage Contract
The Real Estate Mortgage executed between respondent and PaBC to secure the former's
principal obligation, as well as the provision in the Contract of Lease between respondent and
Allied Bank with regard to the application of rent payment to the former's indebtedness,
should subsist until full and final settlement of such obligation pursuant to the guidelines set
forth in this Decision. Thereafter, the parties are free to negotiate a renewal of either or both
contracts, or to end any and all of their contractual relations.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision of the Court of Appeals is
AFFIRMED with the following modifications: Respondent Diaz Realty Inc. is ORDERED to pay
Far East Bank and Trust Co. its principal loan obligation in the amount of P1,067,000, with
interest thereon computed at 20 percent per annum until November 14, 1988, less any
interest payments made to PaBC, petitioner's assignor. Thereafter, interest shall be
computed at 12 percent per annum until fully paid.
SO ORDERED.
TEDDY G. PABUGAIS, PETITIONER, VS. DAVE P. SAHIJWANI, RESPONDENT.
Assailed in this petition for review on certiorari is the January 16, 2003 Amended Decision of
the Court of Appeals in CA-G.R. CV No. 55740 which set aside the November 29, 1996 Decision
of the Regional Trial Court of Makati, Branch 64, in Civil Case No. 94-2363.
Pursuant to an "Agreement And Undertaking"[4] dated December 3, 1993, petitioner Teddy
G. Pabugais, in consideration of the amount of Fifteen Million Four Hundred Eighty Seven
Thousand Five Hundred Pesos (P15,487,500.00), agreed to sell to respondent Dave P.
Sahijwani a lot containing 1,239 square meters located at Jacaranda Street, North Forbes Park,
Makati, Metro Manila. Respondent paid petitioner the amount of P600,000.00 as
option/reservation fee and the balance of P14,887,500.00 to be paid within 60 days from the
execution of the contract, simultaneous with delivery of the owner's duplicate Transfer
Certificate of Title in respondent's name the Deed of Absolute Sale; the Certificate of Non-Tax
Delinquency on real estate taxes and Clearance on Payment of Association Dues. The parties
further agreed that failure on the part of respondent to pay the balance of the purchase price
entitles petitioner to forfeit the P600,000.00 option/reservation fee; while non-delivery by
the latter of the necessary documents obliges him to return to respondent the said
option/reservation fee with interest at 18% per annum, thus
5. DEFAULT In case the FIRST PARTY [herein respondent] fails to pay the balance of the
purchase price within the stipulated due date, the sum of P600,000.00 shall be deemed
forfeited, on the other hand, should the SECOND PARTY [herein petitioner] fail to deliver
within the stipulated period the documents hereby undertaken, the SECOND PARTY shall
return the sum of P600,000.00 with interest at 18% per annum.
Petitioner failed to deliver the required documents. In compliance with their agreement, he
returned to respondent the latter's P600,000.00 option/reservation fee by way of Far East
Bank & Trust Company Check No. 25AO54252P, which was, however, dishonored.
What transpired thereafter is disputed by both parties. Petitioner claimed that he twice
tendered to respondent, through his counsel, the amount of P672,900.00 (representing the
P600,000.00 option/reservation fee plus 18% interest per annum computed from December
3, 1993 to August 3, 1994) in the form of Far East Bank & Trust Company Manager's Check
No. 088498, dated August 3, 1994, but said counsel refused to accept the same. His first
attempt to tender payment was allegedly made on August 3, 1994 through his messenger;[6]
while the second one was on August 8, 1994,[7] when he sent via DHL Worldwide Services,
the manager's check attached to a letter dated August 5, 1994.[8] On August 11, 1994,
petitioner wrote a letter to respondent saying that he is consigning the amount tendered with
the Regional Trial Court of Makati City.[9] On August 15, 1994, petitioner filed a complaint for
consignation.
Respondent's counsel, on the other hand, admitted that his office received petitioner's letter
dated August 5, 1994, but claimed that no check was appended thereto. He averred that there
was no valid tender of payment because no check was tendered and the computation of the
amount to be tendered was insufficient, because petitioner verbally promised to pay 3%
monthly interest and 25% attorney's fees as penalty for default, in addition to the interest of
18% per annum on the P600,000.00 option/reservation fee.
On November 29, 1996, the trial court rendered a decision declaring the consignation invalid
for failure to prove that petitioner tendered payment to respondent and that the latter
refused to receive the same. It further held that even assuming that respondent refused the
tender, the same is justified because the manager's check allegedly offered by petitioner was
not legal tender, hence, there was no valid tender of payment. The trial court ordered
petitioner to pay respondent the amount of P600,000.00 with interest of 18% per annum from
December 3, 1993 until fully paid, plus moral damages and attorney's fees.
Petitioner appealed the decision to the Court of Appeals. Meanwhile, his counsel, Atty.
Wilhelmina V. Joven, died and she was substituted by Atty. Salvador P. De Guzman, Jr. On
December 20, 2001, petitioner executed a "Deed of Assignment" assigning in favor of Atty.
De Guzman, Jr., part of the P672,900.00 consigned with the trial court as partial payment of
the latter's attorney's fees. Thereafter, on January 7, 2002, petitioner filed an Ex Parte Motion
to Withdraw Consigned Money. This was followed by a "Motion to Intervene" filed by Atty.
De Guzman, Jr., praying that the amount consigned be released to him by virtue of the Deed
of Assignment.
Petitioner's motion to withdraw the amount consigned was denied by the Court of Appeals
and the decision of the trial court was affirmed with modification as to the amount of moral
damages and attorney's fees.
On a motion for reconsideration, the Court of Appeals declared the consignation as valid in
an Amended Decision dated January 16, 2003. It held that the validity of the consignation
had the effect of extinguishing petitioner's obligation to return the option/reservation fee to
respondent. Hence, petitioner can no longer withdraw the same. The decretal portion of the
Amended Decision states:
WHEREFORE, premises considered, our decision dated April 26, 2002 is RECONSIDERED. The
trial court's decision is hereby REVERSED and SET ASIDE, and a new one is entered (1)
DECLARING as valid the consignation by the plaintiff-appellant in favor of defendant-appellee
of the amount of P672,900.00 with the Makati City RTC Clerk of Court and deposited under
Official Receipt No. 379061 dated 15 August 1994 and (2) DECLARING as extinguished
appellant's obligation in favor of appellee under paragraph 5 of the parties' "AGREEMENT
AND UNDERTAKING". Neither party shall recover costs from the other.
SO ORDERED.
Unfazed, petitioner filed the instant petition for review contending, inter alia, that he can
withdraw the amount deposited with the trial court as a matter of right because at the time
he moved for the withdrawal thereof, the Court of Appeals has yet to rule on the
consignation's validity and the respondent had not yet accepted the same.
The resolution of the case at bar hinges on the following issues: (1) Was there a valid
consignation? and (2) Can petitioner withdraw the amount consigned as a matter of right?
Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment and it generally requires
a prior tender of payment. In order that consignation may be effective, the debtor must show
that: (1) there was a debt due; (2) the consignation of the obligation had been made because
the creditor to whom tender of payment was made refused to accept it, or because he was
absent or incapacitated, or because several persons claimed to be entitled to receive the
amount due or because the title to the obligation has been lost; (3) previous notice of the
consignation had been given to the person interested in the performance of the obligation;
(4) the amount due was placed at the disposal of the court; and (5) after the consignation had
been made the person interested was notified thereof. Failure in any of these requirements
is enough ground to render a consignation ineffective.
The issues to be resolved in the instant case concerns one of the important requisites of
consignation, i.e, the existence of a valid tender of payment. As testified by the counsel for
respondent, the reasons why his client did not accept petitioner's tender of payment were (1)
the check mentioned in the August 5, 1994 letter of petitioner manifesting that he is settling
the obligation was not attached to the said letter; and (2) the amount tendered was
insufficient to cover the obligation. It is obvious that the reason for respondent's non-
acceptance of the tender of payment was the alleged insufficiency thereof and not because
the said check was not tendered to respondent, or because it was in the form of manager's
check. While it is true that in general, a manager's check is not legal tender, the creditor has
the option of refusing or accepting it.[24] Payment in check by the debtor may be acceptable
as valid, if no prompt objection to said payment is made. Consequently, petitioner's tender of
payment in the form of manager's check is valid.
Anent the sufficiency of the amount tendered, it appears that only the interest of 18% per
annum on the P600,000.00 option/reservation fee stated in the default clause of the
"Agreement And Undertaking" was agreed upon by the parties, thus
5. DEFAULT In case the FIRST PARTY [herein respondent] fails to pay the balance of the
purchase price within the stipulated due date, the sum of P600,000.00 shall be deemed
forfeited, on the other hand, should the SECOND PARTY [herein petitioner] fail to deliver
within the stipulated period the documents hereby undertaken, the SECOND PARTY shall
return the sum of P600,000.00 with interest at 18% per annum.
The manager's check in the amount of P672,900.00 (representing the P600,000.00
option/reservation fee plus 18% interest per annum computed from December 3, 1993 to
August 3, 1994) which was tendered but refused by respondent, and thereafter consigned
with the court, was enough to satisfy the obligation.
There being a valid tender of payment in an amount sufficient to extinguish the obligation,
the consignation is valid.
As regards petitioner's right to withdraw the amount consigned, reliance on Article 1260 of
the Civil Code is misplaced. The said Article provides
Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order
the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial confirmation that the
consignation has been properly made, the debtor may withdraw the thing or the sum
deposited, allowing the obligation to remain in force.
The amount consigned with the trial court can no longer be withdrawn by petitioner because
respondent's prayer in his answer that the amount consigned be awarded to him is equivalent
to an acceptance of the consignation, which has the effect of extinguishing petitioner's
obligation.
Moreover, petitioner failed to manifest his intention to comply with the "Agreement And
Undertaking" by delivering the necessary documents and the lot subject of the sale to
respondent in exchange for the amount deposited. Withdrawal of the money consigned
would enrich petitioner and unjustly prejudice respondent.
The withdrawal of the amount deposited in order to pay attorney's fees to petitioner's
counsel, Atty. De Guzman, Jr., violates Article 1491 of the Civil Code which forbids lawyers
from acquiring by assignment, property and rights which are the object of any litigation in
which they may take part by virtue of their profession.[27] Furthermore, Rule 10 of the
Canons of Professional Ethics provides that "the lawyer should not purchase any interest in
the subject matter of the litigation which he is conducting." The assailed transaction falls
within the prohibition because the Deed assigning the amount of P672,900.00 to Atty. De
Guzman, Jr., as part of his attorney's fees was executed during the pendency of this case with
the Court of Appeals. In his Motion to Intervene, Atty. De Guzman, Jr., not only asserted
ownership over said amount, but likewise prayed that the same be released to him. That
petitioner knowingly and voluntarily assigned the subject amount to his counsel did not
remove their agreement within the ambit of the prohibitory provisions.[28] To grant the
withdrawal would be to sanction a void contract.
WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED. The
January 16, 2003 Amended Decision of the Court of Appeals in CA-G.R. CV No. 55740, which
declared the consignation by the petitioner in favor of respondent of the amount of
P672,900.00 with the Clerk of Court of the Regional Trial Court of Makati City valid, and which
declared petitioner's obligation to respondent under paragraph 5 of the "Agreement And
Undertaking" as having been extinguished, is AFFIRMED. No costs.
 SPS. JAIME BENOS and MARINA BENOS, petitioners, vs. SPS. GREGORIO LAWILAO and
JANICE GAIL LAWILAO, respondents.
YNARES-SANTIAGO, J.:
This petition for review under Rule 45 of the Rules of Court assails the December 5, 2005
Decision1 of the Court of Appeals in CA-G.R. SP No. 78845, affirming the Judgment2 dated
July 1, 2003 of the Regional Trial Court of Bontoc, Mountain Province, Branch 35, in Civil Case
No. 1091. The Regional Trial Court reversed the Decision3 dated November 14, 2002 of the
Municipal Circuit Trial Court of Bauko, Mountain Province in Civil Case No. 314, and ordered
the consolidation of ownership of subject property in the name of respondent-spouses
Gregorio and Janice Gail Lawilao. Also assailed is the March 17, 2006 Resolution4 denying
petitioners’ motion for reconsideration.
The antecedent facts are as follows:
On February 11, 1999, petitioner-spouses Jaime and Marina Benos ("the Benos spouses") and
respondent-spouses Gregorio and Janice Gail Lawilao ("the Lawilao spouses") executed a
Pacto de Retro Sale5 where the Benos spouses sold their lot covered by Tax Declaration No.
25300 and the building erected thereon for P300,000.00, one half of which was to be paid in
cash to the Benos spouses and the other half to be paid to the bank to pay off the loan of the
Benos spouses which was secured by the same lot and building. Under the contract, the Benos
spouses could redeem the property within 18 months from date of execution by returning the
contract price, otherwise, the sale would become irrevocable without necessity of a final deed
to consolidate ownership over the property in the name of the Lawilao spouses.
After paying the P150,000.00, the Lawilao spouses immediately took possession of the
property and leased out the building thereon. However, instead of paying the loan to the
bank, Janice Lawilao restructured it twice. Eventually, the loan became due and demandable.
On August 14, 2000, a son of the Benos spouses paid the bank P159,000.00 representing the
principal and interest. On the same day, the Lawilao spouses also went to the bank and
offered to pay the loan, but the bank refused to accept the payment. The Lawilao spouses
then filed with the Municipal Circuit Trial Court a petition6 docketed as Civil Case No. 310 for
consignation against the bank and simultaneously deposited the amount of P159,000.00.
Upon the bank’s motion, the court dismissed the petition for lack of cause of action.
Subsequently, the Lawilao spouses filed with the Municipal Circuit Trial Court a complaint
docketed as Civil Case No. 314, for consolidation of ownership. This complaint is the precursor
of the instant petition. The Benos spouses moved to dismiss on grounds of lack of jurisdiction
and lack of cause of action but it was denied and the parties went to trial.
On November 14, 2002, the Municipal Circuit Trial Court rendered judgment in favor of the
Benos spouses, the dispositive portion of which states:
IN THE LIGHT of all the foregoing considerations, for lack of legal and factual basis to demand
consolidation of ownership over the subject property, the above-entitled case is hereby
ordered dismissed.
No pronouncement as to damages on the ground that no premium should be assessed on the
right to litigate.
No costs.
SO ORDERED.
The Lawilao spouses appealed before the Regional Trial Court which reversed the Municipal
Circuit Trial Court and declared the ownership of the subject property consolidated in favor
of the Lawilao spouses.
The Benos spouses appealed to the Court of Appeals which affirmed the Regional Trial Court
on December 5, 2005. The dispositive portion of the Decision reads:
WHEREFORE, the petition for review is DISMISSED for lack of sufficient merit. The decision
rendered by the Regional Trial Court, Branch 35, Bontoc, Mountain Province in Civil Case No.
1091 on 1 July 2003, reversing the decision of the Municipal Circuit Trial Court of Bauko-
Sabangan, Mountain Province in (Civil Case No.) 314, is AFFIRMED.
SO ORDERED.
The appellate court denied petitioners’ motion for reconsideration, hence, the instant
petition on the following assignment of errors:
4.0. It was error for the Regional Trial Court and, subsequently, the Court of Appeals to rule
that respondents can consolidate ownership over the subject property.
4.1. It was likewise error for said lower courts not to have ruled that the contract between
the parties is actually an equitable mortgage.10
The Benos spouses argue that consolidation is not proper because the Lawilao spouses
violated the terms of the contract by not paying the bank loan; that having breached the terms
of the contract, the Lawilao spouses cannot insist on the performance thereof by the Benos
spouses; that the contract was actually an equitable mortgage as shown by the inadequacy of
the consideration for the subject property; and that respondent-spouses’ remedy should have
been for recovery of the loan or foreclosure of mortgage.
The Lawilao spouses, on the other hand, assert that the Pacto de Retro Sale reflected the
parties’ true agreement; that the Benos spouses cannot vary its terms and conditions because
they did not put in issue in their pleadings its ambiguity, mistake or imperfection as well as its
failure to express the parties’ true intention; that the Benos spouses admitted its genuineness
and due execution; and that the delivery of the property to the Lawilao spouses after the
execution of the contract shows that the agreement was a sale with a right of repurchase and
not an equitable mortgage.
The Lawilao spouses also claim that they complied with their obligation when they offered to
pay the loan to the bank and filed a petition for consignation; and that because of the failure
of the Benos spouses to redeem the property, the title and ownership thereof immediately
vested in them (Lawilao spouses).
The issue for resolution is whether the Lawilao spouses can consolidate ownership over the
subject property.
The petition is impressed with merit.
In ruling for respondents, the Court of Appeals held that: (1) the pacto de retro sale was
perfected because the parties voluntarily agreed upon the object thereof and the price; (2)
the Lawilao spouses acquired possession over the property immediately after execution of
the pacto de retro sale; (3) the pacto de retro sale does not provide for automatic rescission
in case the Lawilao spouses fail to pay the full price; (4) the Benos spouses did not rescind the
contract after the Lawilao spouses failed to pay the P150,000.00 loan; (5) Janice Lawilao
offered to pay the loan and deposited P150,000.00 to the bank although the period for
payment had expired thus, complying with Article 1592 of the Civil Code allowing payment
even after expiration of the period as long as no demand for rescission of the contract had
been made either judicially or by a notarial act; (6) the title and ownership of the Lawilao
spouses became absolute when the Benos spouses failed to repurchase the lot within the
redemption period; and (7) the payment by the Benos spouses’ son of P159,000.00 to the
bank does not amount to a repurchase as it violates Article 1616 of the Civil Code requiring
the vendor to return to the vendee the price of the sale, the expenses of the contract and
other necessary and useful expenses.
Contrary to the aforesaid findings, the evidence shows that the Lawilao spouses did not make
a valid tender of payment and consignation of the balance of the contract price. As correctly
found by the Regional Trial Court:
As matters stand, no valid tender of payment and/or consignation of the P150,000.00 which
the Appellant (Lawilaos) still owes the Appellee (Benos) has been effected by the former. The
amount of P159,000.00 deposited with the MCTC is in relation to Civil Case No. 310 earlier
dismissed by said court, and not to the instant action. Hence, this Court cannot automatically
apply such sum in satisfaction of the aforesaid debt of the Appellant and order the Appellee
creditor to accept the same.12 (Emphasis supplied)
The Lawilao spouses did not appeal said finding, and it has become final and binding on them.
Although they had repeatedly alleged in their pleadings that the amount of P159,000.00 was
still with the trial court which the Benos spouses could withdraw anytime, they never made
any step to withdraw the amount and thereafter consign it. Compliance with the
requirements of tender and consignation to have the effect of payment are mandatory. Thus
–
Tender of payment is the manifestation by debtors of their desire to comply with or to pay
their obligation. If the creditor refuses the tender of payment without just cause, the debtors
are discharged from the obligation by the consignation of the sum due. Consignation is made
by depositing the proper amount to the judicial authority, before whom the tender of
payment and the announcement of the consignation shall be proved. All interested parties
are to be notified of the consignation. Compliance with these requisites is mandatory.
(Emphasis supplied)
In the instant case, records show that the Lawilao spouses filed the petition for consignation
against the bank in Civil Case No. 310 without notifying the Benos spouses. The petition was
dismissed for lack of cause of action against the bank. Hence, the Lawilao spouses failed to
prove their offer to pay the balance of the purchase price and consignation. In fact, even
before the filing of the consignation case, the Lawilao spouses never notified the Benos
spouses of their offer to pay.
Thus, as far as the Benos are concerned, there was no full and complete payment of the
contract price, which gives them the right to rescind the contract pursuant to Articles 1191 in
relation to Article 1592 of the Civil Code, which provide:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period.
This is understood to be without prejudice to the rights of third persons who have acquired
the thing, in accordance with Articles 1385 and 1388 of the Mortgage Law.
Art. 1592. In the sale of immovable property, even though it may have been stipulated that
upon failure to pay the price at the time agreed upon the rescission of the contract shall of
right take place, the vendee may pay, even after the expiration of the period, as long as no
demand for rescission of the contract has been made upon him either judicially or by a
notarial act. After the demand, the court may not grant him a new term.
In the instant case, while the Benos spouses did not rescind the Pacto de Retro Sale through
a notarial act, they nevertheless rescinded the same in their Answer with Counterclaim where
they stated that:
14. Plaintiffs did not perform their obligation as spelled out in the Pacto de Retro Sale (ANNEX
"A"), particularly the assumption of the obligation of defendants to the Rural Bank of Bontoc.
Defendants were the ones who paid their loan through their son, ZALDY BENOS. As a result,
ANNEX "A" is rendered null and of no effect. Therefore, the VENDEE a retro who is one of
plaintiffs herein cannot consolidate her ownership over the property subject of the null and
ineffective instrument.
15. Since plaintiffs did not perform their corresponding obligation under ANNEX "A",
defendants have been all too willing to return the amount of ON[E] HUNDRED FIFTY
THOUSAND PESOS (P150,000.00) and reasonable interest thereon to plaintiffs. But plaintiffs
refused to accept the same.
With the filing of this answer, defendants pray that this serves as a notice of tender of
payment, and they shall consign the amount with the proper court as soon as it is legally
feasible.
They also prayed that the Municipal Circuit Trial Court render judgment "[d]eclaring the Pacto
de Retro Sale rescinded or ineffective or void for lack of, or insufficient consideration.”
In Iringan v. Court of Appeals,16 we ruled that "even a crossclaim found in the Answer could
constitute a judicial demand for rescission that satisfies the requirement of the law." Similarly,
the counterclaim of the Benos spouses in their answer satisfied the requisites for the judicial
rescission of the subject Pacto de Retro Sale.
The Municipal Circuit Trial Court thus correctly dismissed the complaint for consolidation of
ownership filed by the Lawilao spouses for their failure to comply with the conditions of the
Pacto de Retro Sale. Nevertheless, it refused to declare the rescission of the Pacto de Retro
Sale as prayed for in the counterclaim of the Benos spouses, stating that:
How about the other obligations and/or rights owing to either party by virtue of the Pacto de
Retro Sale? This, the court opines that it can not delve into without overstepping the limits of
his functions there being appropriate remedies. It is hornbook in our jurisprudence that a right
in law may be enforced and a wrong way be remedied but always through the appropriate
action.
The issue of rescission having been put in issue in the answer and the same having been
litigated upon without objections by the Lawilao spouses on grounds of jurisdiction, the
Municipal Circuit Trial Court should have ruled on the same and wrote finis to the controversy.
Thus, as a necessary consequence of its ruling that the Lawilao spouses breached the terms
of the Pacto de Retro Sale, the Municipal Circuit Trial Court should have rescinded the Pacto
de Retro Sale and directed the Benos spouses to return P150,000.00 to the Lawilao spouses,
pursuant to our ruling in Cannu v. Galang,18 to wit:
Petitioners maintain that inasmuch as respondents-spouses Galang were not granted the
right to unilaterally rescind the sale under the Deed of Sale with Assumption of Mortgage,
they should have first asked the court for the rescission thereof before they fully paid the
outstanding balance of the mortgage loan with the NHMFC. They claim that such payment is
a unilateral act of rescission which violates existing jurisprudence.
The record shows petitioners paid respondents-spouses the amount of P75,000.00 out of the
P120,000.00 agreed upon. They also made payments to NHMFC amounting to P55,312.47. As
to the petitioners’ alleged payment to CERF Realty of P46,616.70, except for petitioner Leticia
Cannu’s bare allegation, we find the same not to be supported by competent evidence. As a
general rule, one who pleads payment has the burden of proving it. However, since it has
been admitted in respondents-spouses’ Answer that petitioners shall assume the second
mortgage with CERF Realty in the amount of P35,000.00, and that Adelina Timbang,
respondents-spouses’ very own witness, testified that same has been paid, it is but proper to
return this amount to petitioners. The three amounts total P165,312.47 -- the sum to be
returned to petitioners.

In Tan v. Court of Appeals, this court said:
. . . [T]he power to rescind obligations is implied in reciprocal ones in case one of the obligors
should not comply with what is incumbent upon him is clear from a reading of the Civil Code
provisions. However, it is equally settled that, in the absence of a stipulation to the contrary,
this power must be invoked judicially; it cannot be exercised solely on a party’s own judgment
that the other has committed a breach of the obligation. Where there is nothing in the
contract empowering the petitioner to rescind it without resort to the courts, the petitioner’s
action in unilaterally terminating the contract in this case is unjustified.
WHEREFORE, the petition is GRANTED. The Decision dated December 5, 2005 and Resolution
dated March 17, 2006 of the Court of Appeals in CA-G.R. SP No. 78845, affirming the Judgment
dated July 1, 2003 of the Regional Trial Court of Bontoc, Mountain Province, Branch 35, in Civil
Case No. 1091, are REVERSED and SET ASIDE. The Decision dated November 14, 2002 of the
Municipal Circuit Trial Court of Bauko, Mountain Province in Civil Case No. No. 314 dismissing
respondents’ complaint for consolidation of ownership and damages is REINSTATED WITH
THE MODIFICATION that the Pacto de Retro Sale dated February 11, 1999 is declared
rescinded and petitioners are ordered to return the amount of P150,000.00 to respondents.
No costs.

It is evident that the contract under consideration does not contain a provision authorizing its
extrajudicial rescission in case one of the parties fails to comply with what is incumbent upon
him. This being the case, respondents-spouses should have asked for judicial intervention to
obtain a judicial declaration of rescission. Be that as it may, and considering that respondents-
spouses’ Answer (with affirmative defenses) with Counterclaim seeks for the rescission of the
Deed of Sale with Assumption of Mortgage, it behooves the court to settle the matter once
and for all than to have the case re-litigated again on an issue already heard on the merits and
which this court has already taken cognizance of. Having found that petitioners seriously
breached the contract, we, therefore, declare the same is rescinded in favor of respondents-
spouses.

As a consequence of the rescission or, more accurately, resolution of the Deed of Sale with
Assumption of Mortgage, it is the duty of the court to require the parties to surrender
whatever they may have received from the other. The parties should be restored to their
original situation.
 SPOUSES OSCAR and THELMA CACAYORIN, Petitioners, vs. ARMED FORCES AND POLICE
MUTUAL BENEFIT ASSOCIATION, INC., Respondent.
Consignation is necessarily judicial. Article 1258 of the Civil Code specifically provides that
consignation shall be made by depositing the thing or things due at the disposal of judicial
authority. The said provision clearly precludes consignation in venues other than the courts.
Assailed in this Petition for Review on Certiorari1 are the September 29, 2005 Decision of the
Court of Appeals (CA) which granted the Petition for Certiorari in CA-G.R. SP No. 84446 and
its January 12, 2006 Resolution denying petitioners' Motion for Reconsideration.
Factual Antecedents
Petitioner Oscar Cacayorin (Oscar) is a member of respondent Armed Forces and Police
Mutual Benefit Association, Inc. (AFPMBAI), a mutual benefit association duly organized and
existing under Philippine laws and engaged in the business of developing low-cost housing
projects for personnel of the Armed Forces of the Philippines, Philippine National Police,
Bureau of Fire Protection, Bureau of Jail Management and Penology, and Philippine Coast
Guard. He filed an application with AFPMBAI to purchase a piece of property which the latter
owned, specifically Lot 5, Block 8, Phase I, Kalikasan Mutual Homes, San Pedro, Puerto
Princesa City (the property), through a loan facility.
On July 4, 1994, Oscar and his wife and co-petitioner herein, Thelma, on one hand, and the
Rural Bank of San Teodoro (the Rural Bank) on the other, executed a Loan and Mortgage
Agreement5 with the former as borrowers and the Rural Bank as lender, under the auspices
of Pag-IBIG or Home Development Mutual Fund’s Home Financing Program.
The Rural Bank issued an August 22, 1994 letter of guaranty6 informing AFPMBAI that the
proceeds of petitioners’ approved loan in the amount of ₱77,418.00 shall be released to
AFPMBAI after title to the property is transferred in petitioners’ name and after the
registration and annotation of the parties’ mortgage agreement.
On the basis of the Rural Bank’s letter of guaranty, AFPMBAI executed in petitioners’ favor a
Deed of Absolute Sale,7 and a new title – Transfer Certificate of Title No. 370178 (TCT No.
37017) – was issued in their name, with the corresponding annotation of their mortgage
agreement with the Rural Bank, under Entry No. 3364.9
Unfortunately, the Pag-IBIG loan facility did not push through and the Rural Bank closed and
was placed under receivership by the Philippine Deposit Insurance Corporation (PDIC).
Meanwhile, AFPMBAI somehow was able to take possession of petitioners’ loan documents
and TCT No. 37017, while petitioners were unable to pay the loan/consideration for the
property.
AFPMBAI made oral and written demands for petitioners to pay the loan/ consideration for
the property.
In July 2003, petitioners filed a Complaint for consignation of loan payment, recovery of title
and cancellation of mortgage annotation against AFPMBAI, PDIC and the Register of Deeds of
Puerto Princesa City. The case was docketed as Civil Case No. 3812 and raffled to Branch 47
of the Regional Trial Court (RTC) of Puerto Princesa City (Puerto Princesa RTC). Petitioners
alleged in their Complaint that as a result of the Rural Bank’s closure and PDIC’s claim that
their loan papers could not be located, they were left in a quandary as to where they should
tender full payment of the loan and how to secure cancellation of the mortgage annotation
on TCT No. 37017. Petitioners prayed, thus:
a. That after the filing of this complaint an order be made allowing the consignation x x x of
Php77,418.00.
b. For the court to compute and declare the amount of interest to be paid by the plaintiffs
and thereafter to allow the consignation of the interest payments in order to give way for the
full discharge of the loan.
c. To order the AFPMBAI to turn over to the custody of the court the loan records and title
(T.C.T. No. 37017) of the plaintiffs if the same are in their possession.
d. To declare the full payment of the principal loan and interest and ordering the full discharge
from mortgage of the property covered by T.C.T. No. 37017.
e. To order the Register of Deeds of Puerto Princesa City to cancel the annotation of real
estate mortgage under Entry No. 3364 at the back of T.C.T. No. 37017.
f. Thereafter, to turn over to the plaintiffs their title free from the aforesaid mortgage loan.12
AFPMBAI filed a Motion to Dismiss13 claiming that petitioners’ Complaint falls within the
jurisdiction of the Housing and Land Use Regulatory Board (HLURB) and not the Puerto
Princesa RTC, as it was filed by petitioners in their capacity as buyers of a subdivision lot and
it prays for specific performance of contractual and legal obligations decreed under
Presidential Decree No. 95714 (PD 957). It added that since no prior valid tender of payment
was made by petitioners, the consignation case was fatally defective and susceptible to
dismissal.
Ruling of the Regional Trial Court
In an October 16, 2003 Order,15 the trial court denied AFPMBAI’s Motion to Dismiss, declaring
that since title has been transferred in the name of petitioners and the action involves
consignation of loan payments, it possessed jurisdiction to continue with the case. It further
held that the only remaining unsettled transaction is between petitioners and PDIC as the
appointed receiver of the Rural Bank.
AFPMBAI filed a Motion for Reconsideration,16 which the trial court denied in its March 19,
2004 Order.17
Ruling of the Court of Appeals
AFPMBAI thus instituted CA-G.R. SP No. 84446, which is a Petition for Certiorari18 raising the
issue of jurisdiction. On September 29, 2005, the CA rendered the assailed Decision decreeing
as follows:
WHEREFORE, premises considered, this Petition is GRANTED. The Assailed 16 October 2003
and 19 March 2004 Orders of the public respondent judge are hereby ordered VACATED and
SET ASIDE.
SO ORDERED.19
The CA held that Civil Case No. 3812 is a case for specific performance of AFPMBAI’s
contractual and statutory obligations as owner/developer of Kalikasan Mutual Homes, which
makes PD 957 applicable and thus places the case within the jurisdiction of the HLURB. It said
that since one of the remedies prayed for is the delivery to petitioners of TCT No. 37017, the
case is cognizable exclusively by the HLURB.
Petitioners moved for reconsideration which was denied by the CA in its January 12, 2006
Resolution.
Hence, the instant Petition.
Issue
The sole issue that must be resolved in this Petition is: Does the Complaint in Civil Case No.
3812 fall within the exclusive jurisdiction of the HLURB?
Petitioners’ Arguments
Petitioners assert that the elements which make up a valid case for consignation are present
in their Complaint. They add that since a deed of absolute sale has been issued in their favor,
and possession of the property has been surrendered to them, not to mention that title has
been placed in their name, the HLURB lost jurisdiction over their case. And for this same
reason, petitioners argue that their case may not be said to be one for specific performance
of contractual and legal obligations under PD 957 as nothing more was left to be done in order
to perfect or consolidate their title.
Petitioners thus pray that the herein assailed Decision and Resolution of the CA be set aside,
and that the trial court be ordered to continue with the proceedings in Civil Case No. 3812.
Respondent's Arguments
Respondent, on the other hand, insists in its Comment20 that jurisdiction over petitioners’
case lies with the HLURB, as it springs from their contractual relation as seller and buyer,
respectively, of a subdivision lot. The prayer in petitioners’ Complaint involves the surrender
or delivery of the title after full payment of the purchase price, which respondent claims are
reciprocal obligations in a sale transaction covered by PD 957. Respondent adds that in effect,
petitioners are exacting specific performance from it, which places their case within the
jurisdiction of the HLURB.
Our Ruling
The Court grants the Petition.
The Complaint makes out a case for consignation.
The settled principle is that "the allegations of the Complaint determine the nature of the
action and consequently the jurisdiction of the courts. This rule applies whether or not the
plaintiff is entitled to recover upon all or some of the claims asserted therein as this is a matter
that can be resolved only after and as a result of the trial."21
Does the Complaint in Civil Case No. 3812 make out a case for consignation? It alleges that:
6.0 – Not long after however, RBST22 closed shop and defendant Philippine Deposit Insurance
Corporation (PDIC) was appointed as its receiver. The plaintiffs, through a representative,
made a verbal inquiry to the PDIC regarding the payment of their loan but were told that it
has no information or record of the said loan. This made [sic] the plaintiffs in quandary as to
where or whom they will pay their loan, which they intend to pay in full, so as to cancel the
annotation of mortgage in their title.
7.0 – It was discovered that the loan papers of the plaintiffs, including the duplicate original
of their title, were in the possession of defendant AFPMBAI. It was unclear though why the
said documents including the title were in the possession of AFPMBAI. These papers should
have been in RBST’s possession and given to PDIC after its closure in the latter’s capacity as
receiver.
8.0 – Plaintiffs are now intending to pay in full their real estate loan but could not decide
where to pay the same because of RBST [sic] closure and PDIC’s failure to locate the loan
records and title. This court’s intervention is now needed in order to determine to [sic] where
or whom the loan should be paid.
9.0 – Plaintiffs hereby respectfully prays [sic] for this court to allow the deposit of the amount
of Php77,418.00 as full payment of their principal loan, excluding interest, pursuant to the
Loan and Mortgage Agreement on 4 July 1994.23
From the above allegations, it appears that the petitioners’ debt is outstanding; that the Rural
Bank’s receiver, PDIC, informed petitioners that it has no record of their loan even as it took
over the affairs of the Rural Bank, which on record is the petitioners’ creditor as per the July
4, 1994 Loan and Mortgage Agreement; that one way or another, AFPMBAI came into
possession of the loan documents as well as TCT No. 37017; that petitioners are ready to pay
the loan in full; however, under the circumstances, they do not know which of the two – the
Rural Bank or AFPMBAI – should receive full payment of the purchase price, or to whom
tender of payment must validly be made.
Under Article 1256 of the Civil Code,24 the debtor shall be released from responsibility by the
consignation of the thing or sum due, without need of prior tender of payment, when the
creditor is absent or unknown, or when he is incapacitated to receive the payment at the time
it is due, or when two or more persons claim the same right to collect, or when the title to the
obligation has been lost. Applying Article 1256 to the petitioners’ case as shaped by the
allegations in their Complaint, the Court finds that a case for consignation has been made out,
as it now appears that there are two entities which petitioners must deal with in order to fully
secure their title to the property: 1) the Rural Bank (through PDIC), which is the apparent
creditor under the July 4, 1994 Loan and Mortgage Agreement; and 2) AFPMBAI, which is
currently in possession of the loan documents and the certificate of title, and the one making
demands upon petitioners to pay. Clearly, the allegations in the Complaint present a situation
where the creditor is unknown, or that two or more entities appear to possess the same right
to collect from petitioners. Whatever transpired between the Rural Bank or PDIC and
AFPMBAI in respect of petitioners’ loan account, if any, such that AFPMBAI came into
possession of the loan documents and TCT No. 37017, it appears that petitioners were not
informed thereof, nor made privy thereto.
Indeed, the instant case presents a unique situation where the buyer, through no fault of his
own, was able to obtain title to real property in his name even before he could pay the
purchase price in full. There appears to be no vitiated consent, nor is there any other
impediment to the consummation of their agreement, just as it appears that it would be to
the best interests of all parties to the sale that it be once and for all completed and
terminated. For this reason, Civil Case No. 3812 should at this juncture be allowed to proceed.
Moreover, petitioners’ position is buttressed by AFPMBAI’s own admission in its Comment25
that it made oral and written demands upon the former, which naturally aggravated their
confusion as to who was their rightful creditor to whom payment should be made – the Rural
Bank or AFPMBAI. Its subsequent filing of the Motion to Dismiss runs counter to its demands
to pay. If it wanted to be paid with alacrity, then it should not have moved to dismiss Civil
Case No. 3812, which was brought precisely by the petitioners in order to be able to finally
settle their obligation in full.
Finally, the lack of prior tender of payment by the petitioners is not fatal to their consignation
case. They filed the case for the exact reason that they were at a loss as to which between the
two – the Rural Bank or AFPMBAI – was entitled to such a tender of payment. Besides, as
earlier stated, Article 1256 authorizes consignation alone, without need of prior tender of
payment, where the ground for consignation is that the creditor is unknown, or does not
appear at the place of payment; or is incapacitated to receive the payment at the time it is
due; or when, without just cause, he refuses to give a receipt; or when two or more persons
claim the same right to collect; or when the title of the obligation has been lost.
Consignation is necessarily judicial; hence, jurisdiction lies with the RTC, not with the HLURB.
WHEREFORE, premises considered, the Petition is GRANTED. The September 29, 2005
Decision and January 12, 2006 Resolution of the Court of Appeals in CA-G.R. SP No. 84446 are
ANNULLED and SET ASIDE. The October 16, 2003 and March 19, 2004 Orders of the Regional
Trial Court of Puerto Princesa City, Branch 47, are REINSTATED, and the case is REMANDED to
the said court for continuation of the proceedings.
SO ORDERED.

On the question of jurisdiction, petitioners’ case should be tried in the Puerto Princesa RTC,
and not the HLURB. Consignation is necessarily judicial,26 as the Civil Code itself provides that
consignation shall be made by depositing the thing or things due at the disposal of judicial
authority, thus:

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

The consignation having been made, the interested parties shall also be notified thereof.
(Emphasis and underscoring supplied)

The above provision clearly precludes consignation in venues other than the courts.1âwphi1
Elsewhere, what may be made is a valid tender of payment, but not consignation. The two,
however, are to be distinguished.

Tender of payment must be distinguished from consignation. Tender is the antecedent of

consignation, that is, an act preparatory to the consignation, which is the principal, and from
which are derived the immediate consequences which the debtor desires or seeks to obtain.
Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the
priority of the first is the attempt to make a private settlement before proceeding to the
solemnities of consignation. (8 Manresa 325).27

While it may be true that petitioners’ claim relates to the terms and conditions of the sale of
AFPMBAI’s subdivision lot, this is overshadowed by the fact that since the Complaint in Civil
Case No. 3812 pleads a case for consignation, the HLURB is without jurisdiction to try it, as
such case may only be tried by the regular courts.

PHILIPPINE NATIONAL BANK, PETITIONER, VS. LILIBETH S. CHAN, RESPONDENT.
We resolve the Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing
the May 28, 2012 Decision and the February 21, 2013 Resolution of the Court of Appeals (CA)
in CA-G.R. SP No. 98112.
The Antecedent Facts
Respondent Lilibeth S. Chan owns a three-story commercial building located along A. Linao
Street, Paco, Manila: covered by Transfer Certificate of Title (TCT) No. 208782 On May 10,
2000, she leased said commercial building to petitioner Philippine National Bank (PNB) for a
period of five years from December 15, 1999 to December 14, 2004, with a monthly rental of
P76,160.00. When the lease expired, PNB continued to occupy the property on a month-to-
month basis with a monthly rental of P116,788.44. PNB vacated the premises on March 23,
2006.
Meanwhile, on January 22, 2002, respondent obtained a P1,500,000.00 Joan from PNB which
was secured by a Real Estate Mortgage constituted over the leased property.[6] In addition,
respondent executed a Deed of Assignment[7] over the rental payments in favor of PNB.
The amount of the respondent's loan was subsequently increased to P7,500,000.00.
Consequently, PNB and the respondent executed an "Amendment to the Real Estate
Mortgage by Substitution of Collateral" on March 31, 2004, where the mortgage over the
leased property was released and substituted by a mortgage over a parcel of land located in
Paco, Manila, covered by TCT No. 209631.
On August 26, 2005, respondent filed a Complaint for Unlawful Detainer before the
Metropolitan Trial Court (MeTC), Branch 7, Manila against PNB, alleging that the latter failed
to pay its monthly rentals from October 2004 until August 2005.
In its defense, PNB claimed that it applied the rental proceeds from October 2004 to January
15, 2005 as payment for respondent's outstanding Joan which became due and demandable
in October 2004. [10] As for the monthly rentals from January 16, 2005 to February 2006, PNB
explained that it received a demand letter[11] from a certain Lamberto Chua (Chua) who
claimed to be the new owner of the leased property and requested that the rentals be paid
directly to him, reckoned from January 15, 2005 until PNB decides to vacate the premises or
a new lease contract with Chua is executed. PNB thus deposited the rentals in a separate non-
drawing savings account for the benefit of the rightful party.
The MeTC held a hearing on April 25, 2006 where the parties agreed to apply the rental
proceeds from October 2004 to January 15, 2005 to the respondent's outstanding loan".[13]
PNB, too, consigned the amount of P1,348,643.92, representing the rentals due from January
16, 2005 to February 2006, with the court on May 31, 2006.
Ruling of the Metropolitan Trial Court
In its August 9, 2006 Decision,[15] the MeTC ordered PNB to pay respondent accrued rentals
in the amount of P1,348,643.92[16] with interest at 6% per annum from January 16, 2005 up
to March 23, 2006, when PNB finally vacated the leased property.[17] The MeTC likewise
directed PNB to pay attorney's fees in the amount of P20,000.00 and the cost of suit.
PNB appealed the August 9, 2006 MeTC Decision to the Regional Trial Court (RTC), Branch 14,
Manila, insisting that respondent is not entitled to the disputed rental proceeds amounting
to P1,348,643.92. According to PNB, the money should be applied to offset respondent's
outstanding loan pursuant to the Deed of Assignment the latter executed in its favor. PNB
also argued that it is not liable to pay any interest on the lease rentals since it did not incur
any delay in the payment of rent.
While the appeal was pending before the RTC, PNB initiated foreclosure proceedings on the
mortgaged property covered by TCT No. 209631. The property was sold on October 31, 2006
for P15,311,000.00 to PNB as the highest bidder. Notably, the Certificate of Sale provides that
respondent's indebtedness amounted to P11,211,283.53 as of May 15, 2005, "exclusive of
penalties, expenses, charges and the ten (10) percent attorney's fees, plus sheriff fees and
other lawful expenses of foreclosure and sale."
In light of this development, respondent tiled a Memorandum before the RTC, claiming that
PNB had no right to retain the P1,348,643.92 consigned with the court. She insisted that her
loan was fully paid when PNB bought the mortgaged property at P15,311,000.00
PNB filed a Rejoinder and argued that respondent's outstanding obligation as of October 31,
2006 was P18,016,300.71 while the bid price was only P15,311,000.00. Thus, PNB claimed
that it is entitled to a deficiency claim amounting to 2,705,300.71 to which the rental proceeds
of P1,348,643.92 can be applied.
Ruling of the Regional Trial Court
The RTC affirmed the MeTC ruling in its December 7, 2006 Decision.[25] It found that
respondent's obligation to PNB "has already been paid, notwithstanding the belated claim of
[the latter] that there remains a deficiency."[26] The RTC noted that the P11,211,283.53
amount of indebtedness stated in the Notice of Extra-Judicial Sale[27] dated August 9, 2006
as of May 15, 2006 plus penalties, expenses, charges, attorney's fees and expenses could have
been easily covered by the P15,311,000.00 bid price.[28]
In addition, the RTC held that PNB incurred delay "when despite demand, it refused to pay
and vacate the premises.[29] " As such, the RTC ruled that the respondent is entitled to legal
interest at 6% per annum and attorney's fees for having been compelled to litigate to protect
her interests.[30]
The respondent then moved for tie issuance of a Writ of Execution which was granted by the
RTC in its December 18, 2006 Order?[31] According to the Sheriff's Report of Execution[32]
dated January 2, 2007, the amount of P1,348,643.92, representing the monthly rentals from
January 16, 2005 up to March 23, 2006 was turned over to the respondent on December 20,
2006.[33]
PNB filed a motion for reconsideration of the December 7, 2006 Decision and for the quashal
of the Writ of Execution, but the RTC denied the motion in its Order dated February 6,
2007.[34] Following the denial, PNB filed a Petition for Review under Rule 42 of the Rules of
Court before the CA, challenging the RTC's December 7, 2006 Decision and February 6, 2007
Order.
Ruling of the CourT of Appeals
Title CA pointed out that PNB's entitlement to the rental proceeds in the amount of
P1,348,643.92 is dependent on whether there is a deficiency in payment after the foreclosure
sale.[35] It, however, found no sufficient evidence on record that the amount of respondent's
liability as of October 31, 2006 is indeed P18,016,300.71, PNB claims.[36] Consequently, the
CA remanded the case the MeTC for the proper reception of evidence and determination, if
any, of the deficiency on the foreclosure sale with the following guidelines:[37]
(1) From October 2004 to January 15, 2005: Principal+ Interest+ Penalties- Monthly Rentals
(from October 2004 to January 15, 2005 by virtue of the Deed of Assignment) New Principal
(2) From January 16, 2005 to October 31, 2006: New Principal + Interest + Penalties - Interest
Earned by PNB from the Savings Account Outstanding Obligation as of October 31, 2006
(3) Outstanding Obligation as of October 31, 2006 - P15,311,000.00 = Deficiency[38]
As regards the payment of legal interest, the CA noted that PNB merely opened a non-drawing
savings acc01mt wherein it deposited the monthly rentals from January 16, 2005 to February
2006. Such deposit of the rentals in a savings account, however, is not the consignation
contemplated by law. Thus, the CA found PNB liable to pay the 6% legal interest rate
prescribed under Article 2209 of the Civil Code tor having defaulted in the payment of its
monthly rentals to the respondent.[39]
Finally, the CA deleted the award of attorney's fees, pursuant to the general rule that
attorney's fees cannot be recovered as part of damages because of the public policy that no
premium should be placed on the right to litigate.[40]
PNB filed a partial Motion for Reconsideration, but the CA denied the motion in its Resolution
dated February 21, 2013. As a consequence, PNB filed the present Petition for Review on
Certiorari before the Court, assailing the CA's May 28,2012 Decision and February 21, 2013
Resolution.
Issues
In the present Petition, PNB raises the following issues for the Court's resolution: first,
whether PNB properly consigned the disputed rental payments in the amount of
P1,348,643.92 with the Office of the Clerk of Court of the MeTC of Manila;[41] second,
whether PNB incurred delay in the payment of rentals to the respondent, making it liable to
pay legal interest to the latter;[42] and third, whether PNB is entitled to t11e disputed rental
proceeds in order to cover the alleged deficiency in payment of the respondent's liability after
the foreclosure proceedings.
The Court's Ruling
We DENY the Petition for Review on Certiorari as we find no reversible error committed by
the CA in issuing its assailed Decision and Resolution.
"Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses accept payment. [I]t generally requires a prior
tender of payment."[44]
Under Article 1256 of the Civil Code, consignation alone is sufficient even without a prior
tender of payment a) when the creditor is absent or unknown or does not appear at the place
of payment; b) when be is incapacitated to receive the payment at the time it is due; c) when,
without just cause, he refuses to give a receipt; d) when two or more persons claim the same
right to collect; and e) when the title of the obligation has been lost.
For consignation to be valid, the debtor must comply with the following requirements under
1he law:
1)
there was a debt due;
2)
valid prior tender of payment, unless the consignation was made because of some legal cause
provided in Article 1256;
3)
previous notice of the consignation has been given to the persons interested in the
performance of the obligation;
4)
the amount or thing due was placed at the disposal of the court; and,
5)
at1er the consignation had been made, the persons interested were notified thereof:[45]
"Failure in any of these requirements Is enough ground to render a consignation
ineffective."[46]
In the present case, the records show that: first, PNB had the obligation to pay respondent a
monthly rental of P116,788.44, amounting to P1,348,643.92, from January 16, 2005 to March
23, 2006;[47] second, PNB had the option to pay the monthly rentals to respondent or to
apply the same as payment for respondent's loan with the bank, but PNB did neither;[48]
third, PNB instead opened a non-drawing savings account at its Paco Branch under Account
No. 202- 565327-3, where it deposited the subject monthly rentals, due to the claim of Chua
of the same right to collect the rent;[49] and fourth, PNB consigned the amount of
P1,348,643.92 with the Office of the Clerk of Court of the MeTC of Manila on May 31,
2006.[50]
Note that PNB's deposit of the subject monthly rentals in a non-drawing savings account is
not the consignation contemplated by law, precisely because it does not place the same at
the disposal of the court.[51] Consignation is necessarily judicial; it is not allowed in venues
other than the courts.[52] Consequently, PNB's obligation to pay rent for the period of January
16, 2005 up to March 23, 2006 remained subsisting, as the deposit of the rentals cannot be
considered to have the effect of payment.
It is important to point out that PNB's obligation to pay the subject monthly rentals had
already fallen due and demandable before PNB consigned the rental proceeds with the MeTC
on May 31, 2006. Although it is true that consignment has a retroactive effect, such payment
is deemed to have been made only at the time of the deposit of the thing in court or when it
was placed at the disposal of the judicial authority.[53] Based on these premises, PNB's
payment of the monthly rentals can only be considered to have been made not earlier than
May 31, 2006.
Given its belated consignment of the rental proceeds in court, PNB clearly defaulted in the
payment of monthly rentals to the respondent for the period January 16, 2005 up to March
23, 2006, when it finally vacated the leased property. As such, it is liable to pay interest in
accordance with Article 2209 of the Civil Code.
Article 2209 provides that if the debtor incurs delay in the performance of an obligation
consisting of the payment of a sum of money, he shall be liable to pay the interest agreed
upon and in the absence of stipulation, the legal interest at 6% per annum. There being no
stipulated interest in this case, PNB is liable to pay legal interest at 6% per annum, from
January 16, 2005 up to May 30, 2006.
As for the issue on PNB's entitlement to the subject rental proceeds to cover the deficiency in
payment after the foreclosure sale of the mortgaged property, we agree with the CA's finding
that there is no sufficient evidence on record to show that such a deficiency exists.[54]
Unfortunately, the Statement of Account [55] submitted by PNB is not enough to prove this
claim, considering that it is unsupported by any corroborating evidence. Besides, the copy of
the document in our records, both in the CA rollo and the Supreme Court rollo,[56] consists
of illegible pages.
We likewise agree with the CA's conclusion that the RTC seriously erred when it categorically
stated that the loan was fully paid by virtue of the foreclosure sale without determining the
extent of the respondent's liability as of October 31, 2006, the date of the foreclosure
sale.Specifically, the RTC held that:
x x x In this regard, the amount of the indebtedness, was clearly stated in the Notice of Extra-
Judicial Sale dated August 9, 2006 as P11,211,283.53, as of May 15, [2006], exclusive of
penalties, expenses, charges, attorney's fees and expenses. And since the property was sold
to the bank as the winning bidder at P15,311,000.00, obviously, the difference could have
easily covered the said penalties, etc.
This is clearly an error. It is settled that a mortgagee has the right to recover the deficiency
resulting from the difference between the amount obtained in the sale at public auction and
the outstanding obligation of the mortgagor at the time of the foreclosure proceedings.[59]
The RTC failed to consider that the amount of indebtedness indicated in the Notice ofEx1ra-
Judicial Sale[60] dated August 9, 2006 was computed by PNB as of May 15, 2006. Surely, the
respondent's liability would have significantly increased by the time the foreclosure sale was
held on October 31, 2006.
It also appears that the RTC merely assumed that the bid price would cover the deficiency in
payment, without actually making a determination of whether such a deficiency exists and
how much it really is.
In these lights, we uphold the CA's ruling remanding the case to the MeTC for the proper
reception of evidence and computation of respondent's total indebtedness a of October 31,
2006, in order to determine whether there exists a deficiency in payment as PNB insist.
WHEREFORE, we DENY the Petition for Review on Certiorari and AFFIRM the Decision dated
May 28, 2012 and the Resolution dated February 21, 2013 of the Court of Appeals in CA-G.R.
SP No. 98112.
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, Petitioner, vs. THE HONORABLE
COURT OF APPEALS and MCS CONSTRUCTION and DEVELOPMENT CORPORATION,
Respondents.
Before Us is a Petition for Review on Certiorari under Rule 45 of the Rules of Civil Procedure,
assailing the Decision1 of the Court of Appeals in CA-G.R. SP No. 76198, dated 19 July 2004,
which dismissed Philippine National Construction Corporation’s (PNCC’s) Petition for Review
of the Decision2 of the Construction Industry Arbitration Commission (CIAC) Arbitral Tribunal
awarding herein respondent MCS Construction and Development Corporation (MCS) the
amount of ₱6,352,791.33, with interest at the rate of 6% per annum from 6 June 1999 up to
the date of award and an interest rate of 12% per annum as of the date the decision becomes
final and executory until fully paid.
A contract for the construction of the Philippine Merchant Marine Academy’s (PMMA’s)
Replication Project located in San Marcelino, Zambales, was entered into between the PNCC
and PMMA. Included in the scope of works for the Replication Project was the construction
of a gymnasium building. The construction of said gymnasium was subcontracted by PNCC to
MCS under a Subcontract Agreement dated 28 September 1998 for a consideration in the
amount of ₱19,483,572.65.
In a Certificate of Acceptance dated 6 April 2000, PNCC certified that MCS had satisfactorily
completed the construction of the gymnasium building based on the plans, drawings, and
specifications thereof on March 1999. However, despite several demands made by MCS,
PNCC failed to pay the balance of the contract price left after deducting the partial payments
made by the latter.
Hence, on 6 September 2002, MCS filed with the CIAC Arbitral Tribunal a Request for
Adjudication praying for the award of various sums of money, including interest and damages,
against PNCC in the total amount of ₱24,988,597.44. MCS maintained that notwithstanding
the fact that the construction of the gymnasium had been satisfactorily completed as early as
1999, PNCC still failed to fully satisfy its obligation to pay the price of the construction project
under the Subcontract Agreement despite several written demands.
For its defense, PNCC alleged that the request for arbitration was premature, as MCS had no
cause of action against PNCC since the latter is still in the process of paying its obligation to
MCS. Furthermore, PNCC claimed that although its payments were made in installments, said
payments were made regularly, contrary to the claim of MCS that said installment payments
were irregular and took a very long period of time.1awphi1.net
In a preliminary conference held on 4 December 2002, the parties defined the issues to be
resolved in the proceedings before the CIAC Arbitral Tribunal as follows:
1. Was the filing of this case before CIAC premature for lack of cause of action?
1.1 In the event this case is proven to have been prematurely filed, is Respondent entitled to
its claim to be compensated for the alleged bad reputation suffered? If so, how much?
1.2 If the filing of the case is not premature, is Claimant entitled to its claim for the balance of
the contract price, damages and interest? If so, how much?
2. Who between the parties is entitled to attorney’s fees?
3. Who between the parties shall shoulder the cost of arbitration?3
On 10 March 2003, the CIAC Arbitral Tribunal rendered a Decision in favor of MCS, the
decretal portion of which reads:
PNCC contends that Article IV of the Subcontract Agreement (Exhibit A) shows that MCS’
cause of action is premature because the corresponding payments from PMMA had not been
received. The pertinent portion of Article IV reads as follows:
Manner of Payment
4.1. The price referred to in Article 111 above shall be paid by PNCC to Subcontractor in the
following manner and subject to receipt by PNCC of corresponding payment/s from PMMA:
xxxx
PNCC submitted in evidence a summary of the accounts payable to MCS and the payments
made thereunder as of October 10, 2002 (Exhibit 14). Unfortunately for PNCC, the same
document also listed down the payments it had received from PMMA on the "gymnasium
building" project – the very same building for which MCS has been engaged to construct on
behalf of PNCC.
Exhibit 14 clearly showed that PNCC had received a total of P31,249,223.30 from PMMA on
the "gymnasium building", with a further balance of P6,972,043.44 still due from PMMA.
Parenthetically, PNCC did not submit in evidence in these proceedings any copy of its contract
or contracts with PMMA. Other than Exhibit 14, PNCC did not submit any evidence to show
that the payments made to it by PMMA had reference to other accounts between PMMA and
PNCC, or that said payments were inadequate to warrant PNCC’s payment in full of the
amounts due MCS.
On the contrary, having already received a total of P31,249,233.30 from PMMA on the
"gymnasium building" project, PNCC saw fit to consider the same sufficient to justify payment
to MCS of only P9,965,465.98 (as adjusted by this arbitral tribunal). Since there still appeared
a receivable of P6,972,043.44 from PMMA, PNCC chose to relegate such receivable to the
payment of the balance due MCS, in the amount of P6,352,791.33. In other words, PNCC
opted to reap and enjoy its margins from the PMMA contract before satisfying its obligations
to its sub-contractor MCS. This, the arbitral tribunal finds to have been done in bad faith on
the part of PNCC.
Noteworthy also is the fact that PNCC did not raise this defense in its answer nor among the
special and affirmative defenses included in said answer. PNCC merely invoked its "financial
difficulties" in trying to justify its belated payments due MCS.
The arbitral tribunal therefore holds that MCS’ cause was not prematurely filed, and that its
claim for payment of the balance of the contract consideration made in these proceedings
was proper.
Aside from the said unpaid balance, to what other amount or amounts is MCS entitled arising
from PNCC’s breach in bad faith?
xxxx
xxx MCS is entitled to interest, attorney’s fees and reimbursement of the costs of arbitration
– which (aside from its claims on the deterioration of the value of the Phil. Peso) were all that
MCS prayed for.
xxxx
It is the ruling of this arbitral tribunal that, there having been unwarranted and baseless delay
in the payment required of the respondent PNCC, the claimant is entitled to interest at the
legal rate of 6% p.a. on the amount of P6,352,791.33 adjudicated in its favor, computed from
the date of first extrajudicial demand, which was on June 6, 1999 (Exhibit C). However, when
the award herein becomes executory, the amount thereof will then partake of the nature of
a forebearance of credit and will thereupon be entitled therefrom to the interest rate of 12%
p.a. until fully paid (Eastern Shipping Lines, Inc. vs. Court of Appeals, 234 SCRA 78, 95-97
[1994]); reiterated in Bangko Sentral ng Pilipinas vs. Santamaria, G.R. No. 139885, Jan. 13,
2003, page 13).
In respect of the costs of arbitration, Sec. 5, Article XV of the Rules of Procedure Governing
Construction Arbitration states:
Decision as to Cost of Arbitration. – In the case of non-monetary claims or where the parties
agreed that the sharing of fees shall be determined by the Arbitrator(s), the award shall, in
addition to dealing with the merits of the case, fix the cost of arbitration, and/or decide which
of the parties shall bear the cost(s) or in what proportion the cost(s) shall be borne by each.
Rule 142 of the Revised Rules of Court of the Philippines governing the imposition of costs
likewise provides the following:
Section 1. Costs Ordinarily follow the result of suit. Unless otherwise provided in these rules,
costs shall be allowed to the prevailing party as a matter of course, but the court shall have
power for special reasons, to adjudge that either party shall pay the cost of an action, or that
the same shall be divided, as may be equitable.
Since the institution of this arbitration case was necessitated by respondent PNCC’s refusal to
pay claimant MCS the amounts due the latter, this tribunal holds that respondent PNCC
should exclusively bear the costs of arbitration. PNCC had refused to satisfy MCS’ valid and
demandable claims; consequently, MCS had been compelled to institute the present
proceedings to protect its interests. Furthermore, PNCC was in gross and evident bad faith in
delaying the payment of MCS’ claim. It is, therefore, only just and equitable that respondent
PNCC be ordered to pay the costs of arbitration and to refund to MCS all the amounts the
latter had advanced in instituting and pursuing these arbitration proceedings.
The same aforementioned circumstances warranting the award of arbitration costs in favor
of the claimant likewise constitute justification for an award of attorney’s fees by way of
damages, also in favor of claimant (Art. 2208 [5] and [11]. Considering the years of travail
which claimant went through in waiting and following-up the payment of the contract
consideration to which claimant was lawfully entitled, eventually culminating in these
arbitration proceedings, the arbitral tribunal finds that an amount equivalent to ten per cent
(10%) of the principal claim plus the interests accruing thereon up to the date of payment is
just; equitable and reasonable in the premises.
WHREFORE, arbitral award is hereby rendered in favor of claimant MCS Construction and
Development Corp. and against respondent Philippine National Construction Corporation,
ordering the latter to pay the former the following amounts:
(a) The principal claim of P6,352,791.33, with interest thereon at 6% per annum computed
from June 6, 1999 provided however that said rate shall be increased to 12% per annum
effective as of the date that the decision herein becomes final and executory, until the
aforesaid principal amount is paid in full;
(b) Attorney’s fees equivalent to ten per cent (10%) of such principal claim and the interests
accruing thereon until all of such principal claim and interests are paid in full; and,
(c) To reimburse the claimant the costs of arbitration paid and/or advanced thereby.
Respondent’s counterclaim is dismissed for lack of basis.4
Asserting that the CIAC Arbitral Tribunal committed error in ruling that the claim of MCS is
not premature, PNCC filed a Petition for Review before the Court of Appeals, which was
dismissed by the appellate court in a Decision dated 19 July 2004. According to the Court of
Appeals:
Petitioner PNCC avers that the claims of respondent MCS are not yet ripe for court and/or
legal action because petitioner PNCC has yet to violate the rights of respondent MCS, since,
before the filing of the complaint, petitioner was already in the process of paying its
obligations to respondent MCS. In fact, petitioner PNCC argues that its last installment
payment was made in July 2002 while respondent MCS’ last written demand was in April 2002.
We disagree.
As alleged in the complaint of respondent MCS, in pursuance to the agreement, the latter
made billings for various amounts on different dates. However, aside from making its
payments irregularly, petitioner also took a long time to make the payments, so much so, that
even after the lapse of more [than] three years from the time the gymnasium project was
satisfactorily completed in 1999, petitioner has not been able to fully settle its obligation
without lawful ground.
It has been held that a cause of action is defined as an act or omission of one party in violation
of the legal rights of the other which causes the latter injury (Rebollido v. Court of Appeals,
170 SCRA 800 [1989]).
In determining whether or not a cause of action exists the following elements must be
present: (1) a right in favor of the plaintiff by whatever means and under whatever law it
arises or is created; (2) an obligation on the part of the defendant to respect or not violate
such right; and (3) an act or omission on the part of such defendant in violation of the right of
the plaintiff or constituting a breach of the obligation of the defendant to the plaintiff for
which the latter may maintain an action for recovery of damages (Relucio v. Lopez, 373 SCRA
578 [2002]).
In the instant case, respondent MCS has a right to be paid for its services in constructing the
gymnasium and petitioner PNCC recognized this right under the Subcontractors Agreement.
Notwithstanding several written demands made by the respondent MCS and considering the
lapse of a considerable period of time since the project was completed, petitioner PNCC has
not complied with its duty to pay respondent for its services. Petitioner maintains that it was
suffering from "financial difficulties" but no evidence was shown to substantiate the same.
Well-settled is that rule that the cause of action does not accrue until the party obligated
refuses, expressly or impliedly, to comply with his duty (Summit Guaranty and Insurance
Company, Inc. v. De Guzman, 151 SCRA 389 [1987]).
Note should be taken on the arbitral tribunal’s finding of the existence of a cause of action by
respondent MCS. Thus:
"Unfortunately for PNCC, the same document also listed down the payments it had received
from PMMA on the "gymnasium building" project – the very same building for which MCS has
been engaged to construct on behalf of PNCC.
xxx
Exhibit 14 clearly showed that PNCC had received a total of P31,249,223.30 from PMMA on
the "gymnasium building", with a further balance of P6,972,043.44 still due from PMMA. xxx
Other than Exhibit 14, PNCC did not submit any evidence to show that the payments made to
it by PMMA had reference to other accounts between PMMA and PNCC, or that said
payments were inadequate to warrant PNCC’s payment in full of the amounts due MCS."
(Rollo, p. 124)
Also, it has been held that where a contract is to be performed periodically, as by installments,
each failure to pay an installment constitutes a cause of action and can be subject of a
separate suit as the installment falls due, or can be included in the pending or supplemental
pleading (Larena v. Villanueva, 53 Phil. 923 [1928]).
xxxx
The arbitral tribunal ruled that petitioner PNCC was guilty of gross and evident bad faith in
delaying payment of respondent’s claims, and as such, it was only just and equitable that
petitioner PNCC should bear the costs of arbitration.
In the instant case, the arbitral tribunal found that because petitioner PNCC had unjustifiably
refused to satisfy MCS’ valid and demandable claims, notwithstanding the presence of
sufficient funds at its disposal, respondent MCS was compelled to institute the present action
in order to protect its interests. xxx
xxxx
Contrary to petitioner’s argument that the body of the decision of the arbitral tribunal failed
to state legal and factual bases for the award of attorney’s fees, the decision stated the
following basis to justify the award of attorney’s fees:
"The same aforementioned circumstances warranting the award of arbitration costs in favor
of the claimant likewise constitute justification for an award of attorney’s fees by way of
damages, also in favor of claimant (Art. 2208 [5] and [11], Civil Code)." (Rollo, p. 126)
In administrative or quasi-judicial bodies like the CIAC, a fact may be established if supported
by substantial evidence or that amount of relevant evidence which a reasonable mind might
accept as adequate to justify a conclusion (MegaWorld Globus Asia, Inc. v. DSM Construction
and Development Corporation, et al., G.R. No. 153310, March 2, 2004).
xxxx
We are convinced that the CIAC Arbitral Tribunal considered the evidence at hand and the
records clearly show that its decision is amply supported by substantial evidence; thus, we
find no reason to disturb the same.
WHEREFORE, premises considered, the petition is DISMISSED. The Decision dated March 10,
2003 of the CIAC Arbitral Tribunal is AFFIRMED. The motion for reconsideration assailing the
October 1, 2003 Resolution of this Court is likewise DENIED.5
Aggrieved by the aforequoted Decision, PNCC filed the instant petition raising as issues the
alleged prematurity of respondent’s action and the impropriety of the award of attorney’s
fees and arbitration fees.
While petitioner does not dispute the fact that MCS has remaining receivables from PNCC
under the Subcontract Agreement, PNCC insists that such obligation of petitioner to pay
respondent the remaining balance of the contract price is not yet ripe for court or legal action
as no cause of action exists, since PNCC has not yet violated the rights of respondent. PNCC
maintains that before the filing of the complaint for arbitration, petitioner was in the process
of paying its obligations with claimant, thus the complaint for arbitration filed by MCS was
premature.
In its Memorandum, petitioner rationalizes its position that the Request for Adjudication
made by MCS before the CIAC Arbitral Tribunal is premature in view of the fact that PNCC’s
last installment payment to MCS was in July 2002, after the latter’s last demand for payment
in April 2002. Petitioner further highlights its efforts to fulfill its obligations to MCS by stressing
the fact that it had paid MCS a substantial amount under the Subcontract Agreement,
inasmuch as out of the contract price of ₱19,483,572.65, only the balance of ₱6,352,791.33
remains unpaid. PNCC argues that it has never refused, expressly nor impliedly, to comply
with its responsibility under the Subcontract Agreement, thus, MCS lacks a cause of action as
against petitioner.
Petitioner’s contention is without merit.
It is unmistakable that PNCC’s obligation to MCS has not been discharged by the amount it
has already paid, no matter how substantial it may be. Nevertheless, PNCC seems to insist
that said obligation may not be a subject of a court action as MCS is yet to attain a cause of
action since PNCC still continues to pay part of its obligation under the Subcontract
Agreement. We cannot agree in petitioner’s position as this will imply that PNCC’s obligation
to pay may not at all become a proper subject of any court action as long as PNCC continues
to tender irregular installment payments, regardless of the amount, even to the prejudice of
MCS.
A careful perusal of the Subcontract Agreement entered into by the parties will reveal the
clear manner of payment by which PNCC’s obligation to pay MCS for the construction of the
PMMA gymnasium is to be made. According to Article IV of said Subcontract Agreement:
Manner of Payment
4.2. The price referred to in Article 111 above shall be paid by PNCC to Subcontractor in the
following manner and subject to receipt by PNCC of corresponding payment/s from PMMA:
xxxx
b. thru semi-monthly progress billings computed based on accomplishment as
approved/accepted by PNCC/Owner and the agreed unit prices;6
From the facts of the case, it is undisputed that the gymnasium building project subject of the
Subcontract Agreement had been satisfactorily completed by MCS as early as March 1999 and
correspondingly acknowledged by PNCC in a Certificate of Acceptance dated 6 April 2000. It
is also admitted by both parties that in accordance with the provisions of the Subcontract
Agreement, MCS had sent PNCC, on several dates, billings for various amounts which
petitioner paid on installment basis. However, despite the lapse of more than three years
from the completion of the construction project, PNCC still failed to settle its obligation in full,
leaving an unpaid balance of ₱6,352,791.33 as of the time of filing of the instant case.
PNCC justifies its failure to completely settle its obligation to MCS by citing its "financial
difficulties." However, apart from failing to present any competent evidence to substantiate
its claim of financial difficulties, it has been found by the CIAC Arbitral Tribunal that PNCC has
already received a total of ₱31,249,233.30 from PMMA on the "gymnasium building" project.
Nonetheless, PNCC only saw it fit to pay MCS ₱9,965,465.98. Evidently, PNCC lacks any
reasonable defense for its continued neglect of its obligations to MCS.
This conduct demonstrated by PNCC in refusing to expeditiously settle its obligation to MCS,
despite the latter’s satisfactory completion of its duties under the Subcontract Agreement, is
clearly violative of the Subcontract Agreement. Under the pertinent portion of the said
contract cited above, PNCC shall pay MCS thru semi-monthly progress billings upon PNCC’s
receipt of corresponding payments from PMMA. As found by the CIAC Arbitral Tribunal, based
on the evidence presented by PNCC itself, petitioner has already received from PMMA a total
of ₱31,249,233.30 for the construction of the gymnasium building. This amount is evidently
sufficient to pay the whole subcontract price in the amount of only ₱19,483,572.65, and still
leave PNCC the amount of ₱11,765,660.65 as margin/profit from the contract.
Petitioner’s contention that its failure to fully pay MCS is because it still has a receivable of
₱6,972,043.44 from PMMA is untenable. Notwithstanding this fact that PNCC still has a
receivable in an amount sufficient to fulfill its remaining obligation to MCS, it is not adequate
a reason to justify the irregular installment payments PNCC has been making to MCS in light
of the CIAC Arbitral Tribunal’s finding that PNCC had already received more than a substantial
amount from PMMA to satisfy the whole of its obligation to MCS. As deduced by the CIAC
Arbitral Tribunal, this act of PNCC in opting to reap and enjoy its margins from the PMMA
contract before satisfying its obligations to its Subcontractor MCS is an illustration of bad faith
on the part of PNCC.
Having said all these, it is now apparent that MCS has a cause of action as against PNCC for
the full satisfaction of the remaining balance of the contract price. As stated in the case of
Navoa v. Court of Appeals:7
A cause of action is the fact or combination of facts which affords a party a right to judicial
interference in his behalf. The requisites for a cause of action are: (a) a right in favor of the
plaintiff by whatever means and under whatever law it arises or is created, (b) an obligation
on the part of the defendant to respect and not to violate such right; and, (c) an act or
omission on the part of the defendant constituting a violation of the plaintiff’s right or breach
of the obligation of the defendant to the plaintiff. Briefly stated, it is the reason why the
litigation has come about, it is the act or omission of defendant resulting in the violation of
someone’s rights.8
In continuing to delay the full satisfaction of its obligation under the Subcontract Agreement
despite satisfactory completion by MCS of the gymnasium project almost three years earlier
and adequate payment by PMMA, PNCC has clearly breached the provisions of the
Subcontract Agreement, entitling MCS resort to the courts for protection of its interest.
On the issue of the propriety of the award of attorney’s fees and arbitration costs, petitioner
maintains that the Decision of the CIAC Arbitral Tribunal failed to state the legal and factual
basis for the same. We do not agree. As correctly stated by the Court of Appeals, the CIAC
Arbitral Tribunal Decision amply explained the bases for the awards of attorney’s fees and
arbitration cost. As pointed out by the appellate court, on the basis of its findings that PNCC
exercised gross and evident bad faith in delaying its payment of MCS’ claims and the law
applicable in such cases, the CIAC Arbitral Tribunal adjudged PNCC liable for attorney’s fees
and cost of arbitration. Furthermore, we agree with the Court of Appeals when it said that
that there is no justifiable reason to disturb the findings of the CIAC Arbitral Tribunal as said
quasi-judicial body has considered the evidence at hand and the records clearly show that its
decision is amply supported by substantial evidence.
Petitioner’s argument that the CIAC Arbitral Tribunal should not have passed upon the issue
of attorney’s fees as said issue is non-arbitrable under Section 2 of Article IV of the Rules
Governing Construction Arbitration is rejected. Under the Section 2, Article IV of the Rules of
Procedure Governing Construction Arbitration:
Section 2. Non-Arbitrable Issues – Pursuant to Section 4 of Executive Order No. 1008, claims
for moral damages, exemplary damages, opportunity/business losses in addition to liquidated
damages, and attorney’s fees are not arbitrable except when the parties acquiesce or
mutually agree to submit the same for arbitration and to abide by the decision of the
arbitrator thereon. [Emphasis ours]
While it is true that under the aforementioned provision of law, attorney’s fees is not an
arbitrable issue, yet, the same also provides that it may be the subject of arbitration if the
parties agree to submit the same for arbitration. In the case it bar, it must be underscored
that under the Terms of Reference agreed to by the parties during the arbitration
proceedings, PNCC agreed that one of the issues to be determined in the proceedings is who
between the parties is entitled to attorney’s fees. Clearly, petitioner has acquiesced to the
submission of the issue of attorney’s fees to arbitration. What's more, in petitioner’s very own
Answer submitted before the CIAC Arbitral Tribunal, petitioner asked for attorney’s fees as
part of its own compulsory counterclaim. This act of petitioner clearly negates its further LEONARDO MAGAT, petitioner, vs. COURT OF APPEALS and PEOPLE OF THE PHILIPPINES,
assertion that it never agreed to submit the issue of attorney’s fees for arbitration. respondents.

WHEREFORE, premises considered, the instant petition is hereby DENIED. The Decision of the Aniano A. Albon for petitioner.
Court of Appeals in CA G.R. SP No. 76198 dated 19 July 2004 is hereby AFFIRMED. Costs
against petitioner. Solicitor General Estelito P. Mendoza, Asst. Solicitor General Eulogio Raquel-Santos and
Solicitor Wilfredo D. Reyes for respondents.

&

MELENCIO-HERRERA, J.:

This is a petition for review of the Decision of the Court of Appeals 1 in CA- G.R. No. 23228-
CR, affirming with modification the judgment of the Court of First Instance of Zambales,
Branch 1, Olongapo City, in Criminal Case No. 4163 for Robbery convicting petitioner-accused,
Leonardo Magat, of said crime.

The evidence for the prosecution has been summed up by the Trial Court and adopted by the
Court of Appeals, as follows:

James Philip Lanigan, American businessman by profession came to Olongapo City as a tourist
and was billeted at the Admiral Royal Hotel in Olongapo City. At about 2:00 to 3:00 o'clock in
the afternoon of July 19, 1979, Lanigan decided to take a walk from the hotel to the US Naval
Base. Outside the main gate, he exchanged sixty dollars ($60.00) into pesos and when he got
the money equivalent of his dollars, he started to walk back towards the Admiral Royal Hotel.
He had only walked four (4) blocks along Magsaysay Drive when a jeep proceeded to follow
alongside Lanigan and the driver insisted that the said American ride with him as the driver
has a sister who has a bar down the street. The driver requested favor from the American to
give away some cards which Lanigan can, perhaps, distribute to some of his friends. Lanigan
rejected the offer of the stranger to ride in the jeep, so he went to a bar to avoid him and had
a bottle of beer to drink. After approximately fifteen (15) minutes, he went out of the bar and
again he noticed that the same driver with his jeep was waiting for him outside. The driver
was insistent that he take his ride in his jeep so he will bring him to his destination. So Lanigan
agreed and boarded the jeepney. The driver drove away towards Admiral Hotel but made a
right turn at Rizal Avenue into a side street. Lanigan complained to the driver why he is going
into that street when that is not the direction of the Admiral Royal Hotel and the driver
answered that he will get the card first at his house for distribution. The driver later drove
into a parking area in an address which was pointed as No. 8 Fontaine St. and he got off the
jeep, followed by Lanigan who was told to come in Lanigan was introduced to the owner of
the house who was later Identified as Leonardo Magat y Pineda alias 'Dolphy' who told him
to sit down. While they were in the living room Magat talked to him saying that he should be
careful in the Philippines because there are many pick- pockets and thereafter Magat then
started to frisk him saying that he is going to make a demonstration of how a pick-pocket
operates. Lanigan told him to get his hands out of his pocket and he pushed Magat's hands
out of and started heading towards the door for his exit. The driver who was later on Identified
as Francisco Velasco Brosas, immediately ran towards the door and locked it. And thereafter,
a guy made a strangled hold on the American and the accused Magat together with his cohort
emptied the pockets of Lanigan, consisting of eight hundred sixty American dollars ($860.00)
and the seventy dollars which was converted into pesos, his passport, wallet, traveller's
checks, airline tickets without his cash money and he was warned not to say anything and not
to report the matter to the police authorities as he will be killed. The accused even made
gestures making the American believe that he has a knife hidden in one of his pockets.
Thereafter, Lanigan was taken into another room, made to sit down before a table and told
him that they will teach him to play black jack. He was told that he can learn the game easily
in ten minutes but Lanigan repeatedly refused to play with them but they kept on insisting
but since he did not like to play, the accused said that they are going to release him, but he
should not make any attempt to report the matter to the police as they can frame him up
with the charges of rape pushing of marijuana and other similar crimes. Lanigan however,
went inside the US Naval Base where he reported the matter to the members of the shore
patrol and told them that he was robbed. The military police officers from the US Naval Base
accompanied him and pointed out several houses which are suspected in this kind of modus
operandi in the crimes of robbery committed against American servicemen and they came up
to No. 8 Fontaine Extension where Lanigan told the military police that it was the same house
where he was robbed. Considering that they had no jurisdiction since it was outside the US
Naval Base, the Base police instructed the complainant to report the matter to the Olongapo
City Police Department and it was at this juncture that a police officer by the name of 'Danny'
drove up. Later, the complaining witness was brought to the Olongapo City Police Department
where his statement (Exhibit 'A') was taken by Pfc. Ciriaco Marcelino, Jr., on July 23, 1979 and
the accused Magat was Identified through his photograph taken in the gallery. On the
following day, the complainant was again asked to come to the police headquarters for a
supplemental statement (Exhibit 'B') wherein he Identified Francisco Brosas y Velasco as the
driver of the jeep who brought him to the place where he was robbed. 2
Petitioner-accused, on the other hand, denied the commission of robbery and claimed that
complainant lost the money to him in a card game. His version was synthesized by respondent
Court of Appeals thus:
On the other hand, the defense' evidence discloses that in the afternoon of July 19, 1979, a
certain driver named Brosas arrived with an American who turned out to be the herein
complainant, at Magat's residence at No. 8 Fontaine Extension, Olongapo City. Brosas told
Magat that the American was looking for a girl whom he will pay. Magat then told Brosas to
look for a girl so that they could earn some money. Brosas left Magat's residence to look for
a girl while complainant Lanigan waited for him in Magat's residence.
While they were waiting, Magat invited Lanigan to play poker/blackjack, Lanigan agreed. The
two of them sat by the table and they played six games. Magat won in five games but lost in
one. Lanigan's total loss amounted to a little over P1500.00. Lanigan then told Magat that he
will use his traveller's check since he had no more money. Magat did not agree and refused
to play further with Lanigan. Magat's refusal irritated Lanigan. Lanigan then tried to grab the
cash money in the possession of Magat at the time and the two of them struggled for
possession of the money. In the meanwhile, Lanigan kept on shouting that he was cheated
and that he wants his money back. Later, Lanigan told Magat that he is going to cash his
traveller's check at Pag-asa where he has an American acquaintance. Lanigan, however, did
not come back anymore that day.
The following day he appeared at the residence of Magat with a CIS agent named Rene who
told Magat that a certain Captain Santos, Chief of the CIS, wanted to see him in connection
with Lanigans complaint. In the meantime, Patrolman Marcelino also arrived at the house of
Magat who allegedly told the latter that if he will return the P500.00 of the complaining
American, then the complaint against him will be settled.
On July 26, 1979, at 3:00 o'clock in the afternoon, an Information for Robbery was filed against
Leonardo Magat, Francisco Brosas and four others in the Court of First Instance of Zambales,
Branch 1, at Olongapo City. The case was immediately raffled and set for arraignment and
trial. Only petitioner-accused was arraigned at 4:35 that same afternoon, as the others had
not been apprehended. Petitions-accused entered a plea of "Not Guilty."
The post-arraignment proceedings were as follows:
COURT
 I have no objection to the conference between counsel and his witness but after we have
Enter a plea of not guilty in favor of the accused. already submitted our case.

This is for immediate trial because according to the motion of the First Assistant City Fiscal, And besides, we have only twenty-four (24) hours.
the complainant is a tourist.
ATTY. BALINGIT
Are you now ready for trial?
But just only one (1) hour to confer to give me the chance to defend my client.
ATTY. BALINGIT
COURT
If your Honor please, I was hired about a few minutes ago and I was indeed surprised to be
contracted. Although I understand the extent of the law which requires the speedy trial of You can do that after the prosecution presented its witness.
this case, however, if I may be given at least one (1) hour to confer with my witness, I will
proceed with the trial. ATTY. BALINGIT

FISCAL ANONAS Provided . . .

How many witnesses do you intend to present? COURT Before you could cross examine. For cross examination. You can consult your client
from time to time. 4
COURT
Trial proceeded and lasted up to 7:30 in the evening. The following day, trial was resumed at
How about you, Fiscal? 8:30 o'clock in the morning when petitioner-accused and his witness, testified on direct, cross,
and re-direct examination. At 11:35 that same morning, a judgment of conviction was
FISCAL ANONAS promulgated, sentencing the accused to six (6) years and one (1) day to ten (10) years of
prision mayor, to indemnify the offended party in the amount of P6,996.00, and to pay the
Two (2). costs.

COURT Petitioner-accused appealed to the Court of Appeals. Instead of filing a Brief for the People,
the Office of the Solicitor General filed a Motion and Manifestation joining the accused's
How about you Atty. Balingit? cause, and recommending the reversal of the Trial Court's judgment on the ground that
complainant is not a transient visitor; that said Court acted with unusual haste in the
ATTY. BALINGIT arraignment, trial, and rendition of the judgment of conviction; and that the evidence
adduced failed to prove the guilt of the accused beyond reasonable doubt.
Two (2).
In its Decision promulgated on August 21, 1981, the Court of Appeals refuted the contentions
FISCAL ANONAS of the Office of the Solicitor General, affirmed conviction, but modified the penalty.
WHEREFORE, finding accused-appellant guilty beyond reasonable doubt as principal in the
crime of ROBBERY as charged in the information, defined by Art. 293 of the Revised Penal
Code and penalized under Art. 294, par. 5 thereof; and there being no aggravating nor any
mitigating circumstance affecting his criminal liability, thus entitling him to the imposition of
the penalty in its medium period, he is therefore hereby sentenced to an indeterminate
penalty of 2 years, 4 months and 1 day of prision correccional as the minimum to 8 years of
prision mayor as the maximum and to pay costs.
Except with the aforesaid modification, the judgment appealed from is hereby AFFIRMED in
all other respects.
Petitioner-accused appealed by certiorari to this Court assigning the following errors to the
Court of Appeals:
1. The Respondent Honorable Court of Appeals erred in brushing aside the mute but
clear import of lack of adherence to the basic fundamental formulation of due process
whereby counsel and client must be accorded the right to be heard i.e., before proceedings
to commence trial ample opportunity must be given for them to confer and prepare for the
defense.
2. The Respondent Honorable Court of Appeals erred in not sustaining the submission
for acquittal made by the state counsel, the Honorable Solicitor General in its Motion and
Manifestation in lieu of appellee's brief anchored upon grave and conclusive circumstantial
facts negativing petitioner's guilt.
3. The respondent Honorable Court of Appeals erred in merely modifying the judgment
of conviction of the petitioner based upon mere assumptions and suspicion of guilt.
Required to comment by this Court, the Office of the Solicitor General adopted its Motion and
Manifestation filed before the Court of Appeals and recommended the grant of the petition
for certiorari averring that the findings and conclusions of respondent Court of Appeals are
not supported by substantial evidence.
In his first assigned error, petitioner-accused claims lack of due process because of the
unusual speed with which the Trial Court disposed of his case. The record does show that the
accused was arraigned at 4:35 P.M. on July 26, 1979. The request of defense counsel for one
hour within which to confer with his client was deferred by the Trial Court till after the
prosecution had presented its evidence but the Court clarified that it would allow counsel to
consult his client from time to time during cross-examination. Trial commenced thereafter
and continued until 7:30 in the evening, with the prosecution resting its case. The following
day, trial was resumed, for the presentation of evidence for the defense, at 8:30 A. M, and
judgment was promulgated at 11:35 that same morning.
Applicable to this case is General Order No. 39 amending General Order No. 12, dated
September 30, 1972, which gave Civil Courts concurrent jurisdiction with Military Tribunals
over crimes committed against tourists and transients, and mandates that cases involving
tourists be disposed of within 24 hours from the filing of the complaint. 1äwphï1.ñët
23. Crimes where the offended party is a tourist or a transient.
The civil court shall have concurrent jurisdiction with the military tribunals over the said
crimes, provided that civil courts shall dispose of such cases within 24 hours after the filing
thereof by the arresting officer.ït¢@lFº The court or tribunal that first assumes jurisdiction
shall exercise jurisdiction to the exclusion of all others.
Considering that explicit requirement, the Trial Court had no other alternative but to speed
up trial. That defense counsel was aware of the prescribed time element is shown by the fact
that he had asked for only one hour within which to confer with his client although normally
he would have been entitled to at least 2 days to prepare for trial. 5 In point of fact, the Trial
Court did not deny defense counsel's request for conference with petitioner-accused. The
Trial Court merely deferred such conference till after the prosecution had presented its
witnesses. It is to be noted further that defense counsel was not totally unprepared for trial
for he was ready with two witnesses when asked by the Court. Moreover, after the
prosecution had rested its case, trial was resumed the next day, thereby giving the defense
enough time to prepare for the presentation of its direct evidence. Besides, notwithstanding
the brief span of trial time, rebuttal and surrebuttal were presented by the prosecution and
the defense, respectively.
The rendition of the judgment not long after the trial was terminated is not necessarily
indicative of inordinate haste. On the contrary, Judge Regino T. Veridiano I I, the Trial Fiscal,
and the defense counsel are to be commended for their punctilious compliance with the
explicit mandate of the law. A reading of the transcript and of the judgment rendered will also
reveal that petitioner-accused was duly and amply heard in his defense. He was not denied
procedural due process.
The submission of the State that complainant is "not a transient visitor" for his testimony
shows clearly that he has been in Olongapo City many times for the past fifteen years" 6 is
not well taken, the exact declaration of complainant having been "a number of times" and
not "many times". And even if complainant has been in Olongapo City a number of times, that
does not make him any less a transient, or one whose stay is "of uncertain duration" or for a
"short time", or for a "brief period" only each time. 7 There is no question either that
notwithstanding the number of times that he has been to this country, complainant is a
"tourist" or one who travels from place to place for pleasure or culture. 8 As a "tourist" or a
"transient", complainant falls within the coverage of General Order No. 12, as amended,
supra.
We likewise find it difficult to agree with the Solicitor General's position that the guilt of
petitioner-accused has not been established beyond reasonable doubt. Complainant was
categorical in his Identification of petitioner-accused and emphatic as to the latter's direct
and active involvement in the robbery. Petitioner-accused's version of the occurrence does
not ring with truth. As pointed out by the Court of Appeals: 1äwphï1.ñët
Appellant advances the argument that if robbery was his intention, then he would not have
done it in the very premises of his home. This explanation appeared lame and weak. He did
so, because he never expected that their victim being a tourist will have the insistence and
temerity of lodging and pushing through a complaint against him and his cohorts for forcibly
divesting him of his money. No doubt, appellant and his confederates must have been
emboldened by the fact that even if their victim complained but considering his unfamiliarity
with the place, it will be almost next to impossible for him (the American victim) to trace his
way back to appellant's place and pinpoint their Identities. In fact, the American MP's were
able to tract down his (Magat's) place only because of its notoriety for assaults and acts as
that perpetrated against the complainant. Then too appellant and Brosas were Identified only
by their photos in the files of the police. Both happened to be notorious police characters
having been previously involved in a series of robbery and theft cases. They were readily
pointed to and Identified by complainant upon seeing their photos as among the persons who
divested him of his money on the day of the incident in question.
Moreover, if as petitioner-accused testified, Lanigan was shouting at petitioner-accused "you
cheated me, give my money back" 10 it is incredible that "after that the American suggested
that he was going to leave the place because he will cash the traveller's check ...". 11 One who
has been allegedly cheated would refuse to return to play some more.
Again, complainant had been to Olongapo City a number of times in the past, and, therefore
was not a complete stranger to the place. He would have had more or less, an Idea where to
go for entertainment, so that petitioner-accused's allegation that complainant was looking for
a girl when brought to his place hardly deserves credence.
In the last analysis, the issue simmers down to one of credibility. The well established rule is
that the conclusions of a Trial Court on the question of credibility are entitled to utmost
respect and will remain undisturbed on appeal unless substantial facts, which might affect the
result of the case,, have been overlooked, which is not the case herein. Suffice it to quote
some notable observations of the Court of Appeals on the matter of credibility even as it
refuted some of the contentions advanced by the Office of the Solicitor General in support of
the latter's bid for acquittal of the accused.
The second point raised by the state counsel is that allegedly complainant admitted having
been strangled by his neck and yet he did not sustain any physical injury or bodily harm as
could be gleaned from his testimony of July 26, 1979 (p. 12 of the motion and manifestation).
That complainant did not suffer any injury whatsoever did not make his version of the incident
incredible because as the accused together with his confederates tried to divest the
complainant of his money, the latter struggled and it was at that juncture when complainant
was choked. What possible injury must he necessarily sustain in a situation of that sort?
Maybe only the reddening of the portion choked which however, was no longer visible to the
naked eye after a couple of hours or so.
The third circumstance advanced by the Honorable State Counsel is that it was rather
incredible and absurd for one who had robbed another to still endeavor to teach his victim
how to play a game of cards. The argument appears plausible but not conclusive. Complainant
was brought to another room and taught the rudiments of poker blackjack preparatory to the
theory to be set up by the defense that if the American victim has lost his money ... it was in
gambling where cards were utilized during the game. And secondly, to properly appease the
victim and condition his mind making him cool in the process so that whatever he may have
in mind by way of retaliation may no longer be pursued by him. But the victim-complainant
happened to be a person not of the type the accused thought of him to be. In short, he was
underestimated by the culprits.
Lastly, it is likewise claimed that when the complainant first appeared before the police officer
on July 19, 1979, the day when the robbery was committed, he allegedly told the police that
'a jeepney driver picked him up and with the use of flowery words was able to take his money.'
On the fourth day, however, following the incident or on July 23, complainant in his sworn
statement stated that he was choked and strangled by two or three persons and the accused
took his money from his pocket while they were in a house at No. 8 Fontaine Extension,
Olongapo City.
The statement referred to appeared embodied in Exhibit 'A' which was allegedly prepared by
a certain Pfc. Alberto dela Isla, the contents of which reads as follows: 1äwphï1.ñët
All told, we find the second and third assigned errors also without merit, and like the Trial
Court and the Appellate Court, we find petitioner- accused's guilt proven beyond reasonable
doubt.
WHEREFORE, this Petition for Review is denied and the judgment of the Court of Appeals
hereby affirmed.
Costs against petitioner.

This is in connection with Police Blotter Entry No. 2387, (p. 453 dated 15 July, 1979.)
Complainant alleged that on or about 2:00 P.M. to 3:00 P.M. July 1975, at the above
mentioned located, suspect with intent to gain and with intimidation took and carted away
his cash money amounting to $940.00 more or less. Complainant further alleged that while
he was walking along Magsaysay Drive, Q.C., when a jeepney driver picked him up and with
the use of flowery words was able to take his money. Furthermore, suspect/s choked him
while others were holding his hand and at the same time threatened him that if he did not
stop strangling he will be killed. Complainant pointed the person of LEONARDO MAGAT as
one of the suspects when a picture of the said suspect was showed to him. (Emphasis
supplied).

Pfc. Isla was never placed on the witness stand to testify on the alleged report. The contents
therein appearing therefore is decidedly hearsay . . . the prosecution being denied of the right
to cross-examine him on the truth thereof. But what appears confusing is the fact that when
complainant-victim made a follow-up of his complaint with the police, since nothing appeared
to have been done in connection therewith, no records whatsoever pertaining to his
complaint could be found. And yet here comes this alleged police report.

But let it be assumed that complainant when interviewed made the statement that now
appears in this Exhibit 'A'. Analyzing the said statement in its entirety, the conclusion arrived
at appeared not warranted for if complainant was divested of his money merely through the
use of flowers words then why was there a necessity for choking him and holding his hands
and threatening him and, further, that if he did not stop then he will be killed. Interpreted in
the light of the testimony of the complainant, it would appear that the first step that led into
complainant's being divested of his money were the flowery words made by Brosas to him
that ultimately brought him to Magat's place whereby, through force and intimidation the
offenders took his money from his pocket.
 TAGAYTAY REALTY CO., INC., PETITIONER, VS. ARTURO G. GACUTAN, RESPONDENT.
The Court reiterates the right of the installment buyer of a subdivision lot to withhold
payment of his amortizations for the duration that the subdivision developer has not complied
with its contractual undertaking to build the promised amenities in the subdivision.
The Case
On appeal by the subdivision developer is the decision promulgated on May 29, 2003,[1]
whereby the Court of Appeals (CA) upheld the ruling in favor of the installment buyer issued
on December 6, 2001 by the Office of the President (OP).[2] By such ruling, the OP affirmed
the July 14, 1997 decision[3] rendered by the Housing and Land Use Regulatory Board (HLURB)
Board of Commissioners adopting the HLURB Arbiter's decision dated March 22, 1995.[4]
Antecedents
On September 6, 1976, the respondent entered into a contract to sell with the petitioner for
the purchase on installment of a residential lot with an area of 308 square meters situated in
the Foggy Heights Subdivision then being developed by the petitioner.[5] Earlier, on June 30,
1976, the petitioner executed an express undertaking in favor of the respondent, as
follows:[6]
We hereby undertake to complete the development of the roads, curbs, gutters, drainage
system, water and electrical systems, as well as all the amenities to be introduced in FOGGY
HEIGHTS SUBDIVISION, such as, swimming pool, pelota court, tennis and/or basketball court,
bath house, children's playground and a clubhouse within a period of two years from 15 July
1976, on the understanding that failure on their part to complete such development within
the stipulated period shall give the VENDEE the option to suspend payment of the monthly
amortization on the lot/s he/she purchased until completion of such development without
incurring penalty interest.
It is clearly understood, however, that the period or periods during which we cannot pursue
said development by reason of any act of God, any act or event constituting force majeure or
fortuitous event, or any restriction, regulation, or prohibition by the government or any of its
branches or instrumentalities, shall suspend the running of said 2-year period and the running
thereof shall resume upon the cessation of the cause of the stoppage or suspension of said
development.
In his letter dated November 12, 1979,[7] the respondent notified the petitioner that he was
suspending his amortizations because the amenities had not been constructed in accordance
with the undertaking. Despite receipt of the respondent's other communications requesting
updates on the progress of the construction of the amenities so that he could resume his
amortization,[8] the petitioner did not reply. Instead, on June 10, 1985, the petitioner sent to
him a statement of account demanding the balance of the price, plus interest and penalty.[9]
He refused to pay the interest and penalty.
On October 4, 1990, the respondent sued the petitioner for specific performance in the
HLURB, praying that the petitioner be ordered to accept his payment of the balance of the
contract without interest and penalty, and to deliver to him the title of the property.[10]
In its answer,[11] the petitioner sought to be excused from performing its obligations under
the contract, invoking Article 1267 of the Civil Code as its basis. It contended that the
depreciation of the Philippine Peso since the time of the execution of the contract, the
increase in the cost of labor and construction materials, and the increase in the value of the
lot in question were valid justifications for its release from the obligation to construct the
amenities.
In its positiOn paper,[12] the petitiOner stated that it had purposely suspended the
construction of the amenities which would have deteriorated at any rate because its lot
buyers had not constructed their houses in the subdivision.
On March 22, 1995, the HLURB Arbiter ruled m favor of the respondent,[13] to wit:
WHEREFORE, premises considered, respondents are hereby ordered to accept the payment
of the balance of the contract price in the amount of Eight Thousand Five Hundred Eighty
Seven and 80/100 Pesos (P8,587.80) without regular and penalty interest and, thereafter, to
execute and deliver to complainant the absolute deed of sale covering the sale of property
subj,ct of this complaint, together with the valid title over the said lot.[14]
The petitioner appealed, but the HLURB Board of Commissioners affirmed the ruling of the
HLURB Arbiter on July 14, 1997.[15] Upon the denial of its motion for reconsideration, the
petitioner appealed to the OP.[16]
On December 6, 2001, the OP upheld the decision of the HLURB Board of Commissioners.[17]
The OP later denied the petitioner's motion for reconsideration.[18]
On appeal, the CA affirmed the OP through the assailed decision promulgated on May 29,
2003,[19] disposing:
WHEREFORE, premises considered and finding no reversible error in the challenged Decision
and Order dated December 6, 2001, and July 1, 2002, respectively, of the Office of the
President in OP Case No. 98-C-8261 said Decision and Order are AFFIRMED and UPHELD, and
the petition is DISMISSED for lack of merit.
SO ORDERED.[20]
The CA denied the petitioner's motion for reconsideration.[21]
Issues
In this appeal by petition for review on certiorari, the petitioner contends that the CA erred
in affirming the incorrect findings of the OP in a way probably not in accord with law; and in
declaring that the respondent was not guilty of laches.
The petitioner submits that the CA, by observing that the petitioner did not fulfill its obligation
to finish the subdivision project and that it had itself admitted not having finished the project,
did not consider that it must be discharged because extraordinary and unforeseeable
circumstances had rendered its duty to perform its obligation so onerous that to insist on the
performance would have resulted in its economic ruin; that the Court should consider the
practical circumstances surrounding the construction of the luxurious amenities of the
project; that the luxurious amenities of the project would only be exposed to the elements,
resulting in wastage and loss of resources, because none of the lot buyers had constructed
any house in the subdivision; that delaying the construction for that reason was reasonable
on its part considering that no one would have benefited from the amenities anyway, and was
also a sound business practice because the construction would be at great cost to it as the
developer; that another justification for the non-construction was its having suffered extreme
economic hardships during the political and economic turmoil of the 1980s that the parties
did not foresee at the time they entered into their contract; that under Article 1267 of the
Civil Code, equity demanded a certain economic equilibrium between the prestation and the
counter-prestation, and did not permit the unlimited impoverishment of one party for the
benefit of the other by the excessive rigidity of the principle of the obligatory force of
contracts; that as the debtor, it should be partially excused or altogether released from its
obligations due to the extraordinary obstacles to the prestation, which could be overcome
only by a sacrifice that would be absolutely disproportionate, or with very grave risks, or by
violating some important duties; and that the CA thereby erred in closing its eyes to the
realities, and in opting not to apply the principles of equity in favor of applying the terms of
the agreement even if doing so would cause the economic ruin of one of the parties.
The petitioner further submits that the CA erred in declaring that it was apparent that there
was no "unreasonable failure" on the part of the respondent because he had made timely
written demands on November 12, 1979, February 11, 1983, March 20, 1984, June 24, 1985
and November 16, 1988. It urges that the CA's error consisted in its confusing laches as the
failure to assert a right, notwithstanding that jurisprudence has considered laches to be the
unreasonable failure to assert a claim that, by exercising due diligence, could or should be
done earlier; that laches was not, in legal significance, mere delay, but a delay that worked a
disadvantage to another; that the letters of the respondent could hardly be construed as
motivated by prudence and good faith; that the economy had worsened between 1979 and
1988, and such worsening became a factor that raised the cost of real estate development by
leaps and bounds; and that the respondent, whose actuations smacked of bad faith and
opportunism at its expense, had then appeared out of nowhere to seize the opportunity
presented by the real estate boom of the early 1990s, despite having been silent and having
failed to act for a long time, evincing his belief of not having any right at all.
In his comment, the respondent asserts that the submissions of the petitioner did not warrant
the non-construction of the amemt1es; that Article 1159 of the Civil Code provides that
obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith; that neither party could unilaterally and upon his own
exclusive volition escape his obligations under the contract unless for causes sufficient in law
and pronounced adequate by a competent tribunal; that correlative to Article 1159 is Article
1308 of the Civil Code which holds that the validity or compliance of a contract cannot be left
to the will of one party; that a party could not revoke or renounce a contract without the
consent of the other, nor could a party have a contract set aside on the ground that he had
made a bad bargain; that he was not liable for the interest because it was not expressly
stipulated in the contract pursuant to Article 1956 of the Civil Code; that no penalty should
be imposed on him by virtue of the undertaking clearly stating that the two-year period for
the completion of the amenities would be suspended only if the development could not be
pursued "by reason of any act God, any act or event constituting force majeure or fortuitous
event; or any restriction, regulation, or prohibition by the government or any of its branches
or instrumentalities;" that the reason given by the petitioner that "the contemplated
amenities could not be constructed as they would have only been left exposed to the
elements and would have come to naught on account of the fact that there are no persons
residing thereat" did not justify or excuse the non- construction of the amenities; that the
petitioner could not seek refuge in Article 1267 of the Civil Code by merely alleging inflation
without laying down the legal and factual basis to justify the release from its obligation; that
his written extrajudicial demands negated the defense of laches; that he did not fail to assert
his right, or abandon it; and that his written extrajudicial demands wiped out the period that
had already lapsed and started the prescriptive period anew.
In short, was the petitioner released from its obligation to construct the amenities in the
Foggy Heights Subdivision?
Ruling of the Court
The appeal is partly meritorious.
1.
Petitioner was not relieved from its statutory and contractual obligations to complete the
amenities
The arguments of the petitioner to be released from its obligation to construct the amenities
lack persuasion.
To start with, the law is not on the side of the petitioner.
Under Section 20 of Presidential Decree No. 957, all developers, including the petitioner, are
mandated to complete their subdivision projects, including the amenities, within one year
from the issuance of their licenses. The provision reads:
Section 20. Time of Completion. - Every owner or developer shall construct and provide the
facilities, improvements, infrastructures and other forms of development, including water
supply and lighting facilities, which are offered and indicated in the approved subdivision or
condominium plans, brochures, prospectus, printed matters, letters or in any form of
advertisement, within one year from the date of the issuance of the license for the subdivision
or condominium project or such other period of time as maybe fixed by the Authority.
Pursuant to Section 30 of Presidential Decree No. 957,[22] the amenities, once constructed,
are to be maintained by the developer like the petitioner until a homeowners' association has
been organized to manage the amenities.
There is no question that the petitioner did not comply with its legal obligation to complete
the construction of the subdivision project, including the amenities, within one year from the
issuance of the license. Instead, it unilaterally opted to suspend the construction of the
amenities to avoid incurring maintenance expenses. In so opting, it was not driven by any
extremely difficult situation that would place it at any disadvantage, but by its desire to
benefit from cost savings. Such cost-saving strategy dissuaded the lot buyers from
constructing their houses in the subdivision, and from residing therein.
Considering that the petitioner's unilateral suspension of the construction of the amenities
was intended to save itself from costs, its plea for relief from its contractual obligations was
properly rejected because it would thereby gain a position of advantage at the expense of the
lot owners like the respondent. Its invocation of Article 1267 of the Civil Code, which provides
that "(w)hen the service has become so difficult as to be manifestly beyond the contemplation
of the parties, the obligor may also be released therefrom in whole or in part," was factually
unfounded. For Article 1267 to apply, the following conditions should concur, namely: (a) the
event or change in circumstances could not have been foreseen at the time of the execution
of the contract; (b) it makes the performance of the contract extremely difficult but not
impossible; (c) it must not be due to the act of any of the parties; and (d) the contract is for a
future prestation.[23] The requisites did not concur herein because the difficulty of
performance under Article 1267 of the Civil Code should be such that one party would be
placed at a disadvantage by the unforeseen event.[24] Mere inconvenience, or unexepected
impediments, or increased expenses did not suffice to relieve the debtor from a bad
bargain.[25]
And, secondly, the unilateral suspension of the construction had preceded the worsening of
economic conditions in 1983; hence, the latter could not reasonably justify the petitioner's
plea for release from its statutory and contractual obligations to its lot buyers, particularly the
respondent. Besides, the petitioner had the legal obligation to complete the amenities within
one year from the issuance of the license (under Section 20 of Presidential Decree No. 957),
or within two years from July 15, 1976 (under the express undertaking of the petitioner).
Hence, it should have complied with its obligation by July 15, 1978 at the latest, long before
the worsening of the economy in 1983.
2.
Respondent as instalment buyer should pay the annual interest but not the penalty
The respondent insists that his unpaid obligation was only the balance of the contract price
amounting to P8,587.80.[26] He declines to pay the interest and the penalty on the ground
that the petitioner had not constructed the amenities as promised under the undertaking.
The Court holds that the respondent was liable for the stipulated annual interest of 12% but
not the penalty.
Paragraph 2.b, first sentence, of the contract to sell stipulated the 12% annual interest, as
follows:
xxxx
2.) The VENDEE/S hereby agree/s to pay the purchase price of TWENTY SEVEN THOUSAND
SEVEN HUNDRED TWENTY ONLY PESOS (P27,720.00), Philippine Currency, at the office of the
VENDOR at Makati, Rizal, without necessity of demand or the services of a collector in the
following manner:
a.) As downpayment, the amount of FOUR THOUSAND ONE HUNDRED FIFTY EIGHT ONLY
PESOS (P4,158.00) upon the execution of the contract.
b.) The balance of TWENTY THREE THOUSAND FIVE HUNDRED SIXTY TWO ONLY PESOS
(P23,562.00) in eighty four (84) consecutive monthly installments of FOUR HUNDRED FIFTEEN
& 95/100 PESOS (P415.95) each installment, including interest at the rate of twelve (12%)
percent per annum on all outstanding balances, the first of such monthly installment to be
paid on or before the 6th day of each month, beginning October, 1976. It is understood that
unpaid installments or installments in arrears shall earn a penalty interest of one (1%) percent
per month until fully paid.[27] (Bold underscoring supplied for emphasis of the relevant
portion)
xxxx
Accordingly, the parties agreed to an 84-month or seven-year term of installment on the net
contract price of P23,562.00 at the monthly rate of P415.95, the monthly rate being inclusive
of the 12% interest per annum. Such monthly installment of P415.95 included the principal
and the annual interest, the latter being legally termed the amortization interest. The annual
interest was designed to compensate the petitioner for waiting seven years before receiving
the total principal amount. As such, the total cost of the lot purchased by the respondent for
the seven-year term would be P39,097.80, which amount would be inclusive of the contract
price of the lot and the amortization interest.[28]
The imposition of the annual or amortization interest on the price for the purchase of a lot on
installment was valid and enforceable. As the Court has explained in Relucio v. Brillante-
Garfin:[29]
x x x The contract price of P10,800.00 may thus be seen to be the cash price of the subdivision
lots, that is, the amount payable if the price of the lots were to be paid in cash and in full at
the execution of the contract; it is not the amount that the vendor will have received in the
aggregate after fifteen (15) years if the vendee shall have religiously paid the monthly
installments. The installment price, upon the other hand, of the subdivision lots-the sum total
of the monthly installments (i.e., P16,101.00) typically, as in the instant case, has an interest
component which compensates the vendor for waiting fifteen (15) years before receiving the
total principal amount of P10,600.00. Economically or financially, P10,600.00 delivered in full
today is simply worth much more than a long series of small payments totalling, after fifteen
(15) years, P10,600.00. For the vendor, upon receiving the full cash price, could have
deposited that amount in a bank, for instance, and earned interest income which at six
percent (6%) per year and for fifteen (15) years, would precisely total P5,501.00 (the
difference between the installment price of P16,101.00 and the cash price of P10,600.00) To
suppose, as private respondent argues, that mere prompt payment of the monthly
installments as they fell due would obviate application of the interest charge of six percent
(6%) per annum, is to ignore that simple economic fact. That economic fact is, of course,
recognized by law, which authorizes the payment of interest when contractually stipulated
for by the parties or when implied in recognized commercial custom or usage.
Vendor and vendee are legally free to stipulate for the payment of either the cash price of a
subdivision lot or its installment price. Should the vendee opt to purchase a subdivision lot via
the installment payment system, he is in effect paying interest on the cash price, whether the
fact and rate of such interest payment is disclosed in the contract or not. The contract for the
purchase and sale of a piece of land on the installment payment system in the case at bar is
not only quite lawful; it also reflects a very wide spread usage or custom in our present day
commercial life.[30]
In view of the foregoing, the respondent's insistence on condoning his liability for the
contractually-stipulated 12% annual amortization interest is unwarranted. The condonation
will impose a harsh burden upon the petitioner, even as it will result in the unjust enrichment
of the respondent. We cannot ignore that the former has waited for a very long period of time
before it would be able to use the proceeds of the lot sold to the respondent.
The 1% monthly penalty sought to be charged on the arrears for failure to pay the
amortizations on time until the arrears would be fully paid was also stipulated in paragraph
2.b, second sentence, of the contract to sell, supra. But such stipulation could not be enforced
against the respondent because the petitioner waived the penalty should the subdivision
development not be completed by July 15, 1978. The waiver should stand considering that
the suspension of the amortization payment in 1979 was excusable on account of the failure
to construct the amenities by July 15, 1978, and considering further that the petitioner did
not contest the suspension of payment of the monthly amortization.[31]
Under Tamayo v. Huang,[32] the buyer has the option to demand the reimbursement of the
total amounts paid, or to await the further development of the subdivision; when the buyer
opts for the latter alternative, he may suspend the payment of his installments until the time
when the developer has fulfilled its obligation to him; should the developer persist in refusing
to complete the facilities, the National Housing Authority may take over or cause the
development and completion of the subdivision at the expense of the developer.[33]
petitioner did not respond to his requests. His efforts to have the petitioner construct the
amenities so that he would already pay for the lot demonstrated his prudence and alacrity in
insisting on his rights, negating any hint of bad faith or of lack of diligence on his part.
WHEREFORE, the Court AFFIRMS the judgment promulgated on May 29, 2003 subject to the
MODIFICATIONS, as follows: (1) the respondent shall pay to the petitioner the amount of
P19,965.60; (2) the petitioner shall execute the deed of absolute sale covering the property,
and shall deliver the property to the respondent together with the pertinent certificate of title
in accordance with the terms of their contract; and (3) the petitioner shall pay the costs of
suit.
SO ORDERED.

In this case, the respondent initially opted to suspend the payment of his amortizations, but
then offered to complete the payment upon realizing that the petitioner did not anymore
intend to build the amenities. His payments from October 6, 1976 to October 6, 1979
corresponded to 36 monthly amortizations totaling P14,974.20, leaving 48 installments
unpaid totaling P19,965.60.[34]

3.

Claim of respondent was not barred by laches

Laches is the failure of or neglect for an unreasonable and unexplained length of time to do
that which by exercising due diligence could or should have been done earlier, or to assert a
right within a reasonable time. It warrants a presumption that the party entitled thereto has
either abandoned it or declined to assert it.[35]

The CA correctly declared that laches did not set in to bar the claim of the respondent because
he had made periodic written demands upon the petitioner that indicated that he had not
abandoned or declined to assert the claim. In 1979, he manifested the intention to avail
himself of his right to suspend the payment of his amortizations pursuant to the undertaking.
Since then until 1984, he had continuously requested the petitioner for updates on the
progress of the construction of the amenities so that he could resume his amortizations. The