Extinguishment of Obligation - Antonio

Cases on Extinguishment of Obligations
1) Kalalo v Luz, 34 SCRA 377

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-27782 July 31, 1970
OCTAVIO A. KALALO, plaintiff-appellee,
vs.
ALFREDO J. LUZ, defendant-appellant.
Amelia K. del Rosario for plaintiff-appellee.
Pelaez, Jalandoni & Jamir for defendant-appellant.
ZALDIVAR, J.:
Appeal from the decision, dated, February 10, 1967, of the Court of First Instance of Rizal (Branch V, Quezon City)
in its Civil Case No. Q-6561.
On November 17, 1959, plaintiff-appellee Octavio A. Kalalo hereinafter referred to as appellee), a licensed civil
engineer doing business under the firm name of O. A. Kalalo and Associates, entered into an agreement (Exhibit A )
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with defendant-appellant Alfredo J . Luz (hereinafter referred to as appellant), a licensed architect, doing business
under firm name of A. J. Luz and Associates, whereby the former was to render engineering design services to the
latter for fees, as stipulated in the agreement. The services included design computation and sketches, contract
drawing and technical specifications of all engineering phases of the project designed by O. A. Kalalo and
Associates bill of quantities and cost estimate, and consultation and advice during construction relative to the work.
The fees agreed upon were percentages of the architect's fee, to wit: structural engineering, 12-½ %; electrical engineering,
2-½%. The agreement was subsequently supplemented by a "clarification to letter-proposal" which provided, among other things, that "the schedule of engineering
fees in this agreement does not cover the following: ... D. Foundation soil exploration, testing and evaluation; E. Projects that are principally engineering works
such as industrial plants, ..." and "O. A. Kalalo and Associates reserve the right to increase fees on projects ,which cost less than P100,000 ...." 2 Pursuant to said
agreement, appellee rendered engineering services to appellant in the following projects:
(a) Fil-American Life Insurance Building at Legaspi City;
(b) Fil-American Life Insurance Building at Iloilo City;
(c) General Milling Corporation Flour Mill at Opon Cebu;
(d) Menzi Building at Ayala Blvd., Makati, Rizal;
(e) International Rice Research Institute, Research center Los Baños, Laguna;
(f) Aurelia's Building at Mabini, Ermita, Manila;
(g) Far East Bank's Office at Fil-American Life Insurance Building at Isaac Peral Ermita, Manila;
(h) Arthur Young's residence at Forbes Park, Makati, Rizal;
(i) L & S Building at Dewey Blvd., Manila; and

(j) Stanvac Refinery Service Building at Limay, Bataan.
On December 1 1, '1961, appellee sent to appellant a statement of account (Exhibit "1"), to which was attached an
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itemized statement of defendant-appellant's account (Exh. "1-A"), according to which the total engineering fee asked
by appellee for services rendered amounted to P116,565.00 from which sum was to be deducted the previous
payments made in the amount of P57,000.00, thus leaving a balance due in the amount of P59,565.00.
On May 18, 1962 appellant sent appellee a resume of fees due to the latter. Said fees, according to appellant.
amounted to P10,861.08 instead of the amount claimed by the appellee. On June 14, 1962 appellant sent appellee
a check for said amount, which appellee refused to accept as full payment of the balance of the fees due him.
On August 10, 1962, appellee filed a complaint against appellant, containing four causes of action. In the first cause
of action, appellee alleged that for services rendered in connection with the different projects therein mentioned
there was due him fees in sum s consisting of $28,000 (U.S.) and P100,204.46, excluding interests, of which sums
only P69,323.21 had been paid, thus leaving unpaid the $28,000.00 and the balance of P30,881.25. In the second
cause of action, appellee claimed P17,000.00 as consequential and moral damages; in the third cause of action
claimed P55,000.00 as moral damages, attorney's fees and expenses of litigation; and in the fourth cause of action
he claimed P25,000.00 as actual damages, and also for attorney's fees and expenses of litigation.
In his answer, appellant admitted that appellee rendered engineering services, as alleged in the first cause of action,
but averred that some of appellee's services were not in accordance with the agreement and appellee's claims were
not justified by the services actually rendered, and that the aggregate amount actually due to appellee was only
P80,336.29, of which P69,475.21 had already been paid, thus leaving a balance of only P10,861.08. Appellant
denied liability for any damage claimed by appellee to have suffered, as alleged in the second, third and fourth
causes of action. Appellant also set up affirmative and special defenses, alleging that appellee had no cause of
action, that appellee was in estoppel because of certain acts, representations, admissions and/or silence, which led
appellant to believe certain facts to exist and to act upon said facts, that appellee's claim regarding the Menzi project
was premature because appellant had not yet been paid for said project, and that appellee's services were not
complete or were performed in violation of the agreement and/or otherwise unsatisfactory. Appellant also set up a
counterclaim for actual and moral damages for such amount as the court may deem fair to assess, and for
attorney's fees of P10,000.00.
Inasmuch as the pleadings showed that the appellee's right to certain fees for services rendered was not denied, the
only question being the assessment of the proper fees and the balance due to appellee after deducting the admitted
payments made by appellant, the trial court, upon agreement of the parties, authorized the case to be heard before
a Commissioner. The Commissioner rendered a report which, in resume, states that the amount due to appellee
was $28,000.00 (U.S.) as his fee in the International Research Institute Project which was twenty percent (20%) of
the $140,000.00 that was paid to appellant, and P51,539.91 for the other projects, less the sum of P69,475.46
which was already paid by the appellant. The Commissioner also recommended the payment to appellee of the sum
of P5,000.00 as attorney's fees.
At the hearing on the Report of the Commissioner, the respective counsel of the parties manifested to the court that
they had no objection to the findings of fact of the Commissioner contained in the Report, and they agreed that the
said Report posed only two legal issues, namely: (1) whether under the facts stated in the Report, the doctrine of
estoppel would apply; and (2) whether the recommendation in the Report that the payment of the amount. due to
the plaintiff in dollars was legally permissible, and if not, at what rate of exchange it should be paid in pesos. After
the parties had submitted their respective memorandum on said issues, the trial court rendered its decision dated
February 10, 1967, the dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered in favor of plaintiff and against the defendant, by ordering the
defendant to pay plaintiff the sum of P51,539.91 and $28,000.00, the latter to be converted into the
Philippine currency on the basis of the current rate of exchange at the time of the payment of this
judgment, as certified to by the Central Bank of the Philippines, from which shall be deducted the
sum of P69,475.46, which the defendant had paid the plaintiff, and the legal rate of interest thereon
from the filing of the complaint in the case until fully paid for; by ordering the defendant to pay to
plaintiff the further sum of P8,000.00 by way of attorney's fees which the Court finds to be
reasonable in the premises, with costs against the defendant. The counterclaim of the defendant is
ordered dismissed.
From the decision, this appeal was brought, directly to this Court, raising only questions of law.
During the pendency of this appeal, appellee filed a petition for the issuance of a writ of attachment under Section 1
(f) of Rule 57 of the Rules of Court upon the ground that appellant is presently residing in Canada as a permanent
resident thereof. On June 3, 1969, this Court resolved, upon appellee's posting a bond of P10,000.00, to issue the
writ of attachment, and ordered the Provincial Sheriff of Rizal to attach the estate, real and personal, of appellant
Alfredo J. Luz within the province, to the value of not less than P140,000.00.
The appellant made the following assignments of errors:
I. The lower court erred in not declaring and holding that plaintiff-appellee's letter dated December
11, 1961 (Exhibit "1") and the statement of account (Exhibit "1-A") therein enclosed, had the effect,
cumulatively or alternatively, of placing plaintiff-appellee in estoppel from thereafter modifying the
representations made in said exhibits, or of making plaintiff-appellee otherwise bound by said
representations, or of being of decisive weight in determining the true intent of the parties as to the
nature and extent of the engineering services rendered and/or the amount of fees due.
II. The lower court erred in declaring and holding that the balance owing from defendant-appellant to
plaintiff-appellee on the IRRI Project should be paid on the basis of the rate of exchange of the U.S.
dollar to the Philippine peso at the time of payment of judgment. .
III. The lower court erred in not declaring and holding that the aggregate amount of the balance due
from defendant-appellant to plaintiff-appellee is only P15,792.05.
IV. The lower court erred in awarding attorney's fees in the sum of P8,000.00, despite the
commissioner's finding, which plaintiff-appellee has accepted and has not questioned, that said fee
be only P5,000.00; and
V. The lower court erred in not granting defendant-appellant relief on his counter-claim.
1. In support of his first assignment of error appellant argues that in Exhibit 1-A, which is a statement of accounts
dated December 11, 1961, sent by appellee to appellant, appellee specified the various projects for which he
claimed engineering fees, the precise amount due on each particular engineering service rendered on each of the
various projects, and the total of his claims; that such a statement barred appellee from asserting any claim contrary
to what was stated therein, or from taking any position different from what he asserted therein with respect to the
nature of the engineering services rendered; and consequently the trial court could not award fees in excess of what
was stated in said statement of accounts. Appellant argues that for estoppel to apply it is not necessary, contrary to
the ruling of the trial court, that the appellant should have actually relied on the representation, but that it is sufficient
that the representations were intended to make the defendant act there on; that assuming arguendo that Exhibit 1-A
did not put appellee in estoppel, the said Exhibit 1-A nevertheless constituted a formal admission that would be
binding on appellee under the law on evidence, and would not only belie any inconsistent claim but also would
discredit any evidence adduced by appellee in support of any claim inconsistent with what appears therein; that,
moreover, Exhibit 1-A, being a statement of account, establishes prima facie the accuracy and correctness of the
items stated therein and its correctness can no longer be impeached except for fraud or mistake; that Exhibit 1-A
furthermore, constitutes appellee's own interpretation of the contract between him and appellant, and hence, is
conclusive against him.
On the other hand, appellee admits that Exhibit 1-A itemized the services rendered by him in the various
construction projects of appellant and that the total engineering fees charged therein was P116,565.00, but
maintains that he was not in estoppel: first, because when he prepared Exhibit 1-A he was laboring under an
innocent mistake, as found by the trial court; second, because appellant was not ignorant of the services actually
rendered by appellee and the fees due to the latter under the original agreement, Exhibit "A."
We find merit in the stand of appellee.
The statement of accounts (Exh. 1-A) could not estop appellee, because appellant did not rely thereon as found by
the Commissioner, from whose Report we read:
While it is true that plaintiff vacillated in his claim, yet, defendant did not in anyway rely or believe in
the different claims asserted by the plaintiff and instead insisted on a claim that plaintiff was only
entitled to P10,861.08 as per a separate resume of fees he sent to the plaintiff on May 18, 1962
(See Exhibit 6).4
The foregoing finding of the Commissioner, not disputed by appellant, was adopted by the trial court in its decision.
Under article 1431 of the Civil Code, in order that estoppel may apply the person, to whom representations have
been made and who claims the estoppel in his favor must have relied or acted on such representations. Said article
provides:
Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person relying thereon.
An essential element of estoppel is that the person invoking it has been influenced and has relied on the
representations or conduct of the person sought to be estopped, and this element is wanting in the instant case.
In Cristobal vs. Gomez, this Court held that no estoppel based on a document can be invoked by one who has not
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been mislead by the false statements contained therein. And in Republic of the Philippines vs. Garcia, et al., this6
Court ruled that there is no estoppel when the statement or action invoked as its basis did not mislead the adverse
party-Estoppel has been characterized as harsh or odious and not favored in law. When misapplied, estoppel
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becomes a most effective weapon to accomplish an injustice, inasmuch as it shuts a man's mouth from speaking
the truth and debars the truth in a particular case. Estoppel cannot be sustained by mere argument or doubtful
8
inference: it must be clearly proved in all its essential elements by clear, convincing and satisfactory evidence. No 9
party should be precluded from making out his case according to its truth unless by force of some positive principle
of law, and, consequently, estoppel in pains must be applied strictly and should not be enforced unless
substantiated in every particular. 0
1
The essential elements of estoppel in pais may be considered in relation to the party sought to be estopped, and in
relation to the party invoking the estoppel in his favor. As related to the party to be estopped, the essential elements
are: (1) conduct amounting to false representation or concealment of material facts or at least calculated to convey
the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts
to assert; (2) intent, or at least expectation that his conduct shall be acted upon by, or at least influence, the other
party; and (3) knowledge, actual or constructive, of the real facts. As related to the party claiming the estoppel, the
essential elements are (1) lack of knowledge and of the means of knowledge of the truth as the facts in questions;
(2) (reliance, in good faith, upon the conduct or statements of the party to be estopped; (3) action or inaction based
thereon of such character as To change the position or status of the party claiming the estoppel, to his injury,
detriment or prejudice. 1
1
The first essential element in relation to the party sought to be estopped does not obtain in the instant case, for, as
appears in the Report of the Commissioner, appellee testified "that when he wrote Exhibit 1 and prepared Exhibit 1-
A, he had not yet consulted the services of his counsel and it was only upon advice of counsel that the terms of the
contract were interpreted to him resulting in his subsequent letters to the defendant demanding payments of his fees
pursuant to the contract Exhibit A." 2 This finding of the Commissioner was adopted by the trial court. 3 It is
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established , therefore, that Exhibit 1-A was written by appellee through ignorance or mistake. Anent this matter, it
has been held that if an act, conduct or misrepresentation of the party sought to be estopped is due to ignorance
founded on innocent mistake, estoppel will not arise. 4 Regarding the essential elements of estoppel in relation to
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the party claiming the estoppel, the first element does not obtain in the instant case, for it cannot be said that
appellant did not know, or at least did not have the means of knowing, the services rendered to him by appellee and
the fees due thereon as provided in Exhibit A. The second element is also wanting, for, as adverted to, appellant did
not rely on Exhibit 1-A but consistently denied the accounts stated therein. Neither does the third element obtain, for
appellant did not act on the basis of the representations in Exhibit 1-A, and there was no change in his position, to
his own injury or prejudice.
Appellant, however, insists that if Exhibit 1-A did not put appellee in estoppel, it at least constituted an admission
binding upon the latter. In this connection, it cannot be gainsaid that Exhibit 1-A is not a judicial admission.
Statements which are not estoppels nor judicial admissions have no quality of conclusiveness, and an opponent.
whose admissions have been offered against him may offer any evidence which serves as an explanation for his
former assertion of what he now denies as a fact. This may involve the showing of a mistake. Accordingly, in Oas
vs. Roa, 6 it was held that when a party to a suit has made an admission of any fact pertinent to the issue involved,
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the admission can be received against him; but such an admission is not conclusive against him, and he is entitled
to present evidence to overcome the effect of the admission. Appellee did explain, and the trial court concluded, that
Exhibit 1-A was based on either his ignorance or innocent mistake and he, therefore, is not bound by it.
Appellant further contends that Exhibit 1-A being a statement of account, establishes prima facie the accuracy and
correctness of the items stated therein. If prima facie, as contended by appellant, then it is not absolutely conclusive
upon the parties. An account stated may be impeached for fraud, mistake or error. In American Decisions, Vol. 62,
p. 95, cited as authority by appellant himself. we read thus:
An account stated or settled is a mere admission that the account is correct. It is not an estoppel.
The account is still open to impeachment for mistakes or errors. Its effect is to establish, prima facie,
the accuracy of the items without other proof; and the party seeking to impeach it is bound to show
affirmatively the mistake or error alleged. The force of the admission and the strength of the
evidence necessary to overcome it will depend upon the circumstances of the case.
In the instant case, it is Our view that the ignorance mistake that attended the writing of Exhibit 1-A by appellee was
sufficient to overcome the prima facie evidence of correctness and accuracy of said Exhibit 1-A.
Appellant also urges that Exhibit 1-A constitutes appellee's own interpretation of the contract, and is, therefore,
conclusive against him. Although the practical construction of the contract by one party, evidenced by his words or
acts, can be used against him in behalf of the other party, 7 yet, if one of the parties carelessly makes a wrong
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interpretation of the words of his contract, or performs more than the contract requires (as reasonably interpreted
independently of his performance), as happened in the instant case, he should be entitled to a restitutionary
remedy, instead of being bound to continue to his erroneous interpretation or his erroneous performance and "the
other party should not be permitted to profit by such mistake unless he can establish an estoppel by proving a
material change of position made in good faith. The rule as to practical construction does not nullify the equitable
rules with respect to performance by mistake." 8 In the instant case, it has been shown that Exhibit 1-A was written
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through mistake by appellee and that the latter is not estopped by it. Hence, even if said Exhibit 1-A be considered
as practical construction of the contract by appellee, he cannot be bound by such erroneous interpretation. It has
been held that if by mistake the parties followed a practice in violation of the terms of the agreement, the court
should not perpetuate the error. 9
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2. In support of the second assignment of error, that the lower court erred in holding that the balance from appellant
on the IRRI project should be paid on the basis of the rate of exchange of the U.S. dollar to the Philippine peso at
the time of payment of the judgment, appellant contends: first, that the official rate at the time appellant received his
architect's fees for the IRRI project, and correspondingly his obligation to appellee's fee on August 25, 1961, was
P2.00 to $1.00, and cites in support thereof Section 1612 of the Revised Administrative Code, Section 48 of
Republic Act 265 and Section 6 of Commonwealth Act No. 699; second, that the lower court's conclusion that the
rate of exchange to be applied in the conversion of the $28,000.00 is the current rate of exchange at the time the
judgment shall be satisfied was based solely on a mere presumption of the trial court that the defendant did not
convert, there being no showing to that effect, the dollars into Philippine currency at the official rate, when the legal
presumption should be that the dollars were converted at the official rate of $1.00 to P2.00 because on August 25,
1961, when the IRRI project became due and payable, foreign exchange controls were in full force and effect,
and partial decontrol was effected only afterwards, during the Macapagal administration; third, that the other ground
advanced by the lower court for its ruling, to wit, that appellant committed a breach of his obligation to turn over to
the appellee the engineering fees received in U.S. dollars for the IRRI project, cannot be upheld, because there was
no such breach, as proven by the fact that appellee never claimed in Exhibit 1-A that he should be paid in dollars;
and there was no provision in the basic contract (Exh. "A") that he should be paid in dollars; and, finally, even if
there were such provision, it would have no binding effect under the provision of Republic Act 529; that, moreover, it
cannot really be said that no payment was made on that account for appellant had already paid P57,000.00 to
appellee, and under Article 125 of the Civil Code, said payment could be said to have been applied to the fees due
from the IRRI project, this project being the biggest and this debt being the most onerous.
In refutation of appellant's argument in support of the second assignment of error, appellee argues that
notwithstanding Republic Act 529, appellant can be compelled to pay the appellee in dollars in view of the fact that
appellant received his fees in dollars, and appellee's fee is 20% of appellant's fees; and that if said amount is be
converted into Philippine Currency, the rate of exchange should be that at the time of the execution of the
judgment. 0
2
We have taken note of the fact that on August 25, 1961, the date when appellant said his obligation to pay
appellee's fees became due, there was two rates of exchange, to wit: the preferred rate of P2.00 to $1.00, and the
free market rate. It was so provided in Circular No. 121 of the Central Bank of the Philippines, dated March 2, 1961.
amending an earlier Circular No. 117, and in force until January 21, 1962 when it was amended by Circular No. 133,
thus:
1. All foreign exchange receipts shall be surrendered to the Central Bank of those authorized to deal
in foreign exchange as follows:
Percentage of Total to be surrendered at
Preferred: Free Market Rate: Rate:
(a) Export Proceeds, U.S. Government Expenditures invisibles other than those specifically
mentioned below. ................................................ 25 75
(b) Foreign Investments, Gold Proceeds, Tourists and Inward Remittances of Veterans and Filipino
Citizens; and Personal Expenses of Diplomatic Per personnel ................................. 100" 1
2
The amount of $140,000.00 received by appellant foil the International Rice Research Institute project is not within
the scope of sub-paragraph (a) of paragraph No. 1 of Circular No. 121. Appellant has not shown that 25% of said
amount had to be surrendered to the Central Bank at the preferred rate because it was either export proceeds, or
U.S. Government expenditures, or invisibles not included in sub-paragraph (b). Hence, it cannot be said that the trial
court erred in presuming that appellant converted said amount at the free market rate. It is hard to believe that a
person possessing dollars would exchange his dollars at the preferred rate of P2.00 to $1.00, when he is not
obligated to do so, rather than at the free market rate which is much higher. A person is presumed to take ordinary
care of his concerns, and that the ordinary course of business has been
followed. 2
2
Under the agreement, Exhibit A, appellee was entitled to 20% of $140,000.00, or the amount of $28,000.00.
Appellee, however, cannot oblige the appellant to pay him in dollars, even if appellant himself had received his fee
for the IRRI project in dollars. This payment in dollars is prohibited by Republic Act 529 which was enacted on June
16, 1950. Said act provides as follows:
SECTION 1. Every provision contained in, or made with respect to, any obligation which provision
purports to give the obligee the right to require payment in gold or in a particular kind of coin or
currency other than Philippine currency or in an amount of money of the Philippines measured
thereby, be as it is hereby declared against public policy, and null, void and of no effect, and no such
provision shall be contained in, or made with respect to, any obligation hereafter incurred. Every
obligation heretofore or here after incurred, whether or not any such provision as to payment is
contained therein or made with respect thereto, shall be discharged upon payment in any coin or
currency which at the time of payment is legal tender for public and private debts: Provided, That,
( a) if the obligation was incurred prior to the enactment of this Act and required payment in a
particular kind of coin or currency other than Philippine currency, it shall be discharged in Philippine
currency measured at the prevailing rate of exchange at the time the obligation was incurred, (b)
except in case of a loan made in a foreign currency stipulated to be payable in the same currency in
which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail.
All coin and currency, including Central Bank notes, heretofore or hereafter issued and declared by
the Government of the Philippines shall be legal tender for all debts, public and private.
Under the above-quoted provision of Republic Act 529, if the obligation was incurred prior to the enactment of the
Act and require payment in a particular kind of coin or currency other than the Philippine currency the same shall be
discharged in Philippine currency measured at the prevailing rate of exchange at the time the obligation was
incurred. As We have adverted to, Republic Act 529 was enacted on June 16, 1950. In the case now before Us the
obligation of appellant to pay appellee the 20% of $140,000.00, or the sum of $28,000.00, accrued on August 25,
1961, or after the enactment of Republic Act 529. It follows that the provision of Republic Act 529 which requires
payment at the prevailing rate of exchange when the obligation was incurred cannot be applied. Republic Act 529
does not provide for the rate of exchange for the payment of obligation incurred after the enactment of said Act. The
logical Conclusion, therefore, is that the rate of exchange should be that prevailing at the time of payment. This view
finds support in the ruling of this Court in the case of Engel vs. Velasco & Co. 3 where this Court held that even if
2
the obligation assumed by the defendant was to pay the plaintiff a sum of money expressed in American currency,
the indemnity to be allowed should be expressed in Philippine currency at the rate of exchange at the time of
judgment rather than at the rate of exchange prevailing on the date of defendant's breach. This is also the ruling of
American court as follows:
The value in domestic money of a payment made in foreign money is fixed with respect to the rate of
exchange at the time of payment. (70 CJS p. 228)
According to the weight of authority the amount of recovery depends upon the current rate of
exchange, and not the par value of the particular money involved. (48 C.J. 605-606)
The value in domestic money of a payment made in foreign money is fixed in reference to the rate of
exchange at the time of such payment. (48 C.J. 605)
It is Our considered view, therefore, that appellant should pay the appellee the equivalent in pesos of the
$28,000.00 at the free market rate of exchange at the time of payment. And so the trial court did not err when it held
that herein appellant should pay appellee $28,000.00 "to be converted into the Philippine currency on the basis of
the current rate of exchange at the time of payment of this judgment, as certified to by the Central Bank of the
Philippines, ...." 4
2
Appellant also contends that the P57,000.00 that he had paid to appellee should have been applied to the due to
the latter on the IRRI project because such debt was the most onerous to appellant. This contention is untenable.
The Commissioner who was authorized by the trial court to receive evidence in this case, however, reports that the
appellee had not been paid for the account of the $28,000.00 which represents the fees of appellee equivalent to
20% of the $140,000.00 that the appellant received as fee for the IRRI project. This is a finding of fact by the
Commissioner which was adopted by the trial court. The parties in this case have agreed that they do not question
the finding of fact of the Commissioner. Thus, in the decision appealed from the lower court says:
At the hearing on the Report of the Commissioner on February 15, 1966, the counsels for both
parties manifested to the court that they have no objection to the findings of facts of the
Commissioner in his report; and agreed that the said report only poses two (2)legal issues, namely:
(1) whether under the facts stated in the Report, the doctrine of estoppel will apply; and (2) whether
the recommendation in the Report that the payment of amount due to the plaintiff in dollars is
permissible under the law, and, if not, at what rate of exchange should it be paid in pesos (Philippine
currency) .... 5
2
In the Commissioner's report, it is spetifically recommended that the appellant be ordered to pay the plaintiff the sum
of "$28,000. 00 or its equivalent as the fee of the plaintiff under Exhibit A on the IRRI project." It is clear from this
report of the Commissioner that no payment for the account of this $28,000.00 had been made. Indeed, it is not
shown in the record that the peso equivalent of the $28,000.00 had been fixed or agreed upon by the parties at the
different times when the appellant had made partial payments to the appellee.
3. In his third assignment of error, appellant contends that the lower court erred in not declaring that the aggregate
amount due from him to appellee is only P15,792.05. Appellant questions the propriety or correctness of most of the
items of fees that were found by the Commissioner to be due to appellee for services rendered. We believe that it is
too late for the appellant to question the propriety or correctness of those items in the present appeal. The record
shows that after the Commissioner had submitted his report the lower court, on February 15, 1966, issued the
following order:
When this case was called for hearing today on the report of the Commissioner, the counsels of the
parties manifested that they have no objection to the findings of facts in the report. However, the
report poses only legal issues, namely: (1) whether under the facts stated in the report, the doctrine
of estoppel will apply; and (2) whether the recommendation in the report that the alleged payment of
the defendant be made in dollars is permissible by law and, if not, in what rate it should be paid in
pesos (Philippine Currency). For the purpose of resolving these issues the parties prayed that they
be allowed to file their respective memoranda which will aid the court in the determination of said
issues. 6
2
In consonance with the afore-quoted order of the trial court, the appellant submitted his memorandum which opens
with the following statements:
As previously manifested, this Memorandum shall be confined to:
(a) the finding in the Commissioner's Report that defendant's defense of estoppel will not lie (pp. 17-
18, Report); and
(b) the recommendation in the Commissioner's Report that defendant be ordered to pay plaintiff the
sum of '$28,000.00 (U.S.) or its equivalent as the fee of the plaintiff under Exhibit 'A' in the IRRI
project.'
More specifically this Memorandum proposes to demonstrate the affirmative of three legal

issues posed, namely:
First: Whether or not plaintiff's letter dated December 11, 1961 (Exhibit 'I') and/or Statement of
Account (Exhibit '1-A') therein enclosed has the effect of placing plaintiff in estoppel from thereafter
modifying the representations made in said letter and Statement of Account or of making plaintiff
otherwise bound thereby; or of being decisive or great weight in determining the true intent of the
parties as to the amount of the engineering fees owing from defendant to plaintiff;
Second: Whether or not defendant can be compelled to pay whatever balance is owing to plaintiff on
the IRRI (International Rice and Research Institute) project in United States dollars; and
Third: Whether or not in case the ruling of this Honorable Court be that defendant cannot be
compelled to pay plaintiff in United States dollars, the dollar-to-peso convertion rate for determining
the peso equivalent of whatever balance is owing to plaintiff in connection with the IRRI project
should be the 2 to 1 official rate and not any other rate. 7
2
It is clear, therefore, that what was submitted by appellant to the lower court for resolution did not include the
question of correctness or propriety of the amounts due to appellee in connection with the different projects for
which the appellee had rendered engineering services. Only legal questions, as above enumerated, were submitted
to the trial court for resolution. So much so, that the lower court in another portion of its decision said, as follows:
The objections to the Commissioner's Report embodied in defendant's memorandum of objections,

dated March 18, 1966, cannot likewise be entertained by the Court because at the hearing of the
Commissioner's Report the parties had expressly manifested that they had no objection to the
findings of facts embodied therein.
We, therefore hold that the third assignment of error of the appellant has no merit.
4. In his fourth assignment of error, appellant questions the award by the lower court of P8,000.00 for attorney's
fees. Appellant argues that the Commissioner, in his report, fixed the sum of P5,000.00 as "just and reasonable"
attorney's fees, to which amount appellee did not interpose any objection, and by not so objecting he is bound by
said finding; and that, moreover, the lower court gave no reason in its decision for increasing the amount to
P8,000.00.
Appellee contends that while the parties had not objected to the findings of the Commissioner, the assessment of
attorney's fees is always subject to the court's appraisal, and in increasing the recommended fees from P5,000.00 to
P8,000.00 the trial court must have taken into consideration certain circumstances which warrant the award of
P8,000.00 for attorney's fees.
We believe that the trial court committed no error in this connection. Section 12 of Rule 33 of the Rules of Court, on
which the fourth assignment of error is presumably based, provides that when the parties stipulate that a
commissioner's findings of fact shall be final, only questions of law arising from the facts mentioned in the report
shall thereafter be considered. Consequently, an agreement by the parties to abide by the findings of fact of the
commissioner is equivalent to an agreement of facts binding upon them which the court cannot disregard. The
question, therefore, is whether or not the estimate of the reasonable fees stated in the report of the Commissioner is
a finding of fact.
The report of the Commissioner on this matter reads as follows:
As regards attorney's fees, under the provisions of Art 2208, par (11), the same may be awarded, and considering
the number of hearings held in this case, the nature of the case (taking into account the technical nature of the case
and the voluminous exhibits offered in evidence), as well as the way the case was handled by counsel, it is
believed, subject to the Court's appraisal of the matter, that the sum of P5,000.00 is just and reasonable as
attorney's fees." 8
2
It is thus seen that the estimate made by the Commissioner was an expression of belief, or an opinion. An opinion is
different from a fact. The generally recognized distinction between a statement of "fact" and an expression of
"opinion" is that whatever is susceptible of exact knowledge is a matter of fact, while that not susceptible of exact
knowledge is generally regarded as an expression of opinion. 9 It has also been said that the word "fact," as
2
employed in the legal sense includes "those conclusions reached by the trior from shifting testimony, weighing
evidence, and passing on the credit of the witnesses, and it does not denote those inferences drawn by the trial
court from the facts ascertained and settled by it. 0 In the case at bar, the estimate made by the Commissioner of
3
the attorney's fees was an inference from the facts ascertained by him, and is, therefore, not a finding of facts. The
trial court was, consequently, not bound by that estimate, in spite of the manifestation of the parties that they had no
objection to the findings of facts of the Commissioner in his report. Moreover, under Section 11 of Rule 33 of the
Rules of Court, the court may adopt, modify, or reject the report of the commissioner, in whole or in part, and hence,
it was within the trial court's authority to increase the recommended attorney's fees of P5,000.00 to P8,000.00. It is a
settled rule that the amount of attorney's fees is addressed to the sound discretion of the court. 1
3
It is true, as appellant contends, that the trial court did not state in the decision the reasons for increasing the
attorney's fees. The trial court, however, had adopted the report of the Commissioner, and in adopting the report the
trial court is deemed to have adopted the reasons given by the Commissioner in awarding attorney's fees, as stated
in the above-quoted portion of the report. Based on the reasons stated in the report, the trial court must have
considered that the reasonable attorney's fees should be P8,000.00. Considering that the judgment against the
appellant would amount to more than P100,000.00, We believe that the award of P8,000.00 for attorney's fees is
reasonable.
5. In his fifth assignment of error appellant urges that he is entitled to relief on his counterclaim. In view of what We
have stated in connection with the preceding four assignments of error, We do not consider it necessary to dwell
any further on this assignment of error.
WHEREFORE, the decision appealed from is affirmed, with costs against the defendant-appellant. It is so ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Castro, Fernando, Teehankee, Barredo and Villamor, JJ.,
concur.
# Footnotes
1 Annex A to complaint, pp. 18-21, Record on Appeal.
2 Record on Appeal, pp. 21-26.
4 Record on Appeal, p. 96.

5 50 Phil. 810, 821.
6 91 Phil. 46, 49.
7 Coronel, 7 et al. vs. CIR, et al., 24 -SCRA, 990, 996.
8 28 Am. Jur., 2d. , pp. 601-602.
9 Rivers vs. Metropolitan Life Ins. Co. of New York, 6 NY 2d. 3, 5.
10 28 Am. Jur. 2d. p. 642.
11 Art. 1437, Civil Code. 28 Am. Jur. 2d, pp. 640-641; Reyes and Puno, an Outline of Philippine Civil
Law, Vol. IV, p. 277.
12 Record on appeal, pp. 95-96.
14 Ramiro vs. Grato 54 Phil. 744, 750; Coleman vs. Southern Pacific Co., 14 Cal App. 2d 121, 296
P2d 386.
15 Wigmore, Evidence, 3d ed., Vol. IV. pp. 21-23.
16 7 Phil. 20, 22.
17 Corbin On Contracts, Vol. 3, P. 145.
18 Corbin On Contracts, Vol. 3, p. 147, and cases cited therein.
19 In re Chicago & E. 1. Rv. Co., 94 F2d 296; Boucher vs. Godfrey, 178 A 655, 119 Conn 622.
20 Citing 48 CJ, 605, 606-607 in support of his submission.
21 Arthur P. Bacomo Central Bank Circulars and Memoranda, 1949- 1968, p. 389.
22 Rule 131, See. 5, pars. (d) and (g), Rules of Court.
23 47 Phil 115, 142.
24 This ruling modifies the decision in Arrieta vs. National Rice and Corn Corporation, L-15645,
January 31, 1964 (10 SCRA 79), where it was held that the obligation based on dollar should be
converted into the Philippine peso at the rate of exchange prevailing at the time the obligation was
incurred, or on July 1, 1952. The provision of Rep. Act 529 was wrong applied in this case, because
the obligation arose after the enactment of Rep. Act 529 (June 16, 1950). The rate of exchange
prevailing at the time the obligation was incurred would apply only to obligations that were incurred
prior to the enactment of Rep. Act 529, but not to obligations incurred after the enactment of said
Act. 25 Record on Appeal, p. 149.
28 Record on Appeal, p. 97; emphasis supplied.

29 Pitney Bomes Inc. vs. Sirkle et al., 248 S. W. 2d. 920.
30 Porter vs. Industrial Commission of Wisconsin, et al., 173 Wis. 267, 181 N.W. 317, 318.
31 San Miguel Brewery, Inc. vs. Magno, L-21879, Sept. 29, 1967, 21 SCRA 292.
2) St. Paul Fire and Marine Insurance v Macondray, 70 SCRA 122

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-27796 March 25, 1976
ST. PAUL FIRE & MARINE INSURANCE CO., plaintiff-appellant,

vs.
MACONDRAY & CO., INC., BARBER STEAMSHIP LINES, INC., WILHELM WILHELMSEN MANILA PORT
SERVICE and/or MANILA RAILROAD COMPANY, defendants-appellees.
Chuidian Law Office for appellant.
Salcedo, Del Rosario Bito & Mesa for appellee Macondray & Co., Inc., Barber Steamship Lines, Inc. and Wilhelm
Wilhelmsen
Macaranas & Abrenica for appellee Manila Port Service and/or Manila Railroad Company.
ANTONIO, J.:
Certified to this Court by the Court of Appeals in its Resolution of May 8, 1967, on the ground that the appeal
1
involves purely questions of law, thus: (a) whether or not, in case of loss or damage, the liability of the carrier to the
consignee is limited to the C.I.F. value of the goods which were lost or damaged, and (b) whether the insurer who
has paid the claim in dollars to the consignee should be reimbursed in its peso equivalent on the date of discharge
of the cargo or on the date of the decision.
According to the records, on June 29, 1960, Winthrop Products, Inc., of New York, New York, U.S.A., shipped
aboard the SS "Tai Ping", owned and operated by Wilhelm Wilhelmsen 218 cartons and drums of drugs and
medicine, with the freight prepaid, which were consigned to Winthrop-Stearns Inc., Manila, Philippines. Barber
Steamship Lines, Inc., agent of Wilhelm Wilhelmsen issued Bill of Lading No. 34, in the name of Winthrop Products,
Inc. as shipper, with arrival notice in Manila to consignee Winthrop-Stearns, Inc., Manila, Philippines. The shipment
was insured by the shipper against loss and/or damage with the St. Paul Fire & Marine Insurance Company under
its insurance Special Policy No. OC-173766 dated June 23, 1960 (Exhibit "S").
On August 7, 1960, the SS "Tai Ping" arrived at the Port of Manila and discharged its aforesaid shipment into the
custody of Manila Port Service, the arrastre contractor for the Port of Manila. The said shipment was discharged
complete and in good order with the exception of one (1) drum and several cartons which were in bad order
condition. Because consignee failed to receive the whole shipment and as several cartons of medicine were
received in bad order condition, the consignee filed the corresponding claim in the amount of Fl,109.67 representing
the C.I.F. value of the damaged drum and cartons of medicine with the carrier, herein defendants- appellees
(Exhibits "G" and "H") and the Manila Port Service (Exhibits "I" & "J" However, both refused to pay such claim.
consequently, the consignee filed its claim with the insurer, St. Paul Fire & Marine insurance Co. (Exhibit "N"), and
the insurance company, on the basis of such claim, paid to the consignee the insured value of the lost and damaged
goods, including other expenses in connection therewith, in the total amount of $1,134.46 U.S. currency (Exhibit
"U").
On August 5, 1961, as subrogee of the rights of the shipper and/or consignee, the insurer, St. Paul Fire & Marine
Insurance Co., instituted with the Court of First Instance of Manila the present action against the defendants for the
2
recovery of said amount of $1,134.46, plus costs.
On August 23, 1961, the defendants Manila Port Service and Manila Railroad Company resisted the action,
contending, among others, that the whole cargo was delivered to the consignee in the same condition in which it
was received from the carrying vessel; that their rights, duties and obligations as arrastre contractor at the Port of
Manila are governed by and subject to the terms, conditions and limitations contained in the Management Contract
between the Bureau of Customs and Manila Port Service, and their liability is limited to the invoice value of the
goods, but in no case more than P500.00 per package, pursuant to paragraph 15 of the said Management Contract;
and that they are not the agents of the carrying vessel in the receipt and delivery of cargoes in the Port of Manila.
On September 7, 1961, the defendants Macondray & Co., Inc., Barber Steamship Lines, Inc. and Wilhelm
Wilhelmsen also contested the claim alleging, among others, that the carrier's liability for the shipment ceased upon
discharge thereof from the ship's tackle; that they and their co-defendant Manila Port Service are not the agents of
the vessel; that the said 218 packages were discharged from the vessel SS "Tai Ping" into the custody of defendant
Manila Port Service as operator of the arrastre service for the Port of Manila; that if any damage was sustained by
the shipment while it was under the control of the vessel, such damage was caused by insufficiency of
packing, force majeure and/or perils of the sea; and that they, in good faith and for the purpose only of avoiding
litigation without admitting liability to the consignee, offered to settle the latter's claim in full by paying the C.I.F.
value of 27 lbs. caramel 4.13 kilos methyl salicylate and 12 pieces pharmaceutical vials of the shipment, but their
offer was declined by the consignee and/or the plaintiff.
After due trial, the lower court, on March 10, 1965 rendered judgment ordering defendants Macondray & Co., Inc.,
Barber Steamship Lines, Inc. and Wilhelm Wilhelmsen to pay to the plaintiff, jointly and severally, the sum of
P300.00, with legal interest thereon from the filing of the complaint until fully paid, and defendants Manila Railroad
Company and Manila Port Service to pay to plaintiff, jointly and severally, the sum of P809.67, with legal interest
thereon from the filing of the complaint until fully paid, the costs to be borne by all the said defendants. 3
On April 12, 1965, plaintiff, contending that it should recover the amount of $1,134.46, or its equivalent in pesos at
the rate of P3.90, instead of P2.00, for every US$1.00, filed a motion for reconsideration, but this was denied by the
lower court on May 5, 1965. Hence, the present appeal.
Plaintiff-appellant argues that, as subrogee of the consignee, it should be entitled to recover from the defendants-
appellees the amount of $1,134.46 which it actually paid to the consignee (Exhibits "N" & "U") and which represents
the value of the lost and damaged shipment as well as other legitimate expenses such as the duties and cost of
survey of said shipment, and that the exchange rate on the date of the judgment, which was P3.90 for every
US$1.00, should have been applied by the lower court.
Defendants-appellees countered that their liability is limited to the C.I.F. value of the goods, pursuant to contract of
sea carriage embodied in the bill of lading that the consignee's (Winthrop-Stearns Inc.) claim against the carrier
(Macondray & Co., Inc., Barber Steamship Lines, Inc., Wilhelm Wilhelmsen and the arrastre operators (Manila Port
Service and Manila Railroad Company) was only for the sum of Pl,109.67 (Exhibits "G", "H", "I" & "J"), representing
the C.I.F. value of the loss and damage sustained by the shipment which was the amount awarded by the lower
court to the plaintiff-appellant; defendants appellees are not insurers of the goods and as such they should not be
4
made to pay the insured value therefor; the obligation of the defendants-appellees was established as of the date of
discharge, hence the rate of exchange should be based on the rate existing on that date, i.e., August 7, 1960, and 5
not the value of the currency at the time the lower court rendered its decision on March 10, 1965.
The appeal is without merit.
The purpose of the bill of lading is to provide for the rights and liabilities of the parties in reference to the contract to
carry. The stipulation in the bill of lading limiting the common carrier's liability to the value of the goods appearing in
6
the bill, unless the shipper or owner declares a greater value, is valid and binding. This limitation of the carrier's
7
liability is sanctioned by the freedom of the contracting parties to establish such stipulations, clauses, terms, or
conditions as they may deem convenient, provided they are not contrary to law, morals, good customs and public
policy. A stipulation fixing or limiting the sum that may be recovered from the carrier on the loss or deterioration of
8
the goods is valid, provided it is (a) reasonable and just under the circumstances, and (b) has been fairly and freely
9
agreed upon. In the case at bar, the liabilities of the defendants- appellees with respect to the lost or damaged
10
shipments are expressly limited to the C.I.F. value of the goods as per contract of sea carriage embodied in the bill
of lading, which reads:
Whenever the value of the goods is less than $500 per package or other freight unit, their value in
the calculation and adjustment of claims for which the Carrier may be liable shall for the purpose of
avoiding uncertainties and difficulties in fixing value be deemed to be the invoice value, plus frieght
and insurance if paid, irrespective of whether any other value is greater or less.
The limitation of liability and other provisions herein shall inure not only to the benefit of the carrier,
its agents, servants and employees, but also to the benefit of any independent contractor performing
services including stevedoring in connection with the goods covered hereunder. (Paragraph 17,
emphasis supplied.)
It is not pretended that those conditions are unreasonable or were not freely and fairly agreed upon. The shipper
and consignee are, therefore, bound by such stipulations since it is expressly stated in the bill of lading that in
"accepting this Bill of Lading, the shipper, owner and consignee of the goods, and the holder of the Bill of Lading
agree to be bound by all its stipulations, exceptions and conditions, whether written, stamped or printed, as fully as if
they were all signed by such shipper, owner, consignee or holder. It is obviously for this reason that the consignee
filed its claim against the defendants-appellees on the basis of the C.I.F. value of the lost or damaged goods in the
aggregate amount of Pl,109.67 (Exhibits "G", "H", "I", and "J"). 11
The plaintiff-appellant, as insurer, after paying the claim of the insured for damages under the insurance, is
subrogated merely to the rights of the assured. As subrogee, it can recover only the amount that is recoverable by
the latter. Since the right of the assured, in case of loss or damage to the goods, is limited or restricted by the
provisions in the bill of lading, a suit by the insurer as subrogee necessarily is subject to like limitations and
restrictions.
The insurer after paying the claim of the insured for damages under the insurance is subrogated
merely to the rights of the insured and therefore can necessarily recover only that to what was
recoverable by the insured. 12
Upon payment for a total loss of goods insured, the insurance is only subrogated to such rights of
action as the assured has against 3rd persons who caused or are responsible for the loss. The right
of action against another person, the equitable interest in which passes to the insurer, being only
that which the assured has, it follows that if the assured has no such right of action, none passes to
the insurer, and if the assured's right of action is limited or restricted by lawful contract between him
and the person sought to be made responsible for the loss, a suit by the insurer, in the Tight of the
assured, is subject to like limitations or restrictions.
13
Equally untenable is the contention of the plaintiff-appellant that because of extraordinary inflation, it should be
reimbursed for its dollar payments at the rate of — exchange on the date of the judgment and not on the date of the
loss or damage. The obligation of the carrier to pay for the damage commenced on the date it failed to deliver the
shipment in good condition to the consignee.
The C.I.F. Manila value of the goods which were lost or damaged, according to the claim of the consignee dated
September 26, 1960 is $226.37 (for the pilferage, Exhibit "G") and $324.33 (shortlanded, Exhibit "H") or P456.14
and P653.53, respectively, in Philippine Currency. The peso equivalent was based by the consignee on the
exchange rate of P2.015 to $1.00 which was the rate existing at that time. We find, therefore, that the trial court
committed no error in adopting the aforesaid rate of exchange.
WHEREFORE, the appealed decision is hereby affirmed, with costs against the plaintiff-appellant.
Barredo, Aquino, Concepcion, Jr. and and Martin, JJ., concur.

Justice Enrique M. Fernando (Chairman), is on leave.
Justice Ruperto G. Martin was designated to sit in the Second Division.
Footnotes
1 CA-G.R. No. 36295-R.
2 Civil Case No. 47720.
4 Decision, pp. 22-23, Record on Appeal.
5 Complaint, par. 8, p. 4, Record on Appeal.
6 The Roanoke 59 F. 161, 165.
7 Article 1749, Civil Code.
8 Article 1306, Ibid.; H. E. Heacock Co. v. Macondray & Co., 42 Phil. 205.
9 Articles 1744, No. 3 and 1750, Ibid.
10 See Articles 1744 to 1749, Ibid.
11 Said amount of P1,109.67 is itemized as follows:
STATEMENT OF CLAIM
Mark Pk D Unit Amo

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(Exhibits "H" & "J")
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12 Rizal Surety & Insurance Co. v. Manila Railroad Co., 23 SCRA 205. Emphasis supplied.
13 Phoenix Insurance Co. of Brooklyn v. Eric and Western Transportation Co., 29 U.S. L. ed., 873.
Emphasis supplied.
3) Papa v A.V. Valencia , 284 SCRA 643

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 105188 January 23, 1998
MYRON C. PAPA, Administrator of the Testate Estate of Angela M. Butte, petitioner,

vs.
A.U. VALENCIA and CO. INC., FELIX PEÑARROYO, SPS. ARSENIO B. REYES & AMANDA SANTOS, and
DELFIN JAO, respondents.
KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Myron C. Papa seeks to
reverse and set aside 1) the Decision dated 27 January 1992 of the Court of Appeals which affirmed with
modification the decision of the trial court; and 2) the Resolution dated 22 April 1992 of the same court, which
denied petitioner's motion for reconsideration of the above decision.
The antecedent facts of this case are as follows:
Sometime in June 1982, herein private respondents A.U. Valencia and Co., Inc. (hereinafter referred to as
respondent Valencia, for brevity) and Felix Peñarroyo (hereinafter called respondent Peñarroyo), filed with the
Regional Trial Court of Pasig, Branch 151, a complaint for specific performance against herein petitioner Myron C.
Papa, in his capacity as administrator of the Testate Estate of one Angela M. Butte.
The complaint alleged that on 15 June 1973, petitioner Myron C. Papa, acting as attorney-in-fact of Angela M. Butte,
sold to respondent Peñarroyo, through respondent Valencia, a parcel of land, consisting of 286.60 square meters,
located at corner Retiro and Cadiz Streets, La Loma, Quezon City, and covered by Transfer Certificate of Title No.
28993 of the Register of Deeds of Quezon City; that prior to the alleged sale, the said property, together with
several other parcels of land likewise owned by Angela M. Butte, had been mortgaged by her to the Associated
Banking Corporation (now Associated Citizens Bank); that after the alleged sale, but before the title to the subject
property had been released, Angela M. Butte passed away; that despite representations made by herein
respondents to the bank to release the title to the property sold to respondent Peñarroyo, the bank refused to
release it unless and until all the mortgaged properties of the late Angela M. Butte were also redeemed; that in order
to protect his rights and interests over the property, respondent Peñarroyo caused the annotation on the title of an
adverse claim as evidenced by Entry No. P.E.-6118/T-28993, inscribed on 18 January 1997.
The complaint further alleged that it was only upon the release of the title to the property, sometime in April 1977,
that respondents Valencia and Peñarroyo discovered that the mortgage rights of the bank had been assigned to one
Tomas L. Parpana (now deceased), as special administrator of the Estate of Ramon Papa, Jr., on 12 April 1977;
that since then, herein petitioner had been collecting monthly rentals in the amount of P800.00 from the tenants of
the property, knowing that said property had already been sold to private respondents on 15 June 1973; that despite
repeated demands from said respondents, petitioner refused and failed to deliver the title to the property.
Thereupon, respondents Valencia and Peñarroyo filed a complaint for specific performance, praying that petitioner
be ordered to deliver to respondent Peñarroyo the title to the subject property (TCT 28993); to turn over to the latter
the sum of P72,000.00 as accrued rentals as of April 1982, and the monthly rental of P800.00 until the property is
delivered to respondent Peñarroyo; to pay respondents the sum of P20,000.00 as attorney's fees; and to pay the
costs of the suit.
In his Answer, petitioner admitted that the lot had been mortgaged to the Associated Banking Corporation (now
Associated Citizens Bank). He contended, however, that the complaint did not state a cause of action; that the real
property in interest was the Testate Estate of Angela M. Butte, which should have been joined as a party defendant;
that the case amounted to a claim against the Estate of Angela M. Butte and should have been filed in Special
Proceedings No. A-17910 before the Probate Court in Quezon City; and that, if as alleged in the complaint, the
property had been assigned to Tomas L. Parpana, as special administrator of the Estate of Ramon Papa, Jr., said
estate should be impleaded. Petitioner, likewise, claimed that he could not recall in detail the transaction which
allegedly occurred in 1973; that he did not have TCT No. 28993 in his possession; that he could not be held
personally liable as he signed the deed merely as attorney-in-fact of said Angela M. Butte. Finally, petitioner
asseverated that as a result of the filing of the case, he was compelled to hire the services of counsel for a fee of
P20,000.00 for which respondents should be held liable.
Upon his motion, herein private respondent Delfin Jao was allowed to intervene in the case. Making common cause
with respondents Valencia and Peñarroyo, respondent Jao alleged that the subject lot which had been sold to
respondent Peñarroyo through respondent Valencia was in turn sold to him on 20 August 1973 for the sum of
P71,500.00, upon his paying earnest money in the amount of P5,000.00. He, therefore, prayed that judgment be
rendered in favor of respondents, the latter in turn be ordered to execute in his favor the appropriate deed of
conveyance covering the property in question and to turn over to him the rentals which aforesaid respondents
sought to collect from petitioner Myron V. Papa.
Respondent Jao, likewise, averred that as a result of petitioner's refusal to deliver the title to the property to
respondents Valencia and Peñarroyo, who in turn failed to deliver the said title to him, he suffered mental anguish
and serious anxiety for which he sought payment of moral damages; and, additionally, the payment of attorney's
fees and costs.
For his part, petitioner, as administrator of the Testate Estate of Angela M. Butte, filed a third-party complaint
against herein private respondents, spouses Arsenio B. Reyes and Amanda Santos (respondent Reyes spouses,
for short). He averred, among other's that the late Angela M. Butte was the owner of the subject property; that due
to non-payment of real estate tax said property was sold at public auction the City Treasurer of Quezon City to the
respondent Reyes spouses on 21 January 1980 for the sum of P14,000.00; that the one-year period of redemption
had expired; that respondents Valencia and Peñarroyo had sued petitioner Papa as administrator of the estate of
Angela M. Butte, for the delivery of the title to the property; that the same aforenamed respondents had
acknowledged that the price paid by them was insufficient, and that they were willing to add a reasonable amount or
a minimum of P55,000.00 to the price upon delivery of the property, considering that the same was estimated to be
worth P143,000.00; that petitioner was willing to reimburse respondents Reyes spouses whatever amount they
might have paid for taxes and other charges, since the subject property was still registered in the name of the late
Angela M. Butte; that it was inequitable to allow respondent Reyes spouses to acquire property estimated to be
worth P143,000.00, for a measly sum of P14,000.00. Petitioner prayed that judgment be rendered canceling the tax
sale to respondent Reyes spouses; restoring the subject property to him upon payment by him to said respondent
Reyes spouses of the amount of P14,000.00, plus legal interest; and, ordering respondents Valencia and Peñarroyo
to pay him at least P55,000.00 plus everything they might have to pay the Reyes spouses in recovering the
property.
Respondent Reyes spouses in their Answer raised the defense of prescription of petitioner's right to redeem the
property.
At the trial, only respondent Peñarroyo testified. All the other parties only submitted documentary proof.
On 29 June 1987, the trial court rendered a decision, the dispositive portion of which reads:
WHEREUPON, judgment is hereby rendered as follows:
1) Allowing defendant to redeem from third-party defendants and ordering the latter to allow the
former to redeem the property in question, by paying the sum of P14,000.00 plus legal interest of
12% thereon from January 21, 1980;
2) Ordering defendant to execute a Deed of Absolute Sale in favor of plaintiff Felix Peñarroyo
covering the property in question and to deliver peaceful possession and enjoyment of the said
property to the said plaintiff, free from any liens and encumbrances;
Should this not be possible, for any reason not attributable to defendant, said defendant is ordered
to pay to plaintiff Felix Peñarroyo the sum of P45,000.00 plus legal interest of 12% from June 15,
1973;
3) Ordering plaintiff Felix Peñarroyo to execute and deliver to intervenor a deed of absolute sale over
the same property, upon the latter's payment to the former of the balance of the purchase price of
P71,500.00;
Should this not be possible, plaintiff Felix Peñarroyo is ordered to pay intervenor the sum of
P5,000.00 plus legal interest of 12% from August 23, 1973; and
4) Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as attorney's fees and
litigation expenses.
SO ORDERED. 1
Petitioner appealed the aforesaid decision of the trial court to the Court of Appeals, alleging among others that the
sale was never "consummated" as he did not encash the check (in the amount of P40,000.00) given by respondents
Valencia and Peñarroyo in payment of the full purchase price of the subject lot. He maintained that what said
respondent had actually paid was only the amount of P5,000.00 (in cash) as earnest money.
Respondent Reyes spouses, likewise, appealed the above decision. However, their appeal was dismissed because
of failure to file their appellant's brief.
On 27 January 1992, the Court of Appeals rendered a decision, affirming with modification the trial court's decision,
thus:
WHEREFORE, the second paragraph of the dispositive portion of the appealed decision is
MODIFIED, by ordering the defendant-appellant to deliver to plaintiff-appellees the owner's duplicate
of TCT No. 28993 of Angela M. Butte and the peaceful possession and enjoyment of the lot in
question or, if the owner's duplicate certificate cannot be produced, to authorize the Register of
Deeds to cancel it and issue a certificate of title in the name of Felix Peñarroyo. In all other respects,
the decision appealed from is AFFIRMED. Costs against defendant-appellant Myron C. Papa.
SO ORDERED. 2
In affirming the trial court's decision, respondent court held that contrary to petitioner's claim that he did not encash
the aforesaid check, and therefore, the sale was not consummated, there was no evidence at all that petitioner did
not, in fact, encash said check. On the other hand, respondent Peñarroyo testified in court that petitioner Papa had
received the amount of P45,000.00 and issued receipts therefor. According to respondent court, the presumption is
that the check was encashed, especially since the payment by check was not denied by defendant-appellant (herein
petitioner) who, in his Answer, merely alleged that he "can no longer recall the transaction which is supposed to
have happened 10 years ago." 3
On petitioner's claim that he cannot be held personally liable as he had acted merely as attorney-in-fact of the
owner, Angela M. Butte, respondent court held that such contention is without merit. This action was not brought
against him in his personal capacity, but in his capacity as the administrator of the Testate Estate of Angela M.
Butte.4
On petitioner's contention that the estate of Angela M. Butte should have been joined in the action as the real party
in interest, respondent court held that pursuant to Rule 3, Section 3 of the Rules of Court, the estate of Angela M.
Butte does not have to be joined in the action. Likewise, the estate of Ramon Papa, Jr., is not an indispensable
party under Rule 3, Section 7 of the same Rules. For the fact is that Ramon Papa, Jr., or his estate, was not a party
to the Deed of Absolute Sale, and it is basic law that contracts bind only those who are parties thereto. 5
Respondent court observed that the conditions under which the mortgage rights of the bank were assigned are not
clear. In any case, any obligation which the estate of Angela M. Butte might have to the estate of Ramon Papa, Jr. is
strictly between them. Respondents Valencia and Peñarroyo are not bound by any such obligation.
Petitioner filed a motion for reconsideration of the above decision, which motion was denied by respondent Court of
Appeals.
Hence, this petition wherein petitioner raises the following issues:
I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS THAT THE SALE IN

QUESTION WAS CONSUMMATED IS GROUNDED ON SPECULATION OR CONJECTURE, AND
IS CONTRARY TO THE APPLICABLE LEGAL PRINCIPLE.
II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF THE TRIAL COURT, ERRED
BECAUSE IT, IN EFFECT, CANCELLED OR NULLIFIED AN ASSIGNMENT OF THE SUBJECT
PROPERTY IN FAVOR OF THE ESTATE OF RAMON PAPA, JR. WHICH IS NOT A PARTY IN
THIS CASE.
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ESTATE OF ANGELA M.
BUTTE AND THE ESTATE OF RAMON PAPA, JR. ARE INDISPENSABLE PARTIES IN THIS
CASE. 6
Petitioner argues that respondent Court of Appeals erred in concluding that alleged sale of the subject property had
been consummated. He contends that such a conclusion is based on the erroneous presumption that the check (in
the amount of P40,000.00) had been cashed, citing Art. 1249 of the Civil Code, which provides, in part, that
payment by checks shall produce the effect of payment only when they have been cashed or when through the fault
of the creditor they have been impaired. Petitioner insists that he never cashed said check; and, such being
7
the case, its delivery never produced the effect of payment. Petitioner, while admitting that he had issued
receipts for the payments, asserts that said receipts, particularly the receipt of PCIB Check No. 761025 in
the amount of P40,000.00, do not prove payment. He avers that there must be a showing that said check had
been encashed. If, according to petitioner, the check had been encashed, respondent Peñarroyo should
have presented PCIB Check No. 761025 duly stamped received by the payee, or at least its microfilm copy.
Petitioner finally avers that, in fact, the consideration for the sale was still in the hands of respondents
Valencia and Peñarroyo, as evidenced by a letter addressed to him in which said respondents wrote, in
part:
. . . Please be informed that I had been authorized by Dr. Ramon Papa, Jr., heir of Mrs. Angela
M. Butte to pay you the aforementioned amount of P75,000.00 for the release and cancellation
of subject property's mortgage. The money is with me and if it is alright with you, I would like
to tender the payment as soon as possible. . . . 8
We find no merit in petitioner's arguments.
It is an undisputed fact that respondents Valencia and Peñarroyo had given petitioner Myron C. Papa the
amounts of Five Thousand Pesos (P5,000.00) in cash on 24 May 1973, and Forty Thousand Pesos
(P40,000.00) in check on 15 June 1973, in payment of the purchase price of the subject lot. Petitioner
himself admits having received said amounts, and having issued receipts therefor. Petitioner's assertion
9 10
that he never encashed the aforesaid check is not substantiated and is at odds with his statement in his
answer that "he can no longer recall the transaction which is supposed to have happened 10 years ago."
After more than ten (10) years from the payment in party by cash and in part by check, the presumption is
that the check had been encashed. As already stated, he even waived the presentation of oral evidence.
Granting that petitioner had never encashed the check, his failure to do so for more than ten (10) years
undoubtedly resulted in the impairment of the check through his unreasonable and unexplained delay.
While it is true that the delivery of a check produces the effect of payment only when it is cashed, pursuant
to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced by the creditor's unreasonable
delay in presentment. The acceptance of a check implies an undertaking of due diligence in presenting it for
payment, and if he from whom it is received sustains loss by want of such diligence, it will be held to
operate as actual payment of the debt or obligation for which it was given. It has, likewise, been held that if
11
no presentment is made at all, the drawer cannot be held liable irrespective of loss or injury unless
12
presentment is otherwise excused. This is in harmony with Article 1249 of the Civil Code under which
payment by way of check or other negotiable instrument is conditioned on its being cashed, except when
through the fault of the creditor, the instrument is impaired. The payee of a check would be a creditor under
this provision and if its no-payment is caused by his negligence, payment will be deemed effected and the
obligation for which the check was given as conditional payment will be discharged. 13
Considering that respondents Valencia and Peñarroyo had fulfilled their part of the contract of sale by
delivering the payment of the purchase price, said respondents, therefore, had the right to compel
petitioner to deliver to them the owner's duplicate of TCT No. 28993 of Angela M. Butte and the peaceful
possession and enjoyment of the lot in question.
With regard to the alleged assignment of mortgage rights, respondent Court of Appeals has found that the
conditions under which said mortgage rights of the bank were assigned are not clear. Indeed, a perusal of
the original records of the case would show that there is nothing there that could shed light on the
transactions leading to the said assignment of rights; nor is there any evidence on record of the conditions
under which said mortgage rights were assigned. What is certain is that despite the said assignment of
mortgage rights, the title to the subject property has remained in the name of the late Angela M. Butte. This
14
much is admitted by petitioner himself in his answer to respondent's complaint as well as in the third-party
complaint that petitioner filed against respondent-spouses Arsenio B. Reyes and Amanda
Santos. Assuming arquendo that the mortgage rights of the Associated Citizens Bank had been assigned
15
to the estate of Ramon Papa, Jr., and granting that the assigned mortgage rights validly exists and
constitute a lien on the property, the estate may file the appropriate action to enforce such lien. The cause
of action for specific performance which respondents Valencia and Peñarroyo have against petitioner is
different from the cause of action which the estate of Ramon Papa, Jr. may have to enforce whatever rights
or liens it has on the property by reason of its being an alleged assignee of the bank's rights of mortgage.
Finally, the estate of Angela M. Butte is not an indispensable party. Under Section 3 of Rule 3 of the Rules of
Court, an executor or administrator may sue or be sued without joining the party for whose benefit the
action is presented or defended, thus:
Sec. 3. Representative parties. — A trustee of an express trust, a guardian, executor or

administrator, or a party authorized by statute, may sue or be sued without joining the party
for whose benefit the action is presented or defended; but the court may, at any stage of the
proceedings, order such beneficiary to be made a party. An agent acting in his own name and
for the benefit of an undisclosed principal may sue or be sued without joining the principal
except when the contract involves things belonging to the principal. 16
Neither is the estate of Ramon Papa, Jr. an indispensable party without whom, no final determination of the
action can be had. Whatever prior and subsisting mortgage rights the estate of Ramon Papa, Jr. has over
the property may still be enforced regardless of the change in ownership thereof.
WHEREFORE, the petition for review is hereby DENIED and the Decision of the Court of Appeals, dated 27
January 1992 is AFFIRMED.
SO ORDERED.
Davide, Jr., Bellosillo and Vitug, JJ., concur.
Footnotes
1 Rollo, pp. 70-71.
2 Rollo, pp. 41-42.
3 Id., at 40.
4 Id., at 41.
5 Id., at 40-41.
6 Id., at 23-24.
7 Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it
not possible to deliver such currency, then in the currency which is legal tender in the
Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
8 Rollo, p. 26.
9 Id., at 132.
10 Id., at 25.
11 60 AM. JUR. 2d, Sec. 59.
12 Campos and Lopez-Campos, Negotiable Instruments Law, 4th Edition (1990), p.

561 citing Rodriguez vs. Hardouin, 15 La. App. 112, 131 So. 593.
13 Id., at 560 citing Gabon vs. Balagot, 53 O.G. No. 11,3504.
14 Rollo, p. 41.
15 Original Records, p. 162.
16 This section has been amended by the 1997 Rules of Civil Procedure to read as follows:
Sec. 3. Representative as parties. — Where the action is allowed to be prosecuted or

defended by a representative or someone acting in a fiduciary capacity, the beneficiary shall
be included in the title of the case and shall be deemed to be the real party in interest. A
representative may be a trustee of an express trust, a guardian, an executor or administrator,
or a party authorized by law or these Rules. An agent acting in his own name and for the
benefit of an undisclosed principal may sue or be sued without joining the principal except
when the contract involves things belonging to the principal.
4) Philippine Airline v Court of Appeals, 181 SCRA 557

SUPREME COURT
Manila
EN BANC
G.R. No. L-49188 January 30, 1990
PHILIPPINE AIRLINES, INC., petitioner,

vs.
HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO, Court of First Instance of Manila, Branch
XIII, JAIME K. DEL ROSARIO, Deputy Sheriff, Court of First Instance, Manila, and AMELIA TAN, respondents.
GUTIERREZ, JR., J.:
Behind the simple issue of validity of an alias writ of execution in this case is a more fundamental question. Should
the Court allow a too literal interpretation of the Rules with an open invitation to knavery to prevail over a more
discerning and just approach? Should we not apply the ancient rule of statutory construction that laws are to be
interpreted by the spirit which vivifies and not by the letter which killeth?
This is a petition to review on certiorari the decision of the Court of Appeals in CA-G.R. No. 07695 entitled
"Philippine Airlines, Inc. v. Hon. Judge Ricardo D. Galano, et al.", dismissing the petition for certiorari against the
order of the Court of First Instance of Manila which issued an alias writ of execution against the petitioner.
The petition involving the alias writ of execution had its beginnings on November 8, 1967, when respondent Amelia
Tan, under the name and style of Able Printing Press commenced a complaint for damages before the Court of First
Instance of Manila. The case was docketed as Civil Case No. 71307, entitled Amelia Tan, et al. v. Philippine
Airlines, Inc.
After trial, the Court of First Instance of Manila, Branch 13, then presided over by the late Judge Jesus P. Morfe
rendered judgment on June 29, 1972, in favor of private respondent Amelia Tan and against petitioner Philippine
Airlines, Inc. (PAL) as follows:
WHEREFORE, judgment is hereby rendered, ordering the defendant Philippine Air Lines:
1. On the first cause of action, to pay to the plaintiff the amount of P75,000.00 as actual damages,
with legal interest thereon from plaintiffs extra-judicial demand made by the letter of July 20, 1967;
2. On the third cause of action, to pay to the plaintiff the amount of P18,200.00, representing the
unrealized profit of 10% included in the contract price of P200,000.00 plus legal interest thereon
from July 20,1967;
3. On the fourth cause of action, to pay to the plaintiff the amount of P20,000.00 as and for moral
damages, with legal interest thereon from July 20, 1 967;
4. On the sixth cause of action, to pay to the plaintiff the amount of P5,000.00 damages as and for
attorney's fee.
Plaintiffs second and fifth causes of action, and defendant's counterclaim, are dismissed.
With costs against the defendant. (CA Rollo, p. 18)
On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The case was docketed as CA-G.R. No.
51079-R.
On February 3, 1977, the appellate court rendered its decision, the dispositive portion of which reads:
IN VIEW WHEREOF, with the modification that PAL is condemned to pay plaintiff the sum of P25,000.00 as
damages and P5,000.00 as attorney's fee, judgment is affirmed, with costs. (CA Rollo, p. 29)
Notice of judgment was sent by the Court of Appeals to the trial court and on dates subsequent thereto, a motion for
reconsideration was filed by respondent Amelia Tan, duly opposed by petitioner PAL.
On May 23,1977, the Court of Appeals rendered its resolution denying the respondent's motion for reconsideration
for lack of merit.
No further appeal having been taken by the parties, the judgment became final and executory and on May 31, 1977,
judgment was correspondingly entered in the case.
The case was remanded to the trial court for execution and on September 2,1977, respondent Amelia Tan filed a
motion praying for the issuance of a writ of execution of the judgment rendered by the Court of Appeals. On October
11, 1977, the trial court, presided over by Judge Galano, issued its order of execution with the corresponding writ in
favor of the respondent. The writ was duly referred to Deputy Sheriff Emilio Z. Reyes of Branch 13 of the Court of
First Instance of Manila for enforcement.
Four months later, on February 11, 1978, respondent Amelia Tan moved for the issuance of an alias writ of
execution stating that the judgment rendered by the lower court, and affirmed with modification by the Court of
Appeals, remained unsatisfied.
On March 1, 1978, the petitioner filed an opposition to the motion for the issuance of an alias writ of execution
stating that it had already fully paid its obligation to plaintiff through the deputy sheriff of the respondent court, Emilio
Z. Reyes, as evidenced by cash vouchers properly signed and receipted by said Emilio Z. Reyes.
On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature, ordering the
executing sheriff Emilio Z. Reyes to appear with his return and explain the reason for his failure to surrender the
amounts paid to him by petitioner PAL. However, the order could not be served upon Deputy Sheriff Reyes who had
absconded or disappeared.
On March 28, 1978, motion for the issuance of a partial alias writ of execution was filed by respondent Amelia Tan.
On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for Partial Alias Writ of Execution" with
Substitute Motion for Alias Writ of Execution. On May 1, 1978, the respondent Judge issued an order which reads:
As prayed for by counsel for the plaintiff, the Motion to Withdraw 'Motion for Partial Alias Writ of Execution
with Substitute Motion for Alias Writ of Execution is hereby granted, and the motion for partial alias writ of
execution is considered withdrawn.
Let an Alias Writ of Execution issue against the defendant for the fall satisfaction of the judgment rendered.
Deputy Sheriff Jaime K. del Rosario is hereby appointed Special Sheriff for the enforcement thereof. (CA
Rollo, p. 34)
On May 18, 1978, the petitioner received a copy of the first alias writ of execution issued on the same day directing
Special Sheriff Jaime K. del Rosario to levy on execution in the sum of P25,000.00 with legal interest thereon from
July 20,1967 when respondent Amelia Tan made an extra-judicial demand through a letter. Levy was also ordered
for the further sum of P5,000.00 awarded as attorney's fees.
On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of execution stating that no return of
the writ had as yet been made by Deputy Sheriff Emilio Z. Reyes and that the judgment debt had already been fully
satisfied by the petitioner as evidenced by the cash vouchers signed and receipted by the server of the writ of
execution, Deputy Sheriff Emilio Z. Reyes.
On May 26,1978, the respondent Jaime K. del Rosario served a notice of garnishment on the depository bank of
petitioner, Far East Bank and Trust Company, Rosario Branch, Binondo, Manila, through its manager and garnished
the petitioner's deposit in the said bank in the total amount of P64,408.00 as of May 16, 1978. Hence, this petition
for certiorari filed by the Philippine Airlines, Inc., on the grounds that:
AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR RETURN OF THE ORIGINAL
WRIT BY THE IMPLEMENTING OFFICER.
II
PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS DIRECTED IN THE WRIT OF

EXECUTION CONSTITUTES SATISFACTION OF JUDGMENT.
III
INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO THE PAYMENT THEREOF.
IV
SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY OF JUDGMENT DEBTOR

AND DISPOSAL OR SALE THEREOF TO SATISFY JUDGMENT.
Can an alias writ of execution be issued without a prior return of the original writ by the implementing officer?
We rule in the affirmative and we quote the respondent court's decision with approval:
The issuance of the questioned alias writ of execution under the circumstances here obtaining is justified
because even with the absence of a Sheriffs return on the original writ, the unalterable fact remains that
such a return is incapable of being obtained (sic) because the officer who is to make the said return has
absconded and cannot be brought to the Court despite the earlier order of the court for him to appear for this
purpose. (Order of Feb. 21, 1978, Annex C, Petition). Obviously, taking cognizance of this circumstance, the
order of May 11, 1978 directing the issuance of an alias writ was therefore issued. (Annex D. Petition). The
need for such a return as a condition precedent for the issuance of an alias writ was justifiably dispensed
with by the court below and its action in this regard meets with our concurrence. A contrary view will produce
an abhorent situation whereby the mischief of an erring officer of the court could be utilized to impede
indefinitely the undisputed and awarded rights which a prevailing party rightfully deserves to obtain and with
dispatch. The final judgment in this case should not indeed be permitted to become illusory or incapable of
execution for an indefinite and over extended period, as had already transpired. (Rollo, pp. 35-36)
Judicium non debet esse illusorium; suum effectum habere debet (A judgment ought not to be illusory it ought to
have its proper effect).
Indeed, technicality cannot be countenanced to defeat the execution of a judgment for execution is the fruit and end
of the suit and is very aptly called the life of the law (Ipekdjian Merchandising Co. v. Court of Tax Appeals, 8 SCRA
59 [1963]; Commissioner of Internal Revenue v. Visayan Electric Co., 19 SCRA 697, 698 [1967]). A judgment
cannot be rendered nugatory by the unreasonable application of a strict rule of procedure. Vested rights were never
intended to rest on the requirement of a return, the office of which is merely to inform the court and the parties, of
any and all actions taken under the writ of execution. Where such information can be established in some other
manner, the absence of an executing officer's return will not preclude a judgment from being treated as discharged
or being executed through an alias writ of execution as the case may be. More so, as in the case at bar. Where the
return cannot be expected to be forthcoming, to require the same would be to compel the enforcement of rights
under a judgment to rest on an impossibility, thereby allowing the total avoidance of judgment debts. So long as a
judgment is not satisfied, a plaintiff is entitled to other writs of execution (Government of the Philippines v. Echaus
and Gonzales, 71 Phil. 318). It is a well known legal maxim that he who cannot prosecute his judgment with effect,
sues his case vainly.
More important in the determination of the propriety of the trial court's issuance of an alias writ of execution is the
issue of satisfaction of judgment.
Under the peculiar circumstances surrounding this case, did the payment made to the absconding sheriff by check
in his name operate to satisfy the judgment debt? The Court rules that the plaintiff who has won her case should not
be adjudged as having sued in vain. To decide otherwise would not only give her an empty but a pyrrhic victory.
It should be emphasized that under the initial judgment, Amelia Tan was found to have been wronged by PAL.
She filed her complaint in 1967.
After ten (10) years of protracted litigation in the Court of First Instance and the Court of Appeals, Ms. Tan won her
case.
It is now 1990.
Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the courts have solemnly declared as
rightfully hers. Through absolutely no fault of her own, Ms. Tan has been deprived of what, technically, she should
have been paid from the start, before 1967, without need of her going to court to enforce her rights. And all because
PAL did not issue the checks intended for her, in her name.
Under the peculiar circumstances of this case, the payment to the absconding sheriff by check in his name did not
operate as a satisfaction of the judgment debt.
In general, a payment, in order to be effective to discharge an obligation, must be made to the proper person. Article
1240 of the Civil Code provides:
Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in
interest, or any person authorized to receive it. (Emphasis supplied)
Thus, payment must be made to the obligee himself or to an agent having authority, express or implied, to receive
the particular payment (Ulen v. Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR 65). Payment made to one having
apparent authority to receive the money will, as a rule, be treated as though actual authority had been given for its
receipt. Likewise, if payment is made to one who by law is authorized to act for the creditor, it will work a discharge
(Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The receipt of money due on ajudgment by an officer
authorized by law to accept it will, therefore, satisfy the debt (See 40 Am Jm 729, 25; Hendry v. Benlisa supra;
Seattle v. Stirrat 55 Wash. 104 p. 834,24 LRA [NS] 1275).
The theory is where payment is made to a person authorized and recognized by the creditor, the payment to such a
person so authorized is deemed payment to the creditor. Under ordinary circumstances, payment by the judgment
debtor in the case at bar, to the sheriff should be valid payment to extinguish the judgment debt.
There are circumstances in this case, however, which compel a different conclusion.
The payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in checks. The
checks were not payable to Amelia Tan or Able Printing Press but to the absconding sheriff.
Did such payments extinguish the judgment debt?
Article 1249 of the Civil Code provides:
The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been cashed, or when through the fault of the creditor
they have been impaired.
In the absence of an agreement, either express or implied, payment means the discharge of a debt or obligation in
money (US v. Robertson, 5 Pet. [US] 641, 8 L. ed. 257) and unless the parties so agree, a debtor has no rights,
except at his own peril, to substitute something in lieu of cash as medium of payment of his debt (Anderson v. Gill,
79 Md.. 312, 29 A 527, 25 LRA 200,47 Am. St. Rep. 402). Consequently, unless authorized to do so by law or by
consent of the obligee a public officer has no authority to accept anything other than money in payment of an
obligation under a judgment being executed. Strictly speaking, the acceptance by the sheriff of the petitioner's
checks, in the case at bar, does not, per se, operate as a discharge of the judgment debt.
Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does
not, by itself, operate as payment (See. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan Landon Co. v.
American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager's
check or ordinary cheek, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of
payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the
obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by
commercial document is actually realized (Art. 1249, Civil Code, par. 3).
If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would have been no
payment. After dishonor of the checks, Ms. Tan could have run after other properties of PAL. The theory is that she
has received no value for what had been awarded her. Because the checks were drawn in the name of Emilio Z.
Reyes, neither has she received anything. The same rule should apply.
It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal contemplation.
The reasoning is logical but is it valid and proper? Logic has its limits in decision making. We should not follow
rulings to their logical extremes if in doing so we arrive at unjust or absurd results.
In the first place, PAL did not pay in cash. It paid in cheeks.
And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of cash in a
careless and inane manner. Mature thought is given to the possibility of the cash being lost, of the bearer being
waylaid or running off with what he is carrying for another. Payment in checks is precisely intended to avoid the
possibility of the money going to the wrong party. The situation is entirely different where a Sheriff seizes a car, a
tractor, or a piece of land. Logic often has to give way to experience and to reality. Having paid with checks, PAL
should have done so properly.
Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment debt but
the Court has never, in the least bit, suggested that judgment debtors should settle their obligations by turning over
huge amounts of cash or legal tender to sheriffs and other executing officers. Payment in cash would result in
damage or interminable litigations each time a sheriff with huge amounts of cash in his hands decides to abscond.
As a protective measure, therefore, the courts encourage the practice of payments by cheek provided adequate
controls are instituted to prevent wrongful payment and illegal withdrawal or disbursement of funds. If particularly big
amounts are involved, escrow arrangements with a bank and carefully supervised by the court would be the safer
procedure. Actual transfer of funds takes place within the safety of bank premises. These practices are perfectly
legal. The object is always the safe and incorrupt execution of the judgment.
It is, indeed, out of the ordinary that checks intended for a particular payee are made out in the name of another.
Making the checks payable to the judgment creditor would have prevented the encashment or the taking of undue
advantage by the sheriff, or any person into whose hands the checks may have fallen, whether wrongfully or in
behalf of the creditor. The issuance of the checks in the name of the sheriff clearly made possible the
misappropriation of the funds that were withdrawn.
As explained and held by the respondent court:
... [K]nowing as it does that the intended payment was for the private party respondent Amelia Tan, the
petitioner corporation, utilizing the services of its personnel who are or should be knowledgeable about the
accepted procedures and resulting consequences of the checks drawn, nevertheless, in this instance,
without prudence, departed from what is generally observed and done, and placed as payee in the checks
the name of the errant Sheriff and not the name of the rightful payee. Petitioner thereby created a situation
which permitted the said Sheriff to personally encash said checks and misappropriate the proceeds thereof
to his exclusive personal benefit. For the prejudice that resulted, the petitioner himself must bear the fault.
The judicial guideline which we take note of states as follows:
As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one
who made it possible by his act of confidence must bear the loss. (Blondeau, et al. v. Nano, et al., L-41377,
July 26, 1935, 61 Phil. 625)
Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act made possible the
loss had but itself to blame.
The attention of this Court has been called to the bad practice of a number of executing officers, of requiring checks
in satisfaction of judgment debts to be made out in their own names. If a sheriff directs a judgment debtor to issue
the checks in the sheriff's name, claiming he must get his commission or fees, the debtor must report the sheriff
immediately to the court which ordered the execution or to the Supreme Court for appropriate disciplinary action.
Fees, commissions, and salaries are paid through regular channels. This improper procedure also allows such
officers, who have sixty (60) days within which to make a return, to treat the moneys as their personal finds and to
deposit the same in their private accounts to earn sixty (60) days interest, before said finds are turned over to the
court or judgment creditor (See Balgos v. Velasco, 108 SCRA 525 [1981]). Quite as easily, such officers could put
up the defense that said checks had been issued to them in their private or personal capacity. Without a receipt
evidencing payment of the judgment debt, the misappropriation of finds by such officers becomes clean and
complete. The practice is ingenious but evil as it unjustly enriches court personnel at the expense of litigants and the
proper administration of justice. The temptation could be far greater, as proved to be in this case of the absconding
sheriff. The correct and prudent thing for the petitioner was to have issued the checks in the intended payee's name.
The pernicious effects of issuing checks in the name of a person other than the intended payee, without the latter's
agreement or consent, are as many as the ways that an artful mind could concoct to get around the safeguards
provided by the law on negotiable instruments. An angry litigant who loses a case, as a rule, would not want the
winning party to get what he won in the judgment. He would think of ways to delay the winning party's getting what
has been adjudged in his favor. We cannot condone that practice especially in cases where the courts and their
officers are involved. We rule against the petitioner.
1âwphi1
Anent the applicability of Section 15, Rule 39, as follows:
Section 15. Execution of money judgments. — The officer must enforce an execution of a money judgment
by levying on all the property, real and personal of every name and nature whatsoever, and which may be
disposed of for value, of the judgment debtor not exempt from execution, or on a sufficient amount of such
property, if they be sufficient, and selling the same, and paying to the judgment creditor, or his attorney, so
much of the proceeds as will satisfy the judgment. ...
the respondent court held:
We are obliged to rule that the judgment debt cannot be considered satisfied and therefore the orders of the
respondent judge granting the alias writ of execution may not be pronounced as a nullity.
x x x x x x x x x
It is clear and manifest that after levy or garnishment, for a judgment to be executed there is the requisite of
payment by the officer to the judgment creditor, or his attorney, so much of the proceeds as will satisfy the
judgment and none such payment had been concededly made yet by the absconding Sheriff to the private
respondent Amelia Tan. The ultimate and essential step to complete the execution of the judgment not
having been performed by the City Sheriff, the judgment debt legally and factually remains unsatisfied.
Strictly speaking execution cannot be equated with satisfaction of a judgment. Under unusual circumstances as
those obtaining in this petition, the distinction comes out clearly.
Execution is the process which carries into effect a decree or judgment (Painter v. Berglund, 31 Cal. App. 2d. 63, 87
P 2d 360, 363; Miller v. London, 294 Mass 300, 1 NE 2d 198, 200; Black's Law Dictionary), whereas the satisfaction
of a judgment is the payment of the amount of the writ, or a lawful tender thereof, or the conversion by sale of the
debtor's property into an amount equal to that due, and, it may be done otherwise than upon an execution (Section
47, Rule 39). Levy and delivery by an execution officer are not prerequisites to the satisfaction of a judgment when
the same has already been realized in fact (Section 47, Rule 39). Execution is for the sheriff to accomplish while
satisfaction of the judgment is for the creditor to achieve. Section 15, Rule 39 merely provides the sheriff with his
duties as executing officer including delivery of the proceeds of his levy on the debtor's property to satisfy the
judgment debt. It is but to stress that the implementing officer's duty should not stop at his receipt of payments but
must continue until payment is delivered to the obligor or creditor.
Finally, we find no error in the respondent court's pronouncement on the inclusion of interests to be recovered under
the alias writ of execution. This logically follows from our ruling that PAL is liable for both the lost checks and
interest. The respondent court's decision in CA-G.R. No. 51079-R does not totally supersede the trial court's
judgment in Civil Case No. 71307. It merely modified the same as to the principal amount awarded as actual
damages.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DISMISSED. The judgment of the
respondent Court of Appeals is AFFIRMED and the trial court's issuance of the alias writ of execution against the
petitioner is upheld without prejudice to any action it should take against the errant sheriff Emilio Z. Reyes. The
Court Administrator is ordered to follow up the actions taken against Emilio Z. Reyes.
SO ORDERED.
Fernan, C.J., Cruz, Paras, Bidin, Griño-Aquino, Medialdea and Regalado, JJ., concur.
Separate Opinions
NARVASA, J., dissenting:
The execution of final judgments and orders is a function of the sheriff, an officer of the court whose authority is by
and large statutorily determined to meet the particular exigencies arising from or connected with the performance of
the multifarious duties of the office. It is the acknowledgment of the many dimensions of this authority, defined by
statute and chiselled by practice, which compels me to disagree with the decision reached by the majority.
A consideration of the wide latitude of discretion allowed the sheriff as the officer of the court most directly involved
with the implementation and execution of final judgments and orders persuades me that PAL's payment to the
sheriff of its judgment debt to Amelia Tan, though made by check issued in said officer's name, lawfully satisfied
said obligation and foreclosed further recourse therefor against PAL, notwithstanding the sheriffs failure to deliver to
Tan the proceeds of the check.
It is a matter of history that the judiciary .. is an inherit or of the Anglo-American tradition. While the common
law as such .. "is not in force" in this jurisdiction, "to breathe the breath of life into many of the institutions,
introduced [here] under American sovereignty, recourse must be had to the rules, principles and doctrines of
the common law under whose protecting aegis the prototypes of these institutions had their birth" A sheriff is
"an officer of great antiquity," and was also called the shire reeve. A shire in English law is a Saxon word
signifying a division later called a county. A reeve is an ancient English officer of justice inferior in rank to an
alderman .. appointed to process, keep the King's peace, and put the laws in execution. From a very remote
period in English constitutional history .. the shire had another officer, namely the shire reeve or as we say,
the sheriff. .. The Sheriff was the special representative of the legal or central authority, and as such usually
nominated by the King. .. Since the earliest times, both in England and the United States, a sheriff has
continued his status as an adjunct of the court .. . As it was there, so it has been in the Philippines from the
time of the organization of the judiciary .. . (J. Fernando's concurring opinion in Bagatsing v. Herrera, 65
SCRA 434)
One of a sheriff s principal functions is to execute final judgments and orders. The Rules of Court require the writs of
execution to issue to him, directing him to enforce such judgments and orders in the manner therein provided (Rule
39). The mode of enforcement varies according to the nature of the judgment to be carried out: whether it be against
property of the judgment debtor in his hands or in the hands of a third person i e. money judgment), or for the sale of
property, real or personal (i.e. foreclosure of mortgage) or the delivery thereof, etc. (sec. 8, Rule 39).
Under sec. 15 of the same Rule, the sheriff is empowered to levy on so much of the judgment debtor's property as
may be sufficient to enforce the money judgment and sell these properties at public auction after due notice to
satisfy the adjudged amount. It is the sheriff who, after the auction sale, conveys to the purchaser the property thus
sold (secs. 25, 26, 27, Rule 39), and pays the judgment creditor so much of the proceeds as will satisfy the
judgment. When the property sold by him on execution is an immovable which consequently gives rise to a light of
redemption on the part of the judgment debtor and others (secs. 29, 30, Rule 39), it is to him (or to the purchaser or
redemptioner that the payments may be made by those declared by law as entitled to redeem (sec. 31, Rule 39);
and in this situation, it becomes his duty to accept payment and execute the certificate of redemption (Enage v. Vda.
y Hijos de Escano, 38 Phil. 657, cited in Moran, Comments on the Rules of Court, 1979 ed., vol. 2, pp. 326-327). It
is also to the sheriff that "written notice of any redemption must be given and a duplicate filed with the registrar of
deeds of the province, and if any assessments or taxes are paid by the redemptioner or if he has or acquires any
lien other than that upon which the redemption was made, notice thereof must in like manner be given to the officer
and filed with the registrar of deeds," the effect of failure to file such notice being that redemption may be made
without paying such assessments, taxes, or liens (sec. 30, Rule 39).
The sheriff may likewise be appointed a receiver of the property of the judgment debtor where the appointment of
the receiver is deemed necessary for the execution of the judgment (sec. 32, Rule 39).
At any time before the sale of property on execution, the judgment debtor may prevent the sale by paying the sheriff
the amount required by the execution and the costs that have been incurred therein (sec. 20, Rule 39).
The sheriff is also authorized to receive payments on account of the judgment debt tendered by "a person indebted
to the judgment debtor," and his "receipt shall be a sufficient discharge for the amount so paid or directed to be
credited by the judgment creditor on the execution" (sec. 41, Rule 39).
Now, obviously, the sheriff s sale extinguishes the liability of the judgment debtor either in fun, if the price paid by
the highest bidder is equal to, or more than the amount of the judgment or pro tanto if the price fetched at the sale
be less. Such extinction is not in any way dependent upon the judgment creditor's receiving the amount realized, so
that the conversion or embezzlement of the proceeds of the sale by the sheriff does not revive the judgment debt or
render the judgment creditor liable anew therefor.
So, also, the taking by the sheriff of, say, personal property from the judgment debtor for delivery to the judgment
creditor, in fulfillment of the verdict against him, extinguishes the debtor's liability; and the conversion of said
property by the sheriff, does not make said debtor responsible for replacing the property or paying the value thereof.
In the instances where the Rules allow or direct payments to be made to the sheriff, the payments may be made by
check, but it goes without saying that if the sheriff so desires, he may require payment to be made in lawful money.
If he accepts the check, he places himself in a position where he would be liable to the judgment creditor if any
damages are suffered by the latter as a result of the medium in which payment was made (Javellana v. Mirasol, et
al., 40 Phil. 761). The validity of the payment made by the judgment debtor, however, is in no wise affected and the
latter is discharged from his obligation to the judgment creditor as of the moment the check issued to the sheriff is
encashed and the proceeds are received by Id. office. The issuance of the check to a person authorized to receive it
(Art. 1240, Civil Code; See. 46 of the Code of Civil Procedure; Enage v. Vda y Hijos de Escano, 38 Phil. 657, cited
in Javellana v. Mirasol, 40 Phil. 761) operates to release the judgment debtor from any further obligations on the
judgment.
The sheriff is an adjunct of the court; a court functionary whose competence involves both discretion and personal
liability (concurring opinion of J. Fernando, citing Uy Piaoco v. Osmena, 9 Phil. 299, in Bagatsing v. Herrera, 65
SCRA 434). Being an officer of the court and acting within the scope of his authorized functions, the sheriff s receipt
of the checks in payment of the judgment execution, may be deemed, in legal contemplation, as received by the
court itself (Lara v. Bayona, 10 May 1955, No. L- 10919).
That the sheriff functions as a conduit of the court is further underscored by the fact that one of the requisites for
appointment to the office is the execution of a bond, "conditioned (upon) the faithful performance of his (the
appointee's) duties .. for the delivery or payment to Government, or the person entitled thereto, of all properties or
sums of money that shall officially come into his hands" (sec. 330, Revised Administrative Code).
There is no question that the checks came into the sheriffs possession in his official capacity. The court may require
of the judgment debtor, in complying with the judgment, no further burden than his vigilance in ensuring that the
person he is paying money or delivering property to is a person authorized by the court to receive it. Beyond this,
further expectations become unreasonable. To my mind, a proposal that would make the judgment debtor
unqualifiedly the insurer of the judgment creditor's entitlement to the judgment amount which is really what this case
is all about begs the question.
That the checks were made out in the sheriffs name (a practice, by the way, of long and common acceptance) is of
little consequence if juxtaposed with the extent of the authority explicitly granted him by law as the officer entrusted
with the power to execute and implement court judgments. The sheriffs requirement that the checks in payment of
the judgment debt be issued in his name was simply an assertion of that authority; and PAL's compliance cannot in
the premises be faulted merely because of the sheriffs subsequent malfeasance in absconding with the payment
instead of turning it over to the judgment creditor.
If payment had been in cash, no question about its validity or of the authority and duty of the sheriff to accept it in
settlement of PAL's judgment obligation would even have arisen. Simply because it was made by checks issued in
the sheriff s name does not warrant reaching any different conclusion.
As payment to the court discharges the judgment debtor from his responsibility on the judgment, so too must
payment to the person designated by such court and authorized to act in its behalf, operate to produce the same
effect.
It is unfortunate and deserving of commiseration that Amelia Tan was deprived of what was adjudged to her when
the sheriff misappropriated the payment made to him by PAL in dereliction of his sworn duties. But I submit that her
remedy lies, not here and in reviving liability under a judgment already lawfully satisfied, but elsewhere.
ACCORDINGLY, I vote to grant the petition.
Melencio-Herrera, Gancayco, J., concurs.
FELICIANO, J., dissenting:
I concur in the able dissenting opinions of Narvasa and Padilla, JJ. and would merely wish to add a few footnotes to
their lucid opinions.
1. Narvasa, J. has demonstrated in detail that a sheriff is authorized by the Rules of Court and our case law
to receive either legal tender or checks from the judgment debtor in satisfaction of the judgment debt. In
addition, Padilla, J. has underscored the obligation of the sheriff, imposed upon him by the nature of his
office and the law, to turn over such legal tender, checks and proceeds of execution sales to the judgment
creditor. The failure of a sheriff to effect such turnover and his conversion of the funds (or goods) held by
him to his own uses, do not have the effect of frustrating payment by and consequent discharge of the
judgment debtor.
To hold otherwise would be to throw the risk of the sheriff faithfully performing his duty as a public officer
upon those members of the general public who are compelled to deal with him. It seems to me that a
judgment debtor who turns over funds or property to the sheriff can not reasonably be made an insurer of
the honesty and integrity of the sheriff and that the risk of the sheriff carrying out his duties honestly and
faithfully is properly lodged in the State itself The sheriff, like all other officers of the court, is appointed and
paid and controlled and disciplined by the Government, more specifically by this Court. The public surely has
a duty to report possible wrongdoing by a sheriff or similar officer to the proper authorities and, if necessary,
to testify in the appropriate judicial and administrative disciplinary proceedings. But to make the individual
members of the general community insurers of the honest performance of duty of a sheriff, or other officer of
the court, over whom they have no control, is not only deeply unfair to the former. It is also a confession of
comprehensive failure and comes too close to an abdication of duty on the part of the Court itself. This Court
should have no part in that.
2. I also feel compelled to comment on the majority opinion written by Gutierrez, J. with all his customary
and special way with words. My learned and eloquent brother in the Court apparently accepts the
proposition that payment by a judgment debtor of cash to a sheriff produces the legal effects of payment, the
sheriff being authorized to accept such payment. Thus, in page 10 of his ponencia, Gutierrez, J. writes:
The receipt of money due on a judgment by an officer authorized by law to accept it will satisfy the debt.
(Citations omitted)
The theory is where payment is made to a person authorized and recognized by the creditor, the payment to
such a person so authorized is deemed payment to the creditor. Under ordinary circumstances, payment by
the judgment debtor in the case at bar, to the sheriff would be valid payment to extinguish the judgment
debt.
Shortly thereafter, however, Gutierrez, J. backs off from the above position and strongly implies that
payment in cash to the sheriff is sheer imprudence on the part of the judgment debtor and that therefore,
should the sheriff abscond with the cash, the judgment debtor has not validly discharged the judgment debt:
It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal
contemplation. The reasoning is logical but is it valid and proper?
In the first place, PAL did not pay in cash. It paid in checks.
And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of
cash in a careless and inane manner. Mature thought is given to the possibility of the cash being lost, of the
bearer being waylaid or running off with what he is carrying for another. Payment in checks is precisely
intended to avoid the possibility of the money going to the wrong party....
Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment
debt but the court has never, in the least bit, suggested that judgment debtors should settle their obligations
by turning over huge amounts of cash or legal tender to sheriffs and other executing officers. ... (Emphasis
in the original) (Majority opinion, pp. 12-13)
There is no dispute with the suggestion apparently made that maximum safety is secured where the judgment
debtor delivers to the sheriff not cash but a check made out, not in the name of the sheriff, but in the judgment
creditor's name. The fundamental point that must be made, however, is that under our law only cash is legal tender
and that the sheriff can be compelled to accept only cash and not checks, even if made out to the name of the
judgment creditor. The sheriff could have quite lawfully required PAL to deliver to him only cash, i.e., Philippine
1
currency. If the sheriff had done so, and if PAL had complied with such a requirement, as it would have had to, one
would have to agree that legal payment must be deemed to have been effected. It requires no particularly acute
mind to note that a dishonest sheriff could easily convert the money and abscond. The fact that the sheriff in the
instant case required, not cash to be delivered to him, but rather a check made out in his name, does not change
the legal situation. PAL did not thereby become negligent; it did not make the loss anymore possible or probable
than if it had instead delivered plain cash to the sheriffs.
It seems to me that the majority opinion's real premise is the unspoken one that the judgment debtor should bear
the risk of the fragility of the sheriff s virtue until the money or property parted with by the judgment debtor actually
reaches the hands of the judgment creditor. This brings me back to my earlier point that risk is most appropriately
borne not by the judgment debtor, nor indeed by the judgment creditor, but by the State itself. The Court requires all
sheriffs to post good and adequate fidelity bonds before entering upon the performance of their duties and,
presumably, to maintain such bonds in force and effect throughout their stay in office. The judgment creditor, in
2
circumstances like those of the instant case, could be allowed to execute upon the absconding sheriff s bond. 3
I believe the Petition should be granted and I vote accordingly.
PADILLA, J., Dissenting Opinion
From the facts that appear to be undisputed, I reach a conclusion different from that of the majority. Sheriff Emilio Z.
Reyes, the trial court's authorized sheriff, armed with a writ of execution to enforce a final money judgment against
the petitioner Philippine Airlines (PAL) in favor of private respondent Amelia Tan, proceeded to petitioner PAL's
office to implement the writ.
There is no question that Sheriff Reyes, in enforcing the writ of execution, was acting with full authority as an officer
of the law and not in his personal capacity. Stated differently, PAL had every right to assume that, as an officer of
the law, Sheriff Reyes would perform his duties as enjoined by law. It would be grossly unfair to now charge PAL
with advanced or constructive notice that Mr. Reyes would abscond and not deliver to the judgment creditor the
proceeds of the writ of execution. If a judgment debtor cannot rely on and trust an officer of the law, as the Sheriff,
whom else can he trust?
Pursued to its logical extreme, if PAL had delivered to Sheriff Reyes the amount of the judgment in CASH, i.e.
Philippine currency, with the corresponding receipt signed by Sheriff Reyes, this would have been payment by PAL
in full legal contemplation, because under Article 1240 of the Civil Code, "payment shall be made to the person in
whose favor the obligation has been constituted or his successor in interest or any person authorized to receive it."
And said payment if made by PAL in cash, i.e., Philippine currency, to Sheriff Reyes would have satisfied PAL's
judgment obligation, as payment is a legally recognized mode for extinguishing one's obligation. (Article 1231, Civil
Code).
Under Sec. 15, Rule 39, Rules of Court which provides that-
Sec. 15. Execution of money judgments. — The officer must enforce an execution of a money judgment by
levying on all the property, real and personal of every name and nature whatsoever, and which may be
disposed of for value, of the judgment debtor not exempt from execution, or on a sufficient amount of such
property, if there be sufficient, and selling the same, and paying to the judgment creditor, or his attorney, so
much of the proceeds as will satisfy the judgment. ... .(emphasis supplied)
it would be the duty of Sheriff Reyes to pay to the judgment creditor the proceeds of the execution i.e., the cash
received from PAL (under the above assumption). But, the duty of the sheriff to pay the cash to the judgment
creditor would be a matter separate the distinct from the fact that PAL would have satisfied its judgment obligation to
Amelia Tan, the judgment creditor, by delivering the cash amount due under the judgment to Sheriff Reyes.
Did the situation change by PAL's delivery of its two (2) checks totalling P30,000.00 drawn against its bank account,
payable to Sheriff Reyes, for account of the judgment rendered against PAL? I do not think so, because when
Sheriff Reyes encashed the checks, the encashment was in fact a payment by PAL to Amelia Tan through Sheriff
Reyes, an officer of the law authorized to receive payment, and such payment discharged PAL'S obligation under
the executed judgment.
If the PAL cheeks in question had not been encashed by Sheriff Reyes, there would be no payment by PAL and,
consequently no discharge or satisfaction of its judgment obligation. But the checks had been encashed by Sheriff
Reyes giving rise to a situation as if PAL had paid Sheriff Reyes in cash, i.e., Philippine currency. This, we repeat, is
payment, in legal contemplation, on the part of PAL and this payment legally discharged PAL from its judgment
obligation to the judgment creditor. To be sure, the same encashment by Sheriff Reyes of PAL's checks delivered to
him in his official capacity as Sheriff, imposed an obligation on Sheriff Reyes to pay and deliver the proceeds of the
encashment to Amelia Tan who is deemed to have acquired a cause of action against Sheriff Reyes for his failure to
deliver to her the proceeds of the encashment. As held:
Payment of a judgment, to operate as a release or satisfaction, even pro tanto must be made to the plaintiff
or to some person authorized by him, or by law, to receive it. The payment of money to the sheriff having an
execution satisfies it, and, if the plaintiff fails to receive it, his only remedy is against the officer (Henderson
v. Planters' and Merchants Bank, 59 SO 493, 178 Ala. 420).
Payment of an execution satisfies it without regard to whether the officer pays it over to the creditor or
misapplies it (340, 33 C.J.S. 644, citing Elliot v. Higgins, 83 N.C. 459). If defendant consents to the Sheriff s
misapplication of the money, however, defendant is estopped to claim that the debt is satisfied (340, 33
C.J.S. 644, citing Heptinstall v. Medlin 83 N.C. 16).
The above rulings find even more cogent application in the case at bar because, as contended by petitioner PAL
(not denied by private respondent), when Sheriff Reyes served the writ of execution on PAL, he (Reyes) was
accompanied by private respondent's counsel. Prudence dictated that when PAL delivered to Sheriff Reyes the two
(2) questioned checks (payable to Sheriff Reyes), private respondent's counsel should have insisted on their
immediate encashment by the Sheriff with the drawee bank in order to promptly get hold of the amount belonging to
his client, the judgment creditor.
ACCORDINGLY, I vote to grant the petition and to quash the court a quo's alias writ of execution.
Melencio-Herrera, Gancayco, Sarmiento, Cortes, JJ., concurs.
Melencio-Herrera, Gancayco, Sarmiento, Cortes, JJ., concurs.
Footnotes
1
Art. 1249, Civil Code; e.g., Belisario v. Natividad, 60 Phil. 156 (1934); Villanueva v. Santos, 67 Phil 648
(1938).
2
See e.g., Sec. 46, Republic Act No. 296, as amended by Republic Act No. 4814.
3
See e.g., Sec. 9, Act No. 3598.
5) Reparations Commission v Universal Deep Fishing, 83 SCRA 764

SUPREME COURT
Manila
SECOND DIVISION
A.M. No. 21901-96 June 27, 1978
REPARATIONS COMMISSION, plaintiff-appellants,
vs.
UNIVERSAL DEEP-SEA FISHING CORPORATION and MANILA SURETY AND FIDELITY CO., INC., defendant-
appellants.
MANILA SURETY & FIDELITY CO., INC., third-party plaintiff-appellee,

vs.
PABLO S. SARMIENTO, third-party defendant-appellant.
CONCEPCION JR., J.:
Appeal of the defendant Universal Deep-Sea Fishing Corporation, defendant and third-party plaintiff Manila Surety
and Fidelity Co., Inc., and third-party defendant Pablo Sarmiento from the decision of the Court of First Instance of
Manila, the dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered as follows:
1. The defendant Universal Deep-Sea Fishing Corporation is hereby sentenced to pay the plaintiff
the sum of P100,242.04 in the first cause of action, P141,343.45 in the second cause of action and
P54,500.00 in the third cause of action, all with interest at the rate of 6% per annum from August 10,
1962, the date of the filing of the complaint, until fully paid;
2. Defendant Manila Surety & Fidelity Co., Inc., is hereby sentenced to pay the plaintiff, jointly and
severally with defendant Universal Deep-Sea Fishing Corporation, the sum of P53,643.00 in the first
cause of action, P68,777.77 in the second cause of action and P54,508.00 in the third cause of
action;
3. Defendant Universal Deep-Sea Fishing Corporation and Pablo Sarmiento are hereby sentenced
to pay, jointly and severally, the Manila Surety & Fidelity Co., Inc., the sum of P53,643.00 and
P68,777.77 with interest thereon at the rate of 12% per annum from August 10, 1962 until fully paid
plus P2,000.00 as attorney's fees;
4. Defendant Universal Deep-Sea Fishing Corporation is hereby sentenced to pay the Manila Surety
& Fidelity Co., Inc., the sum of P54,508.00 with interest thereon at the rate of 12% per annum from
August 10, 1962, until fully paid;
5. Defendant Universal Deep-Sea Fishing Corporation shall pay the costs. 1
It is not disputed that the Universal Deep-Sea Fishing Corporation, hereinafter referred to as UNIVERSAL for short.
was awarded six (6) trawl boats by the. Reparations Commission as end-user of reparations goods. These fishing
boats, christened the M/S UNIFISH 1, M/S UNIFISH 2. M/S UNIFISH 3. M/S UNIFISH 4, M/S UNIFISH 5, and M/S
UNIFISH 6. were delivered to UNIVERSAL two at a time, f.o.b. Japanese port.
The M/S UNIFISH 1 and M/S UNIFISH 2, with an aggregate purchase price of P536,428.44, were delivered to
UNIVERSAL on November 20,1958, and the contract of Conditional Purchase and Sale of Reparations Goods,
executed by and between the parties on February 12, 1960, provided among others, that "the first installment
representing 10% of the amount or FIFTY THREE THOUSAND SIX HUNDRED FORTY TWO PESOS AND
EIGHTY FOUR CENTAVOS (P53,642.84) shall be paid within 24 months from the date of complete delivery thereof,
the balance shall be paid in the manner herein stated as shown in the Schedule of Payments, ... to wit:
2
TOTAL F.O.B. COST — P536,428.44
AMOUNT OF 1st INSTALLMENT (10% OF F.O.B. COST) — P53,642.84
DUE DATE OF 1st INSTALLMENT — May 8, 1961
TERM: Ten (10) EQUAL YEARLY INSTALLMENTS
RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM
No. of Date Amount

Installment
s Due
1 May 8, P56,597.20
1962
2 May 8, P56,597.20
1963
3 May 8, P56,597.20
1964
4 May 8, P56,597.20
1965
5 May 8, P56,597.2
1966
6 May 8, P56,597.20
1967
7 May 8, P56,597.20
1968
8 May 8, P56,597.20
1969
9 May 8, P56,597.20
1970
10 May 8, P56,597.20
1971
To guarantee the faithful compliance with the obligations under said contract, a performance bond in the amount of
P53,643.00, with UNIVERSAL as principal and the Manila Surety & Fidelity Co., Inc., as surety, was executed in
favor of the Reparations Commission. A Corresponding indemnity agreement was executed to indemnify the surety
3
company for any damage, loss charges, etc., which it may sustain or incur as a consequence of having become a
surety upon the performance bond. 4
The M/S UNIFISH 3 and M/S UNIFISH 4, with a total purchase price of P687,777.76 were delivered to UNIVERSAL
on April 20, 1959 and the Contract of Conditional Purchase and Sale Reparations Goods, dated November 25,
1959, provided that "the first installment representing 10% of the amount or SIXTY-EIGHT THOUSAND SEVEN
5
HUNDRED SEVENTY-SEVEN PESOS AND SEVENTY-SEVEN CENTAVOS shall be paid within 24 months from
the date of complete delivery thereof, the balance shall be paid in the manner herein stated as shown in the
Schedule of Payments, . . . , to wit:
TOTAL F.O.B. COSTS — P687,777.76
AMOUNT OF 1st INSTALLMENT (10% of F.O.B. COST) — P68,777.77
DUE DATE OF 1st INSTALLMENT — July, 1961
TERM: Ten (10) EQUAL YEARLY INSTALLMENTS
No. of Due Amount

Installmen
ts Dat
e
1 July P72,565.6
, 8
196
2
2 July P72,565.6
, 8
196
3
3 July P72,565.6
, 8
196
4
4 July P72,565.6
, 8
196
5
5 July P72,565.6
, 8
196
6
6 July P72,565.6
, 8
196
7
7 July P72,565.6
, 8
196
8
8 July P72,565.6
, 8
196
9
9 July P72,565.6
, 8
197
0
10 July P72,565.6
, 8
197
1
A performance bond in the amount of P68,777.77, issued by the Manila Surety & Fidelity Co., Inc., was also
submitted to guarantee the faithful compliance with the obligations set forth in the contract, and indemnity
6
agreement was executed in favor of the surety company in consideration of the said bond. 7
The delivery of the M/S UNIFISH 5 and M/S UNIFISH 6 is covered by a contract for the Utilization of Reparations
Goods (M/S "UNIFISH 5" and M/S "UNIFISH 6") executed by the parties on February 12, 1960, and the Schedule
8
of Payments attached thereto, provided, as follows:
AMOUNT OF 1st INSTALLMENT (10% of F.O.B. COST) — P54,500.00
DUE DATE OF 1st INSTALLMENT — Oct. 17, 1961

TERM: TEN (10) EQUAL YEARLY INSTALLMENTS
No. of Dat Amount

Installment
s e
Due
1 Oct. P57,501.57
17,
196
2
2 Oct. P57,501.57
17,
196
3
3 Oct. P57,501.57
17,
196
4
4 Oct. P57,501.57
17,
196
5
5 Oct. P57,501.57
17,
196
6
6 Oct. P57,501.57
17,
196
7
7 Oct. P57,501.57
17,
196
8
8 Oct. P57,501.57
17,
196
9
9 Oct. P57,501.57
17,
197
0
10 Oct. P57,501.57
9
17,
197
1
A performance bond in judgment, amount of P54,500.00 issued by judgment, Manila Surety & Fidelity Co.,
Inc., was submitted, and an indemnity agreement was executed by UNIVERSAL in favor of judgment, surety
10
company. 11
On August 10, 1962, judgment, Reparations Commission instituted judgment, present action against UNIVERSAL
and judgment, surety company to recover various amounts of money due under these contracts. In answer,
UNIVERSAL claimed that judgment, amounts of money sought to be collected are not yet due and demandable.
The surety company also contended that judgment, action is premature, but set up a cross-claim against
UNIVERSAL for reimbursement of whatever amount of money it may have to pay judgment, plaintiff by reason of
judgment, complaint, including interest, and for judgment, collection of accumulated and unpaid premiums on
judgment, bonds with interest thereon. With leave of courts first obtained, judgment, surety company filed a third-
party complaint against Pablo S. Sarmiento, one of the indemnitors in judgment, indemnity agreements. The third-
party defendant Pablo S. Sarmiento denied personal liability claiming that he signed judgment, indemnity
agreements in question in his capacity as acting general manager of UNIVERSAL. After appropriate proceedings
and upon judgment, preceding facts, judgment, trial court rendered judgment, judgment hereinbefore stated. hence,
this appeal.
(1) The principal issue for resolution is whether or not judgment, first installments under judgment, three (3)
contracts of conditional purchase and sale of reparations goods were already due and demandable when judgment,
complaint was filed. UNIVERSAL contends that there is an obscurity in judgment, terms of judgment, contracts in
question which were caused by the plaintiff as to judgment, amounts and due dates of judgment, first installments
which should have been first fixed before a creditor can demand its payment from judgment, debtor. To be explicit.
counsel points to judgment, Schedule of Payment attached to, and forming a part of, the contract for judgment,
purchase and sale of judgment, M/S UNIFISH 1 and M/S UNIFISH 2 which states that judgment, amount of first
installment is P53,642.84 and judgment, due date of its payment is May 8, 1961. However, judgment, amount of the
first of succeeding itemized installments is P56,597.20 and judgment, due date is May 8, 1962. In the case of the
M/S UNIFISH 3 and M/S UNIFISH 4, the first installments are P68,777.77 and due in July, 1961 and P72,565.68
and due in July 1962, respectively. In the contract for the purchase and sale of the M/S UNIFISH 5 and M/S
UNIFISH 6, the amounts indicated as first installments are P54,500.00 and P57,501.57, and the due dates of
payment are October 17, 1961 and October 17, 1962, respectively.
The terms of the contracts for the purchase and sale of the reparations vessels, however, are very clear and leave
no doubt as to the intent of the contracting parties. Thus, in the contract concerning the M/S UNIFISH 1 and M/S
UNIFISH 2, the parties expressly agreed that the first installment representing 10% of the purchase price or
P53,642.84 shall be paid within 24 months from the date of complete delivery of the vessel or on May 8, 1961, and
the balance to be paid in ten (10) equal yearly installments. The amount of P56,597.20 due on May 8, 1962, which
is also claimed to be a "first installment," is but the first of the ten (10) equal yearly installments of balance of
judgment, purchase price. In judgment, case of Reparations Commission vs. Northern Lines, Inc. et al., where
12
judgment, Schedule of Payments, likewise on RC-LEGAL DEPT FORM NO. 1, also allegedly indicated two (2) due
dates for judgment, payment of judgment, first installment, judgment, Court said:
(a) The major premise in appellants' process of reasoning is that the first installments due on April
25, 1963, and May 26, 1963, are 'first installments. although they are not so designated in judgment,
schedule appended to each of judgment, contracts between judgment, parties. Appellant's,
moreover, assume that judgment, 'first' installment is included in judgment, ten (10) equal yearly
installments' mentioned subsequently to said 'first' installment. In feet, however, only one installment
is labeled as 'first' in each one of said schedules, and that is judgment, installment due on 'April 25,
1962' - as regards M/S Don Salvador or Magsaysay - and that due on 'May 26, 1962'- as regards
M/S Don Amando or Estancia. The schedules do not describe judgment, 'ten (10) equal yearly
installments' — following the one characterized therein as 'first' — meaning 'number,' not order or
sequence, of installments — and the numerals 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 written before each of said
'ten (10) equal yearly installments following the 'first' to accrue after the due date of said 'first'
installment. Just the same, the parties have not so described (as 'first') — in the schedules forming
part of their contracts — the installments numbered '1' in the list contained in each. Moreover,
considering that the words 'TERMS: Ten (10) EQUAL YEARLY INSTALLMENTS,' appear after the
lines reading: 'AMOUNT OF 1st INSTALLMENT (10% OF F.O.B. COSTS) P174,761.42' and DUE
DATE OF 1st INSTALLMENT April 25, 1962 (or May 26, 1962) and that, subsequently to said
'TERM: Ten (10) EQUAL YEARLY INSTALLMENTS,' there is a list of ten (10) equal yearly
installments, it is clear that the latter do not include the one designated as 'first' installment.
xxx xxx xxx

(b) The pertinent part of Section 12 of Rep. Act No. 1789, pursuant to which the vessels in question
were sold to the Buyer reads:
. . . Capital goods . . . disposed of to private parties as provided for in subsection (a) of Section two
hereof shall be sold on a cash or credit basis, under rules and regulations as may be determined by
the Commission. Sales on a credit basis shall be payable in installments: Provided, That judgment,
first installment shall be paid within twenty-four months after complete delivery of judgment, capital
goods and judgment, balance within a period not exceeding ten years, . . . plus judgment, service
provided for in section ten thereof; Provided further, That judgment, unpaid balance of judgment,
price thereof shall bear interest at judgment, rate of not more than three percent per annum. . . . .
It should be noted that, pursuant to judgment, schedules attached to judgment, contracts with
judgment, Buyer, judgment, 'complete delivery' of judgment, vessels took place on April 25, and May
26, 1960, respectively, so that judgment, the 24 months taxed by law for judgment, payment of
judgment, 'First installment expired on April 25, 1962 and May 26,1962, which are judgment, very
dates stated in judgment, aforementioned schedules for judgment, payment of judgment, respective
'1st' installments. What is more, in view of said legal provision, judgment, Commission had no
authority to agree that the 1st installment shall be paid on any later date, and judgment, Buyer must
have been aware of this fact. Hence, judgment, parties could not have intended judgment, first
installments to become due on April 25, and May 26, 1963 It is, likewise, obvious - particularly when
considered in relation to judgment, provision above quoted - that judgment, 'ten (10) equal yearly
installments.' mentioned in the schedules, refer to the 'balance' of the price to be paid by the
buyer, after deducting judgment, 'first' installment, so hat, altogether, there would be 'eleven'
installments, namely, the first , which would be the 10% of the F.O.B. cost of the vessel — as agreed
upon between 'The Governments of the Philippines and Japan — and 'ten (10) yearly installments,'
representing the balance of "he amount due to he Commission from judgment, Buyer, including tile
interest thereon.
Viewing judgment, contracts between judgment, parties in judgment, light of the foregoing exposition, judgment, first
installment on judgment, M/S UNIFISH 1 and M/S UNIFISH 2 of judgment, amount of P53,642.84 was due on May
8, 1961, while judgment, first installments on judgment, M/S UNIFISH 3 and M/S UNIFISH 4, and judgment, M/S
UNIFISH 5 and M/S UNIFISH 6 in judgment, amounts of P68,777.77 and P54,500.00 were due on July 31, 1961
and October 17, 1961, respectively. Accordingly judgment, obligation of UNIVERSAL to pay judgment, first
installments on the purchase price of judgment, six (6) reparations vessels was already due and demandable when
the present action was commenced on August 10, 1962. Also due and demanded from UNIVERSAL were the first of
the ten (10) equal yearly installments on the balance of the purchase price of the M/S UNIFISH I and M/S UNIFISH
2 in the amount of P56,597.20 and P72,565.68 on judgment, M/S UNIFISH 3 and M/S UNIFISH 4. The first accrued
on May 8, 1962, while judgment, second fell due on July 31, 1962.
(2) The claim of judgment, surety company to the effect that the trial court erred in not awarding it the amount of
P7,251.42, as premium is the performance bonds, is well taken. The payment of premiums on the bonds to the
surety company had been expressly undertaken by UNIVERSAL in the indemnity agreements executed by it in favor
of judgment, surety company. The premium is judgment, consideration for furnishing judgment, bonds and
judgment, obligation to pay judgment, same subsists for as long as judgment, liability of judgment, surety shall
exist. Hence, UNIVERSAL should pay judgment, amount of P7,251.42 to judgment, surety company.
13
(3) The surety company also claims that judgment, trial court erred in not applying judgment, amount of P10,000.00,
paid as down payment by UNIVERSAL to judgment, Reparations Commission, to judgment, guaranteed
indebtedness. According to judgment, surety company, under Article 1254 of judgment, Civil rode, where there is no
imputation of payment made by either judgment, debtor or creditor, The debt which is the most onerous to the
debtor shall be deemed to have been satisfied, so that the amount of P10,000.00 paid by UNIVERSAL as down
payment on the purchase of the, M/S UNIFISH 1 and M/S UNIFISH 2 should be applied to the guaranteed portion of
the debt, this releasing part of the liability hence the obligation of 'The surety company shall be only P43,643.00,
instead of P53,643.00.
The rules contained in Articles 1252 to 1254 of judgment, Civil Code apply to a person owing several debts of
judgment, same kind to a single creditor. They cannot be made applicable to a person whose obligation as a mere
surety is both contingent and singular, which in this case is the full and faithful compliance with the terms of the
14
contract of conditional purchase and sale of reparations goods, The obligation included the payment, not only of the
first installment in the amount of P53,643.00, but also of the ten (10) equal yearly installments of P56,597.20 per
annum. The amount of P10,000.00 was, indeed, deducted from judgment, amount of P53,643.00, but then
judgment, first of judgment, ten (10) equal yearly installments had also accrued, hence, no error was committed in
holding judgment, surety company to judgment, full extent of its undertaking.
(4) Finally, We find no merit in judgment, claim of judgment, third-party defendant Pablo S. Sarmiento that he is not
personally liable having merely executed judgment, indemnity agreements in his capacity as acting general
15
manager of UNIVERSAL. Pablo S. Sarmiento appears to have signed the indemnity agreement twice — the first, in
this capacity as acting general manager of UNIVERSAL, and the second, in his individual capacity. The indemnity
agreements in question state the following. among others:
In consideration of judgment, responsibility undertaken by judgment, Company, for judgment,

original bond, and for any renewal, extension or substitution thereof, judgment, undersigned, jointly
and severally, bind themselves in favor of judgment, said COMPANY in judgment, following terms:
xxx xxx xxx
Dated at City of Manila this - - - - day of July l969.
600 Cottage 3, UNIVERSAL DEEP-SEA FISHING CORP.
Aguinaldo Com- BY:
pound, Echague, s/PABLO S. SARMIENTO Manila t/PABLO S. SARMIENTO Signature
s/PABLO S. SARMIENTO Address t/PABLO S. SARMIENTO Signature
Besides, the "acknowledgment" stated that "Pablo S. Sarmiento for himself and on behalf of Universal Deep-Sea
Fishing Corporation" personally appeared before the notary and acknowledged that judgment, document is his own
free and voluntary act and deed.
WHEREFORE, judgment, judgment appealed from is hereby affirmed with judgment, modification that judgment,
UNIVERSAL Deep-Sea Fishing Corporation is further ordered to pay judgment, Manila Surety & Fidelity Co., Inc.,
judgment, amount of P7,251.42 for judgment, premiums and documentary stamps on judgment, performance
bonds. Appellants shall pay proportionate costs.
SO ORDERED.
Antonio, Aquino, Santos, and Guerrero, JJ., concur.
Fernando and Barredo, JJ., took no part.
Footnotes
1 Record on Appeal, pp. 239-240
2 Exhibit "A".
3 Exhibit "B"
4 Exhibit "16-B-Surety"
5 Exhibit "C".
6 Exhibit "D"
7 Exhibit 14-Surety.
8 Exhibit "E".
9 Par. 5 of Affirm. Defense of UNIVERSAL, Record on Appeal, p. 152.
10 Exhibit "F"
11 Exhibit 15-Surety.
12 L-24835, July 31, 1970, 34 SCRA 203.
13 Arranz vs. Manila Surety & Fidelity Co., 101 Phil. 272.
14 Socony-Vacuum Corp. vs. Leon Miraflores, 67 Phil. 304.
15 Exh. 14-Surety and Exh. 16-Surety.
6) Paculdo v Regalado 345 SCRA 134

FIRST DIVISION
G.R. No. 123855 November 20, 2000
NEREO J. PACULDO, petitioner,
vs.
BONIFACIO C. REGALADO, respondent.
DECISION
PARDO, J.:
The case before the Court is an appeal via certiorari seeking to set aside the decision of the Court of Appeals which
1
affirmed that of the Regional Trial Court, Quezon City, and the Metropolitan Trial Court, Quezon City ordering the
ejectment of petitioner from the property subject of the controversy.
The facts are as follows:
On December 27, 1990, petitioner Nereo J. Paculdo (hereafter Nereo) and respondent Bonifacio C. Regalado
(hereafter Bonifacio) entered into a contract of lease over a 16,478 square meter parcel of land with a wet market
building, located along Don Mariano Marcos Avenue, Fairview Park, Quezon City. The contract was for twenty five
(25) years, commencing on January 1, 1991 and ending on December 31, 2015. For the first five (5) years of the
contract beginning December 27, 1990, Nereo would pay a monthly rental of P450,000.00, payable within the first
five (5) days of each month at Bonifacio’s office, with a 2% penalty for every month of late payment.
Aside from the above lease, petitioner leased eleven (11) other property from respondent, ten (10) of which were
located within the Fairview compound, while the eleventh was located along Quirino Highway, Quezon City.
Petitioner also purchased from respondent eight (8) units of heavy equipment and vehicles in the aggregate amount
of P1,020,000.00.
On account of petitioner’s failure to pay P361,895.55 in rental for the month of May, 1992, and the monthly rental of
2
P450,000.00 for the months of June and July 1992, on July 6, 1992, respondent sent a demand letter to petitioner
demanding payment of the back rentals, and if no payment was made within fifteen (15) days from receipt of the
letter, it would cause the cancellation of the lease contract. Another demand letter followed this on July 17, 1992,
3
reiterating the demand for payment and for petitioner to vacate the subject premises. 4
Without the knowledge of petitioner, on August 3, 1992, respondent mortgaged the land subject of the lease
contract, including the improvements which petitioner introduced into the land amounting to P35,000,000.00, to
Monte de Piedad Savings Bank, as security for a loan in the amount of P20,000,000.00. 5
On August 12, 1992, and on subsequent dates thereafter, respondent refused to accept petitioner’s daily rental
payments. 6
On August 20, 1992, petitioner filed with the Regional Trial Court, Quezon City an action for injunction and damages
seeking to enjoin respondent from disturbing his possession of the property subject of the lease contract. On the
7
same day, respondent filed with the Metropolitan Trial Court, Quezon City a complaint for ejectment against
petitioner. Attached to the complaint were the two (2) demand letters dated July 6 and July 17, 1992. 8
On August 25, 1992, five (5) days after the filing of the ejectment complaint, respondent moved to withdraw the
complaint on the ground that certain details had been omitted in the complaint and must be re-computed.
On April 22, 1993, respondent re-filed the ejectment complaint with the Metropolitan Trial Court, Quezon
City. Computed from August 1992 until March 31, 1993, the monthly reasonable compensation that petitioner was
liable for was in the total sum of P3,924,000.00.
9
On January 31, 1994, the Metropolitan Trial Court, Quezon City rendered a decision in favor of respondent, the
dispositive portion of which reads:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, as follows:
"1. Ordering the defendant and all persons claiming right under him to vacate the leased premises located at
Don Mariano Marcos Avenue, Fairview Park, Quezon City, Metro-Manila covered by Transfer Certificate of
Title RT-6883 of the Registry of Deeds of Quezon City;
"2. Ordering the defendant to pay the sum of P527,119.27 representing the unpaid monthly rentals as of
June 30, 1992 plus 2% interest thereon;
"3. Ordering the defendant to pay the sum of P450,000.00 a month plus 2% interest thereon starting July
1992 and every month thereafter until the defendant and all persons claiming right under him shall have
actually vacated the premises and surrender possession thereof to the plaintiff;
"4. Ordering the defendant to pay the sum of P5,000,000.00 as and for attorney’s fees; and
"5. Ordering the defendant to pay the costs of suit.
"SO ORDERED." 10
In time, petitioner appealed to the Regional Trial Court, Quezon City, Branch 220. 11
On February 19, 1994, respondent, with the support of fifty (50) armed security guards forcibly entered the property
and took possession of the wet market building. 12
On July 6, 1994, the Regional Trial Court, Quezon City, Branch 220 rendered a decision affirming in toto the
decision of the Metropolitan Trial Court, to wit:
"WHEREFORE, the appealed decision dated January 31, 1994, for being in accordance with the evidence
presented and the law on the matter, is hereby affirmed in toto.
"Let a writ of execution issue against defendant and his surety, to answer for the decision of the lower court." 13
On the same day, the Regional Trial Court issued a writ of execution whereupon, petitioner vacated the subject
14
premises voluntarily. By July 12, 1994, petitioner had completely turned over possession of subject property to
respondent.
Meanwhile, on July 21, 1994, petitioner filed a petition for review with the Court of Appeals. He alleged that he had
15
paid the amount of P11,478,121.85 for security deposit and rentals on the wet market building, but respondent,
without his consent, applied portions of the payment to his other obligations. The vouchers and receipts indicated
that the payments made were for rentals. Thus, at the time of payment petitioner had declared as to which
obligation the payment must be applied.
On February 10, 1995, the Court of Appeals promulgated its decision finding that petitioner impliedly consented to
respondent’s application of payment to his other obligations and, thus, dismissed the petition for lack of merit. 16
On March 3, 1995, petitioner filed a motion for reconsideration; however, on February 9, 1996 the Court of Appeals
17
denied the motion. 18
Hence, this appeal. 19
At issue is whether petitioner was truly in arrears in the payment of rentals on the subject property at the time of the
filing of the complaint for ejectment.
As found by the Metropolitan Trial Court and Regional Trial Court, petitioner made a total payment of
P10,949,447.18, to respondent as of July 2, 1992.
If the payment made by respondent applied to petitioner’s other obligations is set aside, and the amount petitioner
paid be applied purely to the rentals on the Fairview wet market building, there would be an excess payment of
P1,049,447.18 as of July 2, 1992. The computation in such case would be as follows:
Amount paid as of July 2, 1992 P10,949,447.18

Less:
Monthly rent from January 1991-July 1992
P450,000.00 x 19 months P 8,550,000.00
Less:
Security deposit P 1,350,000.00
==============
Excess amount paid P 1,049,447.18
In the letter dated November 19, 1991, respondent proposed that petitioner’s security deposit for the Quirino lot, in
the amount of P643,276.48, be applied as partial payment for his account under the subject lot as well as to real
estate taxes on the Quirino lot. Petitioner interposed no objection, as evidenced by his signature signifying his
20
conformity thereto.
In an earlier letter, dated July 15, 1991, respondent informed petitioner that the payment was to be applied not only
21
to petitioner’s accounts under both the subject land and the Quirino lot but also to heavy equipment bought by the
latter from respondent. Petitioner claimed that the amount applied as payment for the heavy equipment was critical
because it was equivalent to more than two (2) months rental of the subject property, which was the basis for the
ejectment case in the Metropolitan Trial Court.
The controversy stemmed from the fact that unlike the November 19, 1991 letter, which bore a conformity portion
with petitioner’s signature, the July 15, 1991 letter did not contain the signature of petitioner.
In nevertheless concluding that petitioner gave his consent thereto, the Court of Appeals upheld both the lower
court’s and trial court’s findings that petitioner received the second letter and its attachment and he raised no
objection thereto.
In other words, would petitioner’s failure to object to the letter of July 15, 1991 and its proposed application of
payments amount to consent to such application?
Petitioner submits that his silence is not consent but is in fact a rejection.
The right to specify which among his various obligations to the same creditor is to be satisfied first rests with the
debtor, as provided by law, to wit:
22
"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." 23
At the time petitioner made the payments, he made it clear to respondent that they were to be applied to his rental
obligations on the Fairview wet market property. Though he entered into various contracts and obligations with
respondent, including a lease contract over eleven (11) property in Quezon City and sale of eight (8) heavy
equipment, all the payments made, about P11, 000,000.00, were to be applied to rental and security deposit on the
Fairview wet market property.
Respondent Regalado argues that assuming that petitioner expressed at the time of payment which among his
obligations were to be satisfied first, petitioner is estopped by his assent to the application made by the respondent.
This assent is inferred from the silence of petitioner on the July 15, 1991 letter containing a statement of the
24
application of payments, which was different from the application made by petitioner. A big chunk of the amount
paid by petitioner went into the satisfaction of an obligation which was not yet due and demandable--the payment of
the eight (8) heavy equipment amounting to about P1,020,000.00.
The statement of account prepared by respondent was not the receipt contemplated under the law. The receipt is
the evidence of payment executed at the time of payment, and not the statement of account executed several days
thereafter.
There was no clear assent by petitioner to the change in the manner of application of payment. The petitioner’s
1âwphi1
silence as regards the application of payment by respondent cannot mean that he consented thereto. There was no
meeting of the minds. Though an offer may be made, the acceptance of such offer must be unconditional and
unbounded in order that concurrence can give rise to a perfected contract. Hence, petitioner could not be in
25
estoppel.
Assuming arguendo that, as alleged by respondent, petitioner did not, at the time the payments were made, choose
the obligation to be satisfied first, respondent may exercise the right to apply the payments to the other obligations
of petitioner. But this is subject to the condition that the petitioner must give his consent. Petitioner’s silence is not
tantamount to consent. The consent must be clear and definite.
Under the law, if the debtor did not declare at the time he made the payment to which of his debts with the creditor
the payment is to be applied, the law provided the guideline--no payment is to be made to a debt that is not yet
due and the payment has to be applied first to the debt most onerous to the debtor.
26 27
In the instant case, the purchase price of the eight (8) heavy equipment was not yet due at the time the payment
was made, for there was no date set for such payment. Neither was there a demand by the creditor to make the
obligation to pay the purchase price due and demandable. Hence, the application made by respondent is contrary
28
to the provisions of the law.
The lease over the Fairview wet market property is the most onerous among all the obligations of petitioner to
respondent. It was established that the wet market is a going-concern and that petitioner has invested about
P35,000,000.00, in the form of improvements, on the property. Hence, petitioner would stand to lose more if the
lease would be rescinded, than if the contract of sale of heavy equipment would not proceed.
The decision of the Court of Appeals was based on a misapprehension of the facts and the law on the application of
payment. Hence, the ejectment case subject of the instant petition must be dismissed, without prejudice to the
determination and settlement of the money claims of the parties inter se.
WHEREFORE, the Court GRANTS the petition. The Court REVERSES and SETS ASIDE the decision of the Court
of Appeals in CA-G. R. SP No. 34634.
ACCORDINGLY, the Court REVERSES the decision of the Regional Trial Court, Quezon City, Branch 220 in Civil
Case No. 94-20813, and dismisses the complaint filed with the Metropolitan Trial Court, Quezon City, Branch 36 in
Civil Case No. MTC XXXVI-7089.
No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Ynares-Santiago, JJ., concur.
Footnotes
In CA-G. R. SP No. 34634, promulgated on February 10, 1995, Reyes, R. T., J., ponente, Herrera, O. M.
1
and Gutierrez, A. S., JJ., concurring, Rollo, pp. 138-148.
This represents the balance of the rental payment due from petitioner, computed as follows: Partial
2
payment of P255,104.45 made on July 24, 1992; P90,000.00 on July 28, 1992; and P3,674.67 or a sum total
of P188,779.12 from where the 2% stipulated penalty interest must first be satisfied, leaving an amount of
P88,104.45 to be applied and deducted from the P450,000.00 rental due for the month of May, 1992.
Complaint, Annex "C", RTC Record, Vol. I, p. 13.

3
Complaint, Annex "D", RTC Record, Vol. I, p. 14.

4
Petition for Review, CA Rollo, pp. 2-24, at p. 5.

5
Answer, RTC Record, Vol. I, pp. 35-45.

6
Ibid., p. 40.
7
Originally raffled to Branch 33 (later transferred to Branch 36) and docketed as Civil Case No. 7089,
8
Answer, RTC Record, Vol. I, p. 41.
Complaint, RTC Record, Vol. I, pp. 1-7, at p. 5.

9
10
Decision, Civil Case No. MTC XXXVI-7089, Petition, Annex "D", Rollo, pp. 98-102.
11
Docketed as Civil Case No. Q-94-20813.
12
Petition for Review, CA Rollo, pp. 2-24, at p. 7.
13
Ibid., pp. 25-33.
14
Ibid., pp. 34-35.
15
Docketed as CA-G.R. SP No. 34634, CA Rollo, pp. 2-24.
16
Petition, Annex "D", Rollo, pp. 138-148.
17
Petition, Annex "E", Rollo, pp. 149-182.
18
Resolution, Rollo, pp. 193-194.
Petition filed on March 19, 1996, Rollo, pp. 8-62. On June 18, 1997, we gave due course to the
19
petition, Rollo, p. 281.
20
Rollo, p. 185.
21
Rollo, p. 183.
22
People’s Surety and Insurance Co, Inc. v. Gabriel and Sons Traders Co. Inc.,118 Phil. 1418 [1963].
23
Civil Code.
24
Supra, Note 21.
25
Maria Cristina Fertilizer Corp. v. Court of Appeals, 339 Phil. 349 [1997].
26
Article 1252, Civil Code.
27
Article 1254, Civil Code; Espina v. Court of Appeals, G. R. No. 116805, June 22, 2000.
28
Rose Packing Co., Inc. v. Court of Appeals, 167 SCRA 309, 318 [1988].
7) Development Bank of the Philippines v Court of Appeals 284

SCRA 14
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 118342 January 5, 1998
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and LYDIA CUBA, respondents.
G.R. No. 118367 January 5, 1998

LYDIA P. CUBA, petitioner,
vs.
COURT OF APPEALS, DEVELOPMENT BANK OF THE PHILIPPINES and AGRIPINA P.
CAPERAL, respondents.
DAVIDE, JR., J.:
These two consolidated cases stemmed from a complaint filed against the Development Bank of the
1
Philippines (hereafter DBP) and Agripina Caperal filed by Lydia Cuba (hereafter CUBA) on 21 May 1985 with
the Regional Trial Court of Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity
of DBP's appropriation of CUBA's rights, title, and interests over a 44-hectares fishpond located in Bolinao,
Pangasinan, for being violative of Article 2088 of the Civil Code; (2) the annulment of the Deed of
Conditional Sale executed in her favor by DBP; (3) the annulment of DBP's sale of the subject fishpond to
Caperal; (4) the restoration of her rights, title, and interests over the fishpond; and (5) the recovery of
damages, attorney's fees, and expenses of litigation.
After the joinder of issues following the filing by the parties of their respective pleadings, the trial court
conducted a pre-trial where CUBA and DBP agreed on the following facts, which were embodied in the pre-
trial order:
2
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new) dated
May 13, 1974 from the Government;
2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines in the
amounts of P109,000.00; P109,000.00; and P98,700.00 under the terms stated in the
Promissory Notes dated September 6, 1974; August 11, 1975; and April 4, 1977;
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her
Leasehold Rights;
4. Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with the terms
of the Promissory Notes;
5. Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP

appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in question;
6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba over
the fishpond in question, defendant DBP, in turn, executed a Deed of Conditional Sale of the
Leasehold Rights in favor of plaintiff Lydia Cuba over the same fishpond in question;
7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to the Manager
DBP, Dagupan City dated November 6, 1979 and December 20, 1979. DBP thereafter accepted
the offer to repurchase in a letter addressed to plaintiff dated February 1, 1982;
8. After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a new
Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued by the Ministry of
Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding her husband;
9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional
Sale;
10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of Conditional
Sale, she entered with the DBP a temporary arrangement whereby in consideration for the
deferment of the Notarial Rescission of Deed of Conditional Sale, plaintiff Lydia Cuba
promised to make certain payments as stated in temporary Arrangement dated February 23,
1982;
11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated March 13,
1984, and which was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took possession of the Leasehold Rights
of the fishpond in question;
13. That after defendant DBP took possession of the Leasehold Rights over the fishpond in
question, DBP advertised in the SUNDAY PUNCH the public bidding dated June 24, 1984, to
dispose of the property;
14. That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant
Agripina Caperal on August 16, 1984;
15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-A on
December 28, 1984 by the Ministry of Agriculture and Food.
Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the pre-trial order. 3
Trial was thereafter had on other matters.
The principal issue presented was whether the act of DBP in appropriating to itself CUBA's leasehold rights
over the fishpond in question without foreclosure proceedings was contrary to Article 2088 of the Civil
Code and, therefore, invalid. CUBA insisted on an affirmative resolution. DBP stressed that it merely
exercised its contractual right under the Assignments of Leasehold Rights, which was not a contract of
mortgage. Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by declaring that DBP's taking possession and
ownership of the property without foreclosure was plainly violative of Article 2088 of the Civil Code which
provides as follows:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.
It disagreed with DBP's stand that the Assignments of Leasehold Rights were not contracts of mortgage
because (1) they were given as security for loans, (2) although the "fishpond land" in question is still a
public land, CUBA's leasehold rights and interest thereon are alienable rights which can be the proper
subject of a mortgage; and (3) the intention of the contracting parties to treat the Assignment of Leasehold
Rights as a mortgage was obvious and unmistakable; hence, upon CUBA's default, DBP's only right was to
foreclose the Assignment in accordance with law.
The trial court also declared invalid condition no. 12 of the Assignment of Leasehold Rights for being a
clear case of pactum commissorium expressly prohibited and declared null and void by Article 2088 of the
Civil Code. It then concluded that since DBP never acquired lawful ownership of CUBA's leasehold rights,
all acts of ownership and possession by the said bank were void. Accordingly, the Deed of Conditional Sale
in favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional Sale in favor of
defendant Caperal, as well as the Assignment of Leasehold Rights executed by Caperal in favor of DBP,
were also void and ineffective.
As to damages, the trial court found "ample evidence on record" that in 1984 the representatives of DBP
ejected CUBA and her caretakers not only from the fishpond area but also from the adjoining big house;
and that when CUBA's son and caretaker went there on 15 September 1985, they found the said house
unoccupied and destroyed and CUBA's personal belongings, machineries, equipment, tools, and other
articles used in fishpond operation which were kept in the house were missing. The missing items were
valued at about P550,000. It further found that when CUBA and her men were ejected by DBP for the first
time in 1979, CUBA had stocked the fishpond with 250,000 pieces of bangus fish (milkfish), all of which died
because the DBP representatives prevented CUBA's men from feeding the fish. At the conservative price of
P3.00 per fish, the gross value would have been P690,000, and after deducting 25% of said value as
reasonable allowance for the cost of feeds, CUBA suffered a loss of P517,500. It then set the aggregate of
the actual damages sustained by CUBA at P1,067,500.
The trial court further found that DBP was guilty of gross bad faith in falsely representing to the Bureau of
Fisheries that it had foreclosed its mortgage on CUBA's leasehold rights. Such representation induced the
said Bureau to terminate CUBA's leasehold rights and to approve the Deed of Conditional Sale in favor of
CUBA. And considering that by reason of her unlawful ejectment by DBP, CUBA "suffered moral shock,
degradation, social humiliation, and serious anxieties for which she became sick and had to be
hospitalized" the trial court found her entitled to moral and exemplary damages. The trial court also held
that CUBA was entitled to P100,000 attorney's fees in view of the considerable expenses she incurred for
lawyers' fees and in view of the finding that she was entitled to exemplary damages.
In its decision of 31 January 1990, the trial court disposed as follows:

4
WHEREFORE, judgment is hereby rendered in favor of plaintiff:
1. DECLARING null and void and without any legal effect the act of defendant Development
Bank of the Philippines in appropriating for its own interest, without any judicial or extra-
judicial foreclosure, plaintiff's leasehold rights and interest over the fishpond land in
question under her Fishpond Lease Agreement No. 2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and between the
defendant Development Bank of the Philippines and plaintiff (Exh. E and Exh. 1) and the acts
of notarial rescission of the Development Bank of the Philippines relative to said sale (Exhs.
16 and 26) as void and ineffective;
3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between the
Development Bank of the Philippines and defendant Agripina Caperal (Exh. F and Exh. 21),
the Fishpond Lease Agreement No. 2083-A dated December 28, 1984 of defendant Agripina
Caperal (Exh. 23) and the Assignment of Leasehold Rights dated February 12, 1985 executed
by defendant Agripina Caperal in favor of the defendant Development Bank of the Philippines
(Exh. 24) as void ab initio;
4. ORDERING defendant Development Bank of the Philippines and defendant Agripina

Caperal, jointly and severally, to restore to plaintiff the latter's leasehold rights and interests
and right of possession over the fishpond land in question, without prejudice to the right of
defendant Development Bank of the Philippines to foreclose the securities given by plaintiff;
5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the following
amounts:
a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED PESOS

(P1,067,500.00), as and for actual damages;
b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral

damages;
c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary

damages;
d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as and

for attorney's fees;
6. And ORDERING defendant Development Bank of the Philippines to reimburse and pay to
defendant Agripina Caperal the sum of ONE MILLION FIVE HUNDRED THIRTY-TWO
THOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS (P1,532,610.75)
representing the amounts paid by defendant Agripina Caperal to defendant Development
Bank of the Philippines under their Deed of Conditional Sale.
CUBA and DBP interposed separate appeals from the decision to the Court of Appeals. The former sought
an increase in the amount of damages, while the latter questioned the findings of fact and law of the lower
court.
In its decision of 25 May 1994, the Court of Appeals ruled that (1) the trial court erred in declaring that the
5
deed of assignment was null and void and that defendant Caperal could not validly acquire the leasehold
rights from DBP; (2) contrary to the claim of DBP, the assignment was not a cession under Article 1255 of
the Civil Code because DBP appeared to be the sole creditor to CUBA — cession presupposes plurality of
debts and creditors; (3) the deeds of assignment represented the voluntary act of CUBA in assigning her
property rights in payment of her debts, which amounted to a novation of the promissory notes executed by
CUBA in favor of DBP; (4) CUBA was estopped from questioning the assignment of the leasehold rights,
since she agreed to repurchase the said rights under a deed of conditional sale; and (5) condition no. 12 of
the deed of assignment was an express authority from CUBA for DBP to sell whatever right she had over
the fishpond. It also ruled that CUBA was not entitled to loss of profits for lack of evidence, but agreed with
the trial court as to the actual damages of P1,067,500. It, however, deleted the amount of exemplary
damages and reduced the award of moral damages from P100,000 to P50,000 and attorney's fees, from
P100,000 to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP in appropriating Cuba's
leasehold rights and interest under Fishpond Lease Agreement No. 2083; (2) the deeds of assignment
executed by Cuba in favor of DBP; (3) the deed of conditional sale between CUBA and DBP; and (4) the
deed of conditional sale between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal, and
the assignment of leasehold rights executed by Caperal in favor of DBP. It then ordered DBP to turn over
possession of the property to Caperal as lawful holder of the leasehold rights and to pay CUBA the
following amounts: (a) P1,067,500 as actual damages; P50,000 as moral damages; and P50,000 as attorney's
fees.
Since their motions for reconsideration were denied, DBP and CUBA filed separate petitions for review.
6
In its petition (G.R. No. 118342), DBP assails the award of actual and moral damages and attorney's fees in
favor of CUBA.
Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the Court of Appeals erred (1) in
not holding that the questioned deed of assignment was a pactum commissorium contrary to Article 2088
of the Civil Code; (b) in holding that the deed of assignment effected a novation of the promissory notes; (c)
in holding that CUBA was estopped from questioning the validity of the deed of assignment when she
agreed to repurchase her leasehold rights under a deed of conditional sale; and (d) in reducing the amounts
of moral damages and attorney's fees, in deleting the award of exemplary damages, and in not increasing
the amount of damages.
We agree with CUBA that the assignment of leasehold rights was a mortgage contract.
It is undisputed that CUBA obtained from DBP three separate loans totalling P335,000, each of which was
covered by a promissory note. In all of these notes, there was a provision that: "In the event of foreclosure
of the mortgage securing this notes, I/We further bind myself/ourselves, jointly and severally, to pay the
deficiency, if any."
7
Simultaneous with the execution of the notes was the execution of "Assignments of Leasehold
Rights" where CUBA assigned her leasehold rights and interest on a 44-hectare fishpond, together with the
8
improvements thereon. As pointed out by CUBA, the deeds of assignment constantly referred to the
assignor (CUBA) as "borrower"; the assigned rights, as mortgaged properties; and the instrument itself, as
mortgage contract. Moreover, under condition no. 22 of the deed, it was provided that "failure to comply
with the terms and condition of any of the loans shall cause all other loans to become due and demandable
and all mortgages shall be foreclosed." And, condition no. 33 provided that if "foreclosure is actually
accomplished, the usual 10% attorney's fees and 10% liquidated damages of the total obligation shall be
imposed." There is, therefore, no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment was by way of security for the
payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her
Leasehold Rights.
In People's Bank & Trust Co. vs. Odom, this Court had the occasion to rule that an assignment to
9
guarantee an obligation is in effect a mortgage.
We find no merit in DBP's contention that the assignment novated the promissory notes in that the
obligation to pay a sum of money the loans (under the promissory notes) was substituted by the
assignment of the rights over the fishpond (under the deed of assignment). As correctly pointed out by
CUBA, the said assignment merely complemented or supplemented the notes; both could stand together.
The former was only an accessory to the latter. Contrary to DBP's submission, the obligation to pay a sum
of money remained, and the assignment merely served as security for the loans covered by the promissory
notes. Significantly, both the deeds of assignment and the promissory notes were executed on the same
dates the loans were granted. Also, the last paragraph of the assignment stated: "The assignor
further reiterates and states all terms, covenants, and conditions stipulated in the promissory note or
notes covering the proceeds of this loan, making said promissory note or notes, to all intent and purposes,
an integral part hereof."
Neither did the assignment amount to payment by cession under Article 1255 of the Civil Code for the plain
and simple reason that there was only one creditor, the DBP. Article 1255 contemplates the existence of two
or more creditors and involves the assignment of all the debtor's property.
Nor did the assignment constitute dation in payment under Article 1245 of the civil Code, which reads:
"Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be
governed by the law on sales." It bears stressing that the assignment, being in its essence a mortgage, was
but a security and not a satisfaction of indebtedness.10
We do not, however, buy CUBA's argument that condition no. 12 of the deed of assignment
constituted pactum commissorium. Said condition reads:
12. That effective upon the breach of any condition of this assignment, the Assignor hereby
appoints the Assignee his Attorney-in-fact with full power and authority to take actual
possession of the property above-described, together with all improvements thereon, subject
to the approval of the Secretary of Agriculture and Natural Resources, to lease the same or
any portion thereof and collect rentals, to make repairs or improvements thereon and pay the
same, to sell or otherwise dispose of whatever rights the Assignor has or might have over
said property and/or its improvements and perform any other act which the Assignee may
deem convenient to protect its interest. All expenses advanced by the Assignee in
connection with purpose above indicated which shall bear the same rate of interest
aforementioned are also guaranteed by this Assignment. Any amount received from rents,
administration, sale or disposal of said property may be supplied by the Assignee to the
payment of repairs, improvements, taxes, assessments and other incidental expenses and
obligations and the balance, if any, to the payment of interest and then on the capital of the
indebtedness secured hereby. If after disposal or sale of said property and upon application
of total amounts received there shall remain a deficiency, said Assignor hereby binds himself
to pay the same to the Assignee upon demand, together with all interest thereon until fully
paid. The power herein granted shall not be revoked as long as the Assignor is indebted to
the Assignee and all acts that may be executed by the Assignee by virtue of said power are
hereby ratified.
The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of
security for the payment of the principal obligation, and (2) there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation
within the stipulated period. 11
Condition no. 12 did not provide that the ownership over the leasehold rights would automatically pass to
DBP upon CUBA's failure to pay the loan on time. It merely provided for the appointment of DBP as
attorney-in-fact with authority, among other things, to sell or otherwise dispose of the said real rights, in
case of default by CUBA, and to apply the proceeds to the payment of the loan. This provision is a standard
condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code, which authorizes
the mortgagee to foreclose the mortgage and alienate the mortgaged property for the payment of the
principal obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment. As admitted by
it during the pre-trial, it had "[w]ithout foreclosure proceedings, whether judicial or
extrajudicial, . . . appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba over the fishpond in question."
Its contention that it limited itself to mere administration by posting caretakers is further belied by the deed
of conditional sale it executed in favor of CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor by the
herein vendees [Cuba spouses] the former acquired all the right and interest of the latter over
the above-described property;
x x x x x x x x x
The title to the real estate property [sic] and all improvements thereon shall remain in the
name of the Vendor until after the purchase price, advances and interest shall have been fully
paid. (Emphasis supplied).
It is obvious from the above-quoted paragraphs that DBP had appropriated and taken ownership of CUBA's
leasehold rights merely on the strength of the deed of assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act of appropriating the
leasehold rights. As stated earlier, condition no. 12 did not provide that CUBA's default would operate to
vest in DBP ownership of the said rights. Besides, an assignment to guarantee an obligation, as in the
present case, is virtually a mortgage and not an absolute conveyance of title which confers ownership on
the assignee. 12
At any rate, DBP's act of appropriating CUBA's leasehold rights was violative of Article 2088 of the Civil
Code, which forbids a credit or from appropriating, or disposing of, the thing given as security for the
payment of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not estop her from
questioning DBP's act of appropriation. Estoppel is unavailing in this case. As held by this Court in some
cases, estoppel cannot give validity to an act that is prohibited by law or against public policy. Hence, the
13
appropriation of the leasehold rights, being contrary to Article 2088 of the Civil Code and to public policy,
cannot be deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA, DBP should have
foreclosed the mortgage, as has been stipulated in condition no. 22 of the deed of assignment. But, as
admitted by DBP, there was no such foreclosure. Yet, in its letter dated 26 October 1979, addressed to the
Minister of Agriculture and Natural Resources and coursed through the Director of the Bureau of Fisheries
and Aquatic Resources, DBP declared that it "had foreclosed the mortgage and enforced the assignment of
leasehold rights on March 21, 1979 for failure of said spouses [Cuba spouces] to pay their loan
amortizations." This only goes to show that DBP was aware of the necessity of foreclosure proceedings.
14
In view of the false representation of DBP that it had already foreclosed the mortgage, the Bureau of
Fisheries cancelled CUBA's original lease permit, approved the deed of conditional sale, and issued a new
permit in favor of CUBA. Said acts which were predicated on such false representation, as well as the
subsequent acts emanating from DBP's appropriation of the leasehold rights, should therefore be set aside.
To validate these acts would open the floodgates to circumvention of Article 2088 of the Civil Code.
Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify the
consequent auction sale for failure to comply with the requirements laid down by law, such as Act No. 3135,
as amended. With more reason that the sale of property given as security for the payment of a debt be set
15
aside if there was no prior fore closure proceeding.
Hence, DBP should render an accounting of the income derived from the operation of the fishpond in
question and apply the said income in accordance with condition no. 12 of the deed of assignment which
provided: "Any amount received from rents, administration, . . . may be applied to the payment of repairs,
improvements, taxes, assessment, and other incidental expenses and obligations and the balance, if any, to
the payment of interest and then on the capital of the indebtedness. . ."
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an adequate compensation

only for such pecuniary loss suffered by him as he has duly proved. Such compensation is
referred to as actual or compensatory damages.
Actual or compensatory damages cannot be presumed, but must be proved with reasonable degree of
certainty. A court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of
16
damages, but must depend upon competent proof that they have been suffered by the injured party and on
the best obtainable evidence of the actual amount thereof. It must point out specific facts which could
17
afford a basis for measuring whatever compensatory or actual damages are borne. 18
In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual damages consisting of
P550,000 which represented the value of the alleged lost articles of CUBA and P517,500 which represented
the value of the 230,000 pieces of bangus allegedly stocked in 1979 when DBP first ejected CUBA from the
fishpond and the adjoining house. This award was affirmed by the Court of Appeals.
We find that the alleged loss of personal belongings and equipment was not proved by clear evidence.
Other than the testimony of CUBA and her caretaker, there was no proof as to the existence of those items
before DBP took over the fishpond in question. As pointed out by DBP, there was not "inventory of the
alleged lost items before the loss which is normal in a project which sometimes, if not most often, is left to
the care of other persons." Neither was a single receipt or record of acquisition presented.
Curiously, in her complaint dated 17 May 1985, CUBA included "losses of property" as among the damages
resulting from DBP's take-over of the fishpond. Yet, it was only in September 1985 when her son and a
caretaker went to the fishpond and the adjoining house that she came to know of the alleged loss of several
articles. Such claim for "losses of property," having been made before knowledge of the alleged actual loss,
was therefore speculative. The alleged loss could have been a mere afterthought or subterfuge to justify her
claim for actual damages.
With regard to the award of P517,000 representing the value of the alleged 230,000 pieces of bangus which
died when DBP took possession of the fishpond in March 1979, the same was not called for. Such loss was
not duly proved; besides, the claim therefor was delayed unreasonably. From 1979 until after the filing of
her complaint in court in May 1985, CUBA did not bring to the attention of DBP the alleged loss. In fact, in
her letter dated 24 October 1979, she declared:
19
1. That from February to May 1978, I was then seriously ill in Manila and within the same
period I neglected the management and supervision of the cultivation and harvest of the
produce of the aforesaid fishpond thereby resulting to the irreparable loss in the produce of
the same in the amount of about P500,000.00 to my great damage and prejudice due to
fraudulent acts of some of my fishpond workers.
Nowhere in the said letter, which was written seven months after DBP took possession of the fishpond, did
CUBA intimate that upon DBP's take-over there was a total of 230,000 pieces of bangus, but all of which
died because of DBP's representatives prevented her men from feeding the fish.
The award of actual damages should, therefore, be struck down for lack of sufficient basis.
In view, however, of DBP's act of appropriating CUBA's leasehold rights which was contrary to law and
public policy, as well as its false representation to the then Ministry of Agriculture and Natural Resources
that it had "foreclosed the mortgage," an award of moral damages in the amount of P50,000 is in order
conformably with Article 2219(10), in relation to Article 21, of the Civil Code. Exemplary or corrective
damages in the amount of P25,000 should likewise be awarded by way of example or correction for the
public good. There being an award of exemplary damages, attorney's fees are also recoverable.
20 21
WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No. 26535 is hereby
REVERSED, except as to the award of P50,000 as moral damages, which is hereby sustained. The 31
January 1990 Decision of the Regional Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is
MODIFIED setting aside the finding that condition no. 12 of the deed of assignment constituted pactum
commissorium and the award of actual damages; and by reducing the amounts of moral damages from
P100,000 to P50,000; the exemplary damages, from P50,000 to P25,000; and the attorney's fees, from
P100,000 to P20,000. The Development Bank of the Philippines is hereby ordered to render an accounting of
the income derived from the operation of the fishpond in question.
Let this case be REMANDED to the trial court for the reception of the income statement of DBP, as well as
the statement of the account of Lydia P. Cuba, and for the determination of each party's financial obligation
to one another.
SO ORDERED.
Bellosillo, Vitug and Kapunan, JJ., concur.
Footnotes
1 Original Record (OR), 1-7.
2 OR, 168-170.
3 See OR, 169.
4 Per Judge Artemio R. Corpuz, OR, 686-705.
5 Per Manuel C. Herrera, J., with Artemon D. Luna and Alfredo J. Lagamon, JJ.,

concurring, Rollo, G.R. No. 118342, 21-41; Rollo, G.R. No. 118367, 35-53.
6 Rollo, G.R. No. 118342, 43; Rollo, G.R. No. 118367, 55.
7 Exhibits "B," "C," and "D"; OR, 37-39.
8 Exhibits "B-1," "C-1" and "D-1."
9 64 Phil. 126, 132 [1937].
10 Philippine Bank of Commerce v. De Vera, 6 SCRA 1026, 1029 [1962].

11 V TOLENTINO, ARTURO M., COMMENTARIES & JURISPRUDENCE ON THE CIVIL CODE
OF THE PHILIPPINES 536-537 [1992] citing Uy Tong v. Court of Appeals, 161 SCRA 383
[1988].
12 Philippine Bank of Commerce v. De Vera, supra note 10.
13 Eugenio v. Perdido, 97 Phil. 41, 44 [1955]; Republic v. Go Bon Lee, 1 SCRA 1166, 1170
[1961]; Hian v. Court of Tax Appeals, 59 SCRA 110, 124 [1974].
14 Exhibit "N-1-A"; OR, 454.
15 Roxas v. Court of Appeals, 221 SCRA 729 [1993]; Sempio v. Court of Appeals, 263 SCRA
617 [1996].
16 Del Mundo v. Court of Appeals, 240 SCRA 348 [1995]; Lufthansa German Airlines v. Court
of Appeals, 243 SCRA 600 [1995]; Development Bank of the Philippines v. Court of Appeals,
249 SCRA 331 [1995]; Del Rosario v. Court of Appeals, G.R. No. 118325, 29 January 1997.
17 Lufthansa German Airlines v. Court of Appeals, supra note 16; People v. Rosario, 246

SCRA 658 [1995]; Del Rosario v. Court of Appeals, supra note 16; Sumalpong v. Court of
Appeals, G.R. No. 123404, 26 February 1997.
18 Del Mundo v. Court of Appeals, supra note 16.
19 Exhibit 4, OR, 560.
20 Article 2229, Civil Code.
21 Article 2208(1), Civil Code.
8) Filinvest Credit Corp v Philippine Acetylene 111 SCRA 421

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-50449 January 30, 1982
FILINVEST CREDIT CORPORATION, plaintiff-appellee,

vs.
PHILIPPINE ACETYLENE, CO., INC., defendant-appellant.
DE CASTRO, J.:
This case is certified to Us by the Court of Appeals in its Resolution 1 dated March 22, 1979 on the ground that it
involves purely questions of law, as raised in the appeal of the decision of the Court of First Instance of Manila, Branch XII
in Civil Case No. 91932, the dispositive portion of which reads as follows:
In view of the foregoing consideration, the court hereby renders judgment -
l) directing defendant to pay plaintiff:
a) the sum of P22,227.81 which is the outstanding unpaid obligation of the defendant
under the assigned credit, with 12 %interest from the date of the firing of the
complaint in this suit until the same is fully paid;
b) the sum equivalent to l5% of P22,227.81 as and for attorney's fees; and
2) directing plaintiff to deliver to, and defendant to accept, the motor vehicle, subject of the chattel
may have been changed by the result of ordinary wear and tear of the vehicle.
Defendant to pay the cost of suit.
SO ORDERED.
The facts, as found in the decision 2 subject of the instant appeal, are undisputed.
On October 30, 1971, the Philippine Acetylene Co., Inc., defendant-appellant herein, purchased from one Alexander
Lim, as evidenced by a Deed of Sale marked as Exhibit G, a motor vehicle described as Chevorlet, 1969 model with
Serial No. 136699Z303652 for P55,247.80 with a down payment of P20,000.00 and the balance of P35,247.80
payable, under the terms and conditions of the promissory note (Exh. B), at a monthly installment of P1,036.70 for
thirty-four (34) months, due and payable on the first day of each month starting December 1971 through and
inclusive September 1, 1974 with 12 % interest per annum on each unpaid installment, and attorney's fees in the
amount equivalent to 25% of the total of the outstanding unpaid amount.
As security for the payment of said promissory note, the appellant executed a chattel mortgage (Exh. C) over the
same motor vehicle in favor of said Alexander Lim. Subsequently, on November 2, 1971. Alexander Lim assigned to
the Filinvest Finance Corporation all his rights, title, and interests in the promissory note and chattel mortgage by
virtue of a Deed of Assignment (Exh. D).
Thereafter, the Filinvest Finance Corporation, as a consequence of its merger with the Credit and Development
Corporation assigned to the new corporation, the herein plaintiff-appellee Filinvest Credit Corporation, all its rights,
title, and interests on the aforesaid promissory note and chattel mortgage (Exh. A) which, in effect, the payment of
the unpaid balance owed by defendant-appellant to Alexander Lim was financed by plaintiff-appellee such that Lim
became fully paid.
Appellant failed to comply with the terms and conditions set forth in the promissory note and chattel mortgage since
it had defaulted in the payment of nine successive installments. Appellee then sent a demand letter (Exh. 1)
whereby its counsel demanded "that you (appellant) remit the aforesaid amount in full in addition to stipulated
interest and charges or return the mortgaged property to my client at its office at 2133 Taft Avenue, Malate, Manila
within five (5) days from date of this letter during office hours. " Replying thereto, appellant, thru its assistant
general- manager, wrote back (Exh. 2) advising appellee of its decision to "return the mortgaged property, which
return shall be in full satisfaction of its indebtedness pursuant to Article 1484 of the New Civil Code." Accordingly,
the mortgaged vehicle was returned to the appellee together with the document "Voluntary Surrender with Special
Power of Attorney To Sell" 3 executed by appellant on March 12, 1973 and confirmed to by appellee's vice-president.
On April 4, 1973, appellee wrote a letter (Exh. H) to appellant informing the latter that appellee cannot sell the motor
vehicle as there were unpaid taxes on the said vehicle in the sum of P70,122.00. On the last portion of the said
letter, appellee requested the appellant to update its account by paying the installments in arrears and accruing
interest in the amount of P4,232.21 on or before April 9, 1973.
On May 8, 1973, appellee, in a letter (Exh. 1), offered to deliver back the motor vehicle to the appellant but the latter
refused to accept it, so appellee instituted an action for collection of a sum of money with damages in the Court of
First Instance of Manila on September 14, 1973.
In its answer, appellant, while admitting the material allegations of the appellee's complaint, avers that appellee has
no cause of action against it since its obligation towards the appellee was extinguished when in compliance with the
appellee's demand letter, it returned the mortgaged property to the appellee, and that assuming arguendo that the
return of the property did not extinguish its obligation, it was nonetheless justified in refusing payment since the
appellee is not entitled to recover the same due to the breach of warranty committed by the original vendor-assignor
Alexander Lim.
After the case was submitted for decision, the Court of First Instance of Manila, Branch XII rendered its decision
dated February 25, 1974 which is the subject of the instant appeal in this Court.
Appellant's five assignment of errors may be reduced to, or said to revolve around two issues: first, whether or not
the return of the mortgaged motor vehicle to the appellee by virtue of its voluntary surrender by the appellant totally
extinguished and/or cancelled its obligation to the appellee; second, whether or not the warranty for the unpaid
taxes on the mortgaged motor vehicle may be properly raised and imputed to or passed over to the appellee.
Consistent with its stand in the court a quo, appellant now reiterates its main contention that appellee, after giving
appellant an option either to remit payment in full plus stipulated interests and charges or return the mortgaged
motor vehicle, had elected the alternative remedy of exacting fulfillment of the obligation, thus, precluding the
exercise of any other remedy provided for under Article 1484 of the Civil Code of the Philippines which reads:
Article 1484. Civil Code. - In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:
1) Exact fulfillment of the obligation, should the vendee fail to pay;
2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's
failure to pay cover two or more installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.
In support of the above contention, appellant maintains that when it opted to return, as in fact it did return, the
mortgaged motor vehicle to the appellee, said return necessarily had the effect of extinguishing appellant's
obligation for the unpaid price to the appellee, construing the return to and acceptance by the appellee of the
mortgaged motor vehicle as a mode of payment, specifically, dation in payment or dacion en pago which according
to appellant, virtually made appellee the owner of the mortgaged motor vehicle by the mere delivery thereof, citing
Articles 1232, 1245, and 1497 of the Civil Code, to wit:
Article 1232. Payment means not only the delivery of money but also the performance, in any
manner, of an obligation.
xxx xxx xxx
Article 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt
in money, shall be governed by the law of sales.
xxx xxx xxx
Article 1497. The thing sold shall be understood as delivered, when it is placed in the control and
possession of the vendee.
Passing at once on the relevant issue raised in this appeal, We find appellant's contention devoid of persuasive
force. The mere return of the mortgaged motor vehicle by the mortgagor, the herein appellant, to the mortgagee, the
herein appellee, does not constitute dation in payment or dacion en pago in the absence, express or implied of the
true intention of the parties. Dacion en pago, according to Manresa, is the transmission of the ownership of a thing
by the debtor to the creditor as an accepted equivalent of the performance of obligation. 4 In dacion en pago, as a
special mode of payment, the debtor offers another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying
the thing or property of the debtor, payment for which is to be charged against the debtor's debt. As such, the essential
elements of a contract of sale, namely, consent, object certain, and cause or consideration must be present. In its modern
concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as
an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale, while the
debt is considered as the purchase price. 5 In any case, common consent is an essential prerequisite, be it sale or
innovation to have the effect of totally extinguishing the debt or obligation.
The evidence on the record fails to show that the mortgagee, the herein appellee, consented, or at least intended,
that the mere delivery to, and acceptance by him, of the mortgaged motor vehicle be construed as actual payment,
more specifically dation in payment or dacion en pago. The fact that the mortgaged motor vehicle was delivered to
him does not necessarily mean that ownership thereof, as juridically contemplated by dacion en pago, was
transferred from appellant to appellee. In the absence of clear consent of appellee to the proferred special mode of
payment, there can be no transfer of ownership of the mortgaged motor vehicle from appellant to appellee. If at all,
only transfer of possession of the mortgaged motor vehicle took place, for it is quite possible that appellee, as
mortgagee, merely wanted to secure possession to forestall the loss, destruction, fraudulent transfer of the vehicle
to third persons, or its being rendered valueless if left in the hands of the appellant.
A more solid basis of the true intention of the parties is furnished by the document executed by appellant captioned
"Voluntary Surrender with Special Power of Attorney To Sell" dated March 12, 1973, attached as Annex "C" of the
appellant's answer to the complaint. An examination of the language of the document reveals that the possession of
the mortgaged motor vehicle was voluntarily surrendered by the appellant to the appellee authorizing the latter to
look for a buyer and sell the vehicle in behalf of the appellant who retains ownership thereof, and to apply the
proceeds of the sale to the mortgage indebtedness, with the undertaking of the appellant to pay the difference, if
any, between the selling price and the mortgage obligation. With the stipulated conditions as stated, the appellee, in
essence was constituted as a mere agent to sell the motor vehicle which was delivered to the appellee, not as its
property, for if it were, he would have full power of disposition of the property, not only to sell it as is the limited
authority given him in the special power of attorney. Had appellee intended to completely release appellant of its
mortgage obligation, there would be no necessity of executing the document captioned "Voluntary Surrender with
Special Power of Attorney To Sell." Nowhere in the said document can We find that the mere surrender of the
mortgaged motor vehicle to the appellee extinguished appellant's obligation for the unpaid price.
Appellant would also argue that by accepting the delivery of the mortgaged motor vehicle, appellee is estopped from
demanding payment of the unpaid obligation. Estoppel would not he since, as clearly set forth above, appellee
never accepted the mortgaged motor vehicle in full satisfaction of the mortgaged debt.
Under the law, the delivery of possession of the mortgaged property to the mortgagee, the herein appellee, can only
operate to extinguish appellant's liability if the appellee had actually caused the foreclosure sale of the mortgaged
property when it recovered possession thereof. 6 It is worth noting that it is the fact of foreclosure and actual sale of the
mortgaged chattel that bar the recovery by the vendor of any balance of the purchaser's outstanding obligation not
satisfied by the sale. 7 As held by this Court, if the vendor desisted, on his own initiative, from consummating the auction
sale, such desistance was a timely disavowal of the remedy of foreclosure, and the vendor can still sue for specific
performance. 8 This is exactly what happened in the instant case.
On the second issue, there is no dispute that there is an unpaid taxes of P70,122.00 due on the mortgaged motor
vehicle which, according to appellant, liability for the breach of warranty under the Deed of Sale is shifted to the
appellee who merely stepped into the shoes of the assignor Alexander Lim by virtue of the Deed of Assignment in
favor of appellee. The Deed of Sale between Alexander Lim and appellant and the Deed of Assignment between
Alexander Lim and appellee are very clear on this point. There is a specific provision in the Deed of Sale that the
seller Alexander Lim warrants the sale of the motor vehicle to the buyer, the herein appellant, to be free from liens
and encumbrances. When appellee accepted the assignment of credit from the seller Alexander Lim, there is a
specific agreement that Lim continued to be bound by the warranties he had given to the buyer, the herein
appellant, and that if it appears subsequently that "there are such counterclaims, offsets or defenses that may be
interposed by the debtor at the time of the assignment, such counterclaims, offsets or defenses shall not prejudice
the FILINVEST FINANCE CORPORATION and I (Alexander Lim) further warrant and hold the said corporation free
and harmless from any such claims, offsets, or defenses that may be availed of." 9
It must be noted that the unpaid taxes on the motor vehicle is a burden on the property. Since as earlier shown, the
ownership of the mortgaged property never left the mortgagor, the herein appellant, the burden of the unpaid taxes should
be home by him, who, in any case, may not be said to be without remedy under the law, but definitely not against appellee
to whom were transferred only rights, title and interest, as such is the essence of assignment of credit. 10
WHEREFORE, the judgment appealed from is hereby affirmed in toto with costs against defendant-appellant.
SO ORDERED.
Barredo (Chairman), Aquino, Concepcion, Jr., Ericta and Escolin, JJ., concur.
Separate Opinions
ABAD SANTOS, J., concurring:
I concur in the result.
When the appellant returned the vehicle and executed the document entitled, "Voluntary Surrender with Special
Power of Attorney to Sell" said acts did not result in the fulfillment of its obligation under Art. 1884(l) of the Civil
Code. On the contrary the document indicated that the appellee was to foreclose the chattel mortgage. The
surrender of the car to the appellee was a mere preparatory act for its sale in a foreclosure of the chattel mortgage.
After the appellee discovered, without negligence on its part, that foreclosure of the chattel mortgage was
impractical, it had the right which it exercised to abandon the chattel mortgage and demand fulfillment of the
obligation.
Separate Opinions
ABAD SANTOS, J., concurring:
When the appellant returned the vehicle and executed the document entitled, "Voluntary Surrender with Special
Power of Attorney to Sell" said acts did not result in the fulfillment of its obligation under Art. 1884(l) of the Civil
Code. On the contrary the document indicated that the appellee was to foreclose the chattel mortgage. The
surrender of the car to the appellee was a mere preparatory act for its sale in a foreclosure of the chattel mortgage.
After the appellee discovered, without negligence on its part, that foreclosure of the chattel mortgage was
impractical, it had the right which it exercised to abandon the chattel mortgage and demand fulfillment of the
obligation.
Footnotes
1 p. 33, Rollo.
2 p. 61, Record on Appeal., p. 11, Rollo.
3 p. 54, Annex "C", Record on Appeal, p. I 1, Rollo.

4 8 Manresa 324, cited in 4 Tolentino Commentaries & Jurisprudence on the Civil Code of the
Philippines, 282 (1973).
5 4 Tolentino Commentaries & Jurisprudence on the Civil Code of the Philippines, 283 (1973); 4
Paras, Civil Code of the Philippines Annotated 288 (9th ed., 1978).
6 Northern Motors, Inc. vs. Casiano Sapinoso 33 SCRA 356 (1970); Universal Motors Corp. vs. Dy
Hian Tat et. al., 28 SCRA 161 (1969); Manila Motors Co., Inc. vs. Fernandez, 99 Phil. 782 (1956).
7 New Civil Code, par. 3 Article 1484.
8 Industrial Finance Corp. vs. Tobias, 78 SCRA 28 (1977); Radiowealth Inc. vs. Lavin, 7 SCRA 804
(1963); Pacific Commercial Co. vs. dela Rama, 72 Phil. 380 (1941).
9 Annex "C", Record on Appeal, p. 33, Rollo.
10 New Civil Code, Article 1627.
9) De Guzman v CA 137 SCRA 730

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-52733 July 23, 1985
PILAR DE GUZMAN, ROLANDO GESTUVO, and MINERVA GESTUVO, petitioners,

vs.
THE HON. COURT OF APPEALS, THE HON. JUDGE PEDRO JL. BAUTISTA, Presiding Judge of the Court of
First Instance of Rizal, Branch III, Pasay City, and LEONIDA P. SINGH, respondents.
Barredo, Reyno & Tomacruz Law Office for petitioners.
Adriano T Bruno for private respondent.
CONCEPCION, JR., J.:
Petition for the reversal of the decision of the respondent appeal appellate court which dismissed the petition to
annul and set aside the orders of the Court of First Instance of Rizal, Pasay City Branch, dismissing the petitioners'
appeal in Civil Case No. 5247- P and to restrain the respondents from enforcing the same. Acting upon the petition,
the Court issued a temporary restraining order on May 16, 1980, restraining the respondents from enforcing and/or
carrying out the decision in question.
1
The facts of record show that on February 17, 1971, the petitioners, as SELLER, and the private respondent, as
BUYER, executed a Contract to Sell covering two (2) parcels of land owned by the petitioners located at Cementina
Street, Pasay City and covered by TCT Nos. 11326 and 11327 of the Register of Deeds of Pasay City. It was
stipulated therein that the private respondent should pay the balance of the purchase price of P133,640.00 on or
before February 17, 1975. Two days before the said date, or on February 15, 1975, the private respondent asked
the petitioners to furnish her with a statement of account of the balance due; copies of the certificates of title
covering the two parcels of land subject of the sale; and a copy of the power of attorney executed by Rolando
Gestuvo in favor of Pilar de Guzman. But, the petitioners denied the request. As a result, the private respondent
filed a complaint for specific performance with damages against the petitioners before the Court of First Instance of
Rizal. The case, however, was dismissed for failure to prosecute. But, the private respondent subsequently refiled
the case. The case was docketed in court as Civil Case No. 5247-P. In her complaint, the private respondent
charged that the petitioners, by refusing to furnish her with copies of the documents requested, deliberately intended
not to comply with their obligations under the contract to sell, as a result of which the said petitioners committed a
breach of contract, and had also acted unfairly and in manifest bad faith for which they should be held liable for
damages. Answering the complaint, the petitioners claimed that the complaint failed to state a cause of action; that
the balance due was already pre-determined in the contract; that the petitioners have no obligation to furnish the
private respondent with copies of the documents requested; and that the private respondent's failure to pay the
balance of the purchase price on the date specified had caused the contract to expire and become ineffective
without necessity of notice or of any judicial declaration to that effect.
On November 29, 1977, the trial court rendered a decision approving the compromise agreement submitted by the
parties wherein they agreed on the following:
1. That, not later than December 18, 1977, plaintiff will pay defendants the total amount of TWO
HUNDRED FORTY THOUSAND (P240,000.00) PESOS, Philippine Currency and in case of failure
to do so, she shall have only until January 27, 1978 within which to pay the total amount of TWO
HUNDRED FIFTY THOUSAND (P250,000.00) PESOS, Philippine Currency, which shall be treated
as complete and final payment of the consideration in the contract to sell, dated February 17, 1971.
(Annex "A", Complaint);
2. That, immediately upon receipt of either amounts within the periods so contemplated, defendants
undertake to immediately execute the necessary legal instruments to transfer to plaintiff the title to
the parcels of land subject of the above-mentioned Contract to Sell, free from liens and
encumbrances but with the understanding that all the expenses necessary for the issuance of a new
Transfer Certificate of Title in favor of plaintiff or her assigns including documentary stamp taxes,
science stamp taxes and legal research fund fees shall be for her sole and exclusive account;
3. That defendants would temporarily desist from enforcing their right or possession over the
properties involved herein until January 27, 1978, but this shall not be construed as an abandonment
or waiver of its causes of action as embodied in her Complaint in Civil Case No. 12446 entitled "Pilar
de Guzman vs. Wilfredo C. Tan, etc." for Ejectment pending before Branch IV of the Pasay City
Court;
4. Should plaintiff fail to pay either of the amounts abovestated within the period herein stipulated,
the aforesaid Contract to Sell dated February 17, 1971 shall be deemed rescinded and defendants
would immediately enforce its right of possession of the premises and plaintiff agrees to voluntarily
surrender and vacate the same without further notice or demand;
5. That payment of either amounts above-stated shall take place before the Honorable Judge Pedro
Jl. Bautista in the courtroom of the Court of First Instance of Rizal, Branch III in Pasay City at 10:00
a.m. Friday, January 27, 1978 unless payment has been earlier made, in which case plaintiff shall
produce receipt of the same at the same time and place, otherwise defendants shag immediately be
entitled to a Writ of Execution on its right of possession over the premises;
6. Lastly, that both parties waive and abandon, by reason hereof, their respective claims and
counterclaims as embodied in the Complaint and Answer. 2
On January 28, 1978, the petitioners filed a motion for the issuance of a writ of execution, claiming that the private
respondent had failed to abide by the terms of the compromise agreement and pay the amount specified in their
compromise agreement within the period stipulated. The private respondent opposed the motion, saying that she
3
had complied with the terms and conditions of the compromise agreement and asked the court to direct the
petitioners to comply with the court's decision and execute the necessary documents to effect the transfer of
ownership of the two parcels of land in question to her. 4
Acting upon the motions, the respondent judge issued an order on March 27, 1978, denying the petitioners' motion
for execution, and instead, directed the petitioners to immediately execute the necessary documents, transferring to
private respondent the title to the properties. He also ordered the Clerk of Court to release to the petitioners the
amount of P250,000.00, which had been deposited by the private respondent, upon proper receipt therefor. 5
The petitioners filed a motion for the reconsideration of the order, but the trial court denied the same in an order
6
dated July 24, 1978. 7
Whereupon, the petitioners filed a notice of appeal, appeal bond, and a motion for extension of time (20 days)
8
within which to submit a record on appeal. On August 21, 1978, they filed a second motion for extension of time (5
9
days) within which to file their record on appeal, and on August 26, 1978, they submitted their record on appeal.
10
On September 30, 1978, the private respondent filed a motion to dismiss the appeal on the grounds that: (1) the
orders appealed from are inappealable; and (2) that the record on appeal is defective as it does not contain the
material data showing that the appeal was perfected on time. The trial court found merit in the motion and
11
dismissed the appeal of the petitioners. As a result, the petitioners filed a petition for certiorari with the respondent
12
Court of Appeals to nullify the order of the trial court which dismissed their appeal. On February 5, 1980, the said
appellate court rendered judgment sustaining the decision of the trial court. Hence, the present recourse.
13
Passing upon the propriety of the petitioners' appeal, the rule is that a judgment rendered in accordance with a
compromise agreement is not appealable. It is immediately executory unless a motion is filed to set aside the
compromise agreement on the ground of fraud, mistake or duress, in which case an appeal may be taken from the
order denying the motion. It is also a settled rule that an order of execution of judgment is not appealable.
14
However, where such order of execution in the opinion of the defeated party varies the terms of the judgment and
does not conform to the essence thereof, or when the terms of the judgment are not clear and there is room for
interpretation and the interpretation given by the trial court as contained in its order of execution is wrong in the
opinion of the defeated party, the latter should be allowed to appeal from said order so that the Appellate Tribunal
may pass upon the legality and correctness of the said order. 15
In the instant case, the legality or enforceability of the compromise agreement or the decision of the trial court
approving the compromise agreement is not disputed. The parties both want the said compromise agreement to be
implemented. The petitioners question the ruling of the trial court that the private respondent had complied with the
terms of the compromise agreement. The issue raised, albeit one of fact, is appealable.
As to the sufficiency of the record on appeal filed by the petitioners, the rule is that the submission of a record on
appeal, for purposes of appeal, is no longer required as the original record is elevated to the appellate court, except
in appeals in special proceedings in accordance with Rule 109 of the Rules of Court and other cases wherein
multiple appeals are allowed. Since the appeal of the petitioners is not one of those mentioned above, the late
16
filing or insufficiency of the record on appeal filed by the petitioners is no longer a ground for dismissing their appeal.
On the merits of the case, We agree with the findings of the trial court that the private respondent had substantially
complied with the terms and conditions of the compromise agreement. Her failure to deliver to the petitioners the full
amount on January 27, 1978 was not her fault. The blame lies with the petitioners. The record shows that the
private respondent went to the sala of Judge Bautista on the appointed day to make payment, as agreed upon in
their compromise agreement. But, the petitioners were not there to receive it. Only the petitioners' counsel appeared
later, but, he informed the private respondent that he had no authority to receive and accept payment. Instead, he
invited the private respondent and her companions to the house of the petitioners to effect payment. But, the
petitioners were not there either. They were informed that the petitioner Pilar de Guzman would arrive late in the
afternoon, possibly at around 4:00 o'clock. The private respondent was assured, however, that she would be
informed as soon as the petitioners arrived. The private respondent, in her eagerness to settle her obligation,
consented and waited for the call which did not come and unwittingly let the period lapse. The next day, January 28,
1978, the private respondent went to the office of the Clerk of the Court of First Instance of Rizal, Pasay City
Branch, to deposit the balance of the purchase price. But, it being a Saturday, the cashier was not there to receive
it. So, on the next working day, Monday, January 30, 1978, the private respondent deposited the amount of
P30,000.00 with the cashier of the Office of the Clerk of the Court of First Instance of Rizal, Pasay City Branch, to
complete the payment of the purchase price of P250,000.00. Since the deposit of the balance of the purchase price
was made in good faith and that the failure of the private respondent to deposit the purchase price on the date
specified was due to the petitioners who also make no claim that they had sustained damages because of the two
days delay, there was substantial compliance with the terms and conditions of the compromise agreement.
WHEREFORE, the petition should be, as it is hereby DISMISSED. The temporary restraining order heretofore
issued is LIFTED and SET ASIDE. With costs against the petitioners.
SO ORDERED.
Makasiar (Chairman), Abad Santos, Escolin and Cuevas, JJ., concur.
Separate Opinions
AQUINO, J., dissenting:
I dissent. On November 29, 1977 the trial court rendered a decision approving a compromise between Pilar de
Guzman, Rolando Gestuvo and Minerva Gestuvo, as sellers, and Leonida P. Singh, buyer. Singh agreed to pay de
Guzman and the Gestuvos, now petitioners, P250,000 for two lots located at Cementina Street, Pasay City at ten
o'clock in the morning of January 27, 1978 in the courtroom of Judge Bautista of Pasay City. In case no payment
was made, then the petitioners would be immediately entitled to a writ of execution for the possession of the said
lots.
Singh did not pay the P250,000. Ben Restrivera, in behalf of Singh, on January 24, 1978 deposited P220,000 with
the clerk of court. Restrivera on January 27, 1978 tried to deliver to Antonio G. Barredo, petitioners' counsel, P5,000
cash and P25,000 in postdated checks, or P30,000 to complete the price of P250,000. Barredo refused to accept
that payment. On January 30, 1978 (3 days after the deadline) Singh deposited with the clerk of court cash of
P30,000.
On that same day, January 30, the petitioners filed a motion for execution. It was opposed by Singh. Judge Bautista
in his order of March 27, 1978 denied the motion and ordered the petitioners to execute the corresponding deed of
sale. He ordered the clerk of court to release the P250,000 to them.
The petitioners filed a motion for reconsideration which the trial court denied in an order dated July 24, 1978, a copy
of which was received by the petitioners on July 31, 1978. The next day, August 1, the petitioners filed a notice of
appeal and an appeal bond and asked for an extension of twenty days within which to file their record on appeal.
They asked for a second extension of five days. The record on appeal was filed on August 26, 1978.
The trial court did not give due course to the appeal. The petitioners filed a petition for mandamus with the Court of
Appeals to compel the trial court to elevate their appeal. The Court of Appeals in its decision dated February 5, 1980
sustained the trial court. The petitioners appealed to this Court.
The trial court erred in ordering the petitioners to execute the deed of sale. Singh did not comply with the
compromise agreement. She did not pay the P250,000 on January 27, 1978. The petitioners were entitled to a writ
of execution
The appeal should have been given due course. It was filed on time. The technicality that the petitioners did not
comply with the "material data" rule may be disregarded. That rule has been relaxed in later cases. See
Berkenkotter vs. Court of Appeals, L-36629, September 28, 1973, 53 SCRA 228 and later cases.
Instead of ordering the Pasay court to elevate the record of the case to the Intermediate Appellate Court, we should
now resolve the case or the merits of the appeal.
It is indubitable that Singh violated the compromise agreement. She lost the right to purchase the two lots. The
petitioners are entitled to possess them.
Separate Opinions
AQUINO, J., dissenting:
I dissent. On November 29, 1977 the trial court rendered a decision approving a compromise between Pilar de
Guzman, Rolando Gestuvo and Minerva Gestuvo, as sellers, and Leonida P. Singh, buyer. Singh agreed to pay de
Guzman and the Gestuvos, now petitioners, P250,000 for two lots located at Cementina Street, Pasay City at ten
o'clock in the morning of January 27, 1978 in the courtroom of Judge Bautista of Pasay City. In case no payment
was made, then the petitioners would be immediately entitled to a writ of execution for the possession of the said
lots.
Singh did not pay the P250,000. Ben Restrivera, in behalf of Singh, on January 24, 1978 deposited P220,000 with
the clerk of court. Restrivera on January 27, 1978 tried to deliver to Antonio G. Barredo, petitioners' counsel, P5,000
cash and P25,000 in postdated checks, or P30,000 to complete the price of P250,000. Barredo refused to accept
that payment. On January 30, 1978 (3 days after the deadline) Singh deposited with the clerk of court cash of
P30,000.
On that same day, January 30, the petitioners filed a motion for execution. It was opposed by Singh. Judge Bautista
in his order of March 27, 1978 denied the motion and ordered the petitioners to execute the corresponding deed of
sale. He ordered the clerk of court to release the P250,000 to them.
The petitioners filed a motion for reconsideration which the trial court denied in an order dated July 24, 1978, a copy
of which was received by the petitioners on July 31, 1978. The next day, August 1, the petitioners filed a notice of
appeal and an appeal bond and asked for an extension of twenty days within which to file their record on appeal.
They asked for a second extension of five days. The record on appeal was filed on August 26, 1978.
The trial court did not give due course to the appeal. The petitioners filed a petition for mandamus with the Court of
Appeals to compel the trial court to elevate their appeal. The Court of Appeals in its decision dated February 5, 1980
sustained the trial court. The petitioners appealed to this Court.
The trial court erred in ordering the petitioners to execute the deed of sale. Singh did not comply with the
compromise agreement. She did not pay the P250,000 on January 27, 1978. The petitioners were entitled to a writ
of execution
The appeal should have been given due course. It was filed on time. The technicality that the petitioners did not
comply with the "material data" rule may be disregarded. That rule has been relaxed in later cases. See
Berkenkotter vs. Court of Appeals, L-36629, September 28, 1973, 53 SCRA 228 and later cases.
Instead of ordering the Pasay court to elevate the record of the case to the Intermediate Appellate Court, we should
now resolve the case or the merits of the appeal.
It is indubitable that Singh violated the compromise agreement. She lost the right to purchase the two lots. The
petitioners are entitled to possess them.
Footnotes
1 Rollo, p. 121.
2 Id, p. 89.
3 Id, p.91.
4 Id, p. 98.
5 Id, p. 52.
6 Id, p. 59.
7 Id, p. 56.
8 Id, p. 100.
9 Id, p. 101.
10 Id, p. 103,
11 Id, p. 110.
12 Id, p. 49.
13 Id, p. 40.
14 Periquet vs. Reyes, 129 Phil. 764.
15 Manaois-Salanga vs. Natividad, 107 Phil. 268.
16 Secs. 18, 19, 20, Interim Rules & Guidelines, Rules of Court.
10) SOCO V Militante 123 SCRA 160

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-58961 June 28, 1983
SOLEDAD SOCO, petitioner,
vs.
HON. FRANCIS MILITANTE, Incumbent Presiding Judge of the Court of First Instance of Cebu, Branch XII,
Cebu City and REGINO FRANCISCO, JR., respondents.
Chua & Associates Law Office (collaborating counsel) and Andales, Andales & Associates Law Office for petitioner.
Francis M. Zosa for private respondent.
GUERRERO, J.:
The decision subject of the present petition for review holds the view that there was substantial compliance with the
requisites of consignation and so ruled in favor of private respondent, Regino Francisco, Jr., lessee of the building
owned by petitioner lessor, Soledad Soco in the case for illegal detainer originally filed in the City Court of Cebu
City, declaring the payments of the rentals valid and effective, dismissed the complaint and ordered the lessor to
pay the lessee moral and exemplary damages in the amount of P10,000.00 and the further sum of P3,000.00 as
attorney's fees.
We do not agree with the questioned decision. We hold that the essential requisites of a valid consignation must be
complied with fully and strictly in accordance with the law, Articles 1256 to 1261, New Civil Code. That these Articles
must be accorded a mandatory construction is clearly evident and plain from the very language of the codal
provisions themselves which require absolute compliance with the essential requisites therein provided. Substantial
compliance is not enough for that would render only a directory construction to the law. The use of the words "shall"
and "must" which are imperative, operating to impose a duty which may be enforced, positively indicate that all the
essential requisites of a valid consignation must be complied with. The Civil Code Articles expressly and explicitly
direct what must be essentially done in order that consignation shall be valid and effectual. Thus, the law provides:
1257. In order that the consignation of the thing due may release the obligor, it must first be
announced to the persons interested in the fulfillment of the obligation.
The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which
regulate payment.
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.
Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency which is legal tender in the Philippines.
documents shall produce the effect of payment only when they have been cashed, or when through
the fault of the creditor they have been impaired.
We have a long line of established precedents and doctrines that sustain the mandatory nature of the above
provisions. The decision appealed from must, therefore, be reversed.
The antecedent facts are substantially recited in the decision under review, as follows:
It appears from the evidence that the plaintiff-appellee-Soco, for short-and the 'defendant-appellant-
Francisco, for brevity- entered into a contract of lease on January 17, 1973, whereby Soco leased
her commercial building and lot situated at Manalili Street, Cebu City, to Francisco for a monthly
rental of P 800.00 for a period of 10 years renewable for another 10 years at the option of the
lessee. The terms of the contract are embodied in the Contract of Lease (Exhibit "A" for Soco and
Exhibit "2" for Francisco). It can readily be discerned from Exhibit "A" that paragraphs 10 and 11
appear to have been cancelled while in Exhibit "2" only paragraph 10 has been cancelled. Claiming
that paragraph 11 of the Contract of Lease was in fact not part of the contract because it was
cancelled, Soco filed Civil Case No. R-16261 in the Court of First Instance of Cebu seeking the
annulment and/or reformation of the Contract of Lease. ...
Sometime before the filing of Civil Case No. R-16261 Francisco noticed that Soco did not anymore
send her collector for the payment of rentals and at times there were payments made but no receipts
were issued. This situation prompted Francisco to write Soco the letter dated February 7, 1975
(Exhibit "3") which the latter received as shown in Exhibit "3-A". After writing this letter, Francisco
sent his payment for rentals by checks issued by the Commercial Bank and Trust Company.
Obviously, these payments in checks were received because Soco admitted that prior to May, 1977,
defendant had been religiously paying the rental. ....
1. The factual background setting of this case clearly indicates that soon after Soco learned that
Francisco sub-leased a portion of the building to NACIDA, at a monthly rental of more than
P3,000.00 which is definitely very much higher than what Francisco was paying to Soco under the
Contract of Lease, the latter felt that she was on the losing end of the lease agreement so she tried
to look for ways and means to terminate the contract. ...
In view of this alleged non-payment of rental of the leased premises beginning May, 1977, Soco
through her lawyer sent a letter dated November 23, 1978 (Exhibit "B") to Francisco serving notice to
the latter 'to vacate the premises leased.' In answer to this letter, Francisco through his lawyer
informed Soco and her lawyer that all payments of rental due her were in fact paid by Commercial
Bank and Trust Company through the Clerk of Court of the City Court of Cebu (Exhibit " 1 "). Despite
this explanation, Soco filed this instant case of Illegal Detainer on January 8, 1979. ...
2. Pursuant to his letter dated February 7, 1975(Exhibit"3") and for reasons stated therein, Francisco
paid his monthly rentals to Soco by issuing checks of the Commercial Bank and Trust Company
where he had a checking account. On May 13, 1975, Francisco wrote the Vice-President of
Comtrust, Cebu Branch (Exhibit "4") requesting the latter to issue checks to Soco in the amount of P
840.00 every 10th of the month, obviously for payment of his monthly rentals. This request of
Francisco was complied with by Comtrust in its letter dated June 4, 1975 (Exhibit "5"). Obviously,
these payments by checks through Comtrust were received by Soco from June, 1975 to April, 1977
because Soco admitted that an rentals due her were paid except the rentals beginning May, 1977.
While Soco alleged in her direct examination that 'since May, 1977 he (meaning Francisco) stopped
paying the monthly rentals' (TSN, Palicte, p. 6, Hearing of October 24, 1979), yet on cross
examination she admitted that before the filing of her complaint in the instant case, she knew that
payments for monthly rentals were deposited with the Clerk of Court except rentals for the months of
May, June, July and August, 1977. ...
Pressing her point, Soco alleged that 'we personally demanded from Engr. Francisco for the months
of May, June, July and August, but Engr. Francisco did not pay for the reason that he had no funds
available at that time.' (TSN-Palicte, p. 28, Hearing October 24, 1979). This allegation of Soco is
denied by Francisco because per his instructions, the Commercial Bank and Trust Company, Cebu
Branch, in fact, issued checks in favor of Soco representing payments for monthly rentals for the
months of May, June, July and August, 1977 as shown in Debit Memorandum issued by Comtrust as
follows:
(a) Exhibit "6"-Debit Memo dated May 11, 1977 for P926.10 as payment for May, 1977;
(b) Exhibit"7"-Debit Memo dated June l5, 197 7for P926.10 as payment for June, 1977;
(c) Exhibit "8"-Debit Memo dated July 11, 1977 for P1926.10 as payment for July, 1977;
(d) Exhibit "9"-Debit Memo dated August 10, 1977 for P926. 10 as payment for August, 1977.
These payments are further bolstered by the certification issued by Comtrust dated October 29,
1979 (Exhibit "13"). Indeed the Court is convinced that payments for rentals for the months of May,
June, July and August, 1977 were made by Francisco to Soco thru Comtrust and deposited with the
Clerk of Court of the City Court of Cebu. There is no need to determine whether payments by
consignation were made from September, 1977 up to the filing of the complaint in January, 1979
because as earlier stated Soco admitted that the rentals for these months were deposited with the
Clerk of Court. ...
Taking into account the factual background setting of this case, the Court holds that there was in fact
a tender of payment of the rentals made by Francisco to Soco through Comtrust and since these
payments were not accepted by Soco evidently because of her intention to evict Francisco, by all
means, culminating in the filing of Civil Case R-16261, Francisco was impelled to deposit the rentals
with the Clerk of Court of the City Court of Cebu. Soco was notified of this deposit by virtue of the
letter of Atty. Pampio Abarientos dated June 9, 1977 (Exhibit "10") and the letter of Atty. Pampio
Abarientos dated July 6. 1977 (Exhibit " 12") as well as in the answer of Francisco in Civil Case R-
16261 (Exhibit "14") particularly paragraph 7 of the Special and Affirmative Defenses. She was
further notified of these payments by consignation in the letter of Atty. Menchavez dated November
28, 1978 (Exhibit " 1 "). There was therefore substantial compliance of the requisites of consignation,
hence his payments were valid and effective. Consequently, Francisco cannot be ejected from the
leased premises for non-payment of rentals. ...
As indicated earlier, the above decision of the Court of First Instance reversed the judgment of the
City Court of Cebu, Branch 11, the dispositive portion of the latter reading as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendant, Regino
Francisco, Jr.:
(1) To vacate immediately the premises in question, consisting of a building located at Manalili St.,
Cebu City;
(2) To pay to the plaintiff the sum of P40,490.46 for the rentals, covering the period from May, 1977
to August, 1980, and starting with the month of September, 1980, to pay to the plaintiff for one (1)
year a monthly rental of P l,072.076 and an additional amount of 5 per cent of said amount, and for
so much amount every month thereafter equivalent to the rental of the month of every preceding
year plus 5 percent of same monthly rental until the defendant shall finally vacate said premises and
possession thereof wholly restored to the plaintiff-all plus legal interest from date of filing of the
complaint;
(3) To pay to the plaintiff the sum of P9,000.00 for attorney's fee;
(4) To pay to the plaintiff the sum of P5,000.00 for damages and incidental litigation expenses; and
(5) To pay the Costs.
SOORDERED.
Cebu City, Philippines, November 21, 1980.
(SGD.)
PATER
NO D.
MONT
ESCLA
ROS
Acting
Presidi
ng
Judge
According to the findings of fact made by the City Court, the defendant Francisco had religiously paid to the plaintiff
Soco the corresponding rentals according to the terms of the Least Contract while enjoying the leased premises
until one day the plaintiff had to demand upon the defendant for the payment of the rentals for the month of May,
1977 and of the succeeding months. The plaintiff also demanded upon the defendant to vacate the premises and
from that time he failed or refused to vacate his possession thereof; that beginning with the month of May, 1977 until
at present, the defendant has not made valid payments of rentals to the plaintiff who, as a consequence, has not
received any rental payment from the defendant or anybody else; that for the months of May to August, 1977,
evidence shows that the plaintiff through her daughter, Teolita Soco and salesgirl, Vilma Arong, went to the office or
residence of defendant at Sanciangko St., Cebu City, on various occasions to effect payment of rentals but were
unable to collect on account of the defendant's refusal to pay; that defendant contended that payments of rental thru
checks for said four months were made to the plaintiff but the latter refused to accept them; that in 1975, defendant
authorized the Commercial Bank and Trust Company to issue checks to the plaintiff chargeable against his bank
account, for the payment of said rentals, and the delivery of said checks was coursed by the bank thru the
messengerial services of the FAR Corporation, but the plaintiff refused to accept them and because of such refusal,
defendant instructed said bank to make consignation with the Clerk of Court of the City Court of Cebu as regard said
rentals for May to August, 1977 and for subsequent months.
The City Court further found that there is no showing that the letter allegedly delivered to the plaintiff in May, 1977
by Filomeno Soon, messenger of the FAR Corporation contained cash money, check, money order, or any other
form of note of value, hence there could never be any tender of payment, and even granting that there was, but
plaintiff refused to accept it without any reason, still no consignation for May, 1977 rental could be considered in
favor of the defendant unless evidence is presented to establish that he actually made rental deposit with the court
in cash money and prior and subsequent to such deposit, he notified the plaintiff thereof.
Notwithstanding the contradictory findings of fact and the resulting opposite conclusions of law by the City Court and
the Court of First Instance, both are agreed, however, that the case presents the issue of whether the lessee failed
to pay the monthly rentals beginning May, 1977 up to the time the complaint for eviction was filed on January 8,
1979. This issue in turn revolves on whether the consignation of the rentals was valid or not to discharge effectively
the lessee's obligation to pay the same. The City Court ruled that the consignation was not valid. The Court of First
Instance, on the other hand, held that there was substantial compliance with the requisites of the law on
consignation.
Let us examine the law and consider Our jurisprudence on the matter, aside from the codal provisions already cited
herein.
According to Article 1256, New Civil Code, if the creditor to whom tender of payment has been made refuses without
just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases: (1) When the creditor is absent or
unknown, or does not appear at the place of payment; (2) When he is incapacitated to receive the payment at the
time it is due; (3) When, without just cause, he refuses to give a receipt; (4) When two or more persons claim the
same right to collect; (5) When the title of the obligation has been lost.
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. (Limkako vs. Teodoro, 74
Phil. 313).
In order that consignation may be effective, the debtor must first comply with certain requirements prescribed by
law. The debtor must show (1) that there was a debt due; (2) that 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 (Art. 1176, Civil Code);
(3) that previous notice of the consignation had been given to the person interested in the performance of the
obligation (Art. 1177, Civil Code); (4) that the amount due was placed at the disposal of the court (Art. 1178, Civil
Code); and (5) that after the consignation had been made the person interested was notified thereof (Art. 1178, Civil
Code). Failure in any of these requirements is enough ground to render a consignation ineffective. (Jose Ponce de
Leon vs. Santiago Syjuco, Inc., 90 Phil. 311).
Without the notice first announced to the persons interested in the fulfillment of the obligation, the consignation as a
payment is void. (Limkako vs. Teodoro, 74 Phil. 313),
In order to be valid, the tender of payment must be made in lawful currency. While payment in check by the debtor
may be acceptable as valid, if no prompt objection to said payment is made (Desbarats vs. Vda. de Mortera, L-4915,
May 25, 1956) the fact that in previous years payment in check was accepted does not place its creditor in estoppel
from requiring the debtor to pay his obligation in cash (Sy vs. Eufemio, L-10572, Sept. 30, 1958). Thus, the tender of
a check to pay for an obligation is not a valid tender of payment thereof (Desbarats vs. Vda. de Mortera, supra). See
Annotation, The Mechanics of Consignation by Atty. S. Tabios, 104 SCRA 174-179.
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).
Reviewing carefully the evidence presented by respondent lessee at the trial of the case to prove his compliance
with all the requirements of a valid tender of payment and consignation and from which the respondent Judge based
his conclusion that there was substantial compliance with the law on consignation, We note from the assailed
decision hereinbefore quoted that these evidences are: Exhibit 10, the letter of Atty. Pampio Abarintos dated June 9,
1977: Exhibit 12, letter of Atty. Pampio Abarintos dated July 6, 1977; Exhibit 14, the Answer of respondent
Francisco in Civil Case R- 16261, particularly paragraph 7 of the Special and Affirmative Defenses; and Exhibit 1,
letter of Atty. Eric Menchavez dated November 28, 1978. All these evidences, according to respondent Judge,
proved that petitioner lessor was notified of the deposit of the monthly rentals.
We have analyzed and scrutinized closely the above exhibits and We find that the respondent Judge's conclusion is
manifestly wrong and based on misapprehension of facts. Thus-
(1) Exhibit 10 reads: (see p. 17, Records)
June 9, 1977
Miss Soledad Soco

Soledad Soco Retazo
P. Gullas St., Cebu City
Dear Miss Soco:
This is in connection with the payment of rental of my client, Engr. Regino Francisco, Jr., of your
building situated at Manalili St., Cebu City.
It appears that twice you refused acceptance of the said payment made by my client.
It appears further that my client had called your office several times and left a message for you to get
this payment of rental but until the present you have not sent somebody to get it.
In this connection, therefore, in behalf of my client, you are hereby requested to please get and claim
the rental payment aforestated from the Office of my client at Tagalog Hotel and Restaurant,
Sanciangko St., Cebu City. within three (3) days from receipt hereof otherwise we would be
constrained to make a consignation of the same with the Court in accordance with law.
Hoping for your cooperation on this matter, we remain.
Very truly yours,
(SGD.) PAMPIO A. ABARINTOS

Counsel for Engr. REGINO
FRANCISCO, Jr.
We may agree that the above exhibit proves tender of payment of the particular monthly rental referred to (the letter
does not, however, indicate for what month and also the intention to deposit the rental with the court, which is the
first notice. But certainly, it is no proof of tender of payment of other or subsequent monthly rentals. Neither is it
proof that notice of the actual deposit or consignation was given to the lessor, which is the second notice required
by law.
(2) Exhibit 12 (see p. 237, Records) states:

July 6,
1977
Miss Soledad Soco

Soledad Soco Reta
P. Gullas St., Cebu City
Dear Miss Soco:
This is to advise and inform you that my client, Engr. Regino Francisco, Jr., has consigned to you,
through the Clerk of Court, City Court of Cebu, Cebu City, the total amount of Pl,852.20, as
evidenced by cashier's checks No. 478439 and 47907 issued by the Commercial Bank and Trust
Company (CBTC) Cebu City Branch, dated May 11, 1977 and June 15, 1977 respectively and
payable to your order, under Official Receipt No. 0436936 dated July 6,1977.
This amount represents payment of the rental of your building situated at Manalili St., Cebu City
which my client, Engr. Regino Francisco, Jr., is renting. You can withdraw the said amount from the
Clerk of Court, City Court of Cebu, Cebu City at any time.
Please be further notified that all subsequent monthly rentals will be deposited to the Clerk of Court,
City Court of Cebu, Cebu City.
Very truly yours,
(SGD.) PAMPIO A. ABARINTOS

Counsel for ENGR. REGINO
FRANCISCO, JR.
The above evidence is, of course, proof of notice to the lessor of the deposit or consignation of only the two
payments by cashier's checks indicated therein. But surely, it does not prove any other deposit nor the notice
thereof to the lessor. It is not even proof of the tender of payment that would have preceded the consignation.
(3) Exhibit 14, paragraph 7 of the Answer (see p. 246, Records) alleges:
7. That ever since, defendant had been religiously paying his rentals without any delay which,
however, the plaintiff had in so many occasions refused to accept obviously in the hope that she
may declare non-payment of rentals and claim it as a ground for the cancellation of the contract of
lease. This, after seeing the improvements in the area which were effected, at no small expense by
the defendant. To preserve defendant's rights and to show good faith in up to date payment of
rentals, defendant had authorized his bank to issue regularly cashier's check in favor of the plaintiff
as payment of rentals which the plaintiff had been accepting during the past years and even for the
months of January up to May of this year, 1977 way past plaintiff's claim of lease expiration. For the
months of June and July, however, plaintiff again started refusing to accept the payments in going
back to her previous strategy which forced the defendant to consign his monthly rental with the City
Clerk of Court and which is now the present state of affairs in so far as payment of rentals is
concerned. These events only goes to show that the wily plaintiff had thought of this mischievous
scheme only very recently and filed herein malicious and unfounded complaint.
The above exhibit which is lifted from Civil Case No. R-16261 between the parties for annulment of the lease
contract, is self-serving. The statements therein are mere allegations of conclusions which are not evidentiary.
(4) Exhibit 1 (see p. 15, Records) is quoted thus:
November 28, 1978

Atty. Luis V. Diores
Suite 504, SSS Bldg.
Jones Avenue, Cebu City
Dear Compañero:
Your letter dated November 23, 1978 which was addressed to my client, Engr. Regino Francisco, Jr.
has been referred to me for reply.
It is not true that my client has not paid the rentals as claimed in your letter. As a matter of fact, he
has been religiously paying the rentals in advance. Payment was made by Commercial Bank and
Trust Company to the Clerk of Court, Cebu City. Attached herewith is the receipt of payment made
by him for the month of November, 1978 which is dated November 16, 1978.
You can check this up with the City Clerk of Court for satisfaction.
Regards.
(SGD.) ERIC
MENCHAVEZ Counsel
for Regino Francisco,
Jr.
377-B Junquera St.,
Cebu City
(new address)
Again, Exhibit 1 merely proves rental deposit for the particular month of November, 1978 and no other. It is no proof
of tender of payment to the lessor, not even proof of notice to consign. We hold that the best evidence of the rental
deposits with the Clerk of Court are the official receipts issued by the Clerk of Court. These the respondent lessee
utterly failed to present and produce during the trial of the case. As pointed out in petitioner's Memorandum, no
single official receipt was presented in the trial court as nowhere in the formal offer of exhibits for lessee Francisco
can a single official receipt of any deposit made be found (pp. 8-9, Memorandum for Petitioner; pp. 163-164,
Records).
Summing up Our review of the above four (4) exhibits, We hold that the respondent lessee has utterly failed to prove
the following requisites of a valid consignation: First, tender of payment of the monthly rentals to the lessor except
that indicated in the June 9, l977 Letter, Exhibit 10. In the original records of the case, We note that the certification,
Exhibit 11 of Filemon Soon, messenger of the FAR Corporation, certifying that the letter of Soledad Soco sent last
May 10 by Commercial Bank and Trust Co. was marked RTS (return to sender) for the reason that the addressee
refused to receive it, was rejected by the court for being immaterial, irrelevant and impertinent per its Order dated
November 20, 1980. (See p. 117, CFI Records).
Second, respondent lessee also failed to prove the first notice to the lessor prior to consignation, except the
payment referred to in Exhibit 10.
In this connection, the purpose of the notice is in order to give the creditor an opportunity to reconsider his
unjustified refusal and to accept payment thereby avoiding consignation and the subsequent litigation. This previous
notice is essential to the validity of the consignation and its lack invalidates the same. (Cabanos vs. Calo, 104 Phil.
1058; Limkako vs. Teodoro, 74 Phil. 313).
There is no factual basis for the lower court's finding that the lessee had tendered payment of the monthly rentals,
thru his bank, citing the lessee's letter (Exh. 4) requesting the bank to issue checks in favor of Soco in the amount of
P840.00 every 10th of each month and to deduct the full amount and service fee from his current account, as well
as Exhibit 5, letter of the Vice President agreeing with the request. But scrutinizing carefully Exhibit 4, this is what
the lessee also wrote: "Please immediately notify us everytime you have the check ready so we may send
somebody over to get it. " And this is exactly what the bank agreed: "Please be advised that we are in conformity to
the above arrangement with the understanding that you shall send somebody over to pick up the cashier's check
from us." (Exhibit 4, see p. 230, Original Records; Exhibit 5, p. 231, Original Records)
Evidently, from this arrangement, it was the lessee's duty to send someone to get the cashier's check from the bank
and logically, the lessee has the obligation to make and tender the check to the lessor. This the lessee failed to do,
which is fatal to his defense.
Third, respondent lessee likewise failed to prove the second notice, that is after consignation has been made, to the
lessor except the consignation referred to in Exhibit 12 which are the cashier's check Nos. 478439 and 47907 CBTC
dated May 11, 1977 and June 15, 1977 under Official Receipt No. 04369 dated July 6, 1977.
Respondent lessee, attempting to prove compliance with the requisites of valid consignation, presented the
representative of the Commercial Bank and Trust Co., Edgar Ocañada, Bank Comptroller, who unfortunately belied
respondent's claim. We quote below excerpts from his testimony, as follows:
ATTY. LUIS DIORES:
Q What month did you say you made ,you started making the deposit? When you
first deposited the check to the Clerk of Court?
A The payment of cashier's check in favor of Miss Soledad Soco was coursed thru
the City Clerk of Court from the letter of request by our client Regino Francisco, Jr.,
dated September 8, 1977. From that time on, based on his request, we delivered the
check direct to the City Clerk of Court.
Q What date, what month was that, you first delivered the check to the Clerk of
Court.?
A We started September 12, 1977.
Q September 1977 up to the present time, you delivered the cashier's check to the
City Clerk of Court?
A Yes.
Q You were issued the receipts of those checks?
A Well, we have an acknowledgment letter to be signed by the one who received the
check.
Q You mean you were issued, or you were not issued any official receipt? My
question is whether you were issued any official receipt? So, were you issued, or you
were not issued?
A We were not issued.
Q On September, 1977, after you deposited the manager's check for that month with
the Clerk of Court, did you serve notice upon Soledad Soco that the deposit was
made on such amount for the month of September, 1977 and now to the Clerk of
Court? Did you or did you not?
A Well, we only act on something upon the request of our client.
Q Please answer my question. I know that you are acting upon instruction of your
client. My question was-after you made the deposit of the manager's check whether
or not you notified Soledad Soco that such manager's check was deposited in the
Clerk of Court from the month of September, 1977?
A We are not bound to.
Q I am not asking whether you are bound to or not. I'masking whether you did or you
did not?
A I did not.
Q Alright, for October, 1977, after having made a deposit for that particular month,
did you notify Miss Soledad Soco that the deposit was in the Clerk of Court?
A No, we did not.
Q Now, on November, 1977, did you notify Soledad Soco that you deposited the
manager's check to the City Clerk of Court for that month?
A I did not.
Q You did not also notify Soledad Soco for the month December, 1977, so also from
January, February, March, April, May, June, July until December, 1978, you did not
also notify Miss Soledad Soco all the deposits of the manager's check which you
said you deposited with the Clerk of Court in every end of the month? So also from
each and every month from January 1979 up to December 1979, you did not also
serve notice upon Soledad Socco of the deposit in the Clerk of Court, is that correct?
A Yes.
Q So also in January 1980 up to this month 1980, you did not instructed by your
client Mr. and Mrs. Regino Francisco, jr. to make also serve notice upon Soledad
Soco of the Manager's check which you said you deposited to the Clerk of Court?
A I did not.
Q Now, you did not make such notices because you were not such notices after the
deposits you made, is that correct?
A Yes, sir.
Q Now, from 1977, September up to the present time, before the deposit was made
with the Clerk of Court, did you serve notice to Soledad Soco that a deposit was
going to be made in each and every month?
A Not.
Q In other words, from September 1977 up to the present time, you did not notify
Soledad Soco that you were going to make the deposit with the Clerk of Court, and
you did not also notify Soledad Soco after the deposit was made, that a deposit has
been made in each and every month during that period, is that correct?
A Yes
Q And the reason was because you were not instructed by Mr. and Mrs. Regino
Francisco, Jr. that such notification should be made before the deposit and after the
deposit was made, is that correct?
A No, I did not. (Testimony of Ocanada pp. 32-41, Hearing on June 3, 1980).
Recapitulating the above testimony of the Bank Comptroller, it is clear that the bank did not send notice to Soco that
the checks will be deposited in consignation with the Clerk of Court (the first notice) and also, the bank did not send
notice to Soco that the checks were in fact deposited (the second notice) because no instructions were given by its
depositor, the lessee, to this effect, and this lack of notices started from September, 1977 to the time of the trial, that
is June 3, 1980.
The reason for the notification to the persons interested in the fulfillment of the obligation after consignation had
been made, which is separate and distinct from the notification which is made prior to the consignation, is stated in
Cabanos vs. Calo, G.R. No. L-10927, October 30, 1958, 104 Phil. 1058. thus: "There should be notice to the
creditor prior and after consignation as required by the Civil Code. The reason for this is obvious, namely, to enable
the creditor to withdraw the goods or money deposited. Indeed, it would be unjust to make him suffer the risk for any
deterioration, depreciation or loss of such goods or money by reason of lack of knowledge of the consignation."
And the fourth requisite that respondent lessee failed to prove is the actual deposit or consignation of the monthly
rentals except the two cashier's checks referred to in Exhibit 12. As indicated earlier, not a single copy of the official
receipts issued by the Clerk of Court was presented at the trial of the case to prove the actual deposit or
consignation. We find, however, reference to some 45 copies of official receipts issued by the Clerk of Court marked
Annexes "B-1 " to "B-40" to the Motion for Reconsideration of the Order granting execution pending appeal filed by
defendant Francisco in the City Court of Cebu (pp, 150-194, CFI Original Records) as well as in the Motion for
Reconsideration of the CFI decision, filed by plaintiff lessor (pp. 39-50, Records, marked Annex "E ") the allegation
that "there was no receipt at all showing that defendant Francisco has deposited with the Clerk of Court the monthly
rentals corresponding to the months of May and June, 1977. And for the months of July and August, 1977, the
rentals were only deposited with the Clerk of Court on 20 November 1979 (or more than two years later)."... The
deposits of these monthly rentals for July and August, 1977 on 20 November 1979, is very significant because on
24 October 1979, plaintiff Soco had testified before the trial court that defendant had not paid the monthly rentals for
these months. Thus, defendant had to make a hurried deposit on the following month to repair his failure. " (pp. 43-
44, Records).
We have verified the truth of the above claim or allegation and We find that indeed, under Official Receipt No.
1697161Z, the rental deposit for August, 1977 in cashier's check No. 502782 dated 8-10-77 was deposited on
November 20, 1979 (Annex "B-15", p. 169, Original CFI Records) and under Official Receipt No. 1697159Z, the
rental deposit for July under Check No. 479647 was deposited on November 20, 1979 (Annex "B-16", p. 170,
Original CFI Records). Indeed, these two rental deposits were made on November 20, 1979, two years late and
after the filing of the complaint for illegal detainer.
The decision under review cites Exhibits 6, 7, 8 and 9, the Debit Memorandum issued by Comtrust Bank deducting
the amounts of the checks therein indicated from the account of the lessee, to prove payment of the monthly rentals.
But these Debit Memorandums are merely internal banking practices or office procedures involving the bank and its
depositor which is not binding upon a third person such as the lessor. What is important is whether the checks were
picked up by the lessee as per the arrangement indicated in Exhibits 4 and 5 wherein the lessee had to pick up the
checks issued by CBTC or to send somebody to pick them up, and logically, for the lessee to tender the same to the
lessor. On this vital point, the lessee miserably failed to present any proof that he complied with the arrangement.
We, therefore, find and rule that the lessee has failed to prove tender of payment except that in Exh. 10; he has
failed to prove the first notice to the lessor prior to consignation except that given in Exh. 10; he has failed to prove
the second notice after consignation except the two made in Exh. 12; and he has failed to pay the rentals for the
months of July and August, 1977 as of the time the complaint was filed for the eviction of the lessee. We hold that
the evidence is clear, competent and convincing showing that the lessee has violated the terms of the lease contract
and he may, therefore, be judicially ejected.
The other matters raised in the appeal are of no moment. The motion to dismiss filed by respondent on the ground
of "want of specific assignment of errors in the appellant's brief, or of page references to the records as required in
Section 16(d) of Rule 46," is without merit. The petition itself has attached the decision sought to be reviewed. Both
Petition and Memorandum of the petitioner contain the summary statement of facts; they discuss the essential
requisites of a valid consignation; the erroneous conclusion of the respondent Judge in reversing the decision of the
City Court, his grave abuse of discretion which, the petitioner argues, "has so far departed from the accepted and
usual course of judicial proceeding in the matter of applying the law and jurisprudence on the matter." The
Memorandum further cites other basis for petitioner's plea.
In Our mind, the errors in the appealed decision are sufficiently stated and assigned. Moreover, under Our rulings,
We have stated that:
This Court is clothed with ample authority to review matters, even if they are not assigned as errors
in the appeal, if it finds that their consideration is necessary in arriving at a just decision of the case.
Also, an unassigned error closely related to an error properly assigned or upon which the
determination of the questioned raised by the error properly assigned is dependent, will be
considered by the appellate court notwithstanding the failure to assign it as an error." (Ortigas, Jr. vs.
Lufthansa German Airlines, L-28773, June 30, 1975, 64 SCRA 610)
Under Section 5 of Rule 53, the appellate court is authorized to consider a plain error, although it
was not specifically assigned by appellants." (Dilag vs. Heirs of Resurreccion, 76 Phil. 649)
Appellants need not make specific assignment of errors provided they discuss at length and assail in
their brief the correctness of the trial court's findings regarding the matter. Said discussion warrants
the appellate court to rule upon the point because it substantially complies with Section 7, Rule 51 of
the Revised Rules of Court, intended merely to compel the appellant to specify the questions which
he wants to raise and be disposed of in his appeal. A clear discussion regarding an error allegedly
committed by the trial court accomplishes the purpose of a particular assignment of error." (Cabrera
vs. Belen, 95 Phil. 54; Miguel vs Court of Appeals, L- 20274, Oct. 30, 1969, 29 SCRA 760-773, cited
in Moran, Comments on the Rules of Court, Vol. 11, 1970 ed., p. 534).
Pleadings as well as remedial laws should be construed liberally in order that the litigants may have
ample opportunity to prove their respective claims, and that a possible denial of substantial justice,
due to legal technicalities, may be avoided." (Concepcion, et al. vs. The Payatas Estate
Improvement Co., Inc., 103 Phil. 10 17).
WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision of the Court of First Instance of Cebu, 14th
Judicial District, Branch XII is hereby REVERSED and SET ASIDE, and the derision of the City Court of Cebu,
Branch II is hereby reinstated, with costs in favor of the petitioner.
SO ORDERED.
Makasiar (Chairman), Concepcion, Jr., Abad Santos, and De Castro, JJ., concur.
Aquino and Escolin JJ., concurs in the result,
11) Reisenbeck v Court of Appeals 209 SCRA 657

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 90359 June 9, 1992

JOHANNES RIESENBECK, petitioner,
vs.
THE HON. COURT OF APPEALS, and JUERGEN MAILE, respondents.
GRIÑO-AQUINO, J.:
This is a petition for review on certiorari to annul the decision dated April 21, 1989 of the Court of Appeals which
dismissed for lack of merit the petition for certiorari against two (2) orders of Regional Trial Court Judge Teodoro K.
Risos.
On July 25, 1988, petitioner Riesenbeck filed in the Regional Trial Court of Cebu, Branch 27, a complaint for
consignation and damages against respondent Juergen Maile. On July 27, 1988, petitioner consigned and
deposited with the Clerk of Court of the Regional Trial Court of Cebu the sum of P113,750. The private respondent
subsequently filed a Manifestation Accepting Consignation and Motion to Dismiss dated August 1, 1988, wherein he
stated, inter alia, that "without necessarily admitting the correctness of obligation of plaintiff to defendant, the latter
hereby manifests to accept the said amount of P113,750 which is consigned by plaintiff, provided that the present
complaint be dismissed outright with cost against plaintiff." (p. 14, CA Rollo.) The petitioner opposed the
manifestation, respondent Maile filed an Answer with Special Defenses and Counterclaim. On August 23, 1988,
petitioner filed his Answer to Counterclaim. Private respondent filed a rejoinder/reply to the petitioner's opposition.
Thereafter, on September 28, 1988, respondent Judge issued the first questioned order reading in part as follows:
After a thorough evaluation of the issues involved in the manifestation and the opposition thereto,
the Court is of the opinion that there was a valid consignation, and defendant could legally accept
the payment by consignation with reservation to prove damages and other claims as held by the
Supreme Court in the case of Sing Juco vs. Cuaycong, 46 Phil. 81.
WHEREFORE the Clerk of Court of this Court is hereby ordered to deliver to defendant Juergen
Maile the sum of P113,750.00 immediately, but the motion to dismiss is hereby in the meantime
DENIED. (p.31, CA, Rollo.)
On November 11. 1988, Judge Risos denied petitioner's motion for reconsideration.
On November 18, 1988, petitioner filed a petition for certiorari in the Court of Appeals to annul and set aside the two
orders of Judge Risos.
In a decision dated April 21, 1989, the Court of Appeals dismissed the petition for certiorari.
Petitioner's motion for reconsideration was denied by the Court of Appeals in a Resolution dated August 29, 1989.
In this petition for review, the petitioner raises the following issue: What is the effect on the petitioner's obligation to
the private respondent of the latter's acceptance with reservation of the amount consigned by the petitioner?
Private respondent's acceptance of the amount consigned by the petitioner-debtor with a reservation or qualification
as to the correctness of the petitioner's obligation, is legally permissible. There is authority for the view that before a
consignation can be judicially declared proper, the creditor may prevent the withdrawal of the amount consigned by
the debtor, by accepting the consignation, even with reservations (Tolentino, Civil Code of the Phil., Vol. IV,
1973 Ed., p. 317, citing 3 Llerena 263).
In ruling that there was a valid consignation and that the respondent creditor could accept the same with a
reservation of his damages and other claims, the Court of Appeals relied on the 1924 case of Sing Juco vs.
Cuaycong, 46 Phil. 81. In that case, the defendants consigned in court the amount which they had received from the
plaintiff as the price of sugar, the sale of which did not materialize. The defendants were given the alternative of
delivering the sugar or returning the price per stipulation in the contract. We ruled that plaintiff's acceptance of the
money consigned, unconditionally and without reservation, was a waiver of his other claims under the contract.
A sensu contrario, when the creditor's acceptance of the money consigned is conditional and with reservations, he
is not deemed to have waived the claims he reserved against his debtor. Thus, when the amount consigned does
not cover the entire obligation, the creditor may accept it, reserving his right to the balance (Tolentino, Civil Code of
the Phil., Vol. IV, 1973 Ed., p. 317, citing 3 Llerena 263). The same factual milieu obtains here because the
respondent creditor accepted with reservation the amount consigned in court by the petitioner-debtor. Therefore, the
creditor is not barred from raising his other claims, as he did in his answer with special defenses and counterclaim
against the petitioner-debtor.
As respondent-creditor's acceptance of the amount consigned was with reservations, it did not completely
extinguish the entire indebtedness of the petitioner-debtor. It is apposite to note here that consignation is completed
at the time the creditor accepts the same without objections, or, if he objects, at the time the court declares that it
has been validly made in accordance with law. (Tolentino, Civil Code of the Phil., Vol. IV, 1973 Ed., p. 315.)
Since the lower court in this case declared on September 28, 1988 that there was a valid consignation by the
petitioner, the latter cannot tenably argue that he is still the owner of the amount consigned and that he can still
withdraw it.
The consignation has retroactive effect. The payment is deemed to have been made at the time of the deposit of the
money in court, or when it was placed at the disposal of the judicial authority, supra. In this case, payment is
considered made on July 27, 1988 when petitioner consigned and deposited with the respondent court the sum of
P113,750.
WHEREFORE, the instant petition is hereby DISMISSED for lack of merit.
SO ORDERED.
Cruz, Medialdea and Bellosillo, JJ., concur.
12) Meat Packing Corp v Sandiganbayan 359 SCRA 409

EN BANC
[G.R. No. 103068. June 22, 2001.]
MEAT PACKING CORPORATION OF THE PHILIPPINES, Petitioner, v. THE HONORABLE

SANDIGANBAYAN, THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT and
PHILIPPINE INTEGRATED MEAT CORPORATION, Respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for certiorari, mandamus and prohibition, assailing the Resolutions of the Sandiganbayan in
Civil Case No. 0024, dated July 2, 1991 and November 29, 1991, directing petitioner to accept the tender of
payment of rentals by the Presidential Commission on Good Government (hereinafter, PCGG). chanrob1es virtua1 1aw 1ibrary
Petitioner Meat Packing Corporation of the Philippines (hereinafter, MPCP), is a corporation wholly owned by
the Government Service Insurance System (GSIS). It is the owner of three (3) parcels of land situated in Barrio
Ugong, Pasig City, as well as the meat processing and packing plant thereon. On November 3, 1975, MPCP and
the Philippine Integrated Meat Corporation (hereinafter, PIMECO) entered into an Agreement 1 whereby
MPCP leased to PIMECO, under a lease-purchase arrangement, its aforesaid property at an annual rental rate of
P1,375,563.92, payable over a period of twenty-eight years commencing on the date of execution of the
Agreement, or for a total consideration of P38,515,789.87. The Agreement contained rescission clauses, to wit:
virtual 1aw library
chanrob1es
5. If for any reason whatsoever the LESSEE-VENDEE should fail or default in the payment of rentals
equivalent to the cumulative sum total of three (3) annual installments, this Agreement shall be deemed
automatically cancelled and forfeited without need of judicial intervention, and LESSOR-VENDOR shall have
the complete and absolute power, authority, and discretion, and without reservation by the LESSEE-VENDEE,
to dispose of, sell, transfer, convey, lease, assign, or encumber the project to any person or persons, natural or
juridical, in the same manner as if this lease-purchase arrangement was never entered into. In the event of such
cancellation or forfeiture, the LESSEE-VENDEE unconditionally agrees that all forms of money paid or due
from the LESSEE-VENDEE shall be considered as rentals for the use and occupancy of the project, and the
LESSEE-VENDEE hereby waives and forfeits all rights to ask for and demand the return or reimbursement
thereof. 2
x x x.
16. Violation of any of the terms and conditions of this Agreement shall be sufficient ground for the LESSOR-
VENDOR to rescind and/or consider null and void this Agreement without need of judicial intervention by
giving the LESSEE-VENDEE one hundred eighty (180) days written notice to that effect, which shall be final
and binding on the LESSEE-VENDEE, and the LESSEE-VENDEE shall thereupon leave and vacate the
project, provided that if LESSEE-VENDEE has subleased portions of the project, LESSEE-VENDEE shall
relinquish all its rights and/or interests over the sublease contracts in favor of the LESSOR-VENDOR.
LESSEE-VENDEE shall leave all improvements, whether finished or unfinished, in good and serviceable
condition immediately after the corresponding notice in writing has been received by the LESSEE-VENDEE,
and all said improvements shall automatically belong to and become the property of the LESSOR-VENDOR
without liability or obligation on the part of the LESSOR-VENDOR to pay for the value thereof. LESSEE-
VENDEE further holds the LESSOR-VENDOR free and harmless from any and all liabilities arising from
and/or connected with such sublease contracts. 3
Subsequently, on November 3, 1975, MPCP and PIMECO entered into a Supplementary and Loan Agreement,
4 whereby, in consideration of the additional expenditures incurred by MPCP for rehabilitating and refurbishing
the meat processing and packing plant, the total contract price of the lease-purchase agreement was increased to
P93,695,552.59, payable over a period of twenty-eight years commencing on January 1, 1981, at the annual
rental rate of P3,346,269.70.
On March 17, 1986, the PCGG, in a letter signed by then Commissioner Ramon A. Diaz, sequestered all the
assets, properties and records of PIMECO. 5 The sequestration included the meat packing plant and the lease-
purchase agreement.
MPCP wrote a letter on November 17, 1986 to PIMECO, 6 giving notice of the rescission of the lease-purchase
agreement on the ground, among others, of non-payment of rentals of more than P2,000,000.00 for the year
1986.
GSIS asked the PCGG to exclude the meat packing plant from the sequestered assets of PIMECO, inasmuch as
the same is owned by MPCP. However, PCGG denied the request. Likewise, MPCP sought the turnover to it of
the meat packing plant on the ground that the lease-purchase agreement had already been rescinded. Acceding
to this, PCGG passed on January 24, 1989 a resolution stating thus: chanrob1es virtua1 1aw 1ibrary
WHEREAS, the Presidential Commission on Good Government at its session en banc on September 20, 1988
ordered the transfer of subject property, consisting of a meat packing complex including the land located at
Barrio Ugong, Pasig, Metro Manila, to the GSIS under the condition then that the PCGG management team
might continue its operations for the purpose of completing the outstanding orders up to December 1988;
WHEREAS, the Government Service Insurance System has shown, to the satisfaction of the Commission, that
it owns the said plant complex; that it has the legal and equitable right to regain possession and control thereof;
that whatever claim PIMECO had to the complex under its so-called agreement to lease/purchase with
GSIS/MPCP has been validly rescinded by the GSIS; and that the projected turn-over to the GSIS will not
adversely affect the ill-gotten wealth case pending against "crony" Peter Sabido before the Sandiganbayan;
WHEREFORE, the turn-over to the GSIS of the said property should be done forthwith upon compliance with
these conditions, to be implemented by the Operations and Legal Departments: (a) joint PCGG-COA audit; (b)
approval by the Sandiganbayan; and (c) execution of a Memorandum of Agreement to contain these
stipulations, among others: (a) that the shares of Peter Sabido in PIMECO are subject to the Sandiganbayan
case; (b) that any disposition or transfer by the GSIS of said property or any part thereof shall be with the
conformity of the PCGG; and (c) that this Memorandum be annotated on the title of the property. 7
Meanwhile, PCGG instituted with the Sandiganbayan on July 29, 1987 a complaint for reconveyance, reversion,
accounting, restitution and damages, docketed as Civil Case No. 0024, entitled, "Republic of the Philippines,
Plaintiff versus Peter Sabido, Et Al., Defendants." 8 The complaint alleged, in pertinent part, that Peter Sabido
obtained, under favored and very liberal terms, huge loans from the GSIS in favor of PIMECO, among other
corporations, which was beneficially held and controlled by defendants Peter Sabido, Roberto S. Benedicto and
Luis D. Yulo; and that PIMECO was granted the monopoly to supply meat products in the Greater Manila Area.
Defendant Peter Sabido filed his answer, 9 alleging that the acts, deeds, transactions and contracts referred to in
the complaint were negotiated and/or executed by his father, the late Roberto M. Sabido, and not by him; and
that, far from being illegal, the acts performed or committed by the late Roberto M. Sabido as a corporate
officer of PIMECO were done in good faith, to the best of his ability and in accordance with law, and whatever
income he received as an officer of PIMECO and whatever assets or properties he acquired during his lifetime
were the fruits of his dedication to his profession, hard work, and honest labor.
On April 28, 1989, defendant Sabido filed with the Sandiganbayan an Urgent Manifestation and Motion, 10 to
the effect that he has come across newspaper reports stating that PCGG intends to turn over the management,
control and possession of PIMECO to the GSIS and MPCP. Sabido also learned from a reliable source that the
PCGG has passed a resolution to implement the said turnover. Hence, Sabido argued that inasmuch as PIMECO
was a sequestered asset, the projected turnover must be approved by the Sandiganbayan. He prayed that PCGG
be required to admit or deny these matters.
The Sandiganbayan, in a Resolution dated May 4, 1989, 11 ordered the PCGG to submit its comment as to the
veracity of the alleged turnover of the management, control and possession of PIMECO to the GSIS or MPCP,
and if true, to furnish movant Sabido a copy of the PCGG resolution approving the same.
Meanwhile, on May 20, 1989, Sabido filed an Urgent Manifestation and Motion, 12 alleging that, according to
newspaper accounts, PCGG had in fact already turned over the management and operation of PIMECO to the
GSIS/MPCP. Thus, he prayed that the transfer of the management, control and possession of PIMECO to GSIS
be declared null and void ab initio for having been done without the approval of the Sandiganbayan.
Sometime thereafter, the Sandiganbayan received a letter 13 from members of the PIMECO Labor Union,
praying for the maintenance of the status quo to enable PIMECO to continue its business operations and to
ensure their continuity of work and security of tenure. Thus, on June 2, 1989, the Sandiganbayan issued a
Resolution, the dispositive portion of which reads: chanrob1es virtual 1aw library
WHEREFORE, in the interest of justice, and conformably with this Court’s adherence to the rule of law, to the
end that undue prejudice and/or injury may be avoided to any and all parties affected by these proceedings,
especially the avoidance of any cessation in the operations of PIMECO, a temporary restraining order is hereby
issued commanding the Presidential Commission on Good Government, their officers, agents, representatives,
monitors or persons acting in their behalf or stead, to cease and desist from enforcing the contemplated turnover
of the management, control and possession of PIMECO to the Meat Packing Corporation of the Philippines
until further orders. In view of the serious issues involved, let the instant incident be re-scheduled for hearing
and consideration on June 6, 1989, at 2:30 o’clock p.m. chanrob1es virtua1 1aw 1ibrary
SO ORDERED. 14
On June 22, 1989, Sabido filed with the Sandiganbayan a Motion for the Issuance of a Writ of Preliminary
Injunction, alleging that the PCGG, in an Order dated May 11, 1989, had ordered that the status quo as regards
the management and operations of PIMECO be maintained pending submission of inventory and financial
audit. However, at the hearings of this incident, it was sufficiently shown that the transfer of PIMECO to MPCP
will result in the dissipation of assets which will cause irreparable injury to Sabido’s rights and interests in the
company in the event that the Sandiganbayan shall ultimately rule that the same was not ill-gotten.
The Sandiganbayan, finding that the PCGG committed grave abuse of authority, power and discretion in
unilaterally terminating the lease-purchase agreement of PIMECO with MPCP and in turning over its
management, control and operation to the latter, ordered the issuance of a writ of preliminary injunction, to
wit:chanrob1es virtual 1aw library
WHEREFORE, finding the verified application for issuance of a writ of preliminary injunction to be sufficient
in form and substance and that after due hearing, it appears that great and irreparable injury will be caused not
only to defendant-applicant but also to PIMECO should the acts sought to be enjoined be allowed to be done or
performed, accordingly, upon defendant-applicant’s posting of a bond of P50,000.00, let the corresponding writ
of preliminary injunction issue commanding the Presidential Commission on Good Government, its officers,
representatives, nominees or agents from proceeding or consummating the projected turnover of PIMECO to
the GSIS-MPCP or to interfere with its present management and operations, until further orders of this Court.
SO ORDERED. 15
Accordingly, upon the posting of the requisite bond, the Writ of Preliminary Injunction was issued on July 10,
1989, enjoining the Presidential Commission on Good Government, its officers, representatives, nominees or
agents, from proceeding or consummating the projected turn over of PIMECO to GSIS-MPCP or to interfere
with its present management and operations, until further orders from this Court. 16
PCGG filed a Motion for Reconsideration of the Resolution of June 22, 1989. On August 3, 1989, the
Sandiganbayan issued its Resolution, viz: chanrob1es virtual 1aw library
WHEREFORE, premises considered, plaintiff’s "Motion for Reconsideration (Re: Resolution dated June 22,
1989)" dated July 3, 1989 is hereby GRANTED, and the dispositive portion of Our Resolution of June 22,
1989, ordered amended to read as follows: jgc:chanrobles.com.ph
"WHEREFORE, finding the verified application for issuance of a writ of preliminary injunction to be sufficient
in form and substance and that after due hearing, it appears that great and irreparable injury will be caused not
only to defendant-applicant but also to PIMECO should the acts sought to be enjoined be allowed to be done or
performed, accordingly, upon defendant-applicant’s posting of a bond of P50,000.00, let the corresponding writ
of preliminary injunction issue commanding the Presidential Commission on Good Government, its officers,
representatives, nominees or agents from proceeding or consummating the projected turnover of PIMECO to
the GSIS-MPCP until further orders of this Court and from replacing, dismissing, demoting, reassigning
grounding, or otherwise prejudicing the present members of the PCGG management team in PIMECO, except
for valid and serious reasons not attributable to or arising from their objection or opposition to or activities of
statements against the said turnover." cralaw virtua1aw library
SO ORDERED. 17
Thereafter, the Sandiganbayan continued to conduct hearings on the issue of the validity of the turn-over of the
meat packing plant to GSIS. On November 29, 1989, it issued a Resolution disposing thus: chanrob1es virtual 1aw library
WHEREFORE, considering the attendant circumstances of the present incident in light of the standard laid
down by the Supreme Court, this Court finds and holds: chanrob1es virtual 1aw library
(1) That the PCGG gravely abused its discretion when it passed the resolutions dated September 20, 1988, and
January 24, 1989, turning over the "meat packing complex including the land located at Barrio Ugong, Pasig,
Metro Manila," to the GSIS/MPCP (Exh. E).
(2) That the PCGG commissioner concerned exceeded his authority when he executed the Memorandum of
Agreement with MPCP on April 28, 1989, transferring the management and operation of PIMECO to the
GSIS/MPCP (Record, pp. 1828-1832).
(3) That, accordingly, the said turnovers or transfers are declared null and void ab initio, and
(4) That the PCGG, its commissioners, officers, representatives, and agents are permanently enjoined from
implementing the same turnovers or transfers.
SO ORDERED. 18
On August 30, 1990, PIMECO filed with the Sandiganbayan a petition, docketed as Civil Case No. 0108,
entitled, "Philippine Integrated Meat Corporation (PIMECO), Petitioner versus Meat Packing Corporation of
the Philippines (MPCP) and Presidential Commission on Good Government (PCGG), Respondents," captioned
as for "Declaratory Relief and Other Similar Remedies (Related to PCGG Case No. 25 and Civil Case No.
0024)." 19
In its petition, PIMECO alleged that from 1981 to 1985, PIMECO has been regularly paying the annual rentals
in the amount of P3,346,269.70; and that prior to its sequestration in January 1986, PIMECO was able to pay
MPCP the amount of P846,269.70. However, after its sequestration, the PCGG Management Team that took
over the plant became erratic and irregular in its payments of the annual rentals to MPCP, thus presenting the
danger that PIMECO may be declared in default in the payment of rentals equivalent to three (3) annual
installments and causing the cancellation of the lease-purchase agreement. Hence, PIMECO prayed for a
declaration that it is no longer bound by the provisions of the above-quoted paragraph 5 of the lease-purchase
agreement. chanrob1es virtua1 1aw 1ibrary
In the meantime, PCGG tendered to MPCP two checks in the amounts of P3,000,000.00 and P2,000,000.00, or
a total of P5,000,000.00, representing partial payment of accrued rentals on the meat packing plant, which
MPCP refused to accept on the theory that the lease-purchase agreement had been rescinded. Thus, the PCGG
filed an Urgent Motion 20 praying that the Sandiganbayan order MPCP to accept the tendered amount of
P5,000,000.00.
The Sandiganbayan set the aforesaid Urgent Motion for hearing. On April 3, 1991, MPCP, by special
appearance, filed its Comment, 21 alleging that the Sandiganbayan had no jurisdiction over MPCP since it was
not a party in Civil Case No. 0024; that its lease-purchase agreement with PIMECO has been rescinded as early
as November 19, 1986; and that PIMECO was in arrears in the payment of rentals in the amount of
P12,378,171.06, which is more than the equivalent of three cumulative rentals at the annual rate of
P3,346,269.70.
On July 2, 1991, the Sandiganbayan issued the first assailed Resolution, as follows: chanrob1es virtual 1aw library
WHEREFORE, the Court declares that the tender of payment and consignation of P5,000,000.00 in the form of
two checks, namely: China Banking Corporation Check No. LIB M 003697 for P3,000,000.00 and Far East
Bank and Trust Company Check No. 29A A 021341 for P2,000,000.00, both dated January 30, 1991, and
payable to GSIS-MPCP, have been validly made in accordance with law and, accordingly, orders Meat Packing
Corporation of the Philippines to accept the payment and issue the corresponding receipt.
SO ORDERED. 22
MPCP, still under a special appearance, filed a Motion for Reconsideration of the above Resolution. 23 On
November 29, 1991, the Sandiganbayan issued the second assailed Resolution, 24 denying MPCP’s Motion for
Reconsideration. Said the Sandiganbayan: chanrob1es virtual 1aw library
When the PCGG sequestered the assets and records of PIMECO, including the lease-purchase agreement over
MPCP’s meat packing plant, it assumed the duty to preserve and conserve those assets and documents while
they remained in its possession and control. That duty did not disappear when the writ was deemed ipso facto
lifted. On the contrary, it continued until the sequestered assets and records where returned to PIMECO. And in
the performance of that duty in order to prevent the cancellation of the lease-purchase agreement by reason of
the failure to pay three accumulated yearly rentals-installments, the PCGG made the timely tender of payment
and consignation which the Resolution sought to be reconsidered sustained. To rule otherwise would be unfair
and unjust to PIMECO considering that during the time the PCGG had possession and control of the
sequestered assets and records, PIMECO was not in the position to take steps necessary for the preservation and
conservation of those assets and records.25 cralaw:red
Meanwhile, on December 2, 1991, the Sandiganbayan dismissed Civil Case No. 0108, i.e., the petition for
declaratory relief, it appearing that while the unpaid rentals as of January 27, 1991 have reached P7,530,036.21,
PCGG’s tender of payment and consignation of the amount of P5,000,000.00, which was upheld by the
Sandiganbayan in Civil Case No. 0024, averted the accumulation of the unpaid rentals to three yearly rentals-
installments. Consequently, the petition for declaratory relief has become moot and academic. 26
Hence, MPCP brought this petition for certiorari, mandamus and prohibition, arguing in fine that the
Sandiganbayan did not have jurisdiction over its person since it was not a party to Civil Case No. 0024; that the
Sandiganbayan likewise did not acquire jurisdiction over the person of PIMECO since it has not been served
summons; and that the PCGG is in estoppel because it has already admitted in its en banc resolutions that the
lease-purchase agreement between MPCP and PIMECO has been rescinded. MPCP prays for injunctive relief
and for judgment setting aside the assailed Resolutions of the Sandiganbayan; ordering the Sandiganbayan to
deny the PCGG’s motion for consignation and to compel MPCP to accept the tendered amount of
P5,000,000.00; and prohibiting the Sandiganbayan from accepting any papers or pleadings from PCGG or
PIMECO against MPCP in Civil Case No. 0024.
Counsel for Peter Sabido filed his Comment, 27 with the qualification that the same was being filed only on
behalf of Sabido, a stockholder of PIMECO, and not on behalf of the corporation. He argued that the
Sandiganbayan correctly held that the MPCP voluntarily submitted itself to the court’s jurisdiction; that there
was a valid consignation made by PCGG; and that the Sandiganbayan did not commit grave abuse of discretion
in issuing the assailed resolutions.
PCGG filed its Comment, 28 also contending that MPCP voluntarily submitted itself to the jurisdiction of the
Sandiganbayan; and that the consignation was validly made.
Copies of this Court’s resolutions were furnished PIMECO at its principal office at 117 E. Rodriguez, Sr. Ave.,
Barrio Ugong, Pasig City. However, all of these were returned unserved with the notation, "RTS Closed." 29
Thus, on June 19, 1995, this Court resolved to dispense with the comment of PIMECO. 30
The petition, being one for certiorari, mandamus and prohibition, is mainly anchored on the alleged grave
abuse of discretion amounting to want of jurisdiction on the part of the Sandiganbayan.
Grave abuse of discretion implies a capricious and whimsical exercise of judgment as is equivalent to lack of
jurisdiction, or, when the power is exercised in an arbitrary or despotic manner by reason of passion or personal
hostility, and it must be so patent and gross as to amount to an evasion of positive duty enjoined or to act at all
in contemplation of law. 31 It is not sufficient that a tribunal, in the exercise of its power, abused its discretion;
such abuse must be grave. 32
In the assailed resolutions, the Sandiganbayan approved the consignation by PCGG of the amount of
P5,000,000.00 as payment for back rentals or accrued amortizations on the meat packing plant, after the MPCP
refused the tender of payment of the same. chanrob1es virtua1 1aw 1ibrary
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. 33 It should be
distinguished from tender of payment. Tender is the antecedent of consignation, that is, an act preparatory to the
consignation, which is the principal, and from which are derived the immediate consequences which the debtor
desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation is necessarily judicial,
and the priority of the first is the attempt to make a private settlement before proceeding to the solemnities of
consignation. 34 Tender and consignation, where validly made, produces the effect of payment and extinguishes
the obligation.
If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall
be released from responsibility by the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases: chanrob1es virtual 1aw library
(1) When the creditor is absent or unknown, or does not appear at the place of payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost. 35
In the case at bar, there was prior tender by PCGG of the amount of P5,000,000.00 for payment of the rentals in
arrears. MPCP’s refusal to accept the same, on the ground merely that its lease-purchase agreement with
PIMECO had been rescinded, was unjustified. As found by the Sandiganbayan, from January 29, 1986 to
January 30, 1990, PIMECO paid, and GSIS/MPCP received, several amounts due under the lease-purchase
agreement, such as annual amortizations or rentals, advances, insurance, and taxes, in total sum of
P15,921,205.83. 36 Surely, the acceptance by MPCP and GSIS of such payments for rentals and amortizations
negates any rescission of the lease-purchase agreement. Parenthetically, the factual findings of the
Sandiganbayan are conclusive upon this Court, subject to certain exceptions. 37 The aforesaid factual findings,
moreover, have not been disputed by petitioner.
In support of its contention that the lease-purchase agreement has been rescinded, MPCP makes reference to the
resolutions of the PCGG turning over to the GSIS the meat packing complex and the land on which it is
situated. MPCP argues that PCGG was estopped from taking a contrary position. A closer perusal of the
resolutions, however, readily shows that the turn-over was explicitly made dependent on certain conditions
precedent, among which was the approval by the Sandiganbayan and the execution of a Memorandum of
Agreement between PCGG and MPCP. 38 A Memorandum of Agreement was in fact executed on April 28,
1989, although the same suffers from formal and substantial infirmities. However, no approval was sought from
the Sandiganbayan. On the contrary, the Sandiganbayan, in its Resolution declaring the turn-over null and void,
refused to honor the PCGG resolutions, reasoning thus: chanrob1es virtual 1aw library
First, what was approved by the PCGG in its resolutions of September 20, 1988, and January 24, 1989, is the
transfer of the "meat packing complex including the land located at Barrio Ugong, Pasig, Metro Manila," and
not "the management and operation of PIMECO." It is, however, the latter that the Memorandum of Agreement,
executed on April 28, 1989, pursuant to the said resolutions, transferred to the GSIS.
Second, the second resolution made the turnover of the "meat packing complex including the land located at
Barrio Ugong, Pasig Metro Manila," "upon compliance with these conditions, to be implemented by the
[PCGG] Operations and Legal Departments: . . . (b) approval by the Sandiganbayan . . ." Until now, however,
no motion has been presented to secure that approval, and none can be expected because the same
Memorandum of Agreement changed the requirement of approval to" (t)he Sandiganbayan shall be advised of
this Agreement." Even the advice stipulated has never been given by the PCGG.
Since the Memorandum of Agreement was executed by one PCGG commissioner only, the same cannot validly
amend the resolutions passed by the PCGG itself. Consequently, the turnover of the management and operation
of PIMECO, which, of course, include the meat packing complex and the land of which it stands, stipulated in
the Memorandum of Agreement, cannot be legally enforced. Needless to say, the commissioners should be the
first to abide by the PCGG’s resolutions. 39
Under the terms of the lease-purchase agreement, the amount of arrears in rentals or amortizations must be
equivalent to the cumulative sum of three annual installments, in order to warrant the rescission of the contract.
Therefore, it must be shown that PIMECO failed to pay the aggregate amount of at least P10,038,809.10 before
the lease-purchaser agreement can be deemed automatically cancelled. Assuming in the extreme that, as alleged
by MPCP, the arrears at the time of tender on January 30, 1991 amounted to P12,578,171.00, 40 the tender and
consignation of the sum of P5,000,000.00, which had the effect of payment, reduced the back rentals to only
P7,578,171.00, an amount less than the equivalent of three annual installments. Thus, with the Sandiganbayan’s
approval of the consignation and directive for MPCP to accept the tendered payment, the lease-purchase
agreement could not be said to have been rescinded.
MPCP’s chief complaint in its present petition is that it was not a party in Civil Case No. 0024. As such, it
alleges that the Sandiganbayan had no jurisdiction over its person and may not direct it to accept the consigned
amount of P5,000,000.00. In rejecting this argument, the Sandiganbayan held that Civil Case No. 0024, i.e., the
sequestration case, on the one hand, and Civil Case No. 0108, i.e., the petition for declaratory relief in which it
was the named respondent, on the other hand, were interrelated since they both involved the sequestered assets
of PIMECO. Thus, the titles of both cases appear on the caption of the assailed Resolutions dated July 2, 1991.
On this point, the Sandiganbayan further ruled: chanrob1es virtual 1aw library
While MPCP is not a named party in Civil Case No. 0024, it is in Civil Case No. 0108. These two civil actions
are interrelated in the sense that they both involve the sequestered and taken-over assets of PIMECO, principal
of which are the lease-purchase agreement, the rights thereunder of PIMECO, and, since these rights can not be
exercised without possession of the meat processing plant, the plant itself. It is for this reason that the caption of
the present Urgent Motion expressly indicates that Civil Case No. 0024 is "Related to Civil Case No. 0108." In
view of these circumstances, the Court considers the Urgent Motion as also filed in Case No. 0108. chanrob1es virtua1 1aw library
Moreover, when the propriety of the turn-over of the management and control of PIMECO, including the meat
packing plant, to MPCP was in issue in Civil Case No. 0024, MPCP, through its officers, appeared in all the
proceedings and actively coordinated with PCGG. To justify the turn-over, the Office of the Solicitor General
echoed the stand of MPCP that the lease-purchase agreement had already been rescinded. And in the present
Urgent Motion, MPCP again appeared. In fact, it appeared in Case No. 0024 even if the matter at hand was not
the said motion. Although MPCP’s lawyer entered a special appearance in the present incident, he did not
confine himself to assailing the jurisdiction of this Court over MPCP, but went to the extent of participating in
the oral argument on the merits of the motion. Indeed, his Comment devoted only one page on the issue of
jurisdiction and seven pages to the alleged untenability of the motion. Although MPCP did not expressly pray
for the denial of the urgent motion, not even for lack of jurisdiction over it, by setting forth therein arguments
not only on the jurisdictional issue, but more extensively on the alleged lack of merit of the motion, it thereby
impliedly prayed for affirmative relief in its favor. Under these circumstances, MPCP voluntarily submitted
itself to the jurisdiction of the Court. 41
Jurisdiction over the person of the defendant in civil cases is acquired either by his voluntary appearance in
court and his submission to its authority or by service of summons. 42 Furthermore, the active participation of a
party in the proceedings is tantamount to an invocation of the court’s jurisdiction and a willingness to abide by
the resolution of the case, and will bar said party from later on impugning the court or body’s jurisdiction. 43 In
this case, petitioner MPCP is precluded from questioning the jurisdiction of the Sandiganbayan over its person
in Civil Case No. 0024, considering that, as shown by the records, it actively participated in the discussion of
the merits of the said case, even going to the extent of seeking affirmative relief. The Sandiganbayan did not
commit grave abuse of discretion in saying so.
WHEREFORE, in view of the foregoing, the instant petition is DISMISSED for lack of merit. chanrob1es virtua1 1aw 1ibrary
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Panganiban, Quisumbing, Pardo, Buena,
Gonzaga-Reyes, De Leon, Jr. and Sandoval-Gutierrez, JJ., concur.
Endnotes:
1. Rollo, pp. 25-39.
2. Ibid., p. 29.
3. Id., p. 32.
4. Id., pp. 40-46.
5. Id., p. 47.
6. Id., pp. 49-50.
7. Id., pp. 95-96.
8. Id., pp. 51-73.
9. Record, Vol. II, pp. 598-617.
10. Ibid., Vol. IV, pp. 1541-1543.

11. Id., p. 1545.
12. Id., pp. 1565-1569.
13. Id., pp. 1624-1625.
14. Id., pp. 1636-1637.
15. Id., pp. 1842-1847.
16. Ibid., Vol. V, p. 2037.
17. Id., pp. 2054-2061.
18. Id., pp. 2447-2468.
19. Record, Civil Case No. 0108, pp. 1-5.
20. Record, Civil Case No. 0024, Vol. VIII, pp. 3581-3586.
21. Ibid., pp. 3648-3657.
22. Id., pp. 3796-3797; penned by Associate Justice Jose S. Balajadia, concurred in by Associate
Justices Romeo M. Escareal and Nathanael M. Grospe.
23. Id., pp. 3848-3857.
24. Ibid., Vol. IX, pp. 4066-4069.
25. Id., p. 4069.
26. Record, Civil Case No. 0108, pp. 208-211.
27. Rollo, pp. 225-231.
28. Ibid., pp. 252-257.
29. Id., p. 446.
30. Id., p. 449.
31. Akbayan-Youth, Et. Al. v. Comelec, G.R. Nos. 147066 & 147179, March 26, 2001.
32. Benito v. Comelec, G.R. No. 134913, January 19, 2001.
33. Ascue v. Court of Appeals, 196 SCRA 804, 807-808 [1991]; Legaspi v. Court of Appeals, 142
SCRA 82, 88 [1986].
34. Soco v. Militante, 123 SCRA 160, 173 [1983].
35. CIVIL CODE, Article 1256.
36. Rollo, p. 128.
37. (1) When the conclusion is a finding grounded entirely on speculation, surmise and conjecture;
(2) when the inference made is manifestly an error or founded on a mistake; (3) when there is grave
abuse of discretion; (4) when the judgment is based on a misapprehension of facts; and (5) when
the findings of fact are premised on a want of evidence and/or contradicted by evidence on record.
(Espinosa v. Sandiganbayan, G.R. No. 119285, May 9, 2000; Diaz v. Sandiganbayan, 302 SCRA 118
[1999]).
38. Op. cit., note 7.
39. Record, Civil Case No. 0024, Vol. V, pp. 2463-2464.
40. Rollo, p. 132.
41. Ibid., pp. 130-131.
42. Ang Ping v. Court of Appeals, 310 SCRA 343, 349 [1999]; Avon Insurance PLC v. Court of
Appeals, 278 SCRA 312 [1997].
43. Melendres, Jr. v. Comelec, 319 SCRA 262, 282 [1999].
13) Occena v Court of Appeals 73 SCRA 637

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-44349 October 29, 1976
JESUS V. OCCENA and EFIGENIA C. OCCENA, petitioners,

vs.
HON. RAMON V. JABSON, Presiding Judge of the Court Of First Instance of Rizal, Branch XXVI; COURT OF
APPEALS and TROPICAL HOMES, INC., respondents.
Occena Law Office for petitioners.
Serrano, Diokno & Serrano for respondents.
TEEHANKEE, J.:
The Court reverses the Court of Appeals appealed resolution. The Civil Code authorizes the release of an obligor
when the service has become so difficult as to be manifestly beyond the contemplation of the parties but does not
authorize the courts to modify or revise the subdivision contract between the parties or fix a different sharing ratio
from that contractually stipulated with the force of law between the parties. Private respondent's complaint for
modification of the contract manifestly has no basis in law and must therefore be dismissed for failure to state a
cause of action. On February 25, 1975 private respondent Tropical Homes, Inc. filed a complaint for modification of
the terms and conditions of its subdivision contract with petitioners (landowners of a 55,330 square meter parcel of
land in Davao City), making the following allegations:
"That due to the increase in price of oil and its derivatives and the concomitant worldwide spiralling of prices, which
are not within the control of plaintiff, of all commodities including basis raw materials required for such development
work, the cost of development has risen to levels which are unanticipated, unimagined and not within the remotest
contemplation of the parties at the time said agreement was entered into and to such a degree that the conditions
and factors which formed the original basis of said contract, Annex 'A', have been totally changed; 'That further
performance by the plaintiff under the contract.
That further performance by the plaintiff under the contract,Annex 'S', will result in situation where
defendants would be unustly enriched at the expense of the plaintiff; will cause an inequitous
distribution of proceeds from the sales of subdivided lots in manifest actually result in the unjust and
intolerable exposure of plaintiff to implacable losses, all such situations resulting in an
unconscionable, unjust and immoral situation contrary to and in violation of the primordial concepts
of good faith, fairness and equity which should pervade all human relations.
Under the subdivision contract, respondent "guaranteed (petitioners as landowners) as the latter's fixed and sole
share and participation an amount equivalent to forty (40%) percent of all cash receifpts fromthe sale of the
subdivision lots"
Respondent pray of the Rizal court of first instance that "after due trial, this Honorable Court render judgment
modifying the terms and conditions of the contract ... by fixing the proer shares that shouls pertain to the herein
parties out of the gross proceeds from the sales of subdivided lots of subjects subdivision".
Petitioners moved to dismiss the complaint principally for lack of cause of action, and upon denial thereof and of
reconsideration by the lower court elevated the matter on certiorari to respondent Court of Appeals.
Respondent court in its questioned resolution of June 28, 1976 set aside the preliminary injunction previously issued
by it and dimissed petition on the ground that under Article 1267 of the Civil Code which provides that
ART. 1267. When the service has become so difficult as to be manifestly beyond the contemplation
of the parties, the obligor may also be released therefrom, in whole or in part. 1
... a positive right is created in favor of the obligor to be released from the performance of an
obligation in full or in part when its performance 'has become so difficult as to be manifestly beyond
the contemplation of the parties.
Hence, the petition at abar wherein petitioners insist that the worldwide increase inprices cited by respondent does
not constitute a sufficient casue of action for modification of the subdivision contrct. After receipt of respondent's
comment, the Court in its Resolution of September 13, 1976 resolved to treat the petition as special civil actionand
declared the case submitted for decision.
The petition must be granted.
While respondent court correctly cited in its decision the Code Commission's report giving the rationale for Article
1267 of the Civil Code, to wit;
The general rule is that impossibility of performance releases the obligor. However, it is submitted
that when the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the court should be authorized to release the obligor in whole or in part. The intention of the
parties should govern and if it appears that the service turns out to be so difficult as have been
beyond their contemplation, it would be doing violence to that intention to hold the obligor still
responsible. ...
2
It misapplied the same to respondent's complaint.
If respondent's complaint were to be released from having to comply with the subdivision contract, assuming it could
show at the trial that the service undertaken contractually by it had "become so difficult as to be manifestly beyond
the contemplation of the parties", then respondent court's upholding of respondet's complaint and dismissal of the
petition would be justifiable under the cited codal article. Without said article, respondent would remain bound by its
contract under the theretofore prevailing doctrine that performance therewith is ot excused "by the fact that the
contract turns out to be hard and improvident, unprofitable, or unespectedly burdensome", since in case a party
3
desires to be excuse from performance in the event of such contingencies arising, it is his duty to provide threfor in
the contract.
But respondent's complaint seeks not release from the subdivision contract but that the court "render judgment I
modifying the terms and Conditions of the Contract by fixing the proper shares that should pertain to the herein
parties out of the gross proceed., from the sales of subdivided lots of subject subdivision". The cited article does not
grant the courts this authority to remake, modify or revise the contract or to fix the division of shares between the
parties as contractually stipulated with the force of law between the parties, so as to substitute its own terms for
those covenanted by the partiesthemselves. Respondent's complaint for modification of contract manifestly has no
basis in law and therefore states no cause of action. Under the particular allegations of respondent's complaint and
the circumstances therein averred, the courts cannot even in equity grant the relief sought.
A final procedural note. Respondent cites the general rule that an erroneous order denying a motion to dismiss is
interlocutory and should not be corrected by certiorari but by appeal in due course. This case however manifestly
falls within the recognized exception that certiorari will lie when appeal would not prove to be a speedy and
adequate remedy.' Where the remedy of appeal would not, as in this case, promptly relieve petitioners from the
injurious effects of the patently erroneous order maintaining respondent's baseless action and compelling petitioners
needlessly to go through a protracted trial and clogging the court dockets by one more futile case, certiorari will
issue as the plain, speedy and adequate remedy of an aggrieved party.
ACCORDINGLY, the resolution of respondent appellate court is reversed and the petition for certiorari is granted
and private respondent's complaint in the lower court is ordered dismissed for failure to state a sufficient cause of
action. With costs in all instances against private respondent.
Makasiar, Muñoz Palma, Concepcion, Jr., and Martin JJ., concur.
Footnotes
1 Other Civil Code articles cited by respondent court as justifyng the complaint were Articles 19 and
1159 which read:
ART. 19. Every person must, in the exercise of his rights and in the performance of his duties, act
with justice, give everyone his due and observe honesty and good faith.
xxx xxx xxx
ART. 1159. Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith.
14) Naga Telephone Company v Court of Appeals 230 SCRA 351

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 107112 February 24, 1994

NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, petitioners,
vs.
THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC. (CASURECO
II), respondents.
Ernesto P. Pangalangan for petitioners.
Luis General, Jr. for private respondent.
NOCON, J.:
The case of Reyes v. Caltex (Philippines), Inc. enunciated the doctrine that where a person by his contract charges
1
himself with an obligation possible to be performed, he must perform it, unless its performance is rendered
impossible by the act of God, by the law, or by the other party, it being the rule that in case the party desires to be
excused from performance in the event of contingencies arising thereto, it is his duty to provide the basis therefor in
his contract.
With the enactment of the New Civil Code, a new provision was included therein, namely, Article 1267 which
provides:
When the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in whole or in part.
In the report of the Code Commission, the rationale behind this innovation was explained, thus:
The general rule is that impossibility of performance releases the obligor. However, it is submitted
that when the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the court should be authorized to release the obligor in whole or in part. The intention of the
parties should govern and if it appears that the service turns out to be so difficult as to have been
beyond their contemplation, it would be doing violence to that intention to hold their contemplation, it
would be doing violence to that intention to hold the obligor still responsible.
2
In other words, fair and square consideration underscores the legal precept therein.
Naga Telephone Co., Inc. remonstrates mainly against the application by the Court of Appeals of Article 1267 in
favor of Camarines Sur II Electric Cooperative, Inc. in the case before us. Stated differently, the former insists that
the complaint should have been dismissed for failure to state a cause of action.
The antecedent facts, as narrated by respondent Court of Appeals are, as follows:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long distance
telephone service in Naga City while private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO II)
is a private corporation established for the purpose of operating an electric power service in the same city.
On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by petitioners in the operation of its
telephone service the electric light posts of private respondent in Naga City. In consideration therefor, petitioners
agreed to install, free of charge, ten (10) telephone connections for the use by private respondent in the following
places:
(a) 3 units — The Main Office of (private respondent);
(b) 2 Units — The Warehouse of (private respondent);
(c) 1 Unit — The Sub-Station of (private respondent) at Concepcion Pequeña;

(d) 1 Unit — The Residence of (private respondent's) President;
(e) 1 Unit — The Residence of (private respondent's) Acting General Manager; &
(f) 2 Units — To be determined by the General Manager. 3
Said contract also provided:
(a) That the term or period of this contract shall be as long as the party of the first part has need for
the electric light posts of the party of the second part it being understood that this contract shall
terminate when for any reason whatsoever, the party of the second part is forced to stop, abandoned
[sic] its operation as a public service and it becomes necessary to remove the electric lightpost; (sic) 4
It was prepared by or with the assistance of the other petitioner, Atty. Luciano M. Maggay, then a member of the
Board of Directors of private respondent and at the same time the legal counsel of petitioner.
After the contract had been enforced for over ten (10) years, private respondent filed on January 2, 1989 with the
Regional Trial Court of Naga City (Br. 28) C.C. No. 89-1642 against petitioners for reformation of the contract with
damages, on the ground that it is too one-sided in favor of petitioners; that it is not in conformity with the guidelines
of the National Electrification Administration (NEA) which direct that the reasonable compensation for the use of the
posts is P10.00 per post, per month; that after eleven (11) years of petitioners' use of the posts, the telephone
cables strung by them thereon have become much heavier with the increase in the volume of their subscribers,
worsened by the fact that their linemen bore holes through the posts at which points those posts were broken during
typhoons; that a post now costs as much as P2,630.00; so that justice and equity demand that the contract be
reformed to abolish the inequities thereon.
As second cause of action, private respondent alleged that starting with the year 1981, petitioners have used 319
posts in the towns of Pili, Canaman, Magarao and Milaor, Camarines Sur, all outside Naga City, without any
contract with it; that at the rate of P10.00 per post, petitioners should pay private respondent for the use thereof the
total amount of P267,960.00 from 1981 up to the filing of its complaint; and that petitioners had refused to pay
private respondent said amount despite demands.
And as third cause of action, private respondent complained about the poor servicing by petitioners of the ten (10)
telephone units which had caused it great inconvenience and damages to the tune of not less than P100,000.00
In petitioners' answer to the first cause of action, they averred that it should be dismissed because (1) it does not
sufficiently state a cause of action for reformation of contract; (2) it is barred by prescription, the same having been
filed more than ten (10) years after the execution of the contract; and (3) it is barred by estoppel, since private
respondent seeks to enforce the contract in the same action. Petitioners further alleged that their utilization of
private respondent's posts could not have caused their deterioration because they have already been in use for
eleven (11) years; and that the value of their expenses for the ten (10) telephone lines long enjoyed by private
respondent free of charge are far in excess of the amounts claimed by the latter for the use of the posts, so that if
there was any inequity, it was suffered by them.
Regarding the second cause of action, petitioners claimed that private respondent had asked for telephone lines in
areas outside Naga City for which its posts were used by them; and that if petitioners had refused to comply with
private respondent's demands for payment for the use of the posts outside Naga City, it was probably because what
is due to them from private respondent is more than its claim against them.
And with respect to the third cause of action, petitioners claimed, inter alia, that their telephone service had been
categorized by the National Telecommunication Corporation (NTC) as "very high" and of "superior quality."
During the trial, private respondent presented the following witnesses:
(1) Dioscoro Ragragio, one of the two officials who signed the contract in its behalf, declared that it was petitioner
Maggay who prepared the contract; that the understanding between private respondent and petitioners was that the
latter would only use the posts in Naga City because at that time, petitioners' capability was very limited and they
had no expectation of expansion because of legal squabbles within the company; that private respondent agreed to
allow petitioners to use its posts in Naga City because there were many subscribers therein who could not be
served by them because of lack of facilities; and that while the telephone lines strung to the posts were very light in
1977, said posts have become heavily loaded in 1989.
(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and Maintenance Department, declared that
the posts being used by petitioners totalled 1,403 as of April 17, 1989, 192 of which were in the towns of Pili,
Canaman, and Magarao, all outside Naga City (Exhs. "B" and "B-1"); that petitioners' cables strung to the posts in
1989 are much bigger than those in November, 1977; that in 1987, almost 100 posts were destroyed by typhoon
Sisang: around 20 posts were located between Naga City and the town of Pili while the posts in barangay
Concepcion, Naga City were broken at the middle which had been bored by petitioner's linemen to enable them to
string bigger telephone lines; that while the cost per post in 1977 was only from P700.00 to P1,000.00, their costs in
1989 went up from P1,500.00 to P2,000.00, depending on the size; that some lines that were strung to the posts did
not follow the minimum vertical clearance required by the National Building Code, so that there were cases in 1988
where, because of the low clearance of the cables, passing trucks would accidentally touch said cables causing the
posts to fall and resulting in brown-outs until the electric lines were repaired.
(3) Dario Bernardez, Project Supervisor and Acting General Manager of private respondent and Manager of Region
V of NEA, declared that according to NEA guidelines in 1985 (Exh. "C"), for the use by private telephone systems of
electric cooperatives' posts, they should pay a minimum monthly rental of P4.00 per post, and considering the
escalation of prices since 1985, electric cooperatives have been charging from P10.00 to P15.00 per post, which is
what petitioners should pay for the use of the posts.
(4) Engineer Antonio Macandog, Department Head of the Office of Services of private respondent, testified on the
poor service rendered by petitioner's telephone lines, like the telephone in their Complaints Section which was
usually out of order such that they could not respond to the calls of their customers. In case of disruption of their
telephone lines, it would take two to three hours for petitioners to reactivate them notwithstanding their calls on the
emergency line.
(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that the Board of Directors asked him to
study the contract sometime during the latter part of 1982 or in 1983, as it had appeared very disadvantageous to
private respondent. Notwithstanding his recommendation for the filing of a court action to reform the contract, the
former general managers of private respondent wanted to adopt a soft approach with petitioners about the matter
until the term of General Manager Henry Pascual who, after failing to settle the matter amicably with petitioners,
finally agreed for him to file the present action for reformation of contract.
On the other hand, petitioner Maggay testified to the following effect:
(1) It is true that he was a member of the Board of Directors of private respondent and at the same time the lawyer
of petitioner when the contract was executed, but Atty. Gaudioso Tena, who was also a member of the Board of
Directors of private respondent, was the one who saw to it that the contract was fair to both parties.
(2) With regard to the first cause of action:
(a) Private respondent has the right under the contract to use ten (10) telephone units of petitioners for as long as it
wishes without paying anything therefor except for long distance calls through PLDT out of which the latter get only
10% of the charges.
(b) In most cases, only drop wires and not telephone cables have been strung to the posts, which posts have
remained erect up to the present;
(c) Petitioner's linemen have strung only small messenger wires to many of the posts and they need only small
holes to pass through; and
(d) Documents existing in the NTC show that the stringing of petitioners' cables in Naga City are according to
standard and comparable to those of PLDT. The accidents mentioned by private respondent involved trucks that
were either overloaded or had loads that protruded upwards, causing them to hit the cables.
(3) Concerning the second cause of action, the intention of the parties when they entered into the contract was that
the coverage thereof would include the whole area serviced by petitioners because at that time, they already had
subscribers outside Naga City. Private respondent, in fact, had asked for telephone connections outside Naga City
for its officers and employees residing there in addition to the ten (10) telephone units mentioned in the contract.
Petitioners have not been charging private respondent for the installation, transfers and re-connections of said
telephones so that naturally, they use the posts for those telephone lines.
(4) With respect to the third cause of action, the NTC has found petitioners' cable installations to be in accordance
with engineering standards and practice and comparable to the best in the country.
On the basis of the foregoing countervailing evidence of the parties, the trial court found, as regards private
respondent's first cause of action, that while the contract appeared to be fair to both parties when it was entered into
by them during the first year of private respondent's operation and when its Board of Directors did not yet have any
experience in that business, it had become disadvantageous and unfair to private respondent because of
subsequent events and conditions, particularly the increase in the volume of the subscribers of petitioners for more
than ten (10) years without the corresponding increase in the number of telephone connections to private
respondent free of charge. The trial court concluded that while in an action for reformation of contract, it cannot
make another contract for the parties, it can, however, for reasons of justice and equity, order that the contract be
reformed to abolish the inequities therein. Thus, said court ruled that the contract should be reformed by ordering
petitioners to pay private respondent compensation for the use of their posts in Naga City, while private respondent
should also be ordered to pay the monthly bills for the use of the telephones also in Naga City. And taking into
consideration the guidelines of the NEA on the rental of posts by telephone companies and the increase in the costs
of such posts, the trial court opined that a monthly rental of P10.00 for each post of private respondent used by
petitioners is reasonable, which rental it should pay from the filing of the complaint in this case on January 2, 1989.
And in like manner, private respondent should pay petitioners from the same date its monthly bills for the use and
transfers of its telephones in Naga City at the same rate that the public are paying.
On private respondent's second cause of action, the trial court found that the contract does not mention anything
about the use by petitioners of private respondent's posts outside Naga City. Therefore, the trial court held that for
reason of equity, the contract should be reformed by including therein the provision that for the use of private
respondent's posts outside Naga City, petitioners should pay a monthly rental of P10.00 per post, the payment to
start on the date this case was filed, or on January 2, 1989, and private respondent should also pay petitioners the
monthly dues on its telephone connections located outside Naga City beginning January, 1989.
And with respect to private respondent's third cause of action, the trial court found the claim not sufficiently proved.
Thus, the following decretal portion of the trial court's decision dated July 20, 1990:
WHEREFORE, in view of all the foregoing, decision is hereby rendered ordering the reformation of
the agreement (Exh. A); ordering the defendants to pay plaintiff's electric poles in Naga City and in
the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where
defendant NATELCO uses plaintiff's electric poles, the sum of TEN (P10.00) PESOS per plaintiff's
pole, per month beginning January, 1989 and ordering also the plaintiff to pay defendant NATELCO
the monthly dues of all its telephones including those installed at the residence of its officers,
namely; Engr. Joventino Cruz, Engr. Antonio Borja, Engr. Antonio Macandog, Mr. Jesus Opiana and
Atty. Luis General, Jr. beginning January, 1989. Plaintiff's claim for attorney's fees and expenses of
litigation and defendants' counterclaim are both hereby ordered dismissed. Without pronouncement
as to costs.
Disagreeing with the foregoing judgment, petitioners appealed to respondent Court of Appeals. In the decision dated
May 28, 1992, respondent court affirmed the decision of the trial court, but based on different grounds to wit: (1)
5
that Article 1267 of the New Civil Code is applicable and (2) that the contract was subject to a potestative condition
which rendered said condition void. The motion for reconsideration was denied in the resolution dated September
10, 1992. Hence, the present petition.
6
Petitioners assign the following pertinent errors committed by respondent court:
1) in making a contract for the parties by invoking Article 1267 of the New Civil Code;
2) in ruling that prescription of the action for reformation of the contract in this case commenced from
the time it became disadvantageous to private respondent; and
3) in ruling that the contract was subject to a potestative condition in favor of petitioners.
Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable primarily because the contract
does not involve the rendition of service or a personal prestation and it is not for future service with future unusual
change. Instead, the ruling in the case of Occeña, et al. v. Jabson, etc., et al., which interpreted the article, should
7
be followed in resolving this case. Besides, said article was never raised by the parties in their pleadings and was
never the subject of trial and evidence.
In applying Article 1267, respondent court rationalized:
We agree with appellant that in order that an action for reformation of contract would lie and may
prosper, there must be sufficient allegations as well as proof that the contract in question failed to
express the true intention of the parties due to error or mistake, accident, or fraud. Indeed, in
embodying the equitable remedy of reformation of instruments in the New Civil Code, the Code
Commission gave its reasons as follows:
Equity dictates the reformation of an instrument in order that the true intention of the
contracting parties may be expressed. The courts by the reformation do not attempt
to make a new contract for the parties, but to make the instrument express their real
agreement. The rationale of the doctrine is that it would be unjust and inequitable to
allow the enforcement of a written instrument which does not reflect or disclose the
real meeting of the minds of the parties. The rigor of the legalistic rule that a written
instrument should be the final and inflexible criterion and measure of the rights and
obligations of the contracting parties is thus tempered to forestall the effects of
mistake, fraud, inequitable conduct, or accident. (pp. 55-56, Report of Code
Commission)
Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code provide in essence that
where through mistake or accident on the part of either or both of the parties or mistake or fraud on
the part of the clerk or typist who prepared the instrument, the true intention of the parties is not
expressed therein, then the instrument may be reformed at the instance of either party if there was
mutual mistake on their part, or by the injured party if only he was mistaken.
Here, plaintiff-appellee did not allege in its complaint, nor does its evidence prove, that there was a
mistake on its part or mutual mistake on the part of both parties when they entered into the
agreement Exh. "A", and that because of this mistake, said agreement failed to express their true
intention. Rather, plaintiff's evidence shows that said agreement was prepared by Atty. Luciano
Maggay, then a member of plaintiff's Board of Directors and its legal counsel at that time, who was
also the legal counsel for defendant-appellant, so that as legal counsel for both companies and
presumably with the interests of both companies in mind when he prepared the aforesaid
agreement, Atty. Maggay must have considered the same fair and equitable to both sides, and this
was affirmed by the lower court when it found said contract to have been fair to both parties at the
time of its execution. In fact, there were no complaints on the part of both sides at the time of and
after the execution of said contract, and according to 73-year old Justino de Jesus, Vice President
and General manager of appellant at the time who signed the agreement Exh. "A" in its behalf and
who was one of the witnesses for the plaintiff (sic), both parties complied with said contract "from the
very beginning" (p. 5, tsn, April 17, 1989).
That the aforesaid contract has become inequitous or unfavorable or disadvantageous to the plaintiff
with the expansion of the business of appellant and the increase in the volume of its subscribers in
Naga City and environs through the years, necessitating the stringing of more and bigger telephone
cable wires by appellant to plaintiff's electric posts without a corresponding increase in the ten (10)
telephone connections given by appellant to plaintiff free of charge in the agreement Exh. "A" as
consideration for its use of the latter's electric posts in Naga City, appear, however, undisputed from
the totality of the evidence on record and the lower court so found. And it was for this reason that in
the later (sic) part of 1982 or 1983 (or five or six years after the subject agreement was entered into
by the parties), plaintiff's Board of Directors already asked Atty. Luis General who had become their
legal counsel in 1982, to study said agreement which they believed had become disadvantageous to
their company and to make the proper recommendation, which study Atty. General did, and
thereafter, he already recommended to the Board the filing of a court action to reform said contract,
but no action was taken on Atty. General's recommendation because the former general managers
of plaintiff wanted to adopt a soft approach in discussing the matter with appellant, until, during the
term of General Manager Henry Pascual, the latter, after failing to settle the problem with Atty.
Luciano Maggay who had become the president and general manager of appellant, already agreed
for Atty. General's filing of the present action. The fact that said contract has become inequitous or
disadvantageous to plaintiff as the years went by did not, however, give plaintiff a cause of action for
reformation of said contract, for the reasons already pointed out earlier. But this does not mean that
plaintiff is completely without a remedy, for we believe that the allegations of its complaint herein and
the evidence it has presented sufficiently make out a cause of action under Art. 1267 of the New
Civil Code for its release from the agreement in question.
xxx xxx xxx
The understanding of the parties when they entered into the Agreement Exh. "A" on November 1,
1977 and the prevailing circumstances and conditions at the time, were described by Dioscoro
Ragragio, the President of plaintiff in 1977 and one of its two officials who signed said agreement in
its behalf, as follows:
Our understanding at that time is that we will allow NATELCO to utilize the posts of
CASURECO II only in the City of Naga because at that time the capability of
NATELCO was very limited, as a matter of fact we do [sic] not expect to be able to
expand because of the legal squabbles going on in the NATELCO. So, even at that
time there were so many subscribers in Naga City that cannot be served by the
NATELCO, so as a mater of public service we allowed them to sue (sic) our posts
within the Naga City. (p. 8, tsn April 3, 1989)
Ragragio also declared that while the telephone wires strung to the electric posts of plaintiff were
very light and that very few telephone lines were attached to the posts of CASURECO II in 1977,
said posts have become "heavily loaded" in 1989 (tsn, id.).
In truth, as also correctly found by the lower court, despite the increase in the volume of appellant's
subscribers and the corresponding increase in the telephone cables and wires strung by it to
plaintiff's electric posts in Naga City for the more 10 years that the agreement Exh. "A" of the parties
has been in effect, there has been no corresponding increase in the ten (10) telephone units
connected by appellant free of charge to plaintiff's offices and other places chosen by plaintiff's
general manager which was the only consideration provided for in said agreement for appellant's
use of plaintiffs electric posts. Not only that, appellant even started using plaintiff's electric posts
outside Naga City although this was not provided for in the agreement Exh. "A" as it extended and
expanded its telephone services to towns outside said city. Hence, while very few of plaintiff's
electric posts were being used by appellant in 1977 and they were all in the City of Naga, the
number of plaintiff's electric posts that appellant was using in 1989 had jumped to 1,403,192 of
which are outside Naga City (Exh. "B"). Add to this the destruction of some of plaintiff's poles during
typhoons like the strong typhoon Sisang in 1987 because of the heavy telephone cables attached
thereto, and the escalation of the costs of electric poles from 1977 to 1989, and the conclusion is
indeed ineluctable that the agreement Exh. "A" has already become too one-sided in favor of
appellant to the great disadvantage of plaintiff, in short, the continued enforcement of said contract
has manifestly gone far beyond the contemplation of plaintiff, so much so that it should now be
released therefrom under Art. 1267 of the New Civil Code to avoid appellant's unjust enrichment at
its (plaintiff's) expense. As stated by Tolentino in his commentaries on the Civil Code citing foreign
civilist Ruggiero, "equity demands a certain economic equilibrium between the prestation and the
counter-prestation, and does not permit the unlimited impoverishment of one party for the benefit of
the other by the excessive rigidity of the principle of the obligatory force of contracts (IV Tolentino,
Civil Code of the Philippines, 1986 ed.,
pp. 247-248).
We therefore, find nothing wrong with the ruling of the trial court, although based on a different and
wrong premise (i.e., reformation of contract), that from the date of the filing of this case, appellant
must pay for the use of plaintiff's electric posts in Naga City at the reasonable monthly rental of
P10.00 per post, while plaintiff should pay appellant for the telephones in the same City that it was
formerly using free of charge under the terms of the agreement Exh. "A" at the same rate being paid
by the general public. In affirming said ruling, we are not making a new contract for the parties
herein, but we find it necessary to do so in order not to disrupt the basic and essential services being
rendered by both parties herein to the public and to avoid unjust enrichment by appellant at the
expense of plaintiff, said arrangement to continue only until such time as said parties can re-
negotiate another agreement over the same
subject-matter covered by the agreement Exh. "A". Once said agreement is reached and executed
by the parties, the aforesaid ruling of the lower court and affirmed by us shall cease to exist and shall
be substituted and superseded by their new agreement. . . .. 8
Article 1267 speaks of "service" which has become so difficult. Taking into consideration the rationale behind this
provision, the term "service" should be understood as referring to the "performance" of the obligation. In the present
9
case, the obligation of private respondent consists in allowing petitioners to use its posts in Naga City, which is the
service contemplated in said article. Furthermore, a bare reading of this article reveals that it is not a requirement
thereunder that the contract be for future service with future unusual change. According to Senator Arturo M.
Tolentino, Article 1267 states in our law the doctrine of unforseen events. This is said to be based on the
10
discredited theory of rebus sic stantibus in public international law; under this theory, the parties stipulate in the light
of certain prevailing conditions, and once these conditions cease to exist the contract also ceases to exist.
Considering practical needs and the demands of equity and good faith, the disappearance of the basis of a contract
gives rise to a right to relief in favor of the party prejudiced.
In a nutshell, private respondent in the Occeña case filed a complaint against petitioner before the trial court praying
for modification of the terms and conditions of the contract that they entered into by fixing the proper shares that
should pertain to them out of the gross proceeds from the sales of subdivided lots. We ordered the dismissal of the
complaint therein for failure to state a sufficient cause of action. We rationalized that the Court of Appeals
misapplied Article 1267 because:
. . . respondent's complaint seeks not release from the subdivision contract but that the court "render
judgment modifying the terms and conditions of the contract . . . by fixing the proper shares that
should pertain to the herein parties out of the gross proceeds from the sales of subdivided lots of
subject subdivision". The cited article (Article 1267) does not grant the courts (the) authority to
remake, modify or revise the contract or to fix the division of shares between the parties as
contractually stipulated with the force of law between the parties, so as to substitute its own terms for
those covenanted by the parties themselves. Respondent's complaint for modification of contract
manifestly has no basis in law and therefore states no cause of action. Under the particular
allegations of respondent's complaint and the circumstances therein averred, the courts cannot even
in equity grant the relief sought.
11
The ruling in the Occeña case is not applicable because we agree with respondent court that the allegations in
private respondent's complaint and the evidence it has presented sufficiently made out a cause of action under
Article 1267. We, therefore, release the parties from their correlative obligations under the contract. However, our
disposition of the present controversy does not end here. We have to take into account the possible consequences
of merely releasing the parties therefrom: petitioners will remove the telephone wires/cables in the posts of private
respondent, resulting in disruption of their service to the public; while private respondent, in consonance with the
contract will return all the telephone units to petitioners, causing prejudice to its business. We shall not allow such
12
eventuality. Rather, we require, as ordered by the trial court: 1) petitioners to pay private respondent for the use of
its posts in Naga City and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places
where petitioners use private respondent's posts, the sum of ten (P10.00) pesos per post, per month, beginning
January, 1989; and 2) private respondent to pay petitioner the monthly dues of all its telephones at the same rate
being paid by the public beginning January, 1989. The peculiar circumstances of the present case, as distinguished
further from the Occeña case, necessitates exercise of our equity jurisdiction. By way of emphasis, we reiterate the
13
rationalization of respondent court that:
. . . In affirming said ruling, we are not making a new contract for the parties herein, but we find it
necessary to do so in order not to disrupt the basic and essential services being rendered by both
parties herein to the public and to avoid unjust enrichment by appellant at the expense of plaintiff . . .
.14
Petitioners' assertion that Article 1267 was never raised by the parties in their pleadings and was never the subject
of trial and evidence has been passed upon by respondent court in its well reasoned resolution, which we hereunder
quote as our own:
First, we do not agree with defendant-appellant that in applying Art. 1267 of the New Civil Code to
this case, we have changed its theory and decided the same on an issue not invoked by plaintiff in
the lower court. For basically, the main and pivotal issue in this case is whether the continued
enforcement of the contract Exh. "A" between the parties has, through the years (since 1977),
become too inequitous or disadvantageous to the plaintiff and too one-sided in favor of defendant-
appellant, so that a solution must be found to relieve plaintiff from the continued operation of said
agreement and to prevent defendant-appellant from further unjustly enriching itself at plaintiff's
expense. It is indeed unfortunate that defendant had turned deaf ears to plaintiffs requests for
renegotiation, constraining the latter to go to court. But although plaintiff cannot, as we have held,
correctly invoke reformation of contract as a proper remedy (there having been no showing of a
mistake or error in said contract on the part of any of the parties so as to result in its failure to
express their true intent), this does not mean that plaintiff is absolutely without a remedy in order to
relieve itself from a contract that has gone far beyond its contemplation and has become so highly
inequitous and disadvantageous to it through the years because of the expansion of defendant-
appellant's business and the increase in the volume of its subscribers. And as it is the duty of the
Court to administer justice, it must do so in this case in the best way and manner it can in the light of
the proven facts and the law or laws applicable thereto.
It is settled that when the trial court decides a case in favor of a party on a certain ground, the
appellant court may uphold the decision below upon some other point which was ignored or
erroneously decided by the trial court (Garcia Valdez v. Tuazon, 40 Phil. 943; Relativo v. Castro, 76
Phil. 563; Carillo v. Salak de Paz, 18 SCRA 467). Furthermore, the appellate court has the discretion
to consider an unassigned error that is closely related to an error properly assigned (Paterno v. Jao
Yan, 1 SCRA 631; Hernandez v. Andal, 78 Phil. 196). It has also been held that the Supreme Court
(and this Court as well) has the authority to review matters, even if they are not assigned as errors in
the appeal, if it is found that their consideration is necessary in arriving at a just decision of the case
(Saura Import & Export Co., Inc. v. Phil. International Surety Co. and PNB, 8 SCRA 143). For it is the
material allegations of fact in the complaint, not the legal conclusion made therein or the prayer, that
determines the relief to which the plaintiff is entitled, and the plaintiff is entitled to as much relief as
the facts warrant although that relief is not specifically prayed for in the complaint (Rosales v. Reyes
and Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844; Baguioro v. Barrios, 77 Phil. 120). To
quote an old but very illuminating decision of our Supreme Court through the pen of American jurist
Adam C. Carson:
"Under our system of pleading it is the duty of the courts to grant the relief to which
the parties are shown to be entitled by the allegations in their pleadings and the facts
proven at the trial, and the mere fact that they themselves misconstrue the legal
effect of the facts thus alleged and proven will not prevent the court from placing the
just construction thereon and adjudicating the issues accordingly." (Alzua v.
Johnson, 21 Phil. 308)
And in the fairly recent case of Caltex Phil., Inc. v IAC, 176 SCRA 741, the Honorable Supreme
Court also held:
We rule that the respondent court did not commit any error in taking cognizance of
the aforesaid issues, although not raised before the trial court. The presence of
strong consideration of substantial justice has led this Court to relax the well-
entrenched rule that, except questions on jurisdiction, no question will be entertained
on appeal unless it has been raised in the court below and it is within the issues
made by the parties in their pleadings (Cordero v. Cabral, L-36789, July 25, 1983,
123 SCRA 532). . . .
We believe that the above authorities suffice to show that this Court did not err in applying Art. 1267
of the New Civil Code to this case. Defendant-appellant stresses that the applicability of said
provision is a question of fact, and that it should have been given the opportunity to present
evidence on said question. But defendant-appellant cannot honestly and truthfully claim that it (did)
not (have) the opportunity to present evidence on the issue of whether the continued operation of the
contract Exh. "A" has now become too one-sided in its favor and too inequitous, unfair, and
disadvantageous to plaintiff. As held in our decision, the abundant and copious evidence presented
by both parties in this case and summarized in said decision established the following essential and
vital facts which led us to apply Art. 1267 of the New Civil Code to this case:
xxx xxx xxx 15
On the issue of prescription of private respondent's action for reformation of contract, petitioners allege that
respondent court's ruling that the right of action "arose only after said contract had already become
disadvantageous and unfair to it due to subsequent events and conditions, which must be sometime during the
latter part of 1982 or in 1983 . . ." is erroneous. In reformation of contracts, what is reformed is not the contract
16
itself, but the instrument embodying the contract. It follows that whether the contract is disadvantageous or not is
irrelevant to reformation and therefore, cannot be an element in the determination of the period for prescription of
the action to reform.
Article 1144 of the New Civil Code provides, inter alia, that an action upon a written contract must be brought within
ten (10) years from the time the right of action accrues. Clearly, the ten (10) year period is to be reckoned from the
time the right of action accrues which is not necessarily the date of execution of the contract. As correctly ruled by
respondent court, private respondent's right of action arose "sometime during the latter part of 1982 or in 1983 when
according to Atty. Luis General, Jr. . . ., he was asked by (private respondent's) Board of Directors to study said
contract as it already appeared disadvantageous to (private respondent) (p. 31, tsn, May 8, 1989). (Private
respondent's) cause of action to ask for reformation of said contract should thus be considered to have arisen only
in 1982 or 1983, and from 1982 to January 2, 1989 when the complaint in this case was filed, ten (10) years had not
yet elapsed." 17
Regarding the last issue, petitioners allege that there is nothing purely potestative about the prestations of either
party because petitioner's permission for free use of telephones is not made to depend purely on their will, neither is
private respondent's permission for free use of its posts dependent purely on its will.
Apart from applying Article 1267, respondent court cited another legal remedy available to private respondent under
the allegations of its complaint and the preponderant evidence presented by it:
. . . we believe that the provision in said agreement —
(a) That the term or period of this contract shall be as long as the party of the first
part [herein appellant] has need for the electric light posts of the party of the second
part [herein plaintiff] it being understood that this contract shall terminate when for
any reason whatsoever, the party of the second part is forced to stop, abandoned
[sic] its operation as a public service and it becomes necessary to remove the
electric light post [sic]"; (Emphasis supplied)
is invalid for being purely potestative on the part of appellant as it leaves the continued effectivity of
the aforesaid agreement to the latter's sole and exclusive will as long as plaintiff is in operation. A
similar provision in a contract of lease wherein the parties agreed that the lessee could stay on the
leased premises "for as long as the defendant needed the premises and can meet and pay said
increases" was recently held by the Supreme Court in Lim v. C.A., 191 SCRA 150, citing the much
earlier case of Encarnacion v. Baldomar, 77 Phil. 470, as invalid for being "a purely potestative
condition because it leaves the effectivity and enjoyment of leasehold rights to the sole and
exclusive will of the lessee." Further held the High Court in the Lim case:
The continuance, effectivity and fulfillment of a contract of lease cannot be made to

depend exclusively upon the free and uncontrolled choice of the lessee between
continuing the payment of the rentals or not, completely depriving the owner of any
say in the matter. Mutuality does not obtain in such a contract of lease of no equality
exists between the lessor and the lessee since the life of the contract is dictated
solely by the lessee.
The above can also be said of the agreement Exh. "A" between the parties in this case. There is no
mutuality and equality between them under the afore-quoted provision thereof since the life and
continuity of said agreement is made to depend as long as appellant needs plaintiff's electric posts.
And this is precisely why, since 1977 when said agreement was executed and up to 1989 when this
case was finally filed by plaintiff, it could do nothing to be released from or terminate said agreement
notwithstanding that its continued effectivity has become very disadvantageous and inequitous to it
due to the expansion and increase of appellant's telephone services within Naga City and even
outside the same, without a corresponding increase in the ten (10) telephone units being used by
plaintiff free of charge, as well as the bad and inefficient service of said telephones to the prejudice
and inconvenience of plaintiff and its customers. . . . 18
Petitioners' allegations must be upheld in this regard. A potestative condition is a condition, the fulfillment of which
depends upon the sole will of the debtor, in which case, the conditional obligation is void. Based on this definition,
19
respondent court's finding that the provision in the contract, to wit:
(a) That the term or period of this contract shall be as long as the party of the first part (petitioner)
has need for the electric light posts of the party of the second part (private respondent) . . ..
is a potestative condition, is correct. However, it must have overlooked the other conditions in the same provision, to
wit:
. . . it being understood that this contract shall terminate when for any reason whatsoever, the party
of the second part (private respondent) is forced to stop, abandoned (sic) its operation as a public
service and it becomes necessary to remove the electric light post (sic);
which are casual conditions since they depend on chance, hazard, or the will of a third person. In sum, the
20
contract is subject to mixed conditions, that is, they depend partly on the will of the debtor and partly on chance,
hazard or the will of a third person, which do not invalidate the aforementioned provision. Nevertheless, in view of
21
our discussions under the first and second issues raised by petitioners, there is no reason to set aside the
questioned decision and resolution of respondent court.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals dated May 28, 1992 and its
resolution dated September 10, 1992 are AFFIRMED.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.
#Footnotes
1 84 Phil. 654.
2 Report of the Code Commission, p. 133; cited in Rollo, p. 57.
3 Records, p. 6.
4 Ibid, pp. 6-7.
5 Rollo, p. 62.
6 Rollo, p. 71.
7 G.R. No. L-44349, October 29, 1976, 73 SCRA 637.
8 Rollo, pp. 54-59.
9 Supra.
10 Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 Edition p. 347.
11 At p. 641.
12 Records, p. 7.
13 Agne, et al. v. Director of Lands, et al., G.R. No. L-40399, February 9, 1990, 181 SCRA 793.
14 Rollo, p.59.
15 Rollo, pp. 66-69.
16 Rollo, pp. 53-54.
17 Rollo, pp. 53-54.
18 Rollo, pp. 59-61.
19 Article 1182 of the New Civil Code.
20 Civil Code of the Philippines Annotated by Edgardo L. Paras, 1985 Edition,

p. 171.
21 Ibid.
15) PNCC vs Court of Appeals 272 SCRA 183

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 116896 May 5, 1997
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, petitioner,

vs.
COURT OF APPEALS, MA. TERESA S. RAYMUNDO-ABARRA, JOSE S. RAYMUNDO, ANTONIO S.
RAYMUNDO, RENE S. RAYMUNDO, and AMADOR S. RAYMUNDO, respondents.
DAVIDE, JR., J.:
This petition for review on certiorari has its roots in Civil Case No. 53444, which was sparked by petitioner's refusal
to pay the rentals as stipulated in the contract of lease on an undivided portion of 30,000 square meters of a parcel
1
of land owned by private respondents.
The lease contract, executed on 18 November 1985, reads in part as follows:
1. TERM OF LEASE — This lease shall be for a period of five (5) years, commencing on the date of
issuance of the industrial clearance by the Ministry of Human Settlements, renewable for a like or
other period at the option of the LESSEE under the same terms and conditions.
2. RATE OF RENT — LESSEE shall pay to the LESSOR rent at the monthly rate of TWENTY
THOUSAND PESOS (P20,000.00), Philippine Currency, in the manner set forth in Paragraph 3
below. This rate shall be increased yearly by Five Percent (5%) based on the agreed monthly rate of
P20,000.00 as follows:
Monthly Rate Period Applicable
P21,000.00 Starting on the 2nd year
P22,000.00 Starting on the 3rd year
P23,000.00 Starting on the 4th year
P24,000.00 Starting on the 5th year
3. TERMS OF PAYMENT — The rent stipulated in Paragraph 2 above shall be paid yearly in
advance by the LESSEE. The first annual rent in the amount of TWO HUNDRED FORTY
THOUSAND PESOS (P240,000.00), Philippine currency, shall be due and payable upon the
execution of this Agreement and the succeeding annual rents shall be payable every twelve (12)
months thereafter during the effectivity of this Agreement.
4. USE OF LEASED PROPERTY — It is understood that the Property shall be used by the LESSEE
as the site, grounds and premises of a rock crushing plant and field office, sleeping quarters and
canteen/mess hall. The LESSORS hereby grant to the LESSEE the right to erect on the Leased
Property such structure(s) and/or improvement(s) necessary for or incidental to the LESSEE's
purposes.
xxx xxx xxx
11. TERMINATION OF LEASE — This Agreement may be terminated by mutual agreement of the

parties. Upon the termination or expiration of the period of lease without the same being renewed,
the LESSEE shall vacate the Leased Property at its expense.
On 7 January 1986, petitioner obtained from the Ministry of Human Settlements a Temporary Use Permit for the
2
proposed rock crushing project. The permit was to be valid for two years unless sooner revoked by the Ministry.
On 16 January 1986, private respondents wrote petitioner requesting payment of the first annual rental in the
amount of P240,000 which was due and payable upon the execution of the contract. They also assured the latter
that they had already stopped considering the proposals of other aggregates plants to lease the property because of
the existing contract with petitioner.
3
In its reply-letter, petitioner argued that under paragraph 1 of the lease contract, payment of rental would commence
on the date of the issuance of an industrial clearance by the Ministry of Human Settlements, and not from the date
of signing of the contract. It then expressed its intention to terminate the contract, as it had decided to cancel or
discontinue with the rock crushing project "due to financial, as well as technical, difficulties."
4
Private respondents refused to accede to petitioner's request for the pretermination of the lease contract. They
insisted on the performance of petitioner's obligation and reiterated their demand for the payment of the first annual
rental.
5
Petitioner objected to private respondents' claim and argued that it was "only obligated to pay . . . the amount of
P20,000.00 as rental payments for the one-month period of lease, counted from 07 January 1986 when the
Industrial Permit was issued by the Ministry of Human Settlements up to 07 February 1986 when the Notice of
Termination was served" on private respondents.
6
On 19 May 1986, private respondents instituted with the Regional Trial Court of Pasig an action against petitioner
for Specific Performance with Damages. The case was docketed as Civil Case No. 53444 at Branch 160 of the
7
said court. After the filing by petitioner of its Answer with Counterclaim, the case was set for trial on the merits.
What transpired next was summarized by the trial court in this wise:
Plaintiffs rested their case on September 7, 1987 (p. 87 rec.). Defendant asked for postponement of
the reception of its evidence scheduled on August 10, 1988 and as prayed for, was reset to August
25, 1988 (p. 91 rec.) Counsel for defendant again asked for postponement, through representative,
as he was presently indisposed. The case was reset, intransferable to September 15 and 26, 1988
(p. 94 rec.) On September 2, 1988, the office of the Government Corporate Counsel entered its
appearance for defendant (p. 95, rec.) and the original counsel later withdrew his appearance. On
September 15, 1988 the Government Corporate Counsel asked for postponement, represented by
Atty. Elpidio de Vega, and with his conformity in open court, the hearing was reset, intransferable to
September 26 and October 17, 1988, (p. 98, rec.) On September 26, 1988 during the hearing,
defendant's counsel filed a motion for postponement (urgent) as he had "sore eyes", a medical
certificate attached.
Counsel for plaintiffs objected to the postponement and the court considered the evidence of the
government terminated or waived. The case was deemed submitted for decision upon the filing of
the memorandum. Plaintiffs filed their memorandum on October 26, 1988. (p. 111, rec.).
On October 18, 1988 in the meantime, the defendant filed a motion for reconsideration of the order
of the court on September 26, 1988 (p. 107, rec.) The motion was not asked to be set for hearing (p.
110 rec.) There was also no proof of notice and service to counsel for plaintiff . The court in the
interest of justice set the hearing on the motion on November 29, 1988. (p. 120, rec.) but despite
notice, again defendant's counsel was absent (p. 120-A, dorsal side, rec.) without reason. The court
reset the motion to December 16, 1988, in the interest of justice. The motion for reconsideration was
denied by the court. A second motion for reconsideration was filed and counsel set for hearing the
motion on January 19, 1989. During the hearing, counsel for the government was absent. The
motion was deemed abandoned but the court at any rate, after a review of the incidents and the
grounds relied upon in the earlier motion of defendant, found no reason to disturb its previous
order. 8
On 12 April 1989, the trial court rendered a decision ordering petitioner to pay private respondents the amount of
P492,000 which represented the rentals for two years, with legal interest from 7 January 1986 until the amount was
fully paid, plus attorney's fees in the amount of P20,000 and costs. 9
Petitioner then appealed to the Court of Appeals alleging that the trial court erred in ordering it to pay private
respondent the amount of P492,000 and in denying it the right to be heard.
Upon the affirmance of the trial court's decision and the denial of its motion for reconsideration, petitioner came to
10
this Court ascribing to respondent Court of Appeals the same alleged errors and reiterating their arguments.
First. Petitioner invites the attention of this Court to paragraph 1 of the lease contract, which reads: "This lease shall
be for a period of five (5) years, commencing on the date of issuance of the industrial clearance by the Ministry of
Human Settlements. . . ." It then submits that the issuance of an industrial clearance is a suspensive condition
without which the rights under the contract would not be acquired. The Temporary Use Permit is not the industrial
clearance referred to in the contract; for the said permit requires that a clearance from the National Production
Control Commission be first secured, and besides, there is a finding in the permit that the proposed project does not
conform to the Zoning Ordinance of Rodriguez, (formerly Montalban), Rizal, where the leased property is located.
Without the industrial clearance the lease contract could not become effective and petitioner could not be compelled
to perform its obligation under the contract.
Petitioner is now estopped from claiming that the Temporary Use Permit was not the industrial clearance
contemplated in the contract. In its letter dated 24 April 1986, petitioner states:
We wish to reiterate PNCC Management's previous stand that it is only obligated to pay your clients
the amount of P20,000.00 as rental payments for the one-month period of the lease, counted
from 07 January 1986 when the Industrial Permit was issued by the Ministry of Human
Settlements up to 07 February 1986 when the Notice of Termination was served on your
clients. (Emphasis Supplied).
11
The "Industrial Permit" mentioned in the said letter could only refer to the Temporary Use Permit issued by
the Ministry of Human Settlements on 7 January 1986. And it can be gleaned from this letter that petitioner
has considered the permit as industrial clearance; otherwise, petitioner could have simply told private
respondents that its obligation to pay rentals has not yet arisen because the Temporary Use Permit is not
the industrial clearance contemplated by them. Instead, petitioner recognized its obligation to pay rentals
counted from the date the permit was issued.
Also worth noting is petitioner's earlier letter, thus:
[P]lease be advised of PNCC Management's decision to cancel or discontinue with the rock crushing
project due to financial as well as technical difficulties. In view thereof, we would like to terminate our
Lease Contract dated 18 November, 1985. Should you agree to the mutual termination of our Lease
Contract, kindly indicate your conformity hereto by affixing your signature on the space provided
below. May we likewise request Messrs. Rene, Jose and Antonio, all surnamed Raymundo and Mrs.
Socorro A. Raymundo as Attorney-in-Fact of Amador S. Raymundo to sign on the spaces indicated
below. 12
It can be deduced from this letter that the suspensive condition — issuance of industrial clearance — has already
been fulfilled and that the lease contract has become operative. Otherwise, petitioner did not have to solicit the
conformity of private respondents to the termination of the contract for the simple reason that no juridical relation
was created because of the non- fulfillment of the condition.
Moreover, the reason of petitioner in discontinuing with its project and in consequently cancelling the lease contract
was "financial as well as technical difficulties," not the alleged insufficiency of the Temporary Use Permit.
Second. Invoking Article 1266 and the principle of rebus sic stantibus, petitioner asserts that it should be released
from the obligatory force of the contract of lease because the purpose of the contract did not materialize due to
unforeseen events and causes beyond its control, i.e., due to the abrupt change in political climate after the EDSA
Revolution and financial difficulties.
It is a fundamental rule that contracts, once perfected, bind both contracting parties, and obligations arising
therefrom have the force of law between the parties and should be complied with in good faith. But the law
13
recognizes exceptions to the principle of the obligatory force of contracts. One exception is laid down in Article 1266
of the Civil Code, which reads: "The debtor in obligations to do shall also be released when the prestation becomes
legally or physically impossible without the fault of the obligor."
Petitioner cannot, however, successfully take refuge in the said article, since it is applicable only to obligations "to
do," and not to obligations "to give." An obligation "to do" includes all kinds of work or service; while an obligation
14
"to give" is a prestation which consists in the delivery of a movable or an immovable thing in order to create a real
right, or for the use of the recipient, or for its simple possession, or in order to return it to its owner.
15
The obligation to pay rentals or deliver the thing in a contract of

16
lease falls within the prestation "to give"; hence, it is not covered within the scope of Article 1266. At any rate, the
17
unforeseen event and causes mentioned by petitioner are not the legal or physical impossibilities contemplated in
the said article. Besides, petitioner failed to state specifically the circumstances brought about by "the abrupt change
in the political climate in the country" except the alleged prevailing uncertainties in government policies on
infrastructure projects.
The principle of rebus sic stantibus neither fits in with the facts of the case. Under this theory, the parties stipulate
18
in the light of certain prevailing conditions, and once these conditions cease to exist, the contract also ceases to
exist. This theory is said to be the basis of Article 1267 of the Civil Code, which provides:
19
Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of
the parties, the obligor may also be released therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute application of the
principle of rebus sic stantibus, which would endanger the security of contractual relations. The parties to the
contract must be presumed to have assumed the risks of unfavorable developments. It is therefore only in
absolutely exceptional changes of circumstances that equity demands assistance for the debtor. 20
In this case, petitioner wants this Court to believe that the abrupt change in the political climate of the country after
the EDSA Revolution and its poor financial condition "rendered the performance of the lease contract impractical
and inimical to the corporate survival of the petitioner."
This Court cannot subscribe to this argument. As pointed out by private respondents: 21
It is a matter of record that petitioner PNCC entered into a contract with private respondents on
November 18, 1985. Prior thereto, it is of judicial notice that after the assassination of Senator
Aquino on August 21, 1983, the country has experienced political upheavals, turmoils, almost daily
mass demonstrations, unprecedented, inflation, peace and order deterioration, the Aquino trial and
many other things that brought about the hatred of people even against crony corporations. On
November 3, 1985, Pres. Marcos, being interviewed live on U.S. television announced that there
would be a snap election scheduled for February 7, 1986.
On November 18, 1985, notwithstanding the above, petitioner PNCC entered into the contract of
lease with private respondents with open eyes of the deteriorating conditions of the country.
Anent petitioner's alleged poor financial condition, the same will neither release petitioner from the binding effect of
the contract of lease. As held in Central Bank v. Court of Appeals, cited by private respondents, mere pecuniary
22
inability to fulfill an engagement does not discharge a contractual obligation, nor does it constitute a defense to an
action for specific performance.
With regard to the non-materialization of petitioner's particular purpose in entering into the contract of lease, i.e., to
use the leased premises as a site of a rock crushing plant, the same will not invalidate the contract. The cause or
essential purpose in a contract of lease is the use or enjoyment of a thing. As a general principle, the motive or
23
particular purpose of a party in entering into a contract does not affect the validity nor existence of the contract; an
exception is when the realization of such motive or particular purpose has been made a condition upon which the
contract is made to depend. The exception does not apply here.
24
Third. According to petitioner, the award of P492,000.00 representing the rent for two years is excessive,
considering that it did not benefit from the property. Besides, the temporary permit, conformably with the express
provision therein, was deemed automatically revoked for failure of petitioner to use the same within one year from
the issuance thereof. Hence, the rent payable should only be for one year.
Petitioner cannot be heard to complain that the award is excessive. The temporary permit was valid for two years
but was automatically revoked because of its non-use within one year from its issuance. The non-use of the permit
and the non-entry into the property subject of the lease contract were both imputable to petitioner and cannot,
therefore, be taken advantage of in order to evade or lessen petitioner's monetary obligation. The damage or
prejudice to private respondents is beyond dispute. They unquestionably suffered pecuniary losses because of their
inability to use the leased premises. Thus, in accordance with Article 1659 of the Civil Code, they are entitled to
25
indemnification for damages; and the award of P492,000.00 is fair and just under the circumstances of the case.
Finally, petitioner submits that the trial court gravely abused its discretion in denying petitioner the right to be heard.
We disagree. The trial court was in fact liberal in granting several postponements to petitioner before it deemed
26
terminated and waived the presentation of evidence in petitioner's behalf.
It must be recalled that private respondents rested their case on 7 September 1987 yet. Almost a year after, or on
27
10 August 1988 when it was petitioner's turn to present evidence, petitioner's counsel asked for postponement of
the hearing to 25 August 1988 due to conflict of schedules, and this was granted. At the rescheduled hearing,
28 29
petitioner's counsel, through a representative, moved anew for postponement, as he was allegedly
indisposed. The case was then reset "intransferable" to September 15 and 26, 1988. On 2 September 1988, the
30 31
Office of the Government Corporate Counsel, through Atty. Elpidio J. Vega, entered its appearance for the
petitioner, and later the original counsel withdrew his appearance. On 15 September 1988, Atty. Vega requested
32 33
for postponement to enable him to go over the records of the case. With his conformity, the hearing was reset
34
"intransferable" to September 26 and October 17, 1988. In the morning of 26 September 1988, the court received
35
Atty. Vega's Urgent Motion for Postponement on the ground that he was afflicted with conjunctivitis or sore
eyes. This time, private respondents objected; and upon their motion, the court deemed terminated and waived the
36
presentation of evidence for the petitioner. Nevertheless, before the court considered the case submitted for
37
decision, it required the parties to submit their respective memoranda within thirty days. But petitioner failed to
38
comply.
Likewise, the court was liberal with respect to petitioner's motion for reconsideration. Notwithstanding the lack of
request for hearing and proof of notice and service to private respondents, the court set the hearing of the said
motion on 29 November 1988. Upon the denial of the said motion for lack of merit, petitioner filed a second
39 40
motion for reconsideration. But during the hearing of the motion on a date selected by him, Atty. Vega was absent
for no reason at all, despite due notice. 41
From the foregoing narration of procedural antecedents, it cannot be said that petitioner was deprived of its day in
court. The essence of due process is simply an opportunity to he heard. To be heard does not only mean oral
42
arguments in court; one may be heard also through pleadings. Where opportunity to be heard, either through oral
arguments or pleadings, is accorded, there is no denial of procedural due process. 43
WHEREFORE, the instant petition is DENIED and the challenge decision of the Court of Appeals is AFFIRMED in
toto.
No pronouncements as to costs.
SO ORDERED.
Narvasa, C.J., Melo, Francisco and Panganiban, JJ., concur.
Footnotes
1 Exhibit "A," Original Record (OR), 68.
2 Exhibit "C," OR, 77; Rollo, 57.
3 Exhibit "B," OR, 76.
4 Exhibit "D," OR, 78.

5 Exhibit "E," Id., 80.
6 Exhibit "F," Id., 81-82.
7 Id., 1-7.
8 Order of 19 January 1989, OR, 129-130; Decision, 2-3.
9 OR 134-137; Rollo, 53-56. Per Judge Mariano M. Umali.
10 Rollo, 24-31. Per then Associate Justice Justo P. Torres, Jr. (now Associate Justice of the
Supreme Court), with the concurrence of then Associate Justice Bernardo P. Pardo and Associate
Justice Corona Ibay-Somera.
11 Exhibit "F-1," OR, 82.
12 Exhibit "D," Id., 78-79.
13 Articles 1159, 1308, 1315, and 1356 of the Civil Code.
14 DESIDERIO P. JURADO, Comments and Jurisprudence on Obligations and Contracts 292 ( 10th

revised ed. 1993) (hereafter JURADO).
15 IV ARTURO M. TOLENTINO, Commentaries and Jurisprudence on the Civil Code of the

Philippines 57 (1991) (hereafter IV TOLENTINO).
16 JURADO, 283.
17 IV TOLENTINO 57.
18 At this point of affairs; in these circumstances. A name given to a tacit condition, said to attach to
all treaties, that they shall cease to be obligatory so soon as the state of facts and conditions upon
which they were founded has substantially changed. (Black's Law Dictionary, 1139 [5th ed., 1979]).
19 Naga Telephone Co. v. Court of Appeals, 230 SCRA 351, 365 [1994] citing IV TOLENTINO 347.
20 IV TOLENTINO 347.
21 Memorandum for the Private Respondents, 17; Rollo, 160.
22 139 SCRA 46 [1985], citing Repide v. Afzelius, 39 Phil. 190 [1918].
23 V TOLENTINO 206 [1992]; V EDGARDO E. PARAS, Civil Code of the Philippines, 307 [1995].
24 V TOLENTINO 535.
25 It provides:
Art. 1659. If the lessor or the lessee should not comply with the obligations set forth in Articles 1654
and 1657, the aggrieved party may ask for rescission of the contract and indemnification for
damages, or only the latter, allowing the contract to remain in force.
26 Ocampo v. Arboleda, 153 SCRA 374, 381 [1987].
27 OR, 87.
28 OR, 89.
29 Id., 91.
30 Id., 94.
31 Id.
32 Id., 95.
33 Id., 99.
34 Id., 98.
35 Id.
36 Id., 101.
37 Id., 106.
38 Id.
39 Id., 120.
40 Id., 128.
41 Id., 127.
42 Roces v. Aportadera, 243 SCRA 108, 114 [1995]; Vallende v. NLRC, 245 SCRA 662, 666-667
[1995]; Navarro III v. Damasco, 246 SCRA 260, 265 [1995].
43 Mutuc v. Court of Appeals, 190 SCRA 43, 49 [1990].
16) Yam v Court of Appeals 303 SCRA 1

ECOND DIVISION
[G.R. No. 104726. February 11, 1999.]
VICTOR YAM & YEK SUN LENT, doing business under the name and style of Philippine Printing
Works, Petitioners, v. THE COURT OF APPEALS and MANPHIL INVESTMENT
CORPORATION, Respondents.
DECISION
MENDOZA, J.:
This is a petition for review of the decision 1 of the Court of Appeals affirming in toto the decision of the
Regional Trial Court of Manila (Branch 149), ordering petitioners to pay private respondent the amount of
P266,146.88 plus interest, service charge, penalty fees, and attorney’s fees and the costs, otherwise the chattel
mortgage given to secure payment of the loan would be foreclosed. chanrobles.com : virtual lawlibrary
The following are the facts: chanrob1es virtual 1aw library
On May 10, 1979, the parties in this case entered into a Loan Agreement with Assumption of Solidary Liability
whereby petitioners were given a loan of P500,000.00 by private Respondent. The contract provided for the
payment of 12% annual interest, 2% monthly penalty, 1½% monthly service charge, and 10% attorney’s fees. 2
Denominated the first Industrial Guarantee and Loan Fund (IGLF), the loan was secured by a chattel mortgage
on the printing machinery in petitioners’ establishment. 3
Petitioners subsequently obtained a second IGLF loan of P300,000.00 evidenced by two promissory notes,
dated July 3, 1981 and September 30, 1981. For this purpose, a new loan agreement 4 was entered into by the
parties containing identical provisions as the first one, except as to the annual interest which was increased to
14% and the service charge which was reduced to 1% per annum. The deed of chattel mortgage was amended
correspondingly. 5
By April 2, 1985, petitioners had paid their first loan of P500,000.00. On November 4, 1985, private respondent
was placed under receivership by the Central Bank and Ricardo Lirio and Cristina Destajo were appointed as
receiver and in-house examiner, respectively.
On May 17, 1986, petitioners made a partial payment of P50,000.00 on the second loan. They later wrote
private respondent a letter, dated June 18, 1986, proposing to settle their obligation. On July 2, 1986, private
respondent, through its counsel, replied with a counter-offer, namely, that it would reduce the penalty charges
up to P140,000.00, provided petitioners can pay their obligation on or before July 30, 1986. 6
As of July 31, 1986, petitioners’ total liability to private respondent was P727,001.35, broken down as follows:
7
Principal P295,469.47
Interest 165,385.00
Penalties 254,820.55
Service Charges 11,326.33
––––––––––
TOTAL P727,001.35
On this date, petitioners paid P410,854.47 by means of a Pilipinas Bank check, receipt of which was
acknowledged by Destajo. 8 The corresponding voucher for the check bears the following notation: "full
payment of IGLF LOAN." 9
The amount of P410,854.47 was the sum of the principal (P295,469.47) and the interest (P165,385.00) less the
partial payment of P50,000.00. The private respondent sent two demand letters to petitioners, dated September
4, 1986 and September 25, 1986, seeking payment of the balance of P266,146.88. As petitioners did not
respond, private respondent filed this case in the Regional Trial Court of Metro Manila for the collection of
P266,146.88 plus interests, penalties, and service charges or, in the alternative, for the foreclosure of the
mortgaged machineries.
In their Answer, petitioners claimed that they had fully paid their obligation to private Respondent. They
contended that some time after receiving private respondent’s letter of July 2, 1986 (concerning the conditional
offer to reduce their penalty charges), petitioner Victor Yam and his wife, Elena Yam, met with Carlos
Sobrepeñas, president of respondent corporation, during which the latter agreed to waive the penalties and
service charges, provided petitioners paid the principal and interest, computed as of July 31, 1986, less the
earlier payment of P50,000.00. This is the reason why according to them they only paid P410,854.47.
Petitioners added that this fact of full payment is reflected in the voucher accompanying the Pilipinas Bank
check they issued, which bore the notation "full payment of IGLF loan." cralaw virtua1aw library
On April 30, 1990, the lower court rendered a decision, the dispositive portion of which reads: chanrob1es virtual 1aw library
WHEREFORE, in view of the foregoing, the defendants Victor Yam and Yek Sun Lent are hereby ordered to
pay jointly and severally, the principal loan balance of P266,146.88 as of September 4, 1986 plus interest at
14% per annum, service charge at 1% per annum and penalty fees at 2% per month and to pay plaintiff
attorney’s fees equivalent to 10% of the amount to be recovered, and to pay the costs of suit, failing in which,
the chattel mortgage instituted on the printing machineries and equipment described in the Deed of Chattel
Mortgage dated May 10, 1979, as amended, is hereby declared foreclosed and the subject thereof sold in
accordance with law to satisfy the judgment herein rendered.
SO ORDERED. 10
On appeal, the Court of Appeals affirmed the decision of the trial court in toto. Hence, this petition. Petitioners
reiterate the same assignment of errors made by them before the Court of Appeals, to wit: 11
FIRST ASSIGNED ERROR
THAT THE LOWER COURT GRIEVOUSLY ERRED IN FAILING TO GIVE CREDENCE TO THE
DOCUMENTARY AS WELL AS TESTIMONIAL EVIDENCE OF THE PETITIONERS RELATIVE TO
THE PAYMENT TO THE RESPONDENT OF THE ADDITIONAL LOAN UNDER THE AMENDMENT OF
DEED OF CHATTEL MORTGAGE (EXHIBIT K, RESPONDENT) AND AS AGAINST THE TESTIMONY
OF RESPONDENT’S WITNESS, CRISTINA L. DESTAJO. chanrobles.com : virtual lawlibrary
SECOND ASSIGNED ERROR
THAT THE COURT BELOW ERRED IN NOT TOTALLY DISREGARDING EXHIBITS E AND F OF THE
RESPONDENTS
The question is whether petitioners are liable for the payment of the penalties and service charges on their loan
which, as of July 31, 1986, amounted to P266,146.88.
The answer is in the affirmative. Art. 1270, par. 2 of the Civil Code provides that express condonation must
comply with the forms of donation. 12 Art. 748, par. 3 provides that the donation and acceptance of a movable,
the value of which exceeds P5,000.00, must be made in writing, otherwise the same shall be void. In this
connection, under Art. 417, par. 1, obligations, actually referring to credits, 13 are considered movable property.
In the case at bar, it is undisputed that the alleged agreement to condone P266,146.88 of the second IGLF loan
was not reduced in writing. 14
Nonetheless, petitioners insist that the voucher covering the Pilipinas Bank check for P410,854.47, containing
the notation that the amount is in "full payment of IGLF loan," constitutes documentary evidence of such oral
agreement. This contention is without merit. The notation in "full payment of IGLF loan" merely states
petitioners’ intention in making the payment, but in no way does it bind private Respondent. It would have been
a different matter if the notation appeared in a receipt issued by respondent corporation, through its receiver,
because then it would be an admission against interest. Indeed, if private respondent really condoned the
amount in question, petitioners should have asked for a certificate of full payment from respondent corporation,
as they did in the case of their first IGLF loan of P500,000.00. 15
Petitioners, however, contend that the Central Bank examiner assigned to respondent corporation, Cristina
Destajo, signed the voucher in question. Destajo claimed that, when she signed the voucher, she failed to notice
the statement that the amount of P410,854.47 was being given in "full payment of IGLF Loan." She said she
merely took note of the amount and the check number indicated therein. 16 In any event, Destajo, by
countersigning the voucher, did no more than acknowledge receipt of the payment. She cannot be held to have
assented thereby to the payment in full of petitioners’ indebtedness to private Respondent. It was obvious she
had no authority to condone any indebtedness, her duties being limited to "issuing official receipts, preparing
check vouchers and documentation." 17
Moreover, it is to be noted that the alleged agreement to condone the amount in question was supposedly
entered into by the parties sometime in July 1986, that is, after respondent corporation had been placed under
receivership on November 4, 1985. As held in Villanueva v. Court of Appeals 18 "the appointment of a receiver
operates to suspend the authority of a [corporation] and of its directors and officers over its property and effects,
such authority being reposed in the receiver." 19 Thus, Sobrepeñas had no authority to condone the debt.
Indeed, Mrs. Yam herself testified that when she and her husband sought the release of the chattel mortgage
over their property, they were told that only the Central Bank would authorize the same "because [the CB] is the
receiver." 20 Considering this, petitioners cannot feign ignorance and plead good faith.
The second assignment of error pertains to the petitioners’ allegation that they did not receive the two letters of
demand sent by private respondent on September 4 and September 25, 1986. Both the lower court and the Court
of Appeals found otherwise. We have no reason to disturb this factual finding. It is settled that findings of fact
of trial courts, adopted and confirmed by the Court of Appeals, are final and conclusive and, as a rule, will not
be reviewed on appeal. 21
WHEREFORE, the decision of the Court of Appeals is AFFIRMED.
SO ORDERED. chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
Bellosillo, Puno, Quisumbing and Buena, JJ., concur.
Endnotes:
1. Per Justice Salome Montoya, Chairman, and concurred in by Justices Eduardo Bengzon and
Fortunato Vailoces.
2. Complaint, Exh. C; Records, pp. 6-16.
3. Id., Exh. D; id., pp. 17-24.
4. Plaintiffs’ Offer of Evidence, Exh. I; Records, pp. 223-228.
5. Id., Exh. D-1; id., pp. 229-231.
6. Plaintiffs’ Formal Offer of Evidence, Exh. C; Records, p. 213.

7. Id., Exh. E-3; id., p. 217.
8. Defendant’s Formal Offer of Evidence, Exh. 5; Records, p. 399.
9. Id., Exhs. 4 & 4-A; id., p. 398.
10. Decision, pp. 13-14; Record, pp. 535-536.
11. Petition, p. 3; Rollo, p. 7.
12. CIVIL CODE, Art. 1270, par. 2.
13. 2 TOLENTINO, CIVIL CODE OF THE PHILIPPINES 25 (4th ed., 1992).
14. TSN, pp. 9-14, Sept. 26, 1989.
15. Offer of Defendant’s Evidence, Exh. 1; Records, p. 395.
16. TSN, p. 42, Oct. 27, 1987.
17. TSN, p. 7, Aug. 11, 1987.
18. 244 SCRA 395 (1995).
19. Id., p. 404 citing 65 Am. Jur. 2d Receivers, §146 [1963].
20. TSN, p. 24, July 31, 1989.
21. GSIS v. Court of Appeals, G.R. No. 128471, March 6, 1998.
17) Gantion vs Court of Appeals 28 SCRA 235

SUPREME COURT
Manila
EN BANC
G.R. No. L-22490 May 21, 1969
GAN TION, petitioner,
vs.
HON. COURT OF APPEALS, HON. JUDGE AGUSTIN P. MONTESA, as Judge of the Court of First Instance of
Manila, ONG WAN SIENG and THE SHERIFF OF MANILA, respondents.
Burgos and Sarte for petitioner.

Roxas, Roxas, Roxas and Associates for respondents.
MAKALINTAL, J.:
The sole issue here is whether or not there has been legal compensation between petitioner Gan Tion and
respondent Ong Wan Sieng.
Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In 1961 the latter filed an ejectment case
against the former, alleging non-payment of rents for August and September of that year, at P180 a month, or P360
altogether. The defendant denied the allegation and said that the agreed monthly rental was only P160, which he
had offered to but was refused by the plaintiff. The plaintiff obtained a favorable judgment in the municipal court (of
Manila), but upon appeal the Court of First Instance, on July 2, 1962, reversed the judgment and dismissed the
complaint, and ordered the plaintiff to pay the defendant the sum of P500 as attorney's fees. That judgment became
final.
On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to P180 a month,
effective November 1st, and at the same time demanded the rents in arrears at the old rate in the aggregate amount
of P4,320.00, corresponding to a period from August 1961 to October 1963. lâwphi1 .ñet
In the meantime, over Gan Tion's opposition, Ong Wan Sieng was able to obtain a writ of execution of the judgment
for attorney's fees in his favor. Gan Tion went on certiorari to the Court of Appeals, where he pleaded legal
compensation, claiming that Ong Wan Sieng was indebted to him in the sum of P4,320 for unpaid rents. The
appellate court accepted the petition but eventually decided for the respondent, holding that although "respondent
Ong is indebted to the petitioner for unpaid rentals in an amount of more than P4,000.00," the sum of P500 could
not be the subject of legal compensation, it being a "trust fund for the benefit of the lawyer, which would have to be
turned over by the client to his counsel." In the opinion of said court, the requisites of legal compensation, namely,
that the parties must be creditors and debtors of each other in their own right (Art. 1278, Civil Code) and that each
one of them must be bound principally and at the same time be a principal creditor of the other (Art. 1279), are not
present in the instant case, since the real creditor with respect to the sum of P500 was the defendant's counsel.
This is not an accurate statement of the nature of an award for attorney's fee's. The award is made in favor of the
litigant, not of his counsel, and is justified by way of indemnity for damages recoverable by the former in the cases
enumerated in Article 2208 of the Civil Code.1 It is the litigant, not his counsel, who is the judgment creditor and who
may enforce the judgment by execution. Such credit, therefore, may properly be the subject of legal compensation.
Quite obviously it would be unjust to compel petitioner to pay his debt for P500 when admittedly his creditor is
indebted to him for more than P4,000.
WHEREFORE, the judgment of the Court of Appeals is reversed, and the writ of execution issued by the Court of
First Instance of Manila in its Civil Case No. 49535 is set aside. Costs against respondent.
Reyes, J.B.L., Dizon, Zaldivar, Sanchez, Fernando and Capistrano, JJ., concur.
Teehankee and Barredo JJ., took no part.
Concepcion, C.J., and Castro, J., are on leave.
Footnotes
1
Fores vs. Miranda, 105 Phil. 268, 272; Necesito, et al. vs. Paras,et al., 104 Phil. 75, 86.
18) Bank of the Phil Islands v Reyes 255 SCRA 571

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 116792 March 29, 1996

BANK OF THE PHILIPPINES ISLAND and GRACE ROMERO, petitioners,
vs.
COURT OF APPEALS and EDVIN F. REYES, respondents.
PUNO, J.:p
Petitioners seek a review of the Decision1 of respondent Court of Appeals in CA-G.R. CV No. 41543 reversing the Decision 2 of the Regional Trial Court of Quezon
City, Branch 79, and ordering petitioners to credit private respondent's Savings Account No. 3185-0172-56 with P10,556,00 plus interest.
The facts reveal that on September 25, 1985, private respondent Edvin F. Reyes opened Savings Account No.
3185-0172-56 at petitioner Bank of the Philippine Islands (BPI) Cubao, Shopping Center Branch. It is a joint
"AND/OR" account with his wife, Sonia S. Reyes.
Private respondent also held a joint "AND/OR" Savings Account No. 3185-0128-82 with his grandmother, Emeteria
M. Fernandez, opened on February 11, 1986 at the same BPI branch. He regularly deposited in this account the
U.S. Treasury Warrants payable to the order of Emeteria M. Fernandez as her monthly pension.
Emeteria M. Fernandez died on December 28, 1989 without the knowledge of the U.S. Treasury Department. She
was still sent U.S. Treasury Warrant No. 21667302 dated January 1, 1990 in the amount of U.S. $377.00 or 3
P10,556.00. On January 4, 1990, private respondent deposited the said U.S. treasury check of Fernandez in
Savings Account No. 3185-0128-82. The U.S. Veterans Administration Office in Manila conditionally cleared the
check. The check was then sent to the United States for further clearing.
4 5
Two months after or on March 8, 1990, private respondent closed Savings Account No. 3185-0128-82 and
transferred its funds amounting to P13,112.91 to Savings Account No. 3185-0172-56, the joint account with his wife.
On January 16, 1991, U.S. Treasury Warrant No. 21667302 was dishonored as it was discovered that Fernandez
died three (3) days prior to its issuance. The U.S. Department of Treasury requested petitioner bank for a
refund. For the first time petitioner bank came to know of the death of Fernandez.
6
On February 19, 1991, private-respondent received a PT&T urgent telegram from petitioner bank requesting him to
contact Manager Grace S. Romero or Assistant Manager Carmen Bernardo. When he called up the bank, he was
informed that the treasury check was the subject of a claim by Citibank NA, correspondent of petitioner bank. He
assured petitioners that he would drop by the bank to look into the matter. He also verbally authorized them to debit
from his other joint account the amount stated in the dishonored U.S. Treasury Warrant. On the same day, 7
petitioner bank debited the amount of P10,556.00 from private respondent's Savings Account No. 3185-0172-56.
On February 21, 1991, private respondent with his lawyer Humphrey Tumaneng visited the petitioner bank and the
refund documents were shown to them. Surprisingly, private respondent demanded from petitioner bank restitution
of the debited amount. He claimed that because of the debit, he failed to withdraw his money when he needed
them. He then filed a suit for Damages against petitioners before the Regional Trial Court of Quezon City, Branch
8
79.
Petitioners contested the complaint and counter claimed, for moral and exemplary damages. By way of Special and
Affirmative Defense, they averred that private respondent gave them his express verbal authorization to debit the
questioned amount. They claimed that private respondent later refused to execute a written authority. 9
In a Decision dated January 20, 1993, the trial court dismissed the complaint of private respondent for lack of cause
of action. 10
Private respondent appealed to the respondent Court of Appeals. On August 16, 1994, the Sixteenth Division of
respondent court in AC-G.R. CV No. 41543 reversed the impugned decision, viz:
WHEREFORE, the judgement appealed from is set aside, and another one entered ordering
defendant (petitioner) to credit plaintiff's (private respondent's) S.A. No. 3185-0172-56 with
P10,556.00 plus interest at the applicable rates for express teller savings accounts from February
19, 1991, until compliance herewith. The claim and counterclaim for damages are dismissed for lack
of merit.
SO ORDERED. 11
Petitioners now contend that respondent Court of Appeals erred:
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT

RESPONDENT REYES GAVE EXPRESS AUTHORITY TO PETITIONER BANK TO DEBIT HIS
JOINT ACCOUNT WITH HIS WIFE FOR THE VALUE OF THE RETURNED U.S. TREASURY
WARRANT.
II
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT PETITIONER

BANK HAS LEGAL RIGHT TO APPLY THE DEPOSIT OF RESPONDENT REYES TO HIS
OUTSTANDING OBLIGATION TO PETITIONER BANK BROUGHT ABOUT BY THE RETURN OF
THE U.S. TREASURY WARRANT HE EARLIER DEPOSITED UNDER THE PRINCIPLE OF
"LEGAL COMPENSATION."
III
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT APPLYING CORRECTLY THE

PRINCIPLES ENUNCIATED BY THE SUPREME COURT IN THE CASE OF GULLAS V. PNB, 62
PHIL. 519.
IV.
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT APPRECIATING THE FACT

THAT THE MONEY DEBITED BY PETITIONER BANK WAS THE SAME MONEY TRANSFERRED
BY RESPONDENT REYES FROM HIS JOINT "AND/OR" ACCOUNT WITH HIS GRANDMOTHER
TO HIS JOINT "AND/OR" ACCOUNT WITH HIS WIFE. 12
We find merit in the petition.
The first issue for resolution is whether private respondent verbally authorized petitioner bank to debit his joint
account with his wife for the amount of the returned U.S. Treasury Warrant. We find that petitioners were able to
prove this verbal authority by preponderance of evidence. The testimonies of Bernardo and Romero deserve
credence. Bernardo testified:
x x x x x x x x x
Q After that, what happened?
A . . . Dr. Reyes Called me up and I informed him about the return of the U.S.
Treasury Warrant and we are requested to reimburse for the amount.
Q What was his response if any?
A Don't you worry about it, there is no personal problem.
x x x x x x x x x
Q And so what was his response?
A He said that don' t you worry about.
x x x x x x x x x
Q You said that you asked him the advice and he did not answer, what advice are
you referring to?
A In our conversation, he promised me that he will give me written confirmation or

authorization.13
The conversation was promptly relayed to Romero who testified:
x x x x x x x x x
Q . . . Was there any opportunity where in said Mrs. Bernardo was able to convey to
you the contents of their conversation?
A This was immediately relayed to me as manager of the Bank of the Philippine

Islands, sir.
Q What, any was the content of her conversation, if you know?
A Mr. Reyes instructed Mrs. Bernardo to debit his account with the bank. His account
was maintained jointly with his wife then he promised to drop by to give us a written
confirmation, sir.
x x x x x x x x x
Q You said that you authorized the debiting of the account on February 19, 1991, is
that correct?
A I did not authorize, we merely followed the instruction of Mr. Reyes, sir.

14
We are not disposed to believe private respondent's allegation that he did not give any verbal authorization.
His testimony is uncorroborated. Nor does he inspire credence. His past and fraudulent conduct is an
evidence against him. He concealed from petitioner bank the death of Fernandez on December
15
28, 1989. As of that date, he knew that Fernandez was no longer entitled to receive any pension.
16
Nonetheless, he-still received the U.S. Treasury Warrant of Fernandez, and on January 4, 1990 deposited
the same in Savings Account No. 3185-0128-82. To pre-empt a refund, private respondent closed his joint
account with Fernandez (Savings Account No. 31-85-0128-82) on March 8, 1990 and transferred its
balance to his joint account with his wife (Savings Account No. 3185-0172-56). Worse, private respondent
declared under the penalties of perjury in the withdrawal slip 7 dated March 8, 1990 that his co-depositor,
1
Fernandez, is still living. By his acts, private respondent has stripped himself of credibility.
More importantly, the respondent court erred when it failed to rule that legal compensation is
proper. Compensation shall take place when two persons, in their own right, are creditors and debtors of each
other. Article 1290 of the Civil Code provides that "when all the requisites mentioned in Article 1279 are
18
present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even
though the creditors and debtors are not aware of the compensation." Legal compensation operates even against
the will of the interested parties and even without the consent of them. Since this compensation takes place ipso
19
jure, its effects arise on the very day on which all its requisites concur. When used as a defense, it retroacts to the
20
date when its requisites are fulfilled. 21
Article 1279 states that in order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor.
The elements of legal compensation are all present in the case at bar. The obligors bound principally are at
the same time creditors of each other. Petitioner bank stands as a debtor of the private respondent, a
depositor. At the same time, said bank is the creditor of the private respondent with respect to the
dishonored U.S. Treasury Warrant which the latter illegally transferred to his joint account. The debts
involved consist of a sum of money. They are due, liquidated, and demandable. They are not claimed by a
third person.
It is true that the joint account of private respondent and his wife was debited in the case at bar. We hold that the
presence of private respondent's wife does not negate the element of mutuality of parties, i.e., that they must be
creditors and debtors of each other in their own right. The wife of private respondent is not a party in the case at bar.
She never asserted any right to the debited U.S. Treasury Warrant. Indeed, the right of the petitioner bank to make
the debit is clear and cannot be doubted. To frustrate the application of legal compensation on the ground that the
parties are not all mutually obligated would result in unjust enrichment on the part of the private respondent and his
wife who herself out of honesty has not objected to the debit. The rule as to mutuality is strictly applied at law. But
not in equity, where to allow the same would defeat a clear right or permit irremediable injustice.22
In VIEW HEREOF, the Decision of respondent Court of Appeals in CA-G.R. CV No. 41543 dated August 16, 1994 is
ANNULLED and SET ASIDE and the Decision of the trial court in Civil Case No. Q-91-8451 dated January 20, 1993
is REINSTATED. Costs against private respondent.
SO ORDERED.
Regalado, Romero and Mendoza, JJ., concur.
Torres, Jr., J., is on leave.
Footnotes
1 Sixteenth Division.
2 Honorable Godofredo L. Legazpi, Presiding Judge.
3 Exhibit "6;" Original Records, p. 117.
4 TSN of June 17, 1992, pp. 12-14.
5 TSN of March 27, 1992 p. 14.
6 Exhibit "5;" Original Records, p. 116.
7 CA Decision, p. 2; Rollo, p. 43.
8 Docketed as Civil Case No. Q-91-8451.

9 Id., CA Decision, p. 3; Rollo p. 44.
10 RTC Decision, p. 11.
11 Id., CA Decision, p. 9; Rollo, p. 50.
12 Petition, pp. 7-8; Rollo, pp. 26-27.
13 TSN of January 9, 1992, pp. 9-12.
14 TSN of June 17, 1992, pp. 7-8, 23.
15 See People v. Maranion, G.R. Nos. 90672-73, July 18, 1991, 199 SCRA 421.
16 TSN of November 22, 1991, p. 9.
17 Exhibit "3;" Original Records p. 114.
18 Civil Code, Article 1278.
19 Padilla, Ambrosio, Civil Law, Civil Code Annotated, Vol. IV, 1987 ed., pp. 612-613.
20 See Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV,
1991 ed., p. 379.
21 See Republic v. CA, No. L-25012, July 22, 1975, 65 SCRA 186.
19) Philippine National Bank v Sapphire Shipping 259 SCRA 174

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 108052 July 24, 1996
PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE COURT OF APPEALS and RAMON LAPEZ, doing business under the name and style SAPPHIRE
1
SHIPPING, respondents.
PANGANIBAN, J.:p
Does a local bank, while acting as local correspondent bank, have the right to intercept funds being
coursed through it by its foreign counterpart for transmittal and deposit to the account of an
individual with another local bank, and apply the said funds to certain obligations owed to it by the
said individual?
Assailed in this petition is the Decision of respondent Court of Appeals in CA-G.R. CV No. 27926
2
rendered on June 16, 1992 affirming the decision of the Regional Trial Court, Branch 107 of Quezon
City, the dispositive portion of which read: 3
WHEREFORE, judgment is hereby rendered:
1) In the main complaint, ordering the defendant (herein petitioner

PNB) to pay the plaintiff (private respondent herein) the sum of
US$2,627.11 or its equivalent in Philippine currency with interest at
the legal rate from January 13, 1987, the date of judicial demand;
2) The plaintiff's supplemental complaint is hereby dismissed (sic);
3) The defendant's counterclaims are likewise dismissed.
The Facts
The factual antecedents as quoted by the respondent Court are reproduced hereinbelow, the same being
undisputed by the parties:
4
The body of the decision reads:
After a close scrutiny and analysis of the pleadings as well as the evidence of both
parties, the Court makes the following conclusions:
(a) The defendant applied/appropriated the amounts of $2,627.11 and P34,340.38 from remittances
of the plaintiff's principals (sic) abroad. These were admitted by the defendant, subject to the
affirmative defense of compensation for what is owing to it on the principle of solution (sic) indebiti.
(b) The first remittance was made by the NCB of Jeddah for the benefit of the plaintiff, to the credited
to his account at Citibank, Greenhills Branch; the second was from Libya, and was intended to be
deposited at the plaintiff's account with the defendant, No. 830-2410;
(c) The plaintiff made a written demand upon the defendant for remittance of the equivalent of
$2,627.11 by means of a letter dated December 4, 1986 (Exh. D). This was answered by the
defendant on December 22, 1986 (Exh. 13), inviting the plaintiff to come for a conference;
(d) There were indeed two instances in the past, one in November 1980 and the other in January
1981 when the plaintiff's account No. 830-2410 was doubly credited with the equivalents of
$5,679.23 and $5,885.38, respectively, which amounted to an aggregate amount of P87,380.44. The
defendant's evidence on this point (Exhs. 1 thru 11, 14 and 15; see also Annexes C and E to
defendant's Answer), were never refuted nor impugned by the plaintiff. He claims, however, that
plaintiff's claim has prescribed.
(e) Defendant PNB made a demand upon the plaintiff for refund of the double or duplicated credits
erroneously made on plaintiff's account, by means of a letter (Exh. 12) dated October 23, 1986 or 5
years and 11 months from November 1980, and 5 years and 9 months from January 1981. Such
letter was answered by the plaintiff on December 2, 1986 (Annex C, Complaint). This plaintiff's letter
was likewise replied to by the defendant through Exh. 13;
(f) The deduction of P34,340.58 was made by the defendant not without the knowledge and consent
of the plaintiff, who was issued a receipt No. 857576 dated February 18, 1987 (Exh. E) by the
defendant.
There is no question that the two erroneous double payments made to plaintiff's accounts in 1980
and 1981 created an extra-contractual obligation on the part of the plaintiff in favor of the defendant,
under the principle of solutio indebiti, as follows:
If something is received when there is no right to demand it, and it was unduly
delivered through (sic) mistake, the obligation to return it arises. (Article 2154, Civil
Code of the Phil.)
Two issues were raised before the trial court, namely, first, whether the herein petitioner was legally justified
in making the compensation or set-off against the two remittances coursed through it in favor of private
respondent to recover on the double credits it erroneously made in 1980 and 1981, based on the
principle solutio indebiti, and second, whether or not petitioner's claim is barred by the statute of limitations.
The trial court's ratiocination, as quoted by the appellate Court, follows: 5
In order that compensation may prosper, it is necessary:
creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;
(5) That over neither of them there by any retention or controversy, commenced by third persons
In the case of the $2,627.11, requisites Nos. 2 through 5 are apparently present, for both debts
consist in a sum of money, are both due, liquidated and demandable, and over neither of them is
there a retention or controversy commenced by third persons and communicated in due time to the
debtor. The question, however, is, where both of the obligors bound principally, and was each one of
them a debtor and creditor of the other at the same time?
Analyzing now the relationship between the parties, it appears that:
(a) With respect to the plaintiff's being a depositor of the defendant bank, they are creditor and
debtor respectively (Guingona, et.al. vs. City Fiscal, et. al., 128 SCRA 577);
(b) As to the relationship created by the telexed fund transfers from abroad: A contract between a
foreign bank and local bank asking the latter to pay an amount to a beneficiary is a
stipulation pour autrui. (Bank of America NT & SA vs. IAC, 145 SCRA 419).
A stipulation pour autrui is a stipulation in favor of a third person (Florentino vs. Encarnacion, 79

SCRA 193; Bonifacio Brothers vs. Mora, 20 SCRA 261; Uy Tam vs. Leonard, 30 Phils. 475).
Thus between the defendant bank (as the local correspondent of the National Commercial Bank of
Jeddah) and the plaintiff as beneficiary, there is created an implied trust pursuant to Art. 1453 of the
Civil Code, quoted as follows:
When the property is conveyed to a person in reliance upon his declared intention to
hold it for, or transfer it to another or the grantor, there is an implied trust in favor of
the person whose benefit is contemplated (sic).
(c) By the principle of solutio indebiti (Art. 2154, Civil Code), the plaintiff who unduly, received
something (sic) by mistake (i.e., the 2 double credits, although he had no right to demand it),
became obligated to the defendant to return what he unduly received. Thus, there was created
between them a relationship of obligor and obligee, or of debtor and creditor under a quasi-contract.
In view of the foregoing, the Court is of the opinion that the parties are not both principally bound
with respect to the $2,627.11 from Jeddah; neither are they at the same time principal creditor of the
other. Therefore, as matters stand, the parties' obligations are not subject to compensation or set off
under Art. 1279 of the Civil Code, for the reason that the defendant is not a principal debtor nor is
the plaintiff a principal creditor insofar as the amount of $2,627.11 is concerned. They are debtor and
creditor only with respect to the double payments; but are trustee-beneficiary as to the fund transfer
of $2,627.11.
Only the plaintiff is principally bound as a debtor of the defendant to the extent of the double credits.
On the other hand, the defendant was an implied trustee, who was obliged to deliver to the Citibank
for the benefit of the plaintiff the sum of $2,627.11.
Thus while it may be concluded that the plaintiff owes the defendant the equivalent of the sums of
$5,179.23 and $5,885.38 erroneously doubly credited to his account, the defendant's actuation in
intercepting the amount of $2,627.11 supposed to be remitted to another bank is not only improper;
it will also erode the trust and confidence of the international banking community in the banking
system of the country, something we can ill afford at this time when we need to attract and invite
deposits of foreign currencies.
It would have been different has the telex advice from NCB of Jeddah been for deposit of $2,627.11
to plaintiff's account No. 830-2410 with the defendant bank. However, the defendant alleged this for
the first time in its Memorandum (Pls. see par. 16, p. 6 of defendant's Memorandum). There was
neither any allegation thereof in its pleadings, nor was there any evidence to prove such fact. On the
contrary, the defendant admitted that the telex advice was for credit of the amount of $2,627.11 to
plaintiff's account with Citibank, Greenhills, San Juan, Metro-Manila (Pls. see par. of defendant's
Answer with Compulsary Counterclaim, in relation to plaintiff's Complaint). Hence, it is submitted that
the set-off or compensation of $2,627.11 against the double payments to plaintiff's account is not in
accordance with law.
On this point, the Court finds the plaintiff's theory of agency to be untenable. For one thing, there
was no express contract of agency. On the other hand, were we to infer that there was an implied
agency, the same would not be between the plaintiff and defendant, but rather, between the National
Commercial Bank of Jeddah as principal on the one hand, and the defendant as agent on the other.
Thus, in case of violation of the agency, the cause of action would accrue to the NCB and not to the
plaintiff.
The P34,340.38 subject of the supplemental complaint is quite another thing. The plaintiff's Exh. "E",
which is a receipt issued to the plaintiff by the defendant for the amount of P34,340.00 in "full
settlement of accounts receivables with RICB Fund Transfer Department, PNB-Escolta base on
Legal Department Memo dated February 28, 1987" seems to uphold the defendant's theory that the
said amount was voluntarily delivered by the plaintiff to the defendant as alleged in the last
paragraph of defendant's memorandum. The same is in accordance with the defendant's answer, as
follows:
The retention and application of the amount of P34,340.58 was done in a manner
consonant with basic due process considering that plaintiff was not only furnished
documented proof of the cause but was also given the opportunity to con(tro)vert
such proof .
Moreover, plaintiff, through counsel, communicated his unequivocal and

unconditional consent to the retention and application of the amount in question. (Pls.
see paragraphs 8-9, defendant's Answer with Compulsary Counterclaim to Plaintiff's
Supplemental Complaint).
This conclusion is borne by the fact that the receipt is in the hands of the plaintiff, indicating that
such receipt was handed over to the plaintiff when he "paid" or allowed the deduction from the
amount of $28,392.38 from Libya.
At any rate, the plaintiff in his Memorandum, stated that the subsequent fund transfer from Brega
Petroleum Marketing Company of Libya (from where the P34,340.38 was deducted) was intended
for credit and deposit in plaintiff's account at the defendant's Bank CA No. 830-2410 (per par. 1,
page 2, Memorandum for the plaintiff). Such being the case, the Court believes that insofar as the
amount of P34,340.38 is concerned, all the requirements of Art. 1279 of the Civil Code are present,
and the said amount may properly be the subject of compensation or set-off. And since all the
requisites of Art. 1279 of the Civil Code are present (insofar as the amount of P34,392.38 is
concerned), compensation takes place by operation of law (Art. 1286, Ibid.), albeit only partial with
respect to plaintiff's indebtedness of P7,380.44.
Now, on the question of prescription, the Court believes that Art. 1149 as cited by the plaintiff is not
applicable in this case. Rather, the applicable law is Art. 1145, which fixes the prescriptive period for
actions upon a quasi contract (such as solution indebiti) at six years.
In the dispositive portion of its decision, the trial court ruled that the herein petitioner was obligated to pay
private respondent the amount of US$2,627.11 or its peso equivalent, with interest at the legal rate. The
court dismissed all other claims and counterclaims.
On appeal to the respondent Court, petitioner bank continued to insist that it validly retained the
US$2,627.11 in payment of the private respondent's indebtedness by way of compensation or set-off, as
provided under Art. 1279 of the Civil Code.
The respondent Court of Appeals rejected such argument, saying:
The telegraphic money transfer was sent by the IBN, plaintiff's principal in Jeddah, Saudi Arabia,
thru the National Commercial Bank of Jeddah, Saudi Arabia (NCB, for short), for the credit/account
of plaintiff with the Citibank, Greenhills Branch, San Juan, Metro Manila, coursed thru the PNB's
head office, the NCB's corresponden(t) bank in the Philippines.
The credit account, or simply account means that the amount stated in the telegraphic money
transfer is to be credited in the account of plaintiff with the Citibank, and, in that sense, presupposes
a creditor-debtor relationship between the plaintiff, as creditor and the Citibank, as debtor. Withal the
telegraphic money transfer, no such creditor-debtor relationship could have been created between
the plaintiff and defendant.
The telegraphic money transfer, or simply telegraphic transfer(,) was purchased by the IBN from the
NCB in Saudi Arabia, and since the PNB is the NCB's corresponden(t) bank in the Philippines, there
is created between the two banks a sort of communication exchange for the corresponden(t) bank to
transmit and/or remit and/or pay the value of the telegraphic transfer in accordance with the dictate
of the correspondence exchange. Some such responsibility of the corresponden(t) bank is akin to
section 7 of the Rules and Regulations Implementing E.O. 857, as amended by E.O. 925, ". . . to
take charge of the prompt payment" of the telegraphic transfer, that is, by transmitting the
telegraphic money transfer to the Citibank so that the amount can be promptly credited to the
account of the plaintiff with the said bank. That is all that the PNB can do under the remittance
arrangement that it has with the NCB. With its responsibility as defined as well as by the nature of its
banking business and the responsibility attached to it, and through which the industry, trade and
commerce of all countries and communities are carried on, the PNB's liability as corresponden(t)
bank continues until it has completely (sic) performed and discharged it(s) obligation thereunder."
(emphasis ours)
Hence, the respondent Court affirmed the trial court's holding in toto.
Dissatisfied, petitioner bank comes before this Court seeking a review of the assailed Decision.
The Issue
Petitioner's arguments revolve around one single issue: 6
WHILE THE RESPONDENT COURT CORRECTLY FOUND PRIVATE RESPONDENT LEGALLY

BOUND (UNDER THE PRINCIPLE OF SOLUTIO INDEBITI) TO RETURN TO PNB THE SUM OF
US$2,627.11, IT ERRED IN NOT RULING THAT LEGAL COMPENSATION HAS TAKEN PLACE
WHEN PNB WAS ORDERED BY THE TRIAL COURT TO RETURN TO PRIVATE RESPONDENT
THE SAME AMOUNT. SUCH COURSE OF ACTION IS IN CONSONANCE WITH SPEEDY AND
SUBSTANTIAL JUSTICE, AND WOULD PREVENT THE UNNECESSARY FILING OF A
SUBSEQUENT SUIT BY PNB FOR THE COLLECTION OF THE SAME AMOUNT FROM PRIVATE
RESPONDENT.
The Court's Ruling
We note that in framing the issue in the manner aforecited, the petitioner implicity admits the correctness of
the respondent Court's affirmance of the trial court's ruling finding herein petitioner liable to private
respondent for the sum of US$2,627.11 or its peso equivalent. And it could not have done otherwise. After a
careful scrutiny of both the decision of the trial court and that of the appellate court, we find no reversible
error whatsoever in either ruling, and see no need to add to the extensive discussions already made
regarding the non-existence of all the requisites for legal compensation to take place.
But petitioner has adopted a novel theory, contending that since respondent Court found that private
respondent is "an obligor of PNB and the latter, as aforesaid, has become an obligor of private respondent
(resulting in legal compensation), the (h)onorable respondent court should have ordered private respondent
to pay PNB what the latter is bound by the trial court's decision to return the former."
7
By this simplistic approach, petitioner in effect seeks to render nugatory the decisions of the trial court and
the appellate Court, and have this Court validate its original misdeed, thereby making a mockery of the
entire judicial process of this country. What the petitioner bank is effectively saying is that since the
respondent Court of Appeals ruled that petitioner bank could not do a shortcut and simply intercept
funds being coursed through it, for transmittal to another bank, and eventually to be deposited to the
account of an individual who happens to owe some amount of money to the petitioner, and because
respondent Court order petitioner bank to return intercepted amount to said individual, who in turn was found
by the appellate Court to be indebted to petitioner bank, THEREFORE, there must now be legal
compensation of the amounts each owes the other, and hence, there is no need for petitioner bank
to actually return the amount, and finally, that petitioner bank ends up in exactly the same position as when
it first took the improper and unwarranted shortcut by intercepting the said money transfer, notwithstanding
the assailed Decision saying that this could not be done!
We see in this petition a clever ploy to use this Court to validate or legalize an improper act of the petitioner
bank, with the not impossible intention of using this case as a precedent for similar acts of interception in the
future. This piratical attitude of the nation's premier bank deserves a warning that it should not abuse the
justice system in its collection efforts, particularly since we are aware that if the petitioner bank had been in
good faith, it could have easily disposed of this controversy in ten minutes flat by means of an exchange of
checks with private respondent for the same amount. The litigation could have ended there, but it did not.
Instead, this plainly unmeritorious case had to clog our docket and take up the valuable time of this Court.
WHEREFORE, the instant petition is herewith DENIED for being plainly unmeritorious, and the assailed
Decision is AFFIRMED in toto. Costs against petitioner.
SO ORDERED.
Narvasa, C.J., Davide, Jr. and Francisco, JJ., concur.
Melo, J., took no part.

Footnotes
1 Deceased and substituted by Teresita V. Lapez; rollo, p. 51.
2 Second Division, composed of J. Artemon D. Luna, ponente, and JJ . Jose A.R. Melo (now Associate
Justice of this Court) and Segundino G. Chua, concurring.
3 Rollo, p. 9.
4 Id., pp. 10-11.
5 Id., pp. 12-14.
6 Id., p. 5.
7 Id., p. 6.
20) CKH Industrial Development v Court of Appeals 272 SCRA 333

SECOND DIVISION
[G.R. No. 111890. May 7, 1997.]
CKH INDUSTRIAL AND DEVELOPMENT CORPORATION and RUBI SAW, Petitioners, v. THE

COURT OF APPEALS, (FORMER 13TH DIVISION), THE REGISTER OF DEEDS OF METRO
MANILA — DISTRICT III (VALENZUELA), CENTURY-WELL PHIL. CORPORATION, LOURDES
CHONG, CHONG TAK KEI and UY CHI KIM, Respondents.
Dumlao, Farolan and Ignacio Law Offices, for Petitioners.
Arturo S. Santo for Private Respondents.
Estrella-Bautista & Associates for respondent Uy Chi Kim.
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; PAROLE EVIDENCE RULE, CONSTRUED. — Section 9 of Rule 130 of
the Rules of Court states that "when the terms of an agreement have been reduced to writing, it is considered as
containing all the terms agreed upon and there can be, between the parties and their successors-in-interest, no
evidence of such terms other than the contents of the written agreement." The so-called "parole evidence rule"
forbids any addition to or contradiction of the terms of a written instrument by testimony or other evidence
purporting to show that, at or before the execution of the parties’ written agreement, other or different terms
were agreed upon by the parties, varying the purport of the written contract. When an agreement has been
reduced to writing, the parties cannot be permitted to adduce evidence to prove alleged practices which to all
purposes would alter the terms of the written agreement. Whatever is not found in the writing is understood to
have been waived and abandoned.
2. ID.; ID.; ID.; EXCEPTIONS. — The rule is not without exceptions, however, as it is likewise provided that a
party to an action may present evidence to modify, explain, or add to the terms of the written agreement if he
puts in issue in his pleadings: (a) an intrinsic ambiguity, mistake or imperfection in the written agreement; (b)
The failure of the written agreement to express the true intent and agreement of the parties thereto; (c) The
validity of the written agreement; or (d) The existence of other terms agreed too by the parties or their
successors in interest after the execution of the written agreement.
3. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTINGUISHMENT OF OBLIGATION; MODES. —

Under Article 1231 of the Civil Code, an obligation may be extinguished: (1) by payment or performance; (2)
by the loss of the thing due, (3) by the condonation or remission of the debt; (4) by the confusion or merger of
the rights of creditor and debtor, (5) by compensation; or (6) by novation. Other causes of extinguishment of
obligations include annulment, rescission, fulfillment of a resolutory condition and prescription.
4. ID.; ID.; ID.; LEGAL COMPENSATION; REQUISITES. — Compensation may take place by operation of
law (legal compensation), when two persons, in their own right, are creditors and debtors of each other. Article
1279 of the Civil Code provides for the requisites of legal compensation: "Article 1279. In order that
compensation may be proper, it is necessary: (1) that each one of the obligors be bound principally, and that he
be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due; (4) That they, be liquidated and demandable; (5) That over neither of them there
be any retention or controversy, commenced by third persons and communicated in due time to the debtor." cralaw virtua1aw library
5. ID.; ID.; ID.; CONVENTIONAL COMPENSATION; REQUISITES. — Compensation may also be

voluntary or conventional, that is, when the parties, who are mutually creditors and debtors agree to compensate
their respective obligations, even though not all the requisites for legal compensation are present. Without the
confluence of the characters of mutual debtors and creditors, contracting parties cannot stipulate to the
compensation of their obligations, for then the legal tie that binds contracting parties to their obligations would
be absent. At least one party would be binding himself under an authority he does not possess. As observed by a
noted author, the requirements of conventional compensation are (1) that each of the parties can dispose of the
credit he seeks to compensate, and (2) that they agree to the mutual extinguishment of their credits.
6. ID.; ID.; ID.; ID.; WILL NOT APPLY WHERE THE CONTRACTING PARTIES ARE NOT MUTUALLY
BOUND AS CREDITORS AND DEBTORS IN THEIR OWN NAME. — In the instant case, there can be no
valid compensation of the purchase price with the obligations of Cheng Kim Heng reflected in the promissory
notes, for the reason that CKH and Century-Well the principal contracting parties, are not mutually bound as
creditors and debtors in their own name. A close scrutiny of the promissory notes does not indicate the late
Cheng, as then president of CKH, acknowledging any indebtedness to Century-Well. In fact, there is no
indication at all, that such indebtedness was contracted by Cheng from Choi and Kei as stockholders of
Century-Well, Choi and Kei, in turn are not parties to the Deed of Absolute Sale. They are merely stockholders
of Century-Well, and as such, are not bound principally, not even in a representative capacity, in the contract of
sale. Thus, their interest in the promissory, notes cannot be off-set against the obligations between CKH and
Century-Well arising out of the deed of absolute sale, absent any allegation, much less, even a scintilla of
substantiation, that Choi and Kei’s interest in Century-Well are so considerable as to merit a declaration of unity
of their civil personalities. Under present law, corporations, such as Century-Well, have personalities separate
and distinct from their stockholders, except only when the law sees it fit to pierce the veil of corporate identity,
particularly when the corporate fiction is shown to be used to defeat public convenience, justify wrong, protect
fraud or defend crime, or where a corporation the mere alter ego or business conduit of a person. The court
cannot, in this instance make such a ruling absent a demonstration of the merit of such a disposition.
DECISION
TORRES, JR., J.:
The present petition springs from a civil action instituted by herein petitioners, to rescind and/or annul the sale
of two parcels of land, from petitioner CKH Industrial and Development Corporation (CKH, for brevity) to
private respondent Century-Well Phil. Corporation (Century-Well, for brevity), for failure to pay the stipulated
price of P800,000.00.
Petitioners specifically assail the Decision 1 of the respondent Court of Appeals, which denied the annulment of
the sale. The appellate court found that there was payment of the consideration by way of compensation, and
ordered petitioners to pay moral damages and attorney’s fees to private respondents. The dispositive portion of
the questioned decision reads: chanrobles law library : red
"WHEREFORE, in view of all the foregoing, the appealed Decision is REVERSED. The complaint is
DISMISSED with costs against the plaintiffs. The plaintiffs jointly and severally are required to pay each of the
defendants Lourdes Chong, Chong Tak Kei, and Uy Chi Kim moral damages of P20,000.00; and further
requiring the plaintiffs, jointly and severally, to pay to each of the defendants Century-Well Phil. Corporation,
Lourdes Chong, Chong Tak Kei and Uy Chi Kim attorney’s fees of P20,000.00
With costs in this instance against the Plaintiffs-Appellees.
SO ORDERED." 2
The said decision reversed the disposition of the Regional Trial Court of Valenzuela, Branch 172 in Civil Case
No. 2845-V-88 entitled "CKH Industrial & Development Corporation v. Century-Well Philippine Corporation,
Lourdes Chong, Chong Tak Kei, Uy Chi Kim, and the Register of Deeds of Metro Manila, District III
(Valenzuela)." The trial court’s decision stated pertinently: jgc:chanrobles.com.ph
"WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of plaintiff: chanrob1es virtual 1aw library
1. Ordering the rescission/annulment of the Deed of Absolute Sale of Realty.
2. Ordering defendants Lourdes Chong, Chong Tak Kei and Century-Well to pay plaintiffs moral damages in
the sum of P200,000.00;
3. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well to pay plaintiffs Attorney’s fees in
the amount of 15% of the agreed price of P800,000.00 plus appearance fees of P500.00 per appearance;
4. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well to pay the costs of suit;
5. As the writ of preliminary injunction was denied, the defendant Register of Deeds of Valenzuela is hereby
ordered to cancel the certificates of title issued to Century-Well by virtue of the Deed of Absolute Sale of
Realty and to reissue a new title in the name of CKH.
The case is dismissed as far as defendant Uy Chi Kim is concerned. His counterclaim is likewise dismissed
considering that by his mediation he took it upon himself to assume the damages he allegedly suffered.
SO ORDERED." 3
The records disclose that petitioner CKH is the owner of two parcels of land, consisting of 4,590 sq. m. and 300
sq. m. respectively, located in Karuhatan, Valenzuela, and covered by Transfer Certificates of Title Nos. 8710
and 8711, Register of Deeds of Caloocan City (now Register of Deeds District III [Valenzuela]). 4 CKH is a
corporation established under Philippine law by the late Cheng Kim Heng (Cheng), an immigrant of Chinese
descent. Upon Cheng’s demise, control over the petitioner corporation was transferred to Rubi Saw, also of
Chinese descent, and Cheng’s second wife.
It also appears that before coming to the Philippines, Cheng Kim Heng was married to Hung Yuk Wah (Wah),
who lived in Hongkong together with their children, Chong Tak Kei (Kei), Chong Tak Choi (Choi), and Chong
Tak Yam (Yam). After Cheng immigrated to the Philippines in 1976, and married Rubi Saw in 1977, he
brought his first wife, Heng, and their children to this country, and established himself and his Chinese family
as naturalized Filipino citizens. Heng died in 1984.
On May 8, 1988, Rubi Saw and Lourdes Chong, the wife of Cheng’s son, Kei, met at the 1266 Soler St., Sta.
Cruz, Manila, the residence of Cheng’s friend, Uy Chi Kim, and executed a Deed of Absolute Sale, 5 whereby
Rubi Saw, representing CKH, agreed to sell the subject properties to Century-Well, a corporation owned in part
by Lourdes Chong, Kei and Choi. 6
The pertinent portions of the Deed of Sale are hereby reproduced: jgc:chanrobles.com.ph
"KNOW ALL MEN BY THESE PRESENTS: chanrob1es virtual 1aw library
This Deed of Absolute Sale of Realty executed by and between: chanrob1es virtual 1aw library
CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a corporation duly organized and existing under
and by virtue of the laws of the Republic of the Philippines, with business address at 553 Bermuda St., Sta.
Cruz, Manila, represented in this act by its authorized representative, Ms. RUBI SAW, hereinafter referred to as
VENDOR,
- in favor of -
CENTURY-WELL PHIL. CORPORATION, a corporation duly organized and existing under and by virtue of
the laws of the Republic of the Philippines at least sixty (60%) percent of the subscribed capital stock of which
is owned by Filipino citizens, duly qualified to own and acquire lands in the Philippines, with office and
business address at 66 F. Bautista St., Valenzuela, Metro Manila and represented in this act by its Treasurer and
authorized representative, Ms. Lourdes Chong, hereinafter referred to as VENDEE,
WITNESSETH: chanrob1es virtual 1aw library
That vendor is the registered owner of two adjacent parcels of residential land situated in the Bo. of Karuhatan,
Municipality of Valenzuela, Metro Manila, covered by Transfer Certificates of Titles Nos. B-8710 and B-8711
of the Registry of Deeds for Metro Manila District III, and more particularly described as follows: chanrob1es virtual 1aw library
x x x
That for and in consideration of the sum of EIGHT HUNDRED THOUSAND (P800,000.00) PESOS,
Philippine Currency, paid by VENDEE to VENDOR, receipt of which is hereby acknowledged by the latter to
its entire satisfaction, said VENDOR, by these presents, has SOLD, CEDED, TRANSFERRED, and
CONVEYED by way of absolute sale unto said VENDEE, its successors and assigns, the two parcels of land
above described and any and all improvements therein;
That the above-described parcels of land are free from liens and encumbrances of whatever kind and nature.
IN WITNESS WHEREOF, the parties hereto and their instrumental witnesses have hereunto set their hand on
_____ at _____." cralaw virtua1aw library
Rubi Saw signed on behalf of CKH, while Lourdes Chong signed for Century Well. 7 The document was
notarized the day after the parties signed the same, i. e., March 9, 1988. 8
Claiming that the consideration for the sale of the subject properties was not paid by the private respondent-
vendee despite several demands to do so, Petitioners CKH and Rubi Saw filed the instant complaint 9 on May
23, 1988, with the Regional Trial Court of Valenzuela, Branch 172, against Century-Well, Lourdes Chong,
Chong Tak Kei and Uy Chi Kim. Petitioners prayed for the annulment/rescission of the Deed of Absolute Sale,
and in the meantime, for the issuance of a writ of preliminary injunction restraining the Register of Deeds of
Valenzuela from registering the Certificates of Title over the subject properties in the name of the private
respondent Century-Well.
The trial court synthesized the petitioners’ submissions as follows: jgc:chanrobles.com.ph
"The complaint alleges the following: chanrob1es virtual 1aw library
Lourdes Chong and Rubi Saw agreed that the full payment of P800,000.00 as purchase price shall be in the
form of a Manager’s Check, to be delivered to Rubi Saw upon the execution of the Deed of Sale, the
preparation of which, Lourdes Chong undertook. On May 8, 1988, the date agreed upon for the execution of the
Deed of Sale, plaintiff Rubi Saw, accompanied by her friend Aurora Chua Ng, went to 1266 Soler St., Sta.
Cruz, Manila which is the residence and place of business of defendant Uy Chi Kim, an elderly man of Chinese
ancestry and the place suggested by Lourdes Chong as their meeting place. During the meeting, Uy Chi Kim
who was there presented to Rubi Saw a Deed of Absolute Sale in favor of defendant Century Well for her
signature. Before Rubi Saw signed the Deed of Absolute Sale she inquired about the payment of the
P800,000.00. Defendant Uy Chi Kim presented to her a personal check but she refused the same because it was
contrary to her arrangement with Lourdes Chong that the payment would be in the form of Manager’s Check.
Uy Chi Kim then explained to Rubi Saw that since it was a Sunday that day, they were unable to obtain the
Manager’s Check. He assured her that he had sufficient cash money at the first floor of his residence which is a
store owned by Uy Chi Kim. Before Uy Chi Kim left on the pretext of getting the money, he persuaded plaintiff
Rubi Saw to sign the Deed of Absolute Sale and give the same to Lourdes Chong together with the two
Certificates of Title. Since Uy Chi Kim is an elderly Chinese whom Rubi Saw had no reason to mistrust,
following Chinese custom, plaintiff Rubi Saw acceded to the request of Uy Chi Kim, trusting that he had
sufficient cash amounting to P800,000.00 kept in the first floor of his residence. When Uy Chi Kim returned, he
told Rubi Saw that he had only P20,000 on hand. He assured plaintiff, however, that there was no cause for her
to worry (as) he was certain he would have the entire amount ready by the next day when the banks would be
open. Again, trusting the elderly defendant Uy Chi Kim, Rubi Saw did not object and did not insist on the return
of the Deed of Absolute Sale that she signed, together with the Certificate of Title which she delivered to
Lourdes Chong. The next day, May 9, 1988 Rubi Saw called Lourdes Chong and Uy Chi Kim over the
telephone but was told they were not around. She could not go to the residence of Uy Chi Kim because she
could not leave her office due to business concerns. On May 10, 1988 Rubi Saw repeatedly called the two but
was informed they were not around. On May 11, 1988 already anxious, she personally went to the residences
and offices of the two defendants but they were not around. On May 12, 1988 Rubi Saw wrote defendant
Century Well advising Lourdes Chong of the rescission and cancellation of the Deed of Absolute Sale because
of lack of consideration. Lourdes Chong refused to receive the letter. Thereafter, several demand letters were
sent to the defendants but they refused to pay plaintiffs. Worried that defendants might surreptitiously transfer
the certificates of title to their names, Rubi Saw wrote the public defendant Register of Deeds on May 16, 1988,
giving information about the circumstances of the sale and requesting not to allow registration of the Deed of
Absolute Sale, together with an Affidavit of Adverse Claim. On May 20, 1988, plaintiffs’ representative was
informed by the Register of Deeds that defendants have made representations with defendant to Register the
Deed of Absolute Sale on May 23, 1988. chanrobles.com : virtual law library
Plaintiff Rubi Saw filed this Complaint alleging that Lourdes Chong and Uy Chi Kim maliciously misled her to
believe that they would pay the P800,000 as consideration when in fact they had no intention to pay plaintiffs,
and prayed that they should be awarded moral damages; that defendants be restrained from registering the Deed
of Absolute Sale, and be ordered to return to them the 2 titles of the properties together with the Deed of
Absolute Sale." 10
On the other hand, private respondents Century-Well, Lourdes Chong, and Chong Tak Kei alleged that: jgc:chanrobles.com.ph
". . . the consideration for the two parcels of land was paid by means of off-setting or legal compensation in the
amount of P700,000 thru alleged promissory notes executed by Cheng Kim Heng in favor of his sons Chong
Tak Choi and Chong Tak Kei (Exh. 6, 7, & 8) and payment of P100,000.00 in cash.
The defendant Century Well filed its Answer stating that during the operation of plaintiff CKH, the latter
borrowed from Chong Tak Choi and Chong Tak Kei the total sum of P700,000.00 paying interest on
P300,000.00 while the remaining P400,000.00 was interest free, and upon the death of Cheng Kim Heng, it
stopped making said payments. Defendant tried to prove that the source of this P700,000 was Hung Yuk Wah
while she was still residing in Hongkong, sent via bank draft from Hongkong to Chong Tak Choi and Chong
Tak Kei on a bank to bank transfer. Defendant likewise tried to prove that after the death of Cheng Kim Heng,
Rubi Saw unilaterally arrogated to herself the executive positions in plaintiff corporation such as President,
Secretary, Treasurer and General Manager; thus effectively shunting aside Hung Yuk Wah and her children in
the management of plaintiff corporation. Family differences (arose) between Rubi Saw on one hand, and Hung
Yuk Wah and her children on the other hand which turned to worst after the death of Cheng Kim Heng. This
brought about the entry of Chinese mediators between them, one of whom is defendant Uy Chi Kim, a reason
why the execution of the Deed of Absolute Sale was to be done at the residence and business address of Uy Chi
Kim." 11
Uy Chi Kim, on the other hand, answered on his behalf, that: jgc:chanrobles.com.ph
". . . his only participation in the transaction was as a mediator, he being one of the closest friends of Cheng
Kim Heng; that because the heirs of Cheng Kim Heng could not settle their problems he, together with Machao
Chan and Tomas Ching tried to mediate in accordance with Chinese traditions; that after long and tedious
meetings the parties finally agreed to meet at his residence at 1266 Soler St., Sta. Cruz, Manila for the purpose
of pushing thru the sale of the properties in question as part of the settlement of the estate. Defendant Uy Chi
Kim corroborated the defense of his co-defendants that the purchase price of the properties was P800,000.00 the
payment of which consists in the form of P100,000.00 in cash Philippine Currency; and the balance of
P700,000.00 will be applied as a set-off to the amount borrowed by plaintiff CKH from Chong Tak Choi and
Chong Tak Kei. He advanced the amount of P100,000.00 by way of his personal check to Rubi Saw but because
Rubi Saw refused, he gave Rubi Saw P100,000 in the form of P100 bills which Rubi Saw and Jacinto Say even
counted. After the P100,000.00 cash was given and the promissory notes, Rubi Saw signed the document of
sale. It was during the registration of the sale that a problem arose as to the payment of the capital gains (tax)
which Rubi Saw refused to pay. The buyer likewise refused to pay the same. The complaint against him is
baseless and which besmirched his reputation. Hence his counterclaim for damages." 12
The trial court denied the petitioners’ prayer for issuance of the writ of preliminary injunction in its Order dated
August 4, 1988. 13
After trial, the lower court rendered its Decision on February 4, 1991, finding that the annulment of the Deed of
Absolute Sale was merited, as there was no payment of the stipulated consideration for the sale of the real
properties involved to Rubi Saw.
In the first place, said the court, the Deed of Sale itself, which is the best evidence of the agreement between the
parties, did not provide for payment by off-setting a portion of the purchase price with the outstanding
obligation of Cheng Kim Heng to his sons Chong Tak Choi and Chong Tak Kei. On the contrary, it provided for
payment in cash, in the amount of P800,000.00. The evidence presented, however, did not disclose that payment
of the said amount had ever been made by the private Respondent. Moreover, there cannot be any valid off-
setting or compensation in this case, as Article 1278 of the Civil Code 14 requires, as a prerequisite for
compensation, that the parties be mutually bound principally as creditors and debtors, which is not the case in
this instance. The rescission of the contract is, therefore, called for, ruled the court.
Upon appeal, the respondent Court of Appeals reversed the findings and pronouncements of the trial court. In
its Decision 15 dated April 21, 1993, the appellate court expressed its own findings, that the execution of the
Deed of Absolute Sale was in settlement of a dispute between Rubi Saw and the first family of Cheng Kim
Heng, which arose upon Cheng’s death. The appellate court described the history of their dispute as follows: jgc:chanrobles.com.ph
"In 1977, Heng formed plaintiff-appellee CKH Industrial & Development Corporation (CKH), with his first
wife Wah, children Choi and Kei, and second wife Rubi as his co-incorporators/stockholders, along with other
individuals (Exhs. C and D; ibid., p. 9 and pp. 10-13. respectively). On April 15 and July 17 the following year,
Heng, on behalf of CHK [sic], obtained loans of P400,000.00 and P100,000.00 from Choi, for which Heng
executed two promissory notes in Choi’s favor (Exhs. 6 and 7; ibid., p. 40 and p. 41, respectively). On
November 24, 1981, Heng obtained from his other son, Kei, another loan this time in the sum of P200,000.00
on behalf of CKH for which he issued another promissory note (Exh. 8, ibid., p. 42).
After its incorporation, CKH acquired two parcels of land situated in Karuhatan, Valenzuela, Bulacan (now
Metro Manila) covered by Transfer Certificates of Title Nos. B-8710 (Annex A-Complaint; Record, p. 13) and
B-8711 (Annex B-Complaint; ibid., p. 14), which are now the subject of litigation in instant case.
On October 11, 1982, Kei was married to defendant-appellant Lourdes Chong nee Lourdes Gochico Hai Huat
(Lourdes). During their marriage, Kei and Lourdes resided in the house on Tetuan St., Sta. Cruz, Manila, which
CKH was then utilizing as its office. At about this time, Heng and Rubi had moved residence from Valenzuela,
Metro Manila, to Bermuda St., Sta. Cruz, Manila.
Two years later, or in late 1984, Heng died. Thenceforth, there appeared to be a falling out between Heng’s first
wife Wah and their three children on the one hand, and his second wife Rubi, on the other, which came to a
head when, Rubi as president of CKH wrote a letter dated August 21, 1985 to the mayor of Valenzuela, Metro
Manila, to prevent issuance of a business permit to American Metals managed by Chong Tak Choi, stating that
CKH has not allowed it to make use of the property, and on November 7, 1985, when CKH, through counsel,
demanded that Wah, Choi and Yam vacate the residential and factory buildings and premises owned by CKH
and located on one of the subject lots on 76 F. Bautista St., Valenzuela, which the three and the corporation (of
which two of them were stockholders), had been allegedly illegally occupying (Exhs. 10 and 10-A; Folio, pp.
44-45).
Respected mediators from the Chinese community in the persons of defendant-appellant Uy Chi Kim, Ma Chao,
Tomas Cheng and Johnny Saw, were called in to mediate. The mediation efforts which resulted in the
withdrawal by Rubi Saw of her letter about the withholding of a license to American Metals. Inc. and much
later, had culminated in the transaction now under litigation.
The formula for settlement in the dispute was for the Valenzuela properties of CKH to be sold to Century Well
for the amount of P800,000.00, P 100,000.00 of which will be paid in cash and the balance of P700,000.00 to be
set-off by the three (3) promissory notes executed in behalf of CKH in favor of Chong Tak Choi and Chong Tak
Kei (Exhs. 6, 7 and 8) the accumulated interests thereon to be waived as unstated consideration of the sale.
Having reached such agreement, on May 8, 1988, the parties met at the residence of Kim at Soler St., where the
corresponding deed of absolute sale of realty was executed (Exhs. 11, 11-A to 11-C; ibid., pp. 46-49), with
mediator Cheng and CKH stockholder and Rubi’s secretary, Jacinto Say, signing as instrumental witnesses.
After having received the cash consideration of P100,000.00 and the promissory notes amounting to
P700,000.00 Rubi had signed the deed, and thereafter delivered to Lourdes the document of sale and the
owner’s copies of the certificates of title for the two lots. The deed having been executed on a Sunday, the
parties agreed to have the same notarized the following day, May 9, 1988. The parties again met the next day,
May 9, 1988, when they acknowledged the deed before a notary public." 16
In sum, the appellate court found that there was indeed payment of the purchase price, partially in cash for P
100,000.00 and partially by compensation by off-setting the debt of Cheng Kim Heng to his sons Choi and Kei
for P500,000.00 and P200,000.00 respectively, against the remainder of the stipulated price. Such mode of
payment is recognized under Article 1249 17 of the Civil Code.
As observed by the appellate court: jgc:chanrobles.com.ph
"We are of the considered view that the appellees have not established what they claim to be the invalidity of
the subject deed of sale. The appellees are therefore neither entitled to the rescission or annulment of the
document nor to the award made in their favor in the decision under question and those other reliefs they are
seeking." 18
The question the Court is now tasked to answer is whether or not there was payment of the consideration for the
sale of real property subject of this case. More specifically, was there a valid compensation of the obligations of
Cheng Kim Heng to his sons with the purchase price of the sale?
To resolve this issue, it is first required that we establish the true agreement of the parties.
Both parties take exception to the provisions of the Deed of Absolute Sale to bolster their respective claims.
Petitioners, while submitting that as worded, the Deed of Absolute Sale does not provide for payment by
compensation, thereby ruling out the intention of the parties to provide for such mode of payment, submit on the
other hand, that they had not received payment of the stipulated cash payment of P800,000.00. The testimony of
Rubi Saw during the hearings for preliminary injunction and during trial was submitted to advance the
submission that she was never paid the price of the subject lots, in cash or in promissory notes.
On the other side of the fence, private respondents, who, ironically, were the parties who drafted the subject
document, claim that the Deed of Sale does not express the true agreement of the parties, specifically with
regard to the mode of payment. Private respondents allege that the execution of the deed of absolute sale was
the culmination of mediation of the dispute of the first and second families of Cheng Kim Heng, over the
properties of the decedent; that the price of the real property subject of the contract of sale was partly in cash,
and the reminder to be compensated against Cheng’s indebtedness to his sons Choi and Kei, reflected in the
promissory notes submitted as Exhibits 6, 7 and 8 during the trial; that by virtue of such compensation, the sale
has been consummated and the private respondent Century-Well is entitled to the registration of the certificates
of title over the subject properties in its name.
These contrasting submissions of the circumstances surrounding the execution of the subject document have led
to this stalemate of sorts. Still, the best test to establish the true intent of the parties remains to be the Deed of
Absolute Sale, whose genuineness and due execution, are unchallenged. 19
Section 9 of Rule 130 of the Rules of Court states that "when the terms of an agreement have been reduced to
writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their
successors-in-interest, no evidence of such terms other than the contents of the written agreement." cralaw virtua1aw library
The so-called "parol evidence rule" forbids any addition to or contradiction of the terms of a written instrument
by testimony or other evidence purporting to show that, at or before the execution of the parties’ written
agreement, other or different terms were agreed upon by the parties, varying the purport of the written contract.
When an agreement has been reduced to writing, the parties cannot be permitted to adduce evidence to prove
alleged practices which to all purposes would alter the terms of the written agreement. Whatever is not found in
the writing is understood to have been waived and abandoned. 20
The rule is not without exceptions, however, as it is likewise provided that a party to an action may present
evidence to modify, explain, or add to the terms of the written agreement if he puts in issue in his pleadings: (a)
An intrinsic ambiguity, mistake or imperfection in the written agreement; (b) The failure of the written
agreement to express the true intent and agreement of the parties thereto; (c) The validity of the written
agreement; or (d) The existence of other terms agreed to by the parties or their successors in interest after the
execution of the written agreement. 21
We reiterate the pertinent provisions of the deed: jgc:chanrobles.com.ph
"That for and in consideration of the sum of EIGHT HUNDRED THOUSAND (P800,000.00) PESOS,
Philippine Currency, paid by VENDEE to VENDOR, receipt of which is hereby acknowledged by the latter to
its entire satisfaction, said VENDOR, by these presents, has SOLD, CEDED, TRANSFERRED, and
CONVEYED by way of absolute sale unto said VENDEE, its successors and assigns, the two parcels of land
above described and any and all improvements therein;" 22
The foregoing stipulation is clear enough in manifesting the vendor’s admission of receipt of the purchase price,
thereby lending sufficient, though reluctant, credence to the private respondents’ submission that payment had
been made by off-setting P700,000.00 of the purchase price with the obligation of Cheng Kim Heng to his sons
Choi and Kei. By signing the Deed of Absolute Sale, petitioner Rubi Saw has given her imprimatur to the
provisions of the deed, and she cannot now challenge its veracity.
However, the suitability of the said stipulations as benchmarks for the intention of the contracting parties, does
not come clothed with the cloak of validity. It must be remembered that agreements affecting the civil
relationship of the contracting parties must come under the scrutiny of the provisions of law existing and
effective at the time of the execution of the contract.
We refer particularly to the provisions of the law on compensation as a mode of extinguishment of obligations.
Under Article 1231 of the Civil Code, an obligation may be extinguished: (1) by payment or performance; (2)
by the loss of the thing due, (3) by the condonation or remission of the debt; (4) by the confusion or merger of
the rights of creditor and debtor, (5) by compensation; or (6) by novation. Other causes of extinguishment of
obligations include annulment, rescission, fulfillment of a resolutory condition and prescription.
Compensation may take place by operation of law (legal compensation), when two persons, in their own right,
are creditors and debtors of each other. 23 Article 1279 of the Civil Code provides for the requisites of legal
compensation: jgc:chanrobles.com.ph
"ARTICLE 1279. In order that compensation may be proper, it is necessary: chanrob1es virtual 1aw library
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
(3) That the two debts be due: chanrob1es virtual 1aw library
(4) That they be liquidated and demandable: chanrob1es virtual 1aw library
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor." cralaw virtua1aw library
Compensation may also be voluntary or conventional, that is, when the parties, who are mutually creditors and
debtors agree to compensate their respective obligations, even though not all the requisites for legal
compensation are present. Without the confluence of the characters of mutual debtors and creditors, contracting
parties cannot stipulate to the compensation of their obligations, for then the legal tie that binds contracting
parties to their obligations would be absent. At least one party would be binding himself under an authority he
does not possess. As observed by a noted author, the requirements of conventional compensation are (1) that
each of the parties can dispose of the credit he seeks to compensate, and (2) that they agree to the mutual
extinguishment of their credits. 24
In the instant case, there can be no valid compensation of the purchase price with the obligations of Cheng Kim
Heng reflected in the promissory notes, for the reason that CKH and Century-Well the principal contracting
parties, are not mutually bound as creditors and debtors in their own name. A close scrutiny of the promissory
notes does not indicate the late Cheng, as then president of CKH, acknowledging any indebtedness to Century-
Well. As worded, the promissory notes reveal CKH’s indebtedness to Chong Tak Choi and Chong Tak Kei.
Exhibit 6
Metro Manila, Philippines
April 15, 1978
For Value Received, We, CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a duly registered
corporation with postal address at Rm. 330, MTM Bldg. 1002 C. M. Recto Avenue, Manila, promises [sic] to
pay on demand to Mr. CHONG TAK CHOI, the sum of FOUR HUNDRED THOUSAND PESOS, Philippine
currency (P400,000.00)
To certify the correctness of the indebtedness to the party, I, CHENG KIM HENG, President of CKH
INDUSTRIAL & DEVELOPMENT CORPORATION, do hereby signed [sic] in behalf of the Corporation.
CKH INDUSTRIAL & DEVELOPMENT
CORPORATION
signed: chanrob1es virtual 1aw library
CHENG KIM HENG"
Exhibit 7
Manila,
July 17, 1978
For Value received, we, CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a duly registered
domestic corporation in the City of Manila, represented by its president, CHENG KIM HENG with residence
certificate no. 118824650 issued at Manila, on 2-28-78 do promise to pay on demand the sum of ONE
HUNDRED THOUSAND PESOS ONLY (P100,000.00), Philippine currency with interest from the date hereof
at the rate of ten per cent (10%) per annum to Mr. CHONG TAK CHOI.
In witness hereof on the consents [sic] of the parties to this promissory note, I, CHENG KIM HENG, president
of CKH INDUSTRIAL & DEVELOPMENT CORPORATION do hereby affixed [sic] my signature below. chanroblesvirtualawlibrary
CHENG KIM HENG
Exhibit 8
Manila, Philippines,
November 24, 1981
I, CHENG KIM HENG, President of CKH INDUSTRIAL & DEVELOPMENT CORPORATION, 831 Tetuan
St. (2nd floor) Sta. Cruz, Manila, promises to pay to CHONG TAK KEI, with postal address at 76 F. Bautista
St., Valenzuela, Metro Manila, the sum of PESOS: TWO HUNDRED THOUSAND ONLY (P200,000.00)
Philippine Currency, with interest at the rate of Ten per cent (10%) per annum from date stated above to a
period of one year and I hereby consent to any renewal, or extension of same amount to a same period which
may be requested by any one of us for the payment of this note.
I also acknowledge the receipt of the above sum of money today from MR. CHONG TAK KEI.
CKH IND. & DEV. CORP.
CHENG KIM HENG
President
In fact, there is no indication at all, that such indebtedness was contracted by Cheng from Choi and Kei as
stockholders of Century-Well. Choi and Kei, in turn, are not parties to the Deed of Absolute Sale. They are
merely stockholders of Century-Well, 25 and as such, are not bound principally, not even in a representative
capacity, in the contract of sale. Thus, their interest in the promissory notes cannot be off-set against the
obligations between CKH and Century-Well arising out of the deed of absolute sale, absent any allegation,
much less, even a scintilla of substantiation, that Choi and Kei’s interest in Century-Well are so considerable as
to merit a declaration of unity of their civil personalities. Under present law, corporations, such as Century-
Well, have personalities separate and distinct from their stockholders, 26 except only when the law sees it fit to
pierce the veil of corporate identity, particularly when the corporate fiction is shown to be used to defeat public
convenience, justify wrong, protect fraud or defend crime, or where a corporation the mere alter ego or business
conduit of a person. 27 The Court cannot, in this instance make such a ruling absent a demonstration of the
merit of such a disposition.
Considering the foregoing premises, the Court finds it proper to grant the prayer for rescission of the subject
deed of sale, for failure of consideration. 28
IN VIEW WHEREOF, the Court hereby RESOLVED to GRANT the present petition. The decision of the
Court of Appeals dated April 21, 1993, is hereby REVERSED and SET ASIDE. The decision of the Regional
Trial Court of Valenzuela, Branch 173 dated February 4, 1991, is hereby REINSTATED, with the
MODIFICATION that the award of moral damages and attorney’s fees to Rubi Saw, and the order for payment
of costs are DELETED.
The parties shall bear their respective costs. chanroblesvirtuallawlibrary:red
SO ORDERED.
Regalado, Romero, Puno and Mendoza, JJ., concur.
Endnotes:
1. Annex "A" Petition, p. 66, Rollo; Justice Cezar D. Francisco, ponente; concurred in by Justices
Pedro A. Ramirez and Corona Ibay-Somera.
2. Ibid., at p. 87, Rollo.
3. Record, P. 421; penned by Judge Teresita Dizon-Capulong.
4. Annexes "A" and "B", Complaint, pp. 13-14, Record.
5. Exhibit 11, p. 46, Folder of Exhibits.
6. See Articles of Incorporation of Century-Well, pp. 15-21, Folder of Exhibits.
7. Exhibit 11-B, p. 48, Folder of Exhibits.
8. Exhibit 11-C, p. 49, Folder of Exhibits.
9. Record, P. 1.
10. Record, p. 422-423.
11. Ibid., p. 423-424.
12. Ibid.
13. Record, p. 113.
14. Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other. (1159)
15. Supra.
16. Rollo, pp. 68-70.
17. Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is
not possible to deliver such currency, then in the currency which is legal tender in the Philippines.
the fault of the creditor they have impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance. (1170)
18. Rollo, p. 86.

19. See petitioner’s comments and/or objections to defendant’s Formal Offer of Evidence, p. 101,
Record.
20. Soriano v. Compania General de Tabacos de Filipinas, 125 Phil 80.
21. Paragraph 2, Section 9, Rule 130, Rules of Court.
22. Supra.
23. Article 1278, Civil Code.
24. IV Tolentino, Civil Code of the Philippines, 1985 ed., p. 368.
25. See Articles of Incorporation of Century-Well, supra.
26. See Section 2, Corporation Code.
27. Yu v. National Labor Relations Commission, G.R. Nos. 111810-11, June 16, 1995, 245 SCRA 134.
21) Mirasol v Court of Appeals 351 SCRA 44

SECOND DIVISION
G.R. No. 128448 February 1, 2001
SPOUSES ALEJANDRO MlRASOL and LILIA E. MIRASOL, petitioners,

vs.
THE COURT OF APPEALS, PHILIPPINE NATIONAL and PHILIPPINE EXCHANGE CO., INC., respondent.
QUISUMBING, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals dated July 22, 1996, in CA-G.R. CY
No. 38607, as well as of its resolution of January 23, 1997, denying petitioners' motion for reconsideration. The
challenged decision reversed the judgment of the Regional Trial Court of Bacolod City, Branch 42 in Civil Case No.
14725.
The factual background of this case, as gleaned from the records, is as follows:
The Mirasols are sugarland owners and planters. In 1973-1974, they produced 70,501.08 piculs 1 of sugar,
25,662.36 of which were assigned for export. The following crop year, their acreage planted to the same crop was
lower, yielding 65,100 piculs of sugar, with 23,696.40 piculs marked for export.
Private respondent Philippine National Bank (PNB) financed the Mirasols' sugar production venture for crop years,
1973-1974 and 1974-1975 under a crop loan financing scheme. Under said scheme, the Mirasols signed Credit
Agreements, a Chattel Mortgage on Standing Crops, and a Real Estate Mortgage in favor of PNB. The Chattel
Mortgage empowered PNB as the petitioners' attorney-in-fact to negotiate and to sell the latter's sugar in both
domestic and export markets and to apply the proceeds to the payment of their obligations to it.
Exercising his law-making powers under Martial Law, then President Ferdinand Marcos issued Presidential Decree
(P.D.) No. 5792 in November, 1974. The decree authorized private respondent Philippine Exchange Co., Inc.
(PHILEX) to purchase sugar allocated for export to the United States and to other foreign markets. The price and
quantity was determined by the Sugar Quota Administration, PNB, the Department of Trade and Industry, and
finally, by the Office of the President. The decree further authorized PNB to finance PHILEX's purchases. Finally,
the decree directed that whatever profit PHILEX might realize from sales of sugar abroad was to be remitted to a
special fund of the national government, after commissions, overhead expenses and liabilities had been deducted.
The government offices and entities tasked by existing laws and administrative regulations to oversee the sugar
export pegged the purchase price of export sugar in crop years 1973-1974 and 1974-1975 at P180.00 per picul.
PNB continued to finance the sugar production of the Mirasols for crop years 1975-1976 and 1976-1977. These
crop loans and similar obligations were secured by real estate mortgages over several properties of the Mirasols
and chattel mortgages over standing crops. Believing that the proceeds of their sugar sales to PNB, if properly
accounted for, were more than enough to pay their obligations, petitioners asked PNB for an accounting of the
proceeds of the sale of their export sugar. PNB ignored the request. Meanwhile, petitioners continued to avail of
other loans from PNB and to make unfunded withdrawals from their current accounts with said bank. PNB then
asked petitioners to settle their due and demandable accounts. As a result of these demands for payment,
petitioners on August 4, 1977, conveyed to PNB real properties valued at P1,410,466.00 by way of dacion en
pago, leaving an unpaid overdrawn account of P1,513,347.78.
On August 10, 1982, the balance of outstanding sugar crop and other loans owed by petitioners to PNB stood at
P15,964,252.93. Despite demands, the Mirasols failed to settle said due anti demandable accounts. PNB then
proceeded to extrajudicially for close the mortgaged properties. After applying the proceeds of the auction sale of
the mortgaged realties, PNB still had a deficiency claim of P12,551,252.93.
Petitioners continued to ask PNB to account for the proceeds of the sale of their export sugar for crop years 1973-
1974 and 1974-1975, insisting that said proceeds, if properly liquidated, could offset their outstanding obligations
with the batik. PNB remained adamant in its stance that under P.D. No. 579, there was nothing to account since
under said law, all earnings from the export sales of sugar pertained to the National Government and were subject
to the disposition of the President of the Philippines for public purposes.
1âwphi1.nêt
On August 9, 1979, the Mirasols filed a suit for accounting, specific performance, and damages against PNB with
the Regional Trial Court of Bacolod City, docketed as Civil Case No. 14725.
On June 16, 1987, the complaint was amended to implead PHILEX as party-defendant.
The parties agreed at pre-trial to limit the issues to the following:
"1. The constitutionality and/or legality of Presidential Decrees numbered 338, 579, and 1192;
"2. The determination of the total amount allegedly due the plaintiffs from the defendants corresponding to
the allege(d) unliquidated cost price of export sugar during crop years 1973-1974 and 1974-1975." 3
After trial on the merits, the trial court decided as follows:
"WHEREFORE, the foregoing premises considered, judgment is hereby rendered in favor of the plaintiffs
and against the defendants Philippine National Bank (PNB) and Philippine Exchange Co., Inc. (PHILEX):
(1) Declaring Presidential Decree 579 enacted on November 12, 1974 and all circulars, as well as policies,
orders and other issuances issued in furtherance thereof, unconstitutional and therefore, NULL and VOID
being in gross violation of the Bill of Rights;
(2) Ordering defendants PNB and PHILEX to pay, jointly and severally, plaintiffs the whole amount
corresponding to the residue of the unliquidated actual cost price of 25,662 piculs in export sugar for crop
year 1973-1974 at an average price of P300.00 per picul, deducting therefrom however, the amount of
P180.00 already paid in advance plus the allowable deductions in service fees and other charges;
(3) And also, for the same defendants to pay, jointly and severally, same plaintiffs the whole amount
corresponding to the unpaid actual price of 14,596 piculs of export sugar for crop year 1974-1975 at an
average rate of P214.14 per picul minus however, the sum of P180.00 per picul already paid by the
defendants in advance and the allowable deducting (sic) in service fees and other charges.
"The unliquidated amount of money due the plaintiffs but withheld by the defendants, shall earn the legal
rate of interest at 12% per annum computed from the date this action was instituted until fully paid; and,
finally -
(4) Directing the defendants PNB and PHILEX to pay, jointly and severally, plaintiffs the sum of P50,000.00
in moral damages and the amount of P50,000.00 as attorney's fees, plus the costs of this litigation.
"SO ORDERED."4
The same was, however, modified by a Resolution of the trial court dated May 14, 1992, which added the following
paragraph:
"This however whatever benefits that may have accrued in favor of the plaintiffs with the massage and
approval of Republic Act. 7202 otherwise known as the 'Sugar Restitution Law,' authorizing the restitution of
losses suffered by the plaintiffs from Crop year 1974-1975 to Crop year 1984-1985 occasioned by the
actuations of government-owned and controlled agencies. (Underscoring in the original).
"SO ORDERED."5
The Mirasols then filed an appeal with the respondent court, docketed as CA-G.R. CY No. 38607, faulting the trial
court for not nullifying the dacion en pago and the mortgage contracts, as well as the foreclosure of their mortgaged
properties. Also faulted was the trial court's failure to award them the full money claims and damages sought from
both PNB and PHILEX.
On July 22, 1996, the Court of Appeals reversed the trial court as follows:
"WHEREFORE, this Court renders judgment REVERSING the appealed Decision and entering the following verdict:
"1. Declaring the dacion en pago and the foreclosure of the mortgaged properties valid;
"2. Ordering the PNB to render an accounting of the sugar account of the Mirasol[s] specifically stating the
indebtedness of the latter to the former and the proceeds of Mirasols' 1973-1974 and 1974-1975 sugar
production sold pursuant to and in accordance with P.D. 579 and the issuances therefrom;
"3. Ordering the PNB to recompute in accordance with RA 7202 Mirasols' indebtedness to it crediting to the
latter payments already made as well as the auction price of their foreclosed real estate and stipulated value
of their properties ceded to PNB in the dacon (sic) en pago;
"4. Whatever the result of the recomputation of Mirasols' account, the outstanding balance or the excess
payment shall be governed by the pertinent provisions of RA 7202.
"SO ORDERED."6
On August 28, 1996, petitioners moved for reconsideration, which the appellate court denied on January 23, 1997.
Hence, the instant petition, with petitioners submitting the following issues for our resolution:
"1. Whether the Trial Court has jurisdiction to declare a statute unconstitutional without notice to the Solicitor
General where the parties have agreed to submit such issue for the resolution of the Trial Court.
"2. Whether PD 579 and subsequent issuances7 thereof are unconstitutional.
"3. Whether the Honorable Court of Appeals committed manifest error in not applying the doctrine of
piercing the corporate veil between respondents PNB and PHILEX.
"4. Whether the Honorable Court of Appeals committed manifest error in upholding the validity of the
foreclosure on petitioners property and in upholding the validity of the dacion en pago in this case.
"5. Whether the Honorable Court of Appeals committed manifest error in not awarding damages to
petitioners grounds relied upon the allowance of the petition. (Underscored in the original)"8
On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to consider the
constitutionality of a statute, presidential decree, or executive order. 9 The Constitution vests the power of judicial
review or the power to declare a law, treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation not. only in this Court, but in all Regional Trial Courts. 10 In J.M. Tuason and Co.
v. Court of Appeals, 3 SCRA 696 (1961) we held:
"Plainly, the Constitution contemplates that the inferior courts should have jurisdiction in cases involving
constitutionality of any treaty or law, for it speaks of appellate review of final judgments of inferior courts in
cases where such constitutionality happens to be in issue." 11
Furthermore, B.P. BIg. 129 grants Regional Trial Courts the authority to rule on the conformity of laws or treaties
with the Constitution, thus:
"SECTION 19. Jurisdiction in civil cases. - Regional Trial Courts shall exercise exclusive original jurisdiction:
(1) In all civil actions in which the subject of the litigations is incapable of pecuniary estimation;"
The pivotal issue, which we must address, is whether it was proper for the trial court to have exercised judicial
review.
Petitioners argue that the Court of Appeals erred in finding that it was improper for the trial court to have declared
P.D. No. 57912 unconstitutional, since petitioners had not complied with Rule 64, Section 3, of the Rules of Court.
Petitioners contend that said Rule specifically refers only to actions for declaratory relief and not to an ordinary
action for accounting, specific performance, and damages.
Petitioners' contentions are bereft of merit. Rule 64, Section 3 of the Rules of Court provides:
"SEC. 3. Notice to Solicitor General. - In any action which involves the validity of a statute, or executive
order or regulation, the Solicitor General shall be notified by the party attacking the statute, executive order,
or regulation, and shall be entitled to be heard upon such question."
This should be read in relation to Section 1 [c] of P.D. No. 478, 13 which states in part:
"SECTION 1. Functions and Organizations - (1) The Office of the Solicitor General shall...have the following
specific powers and functions:
xxx
"[c] Appear in any court in any action involving the validity of any treaty, law, executive order or
proclamation, rule or regulation when in his judgment his intervention is necessary or when requested by the
court."
It is basic legal construction that where words of command such as "shall," "must," or "ought" are employed, they
are generally and ordinarily regarded as mandatory. 14 Thus, where, as in Rule 64, Section 3 of the Rules of Court,
the word "shall" is used, a mandatory duty is imposed, which the courts ought to enforce.
The purpose of the mandatory Notice in Rule 64, Section 3 is to enable the Solicitor General to decide whether or
not his intervention in the action assailing the validity of a law or treaty is necessary. To deny the Solicitor General
such notice would be tantamount to depriving him of his day in court. We must stress that, contrary to petitioners'
stand, the mandatory notice requirement is not limited to actions involving declaratory relief and similar remedies.
The rule itself provides that such notice is required in "any action" and not just actions involving declaratory relief.
Where there is no ambiguity in the words used in the true, there is no room for constnlction. 15 In all actions assailing
the validity of a statute, treaty, presidential decree, order, or proclamation, notice to the Solicitor General is
mandatory.
In this case, the Solicitor General was never notified about Civil Case No. 14725. Nor did the trial court ever require
him to appear in person or by a representative or to file any pleading or memorandum on the constitutionality of the
assailed decree. Hence, the Court of Appeals did not err in holding that lack of the required notice made it improper
for the trial court to pass upon the constitutional validity of the questioned presidential decrees.
As regards the second issue, petitioners contend that P.D. No. 579 and its implementing issuances are void for
violating the due process clause and the prohibition against the taking of private property without just compensation.
Petitioners now ask this Court to exercise its power of judicial review.
Jurisprudence has laid down the following requisites for the exercise of this power: First, there must be before the
Court an actual case calling for the exercise of judicial review. Second, the question before the Court must be ripe
for adjudication. Third, the person challenging the validity of the act must have standing to challenge. Fourth, the
question of constitutionality must have been raised at the earliest opportunity, and lastly, the issue of
constitutionality must be the very lis mota of the case.16
As a rule, the courts will not resolve the constitutionality of a law, if the controversy can be settled on other
grounds.17 The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of the
political departments are valid, absent a clear and unmistakable showing to the contrary. To doubt is to sustain. This
presumption is based on the doctrine of separation of powers. This means that the measure had first been carefully
studied by the legislative and executive departments and found to be in accord with the Constitution before it was
finally enacted and approved.18
The present case was instituted primarily for accounting and specific performance. The Court of Appeals correctly
ruled that PNB's obligation to render an accounting is an issue, which can be determined, without having to rule on
the constitutionality of P.D. No. 579. In fact there is nothing in P.D. No. 579, which is applicable to PNB's
intransigence in refusing to give an accounting. The governing law should be the law on agency, it being undisputed
that PNB acted as petitioners' agent. In other words, the requisite that the constitutionality of the law in question be
the very lis mota of the case is absent. Thus we cannot rule on the constitutionality of P.D. No. 579.
Petitioners further contend that the passage of R.A. No. 720219 rendered P.D. No. 579 unconstitutional, since R.A.
No. 7202 affirms that under P.D. 579, the due process clause of the Constitution and the right of the sugar planters
not to be deprived of their property without just compensation were violated.
A perusal of the text of R.A. No. 7202 shows that the repealing clause of said law merely reads:
"SEC. 10. All laws, acts, executive orders and circulars in conflict herewith are hereby repealed or modified
accordingly."
The settled rule of statutory construction is that repeals by implication are not favored. 20 R.A. No. 7202 cannot be
deemed to have repealed P.D. No. 579. In addition, the power to declare a law unconstitutional does not lie with the
legislature, but with the courts.21 Assuming arguendo that R.A. No. 7202 did indeed repeal P.D. No. 579, said repeal
is not a legislative declaration finding the earlier law unconstitutional.
To resolve the third issue, petitioners ask us to apply the doctrine of piercing the veil of corporate fiction with respect
to PNB and PHILEX. Petitioners submit that PHILEX was a wholly-owned subsidiary of PNB prior to the latter's
privatization.
We note, however, that the appellate court made the following finding of fact:
"1. PNB and PHILEX are separate juridical persons and there is no reason to pierce the veil of corporate
personality. Both existed by virtue of separate organic acts. They had separate operations and different
purposes and powers."22
Findings of fact by the Court of Appeals are conclusive and binding upon this Court unless said findings are not
supported by the evidence.23 Our jurisdiction in a petition for review under Rule 45 of the Rules of Court is limited
only to reviewing questions of law and factual issues are not within its province. 24 In view of the aforequoted finding
of fact, no manifest error is chargeable to the respondent court for refusing to pierce the veil of corporate fiction.
On the fourth issue, the appellate court found that there were two sets of accounts between petitioners and PNB,
namely:
"1. The accounts relative to the loan financing scheme entered into by the Mirasols with PNB (PNB's Brief,
p. 16) On the question of haw much the PNB lent the Mirasols for crop years 1973-1974 and 1974-1975, the
evidence recited by the lower court in its decision was deficient. We are offered (sic) PNB the amount of
FIFTEEN MILLION NINE HUNDRED SIXTY FOUR THOUSAND TWO HUNDRED FIFTY TWO PESOS and
NINETY THREE Centavos (Ps15,964,252.93) but this is the alleged balance the Mirasols owe PNB covering
the years 1975 to 1982.
"2. The account relative to the Mirasol's current account Numbers 5186 and 5177 involving the amount of
THREE MILLION FOUR HUNDRED THOUSAND Pesos (P3,400,000.00). PNB claims against the Mirasols.
(PNB's Brief, p. 17)
"In regard to the first set of accounts, besides the proceeds from PNB's sale of sugar (involving the
defendant PHILEX in relation to the export portion of tile stock), the PNB foreclosed the Mirasols' mortgaged
properties realizing therefrom in 1981 THREE MILLION FOUR HUNDRED THIRTEEN THOUSAND pesos
(P3,413,000.00), the PNB itself having acquired the properties as the highest bidder.
"As to the second set of accounts, PNB proposed, and the Mirasols accepted, a dacion en pago scheme by
which the Mirasols conveyed to PNB pieces of property valued at ONE MILLION FOUR HUNDRED TEN
THOUSAND FOUR HUNDRED SIXTY-SIX Pesos (Ps1,410,466.00) (PNB's Brief, pp. 16-17)." 25
Petitioners now claim that the dacion en pago and the foreclosure of their mortgaged properties were void for want
of consideration. Petitioners insist that the loans granted them by PNB from 1975 to 1982 had been fully paid by
virtue of legal compensation. Hence, the foreclosure was invalid and of no effect, since the mortgages were already
fully discharged. It is also averred that they agreed to the dacion only by virtue of a martial law Arrest, Search, and
Seizure Order (ASSO).
We find petitioners' arguments unpersuasive. Both the lower court and the appellate court found that the Mirasols
admitted that they were indebted to PNB in the sum stated in the latter's counterclaim. 26 Petitioners nonetheless
insist that the same can be offset by the unliquidated amounts owed them by PNB for crop years 1973-74 and 1974-
75. Petitioners' argument has no basis in law. For legal compensation to take place, the requirements set forth in
Articles 1278 and 1279 of the Civil Code must be present. Said articles read as follows:
"Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of
each other.
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
(3) That the two debts are due;
communicated in due time to the debtor."
In the present case, set-off or compensation cannot take place between the parties because: First, neither of the
parties are mutually creditors and debtors of each other. Under P.D. No. 579, neither PNB nor PHILEX could retain
any difference claimed by the Mirasols in the price of sugar sold by the two firms. P.D. No. 579 prescribed where the
profits from the sales are to be paid, to wit:
"SECTION 7. x x x After deducting its commission of two and one-half (2-1/2%) percent of gross sales, the
balance of the proceeds of sugar trading operations for every crop year shall be set aside by the Philippine
Exchange Company, Inc,. as profits which shall be paid to a special fund of the National Government
subject to the disposition of the President for public purposes."
Thus, as correctly found by the Court of Appeals, "there was nothing with which PNB was supposed to have off-set
Mirasols' admitted indebtedness."27
Second, compensation cannot take place where one claim, as in the instant case, is still the subject of litigation, as
the same cannot be deemed liquidated. 28
With respect to the duress allegedly employed by PNB, which impugned petitioners' consent to the dacion en
pago, both the trial court and the Court of Appeals found that there was no evidence to support said claim. Factual
findings of the trial court, affirmed by the appellate court, are conclusive upon this Court. 29
On the fifth issue, the trial court awarded petitioners P50,000.00 in moral damages and P50,000.00 in attorney's
fees. Petitioners now theorize that it was error for the Court of Appeals to have deleted these awards, considering
that the appellate court found PNB breached its duty as an agent to render an accounting to petitioners.
An agent's failure to render an accounting to his principal is contrary to Article 1891 of the Civil Code. 30 The erring
agent is liable for damages under Article 1170 of the Civil Code, which states:
"Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in
any manner contravene the tenor thereof, are liable for damages."
Article 1170 of the Civil Code, however, must be construed in relation to Article 2217 of said Code which reads:
"Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation, and similar injury .Though incapable of pecuniary
computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful
act or omission."
Moral damages are explicitly authorized in breaches of contract where the defendant acted fraudulently or in bad
faith.31 Good faith, however, is always presumed and any person who seeks to be awarded damages due to the acts
of another has the burden of proving that the latter acted in bad faith, with malice, or with ill motive. In the instant
case, petitioners have failed to show malice or bad faith 32 on the part of PNB in failing to render an accounting.
Absent such showing, moral damages cannot be awarded.
Nor can we restore the award of attorney's fees and costs of suit in favor of petitioners. Under Article 2208 (5) of the
Civil Code, attorney's fees are allowed in the absence of stipulation only if "the defendant acted in gross and evident
bad faith in refusing to satisfy the plaintiff s plainly valid, just, and demandable claim." As earlier stated, petitioners
have not proven bad faith on the part of PNB and PHILEX. 1âwphi1.nêt
WHEREFORE, the instant petition is DENIED and the assailed decision of the respondent court in CA-G.R. CY
38607 AFFIRMED. Costs against petitioners.
SO ORDERED.
Bellosillo, Mendoza, Buena, De Leon, Jr., JJ., concur.

Footnotes
1
One picul is equivalent to 63.25 kilograms.
2
The decree was entitled "Rationalizing and Stabilizing The Export of Sugar And For Other Purposes."
3
Rollo, p. 78.
4
Id. at 104-105.
5
Id. at 110.
6
Id. at 88-89.
7
These include Circular Letter No. 24 dated October 25, 1974 which designates PHILEX to undertake the
liquidation, buying and disposition of "B" sugar quedans; Circular Letter No. 13 s. 1974-1975 issued on May
5, 1975 which outlines the revision of the pricing policy for sugar for crop year 1974-1975; and Circular
Letter No. 24 s. 1974-1975 which outlines the fixing of the price of sugar covering production starting May 5,
1975.
8
Supra Note 6, at 32-33.
9
Drilon v. Lim, 235 SCRA 135, 139 (1994).
10
Const, Art. VIII, Sec. 5 (2).
11
3 SCRA 696, 703-704 (1961).
12
Rationalizing and stabilizing the export of sugar and for other purposes.
13
Defining the powers and functions of the Office of the Solicitor General.
14
Brehm v. Republic, 9 SCRA 172, 176 (1963).
15
Republic v. Court of Appeals, 299 SCRA 199, 227 (1998).
Board of Optometry v. Colet, 260 SCRA 88, 103 (1996) citing Garcia vs. Executive Secretary, 204 SCRA
16
516, 522 (1991); Santos vs. Northwest Orient Airlines, 210 SCRA 256, 261 (1992).
17
Ty v. Trampe, 250 SCRA 500, 520 (1995).
18
Drilon v. Lim, supra.
An Act Authorizing the Restitution of Losses Suffered by Sugar Producers from Crop Year 1974-1975 to
19
Crop Year 1984-1985 Due to the Actions of Government-Owned and Controlled Agencies.
Manzano v. Valera, 292 SCRA 66, 76 (1998); Garcia v. Burgos, 291 SCRA 547, 575 (1998)
20
citing Frivaldo vs. Commission on Elections, 257 SCRA 727, 743-744 (1996).
21
Angara v. Electoral Commission, 63 Phil. 139, 175 (1936).
22
Rollo, p. 78.
23
Guerrero v. Court of Appeals, 285 SCRA 670, 678 (1998).
24
Congregation of the Religious of the Virgin Mary v. Court of Appeals, 291 SCRA 385, 391-392 (1998).
25
Rollo, p. 85.
26
Id. at 86.
27
Id. at 87.
Silahis Marketing Corp. v. Intermediate Appellate Court, 180 SCRA 21, 25 (1989); Compania Maritima v.
28
Court of Appeals, 135 SCRA 593 (1985).
Salao v. Court of Appeals, 284 SCRA 493, 498 (1998) citing Catapusan v. Court of Appeals, 264 SCRA
29
534 (1996); People vs. Flores, 243 SCRA 374 (1995); Lufthansa German Airlines v. Court of Appeals, 243
SCRA 600 (1995).
30
Article 1891 of the Civil Code reads:
"Every agent is bound to render an account of his transactions and to deliver to the principal
whatever he may have received by virtue of the agency, even though it may not be owing to the
principal.
"Every stipulation exempting the agent from the obligation to render an account shall be void."
31
Del Rosario v. Court of Appeals, 267 SCRA 158, 172 (1997) citing Civil Code, Art. 2220.
BPI Express Card Corp. v. Court of Appeals, 296 SCRA 260, 272 (1998) citing Barons Marketing Corp.
32
vs. Court of Appeals, 286 SCRA 96 (1998).
22) Associated Bank v Tan 446 SCRA 282

THIRD DIVISION
G.R. No. 156940 December 14, 2004
ASSOCIATED BANK (Now WESTMONT BANK), petitioner,

vs.
VICENTE HENRY TAN, respondent.
DECISION
PANGANIBAN, J.:
While banks are granted by law the right to debit the value of a dishonored check from a depositor’s account, they
must do so with the highest degree of care, so as not to prejudice the depositor unduly.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the January 27, 2003 Decision of
1 2
the Court of Appeals (CA) in CA-GR CV No. 56292. The CA disposed as follows:
"WHEREFORE, premises considered, the Decision dated December 3, 1996, of the Regional Trial Court of
Cabanatuan City, Third Judicial Region, Branch 26, in Civil Case No. 892-AF is hereby AFFIRMED. Costs
against the [petitioner]."
3
The Facts
The CA narrated the antecedents as follows:
"Vicente Henry Tan (hereafter TAN) is a businessman and a regular depositor-creditor of the Associated
Bank (hereinafter referred to as the BANK). Sometime in September 1990, he deposited a postdated UCPB
check with the said BANK in the amount of P101,000.00 issued to him by a certain Willy Cheng from Tarlac.
The check was duly entered in his bank record thereby making his balance in the amount of P297,000.00,
as of October 1, 1990, from his original deposit of P196,000.00. Allegedly, upon advice and instruction of the
BANK that the P101,000.00 check was already cleared and backed up by sufficient funds, TAN, on the
same date, withdrew the sum of P240,000.00, leaving a balance of P57,793.45. A day after, TAN deposited
the amount of P50,000.00 making his existing balance in the amount of P107,793.45, because he has
issued several checks to his business partners, to wit:
CHECK DATE AMOUNT

NUMBERS
a. 138814 Sept. 29, P9,000.00
1990
b. 138804 Oct. 8, 1990 9,350.00
c. 138787 Sept. 30, 6,360.00
1990
d. 138847 Sept. 29, 21,850.00
1990
e. 167054 Sept. 29, 4,093.40
1990
f. 138792 ` Sept. 29, 3,546.00
1990
g. 138774 Oct. 2, 1990 6,600.00
h. 167072 Oct. 10, 9,908.00
1990
i. 168802 Oct. 10, 3,650.00
1990
"However, his suppliers and business partners went back to him alleging that the checks he issued bounced
for insufficiency of funds. Thereafter, TAN, thru his lawyer, informed the BANK to take positive steps
regarding the matter for he has adequate and sufficient funds to pay the amount of the subject checks.
Nonetheless, the BANK did not bother nor offer any apology regarding the incident. Consequently, TAN, as
plaintiff, filed a Complaint for Damages on December 19, 1990, with the Regional Trial Court of Cabanatuan
City, Third Judicial Region, docketed as Civil Case No. 892-AF, against the BANK, as defendant.
"In his [C]omplaint, [respondent] maintained that he ha[d] sufficient funds to pay the subject checks and
alleged that his suppliers decreased in number for lack of trust. As he has been in the business community
for quite a time and has established a good record of reputation and probity, plaintiff claimed that he suffered
embarrassment, humiliation, besmirched reputation, mental anxieties and sleepless nights because of the
said unfortunate incident. [Respondent] further averred that he continuously lost profits in the amount
of P250,000.00. [Respondent] therefore prayed for exemplary damages and that [petitioner] be ordered to
pay him the sum of P1,000,000.00 by way of moral damages, P250,000.00 as lost profits, P50,000.00 as
attorney’s fees plus 25% of the amount claimed including P1,000.00 per court appearance.
"Meanwhile, [petitioner] filed a Motion to Dismiss on February 7, 1991, but the same was denied for lack of
merit in an Order dated March 7, 1991. Thereafter, [petitioner] BANK on March 20, 1991 filed its Answer
denying, among others, the allegations of [respondent] and alleged that no banking institution would give an
assurance to any of its client/depositor that the check deposited by him had already been cleared and
backed up by sufficient funds but it could only presume that the same has been honored by the drawee bank
in view of the lapse of time that ordinarily takes for a check to be cleared. For its part, [petitioner] alleged that
on October 2, 1990, it gave notice to the [respondent] as to the return of his UCPB check deposit in the
amount of P101,000.00, hence, on even date, [respondent] deposited the amount of P50,000.00 to cover
the returned check.
"By way of affirmative defense, [petitioner] averred that [respondent] had no cause of action against it and
argued that it has all the right to debit the account of the [respondent] by reason of the dishonor of the check
deposited by the [respondent] which was withdrawn by him prior to its clearing. [Petitioner] further averred
that it has no liability with respect to the clearing of deposited checks as the clearing is being undertaken by
the Central Bank and in accepting [the] check deposit, it merely obligates itself as depositor’s collecting
agent subject to actual payment by the drawee bank. [Petitioner] therefore prayed that [respondent] be
ordered to pay it the amount of P1,000,000.00 by way of loss of goodwill, P7,000.00 as acceptance fee
plus P500.00 per appearance and by way of attorney’s fees.
"Considering that Westmont Bank has taken over the management of the affairs/properties of the BANK,
[respondent] on October 10, 1996, filed an Amended Complaint reiterating substantially his allegations in the
original complaint, except that the name of the previous defendant ASSOCIATED BANK is now
WESTMONT BANK.
"Trial ensured and thereafter, the court rendered its Decision dated December 3, 1996 in favor of the [respondent]
and against the [petitioner], ordering the latter to pay the [respondent] the sum of P100,000.00 by way of moral
damages, P75,000.00 as exemplary damages, P25,000.00 as attorney’s fees, plus the costs of this suit. In making
said ruling, it was shown that [respondent] was not officially informed about the debiting of the P101,000.00 [from]
his existing balance and that the BANK merely allowed the [respondent] to use the fund prior to clearing merely for
accommodation because the BANK considered him as one of its valued clients. The trial court ruled that the bank
manager was negligent in handling the particular checking account of the [respondent] stating that such lapses
caused all the inconveniences to the [respondent]. The trial court also took into consideration that [respondent’s]
mother was originally maintaining with the x x x BANK [a] current account as well as [a] time deposit, but [o]n one
occasion, although his mother made a deposit, the same was not credited in her favor but in the name of another." 4
Petitioner appealed to the CA on the issues of whether it was within its rights, as collecting bank, to debit the
account of its client for a dishonored check; and whether it had informed respondent about the dishonor prior to
debiting his account.
Ruling of the Court of Appeals
Affirming the trial court, the CA ruled that the bank should not have authorized the withdrawal of the value of the
deposited check prior to its clearing. Having done so, contrary to its obligation to treat respondent’s account with
meticulous care, the bank violated its own policy. It thereby took upon itself the obligation to officially inform
respondent of the status of his account before unilaterally debiting the amount of P101,000. Without such notice, it
is estopped from blaming him for failing to fund his account.
The CA opined that, had the P101,000 not been debited, respondent would have had sufficient funds for the
postdated checks he had issued. Thus, the supposed accommodation accorded by petitioner to him is the
proximate cause of his business woes and shame, for which it is liable for damages.
Because of the bank’s negligence, the CA awarded respondent moral damages of P100,000. It also granted him
exemplary damages of P75,000 and attorney’s fees of P25,000.
Hence this Petition. 5
Issue
In its Memorandum, petitioner raises the sole issue of "whether or not the petitioner, which is acting as a collecting
bank, has the right to debit the account of its client for a check deposit which was dishonored by the drawee bank." 6
The Court’s Ruling
The Petition has no merit.
Sole Issue:
Debit of Depositor’s Account
Petitioner-bank contends that its rights and obligations under the present set of facts were misappreciated by the
CA. It insists that its right to debit the amount of the dishonored check from the account of respondent is clear and
unmistakable. Even assuming that it did not give him notice that the check had been dishonored, such right remains
immediately enforceable.
In particular, petitioner argues that the check deposit slip accomplished by respondent on September 17, 1990,
expressly stipulated that the bank was obligating itself merely as the depositor’s collecting agent and -- until such
time as actual payment would be made to it -- it was reserving the right to charge against the depositor’s account
any amount previously credited. Respondent was allowed to withdraw the amount of the check prior to clearing,
merely as an act of accommodation, it added.
At the outset, we stress that the trial court’s factual findings that were affirmed by the CA are not subject to review
by this Court. As petitioner itself takes no issue with those findings, we need only to determine the legal
7
consequence, based on the established facts.
Right of Setoff
A bank generally has a right of setoff over the deposits therein for the payment of any withdrawals on the part of a
depositor. The right of a collecting bank to debit a client’s account for the value of a dishonored check that has
8
previously been credited has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil Code
provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by
the provisions concerning simple loan."
Hence, the relationship between banks and depositors has been held to be that of creditor and debtor. Thus, legal
9
compensation under Article 1278 of the Civil Code may take place "when all the requisites mentioned in Article
10
1279 are present," as follows:

11
"(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor
of the other;
communicated in due time to the debtor." 12
Nonetheless, the real issue here is not so much the right of petitioner to debit respondent’s account but, rather, the
manner in which it exercised such right. The Court has held that even while the right of setoff is conceded, separate
is the question of whether that remedy has properly been exercised. 13
The liability of petitioner in this case ultimately revolves around the issue of whether it properly exercised its right of
setoff. The determination thereof hinges, in turn, on the bank’s role and obligations, first, as respondent’s depositary
bank; and second, as collecting agent for the check in question.
Obligation as
Depositary Bank
In BPI v. Casa Montessori, the Court has emphasized that the banking business is impressed with public interest.
14
"Consequently, the highest degree of diligence is expected, and high standards of integrity and performance are
even required of it. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors
with meticulous care." 15
Also affirming this long standing doctrine, Philippine Bank of Commerce v. Court of Appeals has held that "the
16
degree of diligence required of banks is more than that of a good father of a family where the fiduciary nature of
their relationship with their depositors is concerned." Indeed, the banking business is vested with the trust and
17
confidence of the public; hence the "appropriate standard of diligence must be very high, if not the highest, degree
of diligence." The standard applies, regardless of whether the account consists of only a few hundred pesos or of
18
millions.
19
The fiduciary nature of banking, previously imposed by case law, is now enshrined in Republic Act No. 8791 or the
20
General Banking Law of 2000. Section 2 of the law specifically says that the State recognizes the "fiduciary nature
of banking that requires high standards of integrity and performance."
Did petitioner treat respondent’s account with the highest degree of care? From all indications, it did not.
It is undisputed -- nay, even admitted -- that purportedly as an act of accommodation to a valued client, petitioner
allowed the withdrawal of the face value of the deposited check prior to its clearing. That act certainly disregarded
the clearance requirement of the banking system. Such a practice is unusual, because a check is not legal tender or
money; and its value can properly be transferred to a depositor’s account only after the check has been cleared by
21
the drawee bank. 22
Under ordinary banking practice, after receiving a check deposit, a bank either immediately credit the amount to a
depositor’s account; or infuse value to that account only after the drawee bank shall have paid such amount. Before23
the check shall have been cleared for deposit, the collecting bank can only "assume" at its own risk -- as herein
petitioner did -- that the check would be cleared and paid out.
Reasonable business practice and prudence, moreover, dictated that petitioner should not have authorized the
withdrawal by respondent of P240,000 on October 1, 1990, as this amount was over and above his outstanding
cleared balance of P196,793.45. Hence, the lower courts correctly appreciated the evidence in his favor.
24
Obligation as
Collecting Agent
Indeed, the bank deposit slip expressed this reservation:
"In receiving items on deposit, this Bank obligates itself only as the Depositor’s Collecting agent, assuming
no responsibility beyond carefulness in selecting correspondents, and until such time as actual payments
shall have come to its possession, this Bank reserves the right to charge back to the Depositor’s account
any amounts previously credited whether or not the deposited item is returned. x x x." 25
However, this reservation is not enough to insulate the bank from any liability. In the past, we have expressed doubt
about the binding force of such conditions unilaterally imposed by a bank without the consent of the depositor. It is 26
indeed arguable that "in signing the deposit slip, the depositor does so only to identify himself and not to agree to
the conditions set forth at the back of the deposit slip." 27
Further, by the express terms of the stipulation, petitioner took upon itself certain obligations as respondent’s agent,
consonant with the well-settled rule that the relationship between the payee or holder of a commercial paper and the
collecting bank is that of principal and agent. Under Article 1909 of the Civil Code, such bank could be held liable
28 29
not only for fraud, but also for negligence.
As a general rule, a bank is liable for the wrongful or tortuous acts and declarations of its officers or agents within
the course and scope of their employment. Due to the very nature of their business, banks are expected to exercise
30
the highest degree of diligence in the selection and supervision of their employees. Jurisprudence has established
31
that the lack of diligence of a servant is imputed to the negligence of the employer, when the negligent or wrongful
act of the former proximately results in an injury to a third person; in this case, the depositor.
32
The manager of the bank’s Cabanatuan branch, Consorcia Santiago, categorically admitted that she and the
employees under her control had breached bank policies. They admittedly breached those policies when, without
clearance from the drawee bank in Baguio, they allowed respondent to withdraw on October 1, 1990, the amount of
the check deposited. Santiago testified that respondent "was not officially informed about the debiting of
the P101,000 from his existing balance of P170,000 on October 2, 1990 x x x." 33
Being the branch manager, Santiago clearly acted within the scope of her authority in authorizing the withdrawal
and the subsequent debiting without notice. Accordingly, what remains to be determined is whether her actions
proximately caused respondent’s injury. Proximate cause is that which -- in a natural and continuous sequence,
unbroken by any efficient intervening cause --produces the injury, and without which the result would not have
occurred.34
Let us go back to the facts as they unfolded. It is undeniable that the bank’s premature authorization of the
withdrawal by respondent on October 1, 1990, triggered -- in rapid succession and in a natural sequence -- the
debiting of his account, the fall of his account balance to insufficient levels, and the subsequent dishonor of his own
checks for lack of funds. The CA correctly noted thus:
"x x x [T]he depositor x x x withdrew his money upon the advice by [petitioner] that his money was already
cleared. Without such advice, [respondent] would not have withdrawn the sum of P240,000.00. Therefore, it
cannot be denied that it was [petitioner’s] fault which allowed [respondent] to withdraw a huge sum which he
believed was already his.
"To emphasize, it is beyond cavil that [respondent] had sufficient funds for the check. Had the P101,000.00
not [been] debited, the subject checks would not have been dishonored. Hence, we can say that
[respondent’s] injury arose from the dishonor of his well-funded checks. x x x." 35
Aggravating matters, petitioner failed to show that it had immediately and duly informed respondent of the debiting
of his account. Nonetheless, it argues that the giving of notice was discernible from his act of depositing P50,000 on
October 2, 1990, to augment his account and allow the debiting. This argument deserves short shrift.
First, notice was proper and ought to be expected. By the bank manager’s account, respondent was considered a
"valued client" whose checks had always been sufficiently funded from 1987 to 1990, until the October imbroglio.
36
Thus, he deserved nothing less than an official notice of the precarious condition of his account.
Second, under the provisions of the Negotiable Instruments Law regarding the liability of a general indorser and the
37
procedure for a notice of dishonor, it was incumbent on the bank to give proper notice to respondent. In Gullas v.
38
National Bank, the Court emphasized:

39
"x x x [A] general indorser of a negotiable instrument engages that if the instrument – the check in this case
– is dishonored and the necessary proceedings for its dishonor are duly taken, he will pay the amount
thereof to the holder (Sec. 66) It has been held by a long line of authorities that notice of dishonor is
necessary to charge an indorser and that the right of action against him does not accrue until the notice is
given.
"x x x. The fact we believe is undeniable that prior to the mailing of notice of dishonor, and without waiting
for any action by Gullas, the bank made use of the money standing in his account to make good for the
treasury warrant. At this point recall that Gullas was merely an indorser and had issued checks in good faith.
As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a third party,
it has been held that he has a right of action against the bank for its refusal to pay such a check in the
absence of notice to him that the bank has applied the funds so deposited in extinguishment of past due
claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203.) However this may be,
as to an indorser the situation is different, and notice should actually have been given him in order that he
might protect his interests." 40
Third, regarding the deposit of P50,000 made by respondent on October 2, 1990, we fully subscribe to the CA’s
observations that it was not unusual for a well-reputed businessman like him, who "ordinarily takes note of the
amount of money he takes and releases," to immediately deposit money in his current account to answer for the
postdated checks he had issued. 41
Damages
Inasmuch as petitioner does not contest the basis for the award of damages and attorney’s fees, we will no longer
address these matters.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
Sandoval-Gutierrez, Carpio-Morales, and Garcia, JJ., concur.

Corona, J., on leave.
Footnotes
Rollo, pp. 18-42.

1
Penned by Justice Mercedes Gozo-Dadole and concurred in by Justices B. A. Adefuin de la Cruz (then
2
Chairman, Ninth Division) and Mariano C. del Castillo.
CA Decision, p. 9; rollo, p. 92.

3
Id., pp. 2-4 & 85-87. Citations omitted.

4
The Petition was deemed submitted for decision on December 1, 2003, upon the court’s receipt of
5
respondent’s Memorandum signed by Atty. Cesar R. Villar. Petitioner’s Memorandum, signed by Atty.
Edgardo G. Villarin, was received by the Court on November 5, 2003.
Petitioner’s Memorandum, p. 8; rollo, p. 121.

6
Aclon v. CA, 436 Phil. 219, 230, August 20, 2002; Reyes v. CA & Far East Bank and Trust Company, 415
7
Phil. 258, 267, August 15, 2001; W-Red Construction and Development Corporation v. CA, 392 Phil. 888,
894, August 17, 2000.
Gullas v. National Bank, 62 Phil. 519, 521, November 13, 1935.

8
Consolidated Bank & Trust Corporation v. CA, 410 SCRA 562, 574, September 11, 2003; Guingona Jr. v.
9
City Fiscal of Manila, 128 SCRA 577, 584, April 4, 1984; Serrano v. Central Bank of the Phils., 96 SCRA 96,
102-103, February 14, 1980.
10
Article 1278 provides:
"Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of
each other." (See also Bank of the Philippine Islands v. CA, 325 Phil. 930, 938-939, March 29, 1996.)
11
Article 1290 of the Civil Code.
12
13
Gullas v. National Bank; supra, p. 522.
14
GR No. 149454, May 28, 2004.
15
Id., per Panganiban, J.
16
336 Phil. 667, March 14, 1997 (cited in Reyes v. CA & Far East Bank and Trust Company; supra, p. 269.)
Id., p. 681, per Hermosisima Jr., J. See also Consolidated Bank & Trust Corporation v. CA; supra, pp. 574-
17
575.
Philippine Commercial International Bank v. CA, 350 SCRA 446, 472, January 29, 2001, per Quisumbing, J
18
(citing Simex International (Manila), Inc. v. CA, 183 SCRA 360, 367, March 19, 1990).
Prudential Bank v. CA, 384 Phil. 817, 825, March 16, 2000; Philippine National Bank v. CA, 373 Phil. 942,
19
948, September 28, 1999; Simex International v. CA, supra; BPI v. Intermediate Appellate Court, 206 SCRA
408, 412-413, February 21, 1992.
Simex International v. CA, supra; BPI v. IAC, supra; Metropolitan Bank & Trust Co. v. CA, 237 SCRA 761,
20
767, October 26, 1994.
21
Philippine Airlines, Inc. v. CA, 181 SCRA 557, 568, January 30, 1990.
Roman Catholic Bishop of Malolos, Inc. v. IAC, 191 SCRA 411, 422, November 16, 1990 (cited in Bank of
22
the Philippine Islands v. CA, 383 Phil. 538, 547, February 29, 2000).
Bank of the Philippine Islands v. CA; supra, p. 554 (citing Banco Atlantico v. Auditor General, 81 SCRA
23
335, 340-341, January 31, 1978).
This amount was computed based on the bank ledger which was submitted as Annex "A" of Respondent’s
24
Complaint; rollo, p. 48.
25
Petitioner’s (then Defendant-Appellant’s) Brief to the CA, pp. 5-6; rollo, pp. 62-63.
26
Metropolitan Bank & Trust Company v. CA, 194 SCRA 169, 175, February 18, 1991.
27
Ibid.
28
Philippine Commercial International Bank v. CA; supra, p. 466.
29
Art. 1909 of the Civil Code provides:
"Art. 1909. The agent is responsible not only for fraud, but also for negligence, which shall be judged with
more or less rigor by the courts, according to whether the agency was or was not for compensation."
Philippine Commercial International Bank v. CA; supra at p. 470; Producers Bank of the Philippines (Now
30
First International Bank) v. CA, 397 SCRA 651, 663, February 19, 2003. Article 2180 of the Civil Code,
which embodies this principle, provides:
"Art. 2180. The obligation imposed by Article 2176 is demandable not only for one’s own acts or
omissions, but also for those of persons for whom one is demandable.
xxx xxx xxx
"Employers shall be liable for the damages caused by their employees and household helpers acting
within the scope of their assigned tasks, even though the former are not engaged in any business or
industry."
31
Philippine Commercial International Bank v. CA; supra, p. 472.
32
Id., p. 464; BPI v. Casa Montessori Internationale; supra.
33
RTC Decision, p. 4; rollo, p. 77.
34
BPI v. Casa Montessori Internationale; supra, p. 26.
35
CA Decision, pp. 7-8; rollo, pp. 90-91.
36
RTC Decision, p. 3; id., p. 76.
37
§66 of the Negotiable Instruments Law provides:
"Sec. 66. Liability of general indorser. – Every indorser who indorses without qualification, warrants
to all subsequent holders in due course:
xxx xxx xxx
"And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the
case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser
who may be compelled to pay it."
The procedure as to the manner and the time of giving notice is outlined under §§89-118 of the said law.
38
§89, in particular, provides as follows:
"Sec. 89. To whom notice of dishonor must be given. – Except as herein otherwise provided, when a
negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor
must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice
is not given is discharged."
39
Supra.
40
Id., pp. 521-522, per Malcolm, J
41
23) Villanueva vs Tantuico 182 SCRA 263

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-53585 February 15, 1990
ROMULO VILLANUEVA, petitioner,
vs.
HON. FRANCISCO TANTUICO, JR., and EMILIANA CRUZ, respondents.
Mariano C. Cortezano for petitioner.
NARVASA, J.:
This case treats of the liability of a Government officer of the Bureau of Records Management who was designated
Administrative Officer and Training Coordinator of two (2) regional seminars of the Bureau, and who, as such, and
having custody of seminar fees collected from the participants, authorized disbursements to certain of the latter for
transportation expenses, food, etc. although, as subsequently disclosed, they had already collected and received
amounts corresponding to said items from their respective offices.
The officer involved is Romulo Villanueva, petitioner herein. The seminars of his Bureau were organized and
conducted pursuant to a directive of the Secretary of General Services with a view to updating records management
techniques. The seminar fees were charged against the appropriations of the participants' respective offices in
1
accordance with Memo Circular 830 issued by the Office of the President, authorizing the attendance of records
officers from the different government agencies at the seminars. All the fees collected, P43,000.00 in the aggregate,
were placed under Villanueva's control and supervision, and were made disbursable only upon his authorization and
for the purposes of the seminars specified in Seminar Operation Plans Numbered 001 and 002.
For both seminars, Villanueva authorized disbursements of P41,148.20 in payment of food, snacks, transportation
expenses, seminar kits and hand-outs of the participants; hauling services; additional allowance for training staff
(including snacks for personnel who worked overtime in preparation for the seminars); hotel bills and honoraria of
resource speakers. The balance of P1,851.80 was deposited with the Cashier of the Bureau of Records
Management after the conclusion of the seminars, this being evidenced by Official Receipt No. 0926496 dated
October 8, 1975.
It was subsequently discovered that employees and officers designated to take part in the seminars had earlier
collected from the offices or corporations to which they pertained, their transportation expenses, per diems, and
other allowances. For this reason, the Auditor of the Bureau of Records Management, herein respondent Emiliana
Cruz, disallowed the disbursement of seminar funds in the total amount of P31,949.15 which Villanueva had
authorized for the transportation expenses, food and other expenses of said employees and officers. In Auditor
Cruz's view, this amount should also have been deposited with the Cashier of the Bureau of Records Management.
Auditor Cruz accordingly wrote to Villanueva demanding restitution of this sum of P31,949.15. Villanueva demurred,
claiming that the seminar funds were private funds, and they had been disbursed in pursuance to the objectives of
the seminars.
What Cruz did was to cause the issuance to Villanueva of a certificate of permanent disallowance in virtue of which
all money collectible by him from the Government would be applied in satisfaction of the amount of P31,949.15
which she had disallowed in audit. She did this in reliance on Section 624 of the Revised Administrative Code, viz.:
SEC. 624. When any person is indebted to the Government of the Philippine Islands, the Insular
Auditor may direct the proper officer to withhold the payment of any money due him or his estate, the
same to be applied in satisfaction of such indebtedness.
Auditor Cruz characterized as an "indebtedness" within the meaning of Section 624, the disbursement of
P31,949.15 authorized by Villanueva to certain seminar participants (which she had disallowed as aforestated). The
result was that Villanueva was prevented from receiving (1) his salaries in the total amount of P13,313.30, (2) his
transportation and representation expenses as Administrative Officer and Training Coordinator of the seminars
amount in to P2,205.00, and (3) the money value of his terminal leave, P14,796.29.
On top of this, Villanueva was charged by the Commission on Audit with malversation of public funds before the
Tanodbayan. The Tanodbayan however dismissed the case upon the Special Prosecutor's finding that the seminar
2
fees were not public funds, and they had been disbursed by Villanueva in good faith. The Commission's motion for
reconsideration was denied for lack of merit.
Villanueva then addressed a letter to the President of the Philippines, appealing for reversal of Auditor Cruz's action
in preventing the payment of his salaries and other money benefits due him. The matter was referred to the
Commission on Audit which however found no cogent reason to recommend favorable action on Villanueva's
appeal. 3
To obtain relief from these adverse dispositions, Villanueva has instituted the special civil action of certiorari at bar,
faulting the respondents with having acted with lack or excess of jurisdiction or grave abuse of discretion. He argues
that:
1) the seminar fees entrusted to him were private, not public funds;
2) any conclusion that he "is indebted to the Government" so that, according to Section 624 of the
Revised Administrative Code, "any money due him or his estate" may be withheld and "applied in
satisfaction of such indebtedness," must proceed from judgment of a competent court, not a mere
opinion and pronouncement of an auditor or even by the COA; and
3) in any event, he is not in truth "indebted to the Government," no disbursement authorized by him
being in violation of the President's Memo Circular 830, or Seminar Regulations Nos. 001 and 002 of
the Bureau of Records Management, or any existing auditing rule or regulation.
1. The petitioner's first submission is quickly disposed of. The record shows that the seminar fees collected from
seminar participants and entrusted to Villanueva were chargeable against the appropriations of the participants'
respective offices or agencies in accordance with the President's Memorandum Circular No. 830. Those fees must
therefore be deemed public, not private, funds. The audit of the disbursements of said funds conducted by a
government auditor was therefore entirely in order.
2. The ratiocinations and conclusions of the auditor, sustained by the Commission on Audit, are something else.
Auditor Cruz made the finding, on the basis of her examination of the relevant records, that Villanueva was indebted
to the Government in the sum of P31,949.15 — representing supposedly unauthorized disbursements, which she
had consequently disallowed — and in reliance on Section 624 of the Revised Administrative Code, supra, the
indebtedness may properly. be offset against Villanueva's salary and other monetary benefits payable to him by the
Government. The proposition is untenable.
While Section 624 of the Revised Administrative Code does indeed authorize the set-off of a person's indebtedness
to the Government against "any money due him or his estate to be applied in satisfaction of such indebtedness,"
that indebtedness must be one that is admitted by the alleged debtor or pronounced by final judgment of a
competent court. In such a case, the person and the Government are in their own right both debtors and creditors of
each other, and compensation takes place by operation of law in accordance with Article 1278 of the Civil
Code. Absent, however, any such categorical admission by an obligor or final adjudication, no legal compensation
4
can take place, as this Court has already had occasion to rule in an early case. Unless admitted by a debtor
5
himself, the conclusion that he is in truth indebted to the Government cannot be definitely and finally pronounced by
a Government auditor, no matter how convinced he may be from his examination of the pertinent records of the
validity of that conclusion. Such a declaration, that a government employee or officer is indeed indebted to the
Government, if it is to have binding authority, may only be made by a court. That determination is after all, plainly a
judicial, not an administrative function. No executive officer or administrative body possesses such a power.
3. In any case, the record does not show Villanueva to have made illegitimate disbursements of the public funds in
his custody for reimbursement of which to the Government he had become obliged. The Court is satisfied that his
disbursements were within the letter and contemplation of the Seminar Operation Plans in question, Numbered 001
and 002. The disbursements were for items explicitly specified as authorized expenditures, i.e., food, snacks,
transportation, hauling services, additional allowances for the training staff, acquisition costs of seminar kits and
hand-outs, and grocery items for the snacks of the training staff who had worked overtime without pay, or for items
which were allowable as reasonably necessary expenses for the seminars upon approval (actually given) of the
Director of the Bureau of Records Management, such as hotel bills and honoraria for resource speakers. There is
moreover no showing whatever, contrary to Auditor Cruz's claim, that Villanueva had knowledge at the time of
making the disputed disbursements, that some of the seminar participants had already collected from their home
offices or agencies certain amounts to cover some of their expenses for attendance at the seminar. Hence,
assuming that some of the participants, after having received certain amounts from their home offices in connection
with their participation in the seminars, had again received other amounts for the same purpose from petitioner
Villanueva, the liability for that duplication in disbursements should be exacted from the participants concerned, not
from Villanueva.
It is difficult, in fine, to discern any irregularity in Villanueva's conduct as officer in charge of the seminars such as
would make him a debtor of the Government, it appearing on the contrary that he has done naught but fulfill his
duties in good faith and in accordance with the applicable rules and guidelines. He did not deserve the harsh
treatment accorded to him in the premises. In meting it out to him, there was grave abuse of discretion.
WHEREFORE, the writ of certiorari prayed for is granted, annulling and declaring void ab initio the certificate of
permanent disallowance issued by Auditor Cruz against petitioner Villanueva and the resolution or order of the
Commission on Audit sustaining the same, and ordering the Commission on Audit to cause the immediate payment
to the petitioner of the sums rightfully due but improperly withheld from him, i.e., his salaries in the total amount of
P13,313.30, the transportation and representation expenses due him as Administrative Officer and Training
Coordinator of the seminars in the sum of P2,205.00, and the money value of his terminal leave: P14,796.29.
SO ORDERED.
Cruz, Gancayco, Griño-Aquino and Medialdea, JJ., concur.
Footnotes
1 The participants were the records officers of the various offices and agencies of the national
government and of government-owned or -controlled corporations. The first seminar was held in
Quezon City from May 7-16, 1975; the second, in Naga City from June 18-27, 1975.
2 The complaint was filed on August 9, 1979 and was docketed as I.S. No. 79-12147.
3 Record, p. 2; Exh. A.
4 ART. 1279 provides that in order that compensation may be proper, it is necessary: (1) that each
one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other; (2) that both debts consist in a sum of money .. (3) that the two debts be due; (4) that they be
liquidated and demandable; (5) that over neither of them there be any retention or controversy,
commenced by third person and communicated in due time to the debtor.
5 La Compania General de Tabacos de Filipinas v. C.H. French, as Auditor of the Philippine Islands,
et al., 39 Phil. 34.
24) Silahis Marketing Corporation v Intermediate Appelate Court

180 SCRA 21
SUPREME COURT
Manila
THIRD DIVISION
G. R. No. L-74027 December 7, 1989
SILAHIS MARKETING CORPORATION, petitioner

vs.
INTERMEDIATE APPELLATE COURT and GREGORIO DE LEON, doing business under the name and style
of "MARK INDUSTRIAL SALES", respondents.
Jaime V. Villanueva for petitioner.
Tinga, Fuentes, Tagle & Malate for private respondent.
FERNAN, C.J.
Petitioner Silahis Marketing Corporation seeks in this petition for review on certiorari a reversal of the decision of the
then Intermediate Appellate Court (IAC) in AC-G.R. CV No. 67162 entitled "De Leon, etc. v. Silahis Marketing
Corporation", disallowing petitioner's counterclaim for commission to partially offset the claim against it of private
respondent Gregorio de Leon for the purchase price of certain merchandise.
A review of the record shows that on various dates in October, November and December, 1975, Gregorio de Leon
(De Leon for short) doing business under the name and style of Mark Industrial Sales sold and delivered to Silahis
Marketing Corporation (Silahis for short) various items of merchandise covered by several invoices in the aggregate
amount of P 22,213.75 payable within thirty (30) days from date of the covering invoices. Allegedly due to Silahis'
failure to pay its account upon maturity despite repeated demands, de Leon filed before the then Court of First
Instance of Manila a complaint for the collection of the said accounts including accrued interest thereon in the
amount of P 661.03 and attorney's fees of P 5,000.00 plus costs of litigation.
The answer admitted the allegations of the complaint insofar as the invoices were concerned but presented as
affirmative defenses; [al a debit memo for P 22,200.00 as unrealized profit for a supposed commission that Silahis
should have received from de Leon for the sale of sprockets in the amount of P 111,000.00 made directly to Dole
Philippines, Incorporated by the latter sometime in August 1975 without coursing the same through the former
allegedly in violation of the usual practice concerning sale of merchandise to Dole Philippines, Inc.; and [b] Silahis'
claim that it is entitled to return the stainless steel screen covered by Exhibits '6-A' and '6-B' which was found
defective by its client, Borden International, Davao City, and to have the corresponding amount cancelled from its
account with de Leon.
In a decision dated August 25, 1978, the lower court confirmed the liability of Silahis for the claim of de Leon but at
1
the same time ordered that it be partially offset by Silahis' counterclaim as contained in the debit memo for
unrealized profit and commission. Judge Bienvenido C. Ejercito of said court held:
There is no question that the defendant received from the plaintiff the items contained in Exhs. 'A' to
'F'. The only question is whether or not the defendant is entitled to set off against the claim of the
plaintiff the amount contained in the debit memo of the defendant, Exh. '1', and whether or not the
defendant is entitled to return the steel wire mesh which was returned to them by Borden
Philippines, as shown by Exhs. '6-A' and '6-B'. The Court believes that the defendant is properly
chargeable for the amounts of the unpaid invoices set forth in the complaint. However, the Court
also believes that the plaintiff is also properly chargeable for the debit memo of P 22,200.00, Exh. '1'.
This is because it was proven by the defendant from the testimonies of Isaias Fernando, Jr. and
Jose Joel Tamon that contrary to the agreement between plaintiff and defendant that the latter was
to serve the account of Dole Philippines in Davao, the plaintiff made a direct sale of sprockets for P
111,000.00 which therreby deprives the defendant of its corresponding commission for P 22,200.00
which the defendant would have otherwise made if the plaintiff had followed its previous
arrangement with the defendant. However, as to the counterclaim of the defendant for a cancellation
of the amount of P 6,000.00 for defective stainless screen wire purchased and intended for Borden
International, Davao City, the Court believes that it is much too late now to present said claim
because the purchase was made and delivered as early as December 22,1975 and the proposed
return to the defendant by Borden was made on April 1, 1976 only. The Court is not ready to award
damages to any of the parties. After deducting the amount of P 22,200.00, which is the unpaid
commission of the defendant from the principal total amount of the unpaid invoices of the plaintiff of
P 22,213.75, the unpaid balance in favor of the plaintiff is P 13.75. The claim for interest and
attorney's fees of the plaintiff may be offset against the interest and attorney's fees of the defendant.
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant
ordering the defendant to pay to the plaintiff the amount of P 13.75, with interest at 12% per annum
from the date of the filing of the action on July 1, 1976 until fully paid, without pronouncement as to
costs.
SO ORDERED. 2
De Leon appealed from the said decision insofar as it directed partial compensation and its failure to award interest
on his principal claim as well as attomey's fees in his favor. In a decision dated March 1 7, 1986, respondent
3
Intermediate Appellate Court set aside the decision of the lower court and dismissed herein petitioner's (therein
4
defendant- appellee's) counterclaim for lack of factual or legal basis. The appellate court found that there was no
agreement, verbal or otherwise, nor was there any contractual obligation between De Leon and Silahis prohibiting
any direct sales to Dole Philippines, Inc. by de Leon; nor was there anything in the debit memo obligating de Leon to
pay a commission to Silahis for the sale of P 111,000.00 worth of sprockets to Dole Philippines although in the past,
the former did supply certain items to the latter for delivery to Dole Philippines, Incorporated.
Hence, in this petition for review on certiorari, the central issue is whether or not private respondent is liable to the
petitioner for the commission or margin for the direct sale which the former concluded and consummated with Dole
Philippines, Incorporated without coursing the same through herein petitioner.
We have carefully gone over the record of this case particularly the debit memo upon which petitioner's
counterclaim rests and found nothing contained therein to show that private respondent obligated himself to set-off
or compensate petitioner's outstanding accounts with the alleged unrealized commission from the assailed sale of
sprockets in the amount of P 111,000.00 to Dole Philippines, Inc.
It must be remembered that compensation takes place when two persons, in their own right, are creditors and
debtors to each other. Article 1279 of the Civil Code provides that: "In order that compensation may be proper, it is
necessary: [1] that each one of the obligors be bound principally, and that he be at the same time a principal creditor
of the other; [2] that both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated; [3] that the two debts be due; [4] that they be
liquidated and demandable; [5] that over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation takes effect by operation
of law, even without the consent or knowledge of the creditors and debtors. Article 1279 requires, among others,
5
that in order that legal compensation shall take place, "the two debts be due" and "they be liquidated and
demandable." Compensation is not proper where the claim of the person asserting the set-off against the other is
not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim existing from breach of
contract.6
Undoubtedly, petitioner admits the validity of its outstanding accounts with private respondent in the amount of P
22,213.75 as contained in its answer. But whether private respondent is liable to pay the petitioner a 20% margin or
commission on the subject sale to Dole Philippines, Inc. is vigorously disputed. This circumstance prevents legal
compensation from taking place.
The Court agrees with respondent appellate court that there is no evidence on record from which it can be inferred
that there was any agreement between the petitioner and private respondent prohibiting the latter from selling
directly to Dole Philippines, Incorporated. Definitely, it cannot be asserted that the debit memo was a contract
binding between the parties considering that the same, as correctly found by the appellate court, was not signed by
private respondent nor was there any mention therein of any commitment by the latter to pay any commission to the
former involving the sale of sprockets to Dole Philippines, Inc. in the amount of P 111,000.00. Indeed, such
document can be taken as self-serving with no probative value absent a showing or at the very least an inference,
that the party sought to be bound assented to its contents or showed conformity thereto.
In fact the letter written by private respondent's lawyer dated March 5,1975 in reply to petitioner's letter dated
7
February 19, 1976 transmitting its Debit Memo No. 1695 further strengthens private respondent's stand that it
8
never agreed to give petitioner any commission on the direct sale to Dole Philippines, Inc. by its company because
said letter denied any utilization of petitioners personnel and facilities at its Davao Branch in the transaction with
Dole Philippines, Inc. which would otherwise lend a basis for petitioner's monetary claim.
WHEREFORE, in view of the foregoing, the questioned decision of respondent appellate court is hereby
AFFIRMED.
SO ORDERED.
Gutierrez, Jr., Feliciano and Cortes, JJ., concur.
Bidin, J., took no part.
Footnotes
1 Record on Appeal, pp. 1 1 -17.
3 Rollo, pp, 26-34.
4 Fourth Civil Cases Division, Veloso, J., ponente; Sison, Bidin, Britanico, Bellosillo, JJ., concurring.
5 Art. 1290, Civil Code.
6 International Corporate Bank, Inc. v. Intermediate Appellate Court, et al., G.R. No. 69560, June
30,1988.
7 Exh.'G' Record on Appeal, Exhibit Folder, p. 7.
8 Exh. '2', Record on Appeal, Exhibit Folder, p. 20.
25) Millar vs Court of Appeals 38 SCRA 642

SUPREME COURT
Manila
EN BANC

G.R. No. L-29981 April 30, 1971
EUSEBIO S. MILLAR, petitioner,
vs.
THE HON. COURT OF APPEALS and ANTONIO P. GABRIEL, respondents.
Fernandez Law Office and Millar and Esguerra for petitioner.
Francisco de la Fuente for respondents.
CASTRO, J.:
On February 11, 1956, Eusebio S. Millar (hereinafter referred to as the petitioner) obtained a favorable judgment
from the Court of First Instance of Manila, in civil case 27116, condemning Antonio P. Gabriel (hereinafter referred
to as the respondent) to pay him the sum of P1,746.98 with interest at 12% per annum from the date of the filing of
the complaint, the sum of P400 as attorney's fees, and the costs of suit. From the said judgment, the respondent
appealed to the Court of Appeals which, however, dismissed the appeal on January 11, 1957.
Subsequently, on February 15, 1957, after remand by the Court of Appeals of the case, the petitioner moved ex
parte in the court of origin for the issuance of the corresponding writ of execution to enforce the judgment. Acting
upon the motion, the lower court issued the writ of execution applied for, on the basis of which the sheriff of Manila
seized the respondent's Willy's Ford jeep (with motor no. B-192297 and plate no. 7225, Manila, 1956).
The respondent, however, pleaded with the petitioner to release the jeep under an arrangement whereby the
respondent, to secure the payment of the judgement debt, agreed to mortgage the vehicle in favor of the petitioner.
The petitioner agreed to the arrangement; thus, the parties, on February 22, 1957, executed a chattel mortgage on
the jeep, stipulating, inter alia, that
This mortgage is given as security for the payment to the said EUSEBIO S. MILLAR, mortgagee, of
the judgment and other incidental expenses in Civil Case No. 27116 of the Court of First Instance of
Manila against Antonio P. Gabriel, MORTGAGOR, in the amount of ONE THOUSAND SEVEN
HUNDRED (P1,700.00) PESOS, Philippine currency, which MORTGAGOR agrees to pay as
follows:
March 31, 1957 — EIGHT HUNDRED FIFTY (P850) PESOS;
April 30, 1957 — EIGHT HUNDRED FIFTY (P850.00) PESOS.
Upon failure of the respondent to pay the first installment due on March 31, 1957, the petitioner obtained an alias
writ of execution. This writ which the sheriff served on the respondent only on May 30, 1957 — after the lapse of the
entire period stipulated in the chattel mortgage for the respondent to comply with his obligation — was returned
unsatisfied.
So on July 17, 1957 and on various dates thereafter, the lower court, at the instance of the petitioner, issued
several alias writs, which writs the sheriff also returned unsatisfied. On September 20, 1961, the petitioner obtained
a fifth alias writ of execution. Pursuant to this last writ, the sheriff levied on certain personal properties belonging to
the respondent, and then scheduled them for execution sale.
However, on November 10, 1961, the respondent filed an urgent motion for the suspension of the execution sale on
the ground of payment of the judgment obligation. The lower court, on November 11, 1961, ordered the suspension
of the execution sole to afford the respondent the opportunity to prove his allegation of payment of the judgment
debt, and set the matter for hearing on November 25, 1961. After hearing, the lower court, on January 25, 1962,
issued an order the dispositive portion of which reads:
IN VIEW WHEREOF, execution reiterated for P1,700.00 plus costs of execution.

The lower court ruled that novation had taken place, and that the parties had executed the chattel mortgage only "to
secure or get better security for the judgment.
The respondent duly appealed the aforesaid order to the Court of Appeals, which set aside the order of execution in
a decision rendered on October 17, 1968, holding that the subsequent agreement of the parties impliedly novated
the judgment obligation in civil case 27116.
The appellate court stated that the following circumstances sufficiently demonstrate the incompatibility between the
judgment debt and the obligation embodied in the deed of chattel mortgage, warranting a conclusion of implied
novation:
1. Whereas the judgment orders the respondent to pay the petitioner the sum of P1,746.98 with interest at 12% per
annum from the filing of the complaint, plus the amount of P400 and the costs of suit, the deed of chattel mortgage
limits the principal obligation of the respondent to P1,700;
2. Whereas the judgment mentions no specific mode of payment of the amount due to the petitioner, the deed of
chattel mortgage stipulates payment of the sum of P1,700 in two equal installments;
3. Whereas the judgment makes no mention of damages, the deed of chattel mortgage obligates the respondent to
pay liquidated damages in the amount of P300 in case of default on his part; and
4. Whereas the judgment debt was unsecured, the chattel mortgage, which may be foreclosed extrajudicially in case
of default, secured the obligation.
On November 26, 1968, the petitioner moved for reconsideration of the appellate court's decision, which motion the
Court of Appeals denied in its resolution of December 7, 1968. Hence, the present petition for certiorari to review
the decision of the Court of Appeals, seeking reversal of the appellate court's decision and affirmance of the order of
the lower court.
Resolution of the controversy posed by the petition at bar hinges entirely on a determination of whether or not the
subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly novated the judgment
obligation in civil case 27116. The Court of Appeals, in arriving at the conclusion that implied novation has taken
place, took into account the four circumstances heretofore already adverted to as indicative of the incompatibility
between the judgment debt and the principal obligation under the deed of chattel mortgage.
1. Anent the first circumstance, the petitioner argues that this does not constitute a circumstance in implying
novation of the judgment debt, stating that in the interim — from the time of the rendition of the judgment in civil
case 27116 to the time of the execution of the deed of chattel mortgage — the respondent made partial payments,
necessarily resulting in the lesser sum stated in the deed of chattel mortgage. He adds that on record appears the
admission by both parties of the partial payments made before the execution of the deed of chattel mortgage. The
erroneous conclusion arrived at by the Court of Appeals, the petitioner argues, creates the wrong impression that
the execution of the deed of chattel mortgage provided the consideration or the reason for the reduced judgment
indebtedness.
Where the new obligation merely reiterates or ratifies the old obligation, although the former effects but minor
alterations or slight modifications with respect to the cause or object or conditions of he latter, such changes do not
effectuate any substantial incompatibility between the two obligations Only those essential and principal changes
introduced by the new obligation producing an alteration or modification of the essence of the old obligation result in
implied novation. In the case at bar, the mere reduction of the amount due in no sense constitutes a
sufficient indictum of incompatibility, especially in the light of (a) the explanation by the petitioner that the reduced
indebtedness was the result of the partial payments made by the respondent before the execution of the chattel
mortgage agreement and (b) the latter's admissions bearing thereon.
At best, the deed of chattel mortgage simply specified exactly how much the respondent still owed the petitioner by
virtue of the judgment in civil case 27116. The parties apparently in their desire to avoid any future confusion as to
the amounts already paid and as to the sum still due, decoded to state with specificity in the deed of chattel
mortgage only the balance of the judgment debt properly collectible from the respondent. All told, therefore, the first
circumstance fails to satisfy the test of substantial and complete incompatibility between the judgment debt an the
pecuniary liability of the respondent under the chattel mortgage agreement.
2. The petitioner also alleges that the third circumstance, considered by the Court of Appeals as indicative of
incompatibility, is directly contrary to the admissions of the respondent and is without any factual basis. The
appellate court pointed out that while the judgment made no mention of payment of damages, the deed of chattel
mortgage stipulated the payment of liquidated damages in the amount of P300 in case of default on the part of the
respondent.
However, the petitioner contends that the respondent himself in his brief filed with the Court of Appeals admitted his
obligation, under the deed of chattel mortgage, to pay the amount of P300 by way of attorney's fees and not as
liquidated damages. Similarly, the judgment makes mention of the payment of the sum of P400 as attorney's fees
and omits any reference to liquidated damages.
The discrepancy between the amount of P400 and tile sum of P300 fixed as attorney's fees in the judgment and the
deed of chattel mortgage, respectively, is explained by the petitioner, thus: the partial payments made by the
respondent before the execution of the chattel mortgage agreement were applied in satisfaction of part of the
judgment debt and of part of the attorney's fee fixed in the judgment, thereby reducing both amounts.
At all events, in the absence of clear and convincing proof showing that the parties, in stipulating the payment of
P300 as attorney's fees in the deed of chattel mortgage, intended the same as an obligation for the payment of
liquidated damages in case of default on the part of the respondent, we find it difficult to agree with the conclusion
reached by the Court of Appeals.
3. As to the second and fourth circumstances relied upon by the Court of Appeals in holding that the montage
obligation superseded, through implied novation, the judgment debt, the petitioner points out that the appellate court
considered said circumstances in a way not in accordance with law or accepted jurisprudence. The appellate court
stated that while the judgment specified no mode for the payment of the judgment debt, the deed of chattel
mortgage provided for the payment of the amount fixed therein in two equal installments.
On this point, we see no substantial incompatibility between the mortgage obligation and the judgment liability of the
respondent sufficient to justify a conclusion of implied novation. The stipulation for the payment of the obligation
under the terms of the deed of chattel mortgage serves only to provide an express and specific method for its
extinguishment — payment in two equal installments. The chattel mortgage simply gave the respondent a method
and more time to enable him to fully satisfy the judgment indebtedness. The chattel mortgage agreement in no
1
manner introduced any substantial modification or alteration of the judgment. Instead of extinguishing the obligation
of the respondent arising from the judgment, the deed of chattel mortgage expressly ratified and confirmed the
existence of the same, amplifying only the mode and period for compliance by the respondent.
The Court of Appeals also considered the terms of the deed of chattel mortgage incompatible with the judgment
because the chattel mortgage secured the obligation under the deed, whereas the obligation under the judgment
was unsecured. The petitioner argues that the deed of chattel agreement clearly shows that the parties agreed upon
the chattel mortgage solely to secure, not the payment of the reduced amount as fixed in the aforesaid deed, but the
payment of the judgment obligation and other incidental expenses in civil case 27116.
The unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the chattel mortgage
purposely to secure the satisfaction of the then existing liability of the respondent arising from the judgment against
him in civil case 27116. As a security for the payment of the judgment obligation, the chattel mortgage agreement
effectuated no substantial alteration in the liability of the respondent.
The defense of implied novation requires clear and convincing proof of complete incompatibility between the two
obligations. The law requires no specific form for an effective novation by implication. The test is whether the two
2
obligations can stand together. If they cannot, incompatibility arises, and the second obligation novates the first. If
they can stand together, no incompatibility results and novation does not take place.
We do not see any substantial incompatibility between the two obligations as to warrant a finding of an implied
novation. Nor do we find satisfactory proof showing that the parties, by explicit terms, intended the full discharge of
the respondent's liability under the judgment by the obligation assumed under the terms of the deed of chattel
mortgage so as to justify a finding of express novation.
ACCORDINGLY, the decision of the Court of Appeals of October 17, 1968 is set aside, and the order of the Court of
First Instance of Manila of January 25, 1962 is affirmed, at respondent Antonio Gabriel's cost.
Concepcion, C. J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Fernando and Makasiar, JJ., concur.
Villamor, J., abstains.
Separate Opinions
BARREDO, J., concurring:
I concur. I would like to add the following considerations to the rationale of the main opinion:
As evidenced by the express terms of the chattel mortgage by repondent Gabriel in favor of petitioner Millar, it was
unmistakably the intent of the parties that the said mortgage be merely a "security for the payment to the said
Eusebio Millar, mortgagee, of the judgment and other incidental expenses in Civil Case No. 27116 of the Court of
First Instance of Manila against Antonio P. Gabriel, mortgagor," to be paid in the amount and manner therein stated.
If this can in any sense in which the parties must be held to have newly bound themselves. In other words, by their
explicit covenant, the parties contemplated the chattel mortgage to be a security for the payment of the judgment
and not the payment itself thereof. Such being the case, and it appearing that respondent Gabriel has not paid the
judgment remains unimpaired in its full existence and vigor, and the resort to the execution thereof thru the ordinary
procedure of a writ of execution by the petitioner is an election to which every mortgage creditor is entitled when he
decides to abandon his security.
Teehankee, J., concurs.
Separate Opinions
BARREDO, J., concurring:
I concur. I would like to add the following considerations to the rationale of the main opinion:
As evidenced by the express terms of the chattel mortgage by repondent Gabriel in favor of petitioner Millar, it was
unmistakably the intent of the parties that the said mortgage be merely a "security for the payment to the said
Eusebio Millar, mortgagee, of the judgment and other incidental expenses in Civil Case No. 27116 of the Court of
First Instance of Manila against Antonio P. Gabriel, mortgagor," to be paid in the amount and manner therein stated.
If this can in any sense in which the parties must be held to have newly bound themselves. In other words, by their
explicit covenant, the parties contemplated the chattel mortgage to be a security for the payment of the judgment
and not the payment itself thereof. Such being the case, and it appearing that respondent Gabriel has not paid the
judgment remains unimpaired in its full existence and vigor, and the resort to the execution thereof thru the ordinary
procedure of a writ of execution by the petitioner is an election to which every mortgage creditor is entitled when he
decides to abandon his security.
Teehankee, J., concurs.
Footnotes
1 Zapanta v. De Rotaeche, 21 Phil. 154.
2 Magdalena Estates, inc. v. Rodriguez and Rodriguez, L18411, Dec. 17, 1966, 18 SCRA 967;
Guerrero v. Court of Appeals and Alto Surety & Insurance Co., Inc., L-22366, Oct. 30, 1969, 29
SCRA 791.
26) Dormitorio vs Fernandez 72 SCRA 388

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-25897 August 21, 1976
AGUSTIN DORMITORIO and LEONCIA D. DORMITORIO, petitioner

vs.
HONORABLE JOSE FERNANDEZ, Judge of the Court of First Instance of Negros Occidental, Branch
Bacolod City, and SERAFIN LAZALITA, respondents.
Graciano H. Arinday, Jr. for petitioners.
Antonio L. Balinas for respondent.
FERNANDO, Acting C.J.:
The filing of this suit for certiorari could have been avoided had there full awareness by petitioners of the legal
import and significance of a later decision involving the parties. If such were the case, they would have realized that
no grave abuse of discretion, no abuse of discretion for that matter, could be imputed to respondent Judge for
issuing the challenged order, setting aside a writ of execution conformably to a petition for relief by private
1
respondent Serafin Lazalita. Insofar as pertinent, it is worded thus: "That the above-mentioned order of Execution to
2
be set aside is based on the decision of the Honorable Court dated September 5, 1961 in the above-entitled case
which is no longer enforceable, and executory by virtue of the "Agreed Stipulation of Facts" entered into by the
Plaintiffs and Defendants in Civil Case No. 6553, and which said "Agreed Stipulation of Facts" was the basis for the
judgment of the Honorable Court dated February 12, 1965. That the parties and subject matter in Civil Case No.
5111 and Civil Case No. 6553 are the same except that the plaintiffs in Civil Case No. 5111 were the defendants in
Civil Case No. 6553, and vice-versa; ... That in the "Agreed Stipulation of Facts" in Civil Case No. 6553 which was
the basis of the Honorable Court judgment dated February 12, 1965, it was agreed by the defendant spouses
Dormitorio, who are the plaintiffs in Civil Case No. 5111 that the defendant Serafin Lazalita should be reimbursed for
his expenses in transferring his house to another Lot to be assigned to him by the Municipality of Victorias, and that
the Decision in Civil Case No. 5111 shall not be enforced and executed anymore; That by means of fraud,
misrepresentation and concealment of the true facts of the case, the plaintiffs were able to mislead the Honorable
Court, thru an Ex-Parte Motion to issue by mistake an Order for the issuance of a Writ of Execution by making this
Honorable Court believe that the Decision of September 5, 1961 is still enforceable and executory; ..." Respondent
3
Judge granted the relief prayed for and set aside the writ of execution, in view of the conclusion reached by him that
such later decision, arrived at as the result of a compromise between the same parties, evidenced by the agreed
stipulation of facts, was clear proof of an animus novandi and thus superseded the previous judgment which as a
result of an ex parte motion was mistakenly ordered executed. Such a conclusion is borne out by a study of the
records of the case. certiorari does not lie.
The decision in the aforecited Civil Case No. 6553, which as contended by private respondent, a submission that
earned the approval of respondent Judge, sufficed for the lifting of the writ of execution, pursuant to the decision in
Civil Case No. 5111 deemed superseded, started with a stipulation of facts. Thus: "When this case was called for
hearing the parties submitted an Agreed Stipulation of Facts duly signed by the parties and their respective counsel,
as follows: "[Agreed Stipulation of Facts]," Come now the parties, in the above-entitled case, represented by their
respective counsel and before this Honorable Court, respectfully submit the following agreed stipulation of facts: 1.
That the defendant Municipality of Victorias, is the owner of several parcels of lands in Victorias, Negros Occidental,
known as Lots Nos. 102 and 120 and 138 and 102-New, which [are] consolidated and subdivided into small lots for
sale to the inhabitants thereof; the lots were sold by the Municipality, either in cash or installment for ten (10) years
at [one peso] (P1.00) per square meter; 2. That on December 7, 1948, the plaintiff Serafin Lazalita, bought from the
Municipality of Victorias, Lot No. 1, Block 16 of the consolidated-subdivision plan PCs-118 having an area of Two
Hundred Thirty (230) Square Meters, payable in installment at [one peso] (P1.00) per square meter, and in the year
1958, upon full payment by plaintiff Lazalita of the purchase price of the land, a deed of definite sale was executed
in his favor by the then Municipal Mayor Montinola of Victorias, Negros Occidental, and thereafter a Certificate of
Title No. T-23098 covering the property, was issued him by the Register of Deeds of Bacolod, Negros Occidental; 3.
That from February 7, 1948, until about eight continuous years thereafter, plaintiff had been in full and peaceful
possession of the said land, and he introduced permanent and valuable improvements thereon, [namely] fruit trees,
like coconuts, avocados, pumelos and oranges, which have long been fruit bearing, and built a house of strong
materials, valued at P5,000.00; 4. That plaintiff Lazalita, was placed in possession of the said Lot No. 1, Block 16 of
the subdivision plan of Victorias, by the persons designated by the Municipality to take charge of the sale of said lots
to the people, and from the time, he had occupied by same, up to the present, there has not been a change in the
location thereof, as described in the Certificate of Title covering the property, now registered in plaintiff's name; 5.
That about the year 1955, however, the other co-defendants herein — the spouses Agustin Dormitorio and Leoncia
D. Dormitorio, purchased also, from the defendant Municipality of Victorias, their lot known as Lot 2, Block 16, of the
same consolidation-subdivision plan PCs-118, having an area of Three Hundred Forty-Three (343) Square
meters, in cash, at [one peso) (P1.00) per square meter. Immediately thereafter, the Dormitorios, obtained a transfer
Certificate of Title known as T-18189 for their property, from the Office of the Register of Deeds, Bacolod, Negros
Occidental. However, the spouses Dormitorio, have not taken actual possession of the land, they have purchased
from the defendant Municipality of Victorias, up to the present; 6. That on December 12, 1958, the spouses
Dormitorio, brought a suit against the plaintiff Lazalita, for Ejectment and the conflict between them was made
known to the office of the Municipal Mayor and the Council of Victorias, who tried to settle the matter between the
parties — Dormitorio and Lazalita. Later, a private Land Surveyor, was hired by the Municipality of Victorias, and it
was found out, according to said Surveyor, Mr. Ceballos, that the Lot sold by the Municipality of Victorias, to the
plaintiff, was converted into the new Municipal. Road known as "Jover Street" and that the lot presently occupied by
him, is supposed to be the lot No. 2, bought by the spouses Dormitorio from the Municipality of Victorias; and so,
availing of the said discovery, the Court of First Instance of Negros Occidental, Branch V, Presided over by Hon.
Jose F. Fernandez, rendered judgment in that case No. 5111, in favor of Dormitorio, ordering the plaintiff herein
Lazalita, to vacate the land and to pay a monthly rental of P20.00, to said Dormitorio, besides his Attorney's fees; 7.
That Lazalita, having failed to appeal from said judgment in Civil Case No. 5111 of this Honorable Court, brought
this present action, against the Municipality of Victorias, and joined the Dormitorios, as formal parties, because of
the value of his permanent improvements and building introduced or constructed on Lot No. 2, Block 16,
ascertained to be that, very lot purchased by Dormitorio from the defendant Municipality of Victorias, which building
and improvements, have far exceed then, the original purchase price of the land; 8. That the present fair market
value of residential lots in the Poblacion of Victorias, ranges between P15.00 to P25.00 per square meter and the
lots in controversy, are saleable at present, at P20.00 per square meter; 9. That the Municipality of Victorias, under
the present administration, is willing to amicably settle the case, now before this Honorable Court, by giving the
plaintiff another lot, if they could open their newly proposed subdivision, or pay back Lazalita the amount necessary
and just for plaintiff to acquire another lot for his residence, and for the expenses of transferring his present
residential house thereto. ....:" Then, as noted in the decision, the parties did respectfully pray "that judgment be
4
rendered by this Honorable Court, on the basis of the foregoing agreed stipulation of facts, and on such other basis
just and equitable, without special pronouncement of costs." So it was granted in the dispositive portion of such
5
decision: "[Wherefore], judgment is hereby rendered in accordance with the above-mentioned Agreed Stipulation of
Facts."6
grave abuse of discretion when he set aside the writ of execution is thus clearly apparent. He had no choice on the
matter. That was made even more evident in the answer to the petition filed by respondents. It must have been the
realization by petitioners that certiorari certainly did not lie that led to their not only failing to make an attempt at a
refutation of what was asserted in the answer but also failing to appear at the hearing when this case was set for
oral argument. As noted at the outset, this petition must be dismissed.
1. What was done by respondent Judge in setting aside the writ of execution in Civil Case No. 5111 finds support in
the applicable authorities. There is this relevant excerpt in Barretta v. Lopez, this Court speaking through the then
7
Chief Justice Paras: "Alleging that the respondent judge of the municipal court had acted in excess of her
jurisdiction and with grave abuse of discretion in issuing the writ of execution of December 15, 1947, the petitioner
has filed the present petition for certiorari and prohibition for the purpose of having said writ of execution annulled.
Said petition is meritorious. The agreement filed by the parties in the ejectment case created as between them new
rights and obligations which naturally superseded the judgment of the municipal court." In Santos v. Acuña, it was
8 9
contended that a lower court decision was novated by subsequent agreement of the parties. Implicit in this Court's
ruling is that such a plea would merit approval if indeed that was what the parties intended. Nonetheless, it was not
granted, for as explained by the ponente, Justice J. B. L. Reyes: "Appellants understood and expressly agreed to be
bound by this condition, when they stipulated that "they will voluntarily deliver and surrender possession of the
premises to the plaintiff in such event" ... Hence, it is plain that in no case were the subsequent arrangements
entered into with any unqualified intention to discard or replace the judgment in favor of the plaintiff-appellee; and
without such intent or animus novandi, no substitution of obligations could possibly take place." Can there be any
10
doubt that if it could be shown, as it was in this case, that there was such clear manifestation of will by the parties,
the original decision had lost force and effect? To ask the question is to answer it. The presence of the animus
novandi is undeniable. Nor is there anything novel in such an approach. So it was noted by then Chief Justice
Concepcion in De los Santos v. Rodriguez: "As early as Molina v. De la Riva the principle has been laid down that,
11
when, after judgment has become final, facts and circumstances transpire which render its execution impossible or
unjust, the interested party may ask the court to modify or alter the judgment to harmonize the same with justice and
the facts" Molina v. de la Riva was a 1907 decision. Again, the present case is far stronger, for there is a later
12 13
decision expressly superseding the earlier one relied upon on which the writ of execution thereafter set aside was
based.
2. Nor can it be denied that as the later decision in Civil Case No. 6553 was the result of a compromise, it had the
effect of res judicata. This was made clear in Salazar v. Jarabe. There are later decisions to the same effect. The
14 15
parties were, therefore, bound by it. There was thus an element of bad faith when petitioners did try to evade its
terms. At first, they were quite successful. Respondent Judge, however, upon being duly informed, set matters right.
He set aside the writ of execution. That was to act in accordance with law. He is to be commended, not condemned.
3. There is no merit likewise to the point raised by petitioners that they were not informed by respondent Judge of
the petition by private respondent to set aside the writ of execution. The order granting such petition was the subject
of a motion for reconsideration. The motion for reconsideration was thereafter denied. Under the circumstances,
16 17
the failure to give notice to petitioners had been cured. That is a well-settled doctrine. Their complaint was that
18
they were not heard. They were given the opportunity to file a motion for reconsideration. So they did. That was to
free the order from the alleged infirmity. Petitioners then cannot be heard to claim that they were denied procedural
due process.
WHEREFORE, the petition for certiorari is dismissed. Costs against petitioners.
Barredo, Antonio, Aquino and Concepcion, Jr., JJ., concur.
Footnotes
1 Petition, Annex F.
2 Ibid, Annex E.
3 Ibid, Annex E, pars. 4-6.
4 Ibid, Annex B, 1-3.
5 Ibid, 3-4.
6 Ibid, 4.
7 83 Phil. 734 (1949).
8 Ibid, 736.
9 100 Phil. 230 (1956).
10 Ibid, 237.
11 L-23170, January 31, 1968, 22 SCRA 451.
12 Ibid, 458.
13 8 Phil. 569. Chief Justice Concepcion, in addition to Molina, also cited the following cases: Behn,
Meyer & Co. v. M'Micking, 11 Phil. 276 (1908); Warner, Barnes & Co. v. Jaucian, 13 Phil. 4 (1909);
Espiritu v. Crossfield, 14 Phil. 588 (1909); Flor Mata v. Lichauco & Salinas, 36 Phil, 809 (1917); De
la Costa v. Cleofas, 67 Phil. 686 (1939); Amor v. Judge Jugo, 77 Phil. 703 (1946). Cf. Nazal v.
Belmonte, L-24410, May 23, 1968, 23 SCRA 700.
14 91 Phil. 596 (1952).
15 Cf. Piano v. Cayanong, L-18603, Feb. 28, 1963, 7 SCRA 397; Araneta v. Perez, L-16187, April
30, 1963, 7 SCRA 923; Serrano v. Miave, L-14678, March 31, 1965, 13 SCRA 461; Manique v.
Cayco, L-17059, Nov. 29, 1965, 15 SCRA 269; Sabino v. Cuba, L-18328, Dec. 17, 1966, 18 SCRA
981; Samonte v. Samonte, L-40693, June 27, 1975, 64 SCRA 524.
16 Petition, Annex G.
17 Ibid, Annex H.
18 Cf. Borja v. Flores, 62 Phil. 106 (1935); De Borja v. Tan, 93 Phil. 167 (1953); Flash Taxicab Co.,
Inc. v. Cruz, L-15464, March 30, 1963, 7 SCRA 518; Caltex (Phil), Inc. v. Castillo, L-24657, Nov. 27,
1967, 21 SCRA 1071; Demoronsing v. Tandayag, L-27057, Aug. 21, 1974, 58 SCRA 484;
Maglasang v. Ople, L-38813, April 29, 1975, 63 SCRA 508; Nation Multi Service Labor Union v.
Agcaoili, L-39741, May 30, 1975, 64 SCRA 274.
27) Magdalena Estate v Rodriguez 18 SCRA 967

SUPREME COURT
Manila
EN BANC
G.R. No. L-18411 December 17, 1966
MAGDALENA ESTATES, INC., plaintiff-appellee,

vs.
ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, defendants-appellants.
Roxas and Sarmiento for plaintiff-appelle.

Somero, Baclig and Savello for defendants-appellants.
REGALA, J.:
Appeal from the decision of the Court of First Instance of Manila ordering the defendants-appellants to pay jointly
and severally to the plaintiff-appellee the sum of P655.89, plus legal interest thereon from date of the judicial
demand, the sum of P100.00 as attorney's fees, and to pay the costs.
The appellants bought from the appellee a parcel of land in Quezon City known as Lot 7-K-2-G, Psd-26193. In view
of an unpaid balance of P5,000.00 on account of the purchase price of the lot, the appellants executed on January
4, 1957, the following promissory note representing the said account:
PROMISSORY NOTE
P5,000.00
Manila, January 4, 1957
We, the Spouses ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ,
jointly and severally promise to pay the Magdalena Estates, Inc., or order, at its
offices in the City of Manila, without any demand the sum of FIVE THOUSAND
PESOS (P5,000.00), Philippine currency, with interest at the rate of Nine Per Cent
9% per annum, within sixty (60) days from January 7, 1957. The sum of P5,000.00
represents the balance of the purchase price of the parcel of land known as Lot 7-
K-2-G, Psd. 26193, containing an area of 2,191 square meters, Quezon City.
(Sgd.
)
Anton
io A.
Rodri
guez
(T)
ANT
ONIO
A.
ROD
RIGU
EZ
(Sgd.
)
Herm
inia
C.
Rodri
guez
(T)
HER
MINI
A C.
ROD
RIGU
EZ
Signed in the Presence of:
(Sgd.) ILLEGIBLE
(Sgd.) ILLEGIBLE
On the same date, the appellants and the Luzon Surety Co., Inc. executed a bond in favor of the appellee, the
undertaking thereof being embodied therein as follows:
. . . comply with the obligation to pay the amount of P5,000.00 representing balance of the purchase price of
a parcel of land known as Lot 7-K-2-G, Psd-26193, with an area of 2191 square meters, Quezon City,
covered by Transfer Certificate of Title No. 13 (6947), Quezon City, within a period of sixty (60) days from
January 7, 1957; That the Surety shall be notified in writing within Ten (10) days from moment of default
otherwise, this undertaking is automatically null and void.
On June 20, 1958, when the obligation of the appellants became due and demandable, the Luzon Surety Co., Inc.
paid to the appellee the sum of P5,000.00. Subsequently, the appellee demanded from the appellants the payment
of P655.89 corresponding to the alleged accumulated interests on the principal of P5,000.00. Due to the refusal of
the appellants to pay the said interest, the appellee started this suit in the Municipal Court of Manila to enforce the
collection thereof. The said court, on February 5, 1959, rendered judgment in favor of the appellee and against the
appellants, ordering the latter to pay jointly and severally the appellee the sum of P655.89 with interest thereon at
the legal rate from November 10, 1958, the date of the filing of the complaint, until the whole amount is fully paid.
Not satisfied with that judgment, appellants appealed to the Court of First Instance of Manila, where the case was
submitted for decision on the pleadings. The Court of First Instance of Manila rendered the judgment stated at the
outset of this decision.
On appeal directly to this Court, the following errors are assigned:
I. The lower court erred in concluding as a fact from the pleadings that the plaintiff-appellee demanded, and
the Luzon Surety Co., Inc. refused, the payment of interest in the amount of P655.89, and in not finding and
declaring that said plaintiff-appellee waived or condoned the said interests.
II. The lower court erred in not finding and declaring that the obligation of the defendants-appellants in favor
of the plaintiff-appellee was totally extinguished by payment and/or condonation.
III. The lower court erred in not finding and declaring that the promissory note executed by the defendants-
appellants in favor of the plaintiff-appellee was, insofar as the said document provided for the payment of
interests, novated when the plaintiff-appellee unqualifiedly accepted the surety bond which merely
guaranteed payment of the principal in the sum of P5,000.00.
Appellants claim that the pleadings do not show that there was demand made by the appellee for the payment of
accrued interest and what could be deduced therefrom was merely that the appellee demanded from the Luzon
Surety Co., Inc., in the capacity of the latter as surety, the payment of the obligation of the appellants, and said
appellee accepted unqualifiedly the amount of P5,000.00 as performance by the obligor and/or obligors of the
obligation in its favor. It is further claimed that the unqualified acceptance of payment made by the Luzon Surety
Co., Inc. of P5,000.00 or only the amount of the principal obligation and without exercising its (appellee's) right to
apply a portion of P655.89 thereof to the payment of the alleged interest due despite its presumed knowledge of its
right to do so, the appellee showed that it waived or condoned the interests due, because Articles 1235 and 1253 of
the Civil Code provide:
ART. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and
without expressing any protest or objection, the obligation is deemed fully complied with.
ART. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made
until the interests have been recovered.
We do not agree with the contention of the appellants. It is very clear in the promissory note that the principal
obligation is the balance of the purchase price of the parcel of land known as Lot 7-K-2-G, Psd-26193, which is the
sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc. undertook "to pay the amount of P5,000.00
representing balance of the purchase price of a parcel of land known as Lot 7-K-2-G, Psd-26193, . . . ." The
appellee did not protest nor object when it accepted the payment of P5,000.00 because it knew that that was the
complete amount undertaken by the surety as appearing in the contract. The liability of a surety is not extended, by
implication, beyond the terms of his contract.1 It is for the same reason that the appellee cannot apply a part of the
P5,000.00 as payment for the accrued interest. Appellants are relying on Article 1253 of the Civil Code, but the rules
contained in Articles 1252 to 1254 of the Civil Code apply to a person owing several debts of the same kind of a
single creditor. They cannot be made applicable to a person whose obligation as a mere surety is both contingent
and singular; his liability is confined to such obligation, and he is entitled to have all payments made applied
exclusively to said application and to no other. 2 Besides, Article 1253 of the Civil Code is merely directory, and not
mandatory.3 Inasmuch as the appellee cannot protest for non-payment of the interest when it accepted the amount
of P5,000.00 from the Luzon Surety Co., Inc., nor apply a part of that amount as payment for the interest, we cannot
now say that there was a waiver or condonation on the interest due.
It is claimed that there was a novation and/or modification of the obligation of the appellants in favor of the appellee
because the appellee accepted without reservation the subsequent agreement set forth in the surety bond despite
its failure to provide that it also guaranteed payment of accruing interest.
The rule is settled that novation by presumption has never been favored. To be sustained, it needs to be established
that the old and new contracts are incompatible in all points, or that the will to novate appears by express
agreement of the parties or in acts of similar import. 4
An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by changing only
the terms of payment and adding other obligations not incompatible with the old one, 5 or wherein the old contract is
merely supplemented by the new one.6 The mere fact that the creditor receives a guaranty or accepts payments
from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall
be released from responsibility does not constitute a novation, and the creditor can still enforce the obligation
against the original debtor. (Straight v. Haskel, 49 Phil. 614; Pacific Commercial Co. v. Sotto, 34 Phil. 237; Estate of
Mota v. Serra, 47 Phil. 464; Duñgo v. Lopena, supra ). In the instant case, the surety bond is not a new and
separate contract but an accessory of the promissory note.
WHEREFORE, the judgment appealed from should be, as it is hereby, affirmed, with costs against the appellants.
Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro,
JJ., concur.
Footnotes
1
La Insular v. Machuaca Go Tauco, 39 Phil. 567.
2
Socony-Vacuum Corp. v. Miraflores, 67 Phil. 304.
3
Baltazar v. Lingayen Gulf Electric Co., Inc., G.R. Nos. L-16236-38, June 30, 1965.
4
Martinez v. Cavives, 25 Phil. 581; Tiu Sinco v. Havana, 45 Phil. 417; Asia Banking Corporation v. Lacson,
48 Phil. 482; Pascual v. Lacsamana, 53 O.G. 2467; Duñgo v. Lopena, et al., G.R. No. L-18377, Dec. 29,
1962.
5
Inchausti v. Yulo, 34 Phil. 978; Pablo v. Sapungan, 71 Phil. 145.
6
Ramos v. Gibbon, 67 Phil. 371; Duñgo v. Lopena, supra.
28) Reyes vs Secretary of Justice 264 SCRA 35
SUPREME COURT
Manila
EN BANC
G.R. No. 118233 December 10, 1999
ANTONIO Z. REYES, ELISEO P. OCAMPO and EDITHA ARCIAGA-SANTOS, petitioners,

vs.
COURT OF APPEALS, HON. SECRETARY OF JUSTICE FRANKLIN DRILON and MAYOR JINGGOY ESTRADA
(JOSE EJERCITO) OF THE MUNICIPALITY OF SAN JUAN, METRO MANILA, respondents.
RESOLUTION
QUISUMBING, J.:
For review is the decision of the Court of Appeals, dated August 3, 1994 and its resolution dated December 8,
1 2
1994 in CA-G.R. SP No. 32473. Said decision dismissed the prohibition case brought by the petitioner against
respondent officials of the Municipality of San Juan to stop the enforcement of Tax Ordinance Nos. 87, 91, 95, 100
and 101.
The factual antecedents are as follows:
The Sangguniang Bayan of San Juan, Metro Manila implemented several tax ordinances as follows:
Ordinance No. Title
87 An ordinance imposing a municipal tax of fifty percent

(50%) of one percent (1%) of the gross receipt on business of
printing and publication
91 An ordinance imposing a transfer tax equivalent to fifty

percent (50%) of one percent (1%) of the total consideration
on the sale, donation, barter or any other mode of transferring
ownership or title of real property situated in San Juan, Metro
Manila, or its fair market value, whichever is higher
95 An ordinance imposing fifty percent (50%) of one percent

(1%) for social housing tax on the assessed value of all real
estate property in San Juan, Metro Manila in excess of
P50,000.00 value as provided in the New Urban Land Reform
Law, also known as R.A. 7279.
100 An ordinance imposing new rates of business taxes of

the Municipality of San Juan Metro Manila
101 An ordinance levying an annual "Ad Valorem" tax on real
property and an additional tax accruing to the special
education fund (SEF)
On May 21, 1993, petitioners filed an appeal with the Department of Justice assailing the constitutionality of these
tax ordinances allegedly because they were promulgated without previous public hearings thereby constituting
deprivation of property without due process of law.
On June 10, 1993, respondent Secretary of Justice dismissed the appeal for having been filed out of time. Citing
Section 187, R.A. No. 7160, he said:
It appears that the tax ordinances in question took effect on September 24, 1992, in the case of Tax
Ordinance No. 87, until October 22, 1992, in the case of Tax Ordinance Nos. 91 and 95, and until
October 29, 1992, in the case of Tax Ordinance Nos. 100 and 101, or more than thirty (30) days
from the effectivity thereof when the appeal was filed and received by this Department on May 21,
1993 and therefore not in accordance with the requirements provided for under Section 187 of the
Local Government Code of 1991.
WHEREFORE, the instant appeal, having been filed out of time, is hereby DISMISSED. 3
Undaunted, petitioners filed with the Court of Appeals a petition for certiorari and prohibition (CA-G.R. SP No.
32473). But respondent court affirmed the decision of the Secretary. On December 8, 1994, the motion for
reconsideration filed by the petitioners was denied for lack of merit.
Hence, the present petition for review, raising the following questions:
1. Whether or not the questioned tax ordinances are violative of the Constitution,
considering the undisputed fact that no public hearings were ever held on the
ordinances before they were passed and approved as required by the Local
Government Code of 1991, thereby constituting as they do a deprivation of property
without due process;
2. Whether or not the wording of the law under Section 187 of the Local Government
Code of 1991 that "any question on the constitutionality . . . of tax ordinance . . . may
be raised on appeal within thirty (30) days from the effectivity thereof . . ." is
a reductio as absurdum, since if the tax ordinance is found to be unconstitutional, it
will be considered as never having become effective at all from the very beginning,
for which reason the thirty-day appeal period cannot be reckoned and cannot be
enforced;
3. Whether or not the constitutionality of a tax ordinance, or any law for that matter,
can be questioned at any time despite the prescription of a limited period within
which to question it, as in case at bar; and
4. Whether or not the constitutionality of an ordinance or a law may be questioned

even if the question of constitutionality may not have been originally or initially raised,
or is not the lis mota of the case, if it appears that a determination of the question of
constitutionality is necessary to a decision of the case. 4
In our view, the pertinent issues for our resolution now are:
1. Whether or not the Court of Appeals erred in affirming the decision of the
Secretary of Justice who dismissed the prohibition suit, on the ground that it was filed
out of time?
2. Whether or not lack of mandatory public hearings prior to enacting Municipal
Ordinance Nos. 87, 91, 95, 100 and 101 render them void on the ground of
deprivation of property without due process?
3. Whether or not the constitutional validity of Sec. 187 of the Local Government
Code could be raised for the first time on appeal?
According to petitioners, respondent Secretary erred in declaring that they failed to file their appeal on time. Also,
they assail Municipal Ordinance Nos. 87, 91, 95, 100 and 101, for alleged failure of the Municipal Council of San
Juan to conduct mandatory public hearings. Because of this, they claim the ordinances are inoperative, as through
they were never passed. Consequently, no prescriptive thirty-day period to question the validity of the ordinance
could toll to bar their appeal to the Department of Justice.
Sec. 187 of R.A. 7160, cited by respondent Secretary, provides as follows:
Sec. 187 — Procedure for Approval and Effectivity of Tax Ordinances and Revenue
Measures; Mandatory Public Hearings. — The procedure for approval of local tax ordinances and
revenue measures shall be in accordance with the provisions of this Code: Provided, That public
hearings shall be conducted for the purpose prior to the enactment thereof: Provided further, That
any question on the constitutionality or legality of tax ordinances or revenue measures may be
raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice who
shall render a decision within sixty (60) days from the date of receipt of the
appeal: Provided, however, That such appeal not have the effect of suspending the effectivity of the
ordinance and the accrual and payment of the tax, fee, or charge levied therein: Provided, finally,
That within thirty (30) days after receipt of the decision or the lapse of the sixty-day period without
the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate
proceedings with a court of competent jurisdiction.
Clearly, the law requires that the dissatisfied taxpayer who questions the validity or legality of a tax ordinance must
file his appeal to the Secretary of Justice, within 30 days from effectivity thereof. In case the Secretary decides the
appeals, a period also of 30 days is allowed for an aggrieved party to go to court. But if the Secretary does not act
thereon, after the lapse of 60 days, a party could already proceed to seek relief in court. These three separate
periods are clearly given for compliance as a prerequisite before seeking redress in a competent court. Such
statutory periods are set to prevent delays as well as enhance the orderly and speedy discharge of judicial
functions. For this reason the courts construct these provisions of statutes as mandatory.
5 6
A municipal tax ordinance empowers a local government unit to impose taxes. The power to tax is the most effective
instrument to raise needed revenues to finance and support the myriad activities of local government units for the
delivery of basic services essential to the promotion of the general welfare and enhancement of peace, progress,
and prosperity of the people. Consequently, any delay in implementing tax measures would be to the detriment of
7
the public. It is for this reason that protests over tax ordinances are required to be done within certain time frames.
In the instant case, it is our view that the failure of petitioners to appeal to the Secretary of Justice within 30 days as
required by Sec. 187 of R.A. 7160 is fatal to their cause.
On the second issue, petitioners allege that the Sangguniang Bayan of San Juan did not comply with the prescribed
procedure for enacting an ordinance because they failed to conduct public hearings.
In Figurres vs. Court of Appeals, where the municipality failed to conduct public hearings prior to enacting the
8
revisions on the schedule of fair market values and assessment level of classes of real estate properties, the Court
said:
Petitioner is right in contending that public hearings are required to be conducted prior to the
enactment of an ordinance imposing real property taxes. R.A. No. 7160, Sec. 186, provides that an
ordinance levying taxes, fees, or charges "shall not be enacted without any prior public hearing
conducted for the purpose."
However, it is noteworthy that part from her bare assertions, petitioner Figuerres has not presented
any evidence to show that no public hearings were conducted prior not the enactment of the
ordinances in question. On the other hand, the Municipality of Mandaluyong claims the public
hearings were indeed conducted before the subject ordinances were adopted, although it likewise
failed to submit any evidence to establish this allegation. However, in accordance with the
presumption of validity in favor of an ordinance, their constitutionality or legality should be upheld in
the absence of evidences showing that procedure prescribed by law was not observed in their
enactment . . . .
Furthermore, the lack of a public hearings is a negative allegation essential to petitioner's cause of
action in the present case. Hence, as petitioner is the party asserting it, she has the burden of proof.
Since petitioner failed to rebut the presumption of validity in favor of the subject ordinances and to
discharge the burden of proving that no public hearings were conducted prior to the enactment
thereof, we are constrained to uphold their constitutionality or legality.
9
We find Figuerres instructive. Petitioners have not proved in the case before us that the Sangguniang Bayan of San
Juan failed to conduct the required public hearings before the enactment of Ordinance Nos. 87, 91, 95, 100 and
101. Although the Sanggunian had the control of records or the better means of proof regarding the facts alleged,
petitioner as not relieved from the burden of proving their averments. Proof that public hearings were not held falls
10
on petitioner' shoulders. For failing to discharge that burden, their petition was properly dismissed.
In any event, for the purpose of securing certainty where doubt would be intolerable, it is a general rules that the
regularity of the enactment of an officially promulgated statute or ordinance may not be impeached by parol
evidence or oral testimony either of individual officers and members, or of strangers who may be interested in
nullifying legislative action. This rules supplements the presumption in favor of the regularity of official conduct
11
which we have upheld repeatedly, absent a clear showing to the contrary.
Finally, on the validity of Section 187 of R.A. 7160, the Local Government Code, we must stress that the
constitutionality of an act of Congress will not be passed upon by the Court unless at the first opportunity that
question is properly raised and presented in an appropriate case, and is necessary to a determination of the case,
particularly where the issue of constitutionality is the very lis mota presented. The constitutional validity of a
12
statutory provision should not be entertained by the Court where it was not specifically raised below, insisted upon,
and adequately argued. Moreover, given the circumstances in this case, we find no genuine necessity to dwell on
13
the issue of constitutional invalidity of Section 187 in relation to issue of valid enactment of the subject ordinances,
as shown in the foregoing discussion. Suffice it now to say that, having resolved the first and second issues, we find
no grave abuse of discretion nor reversible error in the decision of respondent appellate court. Further constitutional
scrutiny of Section 187 is unwarranted.
WHEREFORE, the present petition is DISMISSED for lack of merit and the assailed decision of the Court of
Appeals is AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Panganiban, Purisima, Pardo, Buena, Gonzaga-
Reyes, Ynares-Santiago and De Leon, Jr., JJ., concur.
Footnotes
1 Rollo, pp. 15-18.
2 Id. at p 19.
3 Id. at 50.
4 Rollo, p. 4.
5 Agpalo, Statutory Construction, Third Edition 1995, p. 266.

6 Ibid., citing Shioji vs. Harvey, 43 Phil. 333 (1922); Alvero vs. De la Rosa, 76 Phil. 428, 434 (1946).
7 Mactan Cebu International Airport Authority vs. Marcos, 261 SCRA 667, 690 (1996).
8 G.R. No. 119172, March 25, 1999.
9 Id. at pp. 8-9.
10 People vs. Pajenado, 31 SCRA 812, 817 (1970).
11 73 Am Jur 2d, Statutes, Sec. 81.
12 National Economic Protectionism Association vs. Ongpin, 171 SCRA 657, 665 (1989); People vs.
Vera, 65 Phil. 56, 57 (1937); Dumlao vs. Comelec, 95 SCRA 392, 403 (1980).
13 City of Baguio vs. Marcos, 27 SCRA 324, 351-352 (1969).
29) Molino vs Security Diners International 363 SCRA 358

THIRD DIVISION
G.R. No. 136780 August 16, 2001
JEANETTE D. MOLINO, petitioner,
vs.
SECURITY DINERS INTERNATIONAL CORPORATION, respondent.
GONZAGA-REYES, J.:
Assailed by this petition for review on certiorari is the decision of the Court of Appeals dated September 28,
1998 which held petitioner liable as surety for the outstanding credit card debts of Danilo Alto with herein
1
respondent corporation.
The decision of the Court of Appeals satisfactorily sums up the facts that led to the filing of this case:
The Security Diners International Corporation ("SDIC') operates a credit card system under the name of
Diners Club through which it extends credit accommodation to its cardholders for the purchase of goods and
payment of services from its member establishments to be reimbursed later on by the cardholder upon
proper billing. There are two types of credit cards issued: one, the Regular (Local) Card which entitles the
cardholder to purchase goods and pay services from member establishments in an amount not exceeding
P10,000.00; and two, the Diamond (Edition) Card which entitles the cardholder to purchase goods and pay
services from member establishments in unlimited amounts. One of the requirements for the issuance of
either of these cards is that an applicant should have a surety.
On July 24, 1987, Danilo A. Alto applied for a Regular (Local) Card with SDIC. He got as his surety his own
sister-in-law Jeanette Molino Alto. Thus, Danilo signed the printed application form (Exhibit 'A') and Jeanette
signed the Surety Undertaking (Exhibit 'A-5"). Attached to the Application Form was an Agreement (Use of
Diners' Club Card), paragraph 16 of which reads:
16. SURETY. — The cardholder shall furnish an adequate surety or sureties acceptable to Security
Diners who shall be jointly and severally liable with the cardholder to pay Security Diners all the
obligations and charges incurred and credit extended on the basis of the card. In the event the
surety/sureties furnished the cardholder are discharged the cardholder must furnish a new surety or
sureties acceptable to Security Diners within thirty (30) days. Otherwise the cardholder's privileges
shall be automatically terminated in accordance with Section 11 hereof."
The Surety Undertaking signed by Jeanette states:
"I/WE, the undersigned, bind myself/ourselves jointly and severally with Mr. Danilo Alto to pay
SECURITY DINERS INTERNATIONAL CORPORATION, hereinafter referred to as 'Security Diners'
all the obligations and charges including but not limited to fees, interest, attorney's fees and all other
costs incurred by him/her in connection with the use of the DINERS CLUB CARD in accordance with
the terms and conditions governing the issuance and use of the Diners Club Card. Any change or
novation in the agreement or any extension of time granted by SECURITY DINERS to pay such
obligations, charges and fees, shall not release me/us from this Surety Undertaking, it being
understood that said undertaking is a continuing one and shall subsist and bind me/us until all such
obligations, charges and fees have been fully paid and satisfied.
It is understood that the indication of a credit limit to the cardholder shall not relieve me/us of liability
for charges and all other amounts voluntarily incurred by the cardholder in excess of the credit limit.
On the basis of the completed and signed Application Form and Surety Undertaking, the SDIC issued to
Danilo Diners Card No. 36510293216-0006. The latter used this card and initially paid his obligations to
SDIC. On February 8, 1988, Danilo wrote SDIC a letter (Exhibit "B") requesting it to upgrade his Regular
(Local) Diners Club Card to a Diamond (Edition) one. As a requirement of SDIC, Danilo secured from
Jeanette her approval. The latter obliged and so on March 2, 1988, she signed a Note (Exhibit 'C') which
states:
"This certifies that I, Jeanette D. Molino, approve of the request of Danilo and Gloria Alto with Card
No. 3651-203216 0006 and 3651-203412-5007 to upgrade their card from regular to diamond
edition."
Danilo's request was granted and he was issued a Diamond (Edition) Diners Club Card. He used this card
and made purchases (Exhibits "D", "D-1" to "D-7") from member establishments. On October 1, 1988 Danilo
had incurred credit charged plus appropriate interest and service charges in the aggregate amount of
P166,408.31. He defaulted in the payment of this obligation.
SDIC demanded of Danilo and Jeanette to pay said obligation but they did not pay. So, on November 9,
1988, SDIC filed an action to collect said indebtedness against Danilo and Jeanette. This was docketed in
the Regional Trial Court of Makati, Branch 145 as Civil Case No. 88-2381 x x x 2
Defendant Danilo Alto failed to file an Answer, and during the pre-trial conference respondent moved to have the
complaint dismissed against him, without prejudice to a subsequent re-filing. Petitioner was left as the lone
defendant, sued in her capacity as surety of Danilo.
In the Answer with Compulsory Counterclaim that she filed with the RTC, petitioner claimed that her liability under
the Surety Undertaking was limited to P10,000.00 and that she did not expressly and categorically agree to act as
surety for Danilo in an amount higher than P10,000.00. By way of counterclaim, she asked for moral and exemplary
3
damages.
On August 19, 1991, the trial court rendered a decision dismissing the complaint for failure of respondent to prove
its case by a preponderance of the evidence. It found that while petitioner clearly bound herself as surety under the
terms of Danilo Alto's Regular Diners Club Card, there was no evidence that after the card had been upgraded to
Diamond (Edition) petitioner consented or agreed to act as surety for Danilo. Exhibit "C" or Exhibit "1", inter alia,
which was a note bearing petitioner's signature certifying to her approval of Danilo's request to have his card
upgraded should be read simply as a statement of and objection to his request for upgrading, and not as an
assumption of liability for the debts that Danilo may later owe through the said card. The trial court also took note of
4
the testimony of Alfredo Vicente, an officer of respondent, who opined that the consent to be bound as surety to an
upgraded card should be categorical and not in a simple "no objection" form.
5
The trial court went on further to state that petitioner was not liable for any amount, not even for P10,000.00 which is
the maximum credit limit for Regular Diners Club Cards, since at the time of the upgrading Danilo had no
outstanding credit card debts. This is evident from the fact that Danilo's request for upgrading was approved, since
6
one of the requirements for the approval of a request for the upgrading of a credit card from Regular to Diamond is
that the applicant must have paid all his billings for the last three months prior to his request.
Hence, the trial court disposed of the case with these pronouncements:
WHEREFORE, judgment is rendered dismissing the complaint against defendant Jeanette D. Molino-Alto for
failure of the plaintiff to prove its case by a clear preponderance of evidence.
Said defendants counterclaim is also dismissed.
No pronouncement as to costs.
SO ORDERED. 7
The Court of Appeals found contrary to the lower court, and declared that the Surety Undertaking signed by
petitioner when Danilo Alto first applied for a Regular Diners Club Card clearly applied to the unpaid purchases of
Danilo Alto under the Diamond card. In holding thus, the Court of Appeals referred to the terms of the said Surety
Undertaking, which stated that any change or novation in the agreement on the use of the Diners Club card does
not release the surety from his obligations, it being understood that the undertaking is a continuing one which
subsists until all obligations and charges under the subject credit card are paid and satisfied. It also cited Pacific
Banking Corporation vs. Intermediate Appellate Court, a 1991 decision which held the surety liable to the extent of
8
the credit cardholder's indebtedness, under the clear terms of the Guarantor's Undertaking that the surety signed
with the credit card company.
The Court of Appeals further declared that it was erroneous of the trial court to conclude that petitioner was
completely relieved of liability under Danilo Alto's credit card since the Surety Undertaking she signed remained
valid and enforceable even after the upgrading of the said card; besides, petitioner herself admitted that she was
liable to the extent of P10,000.00.
Additionally, the Court of Appeals reduced the attorney's fees (stipulated in the Agreement for the Use of Diners
Club Card) from 25% to 10% of the amount due, judging this to be a more reasonable rate under the circumstances.
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the appealed Decision is REVERSED and one is rendered ordering defendant-appellee
Jeanette D. Molino-Alto to pay plaintiff-appellant Security Diners Intentional, Inc. the following:
1. The sum of P166,408.31 plus interest of 3% per annum and 2% per month from November 9, 1988 until
the obligation is fully paid;
2. The amount equivalent to 10% of the obligation mentioned in the preceding paragraph as attorneys fees;
and
3. Costs.
SO ORDERED. 9
Petitioner's motion for reconsideration of the above decision was denied for lack of merit on December 1, 1998.
Hence, the petition before us, which assigns the following errors:
I.
The material findings of the Court of Appeals, which are contrary to those of the lower court are erroneous.
II.
The findings of the Court of Appeals are conflicting and/or without citation of specific evidence on which they
are based.
III.
The Court of Appeals erred in disregarding the applicable legal principle established by this Honorable Court
that, unlike in ordinary solidary debtors, the surety does not incur liability unless the principal debtor is held
liable.
10
Petitioner posits that she did not expressly give her consent to be bound as surety under the upgraded card. She
points out that the note she signed, marked as Exhibit "C", registering her approval of the request of Danilo Alto to
upgrade his card, renders the Surety Undertaking she signed under the terms of the previous card "without
probative value, immaterial and irrelevant as it covers only the liability of the surety in the use of the regular credit
card by the principal debtor x x x. " She argues further that because the principal debtor, Danilo Alto, was not held
11
liable, having been dropped as a defendant, she could not be said to have incurred liability as surety.
The petition is devoid of merit.
The resolution of whether petitioner is liable as surety under the Diamond card revolves around the effect of the
upgrading by Danilo Alto of his card. Was the upgrading a novation of the original agreement governing the use of
Danilo Alto's first credit card, as to extinguish that obligation and the Surety Undertaking which was simply
accessory to it?
Novation, as a mode of extinguishing obligations, may be done in two ways: by explicit declaration, or by material
incompatibility (implied novation). As we stated in Fortune Motors vs. Court of Appeals, supra:
x x x The test of incompatibility is whether the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and the latter obligation novates the first.
Novation must be established either by the express terms of the new agreement or by the acts of the parties
clearly demonstrating the intent to dissolve the old obligation as a consideration for the emergence of the
new one. The will to novate, whether totally or partially, must appear by express agreement of the parties, or
by their acts which are too clear or unequivocal to be mistaken.
There is no doubt that the upgrading was a novation of the original agreement covering the first credit card issued to
Danilo Alto, basically since it was committed with the intent of canceling and replacing the said card. However, the
novation did not serve to release petitioner from her surety obligations because in the Surety Undertaking she
expressly waived discharge in case of change or novation in the agreement governing the use of the first credit
card.
The nature and extent of petitioner's obligations are set out in clear and unmistakable terms in the Surety
Undertaking. Thus:
1. She bound herself jointly and severally with Danilo Alto to pay SDIC all obligations and charges in the use of the
Diners Club Card, including fees, interest, attorney's fees, and costs;
2. She declared that "any change or novation in the Agreement or any extension of time granted by SECURITY
DINERS to pay such obligation, charges, and fees, shall not release (her) from this Surety Undertaking";
3. "(S)aid undertaking is a continuous one and shall subsist and bind (her) until all such obligations, charges and
fees have been fully paid and satisfied"; and
4. "The indication of a credit limit to the cardholder shall not relieve (her) of liability for charges and all other amounts
voluntarily incurred by the cardholder in excess of said credit limit."12
We cannot give any additional meaning to the plain language of the subject undertaking. The extent of a surety's
liability is determined by the language of the suretyship contract or bond itself. Article 1370 of the Civil Code
13
provides: "If the terms of contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control."
This case is no different from Pacific Banking Corporation vs. IAC, supra, correctly applied by the Court of Appeals,
which involved a Guarantor's Undertaking (although thus denominated, it was in substance a contract of surety
signed by the husband for the credit card application of his wife. Like herein petitioner, the husband also argued that
his liability should be limited to the credit limit allowed under his wife's card but the Court declared him liable to the
full extent of his wife's indebtedness. Thus:
We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.'s
undertaking. As a surety he bound himself jointly and severally with the debtor Celia Regala "to pay the
Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due
and incurred by said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor
by Pacific Banking Corporation. x x x.
xxx xxx xxx
It is likewise not disputed by the parties that the credit limit granted to Celia Regala was P2,000.00 per
month and that Celia Regala succeeded in using the card beyond the original period of its effectivity,
October 29, 1979. We do not agree, however, that Roberto Jr.'s liability should be limited to that extent.
Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of
the debtor's (Celia's) indebtedness likewise expressly waiving any "discharge in case of any change or
novation of the terms and conditions in connection with the issuance of the Pacificard credit card." Roberto,
in fact, made his commitment as a surety a continuing one, binding upon himself until all the liabilities of
Celia Regala have been fully paid. All these were clear under the "Guarantor's Undertaking" Roberto signed,
thus:
"x x x Any changes of or novation in the terms and conditions in connection with the issuance or use
of said Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in
any manner release me/us from the responsibility hereunder, it being understood that the
undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the said
Celia Syjuco Regala have been fully satisfied or paid." (italics supplied)
As a last-ditch measure, petitioner asseverates that, being merely a surety, a pronouncement should first be made
declaring the principal debtor liable before she herself can be proceeded against. The argument, which is hinged
upon the dropping of Danilo as defendant in the complaint, is bereft of merit.
The Surety Undertaking expressly provides that petitioner's liability is solidary. A surety is considered in law as
being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their
liabilities are interwoven as to be inseparable. Although the contract of a surety is in essence secondary only to a
14
valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt
and duty of another although he possesses no direct or personal interest over the obligations nor does he receive
any benefit therefrom. There being no question that Danilo Alto incurred debts of P166,408.31 in credit card
15
advances, an obligation shared solidarily by petitioner, respondent was certainly within its rights to proceed singly
against petitioner, as surety and solidary debtor, without prejudice to any action it may later file against Danilo Alto,
until the obligation is fully satisfied. This is so provided under Article 1216 of the Civil Code:
The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to those which may be subsequently directed
against the others, so long as the debt has not been fully collected.
Petitioner is a graduate of business administration, and possesses considerable work experience in several banks.
She knew the full import and consequence of the Surety Undertaking that she executed. She had the option to
withdraw her suretyship when Danilo upgraded his card to one that permitted unlimited purchases, but instead she
approved the upgrading. While we commiserate in the financial predicament she now faces, it is also evident that
the liability she incurred is only the legitimate consequence of an undertaking that she freely and intelligently obliged
to. Prospective sureties to credit card applicants would be well-advised to study carefully the terms of the
agreements prepared by the credit card companies before giving their consent, and pay heed to speculations that
could lead to onerous effects, like in the present case where the credit applied for was limitless. At the same time, it
bears articulating that although courts in appropriate cases may equitably reduce the award for penalty as provided
under such suretyship agreements if the same is iniquitous or unconscionable, we are unable to give relief to
16
petitioner by way of reducing the amount of the principal liability as surety under the circumstances of this case.
WHEREFORE, the petition is dismissed for lack of merit The decision of the Court of Appeals is AFFIRMED in all
respects.
SO ORDERED.
Melo, Panganiban and Sandoval-Gutierrez, JJ ., concur.

Vitug, J ., concurs in the result (pro hac vice).
Footnotes
Promulgated by the former Seventeenth Division; written by Associate Justice Hilarion L; Aquino, and
1
concurred in by Associate Justice Ramon U. Mabutas, Jr. (Chairman) and Associate Justice Renato C.
Dacudao.
CA Decision; Rollo, 49-52.

2
Answer with Compulsory Counterclaim, Annex "B" to Petition; Rollo, 29.

3
RTC Decision; Rollo, 44-45.

4
Ibid., 45-46.
5
Ibid., 46.
6
Ibid., 47.
7
203 SCRA 496.

8
CA Decision; Rollo, 58.

9
10
Petition; Rollo, 10.
11
Ibid., 14.
12
Exh. "A-5"; Records of the Case, 93.
Rizal Commercial Banking Corporation vs. Court of Appeals, 178 SCRA 739 (1989); Luzon Surety
13
Company, Inc. vs. Quebrar, 127 SCRA 295 (1984).
14
Philippine National Bank vs. Pineda, 197 SCRA 1 (1991).
15
Garcia vs. Court of Appeals, 191 SCRA 493 (1990).
Article 1229 of the Civil Code provides: "The judge shall equitably reduce the panalty when the principal
16
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." Applied in Palmares vs.
Court of Appeals, 288 SCRA 422 (1998); Barons Marketing Corporation vs. Court of Appeals, 286 SCRA 96
(1998); Insular Bank of Asia & America vs. Salazar, 159 SCRA 133 (1988).
30) Garcia vs Llamas 417 SCRA 292

FIRST DIVISION
G.R. No. 154127 December 8, 2003
ROMEO C. GARCIA, petitioner,
vs.
DIONISIO V. LLAMAS, respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the express assent of the parties or by the
complete incompatibility between the old and the new agreements. Petitioner herein fails to show either requirement
convincingly; hence, the summary judgment holding him liable as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to nullify the November 26, 2001
1
Decision and the June 26, 2002 Resolution of the Court of Appeals (CA) in CA-GR CV No. 60521. The appellate
2 3
court disposed as follows:
"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as it pertains to
[Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the modification that the award for
attorney’s fees and cost of suit is DELETED. The portion of the judgment that pertains to x x x Eduardo de Jesus is
SET ASIDE and VACATED. Accordingly, the case against x x x Eduardo de Jesus is REMANDED to the court of
origin for purposes of receiving ex parte [Respondent] Dionisio Llamas’ evidence against x x x Eduardo de Jesus." 4
The challenged Resolution, on the other hand, denied petitioner’s Motion for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
"This case started out as a complaint for sum of money and damages by x x x [Respondent] Dionisio Llamas
against x x x [Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873, the
complaint alleged that on 23 December 1996[,] [petitioner and de Jesus] borrowed ₱400,000.00 from [respondent];
that, on the same day, [they] executed a promissory note wherein they bound themselves jointly and severally to
pay the loan on or before 23 January 1997 with a 5% interest per month; that the loan has long been overdue and,
despite repeated demands, [petitioner and de Jesus] have failed and refused to pay it; and that, by reason of the[ir]
unjustified refusal, [respondent] was compelled to engage the services of counsel to whom he agreed to pay 25% of
the sum to be recovered from [petitioner and de Jesus], plus ₱2,000.00 for every appearance in court. Annexed to
the complaint were the promissory note above-mentioned and a demand letter, dated 02 May 1997, by [respondent]
addressed to [petitioner and de Jesus].
"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed no liability under the
promissory note because he signed it merely as an accommodation party for x x x de Jesus; and, alternatively, that
he is relieved from any liability arising from the note inasmuch as the loan had been paid by x x x de Jesus by
means of a check dated 17 April 1997; and that, in any event, the issuance of the check and [respondent’s]
acceptance thereof novated or superseded the note.
"[Respondent] tendered a reply to [Petitioner] Garcia’s answer, thereunder asserting that the loan remained unpaid
for the reason that the check issued by x x x de Jesus bounced, and that [Petitioner] Garcia’s answer was not even
accompanied by a certificate of non-forum shopping. Annexed to the reply were the face of the check and the
reverse side thereof.
"For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the supposed ₱400,000.00 loan,
he received only ₱360,000.00, the P40,000.00 having been advance interest thereon for two months, that is, for
January and February 1997; that[,] in fact[,] he paid the sum of ₱120,000.00 by way of interests; that this was made
when [respondent’s] daughter, one Nits Llamas-Quijencio, received from the Central Police District Command at
Bicutan, Taguig, Metro Manila (where x x x de Jesus worked), the sum of ₱40,000.00, representing the peso
equivalent of his accumulated leave credits, another ₱40,000.00 as advance interest, and still another ₱40,000.00
as interest for the months of March and April 1997; that he had difficulty in paying the loan and had asked
[respondent] for an extension of time; that [respondent] acted in bad faith in instituting the case, [respondent] having
agreed to accept the benefits he (de Jesus) would receive for his retirement, but [respondent] nonetheless filed the
instant case while his retirement was being processed; and that, in defense of his rights, he agreed to pay his
counsel ₱20,000.00 [as] attorney’s fees, plus ₱1,000.00 for every court appearance.
"During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did they file any pre-trial brief.
Neither did [Petitioner] Garcia file a pre-trial brief, and his counsel even manifested that he would no [longer] present
evidence. Given this development, the trial court gave [respondent] permission to present his evidence ex parte
against x x x de Jesus; and, as regards [Petitioner] Garcia, the trial court directed [respondent] to file a motion for
judgment on the pleadings, and for [Petitioner] Garcia to file his comment or opposition thereto.
"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to allow him to present his
evidence ex parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting his defense to a judgment on the
pleadings. Subsequently, [respondent] filed a [M]anifestation/[M]otion to submit the case for judgement on the
pleadings, withdrawing in the process his previous motion. Thereunder, he asserted that [petitioner’s and de Jesus’]
solidary liability under the promissory note cannot be any clearer, and that the check issued by de Jesus did not
discharge the loan since the check bounced." 5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the case as follows:
"WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor of [respondent] and
against [petitioner and De Jesus], who are hereby ordered to pay, jointly and severally, the [respondent] the
following sums, to wit:
‘1) ₱400,000.00 representing the principal amount plus 5% interest thereon per month from January 23,
1997 until the same shall have been fully paid, less the amount of ₱120,000.00 representing interests
already paid by x x x de Jesus;
‘2) ₱100,000.00 as attorney’s fees plus appearance fee of ₱2,000.00 for each day of [c]ourt appearance,
and;
‘3) Cost of this suit.’" 6
The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against De Jesus.
According to the appellate court, his Answer raised genuinely contentious issues. Moreover, he was still required to
present his evidence ex parte. Thus, respondent was not ipso facto entitled to the RTC judgment, even though De
Jesus had been declared in default. The case against the latter was therefore remanded by the CA to the trial court
for the ex parte reception of the former’s evidence.
As to petitioner, the CA treated his case as a summary judgment, because his Answer had failed to raise even a
single genuine issue regarding any material fact.
The appellate court ruled that no novation -- express or implied -- had taken place when respondent accepted the
check from De Jesus. According to the CA, the check was issued precisely to pay for the loan that was covered by
the promissory note jointly and severally undertaken by petitioner and De Jesus. Respondent’s acceptance of the
check did not serve to make De Jesus the sole debtor because, first, the obligation incurred by him and petitioner
was joint and several; and, second, the check -- which had been intended to extinguish the obligation -- bounced
upon its presentment.
Hence, this Petition. 7
Issues
Petitioner submits the following issues for our consideration:
"I
Whether or not the Honorable Court of Appeals gravely erred in not holding that novation applies in the instant case
as x x x Eduardo de Jesus had expressly assumed sole and exclusive liability for the loan obligation he obtained
from x x x Respondent Dionisio Llamas, as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full amount of the loan of ₱400,000.00 in favor of
Respondent Llamas, although the check subsequently bounced[;]
b) Acceptance of the check by the x x x respondent x x x which resulted in [the] substitution by x x x de

Jesus or [the superseding of] the promissory note;
c) x x x de Jesus having paid interests on the loan in the total amount of ₱120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that due to financial difficulties,
he be given an extension of time to pay his loan obligation and that his retirement benefits from the
Philippine National Police will answer for said obligation.
"II
Whether or not the Honorable Court of Appeals seriously erred in not holding that the defense of petitioner that he
was merely an accommodation party, despite the fact that the promissory note provided for a joint and solidary
liability, should have been given weight and credence considering that subsequent events showed that the principal
obligor was in truth and in fact x x x de Jesus, as evidenced by the foregoing circumstances showing his assumption
of sole liability over the loan obligation.
"III
Whether or not judgment on the pleadings or summary judgment was properly availed of by Respondent Llamas,
despite the fact that there are genuine issues of fact, which the Honorable Court of Appeals itself admitted in its
Decision, which call for the presentation of evidence in a full-blown trial."
8
Simply put, the issues are the following: 1) whether there was novation of the obligation; 2) whether the defense that
petitioner was only an accommodation party had any basis; and 3) whether the judgment against him -- be it a
judgment on the pleadings or a summary judgment -- was proper.
The Petition has no merit.

First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting that novation took
place, either through the substitution of De Jesus as sole debtor or the replacement of the promissory note by the
check. Alternatively, the former argues that the original obligation was extinguished when the latter, who was his co-
obligor, "paid" the loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The check could not have extinguished the
obligation, because it bounced upon presentment. By law, the delivery of a check produces the effect of payment
9
only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a
new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. Article 1293 of the
10
Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the
new debtor gives him rights mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In
expromision, the initiative for the change does not come from -- and may even be made without the knowledge of --
the debtor, since it consists of a third person’s assumption of the obligation. As such, it logically requires the consent
of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who
consents to the substitution and assumes the obligation; thus, the consent of these three persons are
necessary. Both modes of substitution by the debtor require the consent of the creditor.
11 12
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation
of a new one that takes the place of the former. It is merely modificatory when the old obligation subsists to the
extent that it remains compatible with the amendatory agreement. Whether extinctive or modificatory, novation is
13
made either by changing the object or the principal conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act known as
subjective or personal novation. For novation to take place, the following requisites must concur:
14
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract. 15
Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that
the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every
point. The test of incompatibility is whether the two obligations can stand together, each one with its own
16
independent existence. 17
Applying the foregoing to the instant case, we hold that no novation took place.
The parties did not unequivocally declare that the old obligation had been extinguished by the issuance and the
acceptance of the check, or that the check would take the place of the note. There is no incompatibility between the
promissory note and the check. As the CA correctly observed, the check had been issued precisely to answer for
the obligation. On the one hand, the note evidences the loan obligation; and on the other, the check answers for it.
Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioner’s view, also constitutes novation -- change the terms
18
and conditions of the obligation. Such payment was already provided for in the promissory note and, like the check,
was totally in accord with the terms thereof.
Also unmeritorious is petitioner’s argument that the obligation was novated by the substitution of debtors. In order to
change the person of the debtor, the old one must be expressly released from the obligation, and the third person or
new debtor must assume the former’s place in the relation. Well-settled is the rule that novation is never
19
presumed. Consequently, that which arises from a purported change in the person of the debtor must be clear and
20
express. It is thus incumbent on petitioner to show clearly and unequivocally that novation has indeed taken place.
21
In the present case, petitioner has not shown that he was expressly released from the obligation, that a third person
was substituted in his place, or that the joint and solidary obligation was cancelled and substituted by the solitary
undertaking of De Jesus. The CA aptly held:
"x x x. Plaintiff’s acceptance of the bum check did not result in substitution by de Jesus either, the nature of the
obligation being solidary due to the fact that the promissory note expressly declared that the liability of appellants
thereunder is joint and [solidary.] Reason: under the law, a creditor may demand payment or performance from one
of the solidary debtors or some or all of them simultaneously, and payment made by one of them extinguishes the
obligation. It therefore follows that in case the creditor fails to collect from one of the solidary debtors, he may still
proceed against the other or others. x x x " 22
Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor expressly
consent to the substitution of a new debtor. Since novation implies a waiver of the right the creditor had before the
23
novation, such waiver must be express. It cannot be supposed, without clear proof, that the present respondent has
24
done away with his right to exact fulfillment from either of the solidary debtors. 25
More important, De Jesus was not a third person to the obligation. From the beginning, he was a joint and solidary
obligor of the ₱400,000 loan; thus, he can be released from it only upon its extinguishment. Respondent’s
acceptance of his check did not change the person of the debtor, because a joint and solidary obligor is required to
pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction of the whole
obligation from any or all of the debtors. It is up to the former to determine against whom to enforce
26
collection. Having made himself jointly and severally liable with De Jesus, petitioner is therefore liable for the entire
27 28
obligation. 29
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an accommodation party; and that, as such, he was
released as obligor when respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads:
"PROMISSORY NOTE
"₱400,000.00
"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS, Philippine
Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City, with interest at the rate
of 5% per month or fraction thereof.
"It is understood that our liability under this loan is jointly and severally [sic].
"Done at Quezon City, Metro Manila this 23rd day of December, 1996." 30
By its terms, the note was made payable to a specific person rather than to bearer or to order -- a requisite for
31
negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence, petitioner cannot avail himself of the
NIL’s provisions on the liabilities and defenses of an accommodation party. Besides, a non-negotiable note is
merely a simple contract in writing and is evidence of such intangible rights as may have been created by the assent
of the parties. The promissory note is thus covered by the general provisions of the Civil Code, not by the NIL.
32
Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissory note. Under
Article 29 of Act 2031, an accommodation party is liable for the instrument to a holder for value even if, at the time of
its taking, the latter knew the former to be only an accommodation party. The relation between an accommodation
party and the party accommodated is, in effect, one of principal and surety -- the accommodation party being the
surety. It is a settled rule that a surety is bound equally and absolutely with the principal and is deemed an original
33
promissor and debtor from the beginning. The liability is immediate and direct. 34
Third Issue:
Propriety of Summary Judgment

or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the pleadings and a summary judgment.
Under Section 3 of Rule 35 of the Rules of Court, a summary judgment may be rendered after a summary hearing if
the pleadings, supporting affidavits, depositions and admissions on file show that (1) except as to the amount of
damages, there is no genuine issue regarding any material fact; and (2) the moving party is entitled to a judgment
as a matter of law.
A summary judgment is a procedural device designed for the prompt disposition of actions in which the pleadings
raise only a legal, not a genuine, issue regarding any material fact. Consequently, facts are asserted in the
35
complaint regarding which there is yet no admission, disavowal or qualification; or specific denials or affirmative
defenses are set forth in the answer, but the issues are fictitious as shown by the pleadings, depositions or
admissions. A summary judgment may be applied for by either a claimant or a defending party.
36 37
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the pleadings is proper when an
answer fails to render an issue or otherwise admits the material allegations of the adverse party’s pleading. The
essential question is whether there are issues generated by the pleadings. A judgment on the pleadings may be
38
sought only by a claimant, who is the party seeking to recover upon a claim, counterclaim or cross-claim; or to
obtain a declaratory relief. 39
Apropos thereto, it must be stressed that the trial court’s judgment against petitioner was correctly treated by the
appellate court as a summary judgment, rather than as a judgment on the pleadings. His Answer apparently raised
40
several issues -- that he signed the promissory note allegedly as a mere accommodation party, and that the
obligation was extinguished by either payment or novation. However, these are not factual issues requiring trial. We
quote with approval the CA’s observations:
"Although Garcia’s [A]nswer tendered some issues, by way of affirmative defenses, the documents submitted by
[respondent] nevertheless clearly showed that the issues so tendered were not valid issues. Firstly, Garcia’s claim
that he was merely an accommodation party is belied by the promissory note that he signed. Nothing in the note
indicates that he was only an accommodation party as he claimed to be. Quite the contrary, the promissory note
bears the statement: ‘It is understood that our liability under this loan is jointly and severally [sic].’ Secondly, his
claim that his co-defendant de Jesus already paid the loan by means of a check collapses in view of the dishonor
thereof as shown at the dorsal side of said check." 41
From the records, it also appears that petitioner himself moved to submit the case for judgment on the basis of the
pleadings and documents. In a written Manifestation, he stated that "judgment on the pleadings may now be
1âwphi1
42
rendered without further evidence, considering the allegations and admissions of the parties." 43
In view of the foregoing, the CA correctly considered as a summary judgment that which the trial court had issued
against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
Footnotes
Rollo, pp. 11-39.

1
Id., pp. 41-46. Tenth Division. Penned by Justice Renato C. Dacudao, with the concurrence of Justices
2
Ruben T. Reyes (Division chairman) and Mariano C. del Castillo (member).
Rollo, pp. 48-49.

3

4
Id., pp. 2-3 & 42-43.

5
RTC Decision, p. 4; rollo, p. 68. Penned by Judge Eudarlio B. Valencia.

6
Only Petitioner Garcia appealed the CA Decision. His Petition was deemed submitted for decision on
7
January 30, 2003, upon the Court’s receipt of respondent’s Memorandum signed by Atty. Felipe N. Egargo
Jr. Petitioner’s Memorandum, which was signed by Atty. Carlos G. Nery Jr., was received by the Court on
January 16, 2003.
Petitioner’s Memorandum, pp. 10-11; rollo, pp. 97-98. Original in upper case.
8
Article 1249 of the Civil Code provides in part:

9
"The delivery of promissory notes payable to order, or bills of exchange or other mercantile
the fault of the creditor they have been impaired.
"x x x x x x x x x"
Idolor v. CA, 351 SCRA 399, 407, February 7, 2001; Agro Conglomerates, Inc. v. CA, 348 SCRA 450, 458,
10
December 12, 2000; De Cortes v. Venturanza, 79 SCRA 709, 722-723, October 28, 1977; PNB v. Mallari
and The First Nat’l. Surety & Assurance Co., Inc., 104 Phil. 437, 441, August 29, 1958.
11
Tolentino, Civil Code of the Philippines, Vol. IV (1991 ed.), p. 390; De Cortes v. Venturanza, supra, p. 723.
12
Garcia v. Khu Yek Chiong, 65 Phil. 466, 468, March 31, 1938; De Cortes v. Venturanza, supra, p. 723.
13
Babst v. CA, 350 SCRA 341, January 26, 2001.
14
Spouses Bautista v. Pilar Development Corporation, 371 Phil. 533, August 17, 1999.
Agro Conglomerates, Inc. v. CA, supra, pp. 458-459; Security Bank and Trust Company, Inc. v. Cuenca,
15
341 SCRA 781, 796, October 3, 2000; Reyes v. CA, 332 Phil. 40, 50, November 4, 1996.
16
Spouses Bautista v. Pilar Development Corporation, supra. See also Article 1292 of the Civil Code.
17
Molino v. Security Diners International Corporation, 415 Phil. 587, August 16, 2001.
18
Petitioner’s Memorandum, p. 17; rollo, p. 104.
Reyes v. CA, supra; citing Ajax Marketing and Development Corporation v. CA, 248 SCRA 222, September
19
14, 1995.
20
Ibid.; Agro Conglomerates, Inc. v. CA, supra; Security Bank and Trust Company, Inc. v. Cuenca, supra.
21
Ibid.
22
23
24
Babst v. CA, supra; citing Testate Estate of Mota v. Serra, 47 Phil. 464, February 14, 1925.
25
"Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has not been fully collected."
PH Credit Corporation v. CA, 370 SCRA 155, November 22, 2001; Industrial Management International
26
Development Corp. v. National Labor Relations Commission, 387 Phil. 659, May 11, 2000; Inciong Jr. v. CA,
327 Phil. 364, June 26, 1996. See also Article 1216 of the Civil Code.
27
Inciong v. CA, 327 Phil. 364, June 26, 1996.
Ibid.; PH Credit Corporation v. CA, supra; Industrial Management International Development Corp. v.
28
National Labor Relations Commission, supra.
29
See Articles 1217 and 1218 of the Civil Code.
30
Records, p. 7.
Section 1 of the Negotiable Instruments Law provides the requisites for the negotiability of an instrument,
31
as follows:
"Section 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following
requirements:
It must be in writing and signed by the maker or drawer;
Must contain an unconditional promise or order to pay a sum certain in money;
Must be payable on demand, or at a fixed or determinable future time;
Must be payable to order or to bearer; and
Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty."
Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. 1 (1992 ed.),
32
p. 100.
Spouses Gardose v. Tarroza, 352 Phil. 797, May 19, 1998, citing Caneda Jr. v. CA, 181 SCRA 762,
33
February 5, 1990; Prudencio v. CA, 227 Phil. 7, July 14, 1986.
34
Palmares v. CA, 351 Phil. 664, March 31, 1998.
35
Puyat v. Zabarte, 352 SCRA 738, February 26, 2001.
36
Narra Integrated Corporation v. CA, 344 SCRA 781, November 15, 2000.
37
See §§1 and 2 of Rule 35 of the Rules of Court.
38
Diman v. Alumbres, 359 Phil. 796, November 27, 1998.
39
Ibid.
40
Dated February 2, 1998; records, pp. 21-22.
41
42
Dated May 12, 1998; records, pp. 44-45.
43
Petitioner’s Manifestation dated May 12, 1998, p. 1; id., p. 44.
31) California Bus Lines vs State Investment, 418 SCRA 297

SECOND DIVISION
G.R. No. 147950 December 11, 2003
CALIFORNIA BUS LINES, INC., petitioner,

vs.
STATE INVESTMENT HOUSE, INC., respondent.
DECISION
QUISUMBING, J.:
In this petition for review, California Bus Lines, Inc., assails the decision, dated April 17, 2001, of the Court of
1
Appeals in CA-G.R. CV No. 52667, reversing the judgment , dated June 3, 1993, of the Regional Trial Court of
2
Manila, Branch 13, in Civil Case No. 84-28505 entitled State Investment House, Inc. v. California Bus Lines, Inc., for
collection of a sum of money. The Court of Appeals held petitioner California Bus Lines, Inc., liable for the value of
five promissory notes assigned to respondent State Investment House, Inc.
The facts, as culled from the records, are as follows:
Sometime in 1979, Delta Motors Corporation—M.A.N. Division (Delta) applied for financial assistance from
respondent State Investment House, Inc. (hereafter SIHI), a domestic corporation engaged in the business of quasi-
banking. SIHI agreed to extend a credit line to Delta for ₱25,000,000.00 in three separate credit agreements dated
May 11, June 19, and August 22, 1979. On several occasions, Delta availed of the credit line by discounting with
3
SIHI some of its receivables, which evidence actual sales of Delta’s vehicles. Delta eventually became indebted to
SIHI to the tune of ₱24,010,269.32. 4
Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc. (hereafter CBLI), purchased on
installment basis 35 units of M.A.N. Diesel Buses and two (2) units of M.A.N. Diesel Conversion Engines from Delta.
To secure the payment of the purchase price of the 35 buses, CBLI and its president, Mr. Dionisio O. Llamas,
executed sixteen (16) promissory notes in favor of Delta on January 23 and April 25, 1980. In each promissory note,
5
CBLI promised to pay Delta or order, ₱2,314,000 payable in 60 monthly installments starting August 31, 1980, with
interest at 14% per annum. CBLI further promised to pay the holder of the said notes 25% of the amount due on the
same as attorney’s fees and expenses of collection, whether actually incurred or not, in case of judicial proceedings
to enforce collection. In addition to the notes, CBLI executed chattel mortgages over the 35 buses in Delta’s favor.
When CBLI defaulted on all payments due, it entered into a restructuring agreement with Delta on October 7, 1981,
to cover its overdue obligations under the promissory notes. The restructuring agreement provided for a new
6
schedule of payments of CBLI’s past due installments, extending the period to pay, and stipulating daily remittance
instead of the previously agreed monthly remittance of payments. In case of default, Delta would have the authority
to take over the management and operations of CBLI until CBLI and/or its president, Mr. Dionisio Llamas, remitted
and/or updated CBLI’s past due account. CBLI and Delta also increased the interest rate to 16% p.a. and added a
documentation fee of 2% p.a. and a 4% p.a. restructuring fee.
On December 23, 1981, Delta executed a Continuing Deed of Assignment of Receivables in favor of SIHI as
7
security for the payment of its obligations to SIHI per the credit agreements. In view of Delta’s failure to pay, the loan
agreements were restructured under a Memorandum of Agreement dated March 31, 1982. Delta obligated itself to
8
pay a fixed monthly amortization of ₱400,000 to SIHI and to discount with SIHI ₱8,000,000 worth of receivables with
the understanding that SIHI shall apply the proceeds against Delta’s overdue accounts.
CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to threaten CBLI with the
enforcement of the management takeover clause. To pre-empt the take-over, CBLI filed on May 3, 1982, a
complaint for injunction , docketed as Civil Case No. 0023-P, with the Court of First Instance of Rizal, Pasay City,
9
(now Regional Trial Court of Pasay City). In due time, Delta filed its amended answer with applications for the
issuance of a writ of preliminary mandatory injunction to enforce the management takeover clause and a writ of
preliminary attachment over the buses it sold to CBLI. On December 27, 1982, the trial court granted Delta’s prayer
10 11
for issuance of a writ of preliminary mandatory injunction and preliminary attachment on account of the fraudulent
disposition by CBLI of its assets.
On September 15, 1983, pursuant to the Memorandum of Agreement, Delta executed a Deed of Sale assigning to 12
SIHI five (5) of the sixteen (16) promissory notes from California Bus Lines, Inc. At the time of assignment, these
13
five promissory notes, identified and numbered as 80-53, 80-54, 80-55, 80-56, and 80-57, had a total value of
₱16,152,819.80 inclusive of interest at 14% per annum.
SIHI subsequently sent a demand letter dated December 13, 1983, to CBLI requiring CBLI to remit the payments
14
due on the five promissory notes directly to it. CBLI replied informing SIHI of Civil Case No. 0023-P and of the fact
that Delta had taken over its management and operations. 15
As regards Delta’s remaining obligation to SIHI, Delta offered its available bus units, valued at ₱27,067,162.22, as
payment in kind. On December 29, 1983, SIHI accepted Delta’s offer, and Delta transferred the ownership of its
16
available buses to SIHI, which in turn acknowledged full payment of Delta’s remaining obligation. When SIHI was
17
unable to take possession of the buses, SIHI filed a petition for recovery of possession with prayer for issuance of a
writ of replevin before the RTC of Manila, Branch 6, docketed as Civil Case No. 84-23019. The Manila RTC issued a
writ of replevin and SIHI was able to take possession of 17 bus units belonging to Delta. SIHI applied the proceeds
from the sale of the said 17 buses amounting to ₱12,870,526.98 to Delta’s outstanding obligation. Delta’s obligation
to SIHI was thus reduced to ₱20,061,898.97. On December 5, 1984, Branch 6 of the RTC of Manila rendered
judgment in Civil Case No. 84-23019 ordering Delta to pay SIHI this amount.
Thereafter, Delta and CBLI entered into a compromise agreement on July 24, 1984, in Civil Case No. 0023-P, the
18
injunction case before the RTC of Pasay. CBLI agreed that Delta would exercise its right to extrajudicially foreclose
on the chattel mortgages over the 35 bus units. The RTC of Pasay approved this compromise agreement the
following day, July 25, 1984. Following this, CBLI vehemently refused to pay SIHI the value of the five promissory
19
notes, contending that the compromise agreement was in full settlement of all its obligations to Delta including its
obligations under the promissory notes.
On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No. 84-28505, against CBLI in the Regional
Trial Court of Manila, Branch 34, to collect on the five (5) promissory notes with interest at 14% p.a. SIHI also
prayed for the issuance of a writ of preliminary attachment against the properties of CBLI. 20
On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of chattel mortgages pursuant to its
compromise agreement with CBLI. On January 2, 1985, Delta filed in the RTC of Pasay a motion for execution of
the judgment based on the compromise agreement. The RTC of Pasay granted this motion the following day.
21 22
In view of Delta’s petition and motion for execution per the judgment of compromise, the RTC of Manila granted in
Civil Case No. 84-28505 SIHI’s application for preliminary attachment on January 4, 1985. Consequently, SIHI was
23
able to attach and physically take possession of thirty-two (32) buses belonging to CBLI. However, acting on CBLI’s
24
motion to quash the writ of preliminary attachment, the same court resolved on January 15, 1986, to discharge the
25
writ of preliminary attachment. SIHI assailed the discharge of the writ before the Intermediate Appellate Court (now
Court of Appeals) in a petition for certiorari and prohibition, docketed as CA-G.R. SP No. 08378. On July 31, 1987,
the Court of Appeals granted SIHI’s petition in CA-GR SP No. 08378 and ruled that the writ of preliminary
attachment issued by Branch 34 of the RTC Manila in Civil Case No. 84-28505 should stay. The decision of the
26
Court of Appeals attained finality on August 22, 1987. 27
Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the sheriff of Pasay City conducted a public
auction and issued a certificate of sheriff’s sale to Delta on April 2, 1987, attesting to the fact that Delta bought 14 of
the 35 buses for ₱3,920,000. On April 7, 1987, the sheriff of Manila, by virtue of the writ of execution dated March
28
27, 1987, issued by Branch 6 of the RTC of Manila in Civil Case No. 84-23019, sold the same 14 buses at public
auction in partial satisfaction of the judgment SIHI obtained against Delta in Civil Case No. 84-23019.
Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of the RTC of Manila in view of the
retirement of the presiding judge of Branch 34. Subsequently, SIHI moved to sell the sixteen (16) buses of CBLI
which had previously been attached by the sheriff in Civil Case No. 84-28505 pursuant to the January 4, 1985,
Order of the RTC of Manila. SIHI’s motion was granted on December 16, 1987. On November 29, 1988, however,
29 30
SIHI filed an urgent ex-parte motion to amend this order claiming that through inadvertence and excusable
negligence of its new counsel, it made a mistake in the list of buses in the Motion to Sell Attached Properties it had
earlier filed. SIHI explained that 14 of the buses listed had already been sold to Delta on April 2, 1987, by virtue of
31
the January 3, 1985 Order of the RTC of Pasay, and that two of the buses listed had been released to third party,
claimant Pilipinas Bank, by Order dated September 16, 1987 of Branch 13 of the RTC of Manila.
32
CBLI opposed SIHI’s motion to allow the sale of the 16 buses. On May 3, 1989, Branch 13 of the RTC of Manila
33
denied SIHI’s urgent motion to allow the sale of the 16 buses listed in its motion to amend. The trial court ruled that
the best interest of the parties might be better served by denying further sales of the buses and to go direct to the
trial of the case on the merits. 34
After trial, judgment was rendered in Civil Case No. 84-28505 on June 3, 1993, discharging CBLI from liability on the
five promissory notes. The trial court likewise favorably ruled on CBLI’s compulsory counterclaim. The trial court
directed SIHI to return the 16 buses or to pay CBLI ₱4,000,000 representing the value of the seized buses, with
interest at 12% p.a. to begin from January 11, 1985, the date SIHI seized the buses, until payment is made. In ruling
against SIHI, the trial court held that the restructuring agreement dated October 7, 1981, between Delta and CBLI
novated the five promissory notes; hence, at the time Delta assigned the five promissory notes to SIHI, the notes
were already merged in the restructuring agreement and cannot be enforced against CBLI.
SIHI appealed the decision to the Court of Appeals. The case was docketed as CA-G.R. CV No. 52667. On April 17,
2001, the Court of Appeals decided CA-G.R. CV No. 52667 in this manner:
WHEREFORE, based on the foregoing premises and finding the appeal to be meritorious, We find defendant-
appellee CBLI liable for the value of the five (5) promissory notes subject of the complaint a quo less the proceeds
from the attached sixteen (16) buses. The award of attorney’s fees and costs is eliminated. The appealed decision is
hereby REVERSED. No costs.
SO ORDERED. 35
Hence, this appeal where CBLI contends that
I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE RESTRUCTURING AGREEMENT

BETWEEN DELTA AND THE PETITIONER DID NOT SUBSTANTIALLY NOVATE THE TERMS OF THE
FIVE PROMISSORY NOTES.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPROMISE AGREEMENT BETWEEN
DELTA AND THE PETITIONER IN THE PASAY CITY CASE DID NOT SUPERSEDE AND DISCHARGE
THE PROMISSORY NOTES.
III. THE COURT OF APPEALS ERRED IN UPHOLDING THE CONTINUING VALIDITY OF THE
PRELIMINARY ATTACHMENT AND EXONERATING THE RESPONDENT OF MALEFACTIONS IN
PRESERVING AND ASSERTING ITS RIGHTS THEREUNDER. 36
Essentially, the issues are (1) whether the Restructuring Agreement dated October 7, 1981, between petitioner CBLI
and Delta Motors, Corp. novated the five promissory notes Delta Motors, Corp. assigned to respondent SIHI, and (2)
whether the compromise agreement in Civil Case No. 0023-P superseded and/or discharged the subject five
promissory notes. The issues being interrelated, they shall be jointly discussed.
CBLI first contends that the Restructuring Agreement did not merely change the incidental elements of the
obligation under all sixteen (16) promissory notes, but it also increased the obligations of CBLI with the addition of
new obligations that were incompatible with the old obligations in the said notes. CBLI adds that even if the
37
restructuring agreement did not totally extinguish the obligations under the sixteen (16) promissory notes, the July
24, 1984, compromise agreement executed in Civil Case No. 0023-P did. CBLI cites paragraph 5 of the
38
compromise agreement which states that the agreement between it and CBLI was in "full and final settlement,
adjudication and termination of all their rights and obligations as of the date of (the) agreement, and of the issues in
(the) case." According to CBLI, inasmuch as the five promissory notes were subject matters of the Civil Case No.
0023-P, the decision approving the compromise agreement operated as res judicata in the present case. 39
Novation has been defined as the extinguishment of an obligation by the substitution or change of the obligation by
a subsequent one which terminates the first, either by changing the object or principal conditions, or by substituting
the person of the debtor, or subrogating a third person in the rights of the creditor. 40
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is
41
terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the
old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive novation
42
results either by changing the object or principal conditions (objective or real), or by substituting the person of the
debtor or subrogating a third person in the rights of the creditor (subjective or personal). Novation has two
43
functions: one to extinguish an existing obligation, the other to substitute a new one in its place. For novation to
44
take place, four essential requisites have to be met, namely, (1) a previous valid obligation; (2) an agreement of all
parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new
obligation.45
Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express
46
agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken. 47
The extinguishment of the old obligation by the new one is a necessary element of novation which may be effected
either expressly or impliedly. The term "expressly" means that the contracting parties incontrovertibly disclose that
48
their object in executing the new contract is to extinguish the old one. Upon the other hand, no specific form is
49
required for an implied novation, and all that is prescribed by law would be an incompatibility between the two
contracts. While there is really no hard and fast rule to determine what might constitute to be a sufficient change
50
that can bring about novation, the touchstone for contrariety, however, would be an irreconcilable incompatibility
between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of novation and thereby produce the effect of
extinguishing an obligation by another which substitutes the same. The first is when novation has been explicitly
stated and declared in unequivocal terms. The second is when the old and the new obligations are incompatible on
every point. The test of incompatibility is whether the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and the latter obligation novates the first. Corollarily,
51 52
changes that breed incompatibility must be essential in nature and not merely accidental. The incompatibility must
take place in any of the essential elements of the obligation, such as its object, cause or principal conditions thereof;
otherwise, the change would be merely modificatory in nature and insufficient to extinguish the original obligation. 53
The necessity to prove the foregoing by clear and convincing evidence is accentuated where the obligation of the
debtor invoking the defense of novation has already matured. 54
With respect to obligations to pay a sum of money, this Court has consistently applied the well-settled rule that the
obligation is not novated by an instrument that expressly recognizes the old, changes only the terms of payment,
and adds other obligations not incompatible with the old ones, or where the new contract merely supplements the
old one.55
In Inchausti & Co. v. Yulo this Court held that an obligation to pay a sum of money is not novated in a new
56
instrument wherein the old is ratified, by changing only the term of payment and adding other obligations not
incompatible with the old one. In Tible v. Aquino and Pascual v. Lacsamana this Court declared that it is well
57 58
settled that a mere extension of payment and the addition of another obligation not incompatible with the old one is
not a novation thereof.
In this case, the attendant facts do not make out a case of novation. The restructuring agreement between Delta
and CBLI executed on October 7, 1981, shows that the parties did not expressly stipulate that the restructuring
agreement novated the promissory notes. Absent an unequivocal declaration of extinguishment of the pre-existing
obligation, only a showing of complete incompatibility between the old and the new obligation would sustain a
finding of novation by implication. However, our review of its terms yields no incompatibility between the promissory
59
notes and the restructuring agreement.
The five promissory notes, which Delta assigned to SIHI on September 13, 1983, contained the following common
stipulations:
1. They were payable in 60 monthly installments up to July 31, 1985;
2. Interest: 14% per annum;
3. Failure to pay any of the installments would render the entire remaining balance due and payable at the
option of the holder of the notes;
4. In case of judicial collection on the notes, the maker (CBLI) and co-maker (its president, Mr. Dionisio O.
Llamas, Jr) were solidarily liable of attorney’s fees and expenses of 25% of the amount due in addition to the
costs of suit.
The restructuring agreement, for its part, had the following provisions:
WHEREAS, CBL and LLAMAS admit their past due installment on the following promissory notes:
a. PN Nos. 16 to 26 (11 units)

Past Due as of September 30, 1981 – ₱1,411,434.00
b. PN Nos. 52 to 57 (24 units)

Past Due as of September 30, 1981 – ₱1,105,353.00
WHEREAS, the parties agreed to restructure the above-mentioned past due installments under the following terms
and conditions:
a. PN Nos. 16 to 26 (11 units) – 37 months

PN Nos. 52 to 57 (24 units) – 46 months
b. Interest Rate: 16% per annum
c. Documentation Fee: 2% per annum
d. Penalty previously incurred and Restructuring fee: 4% p.a.
e. Mode of Payment: Daily Remittance
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereby agree and covenant as
follows:
1. That the past due installment referred to above plus the current and/or falling due amortization as of October 1,
1981 for Promissory Notes Nos. 16 to 26 and 52 to 57 shall be paid by CBL and/or LLAMAS in accordance with the
following schedule of payments:
Daily payments of ₱11,000.00 from<>October 1 to December 31, 1981
Daily payments of ₱12,000.00 from<>January 1, 1982 to March 31, 1982
Daily payments of ₱13,000.00 from<>April 1, 1982 to June 30, 1982
Daily payments of ₱14,000.00 from<>July 1, 1982 to September 30, 1982
Daily payments of ₱15,000.00 from<>October 1, 1982 to December 31, 1982
Daily payments of ₱16,000.00 from<>January 1, 1983 to June 30, 1983
Daily payments of ₱17,000.00 from<>July 1, 1983
2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily cash payments due to DMC in
accordance with the schedule in paragraph 1. DMC may send a collector to receive the amount due at CBL’s
premises. All delayed remittances shall be charged additional 2% penalty interest per month.
3. All payments shall be applied to amortizations and penalties due in accordance with paragraph of the restructured
past due installments above mentioned and PN Nos. 16 to 26 and 52 to 57.
4. DMC may at anytime assign and/or send its representatives to monitor the operations of CBL pertaining to the
financial and field operations and service and maintenance matters of M.A.N. units. Records needed by the DMC
representatives in monitoring said operations shall be made available by CBL and LLAMAS.
5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and 52 to 57, CBL or LLAMAS shall
remit in lump sum whatever balance is left after deducting all payments made from what is due and payable to DMC
in accordance with paragraph 1 of this agreement and PN Nos. 16 to 26 and 52 to 57.
6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed upon and the total accumulated
unremitted amount has reached and (sic) equivalent of Sixty (60) days, DMC and Silverio shall exercise any or all of
the following options:
(a) The whole sum remaining then unpaid plus 2% penalty per month and 16% interest per annum
on total past due installments will immediately become due and payable. In the event of judicial
proceedings to enforce collection, CBL and LLAMAS will pay to DMC an additional sum equivalent
to 25% of the amount due for attorney’s fees and expenses of collection, whether actually incurred
or not, in addition to the cost of suit;
(b) To enforce in accordance with law, their rights under the Chattel Mortgage over various M.A.N.
Diesel bus with Nos. CU 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and 80-15, and/or
(c) To take over management and operations of CBL until such time that CBL and/or LLAMAS have
remitted and/or updated their past due account with DMC.
7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for the M.A.N. Diesel Buses and shall
make available to CBL at the price prevailing at the time of purchase, an inventory of spare parts consisting of at
least ninety (90%) percent of the needs of CBL based on a moving 6-month requirement to be prepared and
submitted by CBL, and acceptable to DMC, within the first week of each month.
8. Except as otherwise modified in this Agreement, the terms and conditions stipulated in PN Nos. 16 to 26 and 52
to 57 shall continue to govern the relationship between the parties and that the Chattel Mortgage over various
M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and CM No. 80-15 as well as the
Deed of Pledge executed by Mr. Llamas shall continue to secure the obligation until full payment.
9. DMC and SILVERIO undertake to recall or withdraw its previous request to Notary Public Alberto G. Doller and to
instruct him not to proceed with the public auction sale of the shares of stock of CBL subject-matter of the Deed of
Pledge of Shares. LLAMAS, on the other hand, undertakes to move for the immediate dismissal of Civil Case No.
9460-P entitled "Dionisio O. Llamas vs. Alberto G. Doller, et al.", Court of First Instance of Pasay, Branch XXIX. 60
It is clear from the foregoing that the restructuring agreement, instead of containing provisions "absolutely
incompatible" with the obligations of the judgment, expressly ratifies such obligations in paragraph 8 and contains
provisions for satisfying them. There was no change in the object of the prior obligations. The restructuring
agreement merely provided for a new schedule of payments and additional security in paragraph 6 (c) giving Delta
authority to take over the management and operations of CBLI in case CBLI fails to pay installments equivalent to
60 days. Where the parties to the new obligation expressly recognize the continuing existence and validity of the old
one, there can be no novation. Moreover, this Court has ruled that an agreement subsequently executed between a
61
seller and a buyer that provided for a different schedule and manner of payment, to restructure the mode of
payments by the buyer so that it could settle its outstanding obligation in spite of its delinquency in payment, is not
tantamount to novation. 62
The addition of other obligations likewise did not extinguish the promissory notes. In Young v. CA , this Court ruled
63
that a change in the incidental elements of, or an addition of such element to, an obligation, unless otherwise
expressed by the parties will not result in its extinguishment.
In fine, the restructuring agreement can stand together with the promissory notes.
Neither is there merit in CBLI’s argument that the compromise agreement dated July 24, 1984, in Civil Case No.
0023-P superseded and/or discharged the five promissory notes. Both Delta and CBLI cannot deny that the five
promissory notes were no longer subject of Civil Case No. 0023-P when they entered into the compromise
agreement on July 24, 1984.
Having previously assigned the five promissory notes to SIHI, Delta had no more right to compromise the same.
Delta’s limited authority to collect for SIHI stipulated in the September 13, 1985, Deed of Sale cannot be construed
to include the power to compromise CBLI’s obligations in the said promissory notes. An authority to compromise, by
express provision of Article 1878 of the Civil Code, requires a special power of attorney, which is not present in this
64
case. Incidentally, Delta’s authority to collect in behalf of SIHI was, by express provision of the Continuing Deed of
Assignment, automatically revoked when SIHI opted to collect directly from CBLI.
65
As regards CBLI, SIHI’s demand letter dated December 13, 1983, requiring CBLI to remit the payments directly to
SIHI effectively revoked Delta’s limited right to collect in behalf of SIHI. This should have dispelled CBLI’s erroneous
notion that Delta was acting in behalf of SIHI, with authority to compromise the five promissory notes.
But more importantly, the compromise agreement itself provided that it covered the rights and obligations only of
Delta and CBLI and that it did not refer to, nor cover the rights of, SIHI as the new creditor of CBLI in the subject
promissory notes. CBLI and Delta stipulated in paragraph 5 of the agreement that:
5. This COMPROMISE AGREEMENT constitutes the entire understanding by and between the plaintiffs and the
defendants as well as their lawyers, and operates as full and final settlement, adjudication and termination of all
their rights and obligations as of the date of this agreement, and of the issues in this case. 66
Even in the absence of such a provision, the compromise agreement still cannot bind SIHI under the settled rule that
a compromise agreement determines the rights and obligations of only the parties to it. Therefore, we hold that the
67
compromise agreement covered the rights and obligations only of Delta and CBLI and only with respect to the
eleven (11) other promissory notes that remained with Delta.
CBLI next maintains that SIHI is estopped from questioning the compromise agreement because SIHI failed to
intervene in Civil Case No. 0023-P after CBLI informed it of the takeover by Delta of CBLI’s management and
operations and the resultant impossibility for CBLI to comply with its obligations in the subject promissory notes.
CBLI also adds that SIHI’s failure to intervene in Civil Case No. 0023-P is proof that Delta continued to act in SIHI’s
behalf in effecting collection under the notes.
The contention is untenable. As a result of the assignment, Delta relinquished all its rights to the subject promissory
notes in favor of SIHI. This had the effect of separating the five promissory notes from the 16 promissory notes
subject of Civil Case No. 0023-P. From that time, CBLI’s obligations to SIHI embodied in the five promissory notes
became separate and distinct from CBLI’s obligations in eleven (11) other promissory notes that remained with
Delta. Thus, any breach of these independent obligations gives rise to a separate cause of action in favor of SIHI
against CBLI. Considering that Delta’s assignment to SIHI of these five promissory notes had the effect of removing
the said notes from Civil Case No. 0023-P, there was no reason for SIHI to intervene in the said case. SIHI did not
have any interest to protect in Civil Case No. 0023-P.
Moreover, intervention is not mandatory, but only optional and permissive. Notably, Section 2, Rule 12 of the then
68 69
1988 Revised Rules of Procedure uses the word ‘may’ in defining the right to intervene. The present rules maintain
the permissive nature of intervention in Section 1, Rule 19 of the 1997 Rules of Civil Procedure, which provides as
follows:
SEC. 1. Who may intervene.—A person who has a legal interest in the matter in litigation, or in the success of either
of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other
disposition of property in the custody of the court or of an officer thereof may, with leave of court, be allowed to
intervene in the action. The court shall consider whether or not the intervention will unduly delay or prejudice the
adjudication of the rights of the original parties, and whether or not the intervenor's rights may be fully protected in a
separate proceeding. 70
Also, recall that Delta transferred the five promissory notes to SIHI on September 13, 1983 while Civil Case No.
0023-P was pending. Then as now, the rule in case of transfer of interest pendente lite is that the action may be
continued by or against the original party unless the court, upon motion, directs the person to whom the interest is
transferred to be substituted in the action or joined with the original party. The non-inclusion of a necessary party
71
does not prevent the court from proceeding in the action, and the judgment rendered therein shall be without
prejudice to the rights of such necessary party. 72
In light of the foregoing, SIHI’s refusal to intervene in Civil Case No. 0023-P in another court does not amount to an
estoppel that may prevent SIHI from instituting a separate and independent action of its own. This is especially so
73
since it does not appear that a separate proceeding would be inadequate to protect fully SIHI’s rights. Indeed, 74
SIHI’s refusal to intervene is precisely because it considered that its rights would be better protected in a separate
and independent suit.
The judgment on compromise in Civil Case No. 0023-P did not operate as res judicata to prevent SIHI from
prosecuting its claims in the present case. As previously discussed, the compromise agreement and the judgment
on compromise in Civil Case No. 0023-P covered only Delta and CBLI and their respective rights under the 11
promissory notes not assigned to SIHI. In contrast, the instant case involves SIHI and CBLI and the five promissory
notes. There being no identity of parties and subject matter, there is no res judicata.
CBLI maintains, however, that in any event, recovery under the subject promissory notes is no longer allowed by
Article 1484(3) of the Civil Code, which prohibits a creditor from suing for the deficiency after it has foreclosed on
75
the chattel mortgages. SIHI, being the successor-in-interest of Delta, is no longer allowed to recover on the
promissory notes given as security for the purchase price of the 35 buses because Delta had already extrajudicially
foreclosed on the chattel mortgages over the said buses on April 2, 1987.
This claim is likewise untenable.
Article 1484(3) finds no application in the present case. The extrajudicial foreclosure of the chattel mortgages Delta
effected cannot prejudice SIHI’s rights. As stated earlier, the assignment of the five notes operated to create a
separate and independent obligation on the part of CBLI to SIHI, distinct and separate from CBLI’s obligations to
Delta. And since there was a previous revocation of Delta’s authority to collect for SIHI, Delta was no longer SIHI’s
collecting agent. CBLI, in turn, knew of the assignment and Delta’s lack of authority to compromise the subject
notes, yet it readily agreed to the foreclosure. To sanction CBLI’s argument and to apply Article 1484 (3) to this case
would work injustice to SIHI by depriving it of its right to collect against CBLI who has not paid its obligations.
That SIHI later on levied on execution and acquired in the ensuing public sale in Civil Case No. 84-23019 the buses
Delta earlier extrajudicially foreclosed on April 2, 1987, in Civil Case No. 0023-P, did not operate to render the
compromise agreement and the foreclosure binding on SIHI. At the time SIHI effected the levy on execution to
satisfy its judgment credit against Delta in Civil Case No. 84-23019, the said buses already pertained to Delta by
virtue of the April 2, 1987 auction sale. CBLI no longer had any interest in the said buses. Under the circumstances,
1âwphi1
we cannot see how SIHI’s belated acquisition of the foreclosed buses operates to hold the compromise agreement
—and consequently Article 1484(3)—applicable to SIHI as CBLI contends. CBLI’s last contention must, therefore,
fail. We hold that the writ of execution to enforce the judgment of compromise in Civil Case No. 0023-P and the
foreclosure sale of April 2, 1987, done pursuant to the said writ of execution affected only the eleven (11) other
promissory notes covered by the compromise agreement and the judgment on compromise in Civil Case No. 0023-
P.
In support of its third assignment of error, CBLI maintains that there was no basis for SIHI’s application for a writ of
preliminary attachment. According to CBLI, it committed no fraud in contracting its obligation under the five
76
promissory notes because it was financially sound when it issued the said notes on April 25, 1980. CBLI also 77
asserts that at no time did it falsely represent to SIHI that it would be able to pay its obligations under the five
promissory notes. According to CBLI, it was not guilty of fraudulent concealment, removal, or disposal, or of
78
fraudulent intent to conceal, remove, or dispose of its properties to defraud its creditors; and that SIHI’s bare
79
allegations on this matter were insufficient for the preliminary attachment of CBLI’s properties. 80
The question whether the attachment of the sixteen (16) buses was valid and in accordance with law, however, has
already been resolved with finality by the Court of Appeals in CA-G.R. SP No. 08376. In its July 31, 1987, decision,
the Court of Appeals upheld the legality of the writ of preliminary attachment SIHI obtained and ruled that the trial
court judge acted with grave abuse of discretion in discharging the writ of attachment despite the clear presence of
a determined scheme on the part of CBLI to dispose of its property. Considering that the said Court of Appeals
decision has already attained finality on August 22, 1987, there exists no reason to resolve this question anew.
Reasons of public policy, judicial orderliness, economy and judicial time and the interests of litigants as well as the
peace and order of society, all require that stability be accorded the solemn and final judgments of courts or
tribunals of competent jurisdiction.81
Finally, in the light of the justness of SIHI’s claim against CBLI, we cannot sustain CBLI’s contention that the Court
of Appeals erred in dismissing its counterclaim for lost income and the value of the 16 buses over which SIHI
obtained a writ of preliminary attachment. Where the party who requested the attachment acted in good faith and
without malice, the claim for damages resulting from the attachment of property cannot be sustained. 82
WHEREFORE, the decision dated April 17, 2001, of the Court of Appeals in CA-G.R. CV No. 52667 is AFFIRMED.
Petitioner California Bus Lines, Inc., is ORDERED to pay respondent State Investment House, Inc., the value of the
five (5) promissory notes subject of the complaint in Civil Case No. 84-28505 less the proceeds from the sale of the
attached sixteen (16) buses. No pronouncement as to costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.

Footnotes
Rollo, pp. 62-72. Penned by Associate Justice Elvi John S. Asuncion and concurred in by Associate
1
Justices Cancio C. Garcia and Oswaldo D. Agcaoili.
Id. at 52-60.
2
Records, pp. 10-21; 1077-1079.

3
Id. at 3.
4
Id. at 1215.
5
Id. at 170-174.
6
Id. at 22-26; 1080-1084.

7
Id. at 28-31; 1086-1089.

8
Id. at 175-181.
9
10
Id. at 183-220.
11
Id. at 225-236.
12
Id. at 32-33; 1090-1091.
13
Id. at 34-53; 1092-1111.
14
Id. at 54-55; 1112-1113.
15
Id. at 281.
16
Id. at 282.
17
Id. at 283-285.
18
Id. at 258-264.
19
Id. at 265.
20
Id. at 1-9.
21
Id. at 274-276.
22
Id. at 278.
23
Id. at 61.
24
Id. at 292-295; 306.
25
Id. at 691-694.
26
CA Rollo, p. 103.
27
Ibid.
28
Id. at 101.
29
Records, pp. 761-764.
30
Id. at 772.
31
Id. at 795-797.
32
Id. at 755.
33
Id. at 861-865.
34
Id. at 864.
35
Rollo, p. 72.
36
Id. at 26, 29-30, 36.
37
Rollo, pp. 294-295.
38
Id. at 297.
39
Id. at 299.
40
Idolor v. Court of Appeals, G.R. No. 141853, 7 February 2001, 351 SCRA 399, 407.
41
Ocampo-Paule v. Court of Appeals, G.R. No. 145872, 4 February 2002, 376 SCRA 83, 88.
42
Ibid.
43
Babst v. Court of Appeals, G.R. Nos. 99398 & 104625, 26 January 2001, 350 SCRA 341, 356.
44
Ibid.
45
Reyes v. Court of Appeals, G.R. No. 120817, 4 November 1996, 264 SCRA 35, 43.
46
Sps. Reyes v. Court of Appeals, G.R. No. 147758, 26 June 2002, 383 SCRA 471, 482.
47
Quinto v. People, G.R. No. 126712, 14 April 1999, 305 SCRA 708, 714.
48
Ocampo-Paule v. Court of Appeals, supra, note 41 at 88.
49
Quinto v. People, supra, note 47 at 715.
50
Ocampo-Paule v. CA, supra, note 48.
Molino v. Security Diners International Corporation, G.R. No. 136780, 16 August 2001, 363 SCRA 358,
51
366.
52
Ibid.
53
Quinto v. People, supra note 47 at 715-716.
54
Guerrero v. Court of Appeals, 140 Phil. 335, 342-343 (1969).
Sps. Reyes v. Court of Appeals, supra, note 46; Magdalena Estates, Inc. v. Rodriguez, 125 Phil. 151, 157
55
(1966).
56
34 Phil. 978, 986 (1914).
57
No. L-28967, 22 July 1975, 65 SCRA 207, 218.
58
100 Phil. 381, 385 (1956).
59
Cochingyan, Jr. v. R&B Surety and Insurance Co., Inc., No. L-47369, 30 June 1987, 151 SCRA 339, 350.
60
Records, pp. 170-173,
61
Cochingyan, Jr. v. R&B Surety and Insurance Co., Inc., No. L-47369, 30 June 1987, 151 SCRA 339, 350.
Tropical Homes, Inc. v. Court of Appeals, G.R. No. 111858, 14 May 1997, 272 SCRA 428; See also Tible
62
v. Aquino, No. L-28967, 22 July 1975, 65 SCRA 207, 217-218.
63
G.R. No. 83271, 8 May 1991, 196 SCRA 795, 800.
64
ART. 1878. Special powers of attorney are necessary in the following cases:
(3) To compromise, to submit questions to arbitration, to renounce the right to appeal from a
judgment, to waive objections to the venue of an action or to abandon a prescription already
acquired;
65
Records, p. 3.
66
Records, p. 264. Emphasis supplied.
67
Guerrero v. Court of Appeals, No. L-22366, 30 October 1969, 29 SCRA 791, 796.
68
Cruzcosa v. Hon. H. Concepcion, 101 Phil. 146, 150 (1957).
SEC. 2. Intervention.—A person may, before or during a trial, be permitted by the court, in its discretion, to
69
intervene in an action, x x x.
70
Emphasis supplied.
71
Section 19, Rule 3 of the Rules of Court.
72
Section 9, Rule 3 of the Rules of Court.
73
See Vda. De Cailles v. Mayuga, G.R. No. 30859, 20 February 1989, 170 SCRA 347, 356.
74
Ibid.
ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the
75
vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee’s failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage of the thing sold, if one has been constituted, should the
vendee’s failure to pay cover two or more installments. In this case, he shall have no further action
against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary
shall be void.
76
Rollo, p. 304.
77
Id. at 306-308.
78
Id. at 304, 308.
79
Id. at 309.
80
Id. at 309-310.
81
Turqueza v. Hernando, No. L-51626, 30 April 1980, 97 SCRA 483, 488.
82
Banque Generale Belge v. Walter Bull & Co., Inc., 84 Phil. 164, 172 (1949).
32) Babst vs Court of Appeals 350 SCRA 341

FIRST DIVISION
G.R. No. 99398 & 104625 January 26, 2001
CHESTER BABST, petitioner,
vs.
COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, ELIZALDE STEEL CONSOLIDATED, INC., and
PACIFIC MULTI-COMMERCIAL CORPORATION, respondents.
x ------------------------------------------------ x
ELIZALDE STEEL CONSOLIDATED, INC., petitioner,
vs.
COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, PACIFIC MULTI-COMMERCIAL CORPORATION
and CHESTER BABST, respondents.
YNARES-SANTIAGO, J.:
These consolidated petitions seek the review of the Decision dated April 29, 1991 of the Court of Appeals in CA-
G.R. CV No. 172821 entitled, "Bank of the Philippine Islands, Plaintiff-Appellee versus Elizalde Steel Consolidated,
Inc., Pacific Multi-Commercial Corporation, and Chester G. Babst, Defendants-Appellants."
The complaint was commenced principally to enforce payment of a promissory note and three domestic letters of
credit which Elizalde Steel Consolidated, Inc. (ELISCON) executed and opened with the Commercial Bank and
Trust Company (CBTC).
On June 8, 1973, ELISCON obtained from CBTC a loan in the amount of P 8,015,900.84, with interest at the rate of
14% per annum, evidenced by a promissory note.2 ELISCON defaulted in its payments, leaving an outstanding
indebtedness in the amount of P2,795,240.67 as of October 31, 1982. 3
The letters of credit, on the other hand, were opened for ELISCON by CBTC using the credit facilities of Pacific
Multi-Commercial Corporation (MULTI) with the said bank, pursuant to the Resolution of the Board of Directors of
MULTI adopted on August 31, 1977 which reads:
WHEREAS, at least 90% of the Company's gross sales is generated by the sale of tin-plates manufactured
by Elizalde Steel Consolidated, Inc.;
WHEREAS, it is to the best interests of the Company to continue handling said tin-plate line;
WHEREAS, Elizalde Steel Consolidated, Inc. has requested the assistance of the Company in obtaining
credit facilities to enable it to maintain the present level of its tin-plate manufacturing output and the
Company is willing to extend said requested assistance;
NOW, THEREFORE, for and in consideration of the foregoing premises ---
BE IT RESOLVED AS IT IS HEREBY RESOLVED, That the PRESIDENT & GENERAL MANAGER,

ANTONIO ROXAS CHUA, be, as he is hereby empowered to allow and authorize ELIZALDE STEEL
CONSOLIDATED, INC. to avail and make use of the Credit Line of PACIFIC MULTI-COMMERCIAL
CORPORATION with the COMMERCIAL BANK & TRUST COMPANY OF THE PHILIPPINES, Makati,
Metro Manila;
RESOLVED, FURTHER, That the Pacific Multi-Commercial Corporation guarantee, as it does hereby
guarantee, solidarily, the payment of the corresponding Letters of Credit upon maturity of the same;
RESOLVED, FINALLY, That copies of this resolution be furnished the Commercial Bank & Trust Company
of the Philippines, Makati, Metro Manila, for their information. 4
Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G. Babst executed a Continuing
Suretyship,5 whereby they bound themselves jointly and severally liable to pay any existing indebtedness of MULTI
to CBTC to the extent of P8,000,000.00 each. 1âwphi1.nêt
Sometime in October 1978, CBTC opened for ELISCON in favor of National Steel Corporation three (3) domestic
letters of credit in the amounts of P1,946,805.73,6 P1,702,869.327 and P200,307.72,8 respectively, which ELISCON
used to purchase tin black plates from National Steel Corporation. ELISCON defaulted in its obligation to pay the
amounts of the letters of credit, leaving an outstanding account, as of October 31, 1982, in the total amount of
P3,963,372.08.9
On December 22, 1980, the Bank of the Philippine Islands (BPI) and CBTC entered into a merger, wherein BPI, as
the surviving corporation, acquired all the assets and assumed all the liabilities of CBTC. 10
Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to the Development Bank of
the Philippines (DBP). In order to settle its obligations, ELISCON proposed to convey to DBP by way of dacion en
pago all its fixed assets mortgaged with DBP, as payment for its total indebtedness in the amount of
P201,181,833.16. On December 28, 1978, ELISCON and DBP executed a Deed of Cession of Property in Payment
of Debt.11
In June 1981, ELISCON called its creditors to a meeting to announce the take-over by DBP of its assets.
In October 1981, DBP formally took over the assets of ELISCON, including its indebtedness to BPI. Thereafter, DBP
proposed formulas for the settlement of all of ELISCON's obligations to its creditors, but BPI expressly rejected the
formula submitted to it for not being acceptable. 12
Consequently, on January 17, 1983, BPI, as successor-in-interest of CBTC, instituted with the Regional Trial Court
of Makati, Branch 147, a complaint13 for sum of money against ELISCON, MULTI and Babst, which was docketed as
Civil Case No. 49226.
ELISCON, in its Answer,14 argued that the complaint was premature since DBP had made serious efforts to settle its
obligations with BPI.
Babst also filed his Answer alleging that he signed the Continuing Suretyship on the understanding that it covers
only obligations which MULTI incurred solely for its benefit and not for any third party liability, and he had no
knowledge or information of any transaction between MULTI and ELISCON. 15
MULTI, for its part, denied knowledge of the merger between BPI and CBTC, and averred that the guaranty under
its board resolution did not cover purchases made by ELISCON in the form of trust receipts. It set up a cross-claim
against ELISCON alleging that the latter should be held liable for any judgment which the court may render against
it in favor of BPI.16
On February 20, 1987, the trial court rendered its Decision, 17 the dispositive portion of which reads:
WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor of the plaintiff and
against all the defendants:
1) Ordering defendant ELISCON to pay the plaintiff the amount of P2,795,240.67 due on the promissory
note, Annex "A" of the Complaint as of 31 October 1982 and the amount of P3,963,372.08 due on the three
(3) domestic letters of credit, also as of 31 October 1982;
2) Ordering defendant ELISCON to pay the plaintiff interests and related charges on the principal of said
promissory note of P2,102,232.02 at the rates provided in said note from and after 31 October 1982 until full
payment thereof, and on the principal of the three (3) domestic letters of credit of P3,564,349.25 interests
and related charges at the rates provided in said letters of credit, from and after 31 October 1982 until full
payment;
3) Ordering defendant ELISCON to pay interests at the legal rate on all interests and related charges but
unpaid as of the filing of this complaint, until full payment thereof;
4) Ordering defendant ELISCON to pay attorney's fees equivalent to 10% of the total amount due under the
preceding paragraphs;
5) Ordering defendants Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly
and severally with defendant ELISCON, the total sum of P3,963,372.08 due on the three (3) domestic letters
of credit as of 31 October 1982 with interests and related charges on the principal amount of P3,963,372.08
at the rates provided in said letters of credit from 30 October 1982 until fully paid, but to the extent of not
more than P8,000,000.00 in the case of defendant Chester Babst;
6) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and
severally plaintiff interests at the legal rate on all interests and related charges already accrued but unpaid
on said three (3) domestic letters of credit as of the date of the filing of this Complaint until full payment
thereof;
7) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and
severally, attorney's fees of not less than 10% of the total amount due under paragraphs 5 and 6 hereof.
With costs.
SO ORDERED.
In due time, ELISCON, MULTI and Babst filed their respective notices of appeal. 18
On April 29, 1991, the Court of Appeals rendered the appealed Decision as follows:
WHEREFORE, the judgment appealed from is MODIFIED, to now read (with the underlining to show the
principal changes from the decision of the lower court) thus:
1) Ordering appellant ELISCON to pay the appellee BPI the amount of P2,731,005.60 due on the
promissory note, Annex "A" of the Complaint as of 31 October 1982 and the amount of P3,963,372.08 due
on the three (3) domestic letters of credit, also as of 31 October 1982;
2) Ordering appellant ELISCON to pay the appellee BPI interests and related charges on the principal of
said promissory note of P2,102,232.02 at the rates provided in said note from and after 31 October 1982
until full payment thereof, and on the principal of the three (3) domestic letters of credit of P3,564,349.25
interests and related charges at the rates provided in said letters of credit, from and after 31 October 1982
until full payment;
3) Ordering appellant ELISCON to pay appellee BPI interest at the legal rate on all interests and related
charges but unpaid as of the filing of this complaint, until full payment thereof;
4) Ordering appellant Pacific Multi-Commercial Corporation and appellant Chester G. Babst to pay appellee
BPI, jointly and severally with appellant ELISCON, the total sum of P3,963,372.08 due on the three (3)
domestic letters of credit as of 31 October 1982 with interest and .related charges on the principal amount of
P3,963,372.08 at the rates provided in said letters of credit from 30 October 1982 until fully paid, but to the
extent of not more than P8,000,000.00 in the case of defendant Chester Babst;
5) Ordering appellant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and
severally, appellee BPI interests at the legal rate on all interests and related charges already accrued but
unpaid on said three (3) domestic letters of credit as of the date of the filing of this Complaint until full
payment thereof and the plaintiff's lawyer's fees in the nominal amount of P200.000.00;
6) Ordering appellant ELISCON to reimburse appellants Pacific Multi-Commercial Corporation and Chester
Babst whatever amount they shall have paid in said Eliscon's behalf particularly referring to the three (3)
letters of credit as of 31 October 1982 and other related charges.
No costs.
SO ORDERED.19
ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals which was, however, denied in
a Resolution dated March 9, 1992. 20 Subsequently, ELISCON filed a petition for review on certiorari, docketed as
G.R. No. 104625, on the following grounds:
A. THE BANK OF THE PHILIPPINE ISLANDS IS NOT ENTITLED TO RECOVER FROM PETITIONER
ELISCON THE LATTER'S OBLIGATION WITH COMMERCIAL BANK AND TRUST COMPANY (CBTC)
B. THERE WAS A VALID NOVATION OF THE CONTRACT BETWEEN ELISCON AND BPI THERE BEING
A PRIOR CONSENT TO AND APPROVAL BY BPI OF THE SUBSTITUTION BY DBP AS DEBTOR IN LIEU
OF THE ORIGINAL DEBTOR, ELISCON, THEREBY RELEASING ELISCON FROM ITS OBLIGATION TO
BPI.
C. PACIFIC MULTI COMMERCIAL CORPORATION AND CHESTER BABST CANNOT LAWFULLY

RECOVER FROM ELISCON WHATEVER AMOUNT THEY MAY BE REQUIRED TO PAY TO BPI AS
SURETIES OF ELISCON'S OBLIGATION TO BPI; THEIR CAUSE OF ACTION MUST BE DIRECTED
AGAINST DBP AS THE NEWLY SUBSTITUTED DEBTOR IN PLACE OF ELISCON.
D. THE DBP TAKEOVER OF THE ENTIRE ELISCON AMOUNTED TO AN ACT OF GOVERNMENT

WHICH WAS A FORTUITOUS EVENT EXCULPATING ELISCON FROM FURTHER LIABILITIES TO
RESPONDENT BPI.
E. PETITIONER ELISCON SHOULD NOT BE HELD LIABLE TO PAY RESPONDENT BPI THE AMOUNTS
STATED IN THE DISPOSITIVE PORTION OF RESPONDENT COURT OF APPEALS' DECISION: 21
BPI filed its Comment22 raising the following arguments, to wit:
1. Respondent BPI is legally entitled to recover from ELISCON, MULTI and Babst the past due obligations
with CBTC prior to the merger of BPI with CBTC.
2. BPI did not give its consent to the DBP take-over of ELISCON. Hence, no valid novation has been
effected.
3. Express consent of creditor to substitution should be recorded in the books.
4. Petitioner Chester G. Babst and respondent MULTI are jointly and solidarily liable to BPI for the unpaid
letters of credit of ELISCON.
5. The question of the liability of ELISCON to BPI has been clearly established.
6. Since MULTI and Chester G. Babst are guarantors of the debts incurred by ELISCON, they may recover
from the latter what they may have paid for on account of that guaranty.
Chester Babst filed a Comment with Manifestation,23 wherein he contends that the suretyship agreement he
executed with Antonio Roxas Chua was in favor of MULTI; and that there is nothing therein which authorizes
MULTI, in turn, to guarantee the obligations of ELISCON.
In its Comment,24 MULTI maintained that inasmuch as BPI had full knowledge of the purpose of the meeting in June
1981, wherein the takeover by DBP of ELISCON was announced, it was incumbent upon the said bank to formally
communicate its objection to the assumption of ELISCON's liabilities by DBP in answer to the call for the meeting.
Moreover, there was no showing that the availment by ELISCON of MULTI's credit facilities with CBTC, which was
supposedly guaranteed by Antonio Roxas Chua, was indeed authorized by the latter pursuant to the resolution of
the Board of Directors of MULTI.
In compliance with this Court's Resolution dated March 17, 1993, 25 the parties submitted their respective
memoranda.
Meanwhile, in a petition for review filed with this Court, which was docketed as G.R. No. 99398, Chester Babst
alleged that the Court of Appeals acted without jurisdiction and/or with grave abuse of discretion when:
1. IT AFFIRMED THE LOWER COURT'S HOLDING THAT THERE WAS NO NOVATION INASMUCH AS
RESPONDENT BANK OF THE PHILIPPINE ISLANDS (OR BPI) HAD PRIOR CONSENT TO AND
APPROVAL OF THE SUBSTITUTION AS DEBTOR BY THE DEVELOPMENT BANK OF THE
PHILIPPINES (OR DBP) IN THE PLACE OF ELIZALDE STEEL CONSOLIDATED, INC. (OR ELISCON) IN
THE LATTER 'S OBLIGATION TO BPI.
2. IT CONFIRMED THE LOWER COURT'S CONCLUSION THAT THERE WAS NO IMPLIED CONSENT
OF THE CREDITOR BANK OF THE PHILIPPINE ISLANDS TO THE SUBSTITUTION BY DEVELOPMENT
BANK OF THE PHILIPPINES OF THE ORIGINAL DEBTOR ELIZALDE STEEL CONSOLIDATED, INC.
3. IT AFFIRMED THE LOWER COURT'S FINDING OF LACK OF MERIT OF THE CONTENTION OF

ELISCON THAT THE FAILURE OF THE OFFICER OF BPI, WHO WAS PRESENT DURING THE
MEETING OF ELISCON'S CREDITORS IN JUNE 1981 TO VOICE HIS OBJECTION TO THE
ANNOUNCED TAKEOVER BY THE DBP OF THE ASSETS OF ELISCON AND ASSUMPTION OF ITS
LIABILITIES, CONSTITUTED AN IMPLIED CONSENT TO THE ASSUMPTION BY DBP OF THE
OBLIGATIONS OF ELISCON TO BPI.
4. IN NOT TAKING JUDICIAL NOTICE THAT THE DBP TAKEOVER OF THE ENTIRE ELISCON WAS AN
ACT OF GOVERNMENT CONSTITUTING A FORTUITOUS EVENT EXCULPATING ELISCON FROM ANY
LIABILITY TO BPI.
5. IN NOT FINDING THAT THE DACION EN PAGO BETWEEN DBP AND BPI RELIEVED ELISCON,
MULTI AND BABST OF ANY LIABILITY TO BPI.
6. IN FINDING THAT MULTI AND BABST BOUND THEMSELVES SOLIDARILY WITH ELISCON WITH
RESPECT TO THE OBLIGATION INVOLVED HERE.
7. IN RENDERING JUDGMENT IN FAVOR OF BPI AND AGAINST ELISCON ORDERING THE LATTER
TO PAY THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF THE DECISION; AND ORDERING
PETITIONER AND MULTI TO PAY SAID AMOUNTS JOINTLY AND SEVERALLY WITH ELISCON. 26
Petitioner Babst alleged that DBP sold all of ELISCON's assets to the National Development Company, for the latter
to take over and continue the operation of its business. On September 11, 1981, the Board of Governors of the DBP
adopted Resolution No. 2817 which states that DBP shall enter into a contractual arrangement with NDC for the
latter to pay ELISCON's creditors, including BPI in the amount of P4,015,534.54. This was followed by a
Memorandum of Agreement executed on May 4,1983 by and between DBP and NDC, wherein they stipulated, inter
alia, that NDC shall pay to ELISCON's creditors, through DBP, the amount of P299,524,700.00. Among the
creditors mentioned in the agreement was BPI, with a listed credit of P4,015,534.54.
Furthermore, petitioner Babst averred that the assets of ELISCON which were acquired by the DBP, and later
transferred to the NDC, were placed under the Asset Privatization Trust pursuant to Proclamation No. 50, issued by
then President Corazon C. Aquino on December 8, 1986.
In its Comment,27 BPI countered that by virtue of its merger with CBTC, it acquired all the latter's rights and interest
including all receivables; that in order to effect a valid novation by substitution of debtors, the consent of the creditor
must be express; that in addition, the consent of BPI must appear in its books, it being a private corporation; that
BPI intentionally did not consent to the assumption by DBP of the obligations of ELISCON because it wanted to
preserve intact its causes of action and legal recourse against Pacific Multi-Commercial Corporation and Babst as
sureties of ELISCON and not of DBP; that MULTI expressly bound itself solidarily for ELISCON's obligations to
CBTC in its Resolution wherein it allowed the latter to use its credit facilities; and that the suretyship agreement
executed by Babst does not exclude liabilities incurred by MULTI on behalf of third parties, such as ELISCON.
ELISCON likewise filed a Comment,28 wherein it manifested that of the seven errors raised by Babst in his petition,
six are arguments which ELISCON itself raised in its previous pleadings. It is only the sixth assigned error --- that
the Court of Appeals erred in finding that MULTI and Babst bound themselves solidarily with ELISCON --- that
ELISCON takes exception to. More particularly, ELISCON pointed out the contradictory positions taken by Babst in
admitting that he bound himself to pay the indebtedness of MULTI, while at the same time completely disavowing
and denying any such obligation. It stressed that should MULTI or Babst be finally adjudged liable under the
suretyship agreement, they cannot lawfully recover from ELISCON, but from the DBP which had been substituted as
the new debtor.
MULTI filed its Comrnent,29 admitting the correctness of the petition and adopting the Comment of ELISCON insofar
as it is not inconsistent with the positions of Babst and MULTI.
At the outset, the preliminary issue of BPI's right of action must first be addressed. ELISCON and MULTI assail
BPI's legal capacity to recover their obligation to CBTC. However, there is no question that there was a valid merger
between BPI and CBTC. It is settled that in the merger of two existing corporations, one of the corporations survives
and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by
the surviving corporation.30 Hence, BPI has a right to institute the case a quo.
We now come to the primordial issue in this case — whether or not BPI consented to the assumption by DBP of the
obligations of ELISCON.

Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by
the new debtor gives him the rights mentioned in articles 1236 and 1237.
BPI contends that in order to have a valid novation, there must be an express consent of the creditor. In the case
of Testate Estate of Mota, et al. v. Serra,31 this Court held:
It should be noted that in order to give novation its legal effect, the law requires that the creditor should
consent to the substitution of a new debtor. This consent must be given expressly for the reason that, since
novation extinguishes the personality of the first debtor who is to be substituted by a new one, it implies on
the part of the creditor a waiver of the right that he had before the novation, which waiver must be express
under the principle of renuntiatio non proesumitur, recognized by the law in declaring that a waiver of right
may not be performed [should read: presumed] unless the will to waive is indisputably shown by him who
holds the right.32
The import of the foregoing ruling, however, was explained and clarified by this Court in the later case of Asia
Banking Corporation v. EIser33 in this wise:
The aforecited article 1205 [now 1293] of the Civil Code does not state that the creditor's consent to
the substitution of the new debtor for the old be express, or given at the time of the substitution, and the
Supreme Court of Spain, in its judgment of June 16, 1908, construing said article, laid down the doctrine that
"article 1205 of the Civil Code does not mean or require that the creditor's consent to the change of debtors
must be given simultaneously with the debtor's consent to the substitution, its evident purpose being to
preserve the creditor's full right, it is sufficient that the latter's consent be given at any time and in any form
whatever, while the agreement of the debtors subsists." The same rule is stated in the Enciclopedia Juridica
Española, volume 23, page 503, which reads: "'The rule that this kind of novation, like all others, must be
express, is not absolute; for the existence of the consent may well be inferred from the act of the
creditor, since volition may as well be expressed by deeds as by words." The understanding between
Henry W. Elser and the principal director of Yangco, Rosenstock & Co., Inc., with respect to Luis R.
Yangco's stock in said corporation, and the acts of the board of directors after Henry W. Elser had acquired
said shares, in substituting the latter for Luis R. Yangco, are a clear and unmistakable expression of its
consent. When this court said in the case of Estate of Mota vs. Serra (47 Phil. 464), that the creditor's
express consent is necessary in order that there may be a novation of a contract by the substitution
of debtors, it did not wish to convey the impression that the word "express" was to be given an
unqualified meaning. as indicated in the authorities or cases. both Spanish and American, cited in
said decision.34
Subsequently, in the case of Vda. e Hijos de Pio Barretto y Cia., Inc. v. Albo & Sevilla, Inc., et al.,35 this Court
reiterated the rule that there can be implied consent of the creditor to the substitution of debtors.
In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI to register its objection to
the take-over by DBP of ELISCON's assets, at the creditors' meeting held in June 1981 and thereafter, it is deemed
to have consented to the substitution of DBP for ELISCON as debtor.
We find merit in the argument. Indeed, there exist clear indications that BPI was aware of the assumption by DBP of
the obligations of ELISCON. In fact, BPI admits that ---
"the Development Bank of the Philippines (DBP), for a time, had .proposed a formula for the settlement of
Eliscon's past obligations to its creditors, including the plaintiff [BPI], but the formula was expressly rejected
by the plaintiff as not acceptable (long before the filing of the complaint at bar)." 36
The Court of Appeals held that even if the account officer who attended the June 1981 creditors' meeting had
expressed consent to the assumption by DBP of ELISCON' s debts, such consent would not bind BPI for lack of a
specific authority therefor. In its petition, ELISCON counters that the mere presence of the account officer at the
meeting necessarily meant that he was authorized to represent BPI in that creditors' meeting. Moreover, BPI did not
object to the substitution of debtors, although it objected to the payment formula submitted by DBP.
Indeed, the authority granted by BPI to its account officer to attend the creditors' meeting was an authority to
represent the bank, such that when he failed to object to the substitution of debtors, he did so on behalf of and for
the bank. Even granting arguendo that the said account officer was not so empowered, BPI could have
subsequently registered its objection to the substitution, especially after it had already learned that DBP had taken
over the assets and assumed the liabilities of ELISCON. Its failure to do so can only mean an acquiescence in the
assumption by DBP of ELISCON's obligations. As repeatedly pointed out by ELISCON and MULTI, BPI's objection
was to the proposed payment formula, not to the substitution itself.
BPI gives no cogent reason in withholding its consent to the substitution, other than its desire to preserve its causes
of action and legal recourse against the sureties of ELISCON. It must be remembered, however, that while a surety
is solidarily liable with the principal debtor, his obligation to pay only arises upon the principal debtor's failure or
refusal to pay. A contract of surety is an accessory promise by which a person binds himself for another already
bound, and agrees with the creditor to satisfy the obligation if the debtor does not. 37 A surety is an insurer of the
debt; he promises to pay the principal's debt if the principal will not pay. 38
In the case at bar, there was no indication that the principal debtor will default in payment. In fact, DBP, which had
stepped into the shoes of ELISCON, was capable of payment. Its authorized capital stock was increased by the
government.39 More importantly, the National Development Company took over the business of ELISCON and
undertook to pay ELISCON's creditors, and earmarked for that purpose the amount of P4,015,534.54 for payment to
BPI.40
Notwithstanding the fact that a reliable institution backed by government funds was offering to pay ELISCON's
debts, not as mere surety but as substitute principal debtor, BPI, for reasons known only to itself, insisted in going
after the sureties. The course of action chosen taxes the credulity of this Court. At the very least, suffice it to state
that BPI's actuation in this regard runs counter to the good faith covenant in contractual relations, provided for by the
Civil Code, to wit:
ART. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith. 1âwphi1.nêt
ART. 1159. Obligations arising from contract have the force of law between the contracting parties and
should be complied with in good faith.
BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for ELISCON as debtor. Hence,
there was a valid novation which resulted in the release of ELISCON from its obligation to BPI, whose cause of
action should be directed against DBP as the new debtor.
Novation, in its broad concept, may either be extinctive or modificatory .It is extinctive when an old obligation
is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory
when the old obligation subsists to the extent it remains compatible with the amendatory agreement. An
extinctive novation results either by changing the object or principal conditions (objective or real), or by
substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or
personal). Under this mode, novation would have dual functions — one to extinguish an existing obligation,
the other to substitute a new one in its place — requiring a conflux of four essential requisites, (1) a previous
valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the
old obligation; and (4) the birth of a valid new obligation. 41
The original obligation having been extinguished, the contracts of suretyship executed separately by Babst and
MULTI, being accessory obligations, are likewise extinguished. 42
Hence, BPI should enforce its cause of action against DBP. It should be stressed that notwithstanding the lapse of
time within which these cases have remained pending, the prescriptive period for BPI to file its action was
interrupted when it filed Civil Case No. 49226.43
WHEREFORE, the consolidated petitions are GRANTED. The appealed Decision of the Court of Appeals, which
held ELISCON, MULTI and Babst solidarily liable for payment to BPI of the promissory note and letters of credit,
is REVERSED and SET ASIDE. BPI's complaint against ELISCON, MULTI and Babst is DISMISSED.
SO ORDERED.
Davide, Jr., Puno, Kapunan, and Pardo, JJ., concur.
Footnotes:
1 Associate Justice Cezar D. Francisco, ponente; Associate Justices Jaime M. Lantin and Fortunato A. Vailoces, concurring.
2 Exhibit "A".
3 Exh. "B".
4 Exh. "H".
5 Exh. "I".
6 Exh. "C".
7 Exh. "D".
8 Exh. "E".
9 Exh. "F".
10 Exhs. "K" and "K-1".
11 Record, pp. 186-188.
12 Exh. "I"; Record, p. 58.
13 Record, pp. 1-7.
14 Ibid., pp. 47-48.
15 Id., pp. 49-52.
16 Id., 63-65.
17 Penned by Judge Teofilo L. Guadiz, Jr.: Record. pp. 356-365
18 Record, pp. 366, 367-68, 370.
19 Rollo, G.R. No. 99398. pp. 73-74.
20 Rollo, G.R. No. 104625, p. 76.
21 Ibid., p. 25.
22 Id., pp. 108-135.
23 Id., pp. 145-150.

24 Id., pp. 159-163.
25 Id., p. 193.
26 Ibid., pp. 13-14.
27 Id., pp. 265-291.
28 Id., pp. 296-303.
29 Id., pp. 432-33.
30 Associated Bank v. Court of Appeals, 291 SCRA 511, 520 (1998).
31 47 Phil., 464 (1925).
32 Supra., at 469-70.
33 54 Phil., 994 (1929).
34 Supra., at 1004-1005; emphasis ours.
35 62 Phil., 593 (1935).
36 Exh. "1", Civil Case No. 49226, Reply to ELISCON's Answer; Record, p. 58.
37 E. Zobel, Inc. v. Court of Appeals, 290 SCRA 1, 6 (1998).
38 Palmares v. Court of Appeals, 288 SCRA 422, 435 (1998).
39 Rollo, G.R. No. 99398, p. 25.
40 Ibid., pp. 19-20.
41 Quinto v. People, 305 SCRA 708, 714 (1999).
42 CIVIL CODE, Art. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons
who did not give their consent.
43 CIVIL CODE, Art. 1155.
33) Quinto vs People 305 SCRA 709
THIRD DIVISION
[G.R. No. 126712. April 14, 1999]
LEONIDA C. QUINTO, Petitioner, v. PEOPLE OF THE

PHILIPPINES, respondent.
DECISION
VITUG, J.:
Assailed in this Petition for Review on Certiorari under Rule 45 of the

Rules of Court is the decision of the Court of Appeals, promulgated on
27 September 1996, in People of the Philippines v. Leonida Quinto y
Calayan, docketed CA-G.R. CR No. 16567, which has affirmed the
decision of Branch 157 of the Regional Trial Court (RTC), National
Capital Judicial Region, Branch 157, Pasig City, finding Leonida Quinto
y Calayan guilty beyond reasonable doubt of the crime of Estafa.
Leonida Quinto y Calayan, herein petitioner, was indicted for the crime
of estafa under Article 315, paragraph 1(b), of the Revised Penal
Code, in an information which read:
"That on or about the 23rd day of March 1977, in the Municipality of

Makati, Metro Manila, Philippines and within the jurisdiction of this
Honorable Court, the above-named accused, received in trust from one
Aurelia Cariaga the following pieces of jewelry, to wit:
One (1) set of marques with briliantitos
valued at .............................................P17,500.00
One (1) solo ring (2 karats & 30 points)
valued at .............................................P16,000.00
One (1) diamond ring (rosetas)
valued at .............................................P 2,500.00
with a total value of P36,000.00 for the purpose of selling the same on
commission basis and with the express obligation on the part of the
accused to turn over the proceeds of sale thereof, or to return the said
jewelries (sic), if not sold, five (5) days after receipt thereof, but the
accused once in possession of the jewelries (sic), far from complying
with her obligation, with intent of gain, gave abuse of confidence and
to defraud said Aurelia Cariaga, did then and there wilfully, unlawfully
and feloniously misappropriate, misapply and convert to her own
personal use and benefit the said jewelries (sic) and/or the proceeds
of sale or to return the pieces of jewelry, to the damage and prejudice
of the said Aurelia Cariaga in the aforementioned amount of P
36,000.00.
"Contrary to law "1 cräläwvirtualibräry
Upon her arraignment on 28 March 1978, petitioner Quinto pleaded

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

mga alahas na nakatala sa ibaba, upang aking ipagbili sa
pamamagitan ng BIGAY PALA o Commission at Kaliwaan lamang.
Ako'y hindi pinahihintulutan (na) ipagbili ang mga ito ng Pautang.
Pinananagutan ko na ang mga alahas na ito ay hindi ko ipagkakaloob o
ipagkakatiwala sa kanino pa man upang ilagak o maipagbili nila, at
ang mga ito ay ako ang magbibili sa ilalim ng aking pangangasiwa at
pananagutan sa halagang nakatala sa ibaba. At aking isasauli ang mga
hindi na maipagbili sa loob ng 5 days (sic) araw mula sa petsa nito o
sa kahilingan, na nasa mabuti at malinis na kalagayan katulad ng
tanggapin ko sa petsang ito.
MGA URI NG ALAHAS
1 set marques with titos 17,500.
1 solo 2 karats & 30 points 16,000.
1 ring Rosetas brill 2,500.
Makati, March 23, 1977
(Sgd.)"2cräläwvirtualibräry
When the 5-day period given to her had lapsed, Leonida requested for
and was granted additional time within which to vend the items.
Leonida failed to conclude any sale and, about six (6) months later,
Aurelia asked that the pieces of jewelry be returned. She sent to
Leonida a demand letter which the latter ignored. The inexplicable
delay of Leonida in returning the items spurred the filing of the case
for estafa against her.
The defense proffered differently. In its version, the defense sought to

prove that Leonida was engaged in the purchase and sale of jewelry.
She was used to buying pieces of jewelry from a certain Mrs. Antonia
Ilagan who later introduced her (Leonida) to Aurelia. Sometime in
1975, the two, Aurelia and Leonida, started to transact business in
pieces of jewelry among which included a solo ring worth P40,000.00
which was sold to Mrs. Camacho who paid P20,000.00 in check and
the balance of P20,000.00 in installments later paid directly to Aurelia.
The last transaction Leonida had-with Mrs. Camacho involved a
"marques" worth P16,000.00 and a ring valued at P4,000.00. Mrs.
Camacho was not able to pay the due amount in full and left a balance
of P13,000.00. Leonida brought Mrs. Camacho to Aurelia who agreed
to allow Mrs. Camacho to pay the balance in installments. Leonida was
also able to sell for Aurelia a 2-karat diamond ring worth P17,000.00
to Mrs. Concordia Ramos who, unfortunately, was unable to pay the
whole amount. Leonida brought Mrs. Ramos to Aurelia and they talked
about the terms of payment. As first payment, Mrs. Ramos gave
Leonida a ring valued at P3,000.00. The next payment made by her
was P5,000.00. Leonida herself then paid P2,000.00.
The RTC, in its 25th January 1993 decision, found Leonida guilty
beyond reasonable doubt of the crime of estafa and sentenced her to
suffer the penalty of imprisonment of seven (7) years and one (1) day
of prision mayor as minimum to nine (9) years of prision mayor as
maximum and to indemnify private complainant in the amount
of P36,000.00.
Leonida interposed an appeal to the Court of Appeals which affirmed,

in its 27th September 1996 decision, the RTC's assailed judgment.
The instant petition before this Court would have it that the
agreement between petitioner and private complainant was effectively
novated when the latter consented to receive payment on installments
directly from Mrs. Camacho and Mrs. Ramos.
The petition is bereft of merit.
Novation, in its broad concept, may either

be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes the place of
the former; it is merely modificatory when the old obligation subsists
to the extent it remains compatible with the amendatory agreement.
An extinctive novation results either by changing the object or
principal conditions (objective or real), or by substituting the person
of the debtor or subrogating a third person in the rights of the creditor
(subjective or personal).3 Under this mode, novation would have dual
functions - one to extinguish an existing obligation, the other to substitute a new
one in its place4 - requiring a conflux of four essential requisites: (1) a previous
valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the
extinguishment of the old obligation; and (4) the birth of a valid new obligation. 5
Novation is never presumed,6 and the animus novandi, whether totally

or partially, must appear by express agreement of the parties, or by
their acts that are too clear and unequivocal to be mistaken.7
The extinguishment of the old obligation by the new one is a

necessary element of novation which may be effected either expressly
or impliedly.8 The term "expressly" means that the contracting parties
incontrovertibly disclose that their object in executing the new
contract is to extinguish the old one.9 Upon the other hand, no specific
form is required for an implied novation,10 and all that is prescribed by
law would be an incompatibility between the two contracts. While
there is really no hard and fast rule to determine what might
constitute to be a sufficient change that can bring about novation, the
touchstone for contrariety, however, would be an irreconcilable
incompatibility between the old and the new obligations.11
There are two ways which could indicate, in fine, the presence of
novation and thereby produce the effect of extinguishing an obligation
by another which substitutes the same. The first is when novation has
been explicitly stated and declared in unequivocal terms.
The second is when the old and the new obligations are incompatible
on every point. The test of incompatibility is whether or not the two
obligations can stand together, each one having its independent
existence. If they cannot, they are incompatible and the latter
obligation novates the first.12 Corollarily, changes that breed
incompatibility must be essential in nature and not merely accidental.
The incompatibility must take place in any of the essential elements of
the obligation, such as its object, cause or principal conditions thereof;
otherwise, the change would be merely modificatory in nature and
insufficient to extinguish the original obligation.
The changes alluded to by petitioner consists only in the manner of

payment. There was really no substitution of debtors since private
complainant merely acquiesced to the payment but did not give her
consent13 to enter into a new contract. The appellate court observed:
"Appellant, however, insists that their agreement was novated when

complainant agreed to be paid directly by the buyers and on
installment basis. She adds that her liability is merely civil in nature.
"We are unimpressed.
"It is to remembered that one of the buyers, Concordia Ramos, was

not presented to testify on the alleged aforesaid manner of payment.
"The acceptance by complainant of partial payment tendered by the

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

debtor, depending on whose initiative it comes from, to
wit: expromision and delegacion. In the former, the initiative for the
change does not come from the debtor and may even be made without
his knowledge. Since a third person would substitute for the original
debtor and assume the obligation, his consent and that of the creditor
would be required. In the latter, the debtor offers, and the creditor
accepts, a third person who consents to the substitution and assumes
the obligation, thereby releasing the original debtor from the
obligation, here, the intervention and the consent of all parties thereto
would perforce be necessary.15 In either of these two modes of
substitution, the consent of the creditor, such as can be seen, is an
indispensable requirement.16
It is thus easy to see why Cariaga's acceptance of Ramos and

Camacho's payment on installment basis cannot be construed as a
case of either expromision or delegacion sufficient to justify the
attendance of extinctive novation. Not too uncommon is when a
stranger to a contract agrees to assume an obligation; and while this
may have the effect of adding to the number of persons liable, it does
not necessarily imply the extinguishment of the liability of the first
debtor.17 Neither would the fact alone that the creditor receives
guaranty or accepts payments from a third person who has agreed to
assume the obligation, constitute an extinctive novation absent an
agreement that the first debtor shall be released from responsibility. 18
Petitioner's reliance on Candida Mariano v. People19 is misplaced. The
factual milieu in Mariano would indicate a clear intention on the part
of the parties to release the accused from her responsibility as an
agent and for her to instead assume the obligation of a guarantor.
Unfortunately for petitioner in the case at bar, the factual findings of
both the trial court and the appellate court prove just the opposite
which is that there has never been any animus novandi between or
among the parties.
Article 315 of the Revised Penal Code defines estafa and penalizes any
person who shall defraud another by "misappropriating or converting,
to the prejudice of another, money, goods, or any other personal
property received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to
make delivery of or to return the same, even though such obligation
be totally or partially guaranteed by a bond; or by denying having
received such money, goods, or other property." It is axiomatic that
the gravamen of the offense is the appropriation or conversion of
money or property received to the prejudice of the owner. The terms
"convert" and "misappropriate" have been held to connote "an act of
using or disposing of another's property as if it were one's own or
devoting it to a purpose or use different from that agreed upon." The
phrase, 'to misappropriate to one's own use" has been said to include
"not only conversion to one's personal advantage, but also every
attempt to dispose of the property of another without right."20 Verily,
the sale of the pieces of jewelry on installments in contravention of
the explicit terms of the authority granted to her in Exhibit "A"
(supra) is deemed to be one of conversion. Thus, neither the theory of
"delay in the fulfillment of commission" nor that of novation posed by
petitioner, can avoid the incipient criminal liability. In People vs.
Nery,21 this Court held:
"It may be observed in this regard that novation is not one of the
means recognized by the Penal Code whereby criminal liability can be
extinguished; hence, the role of novation may only be either to
prevent the rise of criminal liability or to cast doubt on the true nature
of the original basic transaction, whether or not it was such that its
breach would not give rise to penal responsibility ..."
The criminal liability for estafa already committed is then not affected
by the subsequent novation of contract, for it is a public offense which
must be prosecuted and punished by the State in its own conation.22
Finally, this Court fails to see any reversible error, let alone any grave
abuse of discretion, in the appreciation of the evidence by the Court of
Appeals which, in fact, hews with those of the trial court. Indeed,
under the circumstances, this Court must be deemed bound by the
factual findings of those courts.
Article 315, 1st paragraph, of the Revised Penal Code, as amended by

Presidential Decree No. 818, provides that the penalty
of "prision correccional in its maximum period to prison mayor in its
minimum period, if the amount of the fraud is over 12,000 but does
not exceed 22,000 pesos, and if such amount exceeds the latter sum,
the penalty provided in this paragraph shall be imposed in its
maximum period, adding one year for each additional 10,000 pesos;
but the total penalty which may be imposed shall not exceed twenty
years. In such case, and in connection with the accessory penalties
which may be imposed and for the purpose of the other provisions of
this Code, the penalty shall be termed prision mayor or reclusion
temporal, as the case may be."
In the leading case of People vs. Gabres23 this Court ruled:
"Under the Indeterminate Sentence Law, the maximum term of the

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

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

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

concur.
Endnotes:
Rollo, p. 35.
1
Rollo, p. 47.
2
8 Manresa 428 cited in IV Tolentino, Commentaries and Jurisprudence, Civil Code of the Philippines, 1991 Edition, p. 381.
3
Sandico, Sr., v. Piguing, 42 SCRA 322; Bert Osmea & Associates v. Court of Appeals, 120 SCRA 395.
4
Reyes vs. Court of Appeals, 264 SCRA 35.

5
Rillo vs. Court of Appeals, 274 SCRA 461.

6
Fortune Motors (Phils.) Corp. vs. Court of Appeals, 267 SCRA 653.
7
Uraca vs. Court of Appeals, 278 SCRA 702, cited in Tolentino, idem.

8
Art. 1292, New Civil Code. In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that the old and new obligations be on every point incompatible with
each other.
Philippine National Bank v. Granada, (C.A.) G.R. No. 13919-R, July 20, 1955, cited in Tolentino, supra, p. 384.
9
10
Tolentino, supra.
Gaw vs. Intermediate Appellate Court, 220 SCRA 405, 417.
11
... "there is complete and substantial incompatibility between the two obligations." Sandico, Sr. v. Piguing, supra, p. 334.
Vda. de Mondragon vs. Intermediate Appellate Court, 184 SCRA 348; Caneda, Jr. vs. Court of Appeals, 181 SCRA 762.
12
Art. 1293. New Civil Code. Novation which consist in substituting a new debtor in the place of the original one, may be made
13
even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment made by the
new debtor gives him the rights mentioned in articles 1236-1237.
Rollo, p. 32.
14
8 Manresa 436-437, cited in Tolentino, p. 390.

15
De Cortes v. Venturanza, 79 SCRA 709; See also E. C. McCullough & Co. v. Veloso and Serna, 46 Phil. 1; Cochingyan, Jr. v. R &
16
B Surety and Insurance Co., Inc., 151 SCRA 339; Government Service Insurance System v. Court of appeals, 169 SCRA 244;
Garcia v. Khu Yek Chiong, 65 Phil. 466.
Rios v. Jacinto, etc., 49 Phil. 7, Garcia v. Khu Yek Ching, 65 Phil. 466.

17
La Campana Food Products, Inc., v. Philippine Commercial and Industrial Bank, 142 SCRA 394, citing Dugo v. Lapea, 6 SCRA
18
1007; See also Ajax Marketing and Development Corporation v. Court of Appeals, 248 SCRA 223; Staight v. Haskell, 49 Phil.
614; Pacific Commercial Co. v. Sotto, 34 Phil 237; Estate of Mota v. Serra, 47 Phil. 464.
216 SCRA 541.

19
Lim vs. Court of Appeals, 271 SCRA 12, 21.

20
10 SCRA 244, 247, citing; Abeto v. People, 90 Phil. 581; and U.S. v. Villareal, 27 Phil. 481.
21
Tan vs. Court of Appeals, 283 SCRA 18; see also People v. Benitez, 108 Phil. 920.
22
267 SCRA 581.

23
At pp. 595-596.

24
34) Astro Electronics Corp vs Philippine Export and Foreign Loan

Guarantee Corporation (2003)
SECOND DIVISION
[G.R. No. 136729. September 23, 2003.]
ASTRO ELECTRONICS CORP. and PETER ROXAS, Petitioners, v. PHILIPPINE EXPORT AND

FOREIGN LOAN GUARANTEE CORPORATION, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Assailed in this petition for review on certiorari under Rule 45 of the Rules of Court is the decision of
the Court of Appeals in CA-G.R. CV No. 41274, 1 affirming the decision of the Regional Trial Court
(Branch 147) of Makati, then Metro Manila, whereby petitioners Peter Roxas and Astro Electronics
Corp. (Astro for brevity) were ordered to pay respondent Philippine Export and Foreign Loan
Guarantee Corporation (Philguarantee), jointly and severally, the amount of P3,621,187.52 with
interests and costs. nad
The antecedent facts are undisputed.

Astro was granted several loans by the Philippine Trust Company (Philtrust) amounting to
P3,000,000.00 with interest and secured by three promissory notes: PN No. PFX-254 dated
December 14, 1981 for P600,000.00, PN No. PFX-258 also dated December 14, 1981 for
P400,000.00 and PN No. 15477 dated August 27, 1981 for P2,000,000.00. In each of these
promissory notes, it appears that petitioner Roxas signed twice, as President of Astro and in his
personal capacity. 2 Roxas also signed a Continuing Suretyship Agreement in favor of Philtrust Bank,
as President of Astro and as surety. 3
Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment of
70% of Astro’s loan, 4 subject to the condition that upon payment by Philguarantee of said amount,
it shall be proportionally subrogated to the rights of Philtrust against Astro. 5
As a result of Astro’s failure to pay its loan obligations, despite demands, Philguarantee paid 70% of
the guaranteed loan to Philtrust. Subsequently, Philguarantee filed against Astro and Roxas a
complaint for sum of money with the RTC of Makati.
In his Answer, Roxas disclaims any liability on the instruments, alleging, inter alia, that he merely
signed the same in blank and the phrases "in his personal capacity" and "in his official capacity" were
fraudulently inserted without his knowledge. 6
After trial, the RTC rendered its decision in favor of Philguarantee with the following dispositive
portion:chanrob1es virtual 1aw library
WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor or (sic) the
plaintiff and against the defendants Astro Electronics Corporation and Peter T. Roxas, ordering the
then (sic) to pay, jointly and severally, the plaintiff the sum of P3,621,187.52 representing the total
obligation of defendants in favor of plaintiff Philguarantee as of December 31, 1984 with interest at
the stipulated rate of 16% per annum and stipulated penalty charges of 16% per annum computed
from January 1, 1985 until the amount is fully paid. With costs.
SO ORDERED. 7
The trial court observed that if Roxas really intended to sign the instruments merely in his capacity
as President of Astro, then he should have signed only once in the promissory note. 8
On appeal, the Court of Appeals affirmed the RTC decision agreeing with the trial court that Roxas
failed to explain satisfactorily why he had to sign twice in the contract and therefore the presumption
that private transactions have been fair and regular must be sustained. 9
In the present petition, the principal issue to be resolved is whether or not Roxas should be jointly
and severally liable (solidary) with Astro for the sum awarded by the RTC.
The answer is in the affirmative.
Astro’s loan with Philtrust Bank is secured by three promissory notes. These promissory notes are
valid and binding against Astro and Roxas. As it appears on the notes, Roxas signed twice: first, as
president of Astro and second, in his personal capacity. In signing his name aside from being the
President of Astro, Roxas became a co-maker of the promissory notes and cannot escape any liability
arising from it. Under the Negotiable Instruments Law, persons who write their names on the face of
promissory notes are makers, 10 promising that they will pay to the order of the payee or any holder
according to its tenor. 11 Thus, even without the phrase "personal capacity," Roxas will still be
primarily liable as a joint and several debtor under the notes considering that his intention to be
liable as such is manifested by the fact that he affixed his signature on each of the promissory notes
twice which necessarily would imply that he is undertaking the obligation in two different capacities,
official and personal.
Unnoticed by both the trial court and the Court of Appeals, a closer examination of the signatures
affixed by Roxas on the promissory notes, Exhibits "A-4" and "3-A" and "B-4" and "4-A" readily
reveals that portions of his signatures covered portions of the typewritten words "personal capacity"
indicating with certainty that the typewritten words were already existing at the time Roxas affixed
his signatures thus demolishing his claim that the typewritten words were just inserted after he
signed the promissory notes. If what he claims is true, then portions of the typewritten words would
have covered portions of his signatures, and not vice versa. chanrob1es virtua1 1aw 1ibrary
As to the third promissory note, Exhibit "C-4" and "5-A", the copy submitted is not clear so that this
Court could not discern the same observations on the notes, Exhibits "A-4" and "3-A" and "B-4" and
"4-A" .
Nevertheless, the following discussions equally apply to all three promissory notes.
The three promissory notes uniformly provide: "FOR VALUE RECEIVED, I/We jointly, severally and
solidarily, promise to pay to PHILTRUST BANK or order . . ." 12 An instrument which begins with "I",
"We", or "Either of us" promise to pay, when signed by two or more persons, makes them solidarily
liable. 13 Also, the phrase "joint and several" binds the makers jointly and individually to the payee
so that all may be sued together for its enforcement, or the creditor may select one or more as the
object of the suit. 14 Having signed under such terms, Roxas assumed the solidary liability of a
debtor and Philtrust Bank may choose to enforce the notes against him alone or jointly with Astro.
Roxas’ claim that the phrases "in his personal capacity" and "in his official capacity" were inserted on
the notes without his knowledge was correctly disregarded by the RTC and the Court of Appeals. It is
not disputed that Roxas does not deny that he signed the notes twice. As aptly found by both the
trial and appellate court, Roxas did not offer any explanation why he did so. It devolves upon him to
overcome the presumptions that private transactions are presumed to be fair and regular 15 and that
a person takes ordinary care of his concerns. 16 Aside from his self-serving allegations, Roxas failed
to prove the truth of such allegations. Thus, said presumptions prevail over his claims. Bare
allegations, when unsubstantiated by evidence, documentary or otherwise, are not equivalent to
proof under our Rules of Court. 17
Roxas is the President of Astro and reasonably, a businessman who is presumed to take ordinary
care of his concerns. Absent any countervailing evidence, it cannot be gainsaid that he will not sign a
document without first informing himself of its contents and consequences. Clearly, he knew the
nature of the transactions and documents involved as he not only executed these notes on two
different dates but he also executed, and again, signed twice, a "Continuing Suretyship Agreement"
notarized on July 31, 1981, wherein he guaranteed, jointly and severally with Astro the repayment of
P3,000,000.00 due to Philtrust. Such continuing suretyship agreement even re-enforced his solidary
liability to Philtrust because as a surety, he bound himself jointly and severally with Astro’s
obligation. 18 Roxas cannot now avoid liability by hiding under the convenient excuse that he merely
signed the notes in blank and the phrases "in his personal capacity" and "in his official capacity" were
fraudulently inserted without his knowledge.
Lastly, Philguarantee has all the right to proceed against petitioner. It is subrogated to the rights of
Philtrust to demand for and collect payment from both Roxas and Astro since it already paid the
value of 70% of Roxas and Astro Electronics Corp.’s loan obligation, in compliance with its contract of
"Guarantee" in favor of Philtrust.
Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all
his rights. 19 It may either be legal or conventional. Legal subrogation is that which takes place
without agreement but by operation of law because of certain acts. 20 Instances of legal subrogation
are those provided in Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is
that which takes place by agreement of the parties. 21
Roxas’ acquiescence is not necessary for subrogation to take place because the instant case is one of
legal subrogation that occurs by operation of law, and without need of the debtor’s knowledge. 22
Further, Philguarantee, as guarantor, became the transferee of all the rights of Philtrust as against
Roxas and Astro because the "guarantor who pays is subrogated by virtue thereof to all the rights
which the creditor had against the debtor." 23
WHEREFORE, finding no error with the decision of the Court of Appeals dated December 10, 1998,
the same is hereby AFFIRMED in toto. chanrob1es virtua1 1aw 1ibrary
SO ORDERED.
Bellosillo, Callejo, Sr. and Tinga, JJ., concur.
Quisumbing, J., concurs in the result.
Endnotes:
1. Justice Portia Aliño-Hormachuelos, ponente; JJ. Presbitero J. Velasco, Jr. and Buenaventura J.
Guerrero, concurring.
2. Original Records, pp. 6-8, Exhibits "3", "4" and "5" .
3. Id., pp. 10–13, Exhibit "D" .
4. Id., pp. 14–19, Exhibits "F" and "E" .
5. Id., p. 18.
6. Id., pp. 62–64.
7. Id., p. 217; RTC Decision dated July 20, 1989, p. 4.
8. Ibid.
9. Rollo, p. 25; CA Decision, p. 7.
10. Negotiable Instrument Law (Act No. 2031), Section 184.
11. Id., Section 60.
12. Supra., Note 2.
13. Republic Planters Bank v. Court of Appeals, G.R. No. 93073, December 21, 1992, 216 SCRA 738,
744.
14. Ibid.
15. Section 3 (p), Rule 131, Rules of Court; Mendoza v. Court of Appeals, G.R. No. 116710, June 25,
2001, 412 Phil. 14, 30.
16. Section 3 (d), Rule 131, Rules of Court.
17. Coronel v. Constantino, G.R. No. 121069, February 7, 2003; Manzano v. Perez, Sr., G.R. No.
112485, August 9, 2001, 362 SCRA 430, 439; Cuizon v. Court of Appeals, G.R. No. 102096, August
22, 1996, 260 SCRA 645, 669.
18. E. Zobel, Inc. v. Court of Appeals, G.R. No. 113931, May 6, 1998, 290 SCRA 1, 8.
19. Philippine National Bank v. Court of Appeals, G.R. No. 128661, August 8, 2000, 337 SCRA 381,
404.
20. Chemphil Import & Export Corp. v. Court of Appeals, G.R. Nos. 112438-39, December 12, 1995,
251 SCRA 257, 279.
21. Ibid.
22. Article 1302, paragraph 3, Civil Code.
35) Tuason and San Pedro vs Zamora and Sons 2 PHIL 305
EN BANC
[G.R. No. 39. May 19, 1903. ]
TUASON & SAN PEDRO, Plaintiffs-Appellees, v. GAVINA ZAMORA & SONS, Defendants-

Appellants.
Del Pan & Ortigas for Appellants.
Palma, Gerona & Mercado for Appellees.
SYLLABUS
1. PARTNERSHIP; ACTION ON CONTRACT OF ONE PARTNER ALONE. — A general partnership may

maintain an action in its own name upon a contract entered into for its benefit by one of the partners
in his own name only.
2. CONTRACT; BREACH; LOSS OF SUBJECT MATTER AFTER FULFILLMENT OF ONE PARTY AND
BREACH BY THE OTHER. — Where a contract to erect a building is completed and the owners
wrongfully refuse to accept delivery they must pay therefor, although there has been no delivery by
reason of the loss of the building by fire.
DECISION
MAPA, J. :
Don Mariano Tuason and Don Manuel Garcia San Pedro had entered into a mercantile partnership en
comandita with Luis Vives, under the firm name of "Luis Vives & Co." By the death of Luis Vives the
partnership was dissolved, and was then reorganized under the name of "Tuason & San Pedro" on
the 31st of December, 1898, composed solely of the surviving partners. This partnership assumed
the business of the former partnership as wood sawyers and building contractors, the liability of the
firm being made retroactive to the 11th of July, 1897. In February, 1898, Don Mariano Tuason
entered into the contract with Don Juan Feliciano upon which this case turns, the contract being for
the construction of a house. He did not mention in the contract that it was made on behalf of the firm
of Tuason & San Pedro. In the protest, dated the 23d day of June, 1898, it is seen that Don Manuel
San Pedro makes this protest with respect to the delivery of the house, and makes it on behalf of the
firm of "Tuason & San Pedro," the manager of which, Don Mariano Tuason, says Don Manuel San
Pedro had contracted for the building. On the 25th of August, 1900, Tuason & San Pedro brought this
action. Objection having been made to the right of the plaintiff partnership to sue, the question must
be determined whether a partnership can maintain an action in its own behalf upon a contract
entered into by one of the partners in his own name, thus binding the third person who contracted
with this partner.
The purpose of the complaint is the recovery of the price of the house built. The entire question is
reduced to these terms: Should this payment be made to the partnership?
The following facts had been made to appear of record before the exception was taken: (1) That the
partnership claimed to be the owner of this credit by its protest against default. (2) That it was in the
possession of the document evidentiary of the credit and others connected with it, such as the
notarial record of demand for payment made by the partner Tuason, and the record made of the
offer to deliver the keys of the house, prepared at the instance of Tuason. (3) That the attorney
appearing for the partnership held a power of attorney from the partnership, executed by Tuason as
managing partner. There can not, therefore, be any duality, any incompatibility, or repetition of
action. Everything which Tuason might have done is being done by the partnership, and after what
the partnership has done Tuason can do nothing. The action being a solidary one, therefore, the
result is the same whether it has been brought by Tuason & San Pedro or by Tuason alone. "Payment
should be made to the person in whose favor the obligation is constituted, or to some other person
authorized to receive it in his name." (Art. 1162 of the Civil Code.)
"The first of these cases," says Manresa, "the most natural and simple, refers not only to the person
who may have been the creditor at the time the obligation was created but rather to the person who
is the creditor at the time payment is due. . . . That the principle laid down by the code has this wide
meaning is demonstrated by the fact that it has no rules, as have other codes (for instance, the
Argentine code) which expressly authorized heirs, assignees, and subrogated creditors to demand
payment, and the right of these persons being unquestionable they must be regarded as included in
the first part of article 1162, because, although the obligation was not created in their favor, it has
subsequently resulted that its constitution is to their benefit." (Manresa, Commentaries on the Civil
Code, vol. 8, p. 252.)
When process was served upon the defendant to answer the complaint, it could be seen that the
plaintiff was not an heir, an assignee, or a subrogated creditor, physically distinct from the person
who made the contract, but this very same person, also bringing with him into the case the
responsibility of a general partnership, which, far from declining to entertain the exceptions, set-offs,
and counter claims which might be available against the original creditor, undertakes to defend
against them as the original, actual, and sole creditor.
Hence it is that the defense of the defendant is by no means limited, nor will the effects of the
payment be frustrated. Furthermore, it is evident that although Tuason may have operated in his
own name with certainly was not with his own private funds. Therefore it was that this contract was
communicated to the partnership which became responsible therefor. (Art. 134, Code of Commerce.)
In view of the understanding and agreement between Tuason and the partnership, shown by the
facts stated, the responsibility of the partner Tuason being included in the responsibility of Tuason &
San Pedro, the liability of the firm is not less than the personal liability of the partner, as the
partnership was a general one. And the action brought by the firm being simply the action in favor of
the partner assumed by the firm as the result of the assumption of the business and the filing of the
complaint, the exception, practically speaking, is entirely unnecessary, although, from a theoretical
point of view, it might perhaps be supported. We therefore decide that the action brought by the
partnership will lie, and the payment which may be made to the partnership upon the circumstances
stated will be perfectly legal.
The legal grounds on which paragraph 8 of the conclusions of law of the appealed judgment was
based, are hereby modified to conform to the preceding opinion, and so modified we accept the
findings of fact and the conclusions of law of the court below, with the following amendment: That
part of the first conclusion of law which reads, "the owner of the property, Don Juan Feliciano, and,
by reason of his death, his heirs, now defendants, are bound to pay the entire price agreed upon with
the contractor, as the work was terminated and delivered," being amended to read as follows: "The
owner, Don Juan Feliciano, and, by his death, his heirs, now defendants, are bound to pay all the
price agreed upon to the contractor, because the house burned after the work terminated, and after
the defendants had become in default with respect to their obligation to receive it;" for although it is
evident, as stated in the seventh conclusion of law, that the contractor has done everything
incumbent upon him for the delivery of the house, it is none the less true, as a matter of fact, that no
such delivery took place.
We therefore affirm the judgment below, with costs in this instance to the Appellant. So ordered.
Arellano, C.J., Torres, Cooper, Willard and Ladd, JJ., concur.
McDonough, J., did not sit in this case.
36) Banco de Oro Universal Bank vs Laigo GR No. 173856,

November 20, 2008
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 173856 November 20, 2008
DAO HENG BANK, INC., now BANCO DE ORO UNIVERSAL BANK, petitioner

vs.
SPS. LILIA and REYNALDO LAIGO, respondent.
DECISION
CARPIO MORALES, J.:
The Spouses Lilia and Reynaldo Laigo (respondents) obtained loans from Dao Heng Bank, Inc. (Dao Heng) in the total
amount of P11 Million, to secure the payment of which they forged on October 28, 1996, November 18, 1996 and April 18,
1997 three Real Estate Mortgages covering two parcels of land registered in the name of respondent "Lilia D. Laigo, . . .
married to Reynaldo Laigo," one containing 569 square meters and the other containing 537 square meters.
The mortgages were duly registered in the Registry of Deeds of Quezon City.
The loans were payable within 12 months from the execution of the promissory notes covering the loans. As of 2000,
respondents failed to settle their outstanding obligation, drawing them to verbally offer to cede to Dao Heng one of the two
mortgaged lots by way of dacion en pago. To appraise the value of the mortgaged lands, Dao Heng in fact commissioned
an appraiser whose fees were shouldered by it and respondents.
There appears to have been no further action taken by the parties after the appraisal of the properties.
Dao Heng was later to demand the settlement of respondents' obligation by letter of August 18, 2000 1 wherein it indicated
that they had an outstanding obligation of P10,385,109.92 inclusive of interests and other charges. Respondents failed to
heed the demand, however.
Dao Heng thereupon filed in September 2000 an application to foreclose the real estate mortgages executed by
respondents. The properties subject of the mortgage were sold for P10,776,242 at a public auction conducted on
December 20, 2000 to Banco de Oro Universal Bank (hereafter petitioner) which was the highest bidder.
It appears that respondents negotiated for the redemption of the mortgages for by a June 29, 2001 letter 2 to them,
petitioner, to which Dao Heng had been merged, through its Vice President on Property Management & Credit Services
Department, advised respondent Lilia Laigo as follows:
This is to formally advise you of the bank's response to your proposal pertaining to the redemption of the two (2)
foreclosed lots located in Fairview, Quezon City as has been relayed to you last June 13, 2001 as follows:
1. Redemption price shall be P11.5MM plus 12% interest based on diminishing balance payable in staggered
payments up to January 2, 2002 as follows:
a. P3MM - immediately upon receipt of this approval
b. Balance payable in staggered payments (plus interest) up to January 2, 2002
2. Release Values for Partial Redemption:
a. TCT No. 92257 (along Commonwealth) P7.500 MM*
b. TCT No. N-146289 (along Regalado) P4.000 MM*
* excluding 12% interest
3. Other Conditions:
a. Payments shall be covered by post dated checks
b. TCT No. 92257 shall be the first property to be released upon payment of the first P7.5MM plus interest
c. Arrangement to be covered by an Agreement
If you are agreeable to the foregoing terms and conditions, please affix your signature showing your conformity thereto at
the space provided below. (Emphasis and underscoring in the original; italics supplied)
Nothing was heard from respondents, hence, petitioner by its Manager, Property Management & Credit Services
Department, advised her by letter of December 26, 2001 3 that in view of their failure to conform to the conditions set by it
for the redemption of the properties, it would proceed to consolidate the titles immediately after the expiration of the
redemption period on January 2, 2002.
Six days before the expiration of the redemption period or on December 27, 2001, respondents filed a complaint before
the Regional Trial Court (RTC) of Quezon City, for Annulment, Injunction with Prayer for Temporary Restraining Order
(TRO), praying for the annulment of the foreclosure of the properties subject of the real estate mortgages and for them to
be allowed "to deliver by way of ‘dacion en pago' one of the mortgaged properties as full payment of [their] mortgaged
obligation" and to, in the meantime, issue a TRO directing the defendant-herein petitioner to desist from consolidating
ownership over their properties.
By respondents' claim, Dao Heng verbally agreed to enter into a dacion en pago.
In its Opposition to respondents' Application for a TRO, 4 petitioner claimed that there was no meeting of the minds
between the parties on the settlement of respondents' loan via dacion en pago.
A hearing on the application for a TRO was conducted by Branch 215 of the RTC of Quezon City following which it denied
the same.
Petitioner thereupon filed a Motion to Dismiss the complaint on the ground that the claim on which respondents' action is
founded is unenforceable under the Statute of Frauds and the complaint states no cause of action. Respondents opposed
the motion, contending that their delivery of the titles to the mortgaged properties constituted partial performance of their
obligation under the dacion en pago to take it out from the coverage of the Statute of Frauds.
The trial court granted petitioner's Motion to Dismiss in this wise:
[P]laintiffs' claim must be based on a document or writing evidencing the alleged dacion en pago, otherwise, the
same cannot be enforced in an action in court. The Court is not persuaded by plaintiffs' contention that their case
is an exception to the operation of the rule on statute of frauds because of their partial performance of the
obligation in the dacion en pago consisting of the delivery of the titles of the properties to the defendants. As
correctly pointed out by the defendants, the titles were not delivered to them pursuant to the dacion en
pago but by reason of the execution of the mortgage loan agreement. If indeed a dacion en pago agreement
was entered into between the parties, it is inconceivable that a written document would not be drafted considering
the magnitude of the amount involved.5 (Emphasis and underscoring supplied)
Respondents assailed the dismissal of their complaint via Petition for Review before this Court which referred it to the
Court of Appeals for disposition.
Reversing the trial court's dismissal of the complaint, the appellate court, by Decision of January 26, 2006, 6 reinstated
respondents' complaint.7
In ordering the reinstatement of respondents' complaint, the appellate court held that the complaint states a cause of
action, respondents having alleged that there was partial performance of the agreement to settle their obligation
via dacion en pago when they agreed to have the properties appraised to thus place their agreement within the
exceptions provided under Article 14038 of the Civil Code on Statute of Frauds. Thus the appellate court ratiocinated:
Particularly, in seeking exception to the application of the Statute of Frauds, petitioners[-herein respondents]
averred partial performance of the supposed verbal dacion en pago. In paragraph 5 of their complaint, they
stated: "As part of the agreement, defendant Dao Heng Bank had the mortgaged property appraised to determine
which of the two shall be delivered as full payment of the mortgage obligation; Also as part of the deal, plaintiffs
for their part paid P5,000.00 for the appraisal expense. As reported by the appraiser commissioned by Defendant
Dao Heng, the appraised value of the mortgaged properties were as follows: x x x" Having done so, petitioners
are at least entitled to a reasonable opportunity to prove their case in the course of a full trial, to which the
respondents may equally present their evidence in refutation of the formers' case. (Underscoring supplied)
Petitioner's Motion for Reconsideration having been denied by the appellate court by Resolution of July 19, 2006, the
present petition was filed faulting the appellate court in ruling:
I.
. . . THAT THE COMPLAINT ALLEGED A SUFFICIENT CAUSE OF ACTION DESPITE THE ALLEGATIONS, AS
WELL AS ADMISSIONS FROM THE RESPONDENTS, THAT THERE WAS NO PERFECTED DACION EN
PAGO CONTRACT;
II.
. . . THAT THE ALLEGED DACION EN PAGO IS NOT UNENFORCEABLE UNDER THE STATUTE OF

FRAUDS, DESPITE THE ABSENCE OF A WRITTEN & BINDING CONTRACT;
III.
. . . THAT THE COMPLAINT SUFFICIENTLY STATED A CAUSE OF ACTION. 9
Generally, the presence of a cause of action is determined from the facts alleged in the complaint.
In their complaint, respondents alleged:
xxxx
4. Sometime in the middle of the year 2000, defendant Dao Heng Bank as the creditor bank agreed to the full
settlement of plaintiffs' mortgage obligation of P9 Million through the assignment of one of the two (2) mortgaged
properties;
[5] As part of the agreement, defendant Dao Heng Bank had the mortgaged properties appraised to determine
which of the two (2) mortgaged properties shall be delivered as full payment of the mortgage obligation; Also as
part of the deal, plaintiffs for their part paid P5,000.00 for the appraisal expense; As reported by the appraiser
commissioned by defendant Dao Heng, the appraised value of the mortgaged properties were as follows:
(a) Property No. 1 - T.C.T. No. 92257: P12,518,000.00
L2A Blk 12 Don Mariano Marcos Ave., Fairview, QC
(b) Property No. 2 - T.C.T. No. 146289: P8,055,000.00 L36 Blk 87 Regalado Ave. Cor. Ipil St., Neopolitan,
QC
[6] Sometime in December, year 2000, the protest of plaintiffs notwithstanding and in blatant breach of the agreed
"Dacion en pago" as the mode of full payment of plaintiffs' mortgage obligation, defendant Dao Heng Bank
proceeded to foreclose the mortgaged properties above-described and sold said properties which were
aggregately valued at more than P20 Million for only P10,776,242.00, an unconscionably very low price;
(Underscoring supplied)
Even if a complaint states a cause of action, however, a motion to dismiss for insufficiency of cause of action may be
granted if the evidence discloses facts sufficient to defeat the claim and enables the court to go beyond the disclosures in
the complaint. In such instances, the court can dismiss a complaint on this ground, even without a hearing, by taking into
account the discussions in said motion to dismiss and the disposition thereto.10
In its Opposition to respondents' application for the issuance of a TRO, 11 petitioner, responding to respondents' allegation
that it agreed to the settlement of their obligation via the assignment of one of the two mortgaged properties, alleged that
there was no meeting of the minds thereon:
4. Plaintiffs' claim that defendant Dao Heng Bank[s] foreclosure sale of the mortgaged properties was improper
because there was an agreement to dacion one of the two (2) mortgaged properties as full settlement of the loan
obligation and that defendant Dao Heng Bank and Banco de Oro were already negotiating and colluding for the
latter's acquisition of the mortgaged [properties] for the unsconscionably low price of P10,776.242.00 are
clearly WITHOUT BASIS. Quite to the contrary, there was no meeting of the minds between defendant Dao Heng
Bank and the plaintiffs to dacion any of the mortgaged properties as full settlement of the loan. Although there
was a PROPOSAL and NEGOTIATIONS to settle the loan by way of dacion, nothing came out of said proposal,
much less did the negotiations mature into the execution of a dacion en pago instrument. Defendant Dao Heng
Bank found the offer to settle by way of dacion not acceptable and thus, it opted to foreclose on the mortgage.
The law clearly provides that "the debtor of a thing cannot compel the creditor to receive a different one, although
the latter may be of the same value, or more valuable than that which is due" (Article 1244, New Civil Code). "The
oblige is entitled to demand fulfillment of the obligation or performance as stipulated" (Palmares v. Court of
Appeals, 288 SCRA 422 at p. 444 [1998]). "The power to decide whether or not to foreclose on the mortgage is
the sole prerogative of the mortgagee" (Rural Bank of San Mateo, Inc. vs. Intermediate Appellate Court, 146
SCRA 205, at 213 [1986]) Defendant Dao Heng Bank merely opted to exercise such prerogative. 12 (Emphasis in
the original; capitalization and underscoring supplied)
Dacion en pago as a mode of extinguishing an existing obligation partakes of the nature of sale whereby property is
alienated to the creditor in satisfaction of a debt in money. 13 It is an objective novation of the obligation, hence, common
consent of the parties is required in order to extinguish the obligation.
. . . In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as
equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is,
the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtor's
debt. As such the elements of a contract of sale, namely, consent, object certain, and cause or consideration must be
present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the
obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the
object of the contract of sale, while the debt is considered the purchase price. In any case, common consent is an
essential prerequisite, be it sale or novation, to have the effect of totally extinguishing the debt or obligation. "14 (Emphasis,
italics and underscoring supplied; citation omitted)
Being likened to that of a contract of sale, dacion en pago is governed by the law on sales.15 The partial execution of a
contract of sale takes the transaction out of the provisions of the Statute of Frauds so long as the essential requisites of
consent of the contracting parties, object and cause of the obligation concur and are clearly established to be present.16
Respondents claim that petitioner's commissioning of an appraiser to appraise the value of the mortgaged properties, his
services for which they and petitioner paid, and their delivery to petitioner of the titles to the properties constitute partial
performance of their agreement to take the case out of the provisions on the Statute of Frauds.
There is no concrete showing, however, that after the appraisal of the properties, petitioner approved
respondents' proposal to settle their obligation via dacion en pago. The delivery to petitioner of the titles to the properties
is a usual condition sine qua non to the execution of the mortgage, both for security and registration purposes. For if the
title to a property is not delivered to the mortgagee, what will prevent the mortgagor from again encumbering it also by
mortgage or even by sale to a third party.
Finally, that respondents did not deny proposing to redeem the mortgages, 17 as reflected in petitioner's June 29, 2001
letter to them, dooms their claim of the existence of a perfected dacion en pago.
WHEREFORE, the Court of Appeals Decision of January 26, 2006 is REVERSED and SET ASIDE. The Resolution of
July 2, 2002 of the Regional Trial Court of Quezon City, Branch 215 dismissing respondents' complaint is REINSTATED.
SO ORDERED.
CONCHITA CARPIO MORALES

Associate Justice
WE CONCUR:
LEONARDO A. QUISUMBING
Associate Justice
Chairperson
DANTE O. TINGA PRESBITERO J. VELASCO, JR.
Associate Justice Associate Justice
ARTURO D. BRION
Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Court's Division.
LEONARDO A. QUISUMBING
Associate Justice
Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that
the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the
opinion of the Court's Division.
REYNATO S. PUNO
Chief Justice
Footnotes
1
Records, p. 29.
2
Id. at 38.
3
Id. at 39-40.
4
Id. at 13-18.
5
Id. at 120.
6
Penned by Justice Monina Arevalo-Zenarosa, with the concurrence of Justices Andres B. Reyes, Jr. and
Rosmari D. Carandang. CA rollo, pp. 113-124.
7
Id. at 124.
8
Article 1403. The following contracts are unenforceable unless they are ratified: x x x
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases
an agreement hereafter made shall be unenforceable by action, unless the same, or some note or
memorandum thereof be in writing, and subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the writing, or a secondary evidence of its
contents: x x x
(e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an
interest therein; x x x
9
Rollo, p. 32.
10
Florenz D. Regalado, Remedial Law Compendium, Vol. 1 (2005), citing Tan v. Director of Forestry, et al., L-
24548, Oct. 27, 1983, 210 Phil. 244.
11
Supra note 4.
12
Records, pp. 15-16.
13
Civil Code, Article 1245.
14
Filinvest Credit Association v. Philippine Acetylene Co., 197 Phil. 394, 402-403 (1982).
15
Supra note 13 at Article 1245.
16
Vda. de Jomoc v. Court of Appeals, G.R. No. 92871, August 2, 1991, 200 SCRA 74, 77-78.
17
Supra note 2
37) Excel Agro-Industrial Corporation vs Gochangco, CV-03663,

November 27, 1986
SECOND DIVISION
[G.R. No. L-77032. September 30, 1988.]
EXCEL AGRO-INDUSTRIAL CORPORATION, Petitioner, v. JUAN T. GOCHANGCO AND COURT

OF APPEALS, Respondents.
Raymundo M. Lozada, Jr. for Petitioner.
Enrique S. Chua for Private Respondent.
SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; MOTION TO DISMISS; ALLOWANCE THEREOF BASED ON

GROUND RAISED IN THE ANSWER, PROPER. — As defendant’s answer in the trial court raised the
affirmative defense of lack of cause of action, we see no error in the trial court’s allowance of a
motion to dismiss based on the same ground after the answer had been filed. While this procedure
may appear to be a bit unusual, it is to be considered as part of the trial court’s discretionary power
in order to facilitate speedy dispensation of justice, and we see no abuse in its exercise in the present
case. It will be noted that the affirmative defense that the defendant earlier raised in his answer is
the same ground averred in his motion to dismiss, so that the latter may be treated as a mere
reiteration of said ground, or as a motion for preliminary hearing on the affirmative defense
contained in the answer.
2. ID.; ID.; ID.; HEARING NECESSARY BEFORE RESOLUTION THEREOF; CASE AT BAR. — Section 3,
Rule 16, of the Revised Rules of Court provides that a hearing is necessary before resolution of a
motion to dismiss. Thus, petitioner should have been heard before dismissal of its complaint
especially because there is a stipulation in the Deed of Assignment which it executed in favor of
private respondent, that the nine(9) parcels of land subject of the Deed were to be forfeited in favor
of private respondent who could sell them to any interested party if the loan of P100,000.00
remained unpaid on 1 October 1983, the very day petitioner allegedly tendered payment by check.
Such a precipitate deprivation of ownership should have been considered by the trial court, at the
very least, in requiring a hearing on the motion to dismiss and before actually dismissing the
complaint, notwithstanding private respondent’s attack on the validity of the tendered check and its
character as legal tender. While the alleged unfunded character of the said check has a material, if
not crucial, bearing on the ultimate efficacy of petitioner’s complaint, it still does not justify the denial
to petitioner of a hearing before dismissal of its complaint, pursuant to adverse party’s motion to
dismiss based on alleged failure of the complaint to state a cause of action.
DECISION
PADILLA, J.:
Review on certiorari of the decision * of the Court of Appeals in CA-G.R. No. 03663, dated 27
November 1986, affirming the order of Branch XL, Regional Trial Court of Silay City, Negros
Occidental, dated 20 February 1984, which dismissed Civil Case No. 1038 and the order, dated 16
March 1984, which denied the motion for reconsideration of the dismissal order. **
On 3 October 1983, petitioner as plaintiff filed a complaint against herein private respondent,
docketed as Civil Case No. 1038, Regional Trial Court of Silay City, Negros Occidental, Branch XL,
seeking to compel the private respondent to accept Republic Bank Check No. 21334067 in the
amount of P100,000.00 as payment for a loan secured by a Deed of Assignment over nine (9) parcels
of land, to declare such Deed of Assignment of no further force and effect, and to restrain private
respondent from disposing of said real properties. chanrobles law library
On 12 October 1983, private respondent filed his answer raising therein, among others, the
affirmative defense that the complaint states no cause of action, as the creditor assignee, private
respondent herein, was not legally bound to accept the check, which is not legal tender. It was also
alleged in the answer that there is no defect or illegality in the Deed of Assignment that could render
the instrument of no further force and effect. 1
On 15 November 1983, private respondent also filed a motion to dismiss on grounds similar to those
raised in his answer, namely, lack of cause of action in the complaint and validity of the Deed of
Assignment. 2
On 20 February 1984, the trial court issued the questioned order dismissing the complaint. It also
denied the motion for reconsideration of said dismissal order in an order dated 16 March 1984. On
appeal, the Court of Appeals affirmed the orders of the trial court. It likened respondent’s motion to
dismiss to a motion for preliminary hearing on affirmative defenses. It also held that there was no
need to hold a hearing to receive evidence, as private respondent’s allegation of lack of cause of
action in the complaint was a hypothetical admission of all the material averments of the complaint.
Thus, the sufficiency of the complaint was merely predicated on whether or not the court could
render a valid judgment based on the allegations in said complaint. 3 Since the tender of payment in
check, alleged in the complaint, does not constitute a valid or legal tender of payment, petitioner’s
complaint does not state a cause of action and should be dismissed, ruled the Court of Appeals. chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
Petitioner now contends before this Court that the Court of Appeals erred in affirming the order of the
trial court dismissing its complaint on the basis of private respondent’s motion to dismiss, because
(1) said motion was not filed within the period for filing answer, but instead filed after the answer,
and (2) as the ground in the motion to dismiss is the same as the affirmative defense in the answer,
that is, lack of cause of action, the trial court should have ordered a preliminary hearing to give the
parties an opportunity to adduce evidence.
We find petitioner’s first objection without merit but sustain its second objection founded on the
necessity of a hearing on the private respondent’s motion to dismiss.
As defendant’s answer in the trial court raised the affirmative defense of lack of cause of action, we
see no error in the trial court’s allowance of a motion to dismiss based on the same ground after the
answer had been filed. While this procedure may appear to be a bit unusual, it is to be considered as
part of the trial court’s discretionary power in order to facilitate speedy dispensation of justice, and
we see no abuse in its exercise in the present case. It will be noted that the affirmative defense that
the defendant earlier raised in his answer is the same ground averred in his motion to dismiss, so
that the latter may be treated as a mere reiteration of said ground, or as a motion for preliminary
hearing on the affirmative defense contained in the answer. chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
However, petitioner should have been heard before dismissal of its complaint especially because
there is a stipulation in the Deed of Assignment which it executed in favor of private respondent, that
the nine (9) parcels of land subject of the Deed were to be forfeited in favor of private respondent
who could sell them to any interested party 4 if the loan of P100,000.00 remained unpaid on 1
October 1983, the very day petitioner allegedly tendered payment by check. Such a precipitate
deprivation of ownership should have been considered by the trial court, at the very least, in
requiring a hearing on the motion to dismiss, and before actually dismissing the complaint,
notwithstanding private respondent’s attack on the validity of the tendered check and its character as
legal tender.
Besides, the complaint also alleged that private respondent "refused and still refuses to accept the
check with [sic] legal justification to the prejudice of herein plaintiff." 5 This allegation, we are told by
petitioner in this appeal, is supported by proof (which it evidently is prepared to present) "that the
obligation of the plaintiff-petitioner in the sum of P100,000.00 which fell due on October 1, 1983, fell
on a Friday and since defendant-respondent cannot be contacted earlier, plaintiff-petitioner called
defendant-respondent if he will accept a check (Cashier’s) for the sum of One Hundred Thousand
P100,000.00) as petitioner did not want to carry so much cash with him from Bacolod to Silay City,
due to the rush of hold-ups during that time and to which defendant-respondent gave his assent.
Defendant-respondent (however) intentionally refused to accept the payment of the check of
P100,000.00 from the petitioner in order to make the petitioner default in his payment as the
collateral of the loan is worth more than P1,000,000.00 and by not accepting the payment,
respondent stands to profit by not less than P1,000,000.00." 6
Section 3, Rule 16 of the Revised Rules of Court states: chanrob1es virtual 1aw library
Hearing and order. — After hearing, the court may deny or grant the motion (to dismiss) or allow
amendment of pleading, or may defer the hearing and determination of the motion until the trial if
the ground alleged therein does not appear to be indubitable. (Emphasis supplied)
It is evident from the above provision that a hearing is necessary before resolution of a motion to
dismiss. As held in Asejo v. Leonoso, 7 penned by Mr. Justice Tuason: jgc:chanrobles.com.ph
"Sections 3 and 4 of Rule 8 outline the procedure in cases where one or more of the grounds of
dismissal are asserted. Two courses are open: (a) to deny or grant the motion or allow amendment
of pleading; (b) to ‘defer the hearing and determination of the motion until the trial if the ground
alleged therein does not appear to be indubitable.’ Any of the grounds to dismiss which has not been
brought before the court by motion may be pleaded as an affirmative defense. In either case there
must be a hearing. And of necessity the hearing, although called preliminary, should be conducted as
ordinary hearings: the parties should be allowed to present evidence and the evidence should be
taken down. Otherwise in the event of appeal from an order of dismissal, as in this case, the
appellate court would have no means to judge the legality of the proceedings and the sufficiency of
the proofs on which the order is predicated. If after the hearing the court is of the opinion that the
ground alleged in the motion to dismiss or in the answer is not indubitable, it shall defer the
determination of the questions until the trial." 8 (Emphasis supplied)
Private respondent also makes much of the alleged unfunded character of petitioner’s check (not a
cashier’s check) and its failure to assert the validity of said check in the pleadings filed before the
trial court, allegations that petitioner now disputes. While this fact (the alleged unfunded character of
the said check) has a material, if not crucial, bearing on the ultimate efficacy of petitioner’s
complaint, it still does not justify the denial to petitioner of a hearing before dismissal of its
complaint, pursuant to adverse party’s motion to dismiss based on alleged failure of the complaint to
state a cause of action. Again, quoting from the Asejo case: jgc:chanrobles.com.ph
"The plaintiff should at least have been accorded a hearing. This is the least she is entitled to. And
this is true regardless of any strong opinion the court may have as to the truthfulness of the
document. No such hearing was held. Without hearing the plaintiff would be barred from pursuing
her action and is to be deprived of what she claims to be her property without being given an
opportunity to affirm or deny the validity of Exhibit B." 9
WHEREFORE, the decision of the Court of Appeals in CA-G.R. No. 03663 dated 27 November 1986
affirming the orders of the Regional Trial Court, Branch XL, Silay City, Negros Occidental, dated 20
February 1984 and 16 March 1984, respectively, dismissing Civil Case No. 1038 is hereby SET
ASIDE. Civil Case No. 1038 is reinstated and the trial court is ordered to hold a hearing on the
motion to dismiss complaint, filed by private Respondent. No costs. chanrobles virtual lawlibrary
SO ORDERED.
Melencio-Herrera (Chairperson), Paras, Sarmiento and Regalado, JJ., concur.
Endnotes:
* Penned by Justice Fidel P. Purisima, concurred in by Justices Oscar R. Victoriano and Pedro A.
Ramirez.
** Both trial court orders were issued by Judge Reynaldo M. Alon.
1. Decision Rollo at 12. Original Record at 12-13.
2. Id., Rollo at 15, 44.
3. Decision, Rollo at 15.
4. Annex "B," Original Record at 5.
5. Original Record at 1.
6. Memorandum for the Petitioner, at 6, Rollo at 48.
7. CA-No. 9246, May 26, 1947, 78 Phil. 467.
8. Id. at 470.
9. CA-No. 9246, May 26, 1947, 78 Phil. at 471.
38) Menzi and Co. vs Quing Chuan, 69 PHIL 46

EN BANC
[G.R. No. 46278. October 26, 1939.]
MENZI & CO., INC., Petitioner, v. QUING CHUAN as administrator of the intestate of Quing
Tong Co., Respondent.
V. D. Carpio for Petitioner.
Yuseco & Arteche for Respondent.
SYLLABUS
1. LIABILITY OF A SURETY; ARTICLE 1174 OF THE CIVIL CODE — The application of payments made
by the plaintiff corporation is erroneous for the reason that, where, as in the present case, there is
more than one indebtedness, the payment or payments made by the debtor, in the absence of any
agreement to the contrary, should first be applied, under the provisions of article 1174 of the Civil
Code, to the most burdensome of the matured debts. The debt of P32,453.70 was more burdensome
than the old indebtedness of P3,168.80 because, unlike the latter, it earned interest at 12 per cent.
Moreover, according to the decision of the Court of Appeals, the period fixed for the payment of the
invoices is one week, after which they become due and payable. Accordingly, the various payments
made by K. M. should have been applied first to the amount of the goods taken one week earlier.
From this it follows that the amount claimed by the plaintiff is the balance of the former indebtedness
of P3,168.80, for which the surety is not liable because the bond given by him cannot be extended to
debts incurred before the execution thereof.
DECISION
CONCEPCION, J.:
The question to be determined in this appeal has to do with the extent, or rather the limit, of the
liability of a surety. This question arises from the following facts:
chanrob1es virtual 1aw library
King Meng purchased merchandise on credit from the plaintiff-appellee Menzi & Co., Inc. On October
3, 1932, his account showed a balance against him in the amount of P3,168.80 The plaintiff
corporation required him to give a bond for P10,000. Quing Tong Co gave the bond under certain
conditions, one of which is that Quing Tong Co guaranteed the payment of the merchandise and
goods which King Meng should purchase from the plaintiff in his own name or in that of King Yap Yek,
paying in the manner to be set out in the invoices, with interest at 12 per cent, the value of the
merchandise from the date of maturity. King Meng purchased from the plaintiff on different dates
merchandise and goods totalling P32,453.70. Adding to this sum the preexisting debt of P3,168.80,
gives a total of P35,622.30. On the other hand, King Meng had made payments amounting to
P35,264.60. The plaintiff corporation applied and thereafter to the amount of the successive
purchases made by King Meng from October 3, 1932, resulting in a balance in favor of the plaintiff in
the sum of P358, payment of which is claimed, with interest and attorney’s fees, from the intestate
of the surety Quing Tong Co. The trial court gave judgment for the plaintiff corporation, but on
appeal to the Court of Appeals, the latter reversed the judgment of the trial court and absolved the
administrator of the intestate of Quing Tong Co from the complaint.
We believe that the application of payments made by the plaintiff corporation is erroneous for the
reason that, where, as in the present case, there is more than one indebtedness, the payment or
payments made by the debtor, in the absence of any agreement to the contrary, should first be
applied, under the provisions of article 1174 of the Civil Code, to the most burdensome of the
matured debts. The debt of P32,453.70 was more burdensome than the old indebtedness of
P3,168.80 because, unlike the latter, it earned interest at 12 per cent. Moreover, according to the
decision of the Court of Appeals, the period fixed for the payment of the invoices is one week, after
which they become due and payable. Accordingly, the various payments made by King Meng should
have been applied first to the amount of the goods taken one week earlier. From this it follows that
the amount claimed by the plaintiff is the balance of the former indebtedness of P3,168.80 from
which the surety is not liable because the bond given by him cannot be extended to debts incurred
before the execution thereof. (El Vencedor v. Canlas, 44 Phil., 699; Asiatic Petroleum Co. v. De Pio,
46 Phil., 167; Socony-Vacuum Corporation [formerly the Standard Oil Company of New York] v. Leon
C. Miraflores, 37 Off. Gaz., 2807).
Finding no merit in the errors assigned in the petitioner’s brief, the appealed judgment is affirmed,
with the costs to said petitioner. So ordered.
Avanceña, C.J., Villa-Real, Imperial, Diaz and Laurel, JJ., concur.
39) Mission de San Vicente vs Reyes 19 PHIL 525

SUPREME COURT
Manila
EN BANC
G.R. No. L-5508 August 14, 1911
CONGREGACION DE LA MISION DE SAN VICENTE DE PAUL, plaintiff-appellant,

vs.
FRANCISCO REYES Y MIJARES and EL BANCO ESPAÑOL-FILIPINO, defendants-appellees.
Haussermann and Cohn for appellant.

Ortigas and Fisher for appellee, El Banco Español-Filipino.
No appearance for appellee Reyes.
MORELAND, J.:
This is an appeal by the plaintiff from a judgment of the Court of First Instance of the city of Manila, the Hon. A.S.
Crossfield presiding, foreclosing a second mortgage upon the property of the defendant Francisco Reyes y Mijares,
subject, however, to the lien of a first mortgage held by the defendant bank, and declaring that there had not been
paid on said first mortgage the sum of P96,781.75, as claimed by the plaintiff, and that said first mortgage had not
been fully paid and satisfied.
This is an action by the plaintiff as the holder of an alleged second lien upon certain real and personal property to
have declared fully satisfied and discharged the first lien held by defendant bank and to have plaintiff's lien
foreclosed. The complaint contains two counts. In the first appear allegations showing the second mortgage to the
plaintiff, the prior mortgage of the same property to the defendant bank to secure a specific debt, and alleging the
subsequent payment of said debt in full. The second alleges the pledge of the personal property to the defendant
bank to secure the same debt, the subsequent pledge thereof, or of such part thereof as might remain after the
payment of the bank's lien, to the plaintiff, the payment to the defendant bank in full of the debt secured by said
pledge, and that a portion of said personal property remained unexpended after the payment of the debt aforesaid.
The complaint then asks for a foreclosure of the lien of the plaintiff and prays that the defendant bank render an
account of all property remaining after the payment of its debt and of all moneys realized over and above the
amount of the debt and interest, and that the same be delivered to the plaintiff for the purpose of said foreclosure.
The defendants answered denying that the debt of the defendant bank secured by the mortgage and lien had been
paid and alleging that the greater part thereof remained unpaid.
The cause was submitted to the trial court for decision upon an agreed statement of facts and a judgment was
rendered which decreed foreclosure in favor of the plaintiff, subjecting such foreclosure, however, to the first lien of
the defendant bank upon the real and personal property described in the mortgage and pledge, upon which there
still remained due and unpaid the sum of P75,427.88.
The attorney for the appellant states the facts and the case in his brief as follows:
The facts involved in this contention are not disputed, but are all set forth in an express stipulation, certified
as true by the parties litigant. It appears that on March 4, 1905, Francisco Reyes was indebted to the Banco
Español-Filipino in the sum of P84,415.38; to the Hongkong & Shanghai Bank in the sum of P141,702; and
to the plaintiff in the sum of P45,286. (Agreed statement Pars. I, II, and VII.) On that date the Banco
Español-Filipino advanced Reyes the money to pay the Hongkong & Shanghai Bank, thus becoming his
creditor in the sum total of P226,117.38. Reyes thereupon executed (Exhibit A) a first mortgage upon certain
specified real property, to secure the payment of said debt of P226,117.38 (agreed statement Par. III) and
naught else. The indenture (Exhibit A) provides:
"15. Francisco Reyes y Mijares, in addition to the securities above stated as mortgaged and
pledged, likewise charges with the complete payment of his obligation in favor of the Banco Español-
Filipino, his other assets, present and future, particularly the balance to which he is this date entitled
in and to the credits against the Government of Spain originally due him or acquired later, and the
commission upon the collection of those entrusted to him, which said balance he obligates himself to
pay into the hands of the said creditor bank when collected, if the obligation which is the subject of
this indenture has not yet been completely satisfied and
"16. Francisco Reyes y Mijares obligates himself to give account to the creditor bank whenever the
latter desires, of the condition of his business affairs, displaying to it the books, documents and other
data which may be necessary for the investigation which it desires to make concerning the status
and progress of his business affairs in which he grants to the creditor a direct participation and
obligates himself to follow its directions."
Thereafter, on May 4, 1905, the bank made a further advance of P62,000 to Reyes, to secure which the
latter executed a pledge (Exhibit B) of certain specified items of personal property, other than the items
referred to in Exhibit A.
Thereafter, on May 12, 1905, to secure the payment of the amount due to plaintiff, Reyes executed a
second mortgage and pledge in favor of plaintiff (Exhibit C) upon the same real and personal property
described and referred to in Exhibit A.
All of the properties hereinabove referred to passed into the custody and control of the defendant bank.
Portions of the same were disposed of from time to time and the proceeds were credited to the account of
Reyes. This account, the sole and only account kept with Reyes by the bank, opened with a debit of the
P226,117.38 which was secured by this mortgage.
The total amount thus credited to this account of Reyes was P297,418.27, made up as follows:
(a) From the proceeds of a portion of the securities

covered by Exhibit A. P145,646.15
(b) From the proceeds of a portion of the securities

covered by Exhibit B 15,098.12
(c) From the proceeds of properties not hypothecated

in Exhibits A or B, but subsequently
pledged to the bank to secure a total of P25,627.25 37,739.75
(d) An erroneous counterbalanced by

an equal debit 2,152.50
(e) Amounts paid to the bank by Reyes from

time to time obtained from assets and
credits other than those covered by Exhibits
A or B or the special pledges
above referred to 96,781.75
—————
297,418.27
From time to time the bank cashed checks for Reyes and paid drafts and other obligations in favor of third
persons. Sometimes these advances were secured by specific pledges of assets, other than those covered
by the Exhibits A and B. For the most part, however, these account, without any security whatever. (A.S.
Par. XI.)
Upon this state of facts the plaintiff contends that the first mortgage (Exhibit A) is wholly paid and satisfied by
the payment of the following sums, to wit:
(a) The proceeds of the mortgage securities

expressly covered by Exhibit A P145,646.15
(b) The proceeds of the property

not mortgaged to the bank
by Exhibits A and B but
subsequently pledged at
least to the extent of the
excess thereof over and
above the amount of the
pledges P37,739.75
25,627.25
————— 12,112.50
(c) The amounts paid to the bank by Reyes

from other sources 96,781.75
—————
254,540.40
Wherefore plaintiff contends that the mortgaged properties referred to in Exhibit A which still remain
undisposed of are released therefrom and the second mortgage thereon contained in Exhibit C, is now
equivalent to a first mortgage, thereon, to be foreclosed and satisfied without regard to any independent
indebtedness of Reyes to the bank.
The defendants' contention is twofold. In their answers they seek to maintain that the original mortgage
(Exhibit A), legally secures any and all amounts which may be owing by Reyes to the bank, and that the
entire indebtedness of Reyes to the bank is secured thereby. In their arguments, defendants contends that
the amounts paid in by Reyes are now applicable to the satisfaction of any part of the latter's indebtedness,
and as they choose to apply the same to the satisfaction of the unsecured advances, the mortgage debt, or
a large part thereof, still remains unsatisfied.
The opinion of the court is in favor of the plaintiff so far as concerns the proceeds of the mortgaged property
and the excess obtained from the special pledges, but holds that the P96,781.75 paid into the bank from
independent sources is not legally applicable to the satisfaction of the mortgage debt.
As is seen from appellant's own statement, the only question before us for determination is whether or not the sum
of P96,781.75 should have been applied by the trial court to the payment of the debt, P226,117.38.
In taking the affirmative of this question counsel for the appellant asserts that said sum "must be" so "applied as the
parties have expressly agreed" to do so. To the establishment of this proposition counsel, for the purpose of
demonstrating the agreement referred to, divides the payments made by Reyes to the bank into three classes,
saying:
In the presentation of this point, the various payments made by Reyes are necessarily to be divided into
three classes and each class considered separately.
(a) The first class embraces the proceeds of that part of the mortgaged property which was converted into
cash and paid into the bank. These proceeds amount to P145,646.15. Since the lower court has expressly
ruled that the payment of this amount was a satisfaction pro tanto of the mortgage (Exhibit A) and the
defendants are prosecuting no exception to this ruling, there is no need to justify the latter by argument and
authority.
(b) The second class embraces the excess proceeds of specially pledged property over the amounts
secured by such pledges. By this is meant that after the execution of the mortgage (Exhibit A) the bank
advanced various sums of money to Reyes from time to time and took as security therefor pledges of certain
assets of Reyes which were not covered by the mortgage Exhibit A. The total amount thus advanced and
secured by these special pledges was P25,627.25. The property thus pledged was subsequently disposed
of and the proceeds, paid into the bank, amounted to 37,739.75. The excess proceeds of the pledges over
the total amount of the advances was thus P12,112.50. This latter amount the lower court applies in pro
tanto satisfaction of the mortgage, and for like reasons as before, it is wholly unnecessary to justify this
ruling.
(c) The third class embraces the unencumbered residue of Reyes' assets, neither mortgaged nor pledged
unto the bank, but paid in from time to time to the aggregate total of P96,781.75. The plaintiff contends that
this amount must be legally considered as paid in satisfaction pro tanto of the mortgage debt and appeals
from the failure of the lower court so to do.
Counsel then says that the express agreement referred to is found in paragraph 15 of the bank's mortgage and
pledge, Exhibit A, in which, he asserts, "the parties stipulated that in addition to the securities therein constituted,
the mortgagor obligated all of his property, present and future, to the payment of the mortgage debt, and agreed to
pay its proceeds into the bank so long as that mortgage debt was not wholly liquidated." The paragraph from which
he draws this conclusion reads as follows:
Don Francisco Reyes y Mijares, in addition to the properties above mentioned as mortgaged and pledged,
also charges as security for the payment of said obligation in favor of the bank his other property, present
and future especially those debts which are now due him or which may hereafter become due him, and also
the commission to which he is entitled or becomes entitled for the collection of claims against the Spanish
Government which have been entrusted to him for collection, which said debts he obligates himself to turn
over to the bank upon receiving them, if the debt which is the basis of this obligation has not been fully paid.
In answering this proposition of plaintiff's counsel, these points should be noted:
The provision just quoted, in so far as it seeks to mortgage or pledge the property mentioned therein, is wholly
without force or effect. The property sought to be pledged is not described or identified. We do not know, from the
terms of the clause or from any other source, that any of it really existed at the time of the execution of the clause.
As a pledge or personally it is wholly ineffective, not only for indefiniteness but also for the reason that the property
pledged, if any, was not delivered. As a mortgage of realty it is equally ineffective for the reason that, to be valid
under the provisions of the Civil Code and the Mortgage Law, the mortgage must describe the property mortgaged
so that it is clearly identified and identifiable. Sanchez Roman, in his work on the Civil Law (vol. 3, pp. 828, 829)
correctly states the law as to mortgages. He says:
A logical consequence of the plan of publicity of mortgages is the disappearance from our legal system
of general mortgages, with the consequent repeal of all laws prescribing and authorizing them; and the
stipulation of general mortgage which may hereafter be placed in contracts between private parties will
signify nothing, as in fact it has signified nothing since the establishment of the mortgage office (contaduria
de hipotecas). Even though limited to the property existing at the time, and not, as was usual, extending to
the property which might thereafter be acquired, a general mortgage involves lack of publicity in the
mortgage, because it can be called public just as soon as it is inscribed in the registro with a detailed
statement of the state affected and of the extent of the guarantee. A definite statement of the property
mortgaged is an essential element of the publicity.
Even aside from this consideration, which is conclusive in the plan adopted, general mortgages would not
have gone unabolished, since their very extension renders them invalid. Because of the very fact that they
include all the present and future property of the debtor, he has to remain free to alienate it; and if he does
alienate all of it, the guarantee disappears, without recourse against the purchaser, thus bringing about
actual nullification of the right to the thing, because a mortgage that does not go with the estate, whoever
may be its owner, does not deserve the name of mortgage.
This paragraph being entirely ineffective and valueless as a mortgage or pledge, the agreement to pay the proceeds
of any portion of the property or credits therein mentioned upon the mortgage debt would be equally ineffective and
valueless, as such an agreement is purely subsidiary to the agreement of mortgage and pledge, and is wholly
dependent upon it. The latter failing for illegality, or at least, invalidity, the dependent agreement falls with it.
Moreover, even though we are wrong in our assertion that said paragraph 15 is wholly futile for the purpose for
which it is relied upon by the plaintiff, nevertheless, the stipulation of facts prevents plaintiff from taking the position
which counsel takes in this connection. Paragraph X of said stipulation reads:
That from the 4th day of March, 1905, to the 31st day of December, 1907, the account of the defendant
Reyes with the defendant bank has been credited from time to time, as shown by Exhibit D, hereunto
attached, with various amounts aggregating the sum total of P297,418.27, derived from the following
sources, to wit:
(a) Amounts realized from time to time upon

the securities given by instrument of
March 4, 1905 (Exhibit A) P145,646.15
(b) Amounts realized from time to time upon

the securities given by instrument of
May 4, 1905 (Exhibit B) P 15,098.12
(c) Amounts realized from time to time upon

additional pledges of merchandise other
than those enumerated in Exhibits A
and B 37,739.75
NOTE. — This sum of P37,739.75

realized by the bank from special pledges of
merchandise, resulted from advances
made to Reyes upon such special pledges
as follows:
April 13, 1905 P2,960.00

April 29, 1905 9,800.32
May 13, 1905 2,483.34
May 27, 1905 1,999.91
June 10, 1905 695.04
July 17, 1905 1,490.00
July 20, 1905 6,198.64
—————
25,627.25
(d) Amounts erroneously credited to account

of defendant Reyes and corrected by
cross entries to his debit 2,152.50.
(e) Amounts paid to the bank from time to

time by defendant Reyes, realized by
him from sources and credits other than
those set out in Exhibits A and B or
subject of the special pledges referred
to in par. C above 96,781.75
NOTE. — This P96,781.75 includes the
sum of P2,039.14 standing to Reyes'
credit on the books of the bank on
March 1, 1905, and deducted from his
indebtedness of P226,117.38 on March 4,
1905, as shown by Exhibit D.
By this paragraph of the stipulation of facts it is clear that the sum of P96,781.75 was received by Reyes "from
sources and credits other than those set out in Exhibits A and B or subject to the special pledges referred to in
paragraph A above." But paragraph 15 to which plaintiff's counsel refers as giving a right to plaintiff to require that
said sum of P96,781.75 be applied on the mortgage debt, said paragraph, asserts plaintiff's counsel, covering all of
the other property of Reyes beyond that described in the other paragraphs of said exhibit and making its proceeds
applicable to the payment of the mortgage debt, is a paragraph of Exhibit A; and for that reason the property therein
described is excluded as the source of said sum of P96,781.75 by express stipulation of subdivision (c) of
Paragraph X of the stipulation of facts, which agrees, as we have seen, that said sum came "from sources and
credits other than those set out in Exhibits A and B." If we exclude this stipulation of fact from consideration we are
left without facts to sustain plaintiff's contention. There would be then in the whole case not a word of evidence as to
the origin and source of said sum of P96,781.75. Its origin or source being unknown, there is no means of
determining the express agreement of the parties as to its application, their express agreements relating only to
sums whose sources are fully known and plainly set forth.
Finally, we can not overlook the fact that said sum of P96,781.75 is referred to by plaintiff's counsel in his brief as
having been derived from "independent sources," as is seen from the quotation from his brief, above (p. 9).
These facts and observations entirely dispose of appellant's first proposition, that there was an express agreement
between the parties to Exhibit A that the P96, 781.75 should be applied to the payment of the debt to the defendant
bank.
The second proposition presented by the appellant to which we direct our attention is:
That in any event the payments made by the mortgage debtor to the mortgage creditor are legally applicable
to the satisfaction of the mortgage debt.
He then proceeds to discuss the law governing the application of payment, asserting that the proper rule to be
applied to this case "is that furnished by article 1174 of the Civil Code, which makes these payments applicable to
the more onerous of the two debts. As between the mortgage debt and the unsecured advances there can be no
doubt that the former was the more onerous. By virtue of the mortgage debt, all of Reyes' real estate and a large
portion of his personal property was in the control of the bank; he was obliged to lay open his business affairs, his
books, accounts and other documents to the bank; he was obliged to allow the bank to intervene in his business
affairs and to implicitly obey the bank's directions therein; he was obliged to turn over his entire income to the bank;
he was the obligee of a score of covenants all set forth in the instrument of mortgage. By virtue of the unsecured
advances, on the other hand, Reyes was a simple debtor for the amount thereof. It imports nothing that Reyes, in
his present insolvent indifference, at the dictates of the bank, may voice a preference for the payment of one debtor
or the other. The rule of law makes the payment applicable, not to the debt chosen by the debtor, but to that which
is the more onerous in fact." Counsel's discussion of this point goes, as it necessarily must, upon the assumption
that said sum of P96,781.75 was in fact a payment and not a deposit. That assumption is based on two grounds:
One. That there was an express agreement that all money from the source whence came said sum should be
turned over to the bank as payments. The other. That said sum is found credited to Reyes in the only account kept
by the bank between it and Reyes, and that such credit is an application of said sum to the payment of the debt
which, having once been made, can not be recalled. The first ground, as we have already seen, is untenable. There
was no such express agreement. The second ground we will discuss along with the proposition whether or not said
sum was really a payment at all.
We have already twice said that there was no express agreement that the proceeds of all of Reyes' property other
than that specifically described in Exhibit A should be applied in payment of the bank's debt. Not only is this so, but
we for farther and say that it was not even agreed that all the rents and incomes of the property specifically describe
in Exhibit A should be so applied. It should be remembered that Reyes was to continue in business. The bank
distinctly recognized that. Paragraph 18 of Exhibit A, translated, provides:
18. Don Francisco Reyes y Mijares hereby agrees to render an account to the bank whenever deemed
necessary by the latter of all of his business transactions, and to permit the bank to examine the books,
documents and other papers which may be necessary in connection with any investigation which the bank
may desire to make as to the condition of the business, in which said matters the debtor hereby secures to
his creditor a direct intervention, and hereby promises to follow its instructions and suggestions.
It is obvious that Reyes could not run a business without using money to do so. If he were obliged to pay upon said
mortgage debt every dollar which came to him, from whatever source, the provision permitting him to continue in
business would be farcical. A business can not be run if the money received in the course thereof must instantly be
withdrawn and paid to the discharge f obligations wholly apart from the business itself. In the meantime he must
have something for the support and maintenance of his family. To meet this situation, in part, paragraph 13 was
inserted in Exhibit A. Translated it reads as follows:
13. The total amount of the proceeds of the securities given for the payment of this obligation shall be
deposited by Don Francisco Reyes y Mijares in the vaults of the bank, the same to be applied to the
payment of this obligation. The debtor likewise agrees to do the same with the proceeds of the rents and
dividends accruing to his real estate, securities, credits and shares as they are received by him, reserving to
himself, however, only such portions as the parties by mutual agreement may determine to be necessary to
meet the expenses of his commercial business and those of his family.
Particular attention is called to the last clause, giving Reyes the right to the rents and income of the property, real
and personal, to assist in the conduct of his business and the maintenance of his family and himself, as far as such
rents and incomes were sufficient for that purpose. Take this fact in connection with another. It is obvious that Reyes
could not continue in business without banking facilities. He must have a bank in which to make deposits and upon
which to draw checks and upon which drafts could be drawn. What more natural than to use the bank that had
already befriended him? From these facts we can readily see that not every peso delivered to the bank by Reyes
was necessarily to be applied to the payment of the mortgage debt, even though said peso came by way of rents
and income from the property actually included by specific description in Exhibit A. Moreover, Reyes had a large
amount of property not included in the bank's mortgage and pledge. This property was entirely unencumbered and
was free to be used by him in his business conducted after the execution of the mortgage and pledge to the bank. It
is the admitted evidence in the case that he actually did use substantially all of said property in that way. As a result,
such property, converted into cash or used as security, was delivered to the bank to that end. Witness to this fact
not only said P96,781.75 but also Exhibit B and numerous succeeding pledges. Here again we see moneys
delivered to the bank which were not necessarily to be applied to the payment of the debt secured by the mortgage
and pledge of the bank. Desiring to continue his business, Reyes was confronted with a stern necessity. He must
have money to run that business and he must have a bank in which to put it. If every dollar which he could muster
and deposit in the bank had to be applied to the payment of an old obligation by the very fact of that deposit, his
business was in a sorry plight. The stipulation between him and the bank that he should continue such business
would, under such conditions, lose all significance. It is thus clear that it is at least possible that there
was some money delivered at different times to the bank which, strictly speaking, was not intended to be used in
reduction of said original debt. It is, as we have seen, conceded that said sum of P96,781.75 is composed of such
moneys.
At this point, however, we are met with the contention of plaintiff, strongly and insistently urged by its counsel, that
Reyes and the bank can not be held to have had any other intention with respect to said sum of P96,781.75 than to
apply it to the payment of said original debt, because it was actually so applied on the books of the bank. Meeting
this contention it should be noticed:
1. That, as we have seen, there was, prior to the delivery of said sum to the bank, no express agreement that it was
to be applied to said debt.
2. That it nowhere appears that there was any implied agreement to do so. Plaintiff does not assert any such implied
agreement. Counsel rests his contention upon (a) an express agreement to apply, (b) application by operation of
law, and (c) the fact of actual application on the books of the bank.
3. That at the time of the delivery of said sum to the bank, the original debt was not yet due.
Take this fact in connection with the fact already discussed, that Reyes was to continue in business, that, as a
necessary result, he had to have banking facilities, that he must make deposits and draw checks, and that it would
be impossible to continue his business if all the money dedicated by him to its continuance had to be paid upon the
old obligation, and it is evident that it could not be assumed, presumed or implied that moneys so delivered to the
bank were intended by Reyes to be applied on the old obligation. It is certain that the bank, without the consent of
Reyes, had not right whatever so to apply them, for the reason that the debt was not yet due and the only
agreement between the parties as to the application of money of Reyes delivered by him to the bank
related solely and exclusively to the proceeds of the sale of the property specifically described in the mortgage and
pledge, of which said sum of P96,781.75 was concededly no part. Reyes was under no legal obligation to pay any
part of the indebtedness secured by the mortgage and pledge to the bank until June 4, 1905 (clause 10, Exhibit
A), unless he sold some of the property described therein. In such case the proceeds of the sale must be applied to
the payment of the debt. But the bank had absolutely no right, before the debt was due, to apply to its payment
moneys deposited by Reyes which had been obtained from other sources. There was no agreement to which Reyes
was a party that he should apply all of his assets to the payment of the said debt, especially before it was due. He
was not obliged to pay any portion of it before it was due. Under the agreement the bank could not oblige Reyes
before the debt was due to dispose of any of the property described in the mortgage and pledge of the bank, nor
could it do so itself. He had the right to dispose of any said property before the debt was due and apply the
proceeds; but he was not obliged to do so. The bank could foreclose only "in the event that the debt stated, with the
interest thereon, had not been paid at the time and to the amount hereinafter to be fixed." While this clause relates
to real estate only, the agreement was the same relative to the personal property. (See par. 12, Exhibit A.) By what
process of reasoning, then, can the conclusion be justified that said sum of P96,781.75 was applied to the payment
of the debt by operation of law, particularly when we have in mind the fact that said debt was not yet due?
No more can it be concluded that such application was made with the consent of Reyes.
Let us notice the conditions existing at the time the various sums constituting the total of said P96,781.75 were
delivered to the bank by Reyes.
We have already seen the necessity of Reyes having banking facilities, with the right to deposit and check, as a
prerequisite to the conduct of his business. We have also seen the impossibility of conducting his business if every
deposited in bank was to be applied, perforce, to the payment of the original mortgage debt. It has also been made
evident that such application could not have been within the intention of the parties as it would have been entirely at
variance with their intentions and purposes when they inserted in the mortgage and pledge paragraph 18, already
quoted. That instrument must be interpreted as a whole and, if possible, effect given to every part. While a term in a
contract may be, in effect, abrogated by the subsequent acts of the parties showing an intention so to do, to
accomplish such result such acts must be so inconsistent with the abrogated term as to make such a result
necessary. The mutual acts of parties are always presumed to be in fulfillment of their express agreements, and not
in violation thereof, unless the contrary clearly and necessarily appears.
From these observations alone it might be safely assumed that the mere fact of crediting the said sum on Reyes'
account on the books of the bank and the consequent apparent reduction of his general indebtedness (of all kinds)
to the bank, did not show an intention that said sum should be withdrawn from the uses of his business and
dedicated to the payment of a different obligation.
But reliance is not placed wholly on those observations. There are other facts and circumstances, even stronger,
which show that the parties could not have intended such result.
First. During the time that the sums constituting said sum of P96,781.75 were being deposited in the bank, Reyes
had drawn checks on the bank and the bank had honored drafts and obligations of Reyes to an amount exceeding
P160,000. In other words, during said time Reyes had drawn money from the bank so much faster than he had
deposited it that he had not only consumed the said sum of P96,781.75, but had overdrawn his current account
more than P50,000. This was the situation on May 4th. On that date, probably on the demand of the bank that he
make good the overdraft, Reyes executed another pledge to the bank (Exhibit B), the main features of which were:
(a) Reyes acknowledged that the bank had granted him an amplification amounting to P62,426.21 of the credit
given him by the said banking establishment on March 4th last (Exhibit B); (b) to secure this sum Reyes pledged to
the bank personal property described in said instrument; (c) it was agreed that in case the property pledged should
not realize a sum sufficient to pay the amount pledged, the property mortgaged and pledged by the instrument of
March 4, (Exhibit A) should be held liable to respond for the deficiency, and that the property pledged by the present
instrument should likewise respond for any deficiency arising under the instrument of March 4; (d) the time fixed by
the instrument for the payment of said sum was one month, thereby bringing the indebtedness under both pledges
due at the same time, June 4, 1905. The transactions between Reyes and the bank leading up to the result just
noted are significant. From the very beginning deposits were made by Reyes and checks drawn by him against
them as a matter of course, as would naturally be expected from the fact that Reyes was continuing his business
and the necessities, already noted, which such continuance laid upon him. During all the month of March and until
toward the middle of April, the deposits were slightly in excess of the withdrawals. On April 13, two checks were
drawn upon the bank by Reyes, one of P464.15 and another of P9,975.90. On the same day he seems to have
been required to give security by way of pledge in the sum of P2,960. On April 24 Reyes drew on the bank for nearly
P30,000, and on the 26th and 29th other withdrawals were made. On May 2 and 3 checks were drawn amounting to
nearly P40,000. On the 4th of May, as we have seen, the pledge to secure P62,426.21 was required and given.
These facts seem to indicate that Reyes and the bank treated the checking account as a thing quite different from
the pledge account of P226,117.38. While it is true that the bank permitted Reyes to overdraw his checking account
to the extent of more than P130,000, this was undoubtedly done under the belief, clearly well founded, that the
pledges which the bank held on the property of Reyes could be continued and extended to secure the payment of
said overdraft.
Second. In the pledge of May 4 (Exhibit B), given eight days before the execution of the plaintiff's mortgage, it is
stated that the sum secured by the pledge was to be credited to Reyes' "account current with the bank." This
phrase, under the circumstances, and particularly in view of the fact that checks were immediately drawn against it,
clearly imports a check and deposit account. To give one a credit in a "current account" with a bank is to give him a
checking credit. No other meaning is possible. That money was delivered to the bank and that checks were drawn
against it is unquestioned. That this was repeated almost daily, and frequently many times a day, month after
month, for more than two years, is admitted. If this does not make a check and deposit account, nothing can. The
method of bookkeeping is not decisive. It does not change the essential nature of the transaction. What the parties
actually did and what they understood they were doing is the important thing. The intention of the parties governs. It
was clearly not the intention of Reyes, in delivering money to be checked against, that it should go in satisfaction of
the original debt. If it were so applied, it could not be checked against, as it legally ceased to exist as soon as
applied to such payment. It borders on the absurd to say that one would deposit money to create a checking
account with the intention that said account should be instantly destroyed by the application of the sum deposited to
the satisfaction of another obligation. Under such circumstances no check account could possibly be created till the
obligation was fully paid. But this would defeat the very object of the deposit. The purpose and intention of Reyes
and the bank were to provide means and facilities by which Reyes could continue his business. To do this he must
have resources, banking facilities, must make deposits and draw checks. But if, by the application of his deposits
instantly to the payment of an outside obligation, it was impossible to create a check account, what would he draw
against? He could not draw against the original debt, as that was a debt and not a credit. He could not draw against
the deposit, as that had been destroyed by its application to the debt. There is nothing which a check can be drawn
against except a checking account. That can be created only by actual deposit of money or by a credit extended by
the bank. The account in the present case was created by a combination of both methods. Reyes made deposits
and the bank gave him a checking credit by permitting him to overdraw. Certainly Reyes could not ask for more
generous treatment; nor could anyone who occupied his shoes then or thereafter. He could not have had the
hardihood to ask the bank to credit all his deposits on the secured debt, thereby releasing pro tanto the property
mortgaged and pledged to secure that debt, and still permit him to have the same checking credit which he would
have had if the deposits had not been so applied. Such a method would speedily have transformed the secured
debt of the bank into an unsecured one of precisely the same amount. To illustrate: The secured debt was, in round
numbers, P226,000. Let us suppose that, during the first week after securing the debt, Reyes had deposited in cash
P100,000, and during the second week P126,000, also in cash, said sums being from sources entirely independent
of the property mortgaged and pledged to secure the debt. Let us suppose, as plaintiff contends they were, that
these two sums had been credited on the secured debt. The debt would have been fully paid and the mortgage and
pledge given to secure it fully discharged. Suppose, further, that during said two weeks Reyes had drawn checks for
P226,000 in the aggregate, which the bank had honored. What would have been the result? By this method, the
bank's secured debt, in two short weeks, would have been changed into one entirely unsecured. This is exactly
what the plaintiff claims actually happened in the case at bar, substituting the real amounts for the partly fictitious
ones given in the illustration. Under this theory the bank would b the worse off the more deposits it received, and
Reyes the better off the more he overdrew. Every check would be an overdraft.
Moreover, that the delivery of said sum of P96,781.75 was not intended as a payment but, rather, as a deposit, is
shown by the struggle which Reyes made to maintain a checking account in the bank. We have already referred to
this. He was almost continuously hard up. He was always struggling to get money to pay his current expenses. To
met these he pledged and mortgaged and overdrew. In spite of it all his head was almost continually under water.
Under such conditions is it reasonable to say that, after all that struggle and worry, he obtained money to deposit
only to have it used to some other purpose? On the other hand, it is a fair interpretation of the situation to conclude
that, after all its endeavor to keep Reyes from overdrawing, the bank, nevertheless, not only permitted the very thing
it sought to avoid, namely, the overdrafts, but also perpetrated the absurdity of voluntarily exchanging a debt
perfectly secured for such overdrafts, entirely unsecured? Is it reasonable to conclude that it was the intention of the
bank thus to throw away the very security which it had been at so much pains to secure? Whatever the form in
which the books were kept, the parties acted and dealt precisely as if Reyes had not only a secured debt account
but also a current account for checking and general banking purposes. The sum in dispute here was deposited and
wholly drawn out by Reyes, by general banking operations, before June 4, 1905, the date on which the mortgage
and pledges of the bank, Exhibits A and B, matured. The debt of P226,117.38 not having been due when the
P96,781.75 was deposited and withdrawn, and there having been no express agreement for its application to the
payment of said debt, said sum could not have been so applied without the consent of Reyes, express or implied.
We do not believe that such consent is shown merely by the method of bookkeeping pursued by the bank,
particularly in view of the incessant struggle and endeavor put forth by Reyes to create a check account. We do not
think such intention is sufficiently shown on the part of the bank, in view of the strikingly pernicious effect that such
application would have had upon the interests of the bank itself, namely, the exchange of a debt perfectly secured
for one not secured, with no consideration whatever for such exchange.
Again, there was no necessity which called for the application of said sum as a payment on the original debt. It was
secured by property worth more than P400,000, according to the value put upon it by the parties themselves. This
was, so far as appears, sufficient security. There existed, therefore, no particular or pressing reason why the bank
should desire payments upon the debt so secured, especially before it was due. This becomes more apparent when
we recall, again, the extremely pressing need of Reyes for money for current uses and the very injurious results to
the bank which would result from such application.
In most cases the account itself distinguishes between the money delivered to the bank by Reyes for checking
purposes and for payment purposes, referring by the latter phrase to money obtained from the sale of some of the
mortgaged or pledged property. In the one case it always refers to the money as a deposit, "ingreso", and in the
others it is generally entered thus: "Recibido del mismo para amortizar su credito, importe de 78 acciones de la
Electricista." Or: "Recibido para amortizar su credito, importe de 78 acciones de la Electricista." Or: "Recibidas para
amortizar s. credito medte. entrega del mismo del P. No. 421 de Minas de Carbon de Batan." Or "Recibido para
amortizar s. credito medte. entrega al mismo del P. 413 de San Nicola Iron". Or "Su ingreso para amortizar s.
credito mediante entrega al mismo del P. No. 417 de la Vda. de M. Soler" Or "Su ing.o para amortizar s. credito por
cobro P. de Pons & Co."
The only question we are asked to decide being whether or not the said sum of P96,781.75 ought to have been
applied as a payment on the original debt instead of being regarded as a deposit in a check account, we are not
called upon to determine the amount actually due on said debt except to affirm the finding made by the trial court.
Nevertheless in closing, we desire to refer to a subject which touches the question of the amount due indirectly. We
have already said that, so far as the personality described in the mortgage and pledge of defendant bank is
concerned, the plaintiff took absolutely by its second mortgage and pledge (Exhibit C). The pledge was wholly
without virtue or effect as to the property itself. That this is so due, among other things, to the fact that there was no
delivery by the pledgor to the pledgee of the property sought to be pledged. (Civil Code, art. 1863.) Property held in
lawful pledge by one can not legally be pledged to another while the first pledge subsists. (Civil Code, art. 1866;
Manresa, in his discussion of that article, vol. 12.) Moreover, the defendant bank had the right to extend the pledge
created by Exhibit A until every other obligation which Reyes contracted with said bank subsequently thereto and
which was due before the complete liquidation of the first debt should be fully satisfied. (Art. 1866, Civil Code;
Manresa, in his discussion of this article, vol. 12.) Plaintiff's Exhibit C, its alleged second mortgage and pledge,
must, therefore, be construed as nothing more than a mortgage on the real estate covered by the first mortgage. It
does not touch, by way of lien, any of the personal property involved in this suit. It is, in law, simply a mortgage on
the real estate described therein. This, taken in connection with the other effect above set forth, that all of the
personal property described in the bank's first pledge (Exhibit A) could be held by said bank under said pledge for
the payment not only for the mortgage-pledge debt but also of any other debt contracted by Reyes and due before
the mortgage-pledge debt was fully paid, may carry some important consequences in determining how much is due,
when taken in connection with the facts now to be stated. It should be noted that, from the terms of Exhibit A,
primarily, the real estate is charged with the payment of a specified portion of the mortgage-pledge debt, namely,
P88,000; and the personal property with P138,117.38. While it is provided in Exhibit A that the real estate shall
respond for the deficiency should the personal property not produce P138,117.38, and, vice versa, the personal
property shall respond should the real estate not produce P88,000, nevertheless, that can not be required until all of
the property dedicated to its particular purpose has been actually put thereto. In other words, the real estate can not
be used to pay any part of the P138,117.38 until all of the personal property has been used toward paying that sum.
Nor can any portion of the personal property be used to pay any part of the P88,000 until all of the real estate has
been applied to such payment. It appears from Exhibit E that by far the greater part of the real estate yet remains
unsold and has been in no way applied to the reduction of the P88,000. There has been received from the proceeds
of the real estate (and from the income, the amount of which we do not know) only the sum of P19,070.23. It is
manifest, therefore, that no part of the personal property or the income therefrom, if any, could have been applied to
relieve the real estate from its share of the burden of the debt during the time included within the scope of this
action. On the other hand, a considerable part of the charge imposed upon the personal property still remains
unpaid, a portion of said property still remaining in the hands of the bank unsold and unused for the reduction of
said debt. There has been realized from the personal property the sum of P126,575.92. Its share of the burden was
P138,117.38. With interest added, there would remain a considerable balance due from the personal property.
These facts are important for the reason that inasmuch as plaintiff's Exhibit C touches by way of lien nothing but the
real estate, it is evident that its mortgage is effective as a lien only to the extent, at the very utmost, to which the real
estate has been relieved of its burden P88,000.
We are of the opinion that, from every point of view, regarding the case from the standpoint of its separate elements
and as a whole, it is clear that the intention of the parties, Reyes and the bank, was that the said sum of P96,781,75
should be considered as a deposit instead of a payment, and we so hold. No prejudice to the plaintiff having been
shown as a result of the carrying out of such intention, there is no need of further discussion.
The judgment of the court below is affirmed, without special findings as to costs. So ordered.
Torres, Johnson, Carson, and Trent, JJ., concur.
40) Sps Cacayorin vs Armed Forces and Police Mutual Benefit

Association Inc., GR No. 171298, April 15, 2013
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 171298 April 15, 2013
SPOUSES OSCAR and THELMA CACAYORIN, Petitioners,

vs.
ARMED FORCES AND POLICE MUTUAL BENEFIT ASSOCIATION, INC., Respondent.
DECISION
DEL CASTILLO, J.:
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 Decision2 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 3 denying
petitioners' Motion for Reconsideration.4
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 Agreement 5 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 guaranty 6 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. 37017 8 (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. 10
In July 2003, petitioners filed a Complaint 11 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
AFPMBAI thus instituted CA-G.R. SP No. 84446, which is a Petition for Certiorari 18 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 Comment 20 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 Comment 25 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.
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. Elsewhere, what may be made
1âwphi1
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.
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.
MARIANO C. DEL CASTILLO

Associate Justice
WE CONCUR:
ANTONIO T. CARPIO
Associate Justice
Chairperson
DIOSDADO M. PERALTA* JOSE PORTUGAL PEREZ

ESTELA M. PERLAS-BERNABE
Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned
to the writer of the opinion of the Court's Division.
ANTONIO T. CARPIO
Associate Justice
Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the
conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of
the opinion of the Court's Division.
MARIA LOURDES P. A. SERENO

Chief Justice
Footnotes
* Per Raffle dated April 10, 2013.
1
Rollo, pp. 9-30.
2
Id. at 95-103; penned by Associate Justice Andres B. Reyes, Jr. and concurred in by Associate
JusticesRosmari D. Carandang and Monina Arevalo-Zenarosa.
3
Id. at Ill.
4
Id. at 204-109.
5
Id. at 149-151.
6
CA rollo, p. 26.
7
Id. at 27-28.
8
Id. at 29.
9
Id. (dorsal).
10
Rollo, p. 119.
11
Id. at 45-51.
12
Id. at 48-49.
13
Id. at 52-57.
14
The Subdivision and Condominium Buyers' Protective Decree.
15
Rollo, pp. 66-68; penned by Judge Perfecto E. Pe. The Order decreed as follows:
ALL THE FOREGOING CONSIDERED, the Court hereby denies the motion filed by the plaintiffs
thruCounsel only as against the defendant AFPMBAI, but declared [sic] in default the other
defendant PDIC.The Court hereby orders the defendant AFPMBAI to file its necessary pleading
within fifteen (15) days from receipt of this order.
16
CA rollo, pp. 54-58.
17
Id. at 23.
18
Id. at 2-19.
19
Rollo, pp. 102-103.
20
Id. at 114-130.
Bulao v. Court of Appeals, G.R. No. 101983, February 1, 1993, 218 SCRA 321, 323, citing Magay v.
21
Estiandan, 161 Phil. 586, 590 (1976).
22
The Rural Bank of San Teodoro.
23
Rollo, pp. 47-48.
24
Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept
it, the debtor shall be released from responsibility by the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases:
(1) When the creditor is absent or unknown, or does not appear at the place of payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.
25
Rollo, p. 119.
26
Soco v. Hon. Militante, 208 Phil. 151, 159 (1983); Mclaughlin v. Court of Appeals, 229 Phil. 8, 18 (1986);
Meat Packing Corporation of the Philippines v. Sandiganbayan, 411 Phil. 959, 973 (2001); B.E. San Diego,
Inc. v. Alzul, G.R. No. 169501, June 8, 2007, 524 SCRA 402, 426, 428-429.
27
Soco v. Hon. Militante, supra at 160-161.
41) Dalton vs FGR Realty and Development Corporation GR No.
172577, January 19 2011
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 172577 January 19, 2011
SOLEDAD DALTON,
vs.
Petitioner, FGR REALTY AND DEVELOPMENT CORPORATION, FELIX NG, NENITA NG, and FLORA R.
DAYRIT or FLORA REGNER, Respondents.
RESOLUTION
CARPIO, J.:
The Case
This is a petition1 for review on certiorari under Rule 45 of the Rules of Court. The petition challenges the 9
November 2005 Decision2 and 10 April 2006 Resolution3 of the Court of Appeals in CA-G.R. CV No. 76536. The
Court of Appeals affirmed the 26 February 2002 Decision 4 of the Regional Trial Court (RTC), Judicial Region 7,
Branch 13, Cebu City, in Civil Case No. CEB 4218.
The Facts
Flora R. Dayrit (Dayrit) owned a 1,811-square meter parcel of land located at the corner of Rama Avenue and Velez
Street in Cebu City. Petitioner Soledad Dalton (Dalton), Clemente Sasam, Romulo Villalonga, Miguela Villarente,
Aniceta Fuentes, Perla Pormento, Bonifacio Cabajar, Carmencita Yuson, Angel Ponce, Pedro Regudo, Pedro
Quebedo, Mary Cabanlit, Marciana Encabo and Dolores Lim (Sasam, et al.) leased portions of the property.
In June 1985, Dayrit sold the property to respondent FGR Realty and Development Corporation (FGR). In August
1985, Dayrit and FGR stopped accepting rental payments because they wanted to terminate the lease agreements
with Dalton and Sasam, et al.
In a complaint5 dated 11 September 1985, Dalton and Sasam, et al. consigned the rental payments with the RTC.
They failed to notify Dayrit and FGR about the consignation. In motions dated 27 March 1987, 6 10 November
1987,7 8 July 1988,8 and 28 November 1994,9 Dayrit and FGR withdrew the rental payments. In their motions, Dayrit
and FGR reserved the right to question the validity of the consignation.
Dayrit, FGR and Sasam, et al. entered into compromise agreements dated 25 March 1997 10 and 20 June 1997.11 In
the compromise agreements, they agreed to abandon all claims against each other. Dalton did not enter into a
compromise agreement with Dayrit and FGR.
The RTC’s Ruling
In its 26 February 2002 Decision, the RTC dismissed the 11 September 1985 complaint and ordered Dalton to
vacate the property. The RTC held that:
Soledad Dalton built a house which she initially used as a dwelling and store space. She vacated the premises
when her children got married. She transferred her residence near F. Ramos Public Market, Cebu City.
She constructed the 20 feet by 20 feet floor area house sometime in 1973. The last monthly rental was ₱69.00.
When defendants refused to accept rental and demanded vacation of the premises, she consignated [sic] her
monthly rentals in court.
xxxx
It is very clear from the facts that there was no valid consignation made.
The requisites of consignation are as follows:
1. The existence of a valid debt.
2. Valid prior tender, unless tender is excuse [sic];
3. Prior notice of consignation (before deposit)
4. Actual consignation (deposit);
5. Subsequent notice of consignation;
Requisite Nos. 3 and 5 are absent or were not complied with. It is very clear that there were no prior notices of
consignation (before deposit) and subsequent notices of consignation (after deposit)
Besides, the last deposit was made on December 21, 1988. At the time Dalton testified on December 22, 1999, she
did not present evidence of payment in 1999. She had not, therefore, religiously paid her monthly obligation.
By clear preponderance of evidence, defendants have established that plaintiff was no longer residing at Eskina
Banawa at the time she testified in court. She vacated her house and converted it into a store or business
establishment. This is buttressed by the testimony of Rogelio Capacio, the court’s appointed commissioner, who
submitted a report, the full text of which reads as follows:
REPORT AND/OR OBSERVATION
"The store and/or dwelling subject to ocular inspection is stuated [sic] on the left portion of the road which is about
fifty-five (55) meters from the corner of Banawa-Guadalupe Streets, when turning right heading towards the direction
of Guadalupe Church, if travelling from the Capitol Building.
I observed that when we arrived at the ocular inspection site, Mrs. Soledad Dalton with the use of a key opened the
lock of a closed door. She claimed that it was a part of the dwelling which she occupies and was utilized as a store.
There were few saleable items inside said space."
Soledad Dalton did not take exception to the said report.
Two witnesses who were former sub-lessees testified and clearly established that Mrs. Dalton use the house for
business purposes and not for dwelling.12
Dalton appealed to the Court of Appeals.
The Court of Appeals’ Ruling
In its 9 November 2005 Decision, the Court of Appeals affirmed the RTC’s 26 February 2002 Decision. The Court of
Appeals held that:
After a careful review of the facts and evidence in this case, we find no basis for overturning the decision of the
lower court dismissing plaintiffs-appellants’ complaint, as we find that no valid consignation was made by the
plaintiff-appellant.
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 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.
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. It had been consistently held that compliance with these requisites is mandatory.
No error, therefore, can be attributed to the lower court when it held that the consignation made by the plaintiff-
appellant was invalid for failure to meet requisites 3 and 5 of a valid consignation (i.e., previous notice of the
consignation given to the person interested in the performance of the obligation and, after the consignation had
been made, the person interested was notified thereof).
Plaintiff-appellant failed to notify defendants-appellees of her intention to consign the amount due to them as
rentals. She, however, justifies such failure by claiming that there had been substantial compliance with the said
requirement of notice upon the service of the complaint on the defendants-appellees together with the summons.
We do not agree with such contention.
The prevailing rule is that substantial compliance with the requisites of a valid consignation is not enough. In
Licuanan vs. Diaz, reiterating the ruling in Soco vs. Militante, the Supreme Court had the occasion to rule thus:
"In addition, it must be stated that in the case of Soco v. Militante (123 SCRA 160, 166-167 [1983]), this Court ruled
that the codal provisions of the Civil Code dealing with consignation (Articles 1252-1261) should be accorded
mandatory construction —
We do not agree with the questioned decision. We hold that the essential requisites of a valid consignation must be
complied with fully and strictly in accordance with the law. Articles 1256-1261, New Civil Code. That these Articles
must be accorded a mandatory construction is clearly evident and plain from the very language of the codal
provisions themselves which require absolute compliance with the essential requisites therein provided. Substantial
compliance is not enough for that would render only directory construction of the law. The use of the words "shall"
and "must [sic] which are imperative, operating to impose a duty which may be enforced, positively indicated that all
the essential requisites of a valid consignation must be complied with. The Civil Code Articles expressly and
explicitly direct what must be essentially done in order that consignation shall be valid and effectual..."
Clearly then, no valid consignation was made by the plaintiff-appellant for she did not give notice to the defendants-
appellees of her intention to so consign her rental payments. Without any announcement of the intention to resort to
consignation first having been made to persons interested in the fulfillment of the obligation, the consignation as a
means of payment is void.
As to the other issues raised by the plaintiff-appellant in her second and third assigned errors, we hold that the
ruling of the lower court on such issues is supported by the evidence adduced in this case.
That plaintiff-appellant is not residing at the leased premises in Eskina Banawa and that she is using the same for
business purposes, not as dwelling place, is amply supported by the testimony of two of plaintiff-appellant’s sub-
lessees. The Commissioner’s Report submitted by Rogelio Capacio, who was commissioned by the lower court to
conduct an ocular inspection of the leased premises, further lends support to the lower court’s findings. On the other
hand, plaintiff-appellant only has her self-serving claims that she is residing at the leased premises in Eskina
Banawa to prove her continued use of the leased premises as dwelling place.
There is thus no merit to plaintiff-appellant’s fourth assigned error. The lower court acted within its authority in
ordering the plaintiff-appellant to vacate the leased premises. The evidence shows that plaintiff-appellant had failed
to continuously pay the rentals due to the defendants-appellees. It was therefore within the powers of the lower
court to grant such other relief and remedies equitable under the circumstances.
In sum, there having been no valid consignation and with the plaintiff-appellant having failed to pay the rentals due
to the defendants-appellees, no error can be attributed to the lower court in rendering its assailed decision. 13
Hence, the present petition. Dalton raises as issues that the Court of Appeals erred in ruling that (1) the
consignation was void, and (2) Dalton failed to pay rent.
The petition is unmeritorious.
Dalton claims that, "the issue as to whether the consignation made by the petitioner is valid or not for lack of notice
has already been rendered moot and academic with the withdrawal by the private respondents of the amounts
consigned and deposited by the petitioner as rental of the subject premises." 14
The Court is not impressed. First, in withdrawing the amounts consigned, Dayrit and FGR expressly reserved the
right to question the validity of the consignation. In Riesenbeck v. Court of Appeals,15 the Court held that:
A sensu contrario, when the creditor’s acceptance of the money consigned is conditional and with
reservations, he is not deemed to have waived the claims he reserved against his debtor. Thus, when the
amount consigned does not cover the entire obligation, the creditor may accept it, reserving his right to the balance
(Tolentino, Civil Code of the Phil., Vol. IV, 1973 Ed., p. 317, citing 3 Llerena 263). The same factual milieu obtains
here because the respondent creditor accepted with reservation the amount consigned in court by the
petitioner-debtor. Therefore, the creditor is not barred from raising his other claims, as he did in his answer
with special defenses and counterclaim against petitioner-debtor.
As respondent-creditor’s acceptance of the amount consigned was with reservations, it did not completely
extinguish the entire indebtedness of the petitioner-debtor. It is apposite to note here that consignation is
completed at the time the creditor accepts the same without objections, or, if he objects, at the time the
court declares that it has been validly made in accordance with law.16 (Emphasis supplied)
Second, compliance with the requisites of a valid consignation is mandatory. Failure to comply strictly with any of
the requisites will render the consignation void. Substantial compliance is not enough.
In Insular Life Assurance Company, Ltd. v. Toyota Bel-Air, Inc.,17 the Court enumerated the requisites of a valid
consignation: (1) a debt due; (2) the creditor to whom tender of payment was made refused without just cause to
accept the payment, or the creditor was absent, unknown or incapacitated, or several persons claimed the same
right to collect, or the title of the obligation was lost; (3) the person interested in the performance of the
obligation was given notice before consignation was made; (4) the amount was placed at the disposal of the
court; and (5) the person interested in the performance of the obligation was given notice after the
consignation was made.
Articles 1257 and 1258 of the Civil Code state, respectively:
Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be announced
to the persons interested in the fulfillment of the obligation.
The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which
regulate payment.
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 supplied)
The giving of notice to the persons interested in the performance of the obligation is mandatory. Failure to notify the
persons interested in the performance of the obligation will render the consignation void. In Ramos v. Sarao,18 the
Court held that, "All interested parties are to be notified of the consignation. Compliance with [this
requisite] is mandatory."19 In Valdellon v. Tengco,20 the Court held that:
Under Art. 1257 of our Civil Code, in order that consignation of the thing due may release the obligor, it must
first be announced to the persons interested in the fulfillment of the obligation. The consignation shall be
ineffectual if it is not made strictly in consonance with the provisions which regulate payment. In said Article
1258, it is further stated that the consignation having been made, the interested party shall also be notified
thereof.21 (Emphasis supplied)
In Soco v. Militante, et al.,22 the Court held that:
We hold that the essential requisites of a valid consignation must be complied with fully and strictly in
accordance with the law, Articles 1256 to 1261, New Civil Code. That these Articles must be accorded a
mandatory construction is clearly evident and plain from the very language of the codal provisions themselves which
require absolute compliance with the essential requisites therein provided. Substantial compliance is not enough
for that would render only a directory construction to the law. The use of the words "shall" and "must" which
are imperative, operating to impose a duty which may be enforced, positively indicate that all the essential requisites
of a valid consignation must be complied with. The Civil Code Articles expressly and explicitly direct what must
be essentially done in order that consignation shall be valid and effectual.23 (Emphasis supplied)
Dalton claims that the Court of Appeals erred in ruling that she failed to pay rent. The Court is not impressed.
Section 1, Rule 45 of the Rules of Court states that petitions for review on certiorari "shall raise only questions of law
which must be distinctly set forth." In Pagsibigan v. People,24 the Court held that:
A petition for review under Rule 45 of the Rules of Court should cover only questions of law. Questions of fact are
not reviewable. A question of law exists when the doubt centers on what the law is on a certain set of facts. A
question of fact exists when the doubt centers on the truth or falsity of the alleged facts.
1avvphi1
There is a question of law if the issue raised is capable of being resolved without need of reviewing the probative
value of the evidence. The issue to be resolved must be limited to determining what the law is on a certain set of
facts. Once the issue invites a review of the evidence, the question posed is one of fact. 25
Whether Dalton failed to pay rent is a question of fact. It is not reviewable.
The factual findings of the lower courts are binding on the Court. The exceptions to this rule are (1) when there is
grave abuse of discretion; (2) when the findings are grounded on speculation; (3) when the inference made is
manifestly mistaken; (4) when the judgment of the Court of Appeals is based on a misapprehension of facts; (5)
when the factual findings are conflicting; (6) when the Court of Appeals went beyond the issues of the case and its
findings are contrary to the admissions of the parties; (7) when the Court of Appeals overlooked undisputed facts
which, if properly considered, would justify a different conclusion; (8) when the facts set forth by the petitioner are
not disputed by the respondent; and (9) when the findings of the Court of Appeals are premised on the absence of
evidence and are contradicted by the evidence on record. 26 Dalton did not show that any of these circumstances is
present.
WHEREFORE, the Court DENIES the petition. The Court AFFIRMS the 9 November 2005 Decision and 10 April
2006 Resolution of the Court of Appeals in CA-G.R. CV No. 76536.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
ANTONIO EDUARDO B. NACHURA
Associate Justice
DIOSDADO M. PERALTA ROBERTO A. ABAD

JOSE C. MENDOZA
Associate Justice
ATTESTATION
I attest that the conclusions in the above Resolution had been reached in consultation before the case was assigned
to the writer of the opinion of the Court’s Division.
ANTONIO T. CARPIO
Associate Justice
Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, I certify that the
conclusions in the above Resolution had been reached in consultation before the case was assigned to the writer of
the opinion of the Court’s Division.
RENATO C. CORONA
Chief Justice
Footnotes
1
Rollo, pp. 11-22.
2
Id. at 24-31. Penned by Associate Justice Isaias P. Dicdican, with Associate Justices Ramon M. Bato, Jr.
and Apolinario D. Bruselas, Jr. concurring.
3
Id. at 39-40.
4
CA rollo, pp. 23-30. Penned by Judge Meinrado P. Paredes.
5
Records, pp. 1-5.
6
Rollo, pp. 47-48.
7
Id. at 49-50.
8
Id. at 51-52.
9
Id. at 53-54.
10
Id. at 57-58.
11
Id. at 59-60.
12
13
Rollo, pp. 27-30.
14
Id. at 18.
15
G.R. No. 90359, 9 June 1992, 209 SCRA 656.
16
Id. at 659.
17
G.R. No. 137884, 28 March 2008, 550 SCRA 70, 89.
18
491 Phil. 288 (2005).
19
Id. at 305.
20
225 Phil. 279 (1986).
21
Id. at 327.
22
208 Phil. 151 (1983).
23
Id. at 153-154.
24
G.R. No. 163868, 4 June 2009, 588 SCRA 249.
25
Id. at 256.
26
Id. at 257.
42) Cabrera vs Lopez 84 PHIL 834

SECOND DIVISION
[G.R. No. L-3081. October 14, 1949.]
ANTONIO LACSON, Petitioner, v. HONORIO ROMERO ET AL., Respondents.
Cruz, Puno & Lacson for Petitioner.
The respondent Provincial Fiscal in his own behalf.
Solicitor General Felix Bautista Angelo and Assistant Solicitor Inocencio Rosal for
respondent Judge.
Avena, Villaflores & Lopez for other respondents.
SYLLABUS
1. PUBLIC OFFICERS; PROVINCIAL FISCAL; APPOINTMENT OF; INVOLVES SEVERAL STEPS. — The
appointment of provincial fiscal to be complete involves several steps. First, comes the nomination by
the President. Then to make that nomination valid and permanent, the Commission on Appointments
of the Legislature has to confirm said nomination. The last step is the acceptance thereof by the
appointee by his assumption of office. The first two steps, nomination and confirmation, constitute a
mere offer of a post. They are acts of the Executive and Legislative departments of the Government.
But the last necessary step to make the appointment complete and effective rests solely with the
appointee himself. He may or he may not accept the appointment or nomination as there is no power
in this country which can compel a man to accept an office.
2. ID.; ID.; APPOINTMENT AND TRANSFER TO ANOTHER PROVINCE IS EQUIVALENT TO REMOVAL OR

SEPARATION; ILLEGALITY. — The appointment and transfer of a provincial fiscal from one province
to another would mean his removal or separation from the first province. The reason is that a fiscal is
appointed for each province. Said removal is illegal and unlawful unless for cause as provided by law
and the Constitution, and the confirmation of the nomination by the Commission on Appointments
does not and cannot validate the removal, since the Constitution is equally binding on the
Legislature.
3. ID.; ID.; NATURE OF OFFICE. — A provincial fiscal who is nominated and appointed by the
President with the consent of the Commission on Appointments, is under section 671 (b) of the
Revised Administrative Code included in the unclassified service of the Civil Service.
4. ID.; ID.; CONSTITUTIONAL PROHIBITION; PRESIDENT WITH CONCURRENCE OF COMMISSION ON

APPOINTMENTS MAY NOT REMOVE FISCAL WITHOUT CAUSE. — A provincial fiscal as a civil service
official may not be removed from office even by the President who appointed him, and even with the
consent of the Commission on Appointments, except for cause. Article XII, section 4 of the
Constitution provides that no officer or employee in the Civil Service shall be removed or suspended
except for cause as provided by law. This constitutional prohibition is a limitation to the inherent
power of the Executive to remove those civil service officials whom he appoints.
5. ID.; ID.; TENURE OF OFFICE. — A provincial fiscal duly appointed, until he reaches the age of 65
has the right to continue in office unless sooner removed for cause. In other words, he enjoys tenure
of office, which is duly protected by statute and by the Constitution.
6. ID.; REMOVAL OR SUSPENSION OF A CIVIL SERVICE OFFICIAL OR EMPLOYEE, REQUISITES OF. —

By the mandate of sections 64 and 694 of the Revised Administrative Code, before a civil service
official or employee can be removed, there must first be an investigation at which he must be given a
fair hearing and an opportunity to defend himself.
7. ID.; REMOVAL WITHOUT LAWFUL CAUSE IN THE GUISE OF TRANSFER FROM ONE OFFICE TO
ANOTHER WITHOUT TRANSFEREE’S CONSENT, EFFECT OF. — To permit circumvention of the
constitutional prohibition (Art. XII, sec. 4) by allowing removal from office without lawful cause, in
the form or guise of transfers from one office to another, or from one province to another, without
the consent of the transferee, would blast the hopes of those young civil service officials and career
men and women, destroy their security and tenure of office and made for a subservient, discontented
and inefficient civil service force that sways with every political wind that blows and plays up to
whatever political party is in the saddle. That would be far from what the framers of our Constitution
contemplated and desired. Neither would that be our concept of a free and efficient Government
force, possessed of self-respect and reasonable ambition.
DECISION
MONTEMAYOR, J.:
Involved in these quo warranto proceedings filed directly with this Court is the Office of Provincial
Fiscal of Negros Oriental, and the right to said position as between the petitioner Antonio Lacson and
the respondent Honorio Romero.
The facts necessary for the decision in this case may be stated as follows: Petitioner Lacson was on
July 25, 1946, appointed by the President of the Philippines, provincial fiscal of Negros Oriental. The
appointment was confirmed by the Commission on Appointments on August 6, 1946. He took his
oath of office on August 10, 1946, and thereafter performed the duties of that office.
Upon recommendation of the Secretary of Justice, on May 17, 1949, the President nominated
petitioner Lacson to the post of provincial fiscal of Tarlac. On the same date, the President nominated
for the position of provincial fiscal of Negros Oriental respondent Romero. Both nominations were
simultaneously confirmed by the Commission on Appointments on May 19, 1949.
Lacson neither accepted the appointment nor assumed the office of fiscal of Tarlac. But respondent
Romero took his oath of office (the post of fiscal of Negros Oriental) in Manila on June 16, 1949,
notified the Solicitor General of the fact, and thereafter proceeded to his station. Upon arrival at
Dumaguete City, capital of Negros Oriental, he notified Lacson of his intention to take over the office
the following day, but Lacson objected. On June 24, 1949, Romero appeared in criminal case No.
4433 before Judge Gregorio S. Narvasa. In said appearance, petitioner Lacson filed his objection and
asked that Romero’s appearance be stricken from the record. After Romero had exhibited his
credentials as required by the court, Judge Narvasa on the same day denied the petition of Lacson
and recognized respondent Romero as the provincial fiscal of Negros Oriental. On June 27, 1949,
Romero appeared in Special Proceedings No. 630 before Judge Felicisimo Ocampo. Lacson again
objected to said appearance but the court overruled his objection. This will explain why Judges
Narvasa and Ocampo were made respondents in these quo warranto proceedings.
When petitioner Lacson requested payment of his salary for the period from June 16 to June 23,
1949 as provincial fiscal of Negros Oriental, Angel Paguia, Provincial Auditor and L. J. Alfabeto,
Provincial Treasurer turned down his claim and instead paid respondent Romero the salary for the
position of provincial fiscal from June 16, 1949, and continued paying it to him periodically up to the
present time. Their action was based on a reply given to their query, by the Secretary of Justice to
the effect that Romero was the provincial fiscal of Negros Oriental. This is the reason why the Auditor
and the Treasurer of Negros Oriental were likewise made respondents in these proceedings.
The purpose of the present action is to establish the right of the petitioner to the post of provincial
fiscal of Negros Oriental and to oust the respondent Romero therefrom. The petition and the
memorandum in support thereof among other things contain the following prayer: jgc:chanrobles.com.ph
"(1) Recognizing the right of petitioner Antonio Lacson to hold and occupy the position of provincial
fiscal of Negros Oriental;
"(2) Declaring the respondent Honorio Romero guilty of usurpation, unlawful holding and exercise of
the functions and duties of provincial fiscal of Negros Oriental; ordering the exclusion of said
respondent from said office; and ordering him to surrender to herein petitioner all records and papers
appertaining to said office that may have come into his possession;
"(3) Ordering respondents provincial treasurer L. J. Alfabeto and provincial auditor Angel Paguia, or
their successors in office, to pay herein petitioner his salary commencing June 16, 1949, up to the
present time and until herein petitioner shall have legally ceased to be the incumbent of said office;
and
"(4) Ordering respondent Honorio Romero to pay the costs." cralaw virtua1aw library
Incidentally, and to serve as background in the consideration of this case, it may be stated that when
the nominations of Lacson and Romero to the posts of Provincial Fiscal of Tarlac and Negros Oriental,
respectively, were made in May, 1949, Negros Oriental was a second class province with a salary of
P5,100 per annum for the post of provincial fiscal, while Tarlac was first class simple with a higher
salary of P5,700 per annum for its provincial fiscal. There is therefore reason to believe that the
nomination of Lacson to Tarlac or rather his attempted transfer from Negros Oriental to Tarlac was
intended and considered as a promotion. At least, there is nothing in the record to show that he was
being deliberately eased out of or removed from his post in Negros Oriental. However, after the
appointments and confirmations, the President raised the province of Negros Oriental to the category
of First Class A province with retroactive effect as of January 1, 1949. It is alleged by respondent
Romero that after the filing of the present petition, Tarlac was likewise raised to the category of First
Class B province on July 15, 1949 so that thereafter the salary for provincial fiscal in both province is
the same, namely, P6,000 each. This might be one of the reasons why petitioner Lacson declined to
accept his nomination to the Province of Tarlac, preferring to remain at his old post of provincial fiscal
of Negros Oriental.
The determination as to who is entitled to the position of provincial fiscal of Negros Oriental, depends
upon the correct answers to several queries such as: (1) Did the Commission on Appointments alone,
without his acceptance nomination of Lacson to Tarlac and its confirmation by the thereof create a
vacancy in the post of provincial fiscal of Negros Oriental so that Romero could be lawfully appointed
to said vacancy? (2) Does the nomination of Lacson to Tarlac and its confirmation by the Commission
on Appointments serve as and is equivalent to a removal of Lacson as fiscal of Negros Oriental? If in
the affirmative, was that removal valid and lawful? (3) Could the President who appointed Lacson as
provincial fiscal of Negros Oriental remove him at will and without cause, or did the post of provincial
fiscal in general have attached to it a tenure of office during which the incumbent may not be
removed except for cause?
The appointment to a government post like that of provincial fiscal to be complete involves several
steps. First, comes the nomination by the President. Then to make that nomination valid and
permanent, the Commission on Appointments of the Legislature has to confirm said nomination. The
last step is the acceptance thereof by the appointee by his assumption of office. The first two steps,
nomination and confirmation, constitute a mere offer of a post. They are acts of the Executive and
Legislative departments of the Government. But the last necessary step to make the appointment
complete and effective rests solely with the appointee himself. He may or he may not accept the
appointment or nomination. As held in the case of Borromeo v. Mariano, 41 Phil., 327, "there is no
power in this country which can compel a man to accept an office." Consequently, since Lacson has
declined to accept his appointment as provincial fiscal of Tarlac and no one can compel him to do so,
then he continues as provincial fiscal of Negros Oriental and no vacancy in said office was created,
unless Lacson had been lawfully removed as such fiscal of Negros Oriental.
As to the second question, it is obvious that the intended transfer of Lacson to Tarlac on the basis of
his nomination thereto, if carried out, would be equivalent to a removal from his office in Negros
Oriental. To appoint and transfer him from one province to another would mean his removal or
separation from the first province. The reason is that a fiscal is appointed for each province (sec.
1673, Rev. Adm. Code), and Lacson could not well and legally hold and occupy the two posts of fiscal
of Tarlac and Negros Oriental simultaneously. To be fiscal for Tarlac must mean his removal from
Negros Oriental.
In the case of Nicolas v. Alberto, 51 Phil., 370, this Court held that "a transfer of a Justice of the
Peace outside of the municipality of which he is appointed is in legal effect a combined removal and
appointment." (Decision in this case was reversed by the U. S. Supreme Court [279 U. S., 141], but
on other grounds, leaving the doctrine on transfer and removal undisturbed.) When the transfer is
consented to and accepted by the transferees, then there would be no question; but where as in the
present case, the transfer is involuntary and objected to, then it is necessary to decide whether the
removal is lawful.
What is the nature of the office of provincial fiscal? Is it included in the Civil Service? The answer is,
undoubtedly, in the affirmative. Article XII, section 1 of our Constitution provides that "a Civil Service
embracing all branches and subdivisions of the Government shall be provided by law." Section 668 of
the Administrative Code as amended by Com. Act No. 177, sec. 6, provides that "the Philippine Civil
Service shall embrace all branches and subdivisions of the Government;" and section 670 of the
same Code provides that "persons in the Philippine Civil Service pertain either to the classified or
unclassified service." Section 671 of the same code as amended by Commonwealth Act No. 177,
section 8 in part provides as follows: jgc:chanrobles.com.ph
"Sec. 671. Persons embraced in unclassified service. — The following officers and employees
constitute the unclassified service: jgc:chanrobles.com.ph
"(a) A secretary, a sergeant-at-arms, and such other officers as may be required and chosen by the
National Assembly in accordance with the constitution.
"(b) Officers, other than the provincial treasurers and Assistant Directors of Bureaus or Offices,
appointed by the President of the Philippines, with the consent of the Commission on Appointments
of the National Assembly, and all other officers of the Government whose appointments are by law
vested in the President of the Philippines alone.
"(c) Elective officers." cralaw virtua1aw library
x x x
From the foregoing, we find that the post of provincial fiscal in the Philippines is included in
subsection (b) above-quoted particularly the underlined portion thereof. The law regarding
appointment to the post of provincial fiscal is contained in section 66 of the Administrative Code
which provides that "the Governor-General (now the President) shall appoint among other officials,
Secretaries to Departments, Provincial Treasurers, Provincial Fiscals, Register of Deeds, etc." And,
Article VII, section 10(3) of the Constitution provides that the President shall nominate and with the
consent of the Commission on Appointments shall appoint among other officials, "all other officers of
the Government whose appointments are not herein otherwise provided for" which clearly includes
the office of provincial fiscal. It is therefore clear that a provincial fiscal who is nominated and
appointed by the President with the consent of the Commission on Appointments, as was petitioner
Lacson, is, under section 671(b) above-quoted, included in the unclassified service of the Civil
Service.
The next question arises as to whether the President even with the concurrence or consent of the
Commission on Appointments may remove a provincial fiscal without cause. The Constitution itself
denies said right. Article XII, section 4 of said instrument provides that "no officer or employee in the
civil service shall be removed or suspended except for cause as provided by law." This constitutional
provision is reproduced word for word in the first paragraph of sec. 694 of the Rev. Adm. Code, as
amended by Commonwealth Act No. 177, section 22.
In order to better appreciate the meaning of this constitutional provision as well as the purpose
behind it, it is necessary to delve, though ever so lightly into the framing of this basic instrument.
The Committee on Civil Service of the Constitutional Convention which drafted the Constitution in its
report and in advocating the merit system in connection with a civil Service system among other
things stated the following: jgc:chanrobles.com.ph
"The adoption of the ’merit system’ in government service has secured efficiency and social justice. It
eliminates the political factor in the selection of civil employees which is the first essential to an
efficient personnel system. It insures equality of opportunity to all deserving applicants desirous of a
career in the public service. It advocates a new concept of the public office as a career open to all
and not the exclusive patrimony of any party or faction to be doled out as a reward for party
service." (Aruego’s Framing of the Constitution, Vol. II, p. 886.)
"The ’merit system’ was adopted only after the nations of the world took cognizance of its merits.
Political patronage in the government service was sanctioned in 1789 by the constitutional right of
the President of the United States to act alone in the matter of removals. From the time of Andrew
Jackson, the principle of the ’To the victor belong the spoils’ dominated the Federal Government. The
system undermined moral values and destroyed administrative efficiency.." . . (Ibid. p. 886.)
"Since the establishment of the American Regime in the Philippines we have enjoyed the benefits of
the ’merit system.’ The Schurman Commission advocated in its report that ’the greatest care should
be taken in the selection of officials for administration. They should be men of the highest character
and fitness, and partisan politics should be entirely separated from the government.’ The fifth act
passed by the Philippine Commission created a Board of Civil Service. It instituted a system here that
was far more radical and thorough than that in the United States. The Governors-General after
William Taft adopted the policy of appointing Filipinos in the government regardless of their party
affiliation. As the result of these ’the personnel of the Civil Service had gradually come to be one of
which the people of the United States could feel justly proud.’
"Necessity for Constitutional Provisions. — The inclusion in the constitution of provisions regarding
the ’merit system’ is a necessity of modern times. As its establishment secures good government,
the citizens have a right to expect its guarantee as a permanent institution. . . . (Ibid. p. 887.)
"Separations, Suspensions, Demotions, and Transfers. — The ’merit system’ will be ineffective if no
safeguards are placed around the separation and removal of public employees. The Committee’s
report requires that removals shall be made only for ’causes and in the manner provided by law.’ This
means that there should be bona fide reasons and action may be taken only after the employee shall
have been given a fair hearing. This affords to public employees reasonable security of tenure." (Ibid.
p. 890.)
It is contended on behalf of the respondent that the power of removal is inherent in the power to
appoint and that consequently, the President had the right to remove the petitioner as provincial
fiscal of Negros Oriental and transfer him to Tarlac. Ordinarily, where there is no constitutional
limitation the contention of the respondent would be tenable; but where as in the Philippines and as
already stated the Constitution forbids the removal of a civil service official or employee like the
petitioner except for cause as provided by law, said right of the Chief Executive is qualified and
limited. That constitutional prohibition is a limitation to the inherent power of the Executive to
remove those civil service officials whom he appoints. This is the reason why we find the American
cases cited in support of respondent’s theory to be inapplicable. The prohibition against removal
except for cause contained in our Constitution has no counterpart in the Federal Constitution of the
United States.
Again, it is contended that the provincial fiscal is not appointed for a fixed term and that there is no
tenure of office attached to the post. This contention is without merit. As we have already stated, a
provincial fiscal as a civil service official may not be removed from office even by the President who
appointed him, and even with the consent of the Commission on Appointments, except for cause.
Considering this security and protection accorded a provincial fiscal from arbitrary and illegal removal
from office, and considering the provisions of section 1673 of the Administrative Code which among
other things provides that "after December 31, 1932 any city fiscal or assistant city fiscal of Manila,
provincial fiscal or deputy provincial fiscal over 65 years of age shall vacate his office, the logical
inference is that a provincial fiscal duly appointed, until he reaches the age of 65 has the right to
continue in office unless sooner removed for cause. In other words, he enjoys tenure of office, which
is duly protected by statute and by the Constitution.
The last part of the report of the Committee on Civil Service of the Constitutional Convention which
we have reproduced mentions this tenure of office in its last sentence, — "This affords public
employees reasonable security or tenure." Speaking of tenure of office of members of the civil
service in the Philippines, Professor Sinco in his book on Philippine Political Law has the following to
say:jgc:chanrobles.com.ph
"Security of Tenure.
"Nothing can be more demoralizing to a group of civil servants than the fear that they might be
removed from their posts any time at the pleasure of their superiors. It goes without saying that a
demoralized force is an inefficient force. Security of tenure is necessary in order to obtain efficiency
in the civil service. For this purpose the Constitution provides that ’no officer or employee in the Civil
Service shall be removed or suspended except for cause as provided by law.’ (Philippine Political Law
by Sinco, p. 350.)
"In our discussion of the functions of the President, it was there shown that the President’s power of
removal, which is implied from his power of appointment, is very comprehensive and almost
unlimited when it affects officers holding purely executive positions. This class of officers, under the
rule laid down in the Meyers case, may be removed by the President at practically any time and for
any cause. No statutory check, such as a requirement that his order of removal should be subject to
the previous consent of the senate or the Commission on Appointments before it could be effective,
may be validly placed upon his right to exercise this power. But the provision of the Constitution of
the Philippines, which has no counterpart in the Constitution of the United States, makes the tenure
of officers and employees in the Civil Service secure even against the President’s power of removal
and even if the officers should hold purely executive offices. The result is that the scope of the rule
established in the Meyers case is considerably modified and reduced when applied in this jurisdiction.
It may only apply in case of executive officers appointed by the President and not belonging to the
Civil Service as established by the Constitution." (Ibid. pp. 350-351.)
It is also contended by the respondent that neither the Constitution nor the laws passed by the
Legislature mention or enumerate the cause or causes for which a civil service official may be
removed from office. We find this claim untenable. Section 686 of the Revised Administrative Code,
as amended by Commonwealth Act No. 177, section 18 provides that falsification by a civil service
official of his daily time record shall render him liable to summary removal and subject him to
prosecution as provided by law. A like provision for removal and prosecution is found in section 687
of the same Code, as amended by Commonwealth Act 177, section 19 which deals with political
activity and contribution to political fund by civil service employees. Then we have Rule XIII, section
6 of the Civil Service Rules providing thus: jgc:chanrobles.com.ph
"6. Discourtesy to private individuals or to Government officers or employees, drunkenness,

gambling, dishonesty, repeated or flagrant violation or neglect of duty, notoriously disgraceful or
immoral conduct, physical incapacity due to immoral or vicious habits, incompetency, inefficiency,
borrowing money by superior officers from subordinates or lending money by subordinate to superior
officers, lending money at exhorbitant rates of interest, willful failure to pay just debts, contracting
loans of money or other property from merchants or other persons with whom the bureau of the
borrower is in business relations, pecuniary embarrassment arising from reprehensible conduct, the
pursuits of private business, vocation, or profession without permission in writing from the chief of
the bureau or office in which employed and of the Governor-General (now the President) or proper
head of Department, disreputable or dishonest conduct committed prior to entering the service,
insubordination, pernicious political activity, offensive political partisanship or conduct prejudicial to
the best interest of the service, or the willful violation by any person in the Philippine civil service of
any of the provisions of the Revised Civil Service Act or rules, may be considered reasons demanding
proceedings to remove for cause, to reduce in class or grade, or to inflict other punishment as
provided by law in the discretion of the Governor-General (now the President) or proper head of
Department. No chief of a bureau or office shall knowingly continue in the public service any
subordinate officer or employee who is inefficient or who is guilty of any of the above-named
derelictions, without submitting the facts through the Director to the Governor-General (now the
President) or proper head of Department." cralaw virtua1aw library
The law and civil service rules above referred to clearly provide the causes or some of the causes for
removal of civil service officials; and they answer the contention of the respondent on this point.
Section 64 of the Revised Administrative Code, providing for the particular powers and duties of the
Governor-General, now the President of the Republic, in part reads as follows: chanrob1es virtual 1aw library
x x x
"(b) To remove officials from office conformably to law and to declare vacant the offices held by such
removed officials. For disloyalty to the United States (now the Philippines), the Governor-General
(now the President) may at any time remove a person from any position of trust or authority under
the Government of the Philippine Islands.
"(c) To order, when in his opinion the good of the public service so requires, an investigation or any
action or the conduct of any person in the Government service, and in connection therewith to
designate the official, committee, or person by whom such investigation shall be conducted." cralaw virtua1aw library
x x x
Section 694 of the Administrative Code as amended by Commonwealth Act No. 177, section 22,
reads as follows:jgc:chanrobles.com.ph
"Sec. 694. Removal or suspension. — No officer or employee in the civil service shall be removed or
suspended except for cause as provided by law.
"The President of the Philippines may suspend any chief or assistant chief of a bureau or office, and
in the absence of special provision, any other officer appointed by him, pending an investigation of
charges against such officer or pending an investigation of his bureau or office. With the approval of
the proper head of department, the chief of a bureau or office may likewise suspend any subordinate
or employee in his bureau or under his authority pending an investigation, if the charge against such
subordinate or employee involves dishonesty, oppression, or grave misconduct or neglect in the
performance of duty." cralaw virtua1aw library
From the sections above-quoted, the inference is inevitable that before a civil service official or
employee can be removed, there must first be an investigation at which he must be given a fair
hearing and an opportunity to defend himself. In the case of petitioner Lacson, the record fails to
show, neither is there any claim that he has been charged with any violation of law or civil service
regulation, much less investigated and thereafter found guilty so as to authorize or warrant removal
from office.
In view of the foregoing, we are constrained to find and to hold that the transfer of Lacson to Tarlac
by his nomination to the post of provincial fiscal of that province was equivalent to and meant his
removal as provincial fiscal of Negros Oriental; that said removal was illegal and unlawful for lack of
valid cause as provided by law and the Constitution; that the confirmation of the nomination by the
Commission on Appointments did not and could not validate the removal, since the Constitution is
equally binding on the Legislature; that a provincial fiscal is a civil service official or employee whose
tenure of office is protected by the Constitution; and that Antonio Lacson could not be compelled to
accept his appointment as provincial fiscal of Tarlac; that having declined said appointment, he
continued as provincial fiscal of Negros Oriental; that inasmuch as he neither left, abandoned nor
resigned from his post as provincial fiscal of Negros Oriental, there was no vacancy in said post to
which the respondent could be legally appointed; and that consequently, the appointment of the
respondent was invalid.
In this connection we may point out that the Constitution having clearly limited and qualified the
Presidential power of removal in order to protect civil service officials and employees, secure to them
a reasonable tenure of office and thus give the country the benefit of an efficient civil service based
on the merit system, this Court could do no less than give effect to the plain intent and spirit of the
basic law, specially when it is supplemented and given due course by statutes, rules and regulations.
To hold that civil service officials hold their office at the will of the appointing power subject to
removal or forced transfer at any time, would demoralize and undermine and eventually destroy the
whole Civil Service System and structure. The country would then go back to the days of the old
Jacksonian Spoils System under which a victorious Chief Executive, after the elections could if so
minded, sweep out of office, civil service employees differing in political color or affiliation from him,
and sweep in his political followers and adherents, especially those who have given him help, political
or otherwise. A Chief Executive running for re-election may even do this before election time not only
to embarrass and eliminate his political enemies from office but also to put his followers in power so
that with their official influence they could the better help him and his party in the elections. As may
be gathered from the report of the Committee of the Constitutional Convention which we have
reproduced at the beginning of this opinion, the framers of our Constitution, at least the Civil Service
Committee thereof, condemned said spoils system and purposely and deliberately inserted the
constitutional prohibition against removal except for cause, which now forms the basis of this
decision.
There are hundreds, yea, thousands of young, ambitious people who enter the Civil Service not
temporarily or as a makeshift, but to make a career out of it. They give the best years of their lives
to the service in the hope and expectation that with faithful service, loyalty and some talent, they
may eventually attain the upper reaches and levels of official hierarchy.
To permit circumvention of the constitutional prohibition in question by allowing removal from office
without lawful cause, in the form or guise of transfers from one office to another, or from one
province to another, without the consent of the transferee, would blast the hopes of these young civil
service officials and career men and women, destroy their security and tenure of office and make for
a subservient, discontented and inefficient civil service force that sways with every political wind that
blows and plays up to whatever political party is in the saddle. That would be far from what the
framers of our Constitution contemplated and desired. Neither would that be our concept of a free
and efficient Government force, possessed of self-respect and reasonable ambition.
Incidentally, it happens that the petitioner is one of those we had in mind as making a career of the
Government service. He claims and it is not denied by the respondent, that twenty years ago he
entered the service of the Government as register of deeds of Negros Oriental, then was promoted to
the post of fiscal, first of the Province of Palawan, then of Surigao, later of Antique and lastly of
Negros Oriental in 1946. He does not want to accept the transfer to the Province of Tarlac. His only
alternative would be to resign, sacrifice his twenty years of continuous, faithful service and his
career, and perchance his hope that some day, he might yet be promoted to the judiciary. Not a very
bright prospect or picture, not only to him but to other civil service officials in like circumstances.
But in justice to the President and the Commission on Appointments, let it be stated once again that
it would seem that the transfer of the petitioner to Tarlac was not meant and intended as a
punishment, a disciplinary measure or demotion. It was really a promotion, at least at the time the
appointment was made. Only, that later, due to a change in the category of Oriental Negros as a
province, the transfer was no longer a promotion in salary. And yet the respondent and the Solicitor
General insisted in the transfer despite the refusal of the petitioner to accept his new appointment.
In conclusion, we find and declare the petitioner to be the provincial fiscal of Negros Oriental, and the
respondent not being entitled to said post, is hereby ordered to surrender to the petitioner all the
records or papers appertaining to said office that may have come into his possession. The respondent
provincial auditor and provincial treasurer are hereby ordered to pay to the herein petitioner his
salary from June 16, 1949, and as long as said petitioner continues to be the legal incumbent to the
office in question. Considering that the respondent appears to have acted in good faith and relied
upon his nomination by the President and the confirmation thereof by the Commission on
Appointments, as well as the position taken by the Solicitor General, who sustained his appointment,
we make no pronouncement as to costs.
Ozaeta, Paras, Feria, Bengzon, Tuason and Torres, JJ., concur.
REYES, J.:
43) Union Bank of the Philippines vs Development Bank of the

Philippines , G.R. No. 191555, January 20, 2014
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 191555 January 20, 2014
UNION BANK OF THE PHILIPPINES, Petitioner,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on Certiorari are the Decision dated November 3, 2009 and Resolution dated
1 2 3
February 26, 2010 of the Court of Appeals (CA) in CA-G.R. SP No. 93833 which affirmed the Orders dated 4
November 9, 2005 and January 30, 2006 of the Regional Trial Court of Makati, Branch 58 (RTC) in Civil Case No.
5
7648 denying the motion to affirm legal compensation filed by petitioner Union Bank of the Philippines (Union Bank)
6
against respondent Development Bank of the Philippines (DBP).
The Facts
Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Bank’s predecessor-in-interest, Bancom
Development Corporation (Bancom), and to DBP.
On May 21, 1979, FI and DBP, among others, entered into a Deed of Cession of Property In Payment of
Debt (dacion en pago) whereby the former ceded in favor of the latter certain properties (including a processing
7
plant in Marilao, Bulacan [processing plant]) in consideration of the following: (a) the full and complete satisfaction of
FI’s loan obligations to DBP; and (b) the direct assumption by DBP of FI’s obligations to Bancom in the amount of
₱17,000,000.00 (assumed obligations). 8
On the same day, DBP, as the new owner of the processing plant, leased back for 20 years the said property to FI
9
(Lease Agreement) which was, in turn, obliged to pay monthly rentals to be shared by DBP and Bancom.
DBP also entered into a separate agreement with Bancom (Assumption Agreement) whereby the former: (a)
10
confirmed its assumption of FI’s obligations to Bancom; and (b) undertook to remit up to 30% of any and all rentals
due from FI to Bancom (subject rentals) which would serve as payment of the assumed obligations, to be paid in
monthly installments. The pertinent portions of the Assumption Agreement reads as follows:
WHEREAS, DBP has agreed and firmly committed in favor of Bancom that the above obligations to Bancom which
DBP has assumed shall be settled, paid and/or liquidated by DBP out of a portion of the lease rentals or part of the
proceeds of sale of those properties of the Assignors conveyed to DBP pursuant to the [Deed of Cession of Property
in Payment of Debt dated May 21, 1979] and which are the subject of [the Lease Agreement] made and executed
by and between DBP and [FI], the last hereafter referred to as the "Lessee" to be effective as of July 31, 1978.
xxxx
4. DBP hereby covenants and undertakes that the amount up to 30% of any and all rentals due from the Lessee
pursuant to the Lease Agreement shall be remitted by DBP to Bancom at the latter’s offices at Pasay Road, Makati,
Metro Manila within five (5) days from due dates thereof, and applied in payment of the Assumed Obligations.
Likewise, the amount up to 30% of the proceeds from any sale of the Leased Properties shall within the same
period above, be remitted by DBP to Bancom and applied in payment or prepayment of the Assumed Obligations. x
x x.
Any balance of the Assumed Obligations after application of the entire rentals and or the entire sales proceeds
actually received by Bancom on the Leased Properties shall be paid by DBP to Bancom not later than December
29, 1998. (Emphases supplied)
Meanwhile, on May 23, 1979, FI assigned its leasehold rights under the Lease Agreement to Foodmasters
Worldwide, Inc. (FW); while on May 9, 1984, Bancom conveyed all its receivables, including, among others, DBP’s
11
assumed obligations, to Union Bank. 12
Claiming that the subject rentals have not been duly remitted despite its repeated demands, Union Bank filed, on
June 20, 1984, a collection case against DBP before the RTC, docketed as Civil Case No. 7648. In opposition,
13
DBP countered, among others, that the obligations it assumed were payable only out of the rental payments made
by FI. Thus, since FI had yet to pay the same, DBP’s obligation to Union Bank had not arisen. In addition, DBP
14
sought to implead FW as third party-defendant in its capacity as FI’s assignee and, thus, should be held liable to
Union Bank. 15
In the interim, or on May 6, 1988, DBP filed a motion to dismiss on the ground that it had ceased to be a real-party-
in-interest due to the supervening transfer of its rights, title and interests over the subject matter to the Asset
Privatization Trust (APT). Said motion was, however, denied by the RTC in an Order dated May 27, 1988. 16
The RTC Ruling in Civil Case No. 7648
Finding the complaint to be meritorious, the RTC, in a Decision dated May 8, 1990, ordered: (a) DBP to pay Union
17
Bank the sum of ₱4,019,033.59, representing the amount of the subject rentals (which, again, constitutes 30% of
FI’s [now FW’s] total rental debt), including interest until fully paid; and (b) FW, as third-party defendant, to indemnify
DBP, as third- party plaintiff, for its payments of the subject rentals to Union Bank. It ruled that there lies no evidence
which would show that DBP’s receipt of the rental payments from FW is a condition precedent to the former’s
obligation to remit the subject rentals under the Lease Agreement. Thus, when DBP failed to remit the subject
rentals to Union Bank, it defaulted on its assumed obligations. DBP then elevated the case on appeal before the
18
CA, docketed as CA-G.R. CV No. 35866.
The CA Ruling in CA-G.R. CV No. 35866
In a Decision dated May 27, 1994 (May 27, 1994 Decision), the CA set aside the RTC’s ruling, and consequently
19
ordered: (a) FW to pay DBP the amount of ₱32,441,401.85 representing the total rental debt incurred under the
Lease Agreement, including ₱10,000.00 as attorney’s fees; and (b) DBP, after having been paid by FW its unpaid
rentals, to remit 30% thereof (i.e., the subject rentals) to Union Bank. 20
It rejected Union Bank’s claim that DBP has the direct obligation to remit the subject rentals not only from FW’s
rental payments but also out of its own resources since said claim contravened the "plain meaning" of the
Assumption Agreement which specifies that the payment of the assumed obligations shall be made "out of the
portion of the lease rentals or part of the proceeds of the sale of those properties of [FI] conveyed to DBP." It also
21
construed the phrase under the Assumption Agreement that DBP is obligated to "pay any balance of the Assumed
Obligations after application of the entire rentals and/or the entire sales proceeds actually received by [Union Bank]
on the Leased Properties . . . not later than December 29, 1998" to mean that the lease rentals must first be applied
to the payment of the assumed obligations in the amount of ₱17,000,000.00, and that DBP would have to pay out of
its own money only in case the lease rentals were insufficient, having only until December 29, 1998 to do so.
Nevertheless, the monthly installments in satisfaction of the assumed obligations would still have to be first sourced
from said lease rentals as stipulated in the assumption agreement. In view of the foregoing, the CA ruled that DBP
22
did not default in its obligations to remit the subject rentals to Union Bank precisely because it had yet to receive the
rental payments of FW. 23
Separately, the CA upheld the RTC’s denial of DBP’s motion to dismiss for the reason that the transfer of its rights,
title and interests over the subject matter to the APT occurred pendente lite, and, as such, the substitution of parties
is largely discretionary on the part of the court.
At odds with the CA’s ruling, Union Bank and DBP filed separate petitions for review on certiorari before the Court,
respectively docketed as G.R. Nos. 115963 and 119112, which were thereafter consolidated.
The Court’s Ruling in G.R. Nos. 115963 & 119112
The Court denied both petitions in a Resolution dated December 13, 1995. First, it upheld the CA’s finding that
24
while DBP directly assumed FI’s obligations to Union Bank, DBP was only obliged to remit to the latter 30% of the
lease rentals collected from FW, from which any deficiency was to be settled by DBP not later than December 29,
1998. Similarly, the Court agreed with the CA that the denial of DBP’s motion to dismiss was proper since
25
substitution of parties, in case of transfers pendente lite, is merely discretionary on the part of the court, adding
further that the proposed substitution of APT will amount to a novation of debtor which cannot be done without the
consent of the creditor. 26
On August 2, 2000, the Court’s resolution became final and executory. 27
The RTC Execution Proceedings
On May 16, 2001, Union Bank filed a motion for execution before the RTC, praying that DBP be directed to pay the
28
amount of ₱9,732,420.555 which represents the amount of the subject rentals (i.e., 30% of the FW’s total rental debt
in the amount of ₱32,441,401.85). DBP opposed Union Bank’s motion, contending that it sought to effectively vary
29
the dispositive portion of the CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866. Also, on September 12, 2001,
DBP filed its own motion for execution against FW, citing the same CA decision as its basis.
In a Consolidated Order dated October 15, 2001 (Order of Execution), the RTC granted both motions for execution.
30
Anent Union Bank’s motion, the RTC opined that the CA’s ruling that DBP’s payment to Union Bank shall be
demandable only upon payment of FW must be viewed in light of the date when the same was rendered. It noted
that the CA decision was promulgated only on May 27, 1994, which was before the December 29, 1998 due date
within which DBP had to fully pay its obligation to Union Bank under the Assumption Agreement. Since the latter
period had already lapsed, "[i]t would, thus, be too strained to argue that payment by DBP of its assumed
obligation[s] shall be dependent on [FW’s] ability, if not availability, to pay." In similar regard, the RTC granted
31
DBP’s motion for execution against FW since its liability to Union Bank and DBP remained undisputed.
As a result, a writ of execution dated October 15, 2001 (October 15, 2001 Writ of Execution) and, thereafter, a
32
notice of garnishment against DBP were issued. Records, however, do not show that the same writ was
33
implemented against FW.
DBP filed a motion for reconsideration from the Execution Order, averring that the latter issuance varied the import
34
of the CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866 in that it prematurely ordered DBP to pay the assumed
obligations to Union Bank before FW’s payment. The motion was, however, denied on December 5, 2001. Thus, 35
DBP’s deposits were eventually garnished. Aggrieved, DBP filed a petition for certiorari before the CA, docketed
36 37
as CA-G.R. SP No. 68300.
The CA Ruling in CA-G.R. SP No. 68300
In a Decision dated July 26, 2002, the CA dismissed DBP’s petition, finding that the RTC did not abuse its
38
discretion when it issued the October 15, 2001 Writ of Execution. It upheld the RTC’s observation that there was
"nothing wrong in the manner how [said writ] was implemented," as well as "in the zealousness and promptitude
exhibited by Union Bank" in moving for the same. DBP appealed the CA’s ruling before the Court, which was
docketed as G.R. No. 155838.
The Court’s Ruling in G.R. No. 155838
In a Decision dated January 13, 2004 (January 13, 2004 Decision), the Court granted DBP’s appeal, and thereby
39
reversed and set aside the CA’s ruling in CA-G.R. SP No. 68300. It found significant points of variance between the
CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866, and the RTC’s Order of Execution/October 15, 2001 Writ of
Execution. It ruled that both the body and the dispositive portion of the same decision acknowledged that DBP’s
obligation to Union Bank for remittance of the lease payments is contingent on FW’s prior payment to DBP, and that
any deficiency DBP had to pay by December 29, 1998 as per the Assumption Agreement cannot be determined
until after the satisfaction of FW’s own rental obligations to DBP. Accordingly, the Court: (a) nullified the October 15,
2001 Writ of Execution and all related issuances thereto; and (b) ordered Union Bank to return to DBP the amounts
it received pursuant to the said writ. Dissatisfied, Union Bank moved for reconsideration which was, however,
40
denied by the Court in a Resolution dated March 24, 2004 with finality. Thus, the January 13, 2004 Decision
attained finality on April 30, 2004. Thereafter, DBP moved for the execution of the said decision before the RTC.
41
After numerous efforts on the part of Union Bank proved futile, the RTC issued a writ of execution (September 6,
2005 Writ of Execution), ordering Union Bank to return to DBP all funds it received pursuant to the October 15, 2001
Writ of Execution. 42
Union Bank’s Motion to Affirm Legal Compensation
On September 13, 2005, Union Bank filed a Manifestation and Motion to Affirm Legal Compensation, praying that
43
the RTC apply legal compensation between itself and DBP in order to offset the return of the funds it previously
received from DBP. Union Bank anchored its motion on two grounds which were allegedly not in existence prior to
or during trial, namely: (a) on December 29, 1998, DBP’s assumed obligations became due and demandable; and 44
(b) considering that FWI became non-operational and non-existent, DBP became primarily liable to the balance of
its assumed obligation, which as of Union Bank’s computation after its claimed set-off, amounted to ₱1,849,391.87. 45
On November 9, 2005, the RTC issued an Order denying the above-mentioned motion for lack of merit, holding
46
that Union Bank’s stated grounds were already addressed by the Court in the January 13, 2004 Decision in G.R.
No. 155838. With Union Bank’s motion for reconsideration therefrom having been denied, it filed a petition for
certiorari with the CA, docketed as CA-G.R. SP No. 93833.
47
Pending resolution, Union Bank issued Manager’s Check No. 099-0003192363 dated April 21, 2006 amounting to
48
₱52,427,250.00 in favor of DBP, in satisfaction of the Writ of Execution dated September 6, 2005 Writ of Execution.
DBP, however, averred that Union Bank still has a balance of ₱756,372.39 representing a portion of the garnished
funds of DBP, which means that said obligation had not been completely extinguished.
49
The CA Ruling in CA-G.R. SP No. 93833
In a Decision dated November 3, 2009, the CA dismissed Union Bank’s petition, finding no grave abuse of
50
discretion on the RTC’s part. It affirmed the denial of its motion to affirm legal compensation considering that: (a) the
RTC only implemented the Court’s January 13, 2004 Decision in G.R. No. 155838 which by then had already
attained finality; (b) DBP is not a debtor of Union Bank; and (c) there is neither a demandable nor liquidated debt
from DBP to Union Bank. 51
Undaunted, Union Bank moved for reconsideration which was, however, denied in a Resolution dated February 26,
52
2010; hence, the instant petition.
The Issue Before the Court
The sole issue for the Court’s resolution is whether or not the CA correctly upheld the denial of Union Bank’s motion
to affirm legal compensation.

The petition is bereft of merit. Compensation is defined as a mode of extinguishing obligations whereby two persons
in their capacity as principals are mutual debtors and creditors of each other with respect to equally liquidated and
demandable obligations to which no retention or controversy has been timely commenced and communicated by
third parties. The requisites therefor are provided under Article 1279 of the Civil Code which reads as follows:
53
Art. 1279. In order that compensation may be proper, it is necessary:
the other;
communicated in due time to the debtor. (Emphases and underscoring supplied)
1awp++i1
The rule on legal compensation is stated in Article 1290 of the Civil Code which provides that "[w]hen all the
54
requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes
both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation."
In this case, Union Bank filed a motion to seek affirmation that legal compensation had taken place in order to
effectively offset (a) its own obligation to return the funds it previously received from DBP as directed under the
September 6, 2005 Writ of Execution with (b) DBP’s assumed obligations under the Assumption Agreement.
However, legal compensation could not have taken place between these debts for the apparent reason that
requisites 3 and 4 under Article 1279 of the Civil Code are not present. Since DBP’s assumed obligations to Union
Bank for remittance of the lease payments are – in the Court’s words in its Decision dated January 13, 2004 in G.R.
No. 155838 – " contingent on the prior payment thereof by [FW] to DBP," it cannot be said that both debts are due
(requisite 3 of Article 1279 of the Civil Code). Also, in the same ruling, the Court observed that any deficiency that
DBP had to make up (by December 29, 1998 as per the Assumption Agreement) for the full satisfaction of the
assumed obligations " cannot be determined until after the satisfaction of Foodmasters’ obligation to DBP." In this
regard, it cannot be concluded that the same debt had already been liquidated, and thereby became demandable
(requisite 4 of Article 1279 of the Civil Code).
The aforementioned Court decision had already attained finality on April 30, 2004 and, hence, pursuant to the
55
doctrine of conclusiveness of judgment, the facts and issues actually and directly resolved therein may not be raised
in any future case between the same parties, even if the latter suit may involve a different cause of action. Its
56
pertinent portions are hereunder quoted for ready reference: 57
Both the body and the dispositive portion of the [CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866] correctly
construed the nature of DBP’s liability for the lease payments under the various contracts, to wit:
x x x Construing these three contracts, especially the "Agreement" x x x between DBP and Bancom as providing for
the payment of DBP’s assumed obligation out of the rentals to be paid to it does not mean negating DBP’s
assumption "for its own account" of the ₱17.0 million debt x x x. It only means that they provide a mechanism for
discharging [DBP’s] liability. This liability subsists, since under the "Agreement" x x x, DBP is obligated to pay "any
balance of the Assumed Obligations after application of the entire rentals and or the entire sales proceeds actually
received by [Union Bank] on the Leased Properties … not later than December 29, 1998." x x x It only means that
the lease rentals must first be applied to the payment of the ₱17 million debt and that [DBP] would have to pay out
of its money only in case of insufficiency of the lease rentals having until December 29, 1998 to do so. In this sense,
it is correct to say that the means of repayment of the assumed obligation is not limited to the lease rentals. The
monthly installments, however, would still have to come from the lease rentals since this was stipulated in the
"Agreement."
xxxx
Since, as already stated, the monthly installments for the payment of the ₱17 million debt are to be funded from the
lease rentals, it follows that if the lease rentals are not paid, there is nothing for DBP to remit to [Union Bank], and
thus [DBP] should not be considered in default. It is noteworthy that, as stated in the appealed decision, "as regards
plaintiff’s claim for damages against defendant for its alleged negligence in failing and refusing to enforce a lessor’s
remedies against Foodmasters Worldwide, Inc., the Court finds no competent and reliable evidence of such claim."
xxxx
WHEREFORE, the decision appealed from is SET ASIDE and another one is RENDERED,
(i) Ordering third-party defendant-appellee Foodmasters Worldwide, Inc. to pay defendant and third-party
plaintiff-appellant Development Bank of the Philippines the sum of ₱32,441,401.85, representing the unpaid
rentals from August 1981 to June 30, 1987, as well as ₱10,000.00 for attorney’s fees; and
(ii) Ordering defendant and third-party plaintiff-appellant Development Bank of the Philippines after having
been paid by third-party defendant-appellee the sum of ₱32,441,401.85, to remit 30% thereof to plaintiff-
appellee Union Bank of the Philippines.
SO ORDERED.
In other words, both the body and the dispositive portion of the aforequoted decision acknowledged that DBP’s
obligation to Union Bank for remittance of the lease payments is contingent on the prior payment thereof by
Foodmasters to DBP.
A careful reading of the decision shows that the Court of Appeals, which was affirmed by the Supreme Court, found
that only the balance or the deficiency of the ₱17 million principal obligation, if any, would be due and demandable
as of December 29, 1998. Naturally, this deficiency cannot be determined until after the satisfaction of Foodmasters
obligation to DBP, for remittance to Union Bank in the proportion set out in the 1994 Decision. (Emphases and
underscoring supplied; citations omitted)
xxxx
In fine, since requisites 3 and 4 of Article 1279 of the Civil Code have not concurred in this case, no legal
compensation could have taken place between the above-stated debts pursuant to Article 1290 of the Civil Code.
Perforce, the petition must be denied, and the denial of Union Bank s motion to affirm legal compensation
sustained.
WHEREFORE, the petition is DENIED. The Decision dated November 3, 2009 and Resolution dated February 26,
2010 of the Court of Appeals in CA-G.R. SP No. 93833 are hereby AFFIRMED.
SO ORDERED.
ESTELA M. PERLAS-BERNABE
Associate Justice
WE CONCUR:
ANTONIO T. CARPIO
Associate Justice
Chairperson
ARTURO D. BRION MARIANO C. DEL CASTILLO

JOSE PORTUGAL PEREZ
Associate Justice
ATTESTATION
to the writer of the opinion of the Court s Division.
ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, I certify that the
conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of
the opinion of the Court’s Division.
MARIA LOURDES P. A. SERENO

Chief Justice
Footnotes
1
Rollo, pp. 32-50.
Id. at 8-20. Penned by Associate Justice Romeo F. Barza, with Associate Justices Portia Alifio-
2
Hormachuelos and Remedios A. Salazar-Fernando, concurring.
3
Id. at 30.
4
Id. at 278-279 and 323, respectively. Penned by Presiding Judge Eugene C. Paras.
5
Erroneously stated as Branch 148 in the Complaint (see id. at 60) and Amended Third-Party Complaint
(see id. at 71).
6
Id. at 271-277.
7
Id. at 344-348.
8
Id. at 87.
9
Id. at 349-355.
10
Id. at 356-359.
11
Id. at 88.
12
Id.
13
Id. at 60-70.
14
Id. at 72.
Id. at 71-75.
15
Id. at 90-91.
16
Id. at 80-85.
17
Id. at 85.
18
Id. at 86-104.
19
Id. at 103-104.
20
Id. at 100.
21
Id. at 101.
22
Id. at 101-102.
23
Id. at 105-109.
24
Id. at 45.
25
Id. at 108.
26
Id. at 410.
27
Id. at 110-113.
28
Id. at 114-121.
29
Id. at 130-133. Penned by Judge Winlove M. Dumayas.

30
Id. at 411.
31
Id. at 134-136.
32
Id. at 137.
33
Id. at 138-151.
34
Id. at 153-155.
35
Id. at 251.
36
Id. at 174-204.
37
Id. at 248-256.
38
Id. at 257-268; DBP v. Union Bank, 464 Phil. 161 (2004).

39
Id. at 266-267.
40
See Entry of Judgment in G.R. No. 155838; Id. at 452.

41
Id. at 460-462.
42
Id. at 271-277.
43
See Agreement dated May 21, 1979; id. at 272 and 358.
44
Id. at 273.
45
Id. at 278-279.
46
Id. at 326-343.
47
Id. at 463.
48
See Comment of DBP; id. at 386. See also Reply of Union Bank which admitted to such fact; id. at 512.
49
Id. at 8-20.
50
Id. at 9.
51
Id. at 30.
52
See Mavest (U.S.A.), Inc. v. Sampaguita Garment Corporation, G.R. No. 127454, September 21, 2005,
53
470 SCRA 440, 449.
"Compensation may be legal or conventional. Legal compensation takes place ipso jure when all the
54
requisites of law are present, as opposed to conventional or voluntary compensation which occurs when the
parties agree to the mutual extinguishment of their credits or to compensate their mutual obligations even in
the absence of some of the legal requisites." (Id. at 448-449; citations omitted)
See Entry of Judgment in G.R. No. 155838; rollo, p. 452.

55
Tan v. CA, 415 Phil. 675, 676 (2001).

56
Rollo, pp. 264-265; DBP v. Union Bank, supra note 49, at 170-172.
57
44) Soriano vs People, G.R. No. 181692, August 14, 2013

FIRST DIVISION
G.R. No. 181692, August 14, 2013
ADELAIDA SORIANO, Petitioner, v. PEOPLE OF THE PHILIPPINES, Respondent.
DECISION
VILLARAMA, JR., J.:
Before this Court is a petition for review on certiorari assailing the May 19, 2005 Decision1 and
January 11, 2008 Resolution2 of the Court of Appeals (CA) in CA-G.R. CR No. 23108 insofar as it
ordered petitioner to pay P74,807 plus interest to private complainant Consolacion R. Alagao.
Petitioner Adelaida Soriano was charged with the crime of estafa on January 30, 1995 under an
Information which reads as follows:
That on September 9, 1994, at more or less 2:00 o'clock [sic] in the afternoon, and days thereafter,
at Piaping Puti, Macabalan, Cagayan de Oro City, Philippines, and within the jurisdiction of this
Honorable Court, the above-named accused, with intent to defraud and cause damage and prejudice
by means of deceit, and false pretenses or fraudulent acts executed prior to or simultaneously with
the commission of the fraud, did then and there wil[l]fully, unlawfully and feloniously represent and
pretend to the offended party, Consolacion Alagao y Regala, who was then canvassing for buyers of
her one (1) truck load of corn grits containing 398 sacks, that she (accused Adelaida Soriano) was
engaged in the business of buying corn grits, among others from the public under the business style
of A & R Soriano Trading, paying it in cash, with place of business located at Piaping Puti,
Macab[a]lan, this City; that due to accused[’s] representation, said offended party was persuaded
and convinced to sell her own corn grits to the former, which cereals came all the way from Old
Nungnungan, Don Carlos, Bukidnon; that after unloading said 398 sacks of corn grains in the
establishment of said Adelaida Soriano, said accused did not pay offended party for the said goods
delivered, but instead she let offended party to sign a Cash Voucher, making it appear thereat that
offended party has received the sum of P85,607.00, when in truth and in fact accused has not paid
the same; that inspite of that misrepresented entries in the Cash Voucher above-cited, the accused
further directed to collect the same amount from a neighbor of the offended party in
OId.Nungnungan, above-mentioned; that perplexed about the actions of Mrs. Adelaida Soriano,
offended party proceeded to demand payment from her but the accused failed to pay her monetary
obligation [to] the offended party as the accused and her business establishment disappeared from
Piaping Puti, Macabalan, this City after the incident, and transferred to an unknown location; that she
couId.not also get back the said 398 sacks of corn grits anymore because the accused had disposed
of it already; thus misapplying, misappropriating and converting the said sum of P85,607.00 the
value of 398 sacks of corn grits, to her own gain and benefit, to the damage and prejudice of the said
offended party, in the aforestated sum of P85,607.00, Philippine currency.
Contrary to and in violation to Article 315, par. 2(a), of the Revised Penal Code, as amended. 3 cralaw virtualaw library
4
When arraigned, petitioner pleaded not guilty. cralaw virtualaw library
During pre-trial, the following transpired:

1. Parties admitted that on September 9, 1993, private complainant Consolacion Alagao borrowed
cash from the accused in the amount of P10,000, guaranteed by a titled land, owned by her daughter
Evelyn Alagao; chanr0blesvirtualawlibrary
2. Parties also agreed that the aforesaid debt was fully paid with corn grains by the private
complainant in February, 1994; chanr0blesvirtualawlibrary
3. Parties also agreed that subsequent to this transaction, private complainant’s daughter
Evelyn Alagao executed a Contract of Loan secured by Real Estate Mortgage now marked
Exh. “1” for the defense, to secure the payment of P40,000.00 which private complainant
admitted to have received P51,730.00 in the form of fertilizers and cash advances[:]
Fertilizers & Pioneer
P17,910.00
corn seeds
(Exh. "A")

110 bags chicken dung 6,600.00
(Chicken manure)

Hauling expense of
1,570.00
th[e]se materials

Additional fertilizers 9,550.00
(As shown in Exh. "B")
and several cash advances as follows:
2-7-94 P4,000.00
2-14-94 2,000.00
3-3-94 2,000.00
No date 100.00
5-1-94 2,000.00
5-6-94 2,000.00
7-19-94 500.00
7-20-94 500.00
(but which accused
claimed [to be]
P1,500.00)
9-10-94 3,000.00 16,100.00
TotalP51,730.00
4. That private complainant claimed that x x x on August 17, 1994, she delivered a 10-wheeler corn
grains (sic) to the accused which parties agreed [was] worth more than P80,000.00. And the private
complainant claimed having paid the accused partially in the amount of P8,060.00 which accused
denied. The latter claimed that no payment was ever made because the corn grains were owned by
private complainant and another person and that private complainant and companion were paid of
the worth of the delivery; chanr0blesvirtualawlibrary
5. Parties agreed that on September 9, 1994 at 2:00 o’clock (sic) in the afternoon[,] there was a
delivery by the private complainant with her companions, corn grains worth P85,607.00. Private
complainant claimed that she was only paid P3,000.00 and which accused claimed that she did not
pay her because that delivery was in payment of her account and the P3,000.00 which she received
was advanced payment of whatever remaining after paying her previous accounts to the accused; chanr0blesvirtualawlibrary
6. Parties agreed that there was a Cash Voucher of the amount of corn grains delivered to the
accused on September 9, 1994, now marked [as] Exh. “C.”5 (Emphasis and underscoring supplied.)
Trial on the merits ensued.
Based on the evidence presented and what transpired during the pre-trial, the facts are: cralawlibrary
On February 18, 1994, Evelyn Alagao (Evelyn), daughter of private complainant Consolacion Alagao
(Alagao), as borrower-mortgagor, executed a “Contract of Loan Secured by Real Estate Mortgage
with Special Power to Sell Mortgage Property without Judicial Proceedings”6 in favor of petitioner as
lender-mortgagee. The instrument provides for a P40,000 loan secured by a parcel of land covered
by Original Certificate of Title No. P-6254,7 located in OId.Nongnongan, Don Carlos, Bukidnon,
registered in Evelyn’s name. It likewise provides that the loan was to be paid two years from the date
of execution of the contract, or on February 18, 1996, and that Evelyn agrees to give petitioner ¼
of every harvest from her cornland until the full amount of the loan has been paid, starting from the
first harvest. Based on Alagao’s testimony, the first harvest was made only in September
1994.8 Petitioner on the other hand claims that from the time the loan was obtained until September
1994, there were already four harvests. During pre-trial, it was admitted by Alagao that she did not
only receive P40,000 as provided in the contract of loan but P51,730 in the form of fertilizers and
cash advances.9 cralaw virtualaw library
On September 9, 1994, Alagao and some companions delivered 398 sacks of corn grains to
petitioner. Petitioner prepared a voucher indicating that Alagao had received the amount of P85,607
as full payment for the 398 sacks of corn grains. Alagao signed said voucher even if she only
received P3,000.10 According to Alagao, 64 of the 398 sacks will serve as partial payment of her
P40,000 loan with petitioner while the remaining balance will come from the P85,607 cash she was
supposed to receive as payment for the corn grains delivered so she can redeem her daughter’s land
title.11
cralaw virtualaw library
On March 16, 1999, the Regional Trial Court (RTC) of Misamis Oriental, Branch 40, rendered a
decision12 finding petitioner guilty beyond reasonable doubt of the crime of estafa. The fallo of the
RTC decision reads:
WHEREFORE, IN VIEW OF THE FOREGOING PREMISES, accused Adelaida Soriano is hereby found
guilty beyond reasonable doubt of the crime of Estafa as defined and penalized under Article 315,
par. 2(a) of the Revised Penal Code, and is hereby sentenced to suffer imprisonment of Four (4)
Years, Two (2) Months and One (1) day of Prision Correccional, as minimum, to Thirteen (13) Years,
Four (4) Months of Reclusion Temporal, as maximum and, is hereby further ordered to pay the
offended party in this case the amount of P85,607.00 representing the value of the 398 sacks of corn
grains. Costs against the accused.
SO ORDERED.13 cralaw virtualaw library
Petitioner’s conviction, however, was set aside by the CA in the assailed decision. The CA disposed as
follows:
WHEREFORE, premises considered, the assailed Decision of the Regional Trial Court of Misamis
Oriental, Branch 40, dated 16 March 1999 in Criminal Case No. 95-41 is REVERSED and SET ASIDE.
Appellant ADELAIDA SORIANO is ACQUITTED of the crime charged on the ground of reasonable
doubt. However, Appellant ADELAIDA SORIANO is hereby ordered to pay private complainant
CONSOLACION R. ALAGAO the sum of seventy-four thousand, eight hundred seven pesos
(P74,807.00) as payment for the remaining balance of the cash value of the 398 sacks of corn
grains, plus, legal interest at the rate of 12% per annum computed from 9 September 1994 until
fully paid.
SO ORDERED.14 cralaw virtualaw library
The CA ruled that the prosecution failed to establish that petitioner made false pretenses, fraudulent
acts or fraudulent means to induce Alagao to deliver to her the 398 sacks of corn grains. In fact, in
Alagao’s testimony, she admitted that she delivered the corn grains to petitioner because the latter
was demanding payment from her and she wanted to pay her obligation of P40,000 to petitioner so
that she couId.get back the title of her daughter’s mortgaged property and the balance of the total
cash value of the 398 sacks of corn. Thus, the CA heId. in the absence of deceit, petitioner’s liability
is only civil.
In determining petitioner’s civil liability, the CA deducted from P85,607 – the total value of the 398
sacks of corn grains delivered to petitioner – the P3,000 petitioner had paid Alagao and the P7,800
which the CA considered as the value of the 64 sacks of corn grains which Alagao intended as partial
payment for the P40,000 loan, thus leaving the balance of P74,807.
Unsatisfied, petitioner is now before this Court questioning her civil liability. She assigns to the CA
the following errors:
1) The Court of Appeals committed error in the computation of petitioner’s civil
liability as it failed to apply correctly the principle of set-off or compensation.

2) The Court of Appeals, in applying set-off or compensation, erroneously placed
private complainant’s indebtedness to petitioner at P40,000.00 instead of P51,730.00
as found by it and as stipulated during pre-trial.

3) The Court of [A]ppeals omitted to off-set the amount equivalent to ¼ share of the
harvest (or P57,200.00) against petitioner’s indebtedness to private complainant in
the amount of P85,607.00 despite admission by private complainant.15 cralaw virtualaw library
Petitioner argues that while the CA found her indebted to Alagao in the sum of P85,607, it only offset
P40,000 instead of P51,730 which was the amount stipulated during pre-trial. Petitioner contends
that the compensation should be as follows:
Petitioner’s indebtedness: [Alagao’s] Indebtedness:
P51,730.00 (instead of
P85,607.00 (value of 398 sacks)
P40,000.00)
- 7,800.00 (value of 64
- 3,000.00 (cash payment)
sacks)
P82,607.00 P43,930.00
- 7,800.00 (value of 64 sacks)
P74,807.00 (as correctly found by
the Court of Appeals)16
Thus, deducting Alagao’s indebtedness of P43,930 from petitioner’s indebtedness amounting to
P74,807, petitioner’s remaining indebtedness shouId.only be P30,877.
Petitioner likewise argues that the CA also failed to consider Alagao’s obligation to deliver to her ¼ of
every harvest. Petitioner claims that her ¼ share in the harvest amounted to P57,200 for four
harvests. Therefore, applying the principle of set off, it is Alagao who is indebted to petitioner in the
amount of P26,323 (P57,200 minus P30,877).
Respondent on the other hand contends that the amount of loan extended to Alagao was P40,000
and not P51,730 as claimed by petitioner. Moreover, the entire value of the 398 sacks of corn grains
shouId.not be set off with Alagao’s loan since (1) the loan was not yet due and demandable at the
time of delivery of the 398 sacks of corn grains in September 1994; and (2) only 154 of the 398
sacks of corn grains belong to Alagao. Respondent also claims that P13,765.95 17 should be
considered as the correct value of the 64 sacks intended by Alagao as partial payment for the loan
and not P7,800 as found by the CA.
The petition is partly meritorious.
Compensation is a mode of extinguishing to the concurrent amount, the debts of persons who in their
own right are creditors and debtors of each other. The object of compensation is the prevention of
unnecessary suits and payments through the mutual extinction by operation of law of concurring
debts.18 Article 1279 of the Civil Code provides for the requisites for compensation to take effect:
ART. 1279. In order that compensation may be proper, it is necessary: cralawlibrary
creditor of the other; chanr0blesvirtualawlibrary
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated; chanr0blesvirtualawlibrary
(3) That the two debts be due; chanr0blesvirtualawlibrary
(4) That they be liquidated and demandable; chanr0blesvirtualawlibrary
(5) That over neither of them there be any retention or controversy, commenced by third persons
This Court rules that all the above requisites for compensation are present in the instant case.
First, petitioner and Alagao are debtors and creditors of each other. It is undisputable that petitioner
and Alagao owe each other sums of money. Petitioner owes P85,607 for the value of the corn grains
delivered to her by Alagao in September 1994 while Alagao owes petitioner P51,730 by virtue of a
loan extended by the latter in February 1994.
Second, both debts consist in a sum of money. There is no issue as to the P85,607 debt by petitioner
that it consists a sum of money. As to the P51,730 received by Alagao from petitioner, though what
was extended by petitioner consists of cash advances and fertilizers, there is no dispute that said
amount is payable in money.
Third, both debts are due. Upon delivery of the 398 sacks to petitioner, she was under the obligation
to pay for the value thereof as buyer. As to Alagao’s debt, the contract of loan provided that it is
payable in February 1996. Though it was not yet due in September 1994 when she delivered the 398
sacks of corn grains to petitioner, it eventually became due at the time of trial of the instant case.
Fourth, both debts are liquidated and demandable. A debt is liquidated when the amount is known or
is determinable by inspection of the terms and conditions of relevant documents. 19 There is no
dispute that the value of the 398 sacks of corn grains is P85,607. As to Alagao’s debt, we disagree
with respondent People that the loan amount is only P40,000 since during pre-trial, Alagao herself
admitted that she did not only receive P40,000 but P51,730 in the form of cash advances and
fertilizers from petitioner. It is well settled that an admission made in a stipulation of facts at pre-trial
by the parties is considered a judicial admission and, under the Rules of Court, requires no proof.
Such admission may be controverted only by a showing that it was made through a palpable mistake
or that no such admission was made.20 cralaw virtualaw library
And lastly, neither of the debts are subject of a controversy commenced by a third person. There are
no third-party claims with respect to Alagao’s P51,730 loan. As to petitioner’s P85,607 debt
representing the 398 sacks of corn grains, Alagao claims that she is not the sole owner of all the 398
sacks. This claim of Alagao, however, was never substantiated and a perusal of the information for
estafa shows that the subject corn grains are all owned by her. Moreover, the alleged other owners
have not commenced any action to protect their claim over it. Thus, the P85, 607 debt cannot be
considered subject of a controversy by a third person.
With the presence of all the requisites mentioned in Article 1279, legal compensation took effect by
operation of law as provided in Article 1290 of the Civil Code, to wit:
ART. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes effect
by operation of law, and extinguishes both debts to the concurrent amount, even though the
creditors and debtors are not aware of the compensation.
Thus, the computation of petitioner's civil liability should be as follows:
Value of the 398 sacks of
P85,607
corn grains
Cash payment by
- 3,000
petitioner upon delivery
P82,607
Alagao's debt - 51,730
Petitioner's net civil
P30.877
liability to Alagao
With respect to the 114 share in the harvest due to petitioner as provided in the contract of loan, the
same cannot be considered in the legal compensation of the debts of the parties since it does not
consist in a sum of money, said share being in the form of harvests. More importantly, it is not yet
liquidated. There is still a dispute as to how many harvests were made from the time of the execution
of contract of loan up to the time the action was commenced against petitioner and even when the
principal obligation became due in February 1996. Thus, the harvests due petitioner is not capable of
determination.
WHEREFORE, the May 19, 2005 Decision and January 11, 2008 Resolution of the Court of Appeals
in CA-G.R. CR No. 23108 are hereby AFFIRMED with MODIFICATION. Petitioner Adelaida Soriano
is hereby ordered to pay P30,877 as payment for the remaining balance of the cash value of the 398
sacks of corn grains, plus legal interest at the rate of 6% 21 per annum computed from finality of this
Decision until its full satisfaction.
No pronouncement as to costs.
SO ORDERED.
Sereno, C.J., (Chairperson), Brion,*Bersamin, and Reyes, JJ., concur.
Endnotes:
*
Designated additional member per Special Order No. 1497 dated July 31, 2013.
1
Rollo, pp. 18-36. Penned by Associate Justice Myrna Dimaranan-Vidal with Associate Justices
Teresita Dy-Liacco Flores and Edgardo A. Camello concurring.
2
Id. at 38-39. Penned by Associate Justice Edgardo A. Camello with Associate Justices Teresita Dy
Liacco Flores and Mario V. Lopez concurring.
3
Records, pp. 1-2.
4
Id. at 57.
5
Id. at 59-60.
6
Exh. “1,” Exhibits for Accused, pp. 1-2.
7
Exh. “E,” Exhibits for Plaintiff, pp. 5-6.
8
TSN, September 11, 1996, p. 14. nadcralawlibrary
9
Records, p. 59. redcralaw
10
TSN, September 10, 1996, pp. 8-9; Exh. “C,” Exhibits for Plaintiff, p. 3.
11
TSN, November 5, 1996, pp. 16-17.
12
Records, pp. 170-177. Penned by Acting Judge Rodrigo F. Lim, Jr.
13
Id. at 177.
14
Rollo, p. 35.
15
Id. at 12.
16
Id.
17
Computed as follows: P13,765.95 = P85,607.00, x 64 sacks. Rollo, pp. 73-74. 3
98 sacks
18
Nadela v. Engineering and Construction Corporation of Asia (ECCO-ASIA), 510 Phil. 653, 666
(2005), citing PNB MADECOR v. Uy, 415 Phil. 348, 359 (2001), Art. 1278, CIVIL CODE and Compañia
General de Tabacos v. French and Unson, 39 Phil. 34, 51 (1918).
19
Raquel-Santos v. Court of Appeals, G.R. Nos. 174986, 175071 & 181415, July 7, 2009, 592 SCRA
169, 196.
20
Toshiba Information Equipment (Phils.), Inc. v. Commissioner of Internal Revenue, G.R. No.
157594, March 9, 2010, 614 SCRA 526, 545.
21
Bangko Sentral ng Pilipinas Circular No. 799, Series of2013 issued on June 21, 2013.
45) Nisce vs Equitable PCI Bank, Inc., GR No. 167434, February 19,
2007
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 167434 February 19, 2007
SPOUSES RAMON M. NISCE and A. NATIVIDAD PARAS-NISCE, Petitioners,

vs.
EQUITABLE PCI BANK, INC., Respondent.
DECISION
CALLEJO, SR., J.:
On November 26, 2002, Equitable PCI Bank1 (Bank) as creditor-mortgagee filed a petition for extrajudicial
foreclosure before the Office of the Clerk of Court as Ex-Officio Sheriff of the Regional Trial Court (RTC) of Makati
City. It sought to foreclose the following real estate mortgage contracts executed by the spouses Ramon and
Natividad Nisce over two parcels of land covered by Transfer Certificate of Title (TCT) Nos. S-83466 and S-83467 of
the Registry of Deeds of Rizal: one dated February 26, 1974; two (2) sets of "Additional Real Estate Mortgage"
dated September 27, 1978 and June 3, 1996; and an "Amendment to Real Estate Mortgage" dated February 28,
2000. The mortgage contracts were executed by the spouses Nisce to secure their obligation under Promissory
Note Nos. 1042793 and BD-150369, including a Suretyship Agreement executed by Natividad. The obligation of the
Nisce spouses totaled ₱34,087,725.76 broken down as follows:
Spouses Ramon & Natividad Nisce - - - - - ₱17,422,285.99
Natividad P. Nisce (surety) - - - - - - - - - - US$57,306.59
and - - - - - - - - - - - - ₱16,665,439.772
On December 2, 2002, the Ex-Officio Sheriff set the sale at public auction at 10:00 a.m. on January 14, 2003, 3 or on
January 30, 2003 in the event the public auction would not take place on the earlier setting.
On January 28, 2003, the Nisce spouses filed before the RTC of Makati City a complaint for "nullity of the
Suretyship Agreement, damages and legal compensation" with prayer for injunctive relief against the Bank and the
Ex-Officio Sheriff. They alleged the following: in a letter 4 dated December 7, 2000 they had requested the bank
(through their lawyer-son Atty. Rosanno P. Nisce) to setoff the peso equivalent of their obligation against their US
dollar account with PCI Capital Asia Limited (Hong Kong), a subsidiary of the Bank, under Certificate Deposit No.
016125 and Account No. 090-0104 (Passbook No. 83-3041); 6 the Bank accepted their offer and requested for an
estimate of the balance of their account; they complied with the Bank’s request and in a letter dated February 11,
2002, informed it that the estimated balance of their account as of December 1991 (including the 11.875% per
annum interest) was US$51,000.42, 7 and that as of December 2002, Natividad’s US dollar deposit with it amounted
to at least ₱9,000,000.00; they were surprised when they received a letter from the Bank demanding payment of
their loan account, and later a petition for extrajudicial foreclosure.
The spouses Nisce also pointed out that the petition for foreclosure filed by the Bank included the alleged obligation
of Natividad as surety for the loan of Vista Norte Trading Corporation, a company owned and managed by their son
Dino Giovanni P. Nisce (₱16,665,439.77 and US$57,306.59). They insisted, however, that the suretyship
agreement was null and void for the following reasons:
(a) x x x [I]t was executed without the knowledge and consent of plaintiff Ramon M. Nisce, who is by law the
administrator of the conjugal partnership;
(b) The suretyship agreement did not redound to the benefit of the conjugal partnership and therefore did not
bind the same;
(c) Assuming, arguendo, that the suretyship contract was valid and binding, any obligation arising therefrom
is not covered by plaintiffs’ real estate mortgages which were constituted to secure the payment of certain
specific obligations only.8
The spouses Nisce likewise alleged that since they and the Bank were creditors and debtors with respect to each
other, their obligations should have been offset by legal compensation to the extent of their account with the Bank.
To support their plea for a writ of preliminary and prohibitory injunction, the spouses Nisce alleged that the amount
for which their property was being sold at public auction (₱34,087,725.76) was grossly excessive; the US dollar
deposit of Natividad with PCI Capital Asia Ltd. (Hong Kong), and the obligation covered by the suretyship
agreement had not been deducted. They insisted that their property rights would be violated if the sale at public
auction would push through. Thus, the spouses Nisce prayed that they be granted the following reliefs:
(1) that upon the filing of this Complaint and/or after due notice and summary hearing, the Honorable Court
immediately issue a temporary restraining order (TRO) restraining defendants, their representatives and/or
deputies, and other persons acting for and on their behalf from proceeding with the extrajudicial foreclosure
sale of plaintiffs’ mortgaged properties on 30 January 2003 or on any other dates subsequent thereto;
(2) that after due notice and hearing and posting of the appropriate bond, the Honorable Court convert the
TRO to a writ of preliminary prohibitory injunction;
(3) that after trial on the merits, the Honorable Court render judgment –
(a) making the preliminary injunction final and permanent;
(b) ordering defendant Bank to set off the present peso value of Mrs. Nisce’s US dollar time deposit,
inclusive of stipulated interest, against plaintiffs’ loan obligations with defendant Bank;
(c) declaring the Deed of Suretyship dated 25 May 1998 null and valid and without any binding effect
as to plaintiff spouses, and ordering defendant Bank to exclude the amounts covered by said
suretyship contract from plaintiffs’ obligations with defendant Bank;
(d) ordering defendant Bank to pay plaintiffs the following sums:
(i) at least ₱3,000,000.00 as moral damages;
(ii) at least ₱1,500,000.00 as exemplary damages; and
(iii) at least ₱500,000.00 as attorney’s fees and for other expenses of litigation.
Plaintiffs further pray for costs of suit and such other reliefs as may be deemed just and equitable. 9
On same day, the Bank filed an "Amended Petition" with the Office of the Executive Judge for extrajudicial
foreclosure of the Real Estate Mortgage to satisfy the spouses’ loan account of ₱30,533,552.24, exclusive of
interests, penalties and other charges; and the amounts of ₱16,665,439.77 and US$57,306.59 covered by the
suretyship agreement executed by Natividad Nisce. 10
In the meantime, the parties agreed to have the sale at public auction reset to January 30, 2003.
In its Answer to the complaint, the Bank alleged that the spouses had no cause of action for legal compensation
since PCI Capital was a different corporation with a separate and distinct personality; if at all, offsetting may occur
only with respect to the spouses’ US$500.00 deposit account in its Paseo de Roxas branch.
In the meantime, the Ex-Officio Sheriff set the sale at public auction at 10:00 a.m. on March 5 and 27, 2003. 11 The
spouses Nisce then filed a Supplemental Complaint with plea for a temporary restraining order to enjoin the sale at
public auction.12 Thereafter, the RTC conducted hearings on the plaintiffs’ plea for a temporary restraining order, and
the parties adduced testimonial and documentary evidence on their respective arguments.
The Case for the Spouses Nisce
Natividad frequently traveled abroad and needed a facility with easy access to foreign exchange. She inquired from
E.P. Nery, the Bank Manager for PCI Bank Paseo de Roxas Branch, about opening an account. He assured her that
she would be able to access it from anywhere in the world. She and Nery also agreed that any balance of account
remaining at maturity date would be rolled over until further instructions, or until she terminated the
facility.13 Convinced, Natividad deposited US$20,500.00 on July 19, 1984, and was issued Passbook No. 83-
3041.14 Upon her request, the bank transferred the US$20,000.00 to PCI Capital Asia Ltd. in Hong Kong via cable
order.15
On July 11, 1996, the spouses Nisce secured a ₱20,000,000.00 loan from the Bank under Promissory Note No. BD-
150369.16 The maturity date of the loan was July 11, 2001, payable in monthly installments at 16.731% interest per
annum. To secure the payment of the loan account, they executed an Amendment to the Real Estate Mortgage over
the properties17 located in Makati City covered by TCT Nos. S-83466 and S-83467. 18 They later secured another
loan of ₱13,089,936.90 on March 1, 2000 (to mature on March 1, 2005) payable quarterly at 13.9869% interest per
annum; this loan agreement is evidenced by Promissory Note (PN) No. 1042793 19 and covered by a Real Estate
Mortgage20 executed on February 28, 2000. They made a partial payment of ₱13,866,666.50 on the principal of their
loan account covered by PN No. BD-150369, and ₱5,348,239.82 on the interests. 21 These payments are evidenced
by receipts and checks.22 However, there were payments totaling ₱4,600,000.00 received by the Bank but were not
covered by checks or receipts.23 As of September 2000, the balance of their loan account under PN No. BD-150369
was only ₱4,333,333.46.24 They also made partial payment on their loan account under PN No. 1042793 which, as
of May 30, 2001, amounted to ₱2,218,793.61.25
On July 20, 1984, PCI Capital issued Certificate of Deposit No. CD-01612; 26 proof of receipt of the US$20,000.00
transferred to it by PCI Bank Paseo de Roxas Branch as requested by Natividad. The deposit account was to earn
interest at the rate of 11.875% per annum, and would mature on October 22, 1984, thereafter to be payable at the
office of the depositary in Hong Kong upon presentation of the Certificate of Deposit.
In June 1991, two sons of the Nisce spouses were stranded in Hong Kong. Natividad called the Bank and requested
for a partial release of her dollar deposit to her sons. However, she was informed that according to its computer
records, no such dollar account existed. Sometime in November 1991, she submitted her US dollar passbook with a
xerox copy of the Certificate of Deposit for the PCIB to determine the whereabouts of the account. 27 She reiterated
her request to the Bank on January 27, 1992 28 and September 11, 2000.29
In the meantime, in 1994, the Equitable Banking Corporation and the PCIB were merged under the corporate name
Equitable PCI Bank.
In a letter dated December 7, 2000, Natividad confirmed to the Bank, through Ms. Shellane R. Casaysayan, her
offer to settle their loan account by offsetting the peso equivalent of her dollar account with PCI Capital under
Account No. 090-0104.30 Their son, Atty. Rosanno Nisce, later wrote the Bank, declaring that the estimated balance
of the US dollar account with PCI Capital as of December 1991 was US$51,000.42. 31 Atty. Nisce corroborated this in
his testimony, and stated that Ms. Casaysayan had declared that she would refer the matter to her superiors. 32 A
certain Rene Esteven also told him that another offer to setoff his parents’ account had been accepted, and he was
assured that its implementation was being processed. 33 On cross examination, Atty. Nisce declared that there was
no response to his request for setoff,34 and that Esteven assured him that the Bank would look for the records of his
mother’s US dollar savings deposit.35 He was later told that the Bank had accepted the offer to setoff the account. 36
The Case for the Bank
The Bank adduced evidence that, as of January 31, 2003, the balance of the spouses’ account under the two
promissory notes, including interest and penalties, was ₱30,533,552.24. 37 It had agreed to restructure their loans on
March 31, 1998, but they nevertheless failed to pay despite repeated demands. 38 The spouses had also been
furnished with a statement of their account as of June 2001. Thus, under the terms of the Real Estate Mortgage and
Promissory Notes, it had the right to the remedy of foreclosure. It insisted that there is no showing in its records that
the spouses had delivered checks amounting to ₱4,600,000.00. 39
According to the Bank, Natividad’s US$20,000.00 deposit with the PCIB Paseo de Roxas branch was transferred to
PCI Capital via cable order,40 and that it later issued Certificate of Deposit No. 01612 (Non-transferrable). 41 In a letter
dated May 9, 2001, it informed Natividad that it had acted merely as a conduit in facilitating the transfer of the funds,
and that her deposit was made with PCI Capital and not with PCIB. PCI Capital had a separate and distinct
personality from the PCIB, and a claim against the former cannot be made against the latter. It was later advised
that PCI Capital had already ceased operations. 42
The spouses Nisce presented rebuttal documentary evidence to show that PCI Capital was registered in Hong Kong
as a corporation under Registration No. 84555 on February 27, 1989 43 with an authorized capital stock of
50,000,000 (with par value of HKD1.00); the PCIB subscribed to 29,039,993 issued shares at the par value of
HKD1.00 per share;44 on October 25, 2004, the corporate name of PCI Capital was changed to PCI Express Padala
(HK) Ltd.;45 and the stockholdings of PCIB remained at 29,039,999 shares. 46
On March 24, 2003, the RTC issued an Order47 granting the spouses Nisce’s plea for a writ of preliminary injunction
on a bond of ₱10,000,000.00. The dispositive portion of the Order reads:
WHEREFORE, in order not to render the judgment ineffectual, upon filing by the plaintiffs and the approval thereof
by the court of a bond in the amount of Php10,000,000.00, which shall answer for any damage should the court
finally decide that plaintiffs are not entitled thereto, let a writ of preliminary injunction issue enjoining defendants
Equitable-PCI Bank, Atty. Engracio M. Escasinas, Jr., and any person or entity acting for and in their behalf from
proceeding with the extrajudicial foreclosure sale of TCT Nos. 437678 and 437679 registered in the names of the
plaintiffs.48
After weighing the parties’ arguments along with their documentary evidence, the RTC declared that justice would
be best served if a writ of preliminary injunction would be issued to preserve the status quo. It had yet to resolve the
issue of setoff since only Natividad dealt with the Bank regarding her dollar account. It also had to resolve the issue
of whether the Bank had failed to credit the amount of ₱4,600,000.00 to the spouses Nisce’s account under PN No.
BD-150369, and their claim that the Bank had effectively accelerated the respective maturity dates of their
loan.49 The spouses Nisce posted the requisite bond which was approved by the RTC. 1awphi1.net
The Bank opted not to file a motion for reconsideration of the order, and instead assailed the trial court’s order
before the CA via petition for certiorari under Rule 65 of the Rules of Court. The Bank alleged that the RTC had
acted without or in excess of its jurisdiction, or with grave abuse of its discretion amounting to lack or excess of
jurisdiction when it issued the assailed order;50 the spouses Nisce had failed to prove the requisites for the issuance
of a writ of preliminary injunction; respondents’ claim that their account with petitioner had been extinguished by
legal compensation has no factual and legal basis. It further asserted that according to the evidence, Natividad
made the US$20,000.00 deposit with PCI Capital before it merged with Equitable Bank – hence, the Bank was not
the debtor of Natividad relative to the dollar account. The Bank cited the ruling of this Court in Escaño v. Heirs of
Escaño and Navarro51 to support its arguments. It insisted that the spouses Nisce had failed to establish "irreparable
injury" in case of denial of their plea for injunctive relief.
The spouses, for their part, pointed out that the Bank failed to file a motion for reconsideration of the trial court’s
order, a condition sine qua non to the filing of a petition for certiorari under Rule 65 of the Rules of Court. Moreover,
the error committed by the trial court is a mere error of judgment not correctible by certiorari; hence, the petition
should have been dismissed outright by the CA. They reiterated their claim that they had made a partial payment of
₱4,600,000.00 on their loan account which petitioner failed to credit in their favor. The Bank had agreed to debit
their US dollar savings deposit in the PCI Capital as payment of their loan account. They insisted that they had
never deposited their US dollar account with PCI Capital but with the Bank, and that they had never defaulted on
their loan account. Contrary to the Bank’s claim, they would have suffered irreparable injury had the trial court not
enjoined the extrajudicial foreclosure of the real estate mortgage.
On December 22, 2004, the CA rendered judgment granting the petition and nullifying the assailed Order of the
RTC.52 The appellate court declared that a petition for certiorari under Rule 65 of the Rules of Court may be filed
despite the failure to file a motion for reconsideration, particularly in instances where the issue raised is one of law;
where the error is patent; the assailed order is void, or the questions raised are the same as those already ruled
upon by the lower court. According to the appellate court, the issue raised before it was purely one of law: whether
the loan account of the spouses was extinguished by legal compensation. Thus, a motion for the reconsideration of
the assailed order was not a prerequisite to a petition for certiorari under Rule 65.
The appellate court further declared that the trial court committed grave abuse of its discretion in issuing the
assailed order, since no plausible reason was given by the spouses Nisce to justify the injunction of the extrajudicial
foreclosure of the real estate mortgage. Given their admission that they had not settled the obligations secured by
the mortgage, the Bank had a clear right to seek the remedy of foreclosure.
The CA further declared as devoid of factual basis the spouses Nisce’s argument that the Bank should have
applied, by way of legal compensation, the peso equivalent of their time deposit with PCI Capital as partial
settlement of their obligations. It held that for compensation to take place, the requirements set forth in Articles 1278
and 1279 of the Civil Code of the Philippines must be present; in this case, the parties are not mutually creditors and
debtors of each other. It pointed out that the time deposit which the spouses Nisce sought to offset against their
obligations to the Bank is maintained with PCI Capital. Even if PCI Capital is a subsidiary of the Bank, compensation
cannot validly take place because the Bank and PCI Capital are two separate and distinct corporations. It pointed
out the settled principle "that a corporation has a personality separate and distinct from its stockholders and from
other corporations to which it may be connected."
The CA further declared that the alleged ₱4,600,000.00 payment on PN No. BD-150369 was not pleaded in the
spouses’ complaint and supplemental complaint before the court a quo. What they alleged, aside from legal
compensation, was that the mortgage is not liable for the obligation of Natividad Nisce as surety for the loans
obtained by a trading firm owned and managed by their son. The CA further pointed out that the Bank precisely
amended the petition for foreclosure sale by deleting the claim for Natividad’s obligation as surety. The appellate
court concluded that the injunctive writ was issued by the RTC without factual and legal basis. 53
The spouses Nisce moved to have the decision reconsidered, but the appellate court denied the motion. They thus
filed the instant petition for review on the following grounds:
5.1. THE HONORABLE COURT OF APPEALS ERRED IN TAKING COGNIZANCE OF THE PETITION
FOR CERTIORARI DESPITE THE BANK’S FAILURE TO FILE A MOTION FOR RECONSIDERATION
WITH THE TRIAL COURT.
5.2. THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT

PREMATURELY RULED ON THE MERITS OF THE MAIN CASE.
5.3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT JUDGE HAD
COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION
IN ISSUING A TEMPORARY RESTRAINING ORDER AND A WRIT OF PRELIMINARY INJUNCTION IN
FAVOR OF THE SPOUSES NISCE.54
Petitioners aver that the CA erred in not dismissing respondent Bank’s petition for certiorari outright because of the
absence of a condition precedent: the filing of a motion for reconsideration of the assailed Order of the RTC before
filing the petition for certiorari in the CA. They insist that respondent bank’s failure to file a motion for reconsideration
of the assailed Order deprived the RTC of its option to resolve the issue of whether it erred in issuing the writ of
preliminary injunction in their favor.
Petitioners insist that in resolving whether a petition for a writ of preliminary injunction should be granted, the trial
court and the appellate court are not to resolve the merits of the main case. In this case, however, the CA resolved
the bone of contention of the parties in the trial court: whether the loan account of petitioners with respondent bank
had been extinguished by legal compensation against petitioner Natividad Nisce’s US dollar savings account with
PCI Capital in Hong Kong. The CA reversed the assailed order of the trial court by resolving the main issue in the
trial court on its merits, and declaring that the US dollar savings deposit of the petitioner Natividad Nisce with the
PCI Capital cannot be used to offset the loan account of petitioners with respondent bank. In fine, according to
petitioners, the CA preempted the ruling of the RTC on the main issue even before the parties could be given an
opportunity to complete the presentation of their respective evidences. Petitioners point out that in the assailed
Order, the RTC declared that to determine whether respondent had credited petitioners for the amount of
₱4,600,000.00 under PN No. BD-150369 and whether respondent as mortgagee-creditor accelerated the maturities
of the two (2) promissory notes executed by petitioner, there was a need for a full-blown trial and an exhaustive
consideration of the evidence of the parties.
Petitioners further insist that a petition for a writ of certiorari is designed solely to correct errors of jurisdiction and not
errors of judgment, such as errors in the findings and conclusions of the trial court. Petitioners maintain that the trial
court’s erroneous findings and conclusions (according to respondent bank) are not the proper subjects for a petition
for certiorari. Contrary to the findings of the CA, they did not admit in the trial court that they were in default in the
payment of their loan obligations. They had always maintained that they had no outstanding obligation to
respondent bank precisely because their loan account had been offset by the US dollar deposit of petitioner
Natividad Nisce, and that they had made check payments of ₱4,600,000.00 which respondent bank had not
credited in their favor. Likewise erroneous is the CA ruling that they would not suffer irreparable damage or injury if
their properties would be sold at public auction following the extrajudicial foreclosure of the mortgage. Petitioners
point out that their conjugal home stands on the subject properties and would be lost if sold at public auction.
Besides, petitioners aver, the injury to respondent bank resulting from the issuance of a writ of preliminary injunction
is amply secured by the ₱10,000,000.00 injunction bond which they had posted.
For its part, respondent avers that, as held by the CA, the requirement of the filing of a motion for reconsideration of
the assailed Order admits of exceptions, such as where the issue presented in the appellate court is the same issue
presented and resolved by the trial court. It insists that petitioners failed to prove a clear legal right to injunctive
relief; hence, the trial court committed grave abuse of discretion in issuing a writ of preliminary injunction.
Respondent maintains that the sole issue involved in the petition for certiorari of respondent in the CA was whether
or not the trial court committed grave abuse of its discretion in issuing the writ of preliminary injunction. Necessarily,
the CA would have to delve into the circumstances behind such issuance. In so doing, the CA had to consider and
calibrate the testimonial and documentary evidence adduced by the parties. However, the RTC and the CA did not
resolve with finality the threshold factual and legal issue of whether the loan account of petitioners had been paid in
full before it filed its petition for extrajudicial foreclosure of the real estate mortgage.
The Ruling of the Court
The Petition in the

Court of Appeals
Not Premature
The general rule is that before filing a petition for certiorari under Rule 65 of the Rules of Court, the petitioner is
mandated to comply with a condition precedent: the filing of a motion for reconsideration of the assailed order, and
the subsequent denial of the court a quo. It must be stressed that a petition for certiorari is an extraordinary remedy
and should be filed only as a last resort. The filing of a motion for reconsideration is intended to afford the public
respondent an opportunity to correct any actual error attributed to it by way of re-examination of the legal and factual
issues.55 However, the rule is subject to the following recognized exceptions:
(a) where the order is a patent nullity, as where the court a quo has no jurisdiction; (b) where the questions raised in
the certiorari proceeding have been duly raised and passed upon by the lower court, or are the same as those
raised and passed upon in the lower court; (c) where there is an urgent necessity for the resolution of the question
and any further delay would prejudice the interests of the Government or of the petitioner or the subject matter of
the action is perishable; (d) where, under the circumstances, a motion for reconsideration would be useless; (e)
where petitioner was deprived of due process and there is extreme urgency for relief; (f) where, in a criminal case,
relief from an order of arrest is urgent and the granting of such relief by the trial court is improbable; (g) where the
proceedings in the lower court are a nullity for lack of due process; (h) where the proceedings was ex parte or in
which the petitioner had no opportunity to object; and (i) where the issue raised is one purely of law or public interest
is involved.56
As will be shown later, the March 24, 2003 Order of the trial court granting petitioner’s plea for a writ of preliminary
injunction was issued with grave abuse of discretion amounting to excess or lack of jurisdiction and thus a nullity. If
the trial court issues a writ of preliminary injunction despite the absence of proof of a legal right and the injury
sustained by the plaintiff, the writ is a nullity.57
Petitioners Are Not

Entitled to a Writ of
Preliminary Prohibitory
Injunction
Section 3, Rule 58 of the Rules of Court provides that a preliminary injunction may be granted when the following
have been established:
(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in
restraining the commission or continuance of the act or acts complained of, or in requiring the performance
of an act or acts, either for a limited period or perpetually;
(b) That the commission, continuance or nonperformance of the act or acts complained of during the
litigation would probably work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or
suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the
subject of the action or proceeding, and tendering to render the judgment ineffectual.
The grant of a preliminary injunction in a case rests on the sound discretion of the court with the caveat that it should
be made with great caution. The exercise of sound judicial discretion by the lower court should not be interfered with
except in cases of manifest abuse. Injunction is a preservative remedy for the protection of the parties’ substantive
rights and interests. The sole aim of a preliminary injunction is to preserve the status quo within the last actual status
that preceded the pending controversy until the merits of the case can be heard fully. Moreover, a petition for a
preliminary injunction is an equitable remedy, and one who comes to claim for equity must do so with clean hands. It
is to be resorted to by a litigant to prevent or preserve a right or interest where there is a pressing necessity to avoid
injurious consequences which cannot be remedied under any standard of compensation. A petition for a writ of
preliminary injunction rests upon an alleged existence of an emergency or of a special reason for such a writ before
the case can be regularly tried. By issuing a writ of preliminary injunction, the court can thereby prevent a threatened
or continued irreparable injury to the plaintiff before a judgment can be rendered on the claim. 58
The plaintiff praying for a writ of preliminary injunction must further establish that he or she has a present and
unmistakable right to be protected; that the facts against which injunction is directed violate such right; 59 and there is
a special and paramount necessity for the writ to prevent serious damages. In the absence of proof of a legal right
and the injury sustained by the plaintiff, an order for the issuance of a writ of preliminary injunction will be nullified.
Thus, where the plaintiff’s right is doubtful or disputed, a preliminary injunction is not proper. The possibility of
irreparable damage without proof of an actual existing right is not a ground for a preliminary injunction. 60
However, to establish the essential requisites for a preliminary injunction, the evidence to be submitted by the
plaintiff need not be conclusive and complete.61 The plaintiffs are only required to show that they have an ostensible
right to the final relief prayed for in their complaint. 62 A writ of preliminary injunction is generally based solely on initial
or incomplete evidence.63 Such evidence need only be a sampling intended merely to give the court an evidence of
justification for a preliminary injunction pending the decision on the merits of the case, and is not conclusive of the
principal action which has yet to be decided.64
It bears stressing that findings of the trial court granting or denying a petition for a writ of preliminary injunction
based on the evidence on record are merely provisional until after the trial on the merits of the case shall have been
concluded.65
The trial court, in granting or dismissing an application for a writ of preliminary injunction based on the pleadings of
the parties and their respective evidence must state in its order the findings and conclusions based on the evidence
and the law. This is to enable the appellate court to determine whether the trial court committed grave abuse of its
discretion amounting to excess or lack of jurisdiction in resolving, one way or the other, the plea for injunctive relief.
The trial court’s exercise of its judicial discretion whether to grant or deny an application for a writ of preliminary
injunction involves the assessment and evaluation of the evidence, and its findings of facts are ordinarily binding
and conclusive on the appellate court and this Court. 66
We agree with respondent’s contention that as creditor-mortgagee, it has the right under the real estate mortgage
contract and the amendment thereto to foreclose extrajudicially, the real estate mortgage and sell the property at
public auction, considering that petitioners had failed to pay their loans, plus interests and other incremental
amounts as provided for in the deeds. Petitioners contend, however, that if respondent bank extrajudicially
forecloses the real estate mortgage and has petitioners’ property sold at public auction for an amount in excess of
the balance of their loan account, petitioner’s contractual and substantive rights under the real estate mortgage
would be violated; in such a case, the extrajudicial foreclosure sale may be enjoined by a writ of preliminary
injunction.
Respondent bank sought the extrajudicial foreclosure of the real estate mortgage and was to sell the property at
public auction for ₱30,533,552.24. The amount is based on Promissory Notes No. 1042793 and BD-150369,
interests, penalty charges, and attorney’s fees, as of January 31, 2003, exclusive of all interests, penalties, other
charges, and foreclosure costs accruing thereafter. 67 Petitioners asserted before the trial court that respondents
sought the extrajudicial foreclosure of the mortgaged deed for an amount far in excess of what they owed, because
the latter failed to credit ₱4,600,000.00 paid in checks but without any receipts having been issued therefor; and the
₱9,000,000.00 peso equivalent of the US$20,000.00 deposit of petitioner Natividad Nisce with PCIB under
Passbook No. 83-3041 and Certificate of Deposit No. CD-01612 issued by PCI Capital on July 23, 1984. Petitioners
maintain that the US$20,000.00 dollar deposit should be setoff against their account with respondent against their
loan account, on their claim that respondent is their debtor insofar as said deposit is concerned.
It was the burden of petitioners, as plaintiffs below, to adduce preponderant evidence to prove their claim that
respondent bank was the debtor of petitioner Natividad Nisce relative to her dollar deposit with PCIB, and later
transferred to PCI Capital in Hong Kong, a subsidiary of respondent Bank. Petitioners, however, failed to discharge
their burden.
Under Article 1278 of the New Civil Code, compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. In order that compensation may be proper, petitioners were burdened to
establish the following:
the other;
communicated in due time to the debtor.68
Compensation takes effect by operation of law when all the requisites mentioned in Article 1279 of the New Civil
Code are present and extinguishes both debts to the concurrent amount even though the creditors and debtors are
not aware of the compensation. Legal compensation operates even against the will of the interested parties and
even without their consent.69 Such compensation takes place ipso jure; its effects arise on the very day on which all
requisites concur.70
As its minimum, compensation presupposes two persons who, in their own right and as principals, are mutually
indebted to each other respecting equally demandable and liquidated obligations over any of which no retention or
controversy commenced and communicated in due time to the debtor exists. Compensation, be it legal or
conventional, requires confluence in the parties of the characters of mutual debtors and creditors, although their
rights as such creditors or their obligations as such debtors need not spring from one and the same contract or
transaction.71
Article 1980 of the New Civil Code provides that fixed, savings and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loans. Under Article 1953, of the same Code, a
person who secures a loan of money or any other fungible thing acquires the ownership thereof, and is bound to
pay the creditor an equal amount of the same kind and quality. The relationship of the depositors and the Bank or
similar institution is that of creditor-debtor. Such deposit may be setoff against the obligation of the depositor with
the bank or similar institution.
When petitioner Natividad Nisce deposited her US$20,500.00 with the PCIB on July 19, 1984, PCIB became the
debtor of petitioner. However, when upon petitioner’s request, the amount of US$20,000.00 was transferred to PCI
Capital (which forthwith issued Certificate of Deposit No. 01612), PCI Capital, in turn, became the debtor of
Natividad Nisce. Indeed, a certificate of deposit is a written acknowledgment by a bank or borrower of the receipt of
a sum of money or deposit which the Bank or borrower promises to pay to the depositor, to the order of the
depositor; or to some other person; or to his order whereby the relation of debtor and creditor between the bank and
the depositor is created.72 The issuance of a certificate of deposit in exchange for currency creates a debtor-creditor
relationship.73
Admittedly, PCI Capital is a subsidiary of respondent Bank. Even then, PCI Capital [PCI Express Padala (HK) Ltd.]
has an independent and separate juridical personality from that of the respondent Bank, its parent company; hence,
any claim against the subsidiary is not a claim against the parent company and vice versa. 74 The evidence on record
shows that PCIB, which had been merged with Equitable Bank, owns almost all of the stocks of PCI Capital.
However, the fact that a corporation owns all of the stocks of another corporation, taken alone, is not sufficient to
justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence
shall be respected, and the liability of the parent corporation, as well as the subsidiary shall be confined to those
arising in their respective business.75 A corporation has a separate personality distinct from its stockholders and from
other corporations to which it may be conducted. This separate and distinct personality of a corporation is a fiction
created by law for convenience and to prevent injustice.
This Court, in Martinez v. Court of Appeals 76 held that, being a mere fiction of law, peculiar situations or valid
grounds can exist to warrant, albeit sparingly, the disregard of its independent being and the piercing of the
corporate veil. The veil of separate corporate personality may be lifted when, inter alia, the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation; or when the corporation is used as a cloak or cover for fraud or illegality; or to work injustice; or
where necessary to achieve equity or for the protection of the creditors. In those cases where valid grounds exist for
piercing the veil of corporate entity, the corporation will be considered as a mere association of persons. The liability
will directly attach to them.77
The Court likewise declared in the same case that the test in determining the application of the instrumentality or
alter ego doctrine is as follows:
1. Control, not mere majority or complete stock control, but complete dominion, not only of finances but of
policy and business practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal
rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complaint of.
The Court emphasized that the absence of any one of these elements prevents "piercing the corporate veil." In
applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendant’s relationship to that operation. 78
Petitioners failed to adduce sufficient evidence to justify the piercing of the veil of corporate entity and render
respondent Bank liable for the US$20,000.00 deposit of petitioner Natividad Nisce as debtor.
On hindsight, petitioners could have spared themselves the expenses and tribulation of a litigation had they just
withdrawn their deposit from the PCI Capital and remitted the same to respondent. However, petitioner insisted on
their contention of setoff.
On the ₱4,600,000.00 paid in checks allegedly remitted by petitioners to respondent in partial payment of their loan
account, petitioners failed to adduce in evidence the checks to show that, indeed, the checks were drawn by
petitioners and delivered to respondent, and that respondent was able to cash the checks. The only evidence
adduced by petitioners is a piece of paper listing the serial numbers of the checks and the amount of each check:
PAYMENTS MADE & RECEIVED BY EBC BUT W/O RECEIPTS
1. Dec. 29, 1997 - EBC-0000039462 - ₱2,000,000.00
2. Jan. 22, 1998 - EBC-213016118C - 1,000,000.00
3. Feb. 24, 1998 - UB -0000074619 - 800,000.00
4. Mar. 23, 1998 - EBC-213016121C - 800,000.00
79
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. The Decision of the Court of Appeals
is AFFIRMED. Costs against petitioners.
SO ORDERED.
ROMEO J. CALLEJO, SR.

Associate Justice
WE CONCUR:
CONSUELO YNARES-SANTIAGO
Associate Justice
MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO

Associate Justice Asscociate Justice
ATTESTATION
to the writer of the opinion of the Court’s Division.
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation, it is hereby
certified that the conclusions in the above decision were reached in consultation before the case was assigned to
the writer of the opinion of the Court’s Division.
REYNATO S. PUNO
Chief Justice
Footnotes
1
Formerly the Philippine Commercial and International Bank and the Equitable Banking Corporation. The
two banks were later merged under the corporate name "Equitable PCI Bank."
2
Records, pp. 47-50.
3
Id. at 46.
4
Exhibit "K."
5
Exhibit "H."
6
Supra note 4.
7
Exhibit "L-1."
8
Records, p. 9.
9
Id. at 12-14.
10
Id. at 67-69.
11
Id. at 193.
12
Id. at 186-193.
13
Exhibit "U."
14
Exhibit "I."
15
The cable order reads:
Philippine Commercial International Bank
CABLE ORDER
FULL RATE TELEX PREPARED BY: AUTHORIZED SIGNATURE

NIGHT LETTER Beth Mundo
TESTED BY DATE (Sgd.) Illegible
7.19.84
SEND TO: PCI CAPITAL ASIA LIMITED HONG KONG
TEST ATTN: MR. EDUARDO CARREON/VP
MESSAGE: VALUE TODAY WE CREDITED YOUR ACCOUNT WITH CHASE MANHATTAN BANK
NEW YORK FOR US DOLLARS: TWENTY THOUSAND ONLY (US$20,000.00) AS TIME DEPOSIT
PLACEMENT IN FAVOR OF A. NATIVIDAD PARAS NISCE FOR A PERIOD OF 90 DAYS STOP
BY ORDER OF THE SAME UNDER OUR REF NO. PDR TT343 84-90-010 (PASEO DE ROXAS
BR) STOP PLS TELEX CONFIRMATION AS WE HAVE INSTRUCTED CHASE MANHATTAN
BANK NY TO CREDIT YOUR ACCOUNT ON EVEN DATE STOP PLS SEND CERTIFICATE OF
DEPOSIT VIA POUCH ATTN: E.P. NERY/AVP STOP THANKS AND REGARDS FULLSTOP
PCIB PASEO DE ROXAS SUNDRIES
16
Exhibit "U-2."
17
Exhibit "E."
18
Exhibit "A" & "B."
19
Exhibit "U-3."
20
Exhibit "F."
21
Exhibit "U-5."
22
Exhibits "U-5," "U-5-A" to "U-5-FF."
23
Exhibit "U-6."
24
Exhibit "Q-1."
25
Exhibit "U-7."
26
Exhibit "H."
27
Exhibit "I."
28
Id.
29
Exhibit "J."
30
Exhibit "K."
31
Exhibits "L" & "L-1."
32
TSN, March 4, 2003, p. 82.
33
TSN, April 4, 2003, p. 91.
34
TSN, March 4, 2003, pp. 97-98.
35
Id. at 98.
36
Id. at 99.
37
Exhibit "4-H."
38
Exhibits "4-I" to "4-M."
39
TSN, February 8, 2005, p. 7.
40
Exhibit "8."
41
Exhibit "7."
42
Records, p. 170.
43
Exhibit "B-1"-rebuttal.
44
Exhibit "B-2-A"-rebuttal.
45
Exhibit "C-1"-rebuttal.
46
Exhibit "D-3–A"-rebuttal.
47
48
Id.
49
Id. at 416.
50
Rollo, p. 112.
51
28 Phil. 73 (1914).
Penned by Associate Justice Edgardo P. Cruz, with Associate Justices Godardo A. Jacinto and Jose C.
52
Mendoza (both retired), concurring; rollo, pp. 35-43.
53
Id. at 41-43.
54
Id. at 16.
55
Sevillana v. I.T. (International) Corporation, G.R. No. 99047, April 16, 2001, 356 SCRA 451, 462.
56
Tan, Jr. v. Sandiganbayan, 354 Phil. 467, 469-470 (1998).
Ong Ching Kian Chuan v. Court of Appeals, 415 Phil. 365, 374-375 (2001), citing Developers Group of
57
Companies, Inc. v. Court of Appeals, 219 SCRA 715 (1993); Inter-Asia Services Corporation v. Court of
Appeals, 331 Phil. 708 (1996).
58
Del Rosario v. Court of Appeals, 325 Phil. 424, 431-432 (1996).
Searth Commodities Corporation v. Court of Appeals, G.R. No. 64220, March 31, 1992, 207 SCRA 622,
59
628.
Medina v. Greenfield Development Corporation, G.R. No. 140228, November 19, 2004, 443 SCRA 150,
60
159.
61
Olalia, et al. v. Hizon, et al., 274 Phil. 66, 74 (1991).
62
Los Baños Rural Bank, Inc. v. Africa, 433 Phil. 930, 940 (2002).
63
La Vista Association, Inc. v. Court of Appeals, 344 Phil. 30, 44 (1997).
64
Saulog v. Court of Appeals, 330 Phil. 590, 602 (1996).
65
Tambaoan v. Court of Appeals, 417 Phil. 638, 694 (2001).
66
Golangco v. Court of Appeals, G.R. No. 124724, December 22, 1997, 283 SCRA 293.
67
Records, pp. 67-69.
68
Article 1279, New Civil Code.
69
Bank of the Philippine Island v. Court of Appeals, 325 Phil. 930. 938 (1996).
70
Republic v. Court of Appeals, G.R. No. 25012, July 22, 1975, 65 SCRA 186, 190.
Mavest (U.S.A.) Inc. v. Sampaguita Garment Corporation, G.R. No. 127454, September 21, 2005, 470
71
SCRA 440, 449.
72
Ma v. Community Bank, 494 F. Supplement 252.
73
Gendrickson v. Buchbinder, 465 F. Supplement 1250.
74
Velarde v. Lopez, Inc., G.R. No. 153886, January 14, 2004, 419 SCRA 422, 431.
75
MR Holdings, Ltd. v. Bajar, G.R. No. 138104, April 11, 2002, 380 SCRA 617, 641.
76
G.R. No. 131673, September 10, 2004, 438 SCRA 130.
77
Id. at 150-151.
78
Id. at 151.
79
Exhibit "U-6."
46) Starbright Sales Enterprise, Inc. vs Philippine Real Corporation,

et. Al GR No. 177936, January 18, 2012
THIRD DIVISION
[G.R. No. 177936 : January 18, 2012]
STARBRIGHT SALES ENTERPRISES, INC., PETITIONER, VS. PHILIPPINE REALTY

CORPORATION, MSGR. DOMINGO A. CIRILOS, TROPICANA PROPERTIES AND
DEVELOPMENT CORPORATION AND STANDARD REALTY CORPORATION, RESPONDENTS.
DECISION
ABAD, J.:
The present case involves a determination of the perfection of contract of sale.
The Facts and the Case
On April 17, 1988 Ramon Licup wrote Msgr. Domingo A. Cirilos, offering to buy three contiguous
parcels of land in Parañaque that The Holy See and Philippine Realty Corporation (PRC) owned for
P1,240.00 per square meter. Licup accepted the responsibility for removing the illegal settlers on the
land and enclosed a check for P100,000.00 to "close the transaction." [1] He undertook to pay the
balance of the purchase price upon presentation of the title for transfer and once the property has
been cleared of its occupants. cralaw
Msgr. Cirilos, representing The Holy See and PRC, signed his name on the conforme portion of the
letter and accepted the check. But the check could not be encashed due to Licup's stop-order
payment. Licup wrote Msgr. Cirilos on April 26, 1988, requesting that the titles to the land be
instead transferred to petitioner Starbright Sales Enterprises, Inc. (SSE). He enclosed a new check
for the same amount. SSE's representatives, Mr. and Mrs. Cu, did not sign the letter.
On November 29, 1988 Msgr. Cirilos wrote SSE, requesting it to remove the occupants on the
property and, should it decide not to do this, Msgr. Cirilos would return to it the P100,000.00 that he
received. On January 24, 1989 SSE replied with an "updated proposal." [2] It would be willing to
comply with Msgr. Cirilos' condition provided the purchase price is lowered to P1,150.00 per square
meter.
On January 26, 1989 Msgr. Cirilos wrote back, rejecting the "updated proposal." He said that other
buyers were willing to acquire the property on an "as is, where is" basis at P1,400.00 per square
meter. He gave SSE seven days within which to buy the property at P1,400.00 per square meter,
otherwise, Msgr. Cirilos would take it that SSE has lost interest in the same. He enclosed a check for
P100,000.00 in his letter as refund of what he earlier received.
On February 4, 1989 SSE wrote Msgr. Cirilos that they already had a perfected contract of sale in the
April 17, 1988 letter which he signed and that, consequently, he could no longer impose
amendments such as the removal of the informal settlers at the buyer's expense and the increase in
the purchase price.
SSE claimed that it got no reply from Msgr. Cirilos and that the next thing they knew, the land had
been sold to Tropicana Properties on March 30, 1989. On May 15, 1989 SSE demanded rescission of
that sale. Meanwhile, on August 4, 1989 Tropicana Properties sold the three parcels of land to
Standard Realty.
Its demand for rescission unheeded, SSE filed a complaint for annulment of sale and reconveyance
with damages before the Regional Trial Court (RTC) of Makati, Branch 61, against The Holy See, PRC,
Msgr. Cirilos, and Tropicana Properties in Civil Case 90-183. SSE amended its complaint on February
24, 1992, impleading Standard Realty as additional defendant.
The Holy See sought dismissal of the case against it, claiming that as a foreign government, it cannot
be sued without its consent. The RTC held otherwise but, on December 1, 1994, [3] the Court
reversed the ruling of the RTC and ordered the case against The Holy See dismissed. By Order of
January 26, 1996 the case was transferred to the Parañaque RTC, Branch 258.
SSE alleged that Licup's original letter of April 17, 1988 to Msgr. Cirilos constituted a perfected
contract. Licup even gave an earnest money of P100,000.00 to "close the transaction." His offer to
rid the land of its occupants was a "mere gesture of accommodation if only to expedite the transfer
of its title."[4] Further, SSE claimed that, in representing The Holy See and PRC, Msgr. Cirilos acted in
bad faith when he set the price of the property at P1,400.00 per square meter when in truth, the
property was sold to Tropicana Properties for only P760.68 per square meter.
Msgr. Cirilos maintained, on the other hand, that based on their exchange of letters, no contract of
sale was perfected between SSE and the parties he represented. And, only after the negotiations
between them fell through did he sell the land to Tropicana Properties.
In its Decision of February 14, 2000, the Parañaque RTC treated the April 17, 1988 letter between
Licum and Msgr. Cirilos as a perfected contract of sale between the parties. Msgr. Cirilos attempted
to change the terms of contract and return SSE's initial deposit but the parties reached no agreement
regarding such change. Since such agreement was wanting, the original terms provided in the April
17, 1988 letter continued to bind the parties.
On appeal to the Court of Appeals (CA), the latter rendered judgment on November 10, 2006,
[5]
reversing the Parañaque RTC decision. The CA held that no perfected contract can be gleaned from
the April 17, 1988 letter that SSE had relied on. Indeed, the subsequent exchange of letters
between SSE and Msgr. Cirilos show that the parties were grappling with the terms of the sale.
Msgr. Cirilos made no unconditional acceptance that would give rise to a perfected contract.
As to the P100,000.00 given to Msgr. Cirilos, the CA considered it an option money that secured for
SSE only the privilege to buy the property even if Licup called it a "deposit." The CA denied SSE's
motion for reconsideration on May 2, 2007.
The Issue Presented
The only issue in this case is whether or not the CA erred in holding that no perfected contract of sale
existed between SSE and the land owners, represented by Msgr. Cirilos.
The Court's Ruling
Three elements are needed to create a perfected contract: 1) the consent of the contracting parties;
(2) an object certain which is the subject matter of the contract; and (3) the cause of the obligation
which is established.[6] Under the law on sales, a contract of sale is perfected when the seller,
obligates himself, for a price certain, to deliver and to transfer ownership of a thing or right to the
buyer, over which the latter agrees.[7] From that moment, the parties may demand reciprocal
performance.
The Court believes that the April 17, 1988 letter between Licup and Msgr. Cirilos, the representative
of the property's owners, constituted a perfected contract. When Msgr. Cirilos affixed his signature
on that letter, he expressed his conformity to the terms of Licup's offer appearing on it. There was
meeting of the minds as to the object and consideration of the contract.
But when Licup ordered a stop-payment on his deposit and proposed in his April 26, 1988 letter to
Msgr. Cirilos that the property be instead transferred to SSE, a subjective novation took place.
A subjective novation results through substitution of the person of the debtor or through subrogation
of a third person to the rights of the creditor. To accomplish a subjective novation through change in
the person of the debtor, the old debtor needs to be expressly released from the obligation and the
third person or new debtor needs to assume his place in the relation. [8]
Novation serves two functions - one is to extinguish an existing obligation, the other to substitute a
new one in its place - requiring concurrence of four requisites: 1) a previous valid obligation; 2) an
agreement of all parties concerned to a new contract; 3) the extinguishment of the old obligation;
and 4) the birth of a valid new obligation. [9]
Notably, Licup and Msgr. Cirilos affixed their signatures on the original agreement embodied in
Licup's letter of April 26, 1988. No similar letter agreement can be found between SSE and Msgr.
Cirilos.
The proposed substitution of Licup by SSE opened the negotiation stage for a new contract of sale as
between SSE and the owners. The succeeding exchange of letters between Mr. Stephen Cu, SSE's
representative, and Msgr. Cirilos attests to an unfinished negotiation. Msgr. Cirilos referred to his
discussion with SSE regarding the purchase as a "pending transaction." [10]
Cu, on the other hand, regarded SSE's first letter to Msgr. Cirilos as an "updated proposal." [11] This
proposal took up two issues: which party would undertake to evict the occupants on the property and
how much must the consideration be for the property. These are clear indications that there was no
meeting of the minds between the parties. As it turned out, the parties reached no consensus
regarding these issues, thus producing no perfected sale between them.
Parenthetically, Msgr. Cirilos did not act in bad faith when he sold the property to Tropicana even if it
was for a lesser consideration. More than a month had passed since the last communication between
the parties on February 4, 1989. It is not improbable for prospective buyers to offer to buy the
property during that time.
The P100,000.00 that was given to Msgr. Cirilos as "deposit" cannot be considered as earnest
money. Where the parties merely exchanged offers and counter-offers, no contract is perfected
since they did not yet give their consent to such offers. [12] Earnest money applies to a perfected sale.
SSE cannot revert to the original terms stated in Licup's letter to Msgr. Cirilos dated April 17, 1988
since it was not privy to such contract. The parties to it were Licup and Msgr. Cirilos. Under the
principle of relativity of contracts, contracts can only bind the parties who entered into it. It cannot
favor or prejudice a third person.[13] Petitioner SSE cannot, therefore, impose the terms Licup stated
in his April 17, 1988 letter upon the owners. cralaw
WHEREFORE, the Court DISMISSES the petition and AFFIRMS the Court of Appeals Decision dated

November 10, 2006 in CA-G.R. CV 67366.
SO ORDERED.
Velasco, Jr., (Chairperson), Peralta, Mendoza, and Perlas-Bernabe, JJ., concur.
Endnotes:
[1]
Rollo, p. 14.
[2]
Id. at 65.
[3]
Holy See, The v. Rosario, Jr., G.R. No. 101949, December 1, 1994, 238 SCRA 524.
[4]
CA rollo, p. 100.
[5]
Penned by Associate Justice Monina Arevalo-Zeñarosa with the concurrence of Associate Justices
Martin S. Villarama, Jr. and Lucas P. Bersamin (both Members of the Court), rollo, pp. 157-184.
[6]
Civil Code, Article 1318.
[7]
Ang Yu Asuncion v. Court of Appeals, G.R. No. 109125, December 2, 1994, 238 SCRA 602, 611.
[8]
Ajax Marketing & Development Corporation v. Court of Appeals, G.R. No. 118585, September 14,
1995, 248 SCRA 222, 227.
[9]
Quinto v. People, 365 Phil. 259, 266 (1999).
[10]
Rollo, p. 64.
[11]
See note 2.
[12]
XYST Corporation. v. DMC Urban Properties Development, Inc., G.R. No. 171968, July 31, 2009,
594 SCRA 598, 605.
[13]
Ramos v. Court of Appeals, 362 Phil. 205, 215 (1999).
47) Sueno vs Land Bank of the Philippines , GR No. 174711,

September 17, 2008
THIRD DIVISION
[G.R. NO. 174711 : September 17, 2008]
SALLY SUENO, Petitioner, v. LAND BANK OF THE PHILIPPINES, Respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari filed by petitioner Sally Sueno (Sueno) seeking
to reverse and set aside the Decision1 dated 13 July 2006 of the Court of Appeals in CA-G.R. CV No.
79566, which affirmed the Decision2 dated 24 January 2003 of the Regional Trial Court (RTC) of
Marikina City, Branch 192, inLRC Case No. R-2002-551-MK; and the Resolution 3 dated 20 September
2006 of the appellate court which denied Sueno's Motion for Reconsideration. The RTC, in its Decision
affirmed by the Court of Appeals, issued the Writ of Possession authorizing respondent Land Bank of
the Philippines (LBP) to take physical possession of the two disputed parcels of land pursuant to its
Consolidation of Ownership dated 2 April 2001.
The factual and procedural backdrop of this case are as follows:
On different occasions, Sueno obtained loans from LBP, the total sum of which reached
P2,500,000.00, as evidenced by the Contracts of Loan 4 executed by the parties on 28 February 1996
and 9 October 1996. The loans were secured by Real Estate Mortgages over two parcels of land
(subject properties) covered by Transfer Certificates of Title (TCTs) No. T-299900 and No. T-314839
registered in Sueno's name and registered with the Registry of Deeds of Marikina City. Subsequently,
Sueno incurred default, which prompted LBP to cause the extrajudicial foreclosure of the mortgage
constituted on the subject properties,5 and the sale of said properties at a public auction. LBP was the
highest bidder in the auction sale, as shown in the Certificate of Sale 6 dated 6 March 2000 in its
favor.
Before the expiration on 6 March 2001 of the one-year period for the redemption of the subject
properties, Sueno wrote LBP a letter7 dated 16 February 2001 requesting a six-month extension of
her period to redeem. Upon receipt of Sueno's letter, LBP informed her that she needed to post an
initial amount of P115,000.00, so that LBP would not consolidate the titles to the subject properties
in its name. The said amount shall be used to answer for penalties and surcharges that the Registry
of Deeds may impose as a result of the failure of LBP to consolidate the titles to the subject
properties within the required period.8
In partial compliance with the aforesaid condition, Sueno issued a check on 23 February 2001 in the
amount of P50,000.00 with LBP as the payee. Upon receipt of Sueno's partial payment, LBP, in a
letter dated 6 March 2001, reiterated its previous condition that Sueno must post the full amount of
P115,000.00 for LBP to approve her request for the extension of the redemption period. The LBP
further warned Sueno that should she fail to pay the balance of P65,000.00 by 7 March 2001, it
would proceed to consolidate the ownership of the subject properties in its name. Despite such
warning, Sueno failed to remit the balance of P65,000.00.
Thus, in a letter dated 7 March 2001, LBP denied Sueno's request for an extension of the period to
redeem the subject properties, and proceeded to consolidate ownership of the said properties in its
name. Accordingly, TCTs No. 299900 and No. 314839 in Sueno's name were cancelled and were
replaced by TCTs No. 411101 and 411102, respectively, in the name of LBP.
In order to acquire physical possession of the subject properties, LBP filed an Ex
Parte Petition/Motion for the Issuance of Writ of Possession 9 before the RTC, docketed as LRC Case
No. R-2002-551-MK. During the hearing set by the court for the issuance of the writ, Sueno
manifested her Opposition10 thereto on the ground that a novation of the original obligation was
already effected by her and LBP, thereby extending the original period for the redemption of the
subject properties. Therefore, the right of LBP to consolidate the titles to the subject properties in its
name was held in abeyance pending Sueno's exercise of her right of redemption within the extended
period.
In a Decision dated 24 January 2003, the RTC recognized the right of LBP to the possession of the
subject properties as the registered owner thereof after having lawfully acquired the same at the
auction sale. It dismissed Sueno's opposition to the pending Petition/Motion for utter lack of merit,
since she failed to establish that she and LBP indeed agreed to extend the redemption period for the
subject properties. Hence, the RTC granted the Petition/Motion of LBP for the issuance of a Writ of
Possession, to wit:
WHEREFORE, petition being sufficient in form and substance, and the testimonial and documentary
evidence well-founded, the same is hereby GRANTED.
Let a Writ of Possession be issued authorizing [LBP] to take physical possession of the properties
covered by Transfer Certificate[s] of Title Nos. 411101 and 411102 of the Registry of Deeds for
Marikina City registered in the name of [LBP] by virtue of the consolidation of ownership dated June
6, 2001.11
Unyielding, Sueno filed an appeal of the adverse RTC Decision before the Court of Appeals, 12 where it
was docketed as CA-G.R. CV No. 79566.
On 13 July 2006, the Court of Appeals rendered a Decision dismissing Sueno's appeal and affirming
the RTC Decision. According to the Court of Appeals, the records were bereft of evidence to prove
that LBP granted Sueno's request for the extension of the redemption period for the subject
properties, making Sueno's novation theory unacceptable. On the other hand, the appellate court
ruled that the right of LBP to the possession of the subject properties became absolute after the
expiration of the period of redemption without Sueno exercising her right to redeem. The decretal
part of the assailed Court of Appeals Decision reads:
WHEREFORE, the instant appeal is DENIED and the assailed Decision dated January 24, 2003 of the
RTC of Markina City, Branch 192 is hereby AFFIRMED. 13
In its Resolution dated 20 September 2006, the appellate court denied Sueno's Motion for
Reconsideration.
Sueno then proceeded to file this instant Petition for Review on Certiorari under Rule 45 of the
Revised Rules of Court raising the following issues:
I.
WHETHER OR NOT THERE WAS A VALID NOVATION ENTERED BY PARTIES FOR THE EXTENSION OF
THE REDEMPTION PERIOD.
II.
WHETHER OR NOT THE ISSUANCE OF THE WRIT OF POSSESSION OF THE SUBJECT PROPERTIES TO
LBP IS VALID.
Sueno argues that there was a novation of the original obligation of LBP allowing her to redeem the
subject properties within a period of one year, when LBP consented to the extension of said period of
redemption. Sueno insists that the acceptance of LBP of her check payment for the partial sum of
P50,000.00, and its encashment of said check signifies its acquiescence to her request for an
extension of the period of redemption for the subject properties.
We are not persuaded.
An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which
reads as follows:
ART. 1292. In order that an obligation may be extinguished by another which substitute the same, it
is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be
on every point incompatible with each other.
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first, either by changing the object or principal
conditions, or by substituting another in place of the debtor, or by subrogating a third person in the
rights of the creditor. In order for novation to take place, the concurrence of the following requisites
are indispensable:
1. There must be a previous valid obligation;
2. There must be an agreement of the parties concerned to a new contract;
3. There must be the extinguishment of the old contract; and
4. There must be the validity of the new contract.14
The elements of novation clearly do not exist in the instant case. While it is true that there is a
previous valid obligation (i.e., the obligation of LBP to honor Sueno's right to redeem the subject
property within a period of one year), such obligation expired at the same time as the redemption
period on 6 March 2001. There is, however, no clear agreement between the parties to a new
contract, again imposing upon LBP the obligation of honoring Sueno's right to redeem the subject
properties within an extended period of six months. Without a new contract, the old contract cannot
be considered extinguished.
The condition of LBP for the extension of the redemption period for the subject properties was plain
and simple, that Sueno pay an initial amount of P115,000.00 for the extension of the redemption
period. Sueno tendered a check for P50,000.00 in partial payment of the amount demanded by LBP.
By accepting the check payment, LBP merely accepted partial compliance of Sueno with its demand,
but it does not mean that LBP had conceded to the extension of the redemption period for such
reduced amount. In fact, LBP promptly sent Sueno a letter dated 6 March 2001, which was duly
received by the latter, explicitly and consistently requiring payment of the full amount of
P115,000.00 for the extension of the redemption period. It is without doubt that LBP was still
expecting Sueno to pay the balance of P65,000.00. Hence, not until full payment of the amount it
demanded, for LBP had not yet agreed to extend the period for redemption of the subject properties.
The consent of LBP to an extension of the period to redeem is subject to the suspensive condition
that Sueno shall pay the initial amount of P115,000.00 in full. With Sueno's failure to remit the
balance of P65,000.00 to LBP, then there is non-perfection of a new contract. As aptly declared by
the Court of Appeals:
The parties are bound to fulfill the stipulations in a contract only upon its perfection. At anytime prior
to the perfection of a contract, unaccepted offers and proposals remain as such and cannot be
considered binding commitments, hence, not demandable. Since [Sueno] failed to perform what was
incumbent upon her then, [LBP] cannot be faulted in not granting the extension sought. x x x. 15
What further belies Sueno's assertion that LBP consented to her request for extension is its letter
dated 7 March 2006, again duly received by Sueno, categorically denying her request to lengthen the
redemption period. The language and intent of the letter is too clear and simple to be misinterpreted,
to wit:
We wish to inform you that the management denied your request to extend the redemption
period of your foreclosed property for six (6) months since you failed to comply with the
Bank's requirement, upfront payment of P115,000.00.
Hence, the Bank is now consolidating the transfer of its ownership in the name of Land Bank.
Enclosed is the P50,000.00 Manager's Check re: your upfront payment refunded to you. 16 (Emphasis
supplied).
Irrefragably, there is no mutual agreement to extend the original period for the redemption of the
subject properties. There is no common intent by the parties to novate the old obligation by
extending the period thereof.
For this Court to sustain Sueno's position - that the LBP agreed to extend the redemption period
upon her payment of an amount substantially less than what it demanded - offends the elementary
principle enunciated in our jurisdiction that novation can never be presumed. As elucidated by this
Court in Philippine Savings Bank v. MaÃ±alac, Jr.17:
Novation is never presumed, and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are too clear and
unmistakable. The extinguishment of the old obligation by the new one is a necessary element of
novation, which may be effected either expressly or impliedly. The term "expressly" means that the
contracting parties incontrovertibly disclose that their object in executing the new contract is to
extinguish the old one. Upon the other hand, no specific form is required for an implied novation, and
all that is prescribed by law would be an incompatibility between the two contracts. While there is
really no hard and fast rule to determine what might constitute to be a sufficient change that can
bring about novation, the touchstone for contrariety, however, would be an irreconcilable
incompatibility between the old and the new obligations. (Emphasis supplied.)
Given the lapse of the period for Sueno to redeem the subject properties, then the Court cannot
enjoin LBP from taking physical possession of the said properties after the titles thereto were duly
consolidated in its name. The right of LBP to physical possession of the subject properties is explicitly
authorized by Section 33, Rule 39 of the Revised Rules of Court, which provides:
SECTION 33. Deed and possession to be given at expiration of redemption period; by whom
executed or given. - If no redemption be made within one (1) year from the date of the registration
of the certificate of sale, the purchaser is entitled to a conveyance and possession of the property; x
x x.
Upon the expiration of the right of redemption, the purchaser or redemptioner shall be substituted to
and acquire all the rights, title, interest and claim of the judgment obligor to the property as of the
time of the levy. The possession of the property shall be given to the purchaser or last redemptioner
by the same officer unless a third party is actually holding the property adversely to the judgment
obligor.
Corollarily, Section 7 of Act 3135,18 as amended by Act 4118, reads:
Section 7. Possession during redemption period. -In any sale made under the provisions of this Act,
the purchaser may petition the [Regional Trial Court] of the province or place where the property or
any part thereof is situated, to give him possession thereof during the redemption period, furnishing
bond in an amount equivalent to the use of the property for a period of twelve months, to indemnify
the debtor in case it be shown that the sale was made without violating the mortgage or without
complying with the requirements of this Act. Such petition shall be made under oath and filed in form
of an ex parte motion in the registration or cadastral proceedings if the property is registered, or in
special proceedings in the case of property registered under the Mortgage Law or under section one
hundred and ninety-four of the Administrative Code, or of any other real property encumbered with a
mortgage duly registered in the office of any register of deeds in accordance with any existing law,
and in each case the clerk of the court shall, upon the filing of such petition, collect the fees specified
in paragraph eleven of section one hundred and fourteen of Act Numbered Four hundred and ninety-
six, as amended by Act Numbered Twenty-eight hundred and sixty-six, and the court shall, upon
approval of the bond, order that a writ of possession issue, addressed to the sheriff of the province in
which the property is situated, who shall execute said order immediately.
Under the above-quoted provisions, the purchaser in a foreclosure sale may apply for a writ of
possession during the redemption period by filing an ex parte motion under oath for that purpose in
the corresponding registration or cadastral proceeding in the case of property covered by a Torrens
title. Upon the filing of such motion and the approval of the corresponding bond, the law also in
express terms directs the court to issue the order for a writ of possession. 19
A writ of possession may also be issued after consolidation of ownership of the property in the name
of the purchaser. It is settled that the buyer in a foreclosure sale becomes the absolute owner of the
property purchased if it is not redeemed during the period of one year after the registration of sale.
As such, he is entitled to the possession of the property and can demand it any time following the
consolidation of ownership in his name and the issuance of a new transfer certificate of title. In such
a case, the bond required in Section 7 of Act No. 3135 is no longer necessary. Possession of the land
then becomes an absolute right of the purchaser as confirmed owner. 20 Upon proper application and
proof of title, the issuance of the writ of possession becomes a ministerial duty of the court. 21
The right of LBP to the possession of the subject properties is unassailable. It is founded on its right
of ownership. As the purchaser of the subject properties in the foreclosure sale, in whose name titles
over the subject properties were already issued, the right of LBP over the subject properties has
become absolute, vesting in it the corollary right of possession over the subject properties, which the
Court must aid by effecting their delivery. In this case, the RTC is already deprived of discretion and
must comply with its ministerial duty to issue the writ of possession in favor of LBP.
WHEREFORE, IN VIEW OF THE FOREGOING, the instant Petition is DENIED. The Decision dated

13 July 2006 and Resolution dated 20 September 2006 of the Court of Appeals in CA-G.R. CV No.
79566 are hereby AFFIRMED. Costs against petitioner Sally Sueno.
SO ORDERED.
Ynares-Santiago, (Chairperson), Austria-Martinez, Nachura, and Reyes, JJ., concur.
Endnotes:
1
Penned by Associate Justice Estela M. Perlas-Bernabe with Associate Justices Andres B. Reyes, Jr.,
and Hakim S. Abdulwahid, concurring; rollo, pp. 21-28.
2
3
Rollo, p. 36.
4
Id. at 68-105.
5
Id. at 112-113.
6
Id. at 134-135.
7
Id. at 140.
8
Id. at 141.
9
Id. at 1-4.
10
Id. at 51-55.
11
Records, p. 175.
12
13
Rollo, p. 27.
14
Velasquez v. Court of Appeals, 368 Phil. 863, 871 (1999).
15
Rollo, p. 26.
16
Records, p. 142.
17
G.R. No. 145441, 26 April 2005, 457 SCRA 203, 218.
18
"An Act to Regulate the Sale of Property Under Special Powers Inserted in or Annexed to Real
Estate Mortgages."
19
Philippine National Bank v. Sanao Marketing Corporation, G.R. No. 153951, 29 July 2005, 465 SCRA
287, 299.
20
Id.
21
F. David Enterprises v. Insular Bank of Asia and America, G.R. No. 78714, 21 November 1990, 191
SCRA 516, 523.
48) Transpacific Battery Corp vs. Security Bank and Trust Co. GR
No. 173565, May 28, 2009
SECOND DIVISION
[G.R. NO. 173565 : May 8, 2009]
TRANSPACIFIC BATTERY, CORPORATION and MICHAEL G. SAY, Petitioners, v. SECURITY

BANK & TRUST CO., Respondent.
[G.R. NO. 173607 : May 8, 2009]
MICHAEL G. SAY and JOSEPHINE G. SAY, Petitioners, v. SECURITY BANK & TRUST

COMPANY, Respondent.
DECISION
TINGA, J.:
Before this Court are two Petitions for Review on Certiorari 1 under Rule 45 of the Rules of Court
seeking the reversal of the decision2 of the Court of Appeals in CA-G.R. CV No. 74644 which
affirmed with modification the decision3 of Branch 64 of the Regional Trial Court of Makati City,
ordering petitioners Transpacific Battery Company (Transpacific), Michael Go Say (Michael),
Melchor G. Say (Melchor) and Josephine G. Say (Josephine) jointly and severally liable to
Security Bank and Trust Company (The Bank).
The facts, as culled from the records, follow.
Transpacific, represented by its officers, Michael G. Say, Josephine G. Say and Myrna
Magpantay, entered into a Credit Line Agreement4 with the Bank. Consequently, the officers in
behalf of Transpacific applied for nine (9) letters of credit (LC) with the Bank to facilitate the
importation and/or purchases of certain merchandise, goods and supplies for its business. The
Bank issued the corresponding LCs to Transpacific. Transpacific then executed and delivered to
the Bank, as entrustor, nine (9) trust receipt agreements
with for the release of the imported merchandise and supplies in its favor, with the
aforementioned officers, individual petitioners herein, binding themselves to be solidarily liable
with Transpacific to the Bank for the value of the merchandise and supplies covered by the trust
receipts. The letters of credit and their corresponding trust receipts are listed below:
Letter of Trust Receipt Date Expiry Date Amount of Entrustees

Credit Agreement Issued of Trust Trust Receipt
No. Ref. No. Receipt
73 DC- 731B-83/8927 21 July 19 October P359,040.00 Michael G.Say,
82/492 1983 1983 Josephine G. Say,
Myrna E.
Magpantay5
73 DC- 731B-83/9126 8 August 7 November P369,600.00 Michael G. Say,
83/504 1983 1983 Melchor G. Say,
Myrna E.
Magpantay6
83/517 1983 1983 Melchor G. Say,
Myrna E.
Magpantay7
83/6278 1983 1983 Melchor G. Say,
Myrna E.
Magpantay8
73 DC- 731B-83/9461 9 8 December P68,772.19 Michael G. Say,
6994 September 1983 Melchor G. Say,
1983 Myrna E.
Magpantay9
73 DC- 731B-83/9617 27 26 December P84,032.62 Michael G. Say,
6990 September 1983 Melchor G. Say,
1983 Myrna E.
Magpantay10
73 DC- 731B-83/587 6 October 4 January P661,122.00 Michael G. Say,
83/5580 1983 1984 Melchor G. Say,
Myrna E.
Magpantay11
73 DC- 731B-83/588 6 October 4 January P826,402.50 Michael G. Say,
83/5581 1983 1984 Melchor G. Say,
Myrna E.
Magpantay12
73 DC- 731B-83/8110 8 November 9 January P338,500.00 Michael G. Say,
83/432 1983 1984 Melchor G. Say,
Myrna E.
Magpantay13
Under the terms of the trust receipts, the entrustees agreed to hold the goods, merchandise and
supplies, as well as the proceeds of the sale and collection thereof, in trust for the Bank for the
payment of petitioners' acceptance, bank commissions and charges, and/or any
other indebtedness of petitioners to the Bank, and deliver the same to the Bank upon maturity
date of said trust receipts.14
On the maturity dates of the trust receipts, petitioners failed to account for and to deliver to the
Bank the proceeds of the sale and collection of the goods, merchandise and supplies subject of
the trust receipts. Despite repeated demands, petitioners reneged on their obligation.ςrαlαω
On 8 February 1984, petitioners and the Bank executed a letter-agreement restructuring the
former's obligation in the sum of P3,082,029.00, subject to the following terms and conditions:
1. Payment of all interest and other charges prior to restructuring;
2. TR term is for one year with equal monthly principal payments;
3. Interest at 5% p.a. over prime rate or 30% p.a., whichever is higher, amortized monthly;
4. Interest rate subject to review every amortization due; and
5. Against the joint and solidary liability of Sps. Miguel and Mary Say and Michael Go Say. 15
Failure to meet one monthly installment when due shall cause the unmatured balance to become
due and demandable. The account shall be referred automatically to our Special Accounts
Department for collection.16
Alleging that out of the total obligation of P3,082,029.00, the amount of P2,290,865.41
remained unpaid, the Bank demanded in writing the payment of the unpaid balance. 17
Despite repeated demands, petitioners failed to comply with the restructuring agreement,
prompting the Bank to file a criminal complaint for violation of Presidential Decree No. 115 or
the Trust Receipts Law. However, said complaint was dismissed.
On 24 January 1992, the Bank filed a complaint for recovery of a sum of money with the RTC of
Makati.18
In his answer,19 Michael countered that the obligation had already been paid or if not totally
paid, the same is very minimal. He further contended that said obligation had already been
extinguished by novation when the Bank restructured the obligation of Transpacific. He also
claimed that the Bank is guilty of laches for its inaction for an unreasonable length of time. 20
Melchor and Josephine, for their part, argued that the trust receipts have not been executed in
strict compliance with the requirements of the Trust Receipts Law; that their participation in the
questioned transactions was in their capacity as officers of Transpacific and consequently, cannot
be held liable in their individual capacities; that their signatures in some of the documents were
forged; and that the obligation had been extinguished by novation. 21
Ma. Fe Rosadio (Rosadio), who was employed at the Foreign Department of the Bank and tasked
with documentation, processing and releasing of import bills and trust receipts, testified for the
Bank. She identified the trust receipts and attested to the genuineness of the signatures of
petitioners.
Instead of presenting their witnesses, petitioners filed a demurrer to evidence 22 which the trial
court denied on 8 December 1995.
In a decision dated 5 March 2002, the trial court ruled in favor of the Bank. The dispositive
portion reads:
WHEREFORE, IN VIEW OF THE FOREGOING, judgment is rendered in favor of plaintiff Security

Bank and Trust Company and against defendants Transpacific Battery Company, Michael Go Say,
Melchor G. Say and Josephine G. Say ordering the defendants to pay jointly and severally to the
plaintiff the following amounts:
1. The sum of P2,290,865.41 representing the balance of defendants' outstanding and unpaid
obligation as of the filing of the complaint on February 4, 1992 plus interest at the rate of 12%
per annum from February 4, 1992 until full payment of the defendants' obligation under the
aforecited Trust Receipts and/or Letter Agreement is made;
2. Attorney's fees in the amount equivalent to 25% on the amount due;
3. Cost of suit.
SO ORDERED.23
The trial court lent credence to the testimony of Rosadio and upheld the authenticity and
genuineness of the signatures of the individual petitioners on the trust receipts. It also ruled that
the restructuring of the obligation did not relieve individual petitioners of their liability as solidary
debtors to the Bank as there was an express agreement on their part to be bound jointly and
severally with Transpacific under the trust receipts. 24
On appeal, the Court of Appeals affirmed the ruling of the trial court with modification in that it
deleted the award of attorney's fees.
The Court of Appeals' decision centered on the finding that there was no novation in the
restructuring of the obligation, therefore, the individual petitioners as solidary debtors cannot be
exonerated from the obligation of Transpacific. The appellate court also dismissed the allegation
of forgery for failure of petitioners to present evidence to support their allegation that the
purported signatures in the trust receipts were forged. With respect to the amount of the unpaid
obligation, the appellate court concluded that since the issue is factual in nature, the finding of
the trial court should not be disturbed on appeal.
In the petition filed by Michael, he insists that novation had taken place and effectively
extinguished his obligation to the Bank. Moreover, he argues that he did not sign the
restructuring agreement; hence, he should not be made liable to pay any obligation due to the
Bank under said agreement.25
Melchor and Josephine question the credibility of witness Rosadio to testify on the authenticity of
their signatures on the trust receipts. They likewise point out the deficiencies in the trust
receipts. Finally, they assert that whatever obligation they may have assumed under the
agreements in the trust receipts they signed was fully novated by the restructuring agreement
entered into between the Bank and Transpacific without their knowledge and consent.
The Bank posits that the arguments presented by petitioners involve factual questions and the
findings thereof by the courts below are conclusive upon this Court. It also contends that there is
no novation and the restructuring agreement was executed only to make it less onerous for the
debtors to perform their obligation. It avers that although petitioners were no longer signatories
in the restructuring agreement, they are still bound as they were not expressly released from
their obligation. On the contrary, it points out that the restructuring agreement was even made
subject to their joint and solidary liability.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations,

by substituting a new debtor in place of the old one, or by subrogating a third person to the
rights of the creditor.26 Article 1292 of the Civil Code expressly provides:
Art. 1292. In order that an obligation may be extinguished by another which substitute the
same, it is imperative that it be so declared in unequivocal terms, or that the old and new
obligations be in every point incompatible with each other.
In order for novation to take place, the concurrence of the following requisites are indispensable:
1. There must be a previous valid obligation;
2. There must be an agreement of the parties concerned to a new contract;
3. There must be the extinguishment of the old contract; and
4. There must be the validity of the new contract. 27
Novation is never presumed, and the animus novandi, whether totally or partially, must appear
by express agreement of the parties, or by their acts that are too clear and unmistakable. The
extinguishment of the old obligation by the new one is a necessary element of novation, which
may be effected either expressly or impliedly. The contracting parties must incontrovertibly
disclose that their object in executing the new contract is to extinguish the old one. Upon the
other hand, no specific form is required for an implied novation, and all that is prescribed by law
would be an incompatibility between the two contracts. 28
The test of incompatibility is whether the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and the latter obligation novates
the first. Corollarily, changes that breed incompatibility must be essential in nature and not
merely accidental. The incompatibility must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions thereof; otherwise, the change would
be merely modificatory in nature and insufficient to extinguish the original obligation. 29
Petitioners proffer that the terms of the restructuring agreement are absolutely incompatible
with the terms of the trust receipts. First, the maturity date under the trust receipts is reckoned
at ninety (90) days from their respective issuance dates whereas it is one (1) year under the
restructuring agreement. Second, payment is in full under the trust receipts while under the
restructured obligation, it is to be made in equal monthly installments. Third, the rate of interest
under the trust receipts is 16% or 18% per annum whereas it is 5% per annum over prime rate
or 30% per annum, whichever is higher, under the restructured obligation. Fourth, the
restructuring agreement has a provision on the time of interest payments, as well as a review of
the interest rate, whereas there are no such provisions under the trust receipts. Fifth, the
obligation under the trust receipts is secured by the joint and solidary liability of the alleged
signatories, whereas the restructured obligation is secured by the joint and solidary liability of
Spouses Miguel and Mary Say and Michael G. Say. Sixth, there is no acceleration clause under
the trust receipts whereas the restructured obligation is subject to an acceleration clause.
On the other hand, the Bank dismisses any incompatibility between the restructuring agreement
and the trust receipt transactions. It alleges that the restructuring agreement even made an
express recognition of the trust receipts when it obliged the debtors pay all interests and other
charges prior to restructuring. Moreover, only the interest rates and the term of the trust
receipts were modified, according to the Bank. In fact, it claims that the restructuring agreement
was executed to make it less onerous for the debtors to perform their obligation.
The primary issue for resolution is whether the obligation under the trust receipts was novated
by the restructuring agreement. We rule in the negative.
The material portions of the restructuring agreement is hereby reproduced for brevity:
Gentlemen:
We are pleased to inform you that our Executive Committee has approved the restructuring of
your outstanding past due trust receipts amounting to P3,082,029.00, subject to:
1. Payment of all interest and other charges prior to restructuring;
2. TR term is for one year with equal monthly principal payments
3. Interest at 5% p.a. over prime rate or 30% p.a., whichever is higher, amortized monthly;
4. Interest rate subject to review every amortiaton due;
5. Against the joint and solidary liability of Sps. Miguel and Mary Say and Michael Go Say;
Failure to meet one monthly installment when due shall cause the unmatured balance to become
due and demandable. The account shall be referred automatically to our Special Accounts
Department for collection.30
Undoubtedly, there is no express novation since the restructuring agreement does not state in
clear terms that the obligation under the trust receipts is extinguished and in lieu thereof the
restructuring agreement will be substituted. Neither is there an implied novation since the
restructuring agreement is not incompatible with the trust receipt transactions.
Indeed, the restructuring agreement recognizes the obligation due under the trust receipts when
it required "payment of all interest and other charges prior to restructuring." With respect to
Michael, there was even a proviso under the agreement that the amount due is subject to "the
joint and solidary liability of Spouses Miguel and Mary Say and Michael Go Say." While the
names of Melchor and Josephine do not appear on the restructuring agreement, it cannot be
presumed that they have been relieved from the obligation. The old obligation continues to
subsist subject to the modifications agreed upon by the parties.
The circumstance that motivated the parties to enter into a restructuring agreement was the
failure of petitioners to account for the goods received in trust and/or deliver the proceeds
thereof. To remedy the situation, the parties executed an agreement to restructure
Transpacific's obligations.
The Bank only extended the repayment term of the trust receipts from 90 days to one year with
monthly installment at 5% per annum over prime rate or 30% per annum whichever is higher.
Furthermore, the interest rates were flexible in that they are subject to review every
amortization due. Whether the terms appeared to be more onerous or not is immaterial. Courts
are not authorized to extricate parties from the necessary consequences of their acts. The
parties will not be relieved from their obligations as there was absolutely no intention by the
parties to supersede or abrogate the trust receipt transactions. The intention of the new
agreement was precisely to revive the old obligation after the original period expired and the
loan remained unpaid. Well-settled is the rule that, with respect to obligations to pay a sum of
money, the obligation is not novated by an instrument that expressly recognizes the old,
changes only the terms of payment, adds other obligations not incompatible with the old ones,
or the new contract merely supplements the old one.31
Equally unmeritorious is petitioners' claim that they cannot be held liable to pay any obligation
due to the Bank under the restructuring agreement because they did not participate or sign the
same. To reiterate, there is no novation. The trust receipts transactions and the restructuring
agreement can both stand together. Petitioners have not shown that they were expressly
released from the obligation. From the beginning, they were joint and solidary debtors under the
trust receipts, the obligation of which subsist vis - à-vis the restructuring agreement. Being joint
and solidary debtors, they are liable for the entirety of the obligation.
While petitioners Melchor and Josephine insist that they never claimed forgery, the crux of the
matter still pertains to the credibility of the witness, which the courts below chose to uphold.
Suffice it to say that in the absence of any of the recognized exceptions, 32 the factual findings of
the trial court, especially when affirmed by the Court of Appeals are conclusive on this Court.
WHEREFORE, the twin petitions are DENIED. The Decision of the Court of Appeals in CA-G.R. CV
No. 74644 is AFFIRMED. Costs against petitioners.
SO ORDERED.
Endnotes:
*
Acting Chairperson as replacement of Justice Leonardo A. Quisumbing who is on official leave
per Special Order No. 618.
**
Additional member of the Second Division per Special Order No. 619.
1
Rollo (G.R. No. 173565), pp. 14-42; Rollo (G.R. No. 173607), pp. 9-36.
2
Rollo (G.R. No. 173607), pp. 38-48; Penned by Associate Justice Juan Q. Enriquez, Jr.
concurred in by Associate Justices Romeo A. Brawner and Aurora Santiago-Lagman.
3
Id. at 65-71; Presided by Judge Delia B. Panganiban.
4
Records, p. 254.
5
Records, pp. 11-12.
6
Id. at 13-14.
7
Id. at 15-16.
8
Id. at 17-18.
9
Id. at 19-20.
10
Id. at 21-22.
11
Id. at 23-24.
12
Id. at 25-26.
13
Id. at 27-28.
14
See trust receipts, Id. at 12, 14, 16, 18, 20, 22, 24, 26, 28.
15
Records, pp. 29-30.
16
Id. at 29.
17
Id. at 31.
18
Id. at 1-10.
19
Id. at 54-59.
20
Id. at 56-57.
21
Id. at 71-72.
22
Id. at 355-373.
23
Rollo (G.R. No. 173607), p. 71.
24
Id. at 69-70.
25
Id. at 33-37.
26
Garcia v. Llamas, 462 Phil. 779, 788 (2003), citing Idolor v. CA, 351 SCRA 399, 407, February
7, 2001; Agro Conglomerates, Inc. v. CA, 348 SCRA 450, 458, December 12, 2000; De Cortes
v. Venturanza, 79 SCRA 709, 722 723, October 28, 1977; PNB v. Mallari and The First Nat'l.
Surety & Assurance Co., Inc., 104 Phil. 437, 441, August 29, 1958.
27
Sueño v. Land Bank of the Philippines, G.R. No. 174711, 17 September 2008; Azolla Farms v.
Court of Appeals, 484 Phil. 745, 755 (2004).
28
Philippine Savings Bank v. Mañalac, Jr., G.R. No. 145441, 26 April 2005, 457 SCRA 203, 218.
29
California Bus Lines v. State Investment House, 463 Phil. 689, 703 (2003), citing Molino v.
Security Diners International Corporation, G.R. No. 136780, 16 August 2001, 363 SCRA 358,
366.
30
Records, p. 29.
31
Reyes v. BPI Family Savings Bank, Inc., G.R. NOS. 149840-41, 31 March 2006, 486 SCRA
276, 282.
32
(1) the conclusion is grounded on speculations, surmises or conjectures; (2) the inference is
manifestly mistaken, absurd or impossible; (3) there is grave abuse of discretion; (4) the
judgment is based on a misapprehension of facts; (5) the findings of fact are conflicting; (6)
there is no citation of specific evidence on which the factual findings are based; (7) the finding of
absence of facts is contradicted by the presence of evidence on record; (8) the findings of the
CA are contrary to the findings of the trial court; (9) the CA manifestly overlooked certain
relevant and undisputed facts that, if properly considered, would justify a different conclusion;
(10) the findings of the CA are beyond the issues of the case; and, (11) such findings are
contrary to the admissions of both parties. See Pelonia v. People of the Philippines, G.R. No.
168997, 13 April 2007, 521 SCRA 207, 219.
49) Land Bank of the Philippines vs. Ong GR No. 190755, November
24, 2010
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 190755 November 24, 2010
LAND BANK OF THE PHILIPPINES, Petitioner,

vs.
ALFREDO ONG, Respondent.
DECISION
VELASCO, JR., J.:
This is an appeal from the October 20, 2009 Decision of the Court of Appeals (CA) in CA-G.R. CR-CV No. 84445
entitled Alfredo Ong v. Land Bank of the Philippines, which affirmed the Decision of the Regional Trial Court (RTC),
Branch 17 in Tabaco City.
The Facts
On March 18, 1996, spouses Johnson and Evangeline Sy secured a loan from Land Bank Legazpi City in the
amount of PhP 16 million. The loan was secured by three (3) residential lots, five (5) cargo trucks, and a warehouse.
Under the loan agreement, PhP 6 million of the loan would be short-term and would mature on February 28, 1997,
while the balance of PhP 10 million would be payable in seven (7) years. The Notice of Loan Approval dated
February 22, 1996 contained an acceleration clause wherein any default in payment of amortizations or other
charges would accelerate the maturity of the loan. 1
Subsequently, however, the Spouses Sy found they could no longer pay their loan. On December 9, 1996, they sold
three (3) of their mortgaged parcels of land for PhP 150,000 to Angelina Gloria Ong, Evangeline’s mother, under a
Deed of Sale with Assumption of Mortgage. The relevant portion of the document 2 is quoted as follows:
WHEREAS, we are no longer in a position to settle our obligation with the bank;
NOW THEREFORE, for and in consideration of the sum of ONE HUNDRED FIFTY THOUSAND PESOS
(P150,000.00) Philippine Currency, we hereby these presents SELL, CEDE, TRANSFER and CONVEY, by way of
sale unto ANGELINA GLORIA ONG, also of legal age, Filipino citizen, married to Alfredo Ong, and also a resident
of Tabaco, Albay, Philippines, their heirs and assigns, the above-mentioned debt with the said LAND BANK OF THE
PHILIPPINES, and by reason hereof they can make the necessary representation with the bank for the proper
restructuring of the loan with the said bank in their favor;
That as soon as our obligation has been duly settled, the bank is authorized to release the mortgage in favor of the
vendees and for this purpose VENDEES can register this instrument with the Register of Deeds for the issuance of
the titles already in their names.
IN WITNESS WHEREOF, we have hereunto affixed our signatures this 9th day of December 1996 at Tabaco,
Albay, Philippines.
(signed) (signed)
EVANGELINE O. SY JOHNSON B. SY
Vendor Vendor
Evangeline’s father, petitioner Alfredo Ong, later went to Land Bank to inform it about the sale and assumption of
mortgage.3 Atty. Edna Hingco, the Legazpi City Land Bank Branch Head, told Alfredo and his counsel Atty. Ireneo
de Lumen that there was nothing wrong with the agreement with the Spouses Sy but provided them with
requirements for the assumption of mortgage. They were also told that Alfredo should pay part of the principal which
was computed at PhP 750,000 and to update due or accrued interests on the promissory notes so that Atty. Hingco
could easily approve the assumption of mortgage. Two weeks later, Alfredo issued a check for PhP 750,000 and
personally gave it to Atty. Hingco. A receipt was issued for his payment. He also submitted the other documents
required by Land Bank, such as financial statements for 1994 and 1995. Atty. Hingco then informed Alfredo that the
certificate of title of the Spouses Sy would be transferred in his name but this never materialized. No notice of
transfer was sent to him.4
Alfredo later found out that his application for assumption of mortgage was not approved by Land Bank. The bank
learned from its credit investigation report that the Ongs had a real estate mortgage in the amount of PhP
18,300,000 with another bank that was past due. Alfredo claimed that this was fully paid later on. Nonetheless, Land
Bank foreclosed the mortgage of the Spouses Sy after several months. Alfredo only learned of the foreclosure when
he saw the subject mortgage properties included in a Notice of Foreclosure of Mortgage and Auction Sale at the
RTC in Tabaco, Albay. Alfredo’s other counsel, Atty. Madrilejos, subsequently talked to Land Bank’s lawyer and was
told that the PhP 750,000 he paid would be returned to him. 5
On December 12, 1997, Alfredo initiated an action for recovery of sum of money with damages against Land Bank
in Civil Case No. T-1941, as Alfredo’s payment was not returned by Land Bank. Alfredo maintained that Land
Bank’s foreclosure without informing him of the denial of his assumption of the mortgage was done in bad faith. He
argued that he was lured into believing that his payment of PhP 750,000 would cause Land Bank to approve his
assumption of the loan of the Spouses Sy and the transfer of the mortgaged properties in his and his wife’s
name.6 He also claimed incurring expenses for attorney’s fees of PhP 150,000, filing fee of PhP 15,000, and PhP
250,000 in moral damages.7
Testifying for Land Bank, Atty. Hingco claimed during trial that as branch manager she had no authority to approve
loans and could not assure anybody that their assumption of mortgage would be approved. She testified that the
breakdown of Alfredo’s payment was as follows:
PhP 101,409.59 applied to principal

216,246.56 accrued interests receivable
396,571.77 interests
18,766.10 penalties
16,805.98 accounts receivable
----------------
Total: 750,000.00
According to Atty. Hingco, the bank processes an assumption of mortgage as a new loan, since the new borrower is
considered a new client. They used character, capacity, capital, collateral, and conditions in determining who can
qualify to assume a loan. Alfredo’s proposal to assume the loan, she explained, was referred to a separate office,
the Lending Center. 8
During cross-examination, Atty. Hingco testified that several months after Alfredo made the tender of payment, she
received word that the Lending Center rejected Alfredo’s loan application. She stated that it was the Lending Center
and not her that should have informed Alfredo about the denial of his and his wife’s assumption of mortgage. She
added that although she told Alfredo that the agreement between the spouses Sy and Alfredo was valid between
them and that the bank would accept payments from him, Alfredo did not pay any further amount so the foreclosure
of the loan collaterals ensued. She admitted that Alfredo demanded the return of the PhP 750,000 but said that
there was no written demand before the case against the bank was filed in court. She said that Alfredo had made
the payment of PhP 750,000 even before he applied for the assumption of mortgage and that the bank received the
said amount because the subject account was past due and demandable; and the Deed of Assumption of Mortgage
was not used as the basis for the payment. 9
The Ruling of the Trial Court
The RTC held that the contract approving the assumption of mortgage was not perfected as a result of the credit
investigation conducted on Alfredo. It noted that Alfredo was not even informed of the disapproval of the assumption
of mortgage but was just told that the accounts of the spouses Sy had matured and gone unpaid. It ruled that under
the principle of equity and justice, the bank should return the amount Alfredo had paid with interest at 12% per
annum computed from the filing of the complaint. The RTC further held that Alfredo was entitled to attorney’s fees
and litigation expenses for being compelled to litigate. 10
The dispositive portion of the RTC Decision reads:
WHEREFORE, premises considered, a decision is rendered, ordering defendant bank to pay plaintiff, Alfredo Ong
the amount of P750,000.00 with interest at 12% per annum computed from Dec. 12, 1997 and attorney’s fees and
litigation expenses of P50,000.00.
Costs against defendant bank.
SO ORDERED.11
The Ruling of the Appellate Court
On appeal, Land Bank faulted the trial court for (1) holding that the payment of PhP 750,000 made by Ong was one
of the requirements for the approval of his proposal to assume the mortgage of the Sy spouses; (2) erroneously
ordering Land Bank to return the amount of PhP 750,000 to Ong on the ground of its failure to effect novation; and
(3) erroneously affirming the award of PhP 50,000 to Ong as attorney’s fees and litigation expenses.
The CA affirmed the RTC Decision.12 It held that Alfredo’s recourse is not against the Sy spouses. According to the
appellate court, the payment of PhP 750,000 was for the approval of his assumption of mortgage and not for
payment of arrears incurred by the Sy spouses. As such, it ruled that it would be incorrect to consider Alfredo a third
person with no interest in the fulfillment of the obligation under Article 1236 of the Civil Code. Although Land Bank
was not bound by the Deed between Alfredo and the Spouses Sy, the appellate court found that Alfredo and Land
Bank’s active preparations for Alfredo’s assumption of mortgage essentially novated the agreement.
On January 5, 2010, the CA denied Land Bank’s motion for reconsideration for lack of merit. Hence, Land Bank
appealed to us.
The Issues
Whether the Court of Appeals erred in holding that Art. 1236 of the Civil Code does not apply and in finding
that there is no novation.
II
Whether the Court of Appeals misconstrued the evidence and the law when it affirmed the trial court
decision’s ordering Land Bank to pay Ong the amount of Php750,000.00 with interest at 12% annum.
III
Whether the Court of Appeals committed reversible error when it affirmed the award of Php50,000.00 to Ong
as attorney’s fees and expenses of litigation.
The Ruling of this Court
We affirm with modification the appealed decision.
Recourse is against Land Bank
Land Bank contends that Art. 1236 of the Civil Code backs their claim that Alfredo should have sought recourse
against the Spouses Sy instead of Land Bank. Art. 1236 provides:
The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment
of the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the
debtor.1avvphi1
We agree with Land Bank on this point as to the first part of paragraph 1 of Art. 1236. Land Bank was not bound to
accept Alfredo’s payment, since as far as the former was concerned, he did not have an interest in the payment of
the loan of the Spouses Sy. However, in the context of the second part of said paragraph, Alfredo was not making
payment to fulfill the obligation of the Spouses Sy. Alfredo made a conditional payment so that the properties
subject of the Deed of Sale with Assumption of Mortgage would be titled in his name. It is clear from the records that
Land Bank required Alfredo to make payment before his assumption of mortgage would be approved. He was
informed that the certificate of title would be transferred accordingly. He, thus, made payment not as a debtor but as
a prospective mortgagor. But the trial court stated:
[T]he contract was not perfected or consummated because of the adverse finding in the credit investigation which
led to the disapproval of the proposed assumption. There was no evidence presented that plaintiff was informed of
the disapproval. What he received was a letter dated May 22, 1997 informing him that the account of spouses Sy
had matured but there [were] no payments. This was sent even before the conduct of the credit investigation on
June 20, 1997 which led to the disapproval of the proposed assumption of the loans of spouses Sy. 13
Alfredo, as a third person, did not, therefore, have an interest in the fulfillment of the obligation of the Spouses Sy,
since his interest hinged on Land Bank’s approval of his application, which was denied. The circumstances of the
instant case show that the second paragraph of Art. 1236 does not apply. As Alfredo made the payment for his own
interest and not on behalf of the Spouses Sy, recourse is not against the latter. And as Alfredo was not paying for
another, he cannot demand from the debtors, the Spouses Sy, what he has paid.
Novation of the loan agreement
Land Bank also faults the CA for finding that novation applies to the instant case. It reasons that a substitution of
debtors was made without its consent; thus, it was not bound to recognize the substitution under the rules on
novation.
On the matter of novation, Spouses Benjamin and Agrifina Lim v. M.B. Finance Corporation 14 provides the following
discussion:
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the
old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive novation
results either by changing the object or principal conditions (objective or real), or by substituting the person of the
debtor or subrogating a third person in the rights of the creditor (subjective or personal). Under this mode, novation
would have dual functions ─ one to extinguish an existing obligation, the other to substitute a new one in its place ─
requiring a conflux of four essential requisites: (1) a previous valid obligation; (2) an agreement of all parties
concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation.
xxx
In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each
other. The test of incompatibility is whether or not the two obligations can stand together, each one having its
independent existence. x x x (Emphasis supplied.)
Furthermore, Art. 1293 of the Civil Code states:
Novation which consists in substituting a new debtor in the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor
gives him rights mentioned in articles 1236 and 1237.
We do not agree, then, with the CA in holding that there was a novation in the contract between the parties. Not all
the elements of novation were present. Novation must be expressly consented to. Moreover, the conflicting intention
and acts of the parties underscore the absence of any express disclosure or circumstances with which to deduce a
clear and unequivocal intent by the parties to novate the old agreement. 15 Land Bank is thus correct when it argues
that there was no novation in the following:
[W]hether or not Alfredo Ong has an interest in the obligation and payment was made with the knowledge or
consent of Spouses Sy, he may still pay the obligation for the reason that even before he paid the amount of
P750,000.00 on January 31, 1997, the substitution of debtors was already perfected by and between Spouses Sy
and Spouses Ong as evidenced by a Deed of Sale with Assumption of Mortgage executed by them on December 9,
1996. And since the substitution of debtors was made without the consent of Land Bank – a requirement which is
indispensable in order to effect a novation of the obligation, it is therefore not bound to recognize the substitution of
debtors. Land Bank did not intervene in the contract between Spouses Sy and Spouses Ong and did not expressly
give its consent to this substitution.16
Unjust enrichment
Land Bank maintains that the trial court erroneously applied the principle of equity and justice in ordering it to return
the PhP 750,000 paid by Alfredo. Alfredo was allegedly in bad faith and in estoppel. Land Bank contends that it
enjoyed the presumption of regularity and was in good faith when it accepted Alfredo’s tender of PhP 750,000. It
reasons that it did not unduly enrich itself at Alfredo’s expense during the foreclosure of the mortgaged properties,
since it tendered its bid by subtracting PhP 750,000 from the Spouses Sy’s outstanding loan obligation. Alfredo’s
recourse then, according to Land Bank, is to have his payment reimbursed by the Spouses Sy.
We rule that Land Bank is still liable for the return of the PhP 750,000 based on the principle of unjust enrichment.
Land Bank is correct in arguing that it has no obligation as creditor to recognize Alfredo as a person with interest in
the fulfillment of the obligation. But while Land Bank is not bound to accept the substitution of debtors in the subject
real estate mortgage, it is estopped by its action of accepting Alfredo’s payment from arguing that it does not have to
recognize Alfredo as the new debtor. The elements of estoppel are:
First, the actor who usually must have knowledge, notice or suspicion of the true facts, communicates something to
another in a misleading way, either by words, conduct or silence; second, the other in fact relies, and relies
reasonably or justifiably, upon that communication; third, the other would be harmed materially if the actor is later
permitted to assert any claim inconsistent with his earlier conduct; and fourth, the actor knows, expects or foresees
that the other would act upon the information given or that a reasonable person in the actor’s position would expect
or foresee such action.17
By accepting Alfredo’s payment and keeping silent on the status of Alfredo’s application, Land Bank misled Alfredo
to believe that he had for all intents and purposes stepped into the shoes of the Spouses Sy.
The defense of Land Bank Legazpi City Branch Manager Atty. Hingco that it was the bank’s Lending Center that
should have notified Alfredo of his assumption of mortgage disapproval is unavailing. The Lending Center’s lack of
notice of disapproval, the Tabaco Branch’s silence on the disapproval, and the bank’s subsequent actions show a
failure of the bank as a whole, first, to notify Alfredo that he is not a recognized debtor in the eyes of the bank; and
second, to apprise him of how and when he could collect on the payment that the bank no longer had a right to
keep.
We turn then on the principle upon which Land Bank must return Alfredo’s payment. Unjust enrichment exists "when
a person unjustly retains a benefit to the loss of another, or when a person retains money or property of another
against the fundamental principles of justice, equity and good conscience." 18 There is unjust enrichment under Art.
22 of the Civil Code when (1) a person is unjustly benefited, and (2) such benefit is derived at the expense of or with
damages to another.19
Additionally, unjust enrichment has been applied to actions called accion in rem verso. In order that the accion in
rem verso may prosper, the following conditions must concur: (1) that the defendant has been enriched; (2) that the
plaintiff has suffered a loss; (3) that the enrichment of the defendant is without just or legal ground; and (4) that the
plaintiff has no other action based on contract, quasi-contract, crime, or quasi-delict. 20 The principle of unjust
enrichment essentially contemplates payment when there is no duty to pay, and the person who receives the
payment has no right to receive it.21
The principle applies to the parties in the instant case, as, Alfredo, having been deemed disqualified from assuming
the loan, had no duty to pay petitioner bank and the latter had no right to receive it.
Moreover, the Civil Code likewise requires under Art. 19 that "[e]very person must, in the exercise of his rights and
in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith." Land
Bank, however, did not even bother to inform Alfredo that it was no longer approving his assumption of the Spouses
Sy’s mortgage. Yet it acknowledged his interest in the loan when the branch head of the bank wrote to tell him that
his daughter’s loan had not been paid.22 Land Bank made Alfredo believe that with the payment of PhP 750,000, he
would be able to assume the mortgage of the Spouses Sy. The act of receiving payment without returning it when
demanded is contrary to the adage of giving someone what is due to him. The outcome of the application would
have been different had Land Bank first conducted the credit investigation before accepting Alfredo’s payment. He
would have been notified that his assumption of mortgage had been disapproved; and he would not have taken the
futile action of paying PhP 750,000. The procedure Land Bank took in acting on Alfredo’s application cannot be said
to have been fair and proper.
As to the claim that the trial court erred in applying equity to Alfredo’s case, we hold that Alfredo had no other
remedy to recover from Land Bank and the lower court properly exercised its equity jurisdiction in resolving the
collection suit. As we have held in one case:
Equity, as the complement of legal jurisdiction, seeks to reach and complete justice where courts of law, through the
inflexibility of their rules and want of power to adapt their judgments to the special circumstances of cases, are
incompetent to do so. Equity regards the spirit and not the letter, the intent and not the form, the substance rather
than the circumstance, as it is variously expressed by different courts.23
Another claim made by Land Bank is the presumption of regularity it enjoys and that it was in good faith when it
accepted Alfredo’s tender of PhP 750,000.
The defense of good faith fails to convince given Land Bank’s actions. Alfredo was not treated as a mere
prospective borrower. After he had paid PhP 750,000, he was made to sign bank documents including a promissory
note and real estate mortgage. He was assured by Atty. Hingco that the titles to the properties covered by the
Spouses Sy’s real estate mortgage would be transferred in his name, and upon payment of the PhP 750,000, the
account would be considered current and renewed in his name. 24
Land Bank posits as a defense that it did not unduly enrich itself at Alfredo’s expense during the foreclosure of the
mortgaged properties, since it tendered its bid by subtracting PhP 750,000 from the Spouses Sy’s outstanding loan
obligation. It is observed that this is the first time Land Bank is revealing this defense. However, issues, arguments,
theories, and causes not raised below may no longer be posed on appeal. 25 Land Bank’s contention, thus, cannot be
entertained at this point.
1avvphi1
Land Bank further questions the lower court’s decision on the basis of the inconsistencies made by Alfredo on the
witness stand. It argues that Alfredo was not a credible witness and his testimony failed to overcome the
presumption of regularity in the performance of regular duties on the part of Land Bank.
This claim, however, touches on factual findings by the trial court, and we defer to these findings of the trial court as
sustained by the appellate court. These are generally binding on us. While there are exceptions to this rule, Land
Bank has not satisfactorily shown that any of them is applicable to this issue. 26 Hence, the rule that the trial court is
in a unique position to observe the demeanor of witnesses should be applied and respected 27 in the instant case.
In sum, we hold that Land Bank may not keep the PhP 750,000 paid by Alfredo as it had already foreclosed on the
mortgaged lands.
Interest and attorney’s fees
As to the applicable interest rate, we reiterate the guidelines found in Eastern Shipping Lines, Inc. v. Court of
Appeals:28
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
No evidence was presented by Alfredo that he had sent a written demand to Land Bank before he filed the
collection suit. Only the verbal agreement between the lawyers of the parties on the return of the payment was
mentioned.29 Consequently, the obligation of Land Bank to return the payment made by Alfredo upon the former’s
denial of the latter’s application for assumption of mortgage must be reckoned from the date of judicial demand on
December 12, 1997, as correctly determined by the trial court and affirmed by the appellate court.
The next question is the propriety of the imposition of interest and the proper imposable rate of applicable interest.
The RTC granted the rate of 12% per annum which was affirmed by the CA. From the above-quoted guidelines,
however, the proper imposable interest rate is 6% per annum pursuant to Art. 2209 of the Civil Code. Sunga-Chan
v. Court of Appeals is illuminating in this regard:
In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum under Central Bank (CB) Circular
No. 416 shall be adjudged only in cases involving the loan or forbearance of money. And for transactions
involving payment of indemnities in the concept of damages arising from default in the performance of
obligations in general and/or for money judgment not involving a loan or forbearance of money, goods, or credit,
the governing provision is Art. 2209 of the Civil Code prescribing a yearly 6% interest. Art. 2209 pertinently provides:
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six per cent per annum.
The term "forbearance," within the context of usury law, has been described as a contractual obligation of a lender
or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the loan or debt
then due and payable.
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate, as
follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of money,
goods, or credits, as well as to judgments involving such loan or forbearance of money, goods, or credit, while
the 6% per annum under Art. 2209 of the Civil Code applies "when the transaction involves the payment of
indemnities in the concept of damage arising from the breach or a delay in the performance of obligations
in general," with the application of both rates reckoned "from the time the complaint was filed until the [adjudged]
amount is fully paid." In either instance, the reckoning period for the commencement of the running of the legal
interest shall be subject to the condition "that the courts are vested with discretion, depending on the equities of
each case, on the award of interest."30 (Emphasis supplied.)
Based on our ruling above, forbearance of money refers to the contractual obligation of the lender or creditor to
desist for a fixed period from requiring the borrower or debtor to repay the loan or debt then due and for which 12%
per annum is imposed as interest in the absence of a stipulated rate. In the instant case, Alfredo’s conditional
payment to Land Bank does not constitute forbearance of money, since there was no agreement or obligation for
Alfredo to pay Land Bank the amount of PhP 750,000, and the obligation of Land Bank to return what Alfredo has
conditionally paid is still in dispute and has not yet been determined. Thus, it cannot be said that Land Bank’s
alleged obligation has become a forbearance of money.
On the award of attorney’s fees, attorney’s fees and expenses of litigation were awarded because Alfredo was
compelled to litigate due to the unjust refusal of Land Bank to refund the amount he paid. There are instances when
it is just and equitable to award attorney’s fees and expenses of litigation. 31 Art. 2208 of the Civil Code pertinently
states:
In the absence of stipulation, attorney’s fees and expenses of litigation, other than judicial costs, cannot be
recovered, except:
xxxx
(2) When the defendant’s act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest.
Given that Alfredo was indeed compelled to litigate against Land Bank and incur expenses to protect his interest, we
find that the award falls under the exception above and is, thus, proper given the circumstances.
On a final note. The instant case would not have been litigated had Land Bank been more circumspect in dealing
with Alfredo. The bank chose to accept payment from Alfredo even before a credit investigation was underway, a
procedure worsened by the failure to even inform him of his credit standing’s impact on his assumption of mortgage.
It was, therefore, negligent to a certain degree in handling the transaction with Alfredo. It should be remembered
that the business of a bank is affected with public interest and it should observe a higher standard of diligence when
dealing with the public.32
WHEREFORE, the appeal is DENIED. The CA Decision in CA-G.R. CR-CV No. 84445 is AFFIRMED with
MODIFICATION in that the amount of PhP 750,000 will earn interest at 6% per annum reckoned from December 12,
1997, and the total aggregate monetary awards will in turn earn 12% per annum from the finality of this Decision
until fully paid.
SO ORDERED.
PRESBITERO J. VELASCO, JR.

Associate Justice
WE CONCUR:
RENATO C. CORONA
Chief Justice
Chairperson
TERESITA J. LEONARDO-DE CASTRO DIOSDADO M. PERALTA*

JOSE PORTUGAL PEREZ

Associate Justice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above Decision had been
reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.
RENATO C. CORONA
Chief Justice
Footnotes
* Additional member per Special Order No. 913 dated November 2, 2010.
1
Rollo, p. 44.
2
Records, pp. 63-64.
3
Rollo, p. 45.
4
Id. at 45-46.
5
Id. at 46.
6
Id.
7
Id. at 92.
8
9
Id. at 160.
10
Id. at 168.
11
CA rollo, p. 87. Penned by Judge Virginia G. Almonte.
Rollo, p. 53. The CA Decision was penned by Associate Justice Jose C. Reyes, Jr. and concurred in by
12
Presiding Justice Conrado M. Vasquez, Jr. and Associate Justice Apolinario D. Bruselas, Jr.
13
CA rollo, p. 87.
G.R. No. 164300, November 29, 2006, 508 SCRA 556, 560-561; citing Fabrigas v. San Francisco del
14
Monte, Inc., G.R. No. 152346, November 25, 2005, 476 SCRA 247, 258-259.
15
Philippine Savings Bank v. Spouses Mañalac, G.R. No. 145441, April 26, 2005, 457 SCRA 203, 218.
16
Rollo, p. 23.
Philippine Bank of Communications v. Court of Appeals, G.R. No. 109803, April 20, 1998, 289 SCRA 185,
17
186.
Car Cool Philippines v. Ushio Realty and Development Corporation, G.R. No. 138088, January 23, 2006,
18
479 SCRA 404, 412.
H.L. Carlos Corporation, Inc. v. Marina Properties Corporation, G.R. No. 147614, January 29, 2004, 421
19
SCRA 428, 437; citing MC Engineering, Inc. v. Court of Appeals, G.R. No. 104047, April 3, 2002, 380 SCRA
116, 138.
20
1 Tolentino, Civil Code of the Philippines Commentaries and Jurisprudence 77 (1990).
21
Gil Miguel T. Puyat v. Ron Zabarte, G.R. No. 141536. February 26, 2001, 352 SCRA 738, 750.
22
CA rollo, p. 86.
LCK Industries Inc. v. Planters Development Bank, G.R. No. 170606, November 23, 2007, 538 SCRA 634,
23
652; citing Tamio v. Ticson, G.R. No. 154895, November 18, 2004, 443 SCRA 44, 55.
24
CA rollo, p.86.
25
Agra v. Philippine National Bank, G.R. No. 133317, June 29, 1999, 514 SCRA 509, 528.
See Royal Cargo Corporation v. DFS Sports Unlimited Inc., G.R. No. 158621, December 10, 2008, 573
26
SCRA 414, 421-422.
27
See Tugade v. Court of Appeals, G.R. No. 120874, July 31, 2003, 407 SCRA 497, 508.
28
G.R. No. 97412, July 12, 1994, 234 SCRA 78, 95-97.
29
Records, p. 255.
30
G.R. No. 164401, June 25, 2008, 555 SCRA 275, 287-288 [citations omitted].
Trade & Investment Development Corporation v. Roblett Industrial Construction Corp., G.R. No. 139290,
31
November 11, 2005, 474 SCRA 510, 540-541.
32
Philippine Bank of Communications v. Court of Appeals, supra note 17.
50) Arco Pulp and Paper Co. vs Lim GR No. 206806, June 25, 2014
THIRD DIVISION
G.R. No. 206806, June 25, 2014
ARCO PULP AND PAPER CO., INC. AND CANDIDA A. SANTOS, Petitioners, v. DAN T. LIM,
DOING BUSINESS UNDER THE NAME AND STYLE OF QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be
presumed and may be implied only if the old and new contracts are incompatible on every point.
Before us is a petition for review on certiorari 1 assailing the Court of Appeals’ decision2 in CA-G.R. CV
No. 95709, which stemmed from a complaint 3 filed in the Regional Trial Court of Valenzuela City,
Branch 171, for collection of sum of money.
The facts are as follows:
Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under
the name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill
business.4 From February 2007 to March 2007, he delivered scrap papers worth P7,220,968.31 to
Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper) through its Chief Executive Officer and
President, Candida A. Santos.5 The parties allegedly agreed that Arco Pulp and Paper would either
pay Dan T. Lim the value of the raw materials or deliver to him their finished products of equivalent
value.6cralawred
Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-
dated check dated April 18, 20077 in the amount of P1,487,766.68 as partial payment, with the
assurance that the check would not bounce.8 When he deposited the check on April 18, 2007, it was
dishonored for being drawn against a closed account. 9 cralawred
On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of
agreement10 where Arco Pulp and Paper bound themselves to deliver their finished products to
Megapack Container Corporation, owned by Eric Sy, for his account. According to the memorandum,
the raw materials would be supplied by Dan T. Lim, through his company, Quality Paper and Plastic
Products. The memorandum of agreement reads as follows: chanRoblesvirtualLawlibrary
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches
at the price of P18.50 per kg. to Megapack Container for Mr. Eric Sy’s account. Schedule of deliveries
are as follows:
....
It has been agreed further that the Local OCC materials to be used for the production of the above
Test Liners will be supplied by Quality Paper & Plastic Products Ent., total of 600 Metric Tons at P6.50
per kg. (price subject to change per advance notice). Quantity of Local OCC delivery will be based on
the quantity of Test Liner delivered to Megapack Container Corp. based on the above production
schedule.11
On May 5, 2007, Dan T. Lim sent a letter 12 to Arco Pulp and Paper demanding payment of the
amount of ?7,220,968.31, but no payment was made to him. 13 cralawred
Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment with the
Regional Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its
answer15 but failed to have its representatives attend the pre-trial hearing. Hence, the trial court
allowed Dan T. Lim to present his evidence ex parte. 16 cralawred
On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and
dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the
memorandum of agreement, novation took place, which extinguished Arco Pulp and Paper’s
obligation to Dan T. Lim.17cralawred
Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him, novation did not
take place since the memorandum of agreement between Arco Pulp and Paper and Eric Sy was an
exclusive and private agreement between them. He argued that if his name was mentioned in the
contract, it was only for supplying the parties their required scrap papers, where his conformity
through a separate contract was indispensable.19 cralawred
On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting aside the
judgment dated September 19, 2008 and ordering Arco Pulp and Paper to jointly and severally pay
Dan T. Lim the amount of P7,220,968.31 with interest at 12% per annum from the time of demand;
P50,000.00 moral damages; P50,000.00 exemplary damages; and P50,000.00 attorney’s fees. 22 cralawred
The appellate court ruled that the facts and circumstances in this case clearly showed the existence
of an alternative obligation.23 It also ruled that Dan T. Lim was entitled to damages and attorney’s
fees due to the bad faith exhibited by Arco Pulp and Paper in not honoring its undertaking. 24 cralawred
Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its President and Chief
Executive Officer, Candida A. Santos, bring this petition for review on certiorari.
On one hand, petitioners argue that the execution of the memorandum of agreement constituted a
novation of the original obligation since Eric Sy became the new debtor of respondent. They also
argue that there is no legal basis to hold petitioner Candida A. Santos personally liable for the
transaction that petitioner corporation entered into with respondent. The Court of Appeals, they
allege, also erred in awarding moral and exemplary damages and attorney’s fees to respondent who
did not show proof that he was entitled to damages. 27 cralawred
Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was
no proper novation in this case. He argues that the Court of Appeals was correct in ordering the
payment of ?7,220,968.31 with damages since the debt of petitioners remains unpaid. 28 He also
argues that the Court of Appeals was correct in holding petitioners solidarily liable since petitioner
Candida A. Santos was “the prime mover for such outstanding corporate liability.” 29 cralawred
In their reply, petitioners reiterate that novation took place since there was nothing in the
memorandum of agreement showing that the obligation was alternative. They also argue that when
respondent allowed them to deliver the finished products to Eric Sy, the original obligation was
novated.30cralawred
A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No. 99-2-
04-SC dated November 21, 2000.31 cralawred
The issues to be resolved by this court are as follows: chanRoblesvirtualLawlibrary
1. Whether the obligation between the parties was extinguished by novation
2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.
3. Whether moral damages, exemplary damages, and attorney’s fees can be awarded
The petition is denied.
The obligation between the

parties was an alternative
obligation
The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states: chanRoblesvirtualLawlibrary
Article 1199. A person alternatively bound by different prestations shall completely perform one of
them.
The creditor cannot be compelled to receive part of one and part of the other undertaking.
“In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient,
determined by the choice of the debtor who generally has the right of election.” 32 The right of election
is extinguished when the party who may exercise that option categorically and unequivocally makes
his or her choice known.33 The choice of the debtor must also be communicated to the creditor who
must receive notice of it since:chanRoblesvirtualLawlibrary
The object of this notice is to give the creditor . . . opportunity to express his consent, or to impugn
the election made by the debtor, and only after said notice shall the election take legal effect when
consented by the creditor, or if impugned by the latter, when declared proper by a competent court. 34
According to the factual findings of the trial court and the appellate court, the original contract
between the parties was for respondent to deliver scrap papers worth P7,220,968.31 to petitioner
Arco Pulp and Paper. The payment for this delivery became petitioner Arco Pulp and Paper’s
obligation. By agreement, petitioner Arco Pulp and Paper, as the debtor, had the option to either (1)
pay the price or (2) deliver the finished products of equivalent value to respondent. 35 cralawred
The appellate court, therefore, correctly identified the obligation between the parties as an
alternative obligation, whereby petitioner Arco Pulp and Paper, after receiving the raw materials from
respondent, would either pay him the price of the raw materials or, in the alternative, deliver to him
the finished products of equivalent value.
When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the scrap
papers, they exercised their option to pay the price. Respondent’s receipt of the check and his
subsequent act of depositing it constituted his notice of petitioner Arco Pulp and Paper’s option to
pay.
This choice was also shown by the terms of the memorandum of agreement, which was executed on
the same day. The memorandum declared in clear terms that the delivery of petitioner Arco Pulp and
Paper’s finished products would be to a third person, thereby extinguishing the option to deliver the
finished products of equivalent value to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of the memorandum of agreement constituted a
novation of the contract between the parties. When petitioner Arco Pulp and Paper opted instead to
deliver the finished products to a third person, it did not novate the original obligation between the
parties.
The rules on novation are outlined in the Civil Code, thus: chanRoblesvirtualLawlibrary
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
Article 1292. In order that an obligation may be extinguished by another which substitute the same,
it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be
on every point incompatible with each other. (1204)
Article 1293. Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236
and 1237. (1205a)
Novation extinguishes an obligation between two parties when there is a substitution of objects or
debtors or when there is subrogation of the creditor. It occurs only when the new contract declares
so “in unequivocal terms” or that “the old and the new obligations be on every point incompatible
with each other.”36cralawred
Novation was extensively discussed by this court in Garcia v. Llamas:37 cralawred
Novation is a mode of extinguishing an obligation by changing its objects or principal

obligations, by substituting a new debtor in place of the old one, or by subrogating a third
person to the rights of the creditor. Article 1293 of the Civil Code defines novation as follows:
“Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may
be made even without the knowledge or against the will of the latter, but not without the consent of
the creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237.”
In general, there are two modes of substituting the person of the debtor: (1) expromision and
(2) delegacion. In expromision, the initiative for the change does not come from — and may even be
made without the knowledge of — the debtor, since it consists of a third person’s assumption of the
obligation. As such, it logically requires the consent of the third person and the creditor.
In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation; thus, the consent of these three persons are
necessary. Both modes of substitution by the debtor require the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated
by the creation of a new one that takes the place of the former. It is merely modificatory when the
old obligation subsists to the extent that it remains compatible with the amendatory agreement.
Whether extinctive or modificatory, novation is made either by changing the object or the principal
conditions, referred to as objective or real novation; or by substituting the person of the debtor or
subrogating a third person to the rights of the creditor, an act known as subjective or personal
novation. For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is
incompatible with the old one on every point. The test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence.38 (Emphasis
supplied)
Because novation requires that it be clear and unequivocal, it is never presumed, thus: chanRoblesvirtualLawlibrary
In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the
Roman Law jurisprudence, the principle — novatio non praesumitur — that novation is
never presumed. At bottom, for novation to be a jural reality, its animus must be ever
present, debitum pro debito — basically extinguishing the old obligation for the new one. 39 (Emphasis
supplied)
There is nothing in the memorandum of agreement that states that with its execution, the obligation
of petitioner Arco Pulp and Paper to respondent would be extinguished. It also does not state that
Eric Sy somehow substituted petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows
that petitioner Arco Pulp and Paper opted to deliver the finished products to a third person instead.
The consent of the creditor must also be secured for the novation to be valid: chanRoblesvirtualLawlibrary
Novation must be expressly consented to. Moreover, the conflicting intention and acts of the
parties underscore the absence of any express disclosure or circumstances with which to deduce a
clear and unequivocal intent by the parties to novate the old agreement. 40 (Emphasis supplied)
In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the
contract need not be secured. This is clear from the first line of the memorandum, which states: chanRoblesvirtualLawlibrary
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy. . . .41
If the memorandum of agreement was intended to novate the original agreement between the
parties, respondent must have first agreed to the substitution of Eric Sy as his new debtor. The
memorandum of agreement must also state in clear and unequivocal terms that it has replaced the
original obligation of petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is
present in this case.
Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with
their alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of demand
to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither acknowledged
nor consented to the latter as his new debtor. These acts, when taken together, clearly show that
novation did not take place.
Since there was no novation, petitioner Arco Pulp and Paper’s obligation to respondent remains valid
and existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full amount of
P7,220,968.31.
Petitioners are liable for damages
Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract
where the breach is due to fraud or bad faith: chanRoblesvirtualLawlibrary
Art. 2220. Willfull injury to property may be a legal ground for awarding moral damages if the court
should find that, under the circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad faith. (Emphasis
supplied)
Moral damages are not awarded as a matter of right but only after the party claiming it proved that
the breach was due to fraud or bad faith. As this court stated: chanRoblesvirtualLawlibrary
Moral damages are not recoverable simply because a contract has been breached. They are
recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton
disregard of his contractual obligations. The breach must be wanton, reckless, malicious or in bad
faith, and oppressive or abusive.42
Further, the following requisites must be proven for the recovery of moral damages: chanRoblesvirtualLawlibrary
An award of moral damages would require certain conditions to be met, to wit: (1) first, there must
be an injury, whether physical, mental or psychological, clearly sustained by the claimant;
(2) second, there must be culpable act or omission factually established; (3) third, the wrongful act
or omission of the defendant is the proximate cause of the injury sustained by the claimant; and
(4) fourth, the award of damages is predicated on any of the cases stated in Article 2219 of the Civil
Code.43
Here, the injury suffered by respondent is the loss of P7,220,968.31 from his business. This has
remained unpaid since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and Paper’s
act of refusing to pay its obligations.
When the obligation became due and demandable, petitioner Arco Pulp and Paper not only issued an
unfunded check but also entered into a contract with a third person in an effort to evade its liability.
This proves the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be
awarded in the following instances: chanRoblesvirtualLawlibrary
Article 2219. Moral damages may be recovered in the following and analogous cases: ChanRoblesVirtualawlibrary
(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not specified within this enumeration. When a
party breaches a contract, he or she goes against Article 19 of the Civil Code, which states: chanRoblesvirtualLawlibrary
Article 19. Every person must, in the exercise of his rights and in the performance of his duties, act
with justice, give everyone his due, and observe honesty and good faith.
Persons who have the right to enter into contractual relations must exercise that right with honesty
and good faith. Failure to do so results in an abuse of that right, which may become the basis of an
action for damages. Article 19, however, cannot be its sole basis: chanRoblesvirtualLawlibrary
Article 19 is the general rule which governs the conduct of human relations. By itself, it is not the
basis of an actionable tort. Article 19 describes the degree of care required so that an actionable tort
may arise when it is alleged together with Article 20 or Article 21. 44
Article 20 and 21 of the Civil Code are as follows: chanRoblesvirtualLawlibrary
Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same.
Article 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with lawful acts
that are contrary to morals, good customs, and public policy: chanRoblesvirtualLawlibrary
Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the act
have been willful or negligent. Willful may refer to the intention to do the act and the desire to
achieve the outcome which is considered by the plaintiff in tort action as injurious. Negligence may
refer to a situation where the act was consciously done but without intending the result which the
plaintiff considers as injurious.
Article 21, on the other hand, concerns injuries that may be caused by acts which are not necessarily
proscribed by law. This article requires that the act be willful, that is, that there was an intention to
do the act and a desire to achieve the outcome. In cases under Article 21, the legal issues revolve
around whether such outcome should be considered a legal injury on the part of the plaintiff or
whether the commission of the act was done in violation of the standards of care required in Article
19.45
When parties act in bad faith and do not faithfully comply with their obligations under contract, they
run the risk of violating Article 1159 of the Civil Code: chanRoblesvirtualLawlibrary
Article 1159. Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith.
Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be
recovered since it only specifies, among others, Article 21. When a party reneges on his or her
obligations arising from contracts in bad faith, the act is not only contrary to morals, good customs,
and public policy; it is also a violation of Article 1159. Breaches of contract become the basis of moral
damages, not only under Article 2220, but also under Articles 19 and 20 in relation to Article 1159.
Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220
requires that the breach be done fraudulently or in bad faith. In Adriano v. Lasala:46 cralawred
To recover moral damages in an action for breach of contract, the breach must be palpably wanton,
reckless and malicious, in bad faith, oppressive, or abusive. Hence, the person claiming bad faith
must prove its existence by clear and convincing evidence for the law always presumes good faith.
Bad faith does not simply connote bad judgment or negligence. It imports a dishonest
purpose or some moral obliquity and conscious doing of a wrong, a breach of known duty
through some motive or interest or ill will that partakes of the nature of fraud. It is,
therefore, a question of intention, which can be inferred from one’s conduct and/or
contemporaneous statements.47 (Emphasis supplied)
Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination
of the circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to
respondent, it was presumably with the knowledge that it was being drawn against a closed account.
Worse, it attempted to shift their obligations to a third person without the consent of respondent.
Petitioner Arco Pulp and Paper’s actions clearly show “a dishonest purpose or some moral obliquity
and conscious doing of a wrong, a breach of known duty through some motive or interest or ill will
that partakes of the nature of fraud.”48 Moral damages may, therefore, be awarded.
Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in the
following circumstances: chanRoblesvirtualLawlibrary
Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
Article 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide
whether or not they should be adjudicated.
Article 2234. While the amount of the exemplary damages need not be proven, the plaintiff must
show that he is entitled to moral, temperate or compensatory damages before the court may
consider the question of whether or not exemplary damages should be awarded.
In Tankeh v. Development Bank of the Philippines,49 we stated that: chanRoblesvirtualLawlibrary
The purpose of exemplary damages is to serve as a deterrent to future and subsequent

parties from the commission of a similar offense. The case of People v. Rante citing People v.
Dalisay held that:
ChanRoblesVirtualawlibrary
Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective damages are

intended to serve as a deterrent to serious wrong doings, and as a vindication of undue
sufferings and wanton invasion of the rights of an injured or a punishment for those guilty
of outrageous conduct. These terms are generally, but not always, used interchangeably. In
common law, there is preference in the use of exemplary damages when the award is to account for
injury to feelings and for the sense of indignity and humiliation suffered by a person as a result of an
injury that has been maliciously and wantonly inflicted, the theory being that there should be
compensation for the hurt caused by the highly reprehensible conduct of the defendant—associated
with such circumstances as willfulness, wantonness, malice, gross negligence or recklessness,
oppression, insult or fraud or gross fraud—that intensifies the injury. The terms punitive or vindictive
damages are often used to refer to those species of damages that may be awarded against a person
to punish him for his outrageous conduct. In either case, these damages are intended in good
measure to deter the wrongdoer and others like him from similar conduct in the future. 50 (Emphasis
supplied; citations omitted)
The requisites for the award of exemplary damages are as follows: ChanRoblesVirtualawlibrary
(1) they may be imposed by way of example in addition to compensatory damages, and only after the
claimant's right to them has been established;
(2) that they cannot be recovered as a matter of right, their determination depending upon the amount of
compensatory damages that may be awarded to the claimant; and
(3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or malevolent
manner.51
Business owners must always be forthright in their dealings. They cannot be allowed to renege on
their obligations, considering that these obligations were freely entered into by them. Exemplary
damages may also be awarded in this case to serve as a deterrent to those who use fraudulent
means to evade their liabilities.
Since the award of exemplary damages is proper, attorney’s fees and cost of the suit may also be
recovered. Article 2208 of the Civil Code states: chanRoblesvirtualLawlibrary
Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded[.]
Petitioner Candida A. Santos

is solidarily liable with petitioner
corporation
Petitioners argue that the finding of solidary liability was erroneous since no evidence was adduced to
prove that the transaction was also a personal undertaking of petitioner Santos. We disagree.
In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that: chanRoblesvirtualLawlibrary
Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general, from the
people comprising it. Following this principle, obligations incurred by the corporation, acting through
its directors, officers and employees, are its sole liabilities. A director, officer or employee of a
corporation is generally not held personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be disregarded if it is used as a means to
perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues.
....
Before a director or officer of a corporation can be held personally liable for corporate
obligations, however, the following requisites must concur: (1) the complainant must
allege in the complaint that the director or officer assented to patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove such unlawful acts, negligence or bad
faith.
While it is true that the determination of the existence of any of the circumstances that would
warrant the piercing of the veil of corporate fiction is a question of fact which cannot be the subject
of a petition for review on certiorari under Rule 45, this Court can take cognizance of factual issues if
the findings of the lower court are not supported by the evidence on record or are based on a
misapprehension of facts.53 (Emphasis supplied)
As a general rule, directors, officers, or employees of a corporation cannot be held personally liable
for obligations incurred by the corporation. However, this veil of corporate fiction may be pierced if
complainant is able to prove, as in this case, that (1) the officer is guilty of negligence or bad faith,
and (2) such negligence or bad faith was clearly and convincingly proven.
Here, petitioner Santos entered into a contract with respondent in her capacity as the President and
Chief Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment of
petitioner corporation’s obligations to respondent on behalf of petitioner Arco Pulp and Paper. This is
clear on the face of the check bearing the account name, “Arco Pulp & Paper, Co., Inc.” 54 Any
obligation arising from these acts would not, ordinarily, be petitioner Santos’ personal undertaking
for which she would be solidarily liable with petitioner Arco Pulp and Paper.
We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines:55 cralawred
Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where
the separate corporate personality of a corporation is abused or used for wrongful purposes. Under
the doctrine, the corporate existence may be disregarded where the entity is formed or
used for non-legitimate purposes, such as to evade a just and due obligation, or to justify
a wrong, to shield or perpetrate fraud or to carry out similar or inequitable considerations,
other unjustifiable aims or intentions, in which case, the fiction will be disregarded and the
individuals composing it and the two corporations will be treated as identical.56 (Emphasis
supplied)
According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp and
Paper, stating that: chanRoblesvirtualLawlibrary
In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused
to honor their undertaking in favor of the [respondent]. After the check in the amount of
P1,487,766.68 issued by [petitioner] Santos was dishonored for being drawn against a closed
account, [petitioner] corporation denied any privity with [respondent]. These acts prompted the
[respondent] to avail of the remedies provided by law in order to protect his rights. 57
We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the corporate
veil. When petitioner Arco Pulp and Paper’s obligation to respondent became due and demandable,
she not only issued an unfunded check but also contracted with a third party in an effort to shift
petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor petitioner corporation’s
obligations to respondent. These acts clearly amount to bad faith. In this instance, the corporate veil
may be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco Pulp and
Paper.
The rate of interest due on

the obligation must be reduced
in view of Nacar v. Gallery
Frames58 cralawred
In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar
v. Gallery Frames,59 the rate of interest due on the obligation must be modified from 12% per annum
to 6% per annum from the time of demand.
Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,60 and we
have laid down the following guidelines with regard to the rate of legal interest: chanRoblesvirtualLawlibrary
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern
Shipping Lines are accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII
on “Damages” of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e.,
a loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it
is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject
to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on

the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.61 (Emphasis supplied; citations omitted.)
According to these guidelines, the interest due on the obligation of P7,220,968.31 should now be at
6% per annum, computed from May 5, 2007, when respondent sent his letter of demand to
petitioners. This interest shall continue to be due from the finality of this decision until its full
satisfaction.
WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is AFFIRMED.
Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay
respondent Dan T. Lim the amount of P7,220,968.31 with interest of 6% per annum at the time of
demand until finality of judgment and its full satisfaction, with moral damages in the amount of
P50,000.00, exemplary damages in the amount of P50,000.00, and attorney’s fees in the amount of
P50,000.00.
SO ORDERED.
Peralta, (Acting Chairperson),* Villarama, Jr.** Mendoza, and Reyes*** JJ., concur.
Endnotes:
*
Associate Justice Diosdado M. Peralta was designated as Acting Chairperson of the Third Division
per Special Order No. 1707 dated June 17, 2014, vice Associate Justice Presbitero J. Velasco, Jr., in
view of the latter’s official trip to Nairobi, Kenya on June 22 to 25, 2014 and to South Africa on June
26 to 29, 2014.
**
Associate Justice Martin S. Villarama, Jr. was designated as Acting Member per Special Order No.
1691 dated May 22, 2014, in view of the vacancy in the Third Division.
***
Associate Justice Bienvenido L. Reyes was designated as Acting Member of the Third Division per
Special Order No. 1704 dated June 17, 2014, vice Associate Justice Presbitero J. Velasco, Jr., in view
of the latter’s official trip to Nairobi, Kenya on June 22 to 25, 2014 and to South Africa on June 26 to
29, 2014.
1
Rollo, pp. 8–20.
2
Id. at 101–110.
3
Id. at 22–29.
4
Id. at 23, complaint.
5
Id.
6
Id. at 101–102, CA decision.
7
Id. at 38.
8
Id. at 23.
9
Id. at 38.
10
Id. at 39.
11
Id.
12
Id. at 40.
13
Id. at 24.
14
Id. at 22–29.
15
Id. at 41–45.
16
Id. at 52, RTC decision.
17
Id. at 51–54.
18
Id. at 71–95.
19
Id. at 85.
20
Per Seventeenth Division, penned by J. Villon, and concurred in by J. Macalino and J. Inting.
21
Rollo, pp. 101–110.
22
Id. at 110, CA decision.
23
24
25
Id. at 111–116.
26
Id. at 121–122.
27
Id. at 8–20.
28
Id. at 126–131.
29
Id. at 129, comment.
30
Id. at 133–136.
31
Entitled In Re: In Dispensing with Rejoinder, which states that:
“[U]pon the filing of a Reply (when required), no REJOINDER shall be required by the Court. Instead,
the Court shall resolve either to (a) give due course to the petition and either consider the case
submitted for decision based on the pleadings or require the parties to submit their respective
memoranda; or (b) deny or dismiss the petition, as the case may be.”
32
Dissenting opinion of Justice Ynares-Santiago in Chavez v. PEA, 451 Phil. 1, 102–103 (2003) [Per
J. Carpio, En Banc], citing A. M. TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL
CODE OF THE PHILIPPINES IV, 203 (1991).
33
Borbon II v. Servicewide Specialists, 328 Phil. 150, 157–158 (1996) [Per J. Vitug, First Division].
34
Ong Guan Can v. Century Insurance Co., Ltd., 46 Phil. 592, 594 (1924) [Per J. Villamor, En Banc].
See also CIVIL CODE art. 1201.
35
See rollo, p. 53, RTC decision, and rollo, p. 108, CA decision.
36
CIVIL CODE, art. 1292.
37
462 Phil. 779 (2003) [Per. J. Panganiban, First Division].
38
Id. at 788–790, citing Idolor v. CA, 404 Phil. 220, 228 (2001) [Per J. Gonzaga-Reyes, Third
Division]; Agro Conglomerates, Inc. v. CA, 401 Phil. 644, 655 (2000) [Per J. Quisumbing, Second
Division]; De Cortes v. Venturanza, 170 Phil. 55, 68 (1977) [Per J. Makasiar, First Division]; PNB v.
Mallari and The First Nat'l. Surety & Assurance Co., Inc., 104 Phil. 437, 441 (1958) [Per J. Felix, En
Banc]; A. M. TOLENTINO, CIVIL CODE OF THE PHILIPPINES, IV, 390 (1991); Garcia v. Khu Yek
Chiong, 65 Phil. 466, 468 (1938) [Per C.J. Avanceña, En Banc]; Babst v. CA, 403 Phil. 244 (2001)
[Per J. Ynares-Santiago, First Division]; Spouses Bautista v. Pilar Development Corporation, 371 Phil.
533 (1999) [Per J. Puno, First Division]; Security Bank and Trust Company, Inc. v. Cuenca, 396 Phil.
108, 122 (2000) [Per J. Panganiban, Third Division]; Reyes v. CA, 332 Phil. 40, 50 (1996) [Per J.
Torres, Jr., Second Division]; Molino v. Security Diners International Corporation, 415 Phil. 587
(2001) [Per J. Gonzaga-Reyes, Third Division].
39
Reyes v. Court of Appeals, 332 Phil. 40, 56 (1996) [Per J. Torres, Jr., Second Division].
40
Land Bank of the Philippines v. Ong, G.R. No. 190755, November 24, 2010, 636 SCRA 266, 277
[Per J. Velasco, Jr., First Division], citing Philippine Savings Bank v. Spouses Mañalac, 496 Phil. 671,
687–688 (2005) [Per J. Ynares-Santiago, First Division].
41
Rollo, p. 39.
42
Philippine Savings Bank v. Spouses Castillo, G.R. No. 193178, May 30, 2011, 649 SCRA 527, 538
[Per J. Nachura, Second Division], citing Philippine National Bank v. Rocamora, 616 Phil. 369, 385
(2009) [Per J. Brion, Second Division]; Pilipinas Shell Petroleum Corporation v. John Bordman Ltd. of
Iloilo, Inc., 509 Phil. 728, 751 (2005) [Per J. Panganiban, Third Division].
43
Francisco v. Ferrer, Jr., 405 Phil. 741, 749–750 (2001) [Per J. Pardo, First Division].
44
Concurring opinion of J. Leonen, Alano v. Logmao, G.R. No. 175540, April 7, 2014 <
http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2014/april2014/175540_leonen.pdf> [Per J. Peralta, Third Division].
45
Id.
46
G.R. No. 197842, October 9, 2013 < http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2013/october2013/197842.pdf> [Per J. Mendoza, Third Division].
47
Id., citing Erlinda Francisco v. Ferrer, Jr., 405 Phil. 741, 745 (2001) [Per J. Pardo, First
Division]; Magat v. Court of Appeals, 392 Phil. 63, 76 (2000) [Per J. Pardo, First Division]; Far East
Bank & Trust Company v. Court of Appeals, 311 Phil. 783, 787 (1995) [Per J. Vitug, En Banc]; Ace
Haulers Corporation v. Court of Appeals, 393 Phil. 220, 230 (2000) [Per J. Pardo, First Division]; Tan
v. Northwest Airlines, Inc., 383 Phil. 1026, 1032 (2000) [Per J. Pardo, First Division]; Ford
Philippines, Inc. v. Court of Appeals, 335 Phil. 1, 9 (1997) [Per J. Francisco, Third Division];
and Llorente, Jr. v. Sandiganbayan, 350 Phil. 820, 843 (1998) [Per J. Panganiban, First Division].
48
Adriano v. Lasala, G.R. No. 197842, October 9, 2013 <
http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2013/october2013/197842.pdf>
[Per J. Mendoza, Third Division].
49
G.R. No. 171428, November 11, 2013 < http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2013/november2013/171428.pdf> [Per J. Leonen, Third Division].
50
Id.
51
Francisco v. Ferrer, Jr., 405 Phil. 741, 750 (2001) [Per J. Pardo, First Division], citing National
Steel Corporation v. Regional Trial Court of Lanao del Norte, Br. 2, Iligan City, 364 Phil. 240, 257–
258 (1999) [Per J. Purisima, Third Division].
52
G.R. No. 166282–83, February 13, 2013, 690 SCRA 519 [Per J. Mendoza, Third Division].
53
Id. at 525–527, citing Garcia v. Social Security Commission Legal and Collection, 565 Phil. 193,
209–210 (2007) [Per Chico-Nazario, Third Division]; Aratea v. Suico, 547 Phil. 407, 414 (2007) [Per
J. Garcia, First Division]; Prudential Bank v. Alviar, 502 Phil. 595 (2005) [Per J. Tinga, Second
Division]; Francisco v. Mallen, Jr., G.R. No. 173169, September 22, 2010, 631 SCRA 118, 123 [Per J.
Carpio, Second Division]; Sarona v. National Labor Relations Commission, G.R. No. 185280, January
18, 2012, 663 SCRA 394, 415 [Per J. Reyes, Second Division].
54
Rollo, p. 38.
55
G.R. No. 177493, March 19, 2014 < http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2014/march2014/177493.pdf> [Per J. Brion, Second Division].
56
Id., citing J. C. Vitug (Retired Supreme Court Associate Justice), Commercial Law and
Jurisprudence, II, 9 (2006); Lim v. Court of Appeals, 380 Phil. 60, 76 (2000) [Per J. Buena, Second
Division]; Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494, 505 (2001) [Per J. Kapunan,
First Division]; National Federation of Labor Union (NAFLU) v. Ople, 227 Phil. 113 (1986) [Per J.
Gutierrez, Jr., Second Division]; Commissioner of Internal Revenue v. Norton & Harrison Company,
120 Phil. 684 (1964) [Per J. Paredes, En Banc].
57
Rollo, p. 109.
58
G.R. No. 189871, August 13, 2013, 703 SCRA 439 [Per J. Peralta, En Banc].
59
Id.
60
G.R. No. 97412, July 12, 1994, 234 SCRA 78 [Per J. Vitug, En Banc]. The guidelines previously
stated that:chanRoblesvirtualLawlibrary
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.
In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on

the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
61
Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013, 703 SCRA 439, 457–458 [Per J.
Peralta, En Banc].
51) Shurdut Mill Supply Co vs Central Azucena del Danao, 44037-R,
December 19,1979
52) Molina vs Somes, 31 PHIL 76

FIRST DIVISION
[G.R. No. 10105. March 31, 1915. ]
RAFAEL MOLINA SALVADOR, Plaintiff-Appellant, v. ENRIQUE F. SOMES, Defendant-

Appellee.
Lawrence, Ross & Block for Appellant.
Gibbs, McDonough & Blanco for Appellee.
SYLLABUS
Per MORELAND, J., concurring: chanrob1es virtual 1aw library
1. EXECUTION; PRIORITIES BETWEEN JUDGMENTS. — Molina and Somes each had a judgment
against De la Riva (Somes by subrogation) and the controversy between the two arose when it
became necessary to determine whose judgment was entitled to preference with respect to the
proceeds of the sale of certain specific property of the judgment debtor then in the hands of the
sheriff by virtue of an execution levied under Molina’s judgment. Somes was awarded judgment
declaring that he was entitled to preference. Molina appealed and, at that time, or some time prior
thereto, released the levy under his judgment and the property, which was the subject of the levy,
was, so far as appears, returned to De la Riva. Thereupon, and during the pendency of the appeal
from the judgment in his favor, Somes levied an execution on De la Riva’s property issued on the
judgment which he held against De la Riva and duly sold the same in accordance with law. The
proceeds thereof, after deducting expenses and fees, were turned over to him by the sheriff in
accordance with the provisions of the Code of Civil Procedure. Molina made no attempt to intervene
in the proceedings to sell or to present to the sheriff a claim of preference with respect to the
proceeds of the sale. He secured a reversal of the judgment from which he had taken an appeal; but,
when he sought to levy on the property of De la Riva for the payment of his judgment, he was
confronted with the fact that that property had already been sold under Somes’ judgment and the
proceeds turned over to him. This action was commenced after plaintiff’s defeat in the previous
action (24 Phil. Rep., 49) to compel Somes to restore to Molina the property of De la Riva which had
been seized and sold, or its equivalent. Held: That plaintiff was not entitled to recover.
DECISION
PER CURIAM:
This is an appeal from a judgment of the Court of First Instance of the city of Manila dismissing the
complaint on the merits with costs.
With the expectation of later being able to set out fully the grounds of our decision we now, for the
prompt dispatch of pending litigation, decide the case without opinion.
The judgment is affirmed, with costs against the Appellant. So ordered.
Torres, Carson, and Trent, JJ.,
Separate Opinions
MORELAND, J., concurring: chanrob1es virtual 1aw library
In the former case between the same parties (24 Phil. Rep., 49) plaintiff sought to change the nature
of his cause of action on appeal and to recover on what he termed the theory of restitution. This
attempt was frustrated and the cause was disposed of on the theory on which it had been tried and
decided in the Court of First Instance. that action having been on a bond given by defendant to
obtain a preliminary injunction against the plaintiff, and the right to recover against the defendant
having been denied in that action on the ground that he had not signed the bond or become
responsible in any way thereon, plaintiff now seeks to recover against the same defendant on the
theory under which it was presented to the Supreme Court in the previous action, that of restitution.
Strictly speaking, the question of restitution cannot arise in this case. Molina’ and Somes each had a
judgment against De la Riva (Somes by subrogation) and the controversy between the two arose
when it became necessary to determine whose judgment was entitled to preference with respect to
the proceeds of the sale of certain specific property of the judgment debtor then in the hands of the
sheriff by virtue of an execution levied under Molina’s judgment. Somes was awarded judgment
declaring that he was entitled to preference. Molina appealed and, at that time, or some time prior
thereto, released the levy under his judgment and the property, which was the subject of the levy,
was, so far as appears, returned to De la Riva. Thereupon, and during the pendency of the appeal
from the judgment in his favor, Somes levied an execution on De la Riva’s property issued on the
judgment which he held against De la Riva and duly sold the same in accordance with law. The
proceeds thereof, after deducting expenses and fees, were turned over to him by the sheriff in
accordance with the provisions of the Code of Civil Procedure. Molina made no attempt to intervene
in the proceedings to sell or to present to the sheriff a claim of preference with respect to the
proceeds of the sale. He secured a reversal of the judgment from which he had taken an appeal; but,
when he sought to levy on the property of De la Riva for the payment of his judgment, he was
confronted with the fact that that property had already been sold under Somes’ judgment and the
proceeds turned over to him. This action was commenced after plaintiff’s defeat in the previous
action (24 Phil. Rep., 49) to compel Somes to restore to Molina the property of De la Riva which had
been seized and sold, or its equivalent.
I do not believe that the action will lie. Strictly speaking, as already intimated, it is very doubtful if
the purpose of plaintiff’s action is really restitution. At common law restitution was a remedy whose
object was to restore to the appellant a specific thing or its equivalent of which he had been deprived
by the enforcement of the judgment against him during the pendency of his appeal. In this action,
the thing sought to be obtained by Molina was never his. It belonged always to De la Riva. Moreover,
the injury sustained by Molina, if any, was not caused by the levy and sale under Somes’ judgment.
Instead of maintaining his levy Molina released it and returned the property to De la Riva, its owner.
This act was purely voluntary. It was not sought for or asked by Somes nor was it ordered by the
court. Somes never asked that Molina give up the property or even release his levy. He merely asked
that he be paid his judgment out of the proceeds of the property before Molina was paid his. Neither
Somes nor the court was responsible in any way for Molina’s releasing the levy and giving up the
property.
The moment that De la Riva received his property from the sheriff he had absolute control of it. He
could sell it to whom he pleased. He could apply it to the payment of any debt he chose. He could
have conveyed it to another and turned the money received therefrom over to Somes in payment of
his judgment; or he could have turned the property over to Somes as payment or part payment of
the judgment. There is no law which could have prevented any of these things from being done. Is
any one of these things different in substance or effect from what actually happened? Does not the
same legal condition exist in the case at bar? Did De la Riva commit a wrong in turning the property
over to Somes? If De la Riva committed no wrong in permitting Somes to take the property, did
Somes commit a wrong in taking it? There was a real legal relation between De la Riva and Molina,
but there was none between Molina and Somes. If De la Riva cannot be held responsible to Molina,
how can Somes be? What was legal for De la Riva to give was legal for Somes to accept. The turning
of the property back to De la Riva by Molina terminated Molina’s connection with it until he, at some
subsequent time, should renew his levy or make some effort to obtain part of the proceeds of the
sale. Indeed the release by Molina of his levy on De la Riva’s property so completely destroyed the
foundation on which the action in which his appeal was taken was based, that the appeal would have
been dismissed on proper motion on the ground that there existed no controversy between the
parties. I fail to see any basis of legal liability in favor of the plaintiff in this action. Somes committed
no wrong against Molina. He took no property from Molina in which Molina, at the time, had the
slightest interest. It was De la Riva’s property, unincumbered and free. The suit pending between
Somes and Molina at the time could not give Molina an interest in the property. Its only possible
result would be to declare, as between Somes and Molina, who would be entitled to be paid first out
of the proceeds of the sale of the property which was then in the process of being sold under Molina’s
execution. The court, in that action, could not declare that Molina had any interest in the property
itself, although the specific property levied on might have been before the court at the time. Nor
could it declare a preference over the general property of De la Riva. An action could not have been
maintained for either purpose. An action cannot be maintained to declare a preference either in the
general or specific property of a debtor. It must relate to the proceeds of the sale of specific property
of the debtor which has been seized by one creditor to satisfy his debt and as to which another
creditor is urging his rights of priority of payment. In other words, the action must relate to the
distribution of the proceeds of property already in the hands of one creditor whose rights therein are
disputed by another. Preference consists merely in the right to be paid first. The necessary
prerequisites to an action to obtain preference are: first, the debtor’s property shall not be sufficient
to pay the claims of the rival creditors; second, the property shall have been sold or shall have been
levied upon and be in the process of sale; third, a claim of preference in the distribution of the
proceeds of that property shall have been made by one creditor and denied by another; and, fourth,
the claim and denial must be maintained. If one of these requisites is lacking, the action cannot be
maintained. All of these elements existed at the time Somes began his action, but, from about the 3d
day of August, 1907, forward, only one of these essentials was present, namely, that De la Riva did
not have property sufficient to pay the judgments of both Molina and Somes. When the necessary
conditions precedent to the maintenance of the action had ceased to exist, there was in law no real
contest between them. There was no rival claim. The action would have been dismissed at any time
on a showing of the facts as they were. The question left for the court was a moot one. Its resolution
would have been useless. Its judgment would have been impossible of execution. It is idle for a court
to decree preferential rights of parties in the proceeds of specific property when such proceeds have
already ceased to exist as to them. It is nonsense to declare a preference in Molina in the proceeds
resulting from the sale of specific property when he is making no claim with respect to such
proceeds.
The principles which govern preference between creditors under the Civil Code must be kept in mind.
Preference does not create an interest in property. It creates simply a right of one creditor to be paid
the proceeds of the sale of property as against another creditor.
It creates no lien on property and, therefore, gives no interest in property, specific or general, to the
preferred creditor.
In the case of Peterson v. Newberry (6 Phil. Rep., 260), this court said: jgc:chanrobles.com.ph
"The learned judge was of opinion that ’there is no law in the Philippine Islands . . . fixing the lien of
judgments or executions until the levy,’ but our attention has not been directed to any provision of
law which provides that a levy under execution creates or fixes a lien, general or specific, in favor of
a judgment creditor, nor does it appear that a creditor acquires a lien upon the property of the
debtor by virtue of the filing of his complaint, the judgment, the issue of execution, or the levy
thereunder, other than the mere right, as prescribed in article 1924 of the Civil Code, to a preference
in the distribution of the funds of the estate of the judgment debtor in those cases wherein by
intervention or otherwise the judgment creditor is a proper party to the distribution proceedings and
duly asserts his right as a preferred creditor." cralaw virtua1aw library
It has been the frequent action of trial courts to order the property sold under an execution issued by
a person whose rights in the application of the proceeds were admittedly inferior to those of another,
the essential character of the preferential rights being that of application of proceeds rather than
interest in or lien on the property itself.
In the case of Rubert & Guamis v. Luengo & Martinez (8 Phil. Rep., 554), the court said: jgc:chanrobles.com.ph
"It is important to determine the exact nature of the right declared by this article 1922, paragraph 1.
We do not think that it gives any lien to the creditor upon the property itself. It simply provides that,
when the proceeds of the property are distributed, the preferred creditor shall be paid first. Not
having any lien upon the property, the plaintiffs in this case had no right to the possession of these
films. They had no right to prevent a seizure of the films upon an attachment or execution issued at
the suit of another creditor, but they did have a right to secure from the proceeds of the sale made
under such seizure the payment of their claim before the claims of other creditors were paid. It is
apparent that in this case, and in other cases, there must necessarily be a sale of the property before
the rights of the creditors can be adjusted. In this case it was necessary that the films be sold before
it could be determined how much of the proceeds Luengo & Martinez were entitled to receive after
the plaintiffs had been paid. If the films sold for less than the claim of the plaintiffs, the plaintiffs
would be entitled to all the proceeds; if for more, Luengo & Martinez would be entitled to the surplus
after the plaintiffs were paid."
cralaw virtua1aw library
The right of plaintiff is not one in the corpus of the property. He got no lien or other right by his levy,
for, after sale, any other creditor would have had the right to contest with him before the sheriff the
application of the proceeds. His right was simply to have the proceeds applied in a certain way. It
was not a lien on property but a preference in application. The law does not give the creditor who has
a preference a right to take the property or sell it as against another creditor. It is not a question of
who takes or sells; it is one of the application of the proceeds after the sale — of payment of the
debt.
So that the taking and the sale by the sheriff under Somes’ execution, even admitting that Somes’
rights were inferior to those of Molina, so far as the law of preference goes, were not wrongful acts
as to Molina. No one was injured when the sheriff sold under Somes’ execution and collected the
proceeds. Molina’s remedy, and his only remedy, even if he himself had sold, was to fight out with
Somes the application of the proceeds obtained by the sale. The rights which the plaintiff asserts in
this case must be based, if they have basis at all, not on his levy, whether maintained or not, on an
interest in property, but on the application of the proceeds by the sheriff after sale.
Was the application of the proceeds legally made by the sheriff? There can be no doubt about that.
Nobody denies his right or duty to apply them as he did. Molina did not object or protest in any way.
That being the case, did Somes incur responsibility to Molina by reason of such application?
Compliance with the law discharges obligations and responsibilities; it does not create them. The
sheriff obeyed the law in distributing the proceeds. There was no contest before him as to whom the
money should be paid. Molina failed to take the steps necessary to protect his judgment. There was
only one claimant to the proceeds before the sheriff and he was the one whose execution the sheriff
was collecting. The sheriff, then, committed no wrong in delivering the proceeds of the sale of De la
Riva’s property to Somes. All things else being equal, what one man has a right to give another has a
right to receive. The sheriff having the clear right to apply the proceeds to the payment of Somes’
execution, the very execution under which those proceeds were obtained, did not Somes have an
equal right to receive them, and in receiving them did he lay himself open to attack by Molina?
Molina voluntarily abandoned his levy on the property of De la Riva. Somes took advantage of this
and procured a levy of his own, and the sheriff sold and turned the proceeds over to Somes. Molina
made no objection to the levy or sale and none to the act of the sheriff in turning the proceeds over
to Somes to apply on his execution. He saw all of these things taking place and stood passive. Did he
not, thereby, lose his right of preference over Somes? The contention of the plaintiff would
undoubtedly be, in reply, that although he did not actually go to the sheriff at the time of the levy or
sale or while the sheriff still held the proceeds in his hands, and assert his claim to preference in the
distribution of the funds, nevertheless, so far as Somes is concerned, he. Molina, at all times
asserted his right of preference just as effectually; that, at the very time of the levy, sale and
distribution, there was pending in court an action begun by Somes against him for the very purpose
of determining the question of preference; that, in that action, Somes was asserting his right of
preference in the very property so sold and that he was denying such right; that that right was the
whole subject matter of the litigation. To this there is an obvious answer. In the first place, the
declaration by the Supreme Court of the preference of Molina’s claims over Somes’ (15 Phil. Rep.,
133) 1 was based on the finding, a fact undisputed at the time, that the property concerning which
the rival claims were being made was then in the hands of the sheriff under Molina’s levy awaiting
the resolution of the appeal. The court in that case said: "Said executions were placed in the hands of
the sheriff of the city of Manila and the sheriff of the Province of Albay, and all of the property of the
defendant De la Riva was levied upon under said executions, which levies still remain in force, the
property not having been sold pursuant thereto." That fact, coupled with the further fact that the
property of De la Riva was not sufficient to pay the claims of both, furnished the fundamental basis of
the action. If there was property enough to pay both, then the fight over preference was vain. A
litigation to determine a preference when there is no specific property or proceeds in the hands of the
sheriff upon which that preference is to operate is almost equally vain. In fact, until the sheriff has
actually sold the property and has marshalled the net proceeds of the sale, it is at least uncertain, in
many cases, whether a declaration of preference will be necessary. As we said in the case of Rubert
& Guamis v. Luengo & Martinez (8 Phil. Rep., 554): jgc:chanrobles.com.ph
"It is apparent that in this case, and in other cases, there must necessarily be a sale of the property
before the rights of the creditors can be adjusted. In this case it was necessary that the films be sold
before it could be determined how much of the proceeds Luengo & Martinez were entitled to receive
after the plaintiffs had been paid. If the films sold for less than the claim of the plaintiffs, the
plaintiffs would be entitled to all the proceeds; if for more, Luengo & Martinez would be entitled to
the surplus after the plaintiffs were paid."
Strictly speaking, the action is premature if brought before the sale, as the only time when it can be
determined absolutely whether the preference is necessary is after the sale is made. The property
may bring enough to pay all debts. Practically, however, it is many times so clear, even before the
sale, that the property in question will not yield sufficient money on sale to satisfy the contending
creditors, that an action for a declaration of preference will be entertained before the sale takes
place. But in such case the fact that the property, when sold, will not be sufficient to satisfy the
contending creditors must be clearly and explicitly alleged in the complaint and proved on the trial.
Failing in such allegation, the complaint is insufficient. Failing in that proof, the plaintiff cannot
succeed. Moreover, it must appear that the property in question is in process of being sold when the
action is commenced. That is to say, the property must have been seized by the sheriff at the
instance of one of the creditors and must be in the process of sale under such seizure. Unless one of
the creditors is engaged in the act of satisfying his claim at the expense of the other creditors, the
action of which we are speaking cannot be maintained. An action will not be entertained to declare a
preference over the general property of the debtor or over property concerning which creditors are
not disputing. The property must be specific property which has been seized and is actually being
disposed of. Furthermore, there must be an actual present dispute between creditors as to who shall
take preference in the distribution of the proceeds. The right of preference is one which can be made
effective only by being asserted and maintained. If the right claimed is not asserted and maintained,
it is lost. In the case at bar the plaintiff levied on the property of De la Riva. After the levy Somes
asserted a right of preference over Molina in the distribution of the proceeds of the sale as against
the plaintiff. Thereafter Molina released the levy, leaving the property in possession of the debtor, De
la Riva, as free as before the levy. This was in effect an abandonment, at least at that moment, of
any claim of preference, if one had ever been asserted. Let us repeat that, unless the property has
actually been seized by one creditor and a right of preference in application of the proceeds of the
sale thereof has been asserted by another, an action to obtain a declaration of preference will not lie.
The claim of preference necessarily assumes the existence and presence of two persons. If the
property has not been seized by one creditor it is open to seizure by another. If there are not two
parties at least, the question of preference cannot, of course, arise. Therefore, when Molina
abandoned his levy and consequently the possession of the property, indicating thereby that, at that
moment, he did not intend to press his claim further as to that specific property, the right of
preference, if one had been asserted by or against him, could not be a subject of dispute until some
subsequent and timely act of his revived his claim. After that act his claim of preference could not
exist because he had ceased to contest. He did not maintain. As a necessary result, when Somes
thereafter levied on the property and took it from the possession of De la Riva, there was no one
disputing his right to the proceeds thereof. Molina could have made his claim; but he did not. No
subsequent act of his renewed or revived his abandoned claim. He sat quiet while the sheriff levied,
sold and distributed, and made no claim.
Not only was there no preference being asserted to the proceeds of that specific property, but, still
more, at the time of the decision of this court in the case above cited (Somes v. Molina, 15 Phil.
Rep., 133) the property no longer belonged to the debtor, De la Riva. It had been seized and sold by
Somes without protest by Molina and its proceeds had gone from the hands of the sheriff and had
been dissipated. True, it was Somes who caused the property to be sold and took the proceeds. But
it was without objection or protest from Molina. The pendency of the action could not be held to be
an objection or protest on the part of Molina.
In the second place, at the time the action was begun by Somes, Molina held the property under his
executions. Somes was the protestant. He objected to Molina holding the property and opposed his
taking the proceeds after a sale should be made. Somes was the objector and insistent claimant and
was the plaintiff in the action. Molina was passive. He was simply holding fast at the time. Now,
Somes being the objector, the mover, the positive and insistent claimant, and the plaintiff in the
action to enforce his claims, how would be construed, normally, the act of Molina releasing his levies
on the property, abandoning his possession thereof and turning it back to De la Riva? Was this not an
abandonment of the levy and the rights which he had acquired thereunder? Was it not, for the
moment at least, an abandonment of his right of preference, which right cannot be effectively
asserted so long as the property concerning which it is claimed is in possession of and under the
control of the debtor? The very essence of the right is that the property of the debtor shall have been
seized by one of the creditors. So long as the debtor has undisputed possession the claim of
preference cannot be made. There can, at such time, be no basis for it. What can be said, then, of
the voluntary return of the property by Molina to the debtor? The instant that was done the claim of
preference, if any, kept alive, if it was, by the pendency of the action, was abandoned; and that
action would have been dismissed on proper motion, as the purpose for which it had been begun had
disappeared. This is particularly so after the sale of the property and the distribution of the proceeds.
When two acts of an individual are inconsistent with each other, the last act will prevail, as it is the
last expression of his will and purpose. If Molina’s defense of Somes’ action can be said to be an
assertion of his right of preference over Somes, then his subsequent act of abandonment and return
of the property to De la Riva must be held to prevail over it. One cannot hold fast and let loose at the
same time.
It is true that the question in this case is one of preference under article 1213 of the Civil Code; but I
do not believe that the preference under that article is, compared with article 1924, such as to
require, so far as this case is concerned, different treatment. Articles 1210, 1211, 1212 and 1213
read as follows:jgc:chanrobles.com.ph
"ART. 1210. Subrogation shall be presumed: jgc:chanrobles.com.ph

"1. When a creditor pays another preferred creditor.
"2. When a third person, who is not interested in the obligation, pays with the express or implied
approval of the debtor.
"3. When the person who is interested in the fulfillment of the obligation pays, without prejudice to
the effects of the confusion with regard to the share pertaining to him.
"ART. 1211. A debtor may make the subrogation without the consent of the creditor when, in order
to pay the debt, he may have borrowed money in a public instrument, stating his purpose and
setting forth in the receipt the origin of the sum paid.
"ART. 1212. Subrogation transfers to the party subrogated the credit, with the corresponding rights,
either against the debtor or against third persons, be they sureties or holders of mortgages.
"ART. 1213. A creditor to whom a partial payment has been made may exercise his right with regard
to the balance, with preference to the person subrogated in his place by virtue of the partial payment
of the said credit."
There can be no claim in this action that the judgment held by Somes had preference over those held
by Molina, or that the judgments held by Molina had any preference over that held by Somes, by
virtue of anything inherent in the judgments themselves. This is necessarily so because, in the case
of Somes v. Molina (15 Phil. Rep., 133), this court held "that there exists no preference among the
judgments in actions Nos. 3402, 3829 and 4766 referred to in this action. They all stand on an equal
footing." The preference of Molina over Somes exists, as intimated, not by virtue of article 1924 but,
rather, by virtue of article 1213 of the Civil Code above quoted. While, as we have said, there is no
preference under article 1924 and the following articles, nevertheless, the preference provided for in
article 1213 is sufficiently like the preference provided for in article 1924 as, under the theory of
judgments and the credits which they exemplify laid down in the Civil Code, to make them the same
for the purposes of this action. Somes, having been subrogated to the rights of Molina in judgment
No. 3402, was entitled to exercise all of the rights which Molina could have exercised if he had
continued to hold the judgment uncollected, except that Somes could not take from Molina any of the
property of De la Riva then in the sheriff’s hands by virtue of the levies under Molina’s judgments.
After they had been fully satisfied, then Somes was entitled to any surplus which might remain for
the payment of the judgment which he held in cause No. 3402. It must be noted that the case above
cited (15 Phil. Rep., 133) proceeded in this court and was decided by it on the theory that all of the
property of De la Riva had been levied upon by Molina and was then in his hands or the hands of the
sheriff for the purposes of sale and the application of the proceeds thereof to the payment of his
judgments. In that property Somes could have no interest until the payment of Molina’s two
judgments in full. This was so by virtue of the fact that the payment by Somes of judgment No. 3402
was but a part payment of the debt of P130,000 which De la Riva owed to Molina. This being a partial
payment of the debt, Molina was entitled to collect the balance of that debt out of the property of De
la Riva, which he then held under executions, before Somes could take any portion of it for the
payment of his claim against De la Riva arising out of his payment of the judgment in cause No.
3402, notwithstanding the fact that, by such payment, he became subrogated to the rights which
Molina had therein. (Article 1213 of the Civil Code above quoted.) The right of Molina over Somes
was simply a right to be paid first out of specific property, not a right to be paid first out of the
general property of the judgment debtor. If the judgment debtor had paid Somes’ judgment out of
his general assets Molina would have been helpless to prevent it. In the same way, if Somes
collected his judgment out of property of De la Riva which was in his possession and under his
control at the time, with no attempt on the part of Molina to interfere or intervene, the latter is
without remedy after the termination of the proceedings on execution and the payment of the fund to
Somes.
I am of the opinion, therefore, that Molina, having failed to present his claim to the sheriff, or having
neglected to take some other appropriate proceeding to establish, as against Somes, his right to be
preferred in the distribution of the proceeds of the sale of De la Riva’s property, and having
permitted distribution without objection, protest or intervention, lost his right of preference and is not
entitled to assert it in this action. As I have already stated, at the time the judgment was granted by
the Supreme Court in favor of Molina against Somes as to their rights under their respective
judgments, it was assumed by the court that Molina had maintained his levy on De la Riva’s property
and that the real question in litigation was the right of Molina to share ahead of Somes in the
distribution of the proceeds of the sale of that property. It is very doubtful if the court would have
permitted the action to go forward if it had appeared that no property had been seized and held
under levy and that none was before the court. The question presented by the pleadings would
probably have been academic.
For these reasons I am of the opinion that the action cannot be maintained and that the complaint
must be dismissed on the merits.
***be safe and stay home fellows.. #frontliner

Extinguishment of Obligation - Antonio

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Cases on Extinguishment of Obligations

1) Kalalo v Luz, 34 SCRA 377

G.R. No. L-27782 July 31, 1970

Amelia K. del Rosario for plaintiff-appellee.

Pelaez, Jalandoni & Jamir for defendant-appellant.

(a) Fil-American Life Insurance Building at Legaspi City;

(b) Fil-American Life Insurance Building at Iloilo City;

(c) General Milling Corporation Flour Mill at Opon Cebu;

(d) Menzi Building at Ayala Blvd., Makati, Rizal;

(f) Aurelia's Building at Mabini, Ermita, Manila;

(h) Arthur Young's residence at Forbes Park, Makati, Rizal;

(i) L & S Building at Dewey Blvd., Manila; and

The appellant made the following assignments of errors:

We find merit in the stand of appellee.

Percentage of Total to be surrendered at

Preferred: Free Market Rate: Rate:

As previously manifested, this Memorandum shall be confined to:

More specifically this Memorandum proposes to demonstrate the affirmative of three legal

The objections to the Commissioner's Report embodied in defendant's memorandum of objections,

The report of the Commissioner on this matter reads as follows:

1 Annex A to complaint, pp. 18-21, Record on Appeal.

2 Record on Appeal, pp. 21-26.

3 Record on Appeal, pp. 115-118.

4 Record on Appeal, p. 96.

6 91 Phil. 46, 49.

7 Coronel, 7 et al. vs. CIR, et al., 24 -SCRA, 990, 996.

8 28 Am. Jur., 2d. , pp. 601-602.

9 Rivers vs. Metropolitan Life Ins. Co. of New York, 6 NY 2d. 3, 5.

10 28 Am. Jur. 2d. p. 642.

12 Record on appeal, pp. 95-96.

13 Record on Appeal, p. 155.

15 Wigmore, Evidence, 3d ed., Vol. IV. pp. 21-23.

16 7 Phil. 20, 22.

17 Corbin On Contracts, Vol. 3, P. 145.

18 Corbin On Contracts, Vol. 3, p. 147, and cases cited therein.

20 Citing 48 CJ, 605, 606-607 in support of his submission.

22 Rule 131, See. 5, pars. (d) and (g), Rules of Court.

23 47 Phil 115, 142.

26 Record on Appeal, p. 99.

27 Record on Appeal, pp. 113-115.

28 Record on Appeal, p. 97; emphasis supplied.

2) St. Paul Fire and Marine Insurance v Macondray, 70 SCRA 122

G.R. No. L-27796 March 25, 1976

ST. PAUL FIRE & MARINE INSURANCE CO., plaintiff-appellant,

Chuidian Law Office for appellant.

recovery of said amount of $1,134.46, plus costs.

The appeal is without merit.

Barredo, Aquino, Concepcion, Jr. and and Martin, JJ., concur.

Justice Ruperto G. Martin was designated to sit in the Second Division.

1 CA-G.R. No. 36295-R.

2 Civil Case No. 47720.

3 Record on Appeal, p. 29.

4 Decision, pp. 22-23, Record on Appeal.

5 Complaint, par. 8, p. 4, Record on Appeal.

6 The Roanoke 59 F. 161, 165.

7 Article 1749, Civil Code.

8 Article 1306, Ibid.; H. E. Heacock Co. v. Macondray & Co., 42 Phil. 205.

9 Articles 1744, No. 3 and 1750, Ibid.

10 See Articles 1744 to 1749, Ibid.

11 Said amount of P1,109.67 is itemized as follows:

Mark Pk D Unit Amo

(Exhibits "H" & "J")