2.

LOSS OF THE THING DUE

PEOPLE V. FRANKLIN

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-21507 June 7, 1971

PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
NATIVIDAD FRANKLIN, accused, ASIAN SURETY & INSURANCE COMPANY, INC., bondsman-appellant.

Office of the Solicitor General Arturo A. Alafriz, Acting Solicitor General Isidro C. Borromeo and Solicitor Antonio M.
Consing for plaintiff-appellee.

Advincula, Astraquillo, Villa & Ramos for bondsman-appellant.

DIZON, J.:

Appeal taken by the Asian Surety & Insurance Company, Inc. from the decision of the Court of First Instance of
Pampanga dated April 17, 1963, forfeiting the bail bond posted by it for the provisional release of Natividad Franklin,
the accused in Criminal Case No. 4300 of said court, as well as from the latter's orders denying the surety
company's motion for a reductions of bail, and its motion for reconsideration thereof.

It appears that an information filed with the Justice of the Peace Court of Angeles, Pampanga, docketed as Criminal
Case No. 5536, Natividad Franklin was charged with estafa. Upon a bail bond posted by the Asian Surety &
Insurance Company, Inc. in the amount of P2,000.00, she was released from custody.

After the preliminary investigation of the case, the Justice of the Peace Court elevated it to the Court of First
Instance of Pampanga where the Provincial Fiscal filed the corresponding information against the accused. The
Court of First Instance then set her arraignment on July 14, 1962, on which date she failed to appear, but the court
postponed the arraignment to July 28 of the same year upon motion of counsel for the surety company. The
accused failed to appear again, for which reason the court ordered her arrest and required the surety company to
show cause why the bail bond posted by it should not be forfeited.

On September 25, 1962, the court granted the surety company a period of thirty days within which to produce and
surrender the accused, with the warning that upon its failure to do so the bail bond posted by it would be forfeited.
On October 25, 1962 the surety company filed a motion praying for an extension of thirty days within which to
produce the body of the accused and to show cause why its bail bond should not be forfeited. As not withstanding
the extension granted the surety company failed to produce the accused again, the court had no other alternative
but to render the judgment of forfeiture.
Subsequently, the surety company filed a motion for a reduction of bail alleging that the reason for its inability to
produce and surrender the accused to the court was the fact that the Philippine Government had allowed her to
leave the country and proceed to the United States on February 27, 1962. The reason thus given not being to the
satisfaction of the court, the motion for reduction of bail was denied. The surety company's motion for
reconsideration was also denied by the lower court on May 27, 1963, although it stated in its order that it would
consider the matter of reducing the bail bond "upon production of the accused." The surety company never complied
with this condition.

Appellant now contends that the lower court should have released it from all liability under the bail bond posted by it
because its failure to produce and surrender the accused was due to the negligence of the Philippine Government
itself in issuing a passport to said accused, thereby enabling her to leave the country. In support of this contention
the provisions of Article 1266 of the New Civil Code are invoked.

Appellant's contention is untenable. The abovementioned legal provision does not apply to its case, because the
same speaks of the relation between a debtor and a creditor, which does not exist in the case of a surety upon a
bail bond, on the one hand, and the State, on the other.

In U.S. vs. Bonoan, et al., 22 Phil., p. 1, We held that:

The rights and liabilities of sureties on a recognizance or bail bond are, in many respects, different
from those of sureties on ordinary bonds or commercial contracts. The former can discharge
themselves from liability by surrendering their principal; the latter, as a general rule, can only be
released by payment of the debt or performance of the act stipulated.

In the more recent case of Uy Tuising, 61 Phil. 404, We also held that:

By the mere fact that a person binds himself as surety for the accused, he takes charge of, and
absolutely becomes responsible for the latter's custody, and under such circumstances it is
incumbent upon him, or rather, it is his inevitable obligation not merely a right, to keep the accused
at all times under his surveillance, inasmuch as the authority emanating from his character as surety
is no more nor less than the Government's authority to hold the said accused under preventive
imprisonment. In allowing the accused Eugenio Uy Tuising to leave the jurisdiction of the Philippines,
the appellee necessarily ran the risk of violating and in fact it clearly violated the terms of its bail
bonds because it failed to produce the said accused when on January 15, 1932, it was required to
do so. Undoubtedly, the result of the obligation assumed by the appellee to hold the accused at all
times to the orders and processes of the lower court was to prohibit said accused from leaving the
jurisdiction of the Philippines because, otherwise, said orders and processes would be nugatory and
inasmuch as the jurisdiction of the court from which they issued does not extend beyond that of the
Philippines, they would have no binding force outside of said jurisdiction.

It is clear, therefore, that in the eyes of the law a surety becomes the legal custodian and jailer of the accused,
thereby assuming the obligation to keep the latter at all times under his surveillance, and to produce and surrender
him to the court upon the latter's demand.

That the accused in this case was able to secure a Philippine passport which enabled her to go to the United States
was, in fact, due to the surety company's fault because it was its duty to do everything and take all steps necessary
to prevent that departure. This could have been accomplished by seasonably informing the Department of Foreign
Affairs and other agencies of the government of the fact that the accused for whose provisional liberty it had posted
a bail bond was facing a criminal charge in a particular court of the country. Had the surety company done this,
there can be no doubt that no Philippine passport would have been issued to Natividad Franklin.
UPON ALL THE FOREGOING, the decision appealed from is affirmed in all its parts, with costs.

LAGUNA V. MANABAT

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-23546 August 29, 1974

LAGUNA TAYABAS BUS COMPANY and BATANGAS TRANSPORTATION COMPANY, petitioners,

vs.
FRANCISCO C. MANABAT, as assignee of Biñan Transportation Company, Insolvent, respondent.

Domingo E. de Lara for petitioners.

M. A. Concordia & V.A. Guevarra for respondent.

MAKASIAR, J.:p

This is an appeal by certiorari from a judgment of the Court of Appeals dated August 31, 1964, which WE AFFIRM.

The undisputed facts are recounted by the Court of Appeals through then Associate Justice Salvador Esguerra thus:

On January 20, 1956, a contract was executed whereby the Biñan Transportation Company leased
to the Laguna-Tayabas Bus Company at a monthly rental of P2,500.00 its certificates of public
convenience over the lines known as Manila-Biñan, Manila-Canlubang and Sta. Rosa-Manila, and to
the Batangas Transportation Company its certificate of public convenience over the line known as
Manila-Batangas Wharf, together with one "International" truck, for a period of five years, renewable
for another similar period, to commence from the approval of the lease contract by the Public
Service Commission. On the same date the Public Service Commission provisionally approved the
lease contract on condition that the lessees should operate on the leased lines in accordance with
the prescribed time schedule and that such approval was subject to modification or cancellation and
to whatever decision that in due time might be rendered in the case.

Sometime after the execution of the lease contract, the plaintiff Biñan Transportation Company was
declared insolvent in Special Proceedings No. B-30 of the Court of First Instance of Laguna, and
Francisco C. Manabat was appointed as its assignee. From time to time, the defendants paid the
lease rentals up to December, 1957, with the exception of the rental for August 1957, from which
there was deducted the sum of P1,836.92 without the consent of the plaintiff. This deduction was
based on the ground that the employees of the defendants on the leased lines went on strike for 6
days in June and another 6 days in July, 1957, and caused a loss of P500 for each strike, or a total
of P1,000.00; and that in Civil Case No. 696 of the Court of First Instance of Batangas, Branch II,
judgment was rendered in favor of defendant Batangas Transportation Company against the Biñan
Transportation Company for the sum of P836.92. The assignee of the plaintiff objected to such
deduction, claiming that the contract of lease would be suspended only if the defendants could not
 operate the leased lines due to the action of the officers, employees or laborers of the lessor but not
of the lessees, and that the deduction of P836.92 amounted to a fraudulent preference in the
insolvency proceedings as whatever judgment might have been rendered in favor of any of the
lessees should have been filed as a claim in said proceedings. The defendants neither refunded the
deductions nor paid the rentals beginning January, 1958, notwithstanding demands therefor made
from time to time. At first, the defendants assured the plaintiff that the lease rentals would be paid,
although it might be delayed, but in the end they failed to comply with their promise.

On February 18, 1958, the Batangas Transportation Company and Laguna-Tayabas Bus Company
separately filed with the Public Service Commission a petition for authority to suspend the operation
on the lines covered by the certificates of public convenience leased to each of them by the Biñan
Transportation Company. The defendants alleged as reasons the reduction in the amount of dollars
allowed by the Monetary Board of the Central Bank of the Philippines for the purchase of spare parts
needed in the operation of their trucks, the alleged difficulty encountered in securing said parts, and
their procurement at exorbitant costs, thus rendering the operation of the leased lines prohibitive.
The defendants further alleged that the high cost of operation, coupled with the lack of passenger
traffic on the leased lines resulted in financial losses. For these reasons they asked permission to
suspend the operation of the leased lines until such time as the operating expenses were restored to
normal levels so as to allow the lessees to realize a reasonable margin of profit from their operation.

Plaintiff's assignee opposed the petition on the ground that the Public Service Commission had no
jurisdiction to grant the relief prayed for as it should involve the interpretation of the lease contract,
which act falls exclusively within the jurisdiction of the ordinary courts; that the petitioners had not
asked for the suspension of the operation of the lines covered by their own certificates of public
convenience; that to grant the petition would amount to an impairment of the obligation of contract;
and that the defendants have no legal personality to ask for suspension of the operation of the
leased lines since they belonged exclusively to the plaintiffwho is the grantee of the corresponding
certificate of public convenience. Aside from the assignee, the Commissioner of the Internal
Revenue and other creditors of the Biñan Transportation Company, like the Standard Vacuum Oil
Co. and Parsons Hardware Company, filed oppositions to the petitions for suspension of operation.

On October 15, 1958, the Public Service Commission overruled all oppositions filed by the assignee
and other creditors of the insolvent, holding that upon its approval of the lease contract, the lessees
acquired the operating rights of the lessor and assumed full responsibility for compliance with all the
terms and conditions of the certificate of public convenience. The Public Service Commission further
stated that the petition to suspend operation did not pertain to any act of dominion or ownership but
only to the use of the certificate of public convenience which had been transferred by the plaintiff to
the defendants, and that the suspension prayed for was but an incident of the operation of the lines
leased to the defendants. The Public Service Commission further ruled that being a quasi-judicial
body of limited jurisdiction, it had no authority to interpret contracts, which function belongs to the
exclusive domain of the ordinary courts, but the petition did not call for interpretation of any provision
of the lease contract as the authority of the Public Service Commission to grant or deny the prayer
therein was derived from its regulatory power over the leased certificates of public convenience.

While proceedings before the Public Service Commission were thus going on, as a consequence of the continuing
failure of the lessees to fulfill their earlier promise to pay the accruing rentals on the leased certificates,

On May 19, 1959, plaintiff Biñan Transportation Company represented by Francisco C. Manabat,
assignee, filed this action against defendants Laguna Tayabas Bus Company and Batangas
Transportation Company for the recovery of the sum of P42,500 representing the accrued rentals for
the lease of the certificates of public convenience of the former to the latter, corresponding to the
 period from January 1958, to May 1959, inclusive, plus the sum of P1,836.92 which was deducted
by the defendants from the rentals due for August, 1957, together with all subsequent rentals from
June, 1959, that became due and payable; P5,000.00 for attorney's fees and such corrective and
exemplary damages as the court may find reasonable.

The defendants moved to dismiss the complaint for lack of jurisdiction over the subject matter of the
action, there being another case pending in the Public Service Commission between the same
parties for the same cause. ... (pp. 20-21, rec.; pp. 54-55, ROA).

The motion to dismiss was, however, denied. Meanwhile —

The Public Service Commission delegated its Chief Attorney to receive evidence of the parties on
the petition of the herein defendants for authority to suspend operation on the lines leased to them
by the plaintiff. The defendants, the assignee of the plaintiff and other creditors of the insolvent
presented evidence before the Chief Attorney and the hearing was concluded on June 29, 1959. On
October 20, 1959, the Public Service Commission issued an order the dispositive part of which
reads as follows:

In view of the foregoing, the petitioners herein are authorized to suspend their
operation of the trips of the Biñan Transportation Company between Batangas Piers-
Manila, Biñan-Manila, Sta. Rosa-Manila and Canlubang-Manila authorized in the
aforementioned cases from the date of the filing of their petition on February 18,
1958, until December 31, 1959. (p. 25, rec.; pp. 60-61, ROA).

Going back to the Court of First Instance of Laguna —

... The motion (to dismiss) having been denied, the defendants answered the complaint, alleging
among others, that the Public Service Commission authorized the suspension of operation over the
leased lines from February 18, 1950, up to December 31, 1959, and hence the lease contract should
be deemed suspended during that period; that plaintiff failed to place defendants in peaceful and
adequate enjoyment and possession of the things leased; that as a result of the plaintiff being
declared insolvent the lease contract lost further force and effect and payment of rentals thereafter
was made under a mistake and should be refunded to the defendants. (p. 21; rec.; p. 55, ROA).

The Court of Appeals proceeded to state that —

After hearing in the court a quo and presentation by the parties herein of their respective
memoranda, the trial court on March 18, 1960, rendered judgment in favor of plaintiff, ordering the
defendants jointly and severally to pay to the former the sum of P65,000.00 for the rentals of the
certificates of public convenience corresponding to the period from January, 1958, to February,
1960, inclusive, including the withheld amount of P836.92 from the rentals for August, 1957, plus the
rentals that might become due and payable beginning March, 1960, at the rate of P2,500.00 a
month, with interest on the sums of P42,500 and P836.92 at the rate of 6% per annum from the date
of the filing of the complaint, with interest on the subsequent rentals at the same rate beginning the
first of the following month, plus the sum of P3,000.00 as attorney's fees, and the cost of the suit.
(pp. 25-26, rec.)

From the decision of the Court of First Instance, defendants appealed to the Court of Appeals, which affirmed the
same in toto in its decision dated August 31, 1964. Said decision was received by the appellants on September 7,
1964.
On September 21, 1964, appellants filed the present appeal, raising the following questions of law:

1. Considering that the Court of Appeals found that the Public Service Commission provisionally
approved the lease contract of January 20, 1956 between petitioners and Biñan Transportation
Company upon the condition, amongothers, that such approval was subject to modification and
cancellation and towhatever decision that in due time might be rendered in the case, the Court
ofAppeals erred in giving no legal effect and significance whatever to the suspension of operations
later granted by the Public Service Commission after due hearing covering the lines leased to
petitioners thereby nullifying, contrary to law and decisions of this Honorable Court, the authority and
powersconferred on the Public Service Commission.

2. The Court of Appeals misapplied the statutory rules on interpreting contracts and erred in its
construction of the clauses in the lease agreement authorizing petitioners to suspend operation
without the corresponding liability for rentals during the period of suspension.

3. Contrary to various decisions of this Honorable Court relieving the lessee from the obligation to
pay rent where there is failure to use or enjoy the thing leased, the Court of Appeals erroneously
required petitioners to pay rentals, with interest, during the period of suspension of the lease from
January, 1958 up to the expiration of the agreement on January 20, 1961. (p. 7, rec.)

On October 12, 1964, the Supreme Court issued a resolution dismissing said petition "for lack of merit." (p. 43, rec.).
Said resolution was received by petitioners on October 16, 1964.

On October 31, 1964, the day the Court's resolution was to become final, petitioners filed a "Motion to Admit
Amended Petition and to Give Due Course Thereto." In said motion, petitioners explained —

... The amendment includes an alternative ground relating to petitioners' prayer for the reduction of
the rentals payable by them. This alternative petition was not included in the original one as
petitioners where genuinely convinced that they should have been absolved from all liabilities
whatever. However, in view of the apparent position taken by this Honorable Court, as implied in its
resolution on October 12, 1964, notice of which was received on October 16, 1964, petitioners now
squarely submit their alternative position for consideration. There is decisional authority for the
reduction of rentals payable (see Reyes v. Caltex, 47 O.G. 1193, 1203-1204) (p. 44, rec).

The new question raised is presented thus:

xxx xxx xxx

IV

This Honorable Court is authorized to equitably reduce the rentals payableby the petitioners, should
this Honorable Court adopt the position of the Courtof Appeals and the lower court that petitioners
have not been releived from thepayment of rentals on the leased lines. (p. 7 Amended Petition for
Certiorari,pp. 46, 52, rec.).

On November 5, 1964, the Supreme Court required respondents herein to file an answer to the
amended petition. On the same date, respondents filed, quite belatedly, an opposition to the motion
of the petitioners. Said opposition was later "noted" by the Court in its resolution dated December 1,
1964.

I
First, it must be pointed out that the first three questions of law raised by petitioners were already disposed of in Our
resolution dated October 12, 1964 dismissing the original petition for lack of merit, which in effect affirmed the
appealed decision of the Court of of Appeals. Although, in their motion to admit amended petition dated October 31,
1964, petitioners sought a reconsideration of the said resolution not only in the light of the fourth legal issue raised
but also on the said first three legal questions, the petitioners advanced no additional arguments nor cited new
authorities in support of their stand on the first three questions of law. They merely reproduced verbatim from their
original petition their discussion on said questions.

To the extent therefore that the motion filed by the petitioner seeks a reconsideration of our order of dismissal by
submitting anew, through the amended petition, the very same arguments already dismissed by this Court, the
motion shall be considered pro forma, (See Estrada v. Sto. Domingo, 28 SCRA 890, 905-906, 911) and hence is
without merit.

Consequently, we limit the resolution of this case solely on the discussions on the last (fourth) question of law
raised, taking into consideration the discussion on the first three questions only insofar as they place the petitioners'
discussion on the fourth question in its proper context and perspective.

II

The undisguised object of petitioners' discussion on the fourth question of law raised is to justify their plea for a
reduction of the rentals on the ground that the subject matter of the lease was allegedly not used by them as a result
of the suspension of operations on the lines authorized by the Public Service Commission.

In support of said plea, petitioners invoke article 1680 of the Civil Code which grants lessees of rural lands a right to
a reduction of rentals whenever the harvest on the land leased is considerably damaged by an extraordinary
fortuitous event. Reliance was also placed by the petitioners on Our decision in Reyes v. Caltex (Phil.) Inc., 84 Phil.
654, which supposedly applied said article by analogy to a lease other than that covered by said legal provision.

The authorities from which the petitioners draw support, however, are not applicable to the case at bar.

Article 1680 of the Civil Code reads thus:

Art. 1680. The lessee shall have no right to a reduction of the rent on accountof the sterility of the
land leased, or by reason of the loss of fruits due toordinary fortuitous events; but he shall have such
right in case of the loss ofmore than one-half of the fruits through extraordinary and unforeseen
fortuitous events, save always when there is a specific stipulation to the contrary.

Extraordinary fortuitous events are understood to be: fire, war, pestilence, unusual flood, locusts,
earthquake, or others which are uncommon, and which thecontracting parties could not have
reasonably foreseen.

Article 1680, it will be observed is a special provision for leases of rural lands. No other legal provision makes it
applicable to ordinary leases. Had theintention of the lawmakers been so, they would have placed the article among
the general provisions on lease. Nor can the article be applied analogously to ordinary leases, for precisely because
of its special character, it was meant to apply only to a special specie of lease. It is a provision of social justice
designed to relieve poor farmers from the harsh consequences of their contracts with rich landowners. And taken in
that light, the article provides no refuge to lessees whose financial standing or social position is equal to, or even
better than, the lessor as in the case at bar.

Even if the cited article were a general rule on lease, its provisions nevertheless do not extend to petitioners. One of
its requisites is that the cause of loss of the fruits of the leased property must be an "extraordinary and unforeseen
fortuitous event." The circumstances of the instant case fail tosatisfy such requisite. As correctly ruled by the Court
of Appeals, the alleged causes for the suspension of operations on the lines leased, namely, the high prices of
spare parts and gasoline and the reduction of the dollar allocations, "already existed when the contract of lease was
executed" (p. 11, Decision; p. 30, rec.; Cuyugan v. Dizon, 89 Phil. 80). The cause of petitioners' inability to operate
on the lines cannot, therefore, be ascribed to fortuitous events or circumstances beyond their control, but to their
own voluntary desistance (p. 13, Decision; p. 32, rec.).

If the petitioners would predicate their plea on the basis solely of their inability to use the certificates of public
convenience, absent the requisite of fortuitous event, the cited article would speak strongly against their plea.Article
1680 opens with the statement: "The lessee shall have no right to reduction of the rent on account of the sterility of
the land leased ... ." Obviously, no reduction can be sustained on the ground that the operation of the leased lines
was suspended upon the mere speculation that it would yield no substantial profit for the lessee bus company.
Petitioners' profits may be reduced due to increase operating costs; but the volume of passenger traffic along the
leased lines not only remains same but may even increase as the tempo of the movement of population is
intensified by the industrial development of the areas covered or connected by the leased routes. Moreover, upon
proper showing, the Public Service Commission might have granted petitioners an increase in rates, as it has done
so in several instances, so that public interest will always be promoted by a continuous flow of transportation
facilities to service the population and the economy. The citizenry and the economy will suffer by reason of any
disruption in the transportation facilities.

Furthermore, we are not at all convinced that the lease contract brought no material advantage to the lessor for the
period of suspension. It must be recalled that the lease contract not only stipulated for the transfer of the lessor's
right to operate the lines covered by the contract, but also for a forbearance on the part of the lessor to operate
transportation business along the same lines — and to hold a certificate for that purpose. Thus, even if the lessee
would not actually make use of the lessor's certificates over the leased lines, the contractual commitment of the
lessor not to operate on the lines would sufficiently insure added profit to the lessees on account of the lease
contract. In other words, the commitment alone of the lessor under the contract would enable the lessees to reap full
benefits therefrom since the commuting public would, after all, be forced — at their inconvenience and prejudice —
to patronize petitioner's remaining buses.

Contrary to what petitioners want to suggest, WE refused in the Reyes case, supra, to apply by analogy Article 1680
and consequently, WE denied the plea oflessee therein for an equitable reduction of the stipulated rentals, holding
that:

The general rule on performance of contracts is graphically set forth in American treatises which is
also the rule, in our opinion, obtaining under the Civil Code.

Where a person by his contract charges himself with an obligation possible to be performed, he must
perform it, unless the 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 the performance in the
event of contingencies arising, it is his duty to provide therefor in his contract. Hence, performance is
not excused by subsequent inability to perform, by unforeseen difficulties, by unusual or unexpected
expenses, by danger, by inevitable accident, by breaking of machinery, by strikes, by sickness, by
failure of a party to avail himself of the benefits tobe had under the contract, by weather conditions,
by financial stringency or bystagnation of business. Neither is performance excused by the fact that
the contract turns out to be hard and improvident, unprofitable, or impracticable, ill-advised, or even
foolish, or less profitable, unexpectedly burdensome. (17 CJS 946-948) (Reyes vs. Caltex, supra,
664. Emphasis supplied).

Also expressed in said case is a ruling in American jurisprudence, which found relevance again in the case at bar, to
wit: "(S)ince, by the lease, the lessee was to have the advantage of casual profits of the leased premises, he should
run the hazard of casual losses during the term and not lay the whole burden upon the lessor." (Reyes vs. Caltex,
supra, 664).

Militating further against a grant of reduction of the rentals to the petitioners is the petitioners' conduct which is not in
accord with the rules of fair play and justice. Petitioners, it must be recalled, promised to pay the accrued rentals in
due time. Later, however, when they believed they found a convenient excuse for escaping their obligation, they
reneged on their earlier promise. Moreover, petitioners' option to suspend operation on the leased lines appears
malicious. Thus, Justice Esguerra, speaking for the Court of Appeals, propounded the following questions: "If it were
true that thecause of the suspension was the high prices of spare parts, gasoline and needed materials and the
reduction of the dollar allocation, why was it that only plaintiff-appellee's certificate of public convenience was sought
to be suspended? Why did not the defendants-appellants ask for a corresponding reduction or suspension under
their own certificate along the same route? Suppose the prices of the spare parts and needed materials were cheap,
would the defendants-appellants have paid more than what is stipulated in the lease contract? We believe not.
Hence, the suspension of operation on the leased lines was conceived as a scheme to lessen operation costs with
the expectation of greater profit." (p. 14, Decision).

Indeed, petitioners came to court with unclean hands, which fact militates against their plea for equity.

WHEREFORE, THE ORIGINAL AND AMENDED PETITIONS ARE HEREBY DISMISSED, AND THE DECISION
OF THE COURT OF APPEALS DATED AUGUST 31, 1964 IS HEREBY AFFIRMED, WITH COSTS AGAINST
PETITIONERS.

OCCENA V. JABSON

Republic of the Philippines

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.

5. COMPENSATION

GAN TION V. CA

Republic of the Philippines

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.
PNB V. ONG ACERO

FRANCIA V. IAC

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. L-67649 June 28, 1988

ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

GUTIERREZ, JR., J.:

The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate Appellate
Court, to set aside the auction sale of his property which took place on December 5, 1977, and to allow him to
recover a 203 square meter lot which was, sold at public auction to Ho Fernandez and ordered titled in the latter's
name.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Barrio
San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square meters, is
described and covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the
Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the
aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his
property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential
Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho
Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship
bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New
Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the issuance in his
name of a new certificate of title. Upon verification through his lawyer, Francia discovered that a Final Bill of Sale
had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and the
final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on January
24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended
complaint and ordering:

(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in
favor of the defendant Ho Fernandez over the parcel of land including the
improvements thereon, subject to whatever encumbrances appearing at the back of
TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795) cancelled.

(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's
fees. (p. 30, Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

Francia prefaced his arguments with the following assignments of grave errors of law:

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN NOT

HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-
OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE FORMER.

II

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS ERROR IN NOT
HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS
PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY
OF P2,400.00.

III

RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS ERROR AND

GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONTDENT
HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO
FRAUD AND A DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY,
THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)

We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his property was
sold at public auction without notice to him and that the price paid for the property was shockingly inadequate,
amounting to fraud and deprivation without due process of law.

A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his petition upon
himself. While we commiserate with him at the loss of his property, the law and the facts militate against the grant of
his petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims
that the government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977. Hence,
his tax obligation had been set-off by operation of law as of October 15, 1977.

There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are
reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the
case do not satisfy the requirements provided by Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the same time a principal
creditor of the other;

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting of
taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax
on the ground that the government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government.

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can
not be the subject of set-off or compensation. We stated that:

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under
the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the
remedy in an action or any indebtedness of the state or municipality to one who is liable to the state
or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out
of the contract or transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of
public policy is well-settled that no set-off admissible against demands for taxes levied for general or
local governmental purposes. The reason on which the general rule is based, is that taxes are not in
the nature of contracts between the party and party but grow out of duty to, and are the positive acts
of the government to the making and enforcing of which, the personal consent of individual
taxpayers is not required. ..."

We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim
against the governmental body not included in the tax levy.

This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal revenue
taxes can not be the subject of compensation: Reason: government and taxpayer are not mutually creditors and
debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off."

There are other factors which compel us to rule against the petitioner. The tax was due to the city government while
the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the national
government for the 125 square meter portion of his lot was deposited with the Philippine National Bank long before
the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977 was received
by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from
the deposit so that he could pay the tax obligation thus aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as well be shown later, he claimed that he
pocketed the notice of the auction sale without reading it.

Petitioner contends that "the auction sale in question was made without complying with the mandatory provisions of
the statute governing tax sale. No evidence, oral or otherwise, was presented that the procedure outlined by law on
sales of property for tax delinquency was followed. ... Since defendant Ho Fernandez has the affirmative of this
issue, the burden of proof therefore rests upon him to show that plaintiff was duly and properly notified  ... .(Petition
for Review, Rollo p. 18; emphasis supplied)

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the burden of proof to
show that there was compliance with all the prescribed requisites for a tax sale.

The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

xxx xxx xxx

... [D]ue process of law to be followed in tax proceedings must be established by proof and
the general rule is that the purchaser of a tax title is bound to take upon himself the burden of
showing the regularity of all proceedings leading up to the sale. (emphasis supplied)

There is no presumption of the regularity of any administrative action which results in depriving a taxpayer of his
property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This
is actually an exception to the rule that administrative proceedings are presumed to be regular.

But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been complied with,
the petitioner can not, however, deny that he did receive the notice for the auction sale. The records sustain the
lower court's finding that:

[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly notified of
the auction sale. Surprisingly, however, he admitted in his testimony that he received the letter dated
November 21, 1977 (Exhibit "I") as shown by his signature (Exhibit "I-A") thereof. He claimed further
that he was not present on December 5, 1977 the date of the auction sale because he went to Iligan
City. As long as there was substantial compliance with the requirements of the notice, the validity of
the auction sale can not be assailed ... .

We quote the following testimony of the petitioner on cross-examination, to wit:

Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you
that the property in question shall be sold at public auction to the highest bidder on
December 5, 1977 pursuant to Sec. 74 of PD 464. Will you tell the Court whether you
received the original of this letter?

A. I just signed it because I was not able to read the same. It was just sent by mail
carrier.

Q. So you admit that you received the original of Exhibit I and you signed upon
receipt thereof but you did not read the contents of it?

A. Yes, sir, as I was in a hurry.

Q. After you received that original where did you place it?
 A. I placed it in the usual place where I place my mails.

Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored such notice.
By his very own admission that he received the notice, his now coming to court assailing the validity of the auction
sale loses its force.

Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of price is not
material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance Corporation, 36 SCRA 289;
Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388)
we held that "alleged gross inadequacy of price is not material when the law gives the owner the right to redeem as
when a sale is made at public auction, upon the theory that the lesser the price, the easier it is for the owner to
effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:

... [R]espondent treasurer now claims that the prices for which the lands were sold are
unconscionable considering the wide divergence between their assessed values and the amounts
for which they had been actually sold. However, while in ordinary sales for reasons of equity a
transaction may be invalidated on the ground of inadequacy of price, or when such inadequacy
shocks one's conscience as to justify the courts to interfere, such does not follow when the law gives
to the owner the right to redeem, as when a sale is made at public auction, upon the theory that the
lesser the price the easier it is for the owner to effect the redemption. And so it was aptly said:
"When there is the right to redeem, inadequacy of price should not be material, because the
judgment debtor may reacquire the property or also sell his right to redeem and thus recover the loss
he claims to have suffered by reason of the price obtained at the auction sale."

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188 Wash.
162, 61 P. 2d, 1290):

If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of taxes
in this manner would be greatly embarrassed, if not rendered altogether impracticable. In Black on
Tax Titles (2nd Ed.) 238, the correct rule is stated as follows: "where land is sold for taxes, the
inadequacy of the price given is not a valid objection to the sale." This rule arises from necessity, for,
if a fair price for the land were essential to the sale, it would be useless to offer the property. Indeed,
it is notorious that the prices habitually paid by purchasers at tax sales are grossly out of proportion
to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P. 555):

Like most cases of this character there is here a certain element of hardship from which we would be
glad to relieve, but do so would unsettle long-established rules and lead to uncertainty and difficulty
in the collection of taxes which are the life blood of the state. We are convinced that the present
rules are just, and that they bring hardship only to those who have invited it by their own neglect.

We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in value. Precisely
because of the widening of Buendia Avenue in Pasay City, which necessitated the expropriation of adjoining areas,
real estate values have gone up in the area. However, the price quoted by the petitioner for a 203 square meter lot
appears quite exaggerated. At any rate, the foregoing reasons which answer the petitioner's claims lead us to deny
the petition.

And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no strong
considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to the
date of the auction sale. He claims to have pocketed the notice of sale without reading it which, if true, is still an act
of inexplicable negligence. He did not withdraw from the expropriation payment deposited with the Philippine
National Bank an amount sufficient to pay for the back taxes. The petitioner did not pay attention to another notice
sent by the City Treasurer on November 3, 1978, during the period of redemption, regarding his tax delinquency.
There is furthermore no showing of bad faith or collusion in the purchase of the property by Mr. Fernandez. The
petitioner has no standing to invoke equity in his attempt to regain the property by belatedly asking for the
annulment of the sale.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of the
respondent court is affirmed.

SO ORDERED.

REPUBLIC V. DE LOS ANGELES

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-30187 June 25, 1980

REPUBLIC OF THE PHILIPPINES, in behalf of the RICE AND CORN ADMINISTRATION, petitioner,

vs.
HON. WALFRIDO DE LOS ANGELES, in his capacity as Judge of the Court of First Instance of Rizal, Branch
IV, Quezon City and MARCELO STEEL CORPORATION, respondents.

CONCEPCION JR., J.:

Petition for certiorari and prohibition, with preliminary injunction to annul and set aside the order of the respondent
Judge in Civil Case No. Q-9384 of the Court of First Instance of Rizal Branch IV, Quezon City, entitled "Petra R.
Farin, et al., petitioners, versus Benito Macrohon, et al., respondents," dated December 23, 1967, ordering "the Rice
and Corn Administration and all other business concerns holding offices at the building known as 'Doña Petra
Building,' through their proper representative ... to channel or pay directly to herein respondent Meralco Steel
Corporation, at its main office at Malabon, Rizal the rents for the use of the said building, offices, and/or premises,"
as well as the orders dated April 3, 1968, May 14, 1968, and December 19, 1968, all affirming the said order of
December 23, 1967.

It appears that on October 29, 1964, the spouses Petra R. Farin and Benjamin Farin obtained a loan from the
Marcelo Steel Corporation in the amount of P600,000.00, and as security therefor, the said spouses constituted, in
favor of the said corporation, a real estated mortgage upon their parcel of land situated at Quezon City covered by
TCT No. 42589 of the Registry of Deeds of Quezon City.   On July 24, 1965, the mortgagee wrote the Sheriff of
1

Quezon City requesting the extrajudicial foreclosure of the aforesaid mortgage.   Accordingly, the sheriff advertised
2

and scheduled the extra-judicial foreclosure sale of the mortgaged property for August 26, 1965. However, on
August 21, 1965, the mortgagors filed a petition for prohibition with injunction and damages against Benito
Macrohon, as sheriff of Quezon City, and the Marcelo Steel Corporation, with the Court of First Instance of Rizal
docketed therein as Civil Case No. Q-9384, wherein they prayed that the respondent Sheriff be permanently
enjoined from proceeding with the scheduled sale at public auction of the mortgaged property, and that the
respondent Corporation be condemned to pay the petitioners P200,000.00 as actual and moral damages and
P50,000.00 as penal and compensatory damages and P30,000.00 as attorney's fees, upon the ground that they
have not been in default in the payment of their obligation.  Acting upon the petition, the herein respondent Judge
3

Walfrido de los Angeles, issued an order commanding the respondent Sheriff and the respondent Corporation to
desist from proceeding with the public auction sale of the property scheduled on August 26, 1965.  4

While the above case was pending, Petra Farin lease portions of the "Doña Petra Building situated on the
mortgaged premises, to the Rice and Corn Administration, (RCA, for short), for the amount of P11,500.00 per
month, payable on or before the 5th day of the incoming month. 5

On December 9, 1967, the Meralco Steel Corporation invoking paragraph 5 of the mortgage contract,   filed a motion
6

praying that an order be issued directing and/or authorizing the Rice and Corn Administration (RCA) and an other
business concerns holding offices at the Doña Petra Building to channel or pay directly to it the rents for the use of
the building. 
7

On December 23, 1967, the respondent Judge of first instance issued the questioned order, the dispositive portion
of which reads, as follows:

AS PRAYED FOR, the Rice and Corn Administration and all other business concerns holding offices
at the be known as 'Doña Petra Building', through their proper representative and the petitioners as
well are ordered to channel or pay directly to herein respondent, Marcelo Steel Corporation, at its
main office at Malabon, Rizal the rents for the use of the said building, offices, and/or premisee. 
8

The RCA filed a motion for the reconsideration of said order, praying that it be excluded therefrom, for the reasons
that (a) the rents due Petra Farin had been assigned by her, with the conformity with the RCA, to Vidal A. Tan; (b)
Petra Farin has an outstanding obligation with the RCA in the amount of P263,062.40, representing rice shortages
incurred by her as a bonded warehouse under contract with the RCA, which should be compensated with the rents
due and may be due; and (c) RCA was never given an opportunity to be heard on these matters.  9

Petra and Benjamin Farin filed a similar motion for the reconsideration of the disputed order of December 23, 1967,
alleging that (a) the lessees of the Doña Petra Building are not such amounts collected and received in payment of
the interest on the obligation of all expenses of whatever kind and nature by the MORTGAGEE in connection with
this mortgage, and on the principal obligation in the order they are enumerated and all acts done in conformity with
the power herein granted are hereby ratified."

Parties to the case and were not served with a copy of the motion of Marcelo Steel Corporation, filed on December
9, 1967, so that the Court has no jurisdiction over them; (b) Petra Farin has assigned a portion of the monthly rental
due from RCA to Vidal A. Tan, who has acquired proprietary rights thereto, and (c) under the power of attorney
provided for in the real estate mortgage contract, the rents collected shall be applied to the interest on he obligation,
and the legality of the additional interest at the rate of 12% per annum of the total amount of the mortgage
indebtedness in addition to the 12% annual interest being charged by the Marcelo Steel Corporation on said
indebtedness is directly at issue in the case, so that to enforce the disputed portion of the real estate mortgage
contract and allow the Marcelo Steel Corporation to collect rents and apply the same to the interests on the loan
would be premature.  10

The trial court denied both motions for reconsideration on April 3, 1968,   and on April 17, 1968 the RCA filed a
11

second motion for reconsideration, insisting that the claim of Marcelo Steel Corporation for rents has no legal basis
because even a mortgagee who has successfully foreclosed a mortgage is not entitled to the fruits and rents of the
property during the one-year redemption period, and that Marcelo Steel Corporation, after it had chosen to foreclose
the mortgage, cannot resort to the provision of the mortgage contract authorizing the mortgagee to collect and
receive rents and to apply said amounts to the payment of the principal obligation and the interests thereon; and
that no rents are due Petra Farin because she has an accountability with the RCA in the amount of P263,062.40,
which amount should be compensated with the rents due.   No action appears to have been taken on this motion.
12

On May 10, 1968, Petra Farin filed an urgent ex parte motion to authorize the RCA to release the rentals
corresponding to the months of December, 1967, January and February, 1968, amounting to P37,500.00 so as to
enable her to make the necessary repairs on the air conditioning system of the Doña Petra Building, stating, among
others, that "That RCA is ready, willing and able to release to the petitioners the rentals mentioned above. 
13

The respondent Judge granted the motion, saying.

Considering the urgent ex-parte motion, etc. dated May 10, 1968 filed by the plaintiff, thru counsel
and finding the reasons alleged therein to be well-founded;

AS PRAYED FOR, the Rice and Corn Administration (RCA) is hereby authorized to deliver to the
herein Petitioners their rentals for the use of portions of the Dofia Petra Building corresponding to
December, 1967; January 30, February, 1968, all amounting to P37,500.00, to enable the petitioners
to forthwith effect the necessary repairs of the air-conditioning system of the said building Doña
Petra Building. However, all succeeding rentals should be delivered to the Marcelo Steel Corporation
as previously ordered in the order of December 23, 1967.  14

On May 17, 1968, the RCA filed a motion to set aside the said order, c g that the allegations contained in the motion
dated May 10, 1968, that "The RCA is ready, willing and able to release to the petitioners the rentals mentioned
above is unauthorized and gratuitous, and the delivery of the withheld rentals to Petra R. Farin would defeat its
claim without giving the corporation its day in court.   But, the trial court denied the motion, saying:
15

Considering the motion to set aside the order of May 14, 1968, filed by the Rice and Corn
Administration and finding the same to be without merit, the same is thereby DENIED. The records
does not show any proof that the plaintiff, Petra Farin, is indebted to the aforesaid movant, RCA, as
allegedly in the said motion and assuming that the herein plaintiff is really indebted to the RCA, the
records further does not show that a case has been filed against her for the payment of such
obligation, and therefore, there is no apparent legal ground to hold the payment of the rentals due
the plaintiff. 
16

On August 28, 1968, the RCA filed a motion to vacate the orders directing the RCA to pay rentals to Marcelo Steel
Corporation, reiterating therein the grounds alleged in its motion for reconsideration dated January 19, 1968, and in
its second motion for reconsideration dated April 17, 1968, which has remained unacted upon. In said motion, the
RCA emphasized that it is not a party to the case; that it had been denied due process for lack of notice and the
right to be heard; that compensation took place by operation of law pursuant to Art. 1286 of the Civil Code without
the need of a case against Petra R. Farin, or a decision rendered against her for the payment of such obligation;
and that the provisions of the Rules of Court permitting a judgment creditor to reach money or property in the hands
of third persons file the RCA, all purpose a final judgment, and not a mere interlocutory order. 
17

The motion was denied on December 19, 1968,   and when the RCA received a letter from counsel for the Marcelo
18

Steel Corporation, dated January 2, 1969, requesting compliance with the order of December 23, 1967, and the
payment of accrued rentals,   the petitioner instituted the present recourse.
19

Insofar as it recognized the right of the herein private respondent, Marcelo Steel Corporation, to collect and receive
rentals from the lessees of the Doña Petra Building, the order of December 23, 1967 was within the competence of
the respondent Judge, since the lessor-mortgagor, Petra Farin, had empowered the said corporation to collect and
receive any interest, dividend, rents, profits or other income or benefit produced by or derived from the mortgaged
property under the terms of the real estate mortgage contract executed by them. But, the respondent Judge
exceeded his jurisdiction in ordering or compelling the lessees of the said building, the RCA among others, to pay
the rentals to the respondent Corporation, without giving the lessees an opportunity to be heard. The said lessees
are not parties to the case between the lessor and the Marcelo Steel Corporation. The RCA, in particular, was not
furnished with a copy of the motion of the respondent Corporation, dated December 9, 1967, praying that an order
be issued directing and/or authorizing the RCA and other lessees to channel or pay directly to the said corporation
the rents for the use of the Doña Petra Building, so that the RCA was deprived of its day in court and precluded it
from presenting the defenses that it has against the lessor which, in this case, are: (1) that the rents due to Petra
Farin had been assigned by her to Vidal A. Tan with the acquiescence of the RCA, who has acquired proprietary
rights thereto and would be deprived of his property without due process of law; and (2) that the lessor Petra R.
Farin has an outstanding obligation to the RCA in the amount of P263,062.40 which should be compensated with
the rentals already due or may be due. The said order clearly violated the constitutional provision against depriving
a person of his property without due process of law.   While there may be rents due the lessor for the use of
20

portions of the Doña Petra Building, otherwise there would be no claim of compensation, the collection of said rents
should not be done in an arbitrary and illegal manner. Certain ruled should be observed and justice accorded the
parties whose property rights would be adversely affected thereby. Since the order of December 23, 1967 was
issued in executive s of jurisdiction, the said order is null and void and of no legal t effect.

The respondent Judge also erred in denying the claim of the RCA that compensation of debts had taken place
allegedly because "The records does not show any proof that the plaintiff is indebted to the aforesaid movant, RCA,
as alleged in the said motion and assuming that the herein plaintiff is really indebted to the RCA, the records further
does not show that a case has been filed against her, or a decision has been rendered against her for the payment
of such obligation." Proof of the liquidation of a claim, in order that there be compensation of debts, is proper if such
claim is disputed. But, if the claim is undisputed, as in the case at bar, the statement is sufficient and no other proof
may be required. In the instant case, the claim of the RCA that Petra R. Farin has an outstanding obligation to the
RCA in the amount of P263,062.40 which should be compensated against the rents already due or may be due,
was raised by the RCA in its motion for the reconsideration of the order of December 23, 1967. A copy of said
motion was duly furnished counsel for Petra R. Farin and although the said Petra R. Farin subsequently filed a
similar motion for the reconsideration of the order of December 23, 1967, she did not dispute nor deny such claim
Neither did the Marcelo Steel Corporation dispute such claim of compensation in its opposition to the motion for the
reconsideration of the order of December 23, 1967.   The silence of Petra R. Farin, order of December 23, 1967.
21

although the declaration is such as naturally one to call for action or comment if not true, could be taken as an
admission of the existence and validity of such a claim. Therefore, since the claim of the RCA is undisputed, proof of
its liquidation is not necessary. At any rate, if the record is bereft of the proof mentioned by the respondent Judge of
first instance, it is because the respondent Judge did not call for the submission of such proof. Had the respondent
Judge issued an order calling for proof, the RCA would have presented sufficient evidence to the satisfaction of the
court.

WHEREFORE, the petition is granted and the order issued on December 23, 1967 in Civil Case No. Q-9384 of the
Court of First Instance of Rizal, Quezon City, Branch IV, entitled: Petra R. Farin, et al. petitioners, versus Benito
Macrohon, et al., respondents," as well as the orders dated April 3, 1968, May 14, 1968, and December 19, 1968,
all affirming the said order of December 23, 1967, should be, as they are hereby, annulled and set aside. With costs
against the respondent Marcelo Steel Corporation.

SOLINAP V. DEL ROSARIO

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION
G.R. No. L-50638 July 25, 1983

LORETO J. SOLINAP, petitioner,
vs.
HON. AMELIA K. DEL ROSARIO, as Presiding Judge of Branch IV, Court of First Instance of Iloilo,
SPOUSES JUANITO and HARDEVI R. LUTERO, and THE PROVINCIAL SHERIFF OF ILOILO, respondents.

Espeleta & Orleans Law Office for petitioner.

Simplicia Magahum, Offemaria & Sixto Demaisip Law Office for private respondents.

ESCOLIN; J.:

Posed for resolution in this petition is the issue of whether or not the obligation of petitioners to private respondents
may be compensated or set- off against the amount sought to be recovered in an action for a sum of money filed by
the former against the latter.

The facts are not disputed. On June 2, 1970, the spouses Tiburcio Lutero and Asuncion Magalona, owners of the
Hacienda Tambal, leased the said hacienda to petitioner Loreto Solinap for a period of ten [10] years for the
stipulated rental of P50,000.00 a year. It was further agreed in the lease contract that out of the aforesaid annual
rental, the sum of P25,000.00 should be paid by Solinap to the Philippine National Bank to amortize the
indebtedness of the spouses Lutero with the said bank.

Tiburcio Lutero died on January 21, 1971. Soon after, his heirs instituted the testate estate proceedings of the
deceased, docketed as Sp. Proc. No. 1870 of the Court of First Instance of Iloilo, presided by respondent Judge
Amelia K. del Rosario. In the course of the proceedings, the respondent judge, upon being apprized of the mounting
interest on the unpaid account of the estate, issued an order, stating, among others, "that in order to protect the
estate, the administrator, Judge Nicolas Lutero, is hereby authorized to scout among the testamentary heirs who is
financially in a position to pay all the unpaid obligations of the estate, including interest, with the right of subrogation
in accordance with existing laws."

On the basis of this order, respondents Juanito Lutero [grandson and heir of the late Tiburcio] and his wife Hardivi
R. Lutero paid the Philippine National Bank the sum of P25,000.00 as partial settlement of the deceased's
obligations. Whereupon the respondents Lutero filed a motion in the testate court for reimbursement from the
petitioner of the amount thus paid. They argued that the said amount should have been paid by petitioner to the
PNB, as stipulated in the lease contract he had entered into with the deceased Tiburcio Lutero; and that such
reimbursement to them was proper, they being subrogees of the PNB.

Before the motion could be resolved by the court, petitioner on April 28, 1978 filed in the Court of First Instance of
Iloilo a separate action against the spouses Juanito Lutero and Hardivi R. Lutero for collection of the total amount of
P71,000.00, docketed as Civil Case No. 12397. Petitioner alleged in the complaint that on April 25, 1974 the
defendants Lutero borrowed from him the sum of P45,000.00 for which they executed a deed of real estate
mortgage; that on July 2, 1974, defendants obtained an additional loan of P3,000.00, evidenced by a receipt issued
by them; that defendants are further liable to him for the sum of P23,000.00, representing the value of certain
dishonored checks issued by them to the plaintiff; and that defendants refused and failed to settle said accounts
despite demands.

In their answer, the respondents Lutero traversed the material averments of the complaint and set up legal and
factual defenses. They further pleaded a counterclaim against petitioners for the total sum of P 125,000.00
representing unpaid rentals on Hacienda Tambal. Basis of the counterclaim is the allegation that they had
purchased one-half [1/2] of Hacienda Tambal, which their predecessors, the spouses Tiburcio Lutero and Asuncion
Magalona, leased to the plaintiff for a rental of P50,000.00 a year; and that plaintiffs had failed to pay said rentals
despite demands.

At the pre-trial, the parties defined the issues in that case as follows:

(1) Whether or not the defendants [Luteros] are indebted to the plaintiff and, if so, the amount
thereof;

(2) Whether or not the defendants are the owners of one-half [1/2] of that parcel of land known as
'Hacienda Tambal' presently leased to the plaintiff and, therefore, entitled to collect from the latter
one-half [1/2] of its lease rentals; and in the affirmative, the amount representing the unpaid rental by
plaintiff in favor of the defendant. 
1

On June 14, 1978, the respondent judge issued an order in Sp. Proc. No. 1870, granting the respondent Lutero's
motion for reimbursement from petitioner of the sum of P25,000.00 plus interest, as follows:

WHEREFORE, Mr. Loreto Solinap is hereby directed to pay spouses Juanito Lutero and Hardivi R.
Lutero the sum of P25,000.00 with interest at 12% per annum from June 17, 1975 until the same
shall have been duly paid.

Petitioner filed a petition for certiorari before this Court, docketed as G.R. No. L-48776, assailing the above order.
This Court, however, in a resolution dated January 4, 1979 dismissed the petition thus:

L-48776 [Loreto Solinap vs. CFI etc., et al.]- Acting on the petition in this case as well as the
comment thereon of respondents and the reply of petitioner to said comment, the Court Resolved to
DISMISS the petition for lack of merit, anyway, the P25,000.00 to be paid by the petitioner to the
private respondent Luteros may well be taken up in the final liquidation of the account between
petitioner as and the subject estate as lessor.

Thereafter the respondent Luteros filed with the respondent court a "Motion to Reiterate Motion for Execution of the
Order dated June 14, 1978." Petitioner filed a rejoinder to said motion, raising for the first time the thesis that the
amount payable to private respondents should be compensated against the latter's indebtedness to him amounting
to P71,000.00. Petitioner attached to his rejoinder copies of the pleadings filed in Civil Case No. 12397, then
pending before Branch V of the Court of First Instance of Iloilo. This motion was denied by respondent judge on the
ground that "the claim of Loreto Solinap against Juanito Lutero in Civil Case No. 12397 is yet to be liquidated and
determined in the said case, such that the requirement in Article 1279 of the New Civil Code that both debts are
liquidated for compensation to take place has not been established by the oppositor Loreto Solinap."

Petition filed a motion for reconsideration of this order, but the same was denied.

Hence, this petition.

The petition is devoid of merit. Petitioner contends that respondent judge gravely abused her discretion in not
declaring the mutual obligations of the parties extinguished to the extent of their respective amounts. He relies on
Article 1278 of the Civil Code to the effect that compensation shall take place when two persons, in their own right,
are creditors and debtors of each other. The argument fails to consider Article 1279 of the Civil Code which provides
that compensation can take place only if both obligations are liquidated. In the case at bar, the petitioner's claim
against the respondent Luteros in Civil Case No. 12379 is still pending determination by the court. While it is not for
Us to pass upon the merits of the plaintiffs' cause of action in that case, it appears that the claim asserted therein is
disputed by the Luteros on both factual and legal grounds. More, the counterclaim interposed by them, if ultimately
found to be meritorious, can defeat petitioner's demand. Upon this premise, his claim in that case cannot be
categorized as liquidated credit which may properly be set-off against his obligation. As this Court ruled in Mialhe
vs. Halili,   " compensation cannot take place where one's claim against the other is still the subject of court
2

litigation. It is a requirement, for compensation to take place, that the amount involved be certain and liquidated."

WHEREFORE, the petition is dismissed, with costs against petitioner.

SO ORDERED.

SYCIP V. CA

SECOND DIVISION

G.R. No. 125059             March 17, 2000

FRANCISCO T. SYCIP, JR., petitioner,

vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.

QUISUMBING, J.:

For review on certiorari is the decision of the Court of Appeals, dated February 29, 1996, in CA-G.R. CR No. 15993,
which affirmed the judgment of the Regional Trial Court of Quezon City, Branch 95, in Criminal Cases Nos. Q-91-
25910 to 15, finding petitioner guilty beyond reasonable doubt of violating B.P. Blg. 22, the Bouncing Checks Law.

The facts in this case, as culled from the records, are as follows:

On August 24, 1989, Francisco T. Sycip agreed to buy, on installment, from Francel Realty Corporation (FRC), a
townhouse unit in the latter's project at Bacoor, Cavite.

Upon execution of the contract to sell, Sycip, as required, issued to FRC, forty-eight (48) postdated checks, each in
the amount of P9,304.00, covering 48 monthly installments.

After moving in his unit, Sycip complained to FRC regarding defects in the unit and incomplete features of the
townhouse project. FRC ignored the complaint. Dissatisfied, Sycip served on FRC two (2) notarial notices to the
effect that he was suspending his installment payments on the unit pending compliance with the project plans and
specifications, as approved by the Housing and Land Use Regulatory Board (HLURB). Sycip and 12 out of 14 unit
buyers then filed a complaint with the HLURB. The complaint was dismissed as to the defects, but FRC was ordered
by the HLURB to finish all incomplete features of its townhouse project. Sycip appealed the dismissal of the
complaint as to the alleged defects.
Notwithstanding the notarial notices, FRC continued to present for encashment Sycip's postdated checks in its
possession. Sycip sent "stop payment orders" to the bank. When FRC continued to present the other postdated
checks to the bank as the due date fell, the bank advised Sycip to close his checking account to avoid paying bank
charges every time he made a "stop payment" order on the forthcoming checks. Due to the closure of petitioner's
checking account, the drawee bank dishonored six postdated checks. FRC filed a complaint against petitioner for
violations of B.P. Blg. 22 involving said dishonored checks.

On November 8, 1991, the Quezon City Prosecutor's Office filed with the RTC of Quezon City six Informations
docketed as Criminal Cases No. Q-91-25910 to Q-91-25915, charging petitioner for violation of B.P. Blg. 22.

The accusative portion of the Information in Criminal Case No. Q-91-25910 reads:

That on or about the 30th day of October 1990 in Quezon City, Philippines and within the jurisdiction of this
Honorable Court, the said accused, did then and there, willfully, unlawfully and feloniously make, draw and
issue in favor of Francel Realty Corporation a check 813514 drawn against Citibank, a duly established
domestic banking institution in the amount of P9,304.00 Philippine Currency dated/postdated October 30,
1990 in payment of an obligation, knowing fully well at the time of issue that she/he did not have any funds
in the drawee bank of (sic) the payment of such check; that upon presentation of said check to said bank for
payment, the same was dishonored for the reason that the drawer thereof, accused Francisco T. Sycip, Jr.
did not have any funds therein, and despite notice of dishonor thereof, accused failed and refused and still
fails and refused (sic) to redeem or make good said check, to the damage and prejudice of the said Francel
Realty Corporation in the amount aforementioned and in such other amount as may be awarded under the
provisions of the Civil Code.

CONTRARY TO LAW. 1

Criminal Cases No. Q-91-25911 to Q-91-25915, with Informations similarly worded as in Criminal Case No. Q-91-
25910, except for the dates, and check numbers were consolidated and jointly tried.
2 

When arraigned, petitioner pleaded "Not Guilty" to each of the charges. Trial then proceeded.

The prosecution's case, as summarized by the trial court and adopted by the appellate court, is as follows:

The prosecution evidence established that on or about August 24, 1989, at the office of the private
complainant Francel Realty Corporation (a private domestic corporation engaged in the real estate
business) at 822 Quezon Avenue, QC, accused Francisco Sycip, Jr. drew, issued, and delivered to private
complainant Francel Realty Corporation (FRC hereinafter) six checks (among a number of other checks),
each for P9,304.00 and drawn pay to the order of FRC and against Francisco's account no. 845515 with
Citibank, to wit: Check No. 813514 dated October 30, 1990 (Exh. C), Check No. 813515 dated November
30, 1990 (Exh. D), Check No. 813518 dated February 28, 1991 (Exh. E), Check No. 813516 dated
December 30, 1990 (Exh. F), Check No. 813517 dated January 30, 1991 (Exh. G) and Check No. 813519
dated March 30, 1991 (Exh. H), as and in partial payment of the unpaid balance of the purchase price of the
house and lot subject of the written contract executed and entered into by and between FRC as seller and
Francisco as buyer on said date of August 24, 1989 (Exh. B, also Exh. 1). The total stipulated purchase
price for the house and lot was P451,700.00, of which Francisco paid FRC in the sum of P135,000.00 as
down payment, with Francisco agreeing and committing himself to pay the balance of P316,000.00 in 48
equal monthly installments of P9,304.00 (which sum already includes interest on successive monthly
balance) effective September 30, 1989 and on the 30th day of each month thereafter until the stipulated
purchase price is paid in full. The said six Citibank checks, Exhs. C thru H, as earlier indicated were drawn,
issued, and delivered by Francisco in favor of FRC as and in partial payment of the said 48 equal monthly
installments under their said contract (Exh. B, also Exh. 1). Sometime in September 1989, the Building
 Official's certificate of occupancy for the subject house — a residential townhouse — was issued (Exh. N)
and Francisco took possession and started in the use and occupancy of the subject house and lot. 1âwphi1.nêt

When the subject six checks, Exhs. C thru H, were presented to the Citibank for payment on their respective
due dates, they were all returned to FRC dishonored and unpaid for the reason: account closed as indicated
in the drawee bank's stamped notations on the face and back of each check; in fact, as indicated in the
corresponding record of Francisco's account no. 815515 with Citibank, said account already had a zero
balance as early as September 14, 1990 (Exh. 1-5). Notwithstanding the fact that FRC, first thru its
executive vice president and project manager and thereafter thru its counsel, had notified Francisco, orally
and in writing, of the checks' dishonor and demanded from him the payment of the amount thereof, still
Francisco did not pay or make good any of the checks (Exhs. I thru K). . . 3

The case for the defense, as summarized also by the trial court and adopted by the Court of Appeals, is as follows:

The defense evidence in sum is to the effect that after taking possession and starting in the use and
occupancy of the subject townhouse unit, Francisco became aware of its various construction defects; that
he called the attention of FRC, thru its project manager, requesting that appropriate measures be forthwith
instituted, but despite his several requests, FRC did not acknowledge, much less attend to them; that
Francisco thus mailed to FRC a verified letter dated June 6, 1990 (Exh. 2) in sum giving notice that effective
June 1990, he will cease and desist "from paying my monthly amortization of NINE THOUSAND THREE
HUNDRED FOUR (P9,304.00) PESOS towards the settlement of my obligation concerning my purchase of
Unit No. 14 of FRC Townhomes referred to above, unless and until your Office satisfactorily complete(s) the
construction, renovation and/or repair of my townhouses (sic) unit referred to above" and that should FRC
"persist in ignoring my aforesaid requests, I shall, after five (5) days from your receipt of this Verified Notice,
forthwith petition the [HLURB] for Declaratory Relief and Consignation to grant me provisional relief from my
obligation to pay my monthly amortization to your good Office and allow me to deposit said amortizations
with [HLURB] pending your completion of FRC Townhomes Unit in question"; that Francisco thru counsel
wrote FRC, its president, and its counsel notices/letters in sum to the effect that Francisco and all other
complainants in the [HLURB] case against FRC shall cease and desist from paying their monthly
amortizations unless and until FRC satisfactorily completes the construction of their units in accordance with
the plans and specifications thereof as approved by the [HLURB] and as warranted by the FRC in their
contracts and that the dishonor of the subject checks was a natural consequence of such suspension of
payments, and also advising FRC not to encash or deposit all other postdated checks issued by Francisco
and the other complainants and still in FRC's possession (Exhs. 3 thru 5); that Francisco and the other
complainants filed the [HLURB] case against FRC and later on a decision was handed down therein and the
same is pending appeal with the Board (Exhs. 6, 7, & 12 thru 17, also Exh. 8); that as of the time of
presentation of the subject checks for payment by the drawee bank, Francisco had at least P150,000.00
cash or credit with Citibank (Exhs. 10 & 11) and, that Francisco closed his account no. 845515 with Citibank
conformably with the bank's customer service officer's advice to close his said account instead of making a
stop-payment order for each of his more than 30 post-dated checks still in FRC's possession at the time, so
as to avoid the P600.00-penalty imposed by the bank for every check subject of a stop-payment order. 4

On March 11, 1994, the trial court found petitioner guilty of violating Section 1 of B.P. Blg. 22 in each of the six
cases, disposing as follows:

WHEREFORE, in each of Crim. Cases Nos. Q-91-25910, Q-91-25911, Q-91-25912, Q-91-25913, Q-91-
25914 and Q-91-25915, the Court finds accused Francisco T. Sycip, Jr. guilty beyond reasonable doubt of a
violation of Sec. 1 of Batas Pambansa Blg. 22 and, accordingly, he is hereby sentenced in and for each
case to suffer imprisonment of thirty (30) days and pay the costs. Further, the accused is hereby ordered to
pay the offended party, Francel Realty Corporation, as and for actual damages, the total sum of fifty-five
 thousand eight hundred twenty four pesos (P55,824.00) with interest thereon at the legal rate from date of
commencement of these actions, that is, November 8, 1991, until full payment thereof.

SO ORDERED.

Dissatisfied, Sycip appealed the decision to the Court of Appeals. His appeal was docketed as CA-G.R. CR No.
15993. But on February 29, 1996, the appellate court ruled:

On the basis of the submission of the People, We find and so hold that appellant has no basis to rely on the
provision of PD 957 to justify the non-payment of his obligation, the closure of his checking account and the
notices sent by him to private complainant that he will stop paying his monthly amortizations. 6

Petitioner filed a motion for reconsideration on March 18, 1996, but it was denied per Resolution dated April 22,
1996.

Hence, the instant petition anchored on the following assignment of errors:

THE APPELLATE COURT ERRED IN AFFIRMING THE DECISION OF THE LOWER COURT FINDING
THAT THE ACCUSED-APPELLANT DID NOT HAVE ANY JUSTIFIABLE CAUSE TO STOP OR
OTHERWISE PREVENT THE PAYMENT OF THE SUBJECT CHECKS BY THE DRAWEE BANK.

II

THE LOWER COURT ERRED IN FINDING THAT THE ACCUSED-APPELLANT MUST BE DEEMED TO
HAVE WAIVED HIS RIGHT TO COMPLAIN AGAINST THE DEVELOPMENT OF THE TOWNHOUSE UNIT
AND THE TOWNHOUSE PROJECT.

III

THE APPELLATE COURT ERRED IN AFFIRMING THE DECISION OF THE LOWER COURT THAT THE
ACCUSED-APPELLANT DID NOT HAVE SUFFICIENT FUNDS WITH THE DRAWEE BANK TO COVER
THE SUBJECT CHECKS UPON PRESENTMENT FOR PAYMENT THEREOF.

IV

THE APPELLATE COURT ERRED IN AFFIRMING THE DECISION OF THE LOWER COURT
CONVICTING THE ACCUSED-APPELLANT AND AWARDING DAMAGES IN FAVOR OF PRIVATE
COMPLAINANT. 7

The principal issue before us is whether or not the Court of Appeals erred in affirming the conviction of petitioner for
violation of the Bouncing Checks Law.

Petitioner argues that the court a quo erred when it affirmed his conviction for violation of B.P. Blg. 22, considering
that he had cause to stop payment of the checks issued to respondent. Petitioner insists that under P.D. No. 957,
the buyer of a townhouse unit has the right to suspend his amortization payments, should the subdivision or
condominium developer fail to develop or complete the project in accordance with duly-approved plans and
specifications. Given the findings of the HLURB that certain aspects of private complainant's townhouse project
were incomplete and undeveloped, the exercise of his right to suspend payments should not render him liable under
B.P. Blg. 22.
The Solicitor General argues that since what petitioner was charged with were violations of B.P. Blg. 22, the intent
and circumstances surrounding the issuance of a worthless check are immaterial. The gravamen of the offense
8 

charged is the act itself of making and issuing a worthless check or one that is dishonored upon its presentment for
payment. Mere issuing of a bad check is malum prohibitum, pernicious and inimical to public welfare. In his view,
P.D. No. 957 does not provide petitioner a sufficient defense against the charges against him.

Under the provisions of the Bouncing Checks Law (B.P. No. 22), an offense is committed when the following
9 

elements are present:

(1) the making, drawing and issuance of any check to apply for account or for value;

(2) the knowledge of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds
in or credit with the drawee bank for the payment of such check in full upon its presentment; and

(3) the subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor
for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment.  10

In this case, we find that although the first element of the offense exists, the other elements have not been
established beyond reasonable doubt.

To begin with, the second element involves knowledge on the part of the issuer at the time of the check's issuance
that he did not have enough funds or credit in the bank for payment thereof upon its presentment. B.P. No. 22
creates a presumption juris tantum that the second element prima facie exists when the first and third elements of
the offense are present.  But such evidence may be rebutted. If not rebutted or contradicted, it will suffice to sustain
11 

a judgment in favor of the issue, which it supports.  As pointed out by the Solicitor General, such knowledge of the
12 

insufficiency of petitioner's funds "is legally presumed from the dishonor of his checks for insufficiency of
funds."  But such presumption cannot hold if there is evidence to the contrary. In this case, we find that the other
13 

party has presented evidence to contradict said presumption. Hence, the prosecution is duty bound to prove every
element of the offense charged, and not merely rely on a rebuttable presumption.

Admittedly, what are involved here are postdated checks. Postdating simply means that on the date indicated on its
face, the check would be properly funded, not that the checks should be deemed as issued only then.  The checks
14 

in this case were issued at the time of the signing of the Contract to Sell in August 1989. But we find from the
records no showing that the time said checks were issued, petitioner had knowledge that his deposit or credit in the
bank would be insufficient to cover them when presented for encashment.  On the contrary, there is testimony by
15 

petitioner that at the time of presentation of the checks, he had P150,000,00 cash or credit with Citibank.

As the evidence for the defense showed, the closure of petitioner's Account No. 845515 with Citibank was not for
insufficiency of funds. It was made upon the advice of the drawee bank, to avoid payment of hefty bank charges
each time petitioner issued a "stop payment" order to prevent encashment of postdated checks in private
respondent's possession.  Said evidence contradicts the prima facie presumption of knowledge of insufficiency of
16 

funds. But it establishes petitioner's state of mind at the time said checks were issued on August 24, 1989.
Petitioner definitely had no knowledge that his funds or credit would be insufficient when the checks would be
presented for encashment. He could not have foreseen that he would be advised by his own bank in the future, to
close his account to avoid paying the hefty banks charges that came with each "stop payment" order issued to
prevent private respondent from encashing the 30 or so checks in its possession. What the prosecution has
established is the closure of petitioner's checking account. But this does not suffice to prove the second element of
the offense under B.P. Blg. 22, which explicitly requires "evidence of knowledge of insufficient funds" by the accused
at the time the check or checks are presented for encashment.
To rely on the presumption created by B.P. No. 22 as the prosecution did in this case, would be to misconstrue the
import of requirements for conviction under the law. It must be stressed that every element of the offense must be
proved beyond reasonable doubt, never presumed. Furthermore, penal statutes are strictly construed against the
State and liberally in favor of the accused. Under the Bouncing Checks Law, the punishable act must come clearly
within both the spirit and letter of the statute. 
17

While B.P. Blg. 22 was enacted to safeguard the interest of the banking system,  it is difficult to see how conviction
18 

of the accused in this case will protect the sanctity of the financial system. Moreover, protection must also be
afforded the interest of townhouse buyers under P.D. No. 957.  A statute must be construed in relation to other laws
19 

so as to carry out the legitimate ends and purposes intended by the legislature.  Courts will not strictly follow the
20 

letter of one statute when it leads away from the true intent of legislature and when ends are inconsistent with the
general purpose of the act.  More so, when it will mean the contravention of another valid statute. Both laws have to
21 

be reconciled and given due effect.

Note that we have upheld a buyer's reliance on Section 23 of P.D. 957 to suspend payments until such time as the
owner or developer had fulfilled its obligations to the buyer.  This exercise of a statutory right to suspend installment
22 

payments, is to our mind, a valid defense against the purported violations of B.P. Blg. 22 that petitioner is charged
with.

Given the findings of the HLURB as to incomplete features in the construction of petitioner's and other units of the
subject condominium bought on installment from FRC, we are of the view that petitioner had a valid cause to order
his bank to stop payment. To say the least, the third element of "subsequent dishonor of the check. . . without valid
cause" appears to us not established by the prosecution. As already stated, the prosecution tried to establish the
crime on a prima facie presumption in B.P. Blg. 22. Here that presumption is unavailing, in the presence of a valid
cause to stop payment, thereby negating the third element of the crime. 1âwphi1

Offenses punished by a special law, like the Bouncing Checks Law, are not subject to the Revised Penal Code, but
the Code is supplementary to such a law.  We find nothing in the text of B.P. Blg. 22, which would prevent the
23 

Revised Penal Code from supplementing it. Following Article 11 (5)  of the Revised Penal Code, petitioner's
24 

exercise of a right of the buyer under Article 23 of P.D. No. 957 is a valid defense to the charges against him.

WHEREFORE, the instant petition is GRANTED. Petitioner Francisco T. Sycip, Jr., is ACQUITTED of the charges
against him under Batas Pambansa Blg. 22, for lack of sufficient evidence to prove the offenses charged beyond
reasonable doubt. No pronouncement as to costs.

SO ORDERED.

CIA MARITIMA V. CA

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. L-31379 August 29, 1988

COMPAÑIA MARITIMA, petitioner,
vs.
COURT OF APPEALS and VICENTE CONCEPCION, respondents.
Rafael Dinglasan for petitioner.

Benjamin J. Molina for private respondent.

FERNAN, C.J.:

Petitioner Compañia Maritima seeks to set aside through this petition for review on certiorari the decision  1 of the
Court of Appeals dated December 5, 1965, adjudging petitioner liable to private respondent Vicente E. Concepcion
for damages in the amount of P24,652.97 with legal interest from the date said decision shall have become final, for
petitioner's failure to deliver safely private respondent's payloader, and for costs of suit. The payloader was declared
abandoned in favor of petitioner.

The facts of the case are as follows:

Private respondent Vicente E. Concepcion, a civil engineer doing business under the name and style of
Consolidated Construction with office address at Room 412, Don Santiago Bldg., Taft Avenue, Manila, had a
contract with the Civil Aeronautics Administration (CAA) sometime in 1964 for the construction of the airport in
Cagayan de Oro City Misamis Oriental.

Being a Manila — based contractor, Vicente E. Concepcion had to ship his construction equipment to Cagayan de
Oro City. Having shipped some of his equipment through petitioner and having settled the balance of P2,628.77 with
respect to said shipment, Concepcion negotiated anew with petitioner, thru its collector, Pacifico Fernandez, on
August 28, 1964 for the shipment to Cagayan de Oro City of one (1) unit payloader, four (4) units 6x6 Reo trucks
and two (2) pieces of water tanks. He was issued Bill of Lading 113 on the same date upon delivery of the
equipment at the Manila North Harbor. 2

These equipment were loaded aboard the MV Cebu in its Voyage No. 316, which left Manila on August 30, 1964
and arrived at Cagayan de Oro City in the afternoon of September 1, 1964. The Reo trucks and water tanks were
safely unloaded within a few hours after arrival, but while the payloader was about two (2) meters above the pier in
the course of unloading, the swivel pin of the heel block of the port block of Hatch No. 2 gave way, causing the
payloader to fall. 3 The payloader was damaged and was thereafter taken to petitioner's compound in Cagayan de
Oro City.

On September 7, 1964, Consolidated Construction, thru Vicente E. Concepcion, wrote Compañia Maritima to
demand a replacement of the payloader which it was considering as a complete loss because of the extent of
damage. 4 Consolidated Construction likewise notified petitioner of its claim for damages. Unable to elicit response,
the demand was repeated in a letter dated October 2, 1964. 5

Meanwhile, petitioner shipped the payloader to Manila where it was weighed at the San Miguel Corporation. Finding
that the payloader weighed 7.5 tons and not 2.5 tons as declared in the B-111 of Lading, petitioner denied the claim
for damages of Consolidated Construction in its letter dated October 7, 1964, contending that had Vicente E.
Concepcion declared the actual weight of the payloader, damage to their ship as well as to his payloader could have
been prevented. 6

To replace the damaged payloader, Consolidated Construction in the meantime bought a new one at P45,000.00
from Bormaheco Inc. on December 3, 1964, and on July 6, 1965., Vicente E. Concepcion filed an action for
damages against petitioner with the then Court of First Instance of Manila, Branch VII, docketed as Civil Case No.
61551, seeking to recover damages in the amount of P41,225.00 allegedly suffered for the period of 97 days that he
was not able to employ a payloader in the construction job at the rate of P450.00 a day; P34,000.00 representing
the cost of the damaged payloader; Pl 1, 000. 00 representing the difference between the cost of the damaged
payloader and that of the new payloader; P20,000.00 representing the losses suffered by him due to the diversion of
funds to enable him to buy a new payloader; P10,000.00 as attorney's fees; P5,000.00 as exemplary damages; and
cost of the suit. 7

After trial, the then Court of First Instance of Manila, Branch VII, dismissed on April 24, 1968 the complaint with
costs against therein plaintiff, herein private respondent Vicente E. Concepcion, stating that the proximate cause of
the fall of the payloader was Vicente E. Concepcion's act or omission in having misrepresented the weight of the
payloader as 2.5 tons instead of its true weight of 7.5 tons, which underdeclaration was intended to defraud
Compañia Maritima of the payment of the freight charges and which likewise led the Chief Officer of the vessel to
use the heel block of hatch No. 2 in unloading the payloader. 8

From the adverse decision against him, Vicente E. Concepcion appealed to the Court of Appeals which, on
December 5, 1965 rendered a decision, the dispositive portion of which reads:

IN VIEW WHEREOF, judgment must have to be as it is hereby reversed; defendant is condemned to

pay unto plaintiff the sum in damages of P24,652.07 with legal interest from the date the present
decision shall have become final; the payloader is declared abandoned to defendant; costs against
the latter. 9

Hence, the instant petition.

The principal issue in the instant case is whether or not the act of private respondent Vicente E. Concepcion in
furnishing petitioner Compañia Maritima with an inaccurate weight of 2.5 tons instead of the payloader's actual
weight of 7.5 tons was the proximate and only cause of the damage on the Oliver Payloader OC-12 when it fell while
being unloaded by petitioner's crew, as would absolutely exempt petitioner from liability for damages under
paragraph 3 of Article 1734 of the Civil Code, which provides:

Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods,
unless the same is due to any of the following causes only:

xxx xxx xxx

(3) Act or omission of the shipper or owner of the goods.

Petitioner claims absolute exemption under this provision upon the reasoning that private respondent's act of
furnishing it with an inaccurate weight of the payloader constitutes misrepresentation within the meaning of "act or
omission of the shipper or owner of the goods" under the above- quoted article. It likewise faults the respondent
Court of Appeals for reversing the decision of the trial court notwithstanding that said appellate court also found that
by representing the weight of the payloader to be only 2.5 tons, private respondent had led petitioner's officer to
believe that the same was within the 5 tons capacity of the heel block of Hatch No. 2. Petitioner would thus insist
that the proximate and only cause of the damage to the payloader was private respondent's alleged
misrepresentation of the weight of the machinery in question; hence, any resultant damage to it must be borne by
private respondent Vicente E. Concepcion.

The general rule under Articles 1735 and 1752 of the Civil Code is that common carriers are presumed to have
been at fault or to have acted negligently in case the goods transported by them are lost, destroyed or had
deteriorated. To overcome the presumption of liability for the loss, destruction or deterioration of the goods under
Article 1735, the common carriers must prove that they observed extraordinary diligence as required in Article 1733
of the Civil Code. The responsibility of observing extraordinary diligence in the vigilance over the goods is further
expressed in Article 1734 of the same Code, the article invoked by petitioner to avoid liability for damages.
Corollary is the rule that mere proof of delivery of the goods in good order to a common carrier, and of their arrival at
the place of destination in bad order, makes out prima facie case against the common carrier, so that if no
explanation is given as to how the loss, deterioration or destruction of the goods occurred, the common carrier must
be held responsible. 10 Otherwise stated, it is incumbent upon the common carrier to prove that the loss,
deterioration or destruction was due to accident or some other circumstances inconsistent with its liability.

In the instant case, We are not persuaded by the proferred explanation of petitioner alleged to be the proximate
cause of the fall of the payloader while it was being unloaded at the Cagayan de Oro City pier. Petitioner seems to
have overlooked the extraordinary diligence required of common carriers in the vigilance over the goods transported
by them by virtue of the nature of their business, which is impressed with a special public duty.

Thus, Article 1733 of the Civil Code provides:

Art. 1733. Common carriers, from the nature of their business and for reason of public policy, are
bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the
passengers transported by them according to all the circumstances of each case.

Such extraordinary diligence in the vigilance over the goods is further expressed in Articles 1734,
1735 and 1745, Nos. 5, 6 and 7, ...

The extraordinary diligence in the vigilance over the goods tendered for shipment requires the common carrier to
know and to follow the required precaution for avoiding damage to, or destruction of the goods entrusted to it for
safe carriage and delivery. It requires common carriers to render service with the greatest skill and foresight and "to
use all reasonable means to ascertain the nature and characteristic of goods tendered for shipment, and to exercise
due care in the handling and stowage including such methods as their nature requires." 11 Under Article 1736 of the
Civil Code, the responsibility to observe extraordinary diligence commences and lasts from the time the goods are
unconditionally placed in the possession of, and received by the carrier for transportation until the same are
delivered, actually or constructively, by the carrier to the consignee, or to the person who has the right to receive
them without prejudice to the provisions of Article 1738.

Where, as in the instant case, petitioner, upon the testimonies of its own crew, failed to take the necessary and
adequate precautions for avoiding damage to, or destruction of, the payloader entrusted to it for safe carriage and
delivery to Cagayan de Oro City, it cannot be reasonably concluded that the damage caused to the payloader was
due to the alleged misrepresentation of private respondent Concepcion as to the correct and accurate weight of the
payloader. As found by the respondent Court of Appeals, the fact is that petitioner used a 5-ton capacity lifting
apparatus to lift and unload a visibly heavy cargo like a payloader. Private respondent has, likewise, sufficiently
established the laxity and carelessness of petitioner's crew in their methods of ascertaining the weight of heavy
cargoes offered for shipment before loading and unloading them, as is customary among careful persons.

It must be noted that the weight submitted by private respondent Concepcion appearing at the left-hand portion of
Exhibit 8 12 as an addendum to the original enumeration of equipment to be shipped was entered into the bill of
lading by petitioner, thru Pacifico Fernandez, a company collector, without seeing the equipment to be
shipped.13 Mr. Mariano Gupana, assistant traffic manager of petitioner, confirmed in his testimony that the company
never checked the information entered in the bill of lading. 14 Worse, the weight of the payloader as entered in the
bill of lading was assumed to be correct by Mr. Felix Pisang, Chief Officer of MV Cebu. 15

The weights stated in a bill of lading are prima facie evidence of the amount received and the fact that the weighing
was done by another will not relieve the common carrier where it accepted such weight and entered it on the bill of
lading. 16 Besides, common carriers can protect themselves against mistakes in the bill of lading as to weight by
exercising diligence before issuing the same. 17
While petitioner has proven that private respondent Concepcion did furnish it with an inaccurate weight of the
payloader, petitioner is nonetheless liable, for the damage caused to the machinery could have been avoided by the
exercise of reasonable skill and attention on its part in overseeing the unloading of such a heavy equipment. And
circumstances clearly show that the fall of the payloader could have been avoided by petitioner's crew. Evidence on
record sufficiently show that the crew of petitioner had been negligent in the performance of its obligation by reason
of their having failed to take the necessary precaution under the circumstances which usage has established among
careful persons, more particularly its Chief Officer, Mr. Felix Pisang, who is tasked with the over-all supervision of
loading and unloading heavy cargoes and upon whom rests the burden of deciding as to what particular winch the
unloading of the payloader should be undertaken. 18 While it was his duty to determine the weight of heavy cargoes
before accepting them. Mr. Felix Pisang took the bill of lading on its face value and presumed the same to be correct
by merely "seeing" it. 19 Acknowledging that there was a "jumbo" in the MV Cebu which has the capacity of lifting 20
to 25 ton cargoes, Mr. Felix Pisang chose not to use it, because according to him, since the ordinary boom has a
capacity of 5 tons while the payloader was only 2.5 tons, he did not bother to use the "jumbo" anymore. 20

In that sense, therefore, private respondent's act of furnishing petitioner with an inaccurate weight of the payloader
upon being asked by petitioner's collector, cannot be used by said petitioner as an excuse to avoid liability for the
damage caused, as the same could have been avoided had petitioner utilized the "jumbo" lifting apparatus which
has a capacity of lifting 20 to 25 tons of heavy cargoes. It is a fact known to the Chief Officer of MV Cebu that the
payloader was loaded aboard the MV Cebu at the Manila North Harbor on August 28, 1964 by means of a terminal
crane. 21 Even if petitioner chose not to take the necessary precaution to avoid damage by checking the correct
weight of the payloader, extraordinary care and diligence compel the use of the "jumbo" lifting apparatus as the
most prudent course for petitioner.

While the act of private respondent in furnishing petitioner with an inaccurate weight of the payloader cannot
successfully be used as an excuse by petitioner to avoid liability to the damage thus caused, said act constitutes a
contributory circumstance to the damage caused on the payloader, which mitigates the liability for damages of
petitioner in accordance with Article 1741 of the Civil Code, to wit:

Art. 1741. If the shipper or owner merely contributed to the loss, destruction or deterioration of the
goods, the proximate cause thereof being the negligence of the common carrier, the latter shall be
liable in damages, which however, shall be equitably reduced.

We find equitable the conclusion of the Court of Appeals reducing the recoverable amount of damages by 20% or
1/5 of the value of the payloader, which at the time the instant case arose, was valued at P34,000. 00, thereby
reducing the recoverable amount at 80% or 4/5 of P34,000.00 or the sum of P27,200.00. Considering that the
freight charges for the entire cargoes shipped by private respondent amounting to P2,318.40 remained unpaid.. the
same would be deducted from the P27,000.00 plus an additional deduction of P228.63 representing the freight
charges for the undeclared weight of 5 tons (difference between 7.5 and 2.5 tons) leaving, therefore, a final
recoverable amount of damages of P24,652.97 due to private respondent Concepcion.

Notwithstanding the favorable judgment in his favor, private respondent assailed the Court of Appeals' decision
insofar as it limited the damages due him to only P24,652.97 and the cost of the suit. Invoking the provisions on
damages under the Civil Code, more particularly Articles 2200 and 2208, private respondent further seeks additional
damages allegedly because the construction project was delayed and that in spite of his demands, petitioner failed
to take any steps to settle his valid, just and demandable claim for damages.

We find private respondent's submission erroneous. It is well- settled that an appellee, who is not an appellant, may
assign errors in his brief where his purpose is to maintain the judgment on other grounds, but he may not do so if his
purpose is to have the judgment modified or reversed, for, in such case, he must appeal. 22 Since private respondent
did not appeal from the judgment insofar as it limited the award of damages due him, the reduction of 20% or 1/5 of
the value of the payloader stands.
WHEREFORE, in view of the foregoing, the petition is DENIED. The decision of the Court of Appeals is hereby
AFFIRMED in all respects with costs against petitioner. In view of the length of time this case has been pending, this
decision is immediately executory.

INT’L CORPORATE BANK V. IAC

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-69560 June 30, 1988

THE INTERNATIONAL CORPORATE BANK INC., petitioner,

vs.
THE IMMEDIATE APPELLATE COURT, HON. ZOILO AGUINALDO, as presiding Judge of the Regional Trial
Court of Makati, Branch 143, NATIVIDAD M. FAJARDO, and SILVINO R. PASTRANA, as Deputy and Special
Sheriff, respondents.

PARAS, J.:

This is a petition for review on certiorari of the Decision of the Court of Appeals dated October 31, 1984 in AC-G.R.
SP No. 02912 entitled "THE INTERNATIONAL CORPORATE BANK, INC. v. Hon. ZOILO AGUINALDO, et al.,"
dismissing petitioner's petition for certiorari against the Regional Trial Court of Makati (Branch 143) for lack of merit,
and of its Resolution dated January 7, 1985, denying petitioner's motion for reconsideration of the aforementioned
Decision.

Petitioner also prays that upon filing of the petition, a restraining order be issued ex-parte, enjoining respondents or
any person acting in their behalf, from enforcing or in any manner implementing the Order of the respondent trial
court dated February 13 and March 9, 1984, and January 10 and January 11, 1985.

The facts of this case, as found by the trial court and subsequently adopted by the Court of Appeals, are as follows:

In the early part of 1980, private respondent secured from petitioner's predecessors-in-interest, the then Investment
and Underwriting Corp. of the Philippines and Atrium Capital Corp., a loan in the amount of P50,000,000.00. To
secure this loan, private respondent mortgaged her real properties in Quiapo, Manila and in San Rafael, Bulacan,
which she claimed have a total market value of P110,000,000.00. Of this loan, only the amount of P20,000,000.00
was approved for release. The same amount was applied to pay her other obligations to petitioner, bank charges
and fees. Thus, private respondent's claim that she did not receive anything from the approved loan.

On September 11, 1980, private respondent made a money market placement with ATRIUM in the amount of
P1,046,253.77 at 17% interest per annum for a period of 32 days or until October 13, 1980, its maturity date.
Meanwhile, private respondent allegedly failed to pay her mortgaged indebtedness to the bank so that the latter
refused to pay the proceeds of the money market placement on maturity but applied the amount instead to the
deficiency in the proceeds of the auction sale of the mortgaged properties. With Atrium being the only bidder, said
properties were sold in its favor for only P20,000,000.00. Petitioner claims that after deducting this amount, private
respondent is still indebted in the amount of P6.81 million.
On November 17, 1982, private respondent filed a complaint with the trial court against petitioner for annulment of
the sheriff's sale of the mortgaged properties, for the release to her of the balance of her loan from petitioner in the
amount of P30,000,000,00, and for recovery of P1,062,063.83 representing the proceeds of her money market
investment and for damages. She alleges in her complaint, which was subsequently amended, that the mortgage is
not yet due and demandable and accordingly the foreclosure was illegal; that per her loan agreement with petitioner
she is entitled to the release to her of the balance of the loan in the amount of P30,000,000.00; that petitioner
refused to pay her the proceeds of her money market placement notwithstanding the fact that it has long become
due and payable; and that she suffered damages as a consequence of petitioner's illegal acts.

In its answer, petitioner denies private respondent's allegations and asserts among others, that it has the right to
apply or set off private respondent's money market claim of P1,062,063.83. Petitioner thus interposes counterclaims
for the recovery of P5,763,741.23, representing the balance of its deficiency claim after deducting the proceeds of
the money market placement, and for damages.

The trial court subsequently dismissed private respondent's cause of action concerning the annulment of the
foreclosure sale, for lack of jurisdiction, but left the other causes of action to be resolved after trial. Private
respondent then filed separate complaints in Manila and in Bulacan for annulment of the foreclosure sale of the
properties in Manila and in Bulacan, respectively.

On December 15, 1983, private respondent filed a motion to order petitioner to release in her favor the sum of
P1,062,063.83, representing the proceeds of the money market placement, at the time when she had already given
her direct testimony on the merits of the case and was being cross-examined by counsel. On December 24, 1983,
petitioner filed an opposition thereto, claiming that the proceeds of the money market investment had already been
applied to partly satisfy its deficiency claim, and that to grant the motion would be to render judgment in her favor
without trial and make the proceedings moot and academic. However, at the hearing on February 9, 1984, counsel
for petitioner and private respondent jointly manifested that they were submitting for resolution said motion as well
as the opposition thereto on the basis of the pleadings and of the evidence which private respondent had already
presented.

On February 13, 1984, respondent judge issued an order granting the motion, as follows:

IN VIEW OF THE FOREGOING, the defendant International Corporate Bank is hereby ordered to
deliver to the plaintiff Natividad M. Pajardo the amount of P1,062,063.83 covered by the repurchase
agreement with Serial No. AOY-14822 (Exhibit "A'), this amount represented the principal of
P1,046,253.77 which the plaintiff held including its interest as of October 13, 1980, conditioned upon
the plaintiff filing a bond amount to P1,062,063.83 to answer for all damages which the said
defendant bank may suffer in the event that the Court should finally decide that the plaintiff was not
entitled to the said amount.

Petitioner filed a motion for reconsideration to the aforesaid order, asserting among other things that said motion is
not verified, and therefore a mere scrap of paper. Private respondent however manifested that since she testified in
open court and was cross-examined by counsel for petitioner on the motion for release of the proceeds of the
money market placement, the defect had already been cured. On March 9, 1984, the respondent judge issued an
order denying petitioner's motion for reconsideration. (CA Decision, Rollo, pp. 109-111).

On March 13, 1984, petitioner filed a special civil action for certiorari and prohibition with preliminary injunction with
the Court of Appeals, (a) for the setting aside and annulment of the Orders dated February 13, 1984 and March
9,1984, issued by the respondent trial court, and (b) for an order commanding or directing the respondent trial judge
to desist from enforcing and/or implementing and/or executing the aforesaid Orders. The temporary restraining
order prayed for was issued by respondent Court of Appeals on March 22, 1984. (Please see CA Decision, Rollo, p.
114, last paragraph).
In a decision rendered on October 31, 1984 (Rollo, pp. 109-14), the Court of Appeals dismissed said petition finding
—(a) that while the Motion for the release of the proceeds of the money market investment in favor of private
respondent was not verified by her, that defect was cured when she testified under oath to substantiate her
allegations therein: (b) that, petitioner cannot validly claim it was denied due process for the reason that it was given
ample time to be heard, as it was in fact heard when it filed an Opposition to the motion and a motion for
reconsideration; (c) that the circumstances of this case prevent legal compensation from taking place because the
question of whether private respondent is indebted to petitioner in the amount of 6.81 million representing the
deficiency balance after the foreclosure of the mortgage executed to secure the loan extended to her, is vigorously
disputed; (d) that the release of the proceeds of the money market investment for private respondent will not make
the causes of action of the case pending before the trial court moot and academic nor will it cause irreparable
damage to petitioner, private respondent having filed her bond in the amount of P1,062,063.83 to answer for all
damages which the former may suffer in the event that the court should finally decide that private respondent is not
entitled to the return of said amount (CA Decision, Rello, pp. 112-114).

The dispositive portion of the aforementioned Decision reads:

... We hold that the respondent court cannot be successfully charged with grave abuse of discretion
amounting to lack of jurisdiction when it issued its Orders of February 13, 1984 and March 9, 1984,
based as they are on a correct appreciation of the import of the parties' evidence and the applicable
law.

IN VIEW WHEREOF, the petition is dismissed for lack of merit and the temporary restraining order
issued by this Court on March 22, 1984 is lifted. (Ibid., p. 114).

Petitioner moved for the reconsideration of the above decision (Annex "S", Rollo, pp. 116-124), but for the reason
that the same failed to raise any issue that had not been considered and passed upon by the respondent Court of
Appeals, it was denied in a Resolution dated January 7, 1985 (CA Resolution, Rollo, p. 126).

Having been affirmed by the Court of Appeals, the trial court issued a Writ of Execution to implement its Order of
February 13, 1984 (Annex "BB", Rollo, p. 188) and by virtue thereof, a levy was made on petitioner's personal
property consisting of 20 motor vehicles (Annex "U", Rollo, p. 127).

On January 9, 1985, herein private respondent (then plaintiff) filed in the trial court an ex-parte motion praying that
the four branches of the petitioner such as: Baclaran Branch, Paranaque, Metro Manila; Ylaya Branch, Divisoria,
Metro Manila; Cubao Branch, Quezon City and Binondo Branch, Sta. Cruz, Manila, be ordered to pay the amount of
P250,000.00 each, and the main office of the petitioner bank at Paseo de Roxas, Makati, Metro Manila, be ordered
to pay the amount of P62,063.83 in order to answer for the claim of private respondent amounting to P1,062,063.83.

Thereupon, on January 10, 1985, the trial court issued an Order (Annex "V", Rollo, p. 129) granting the above-
mentioned prayers.

Acting on the ex-parte motion by the plaintiff (now private respondent), the trial court, on January 11, 1984, ordered
the President of defendant International Corporate Bank (now petitioner) and all its employees and officials
concemed to deliver to the sheriff the 20 motor vehicles levied by virtue of the Writ of Execution dated December 12,
1984 (Annex "W", Rollo, p. 131).

The petitioner having failed to comply with the above-cited Order, the respondent trial court issued two (2) more
Orders: the January 16, 1985 (Annex "CC," Rollo, p. 190) and January 21, 1985 Orders (Annex "DD", Rollo, p. 191),
directing several employees mentioned therein to show cause wily they should not be cited in contempt.

Hence, this petition for review on certiorari with prayer for a restraining order and for a writ of preliminary injunction.
Three days after this petition was filed, or specifically on January 18, 1985, petitioner filed an urgent motion
reiterating its prayer for the issuance of an ex-parte restraining order (Rollo, p. 132).

Simultaneous with the filing of the present petition, petitioner, as defendant, filed with the trial court an ex-
parte motion to suspend the implementation of any and all orders and writs issued pursuant to Civil Case No. 884
(Annex "A", Rollo, p. 135).

This Court's resolution dated January 21, 1985, without giving due course to the petition, resolved (a) to require the
respondents to comment: (b) to issue, effective immediately and until further orders from this Court, a Temporary
Restraining Order enjoining the respondents from enforcing or in any manner implementing the questioned Orders
dated February 13, 1984, March 9, 1984, January 10, 1985 and January 11 and 16, 1985, issued in Civil Case No.
884.

The corresponding writ was issued on the same day (Rollo, pp. 139-140).

As required, the Comment of private respondent was filed on January 28, 1985 (Rollo, pp. 141- 150).

Thereafter, petitioner moved for leave to file a supplemental petition on the ground that after it had filed this present
petition, petitioner discovered that the bond filed with, and approved by, the respondent lower court showed
numerous material erasures, alterations and/or additions (Rollo, p. 151), which the issuing insurance company
certified as having been done without its authority or consent (Annex "Z", Rollo, p. 178).

The Supplemental Petition was actually filed on February 1, 1985 (Rollo, pp. 154-171). It pointed out the erasures,
alterations and/or additions in the bond as follows:

a. below "Civil Case No. 884" after the words, "Plaintiff's Bond," the phrase "For Levying of
Attachment" was erased or deleted;

b. in lines 2 and 3 after the word "order," the phrase "approving plaintiff's motion dated Dec. 15,
1983, was inserted or added;

c. in line 3, the phrases "Of attachment" and "ordered that a writ of attachment issue' were erased or
deleted;

d also in line 3 after the words "the court has" the phrase "approved the Motion was likewise inserted
or added;

e. in line 9, the phrase "and of the levying of said attachment" was also erased or deleted;

f. in line 13, the word "attachment" was likewise erased or deleted;

g. also in line 13 after the deletion of word "attachment" the phrase "release of the P1,062,063.83 to
the plaintiff was similarly inserted or added."

Petitioner contended therein that in view of the foregoing facts, the genuineness, due execution and authenticity as
well as the validity and enforceability of the bond (Rello, p. 174) is now placed in issue and consequently, the bond
may successfully be repudiated as falsified and, therefore, without any force and effect and the bonding company
may thereby insist that it has been released from any hability thereunder.

Also, petitioner pointed as error the respondent trial court's motu proprio transferring Civil Case No. 884 to the
Manila Branch of the same Court arguing that improper venue, as a ground for, and unless raised in, a Motion to
Dismiss, may be waived by the parties and the court may not pre-empt the right of the parties to agree between or
among themselves as to the venue of their choice in litigating their justiciable controversy (Supplemental Petition,
Rollo, p. 160).

On being required to comment thereon, (Rollo, p. 192) private respondent countered (Rollo, pp. 193-198) that bond
forms are ready-prepared forms and the bonding company used the form for "Levying of Attachment" because the
company has no ready-prepared form for the kind of bond called for or required in Civil Case 884. Whatever
deletions or additions appear on the bond were made by the Afisco Insurance Corporation itself for the purpose of
accomplishing what was required or intended.

Nonetheless, on May 7, 1985, private respondent filed "Plaintiffs Bond" in the respondent trial court in the amount of
P1,062,063.83 a xerox copy of which was furnished this Court (Rollo, p. 219), and noted in the Court's Resolution
dated May 29,1985 (Rollo, p. 225).

On March 11, 1985, petitioner was required to file a Consolidated Reply (Rollo, p. 199) which was filed on April 10,
1985 (Rollo, p. 201).

Thereafter, a Rejoinder (Rollo, p. 238) was filed by private respondent on September 18, 1985 after Atty. Advincula,
counsel for private respondents was required by this Court to show cause why he should not be disciplinarily dealt
with or held in contempt for his failure to comply on time (Rollo, p. 226) and on August 19, 1985 said lawyer was
finally admonished (Rollo, p. 229) for his failure to promptly apprise the Court of his alleged non-receipt of copy of
petitioner's reply, which alleged non-receipt was vehemently denied by petitioner in its Counter Manifestation (Rollo,
p. 230) filed on August 5, 1985.

Finally, on October 7, 1985, this petition was given due course and both parties were required to submit
simultaneous memoranda (Rollo, p. 249) but before the same were filed, petitioner moved for leave to file sur-
rejoinder (Rollo, p. 250), the sur-rejoinder was filed on October 14,1985 (Rollo, pp. 252-254).

Petitioner's memorandum was filed on December 28, 1985 (Rollo, pp. 264-292) while that of private respondent was
submitted on January 10, 1986 (Rollo, pp. 295-304).

Petitioner again moved for leave to file a Reply Memorandum (Rollo, p. 307) which, despite permission from this
Court, was not filed and on August 22, 1986, private respondent prayed for early resolution of the petition (Rollo, p.
311).

In a resolution dated October 13, 1986 (Rollo, p. 314) this case was transferred to the Second Division of this Court,
the same being assigned to a member of that Division.

The crucial issue to be resolved in this case is whether or not there can be legal compensation in the case at bar.

Petitioner contends that after foreclosing the mortgage, there is still due from private respondent as deficiency the
amount of P6.81 million against which it has the right to apply or set off private respondent's money market claim of
P1,062,063.83.

The argument is without merit.

As correctly pointed out by the respondent Court of Appeals —

Compensation shall take place when two persons, in their own right, are creditors and debtors of
each other. (Art. 1278, Civil Code). "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 debtors." (Art. 1290, Civil Code). Article 1279 of the Civil Code requires among others, 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 arising from breach of contract. (Compañia General de Tabacos vs. French and Unson, 39
Phil. 34; Lorenzo & Martinez vs. Herrero, 17 Phil. 29).

There can be no doubt that petitioner is indebted to private respondent in the amount of
P1,062,063.83 representing the proceeds of her money market investment. This is admitted. But
whether private respondent is indebted to petitioner in the amount of P6.81 million representing the
deficiency balance after the foreclosure of the mortgage executed to secure the loan extended to
her, is vigorously disputed. This circumstance prevents legal compensation from taking place. (CA
Decision, Rollo, pp. 112-113).

It must be noted that Civil Case No. 83-19717 is still pending consideration at the RTC Manila, for annulment of
Sheriffs sale on extra-judicial foreclosure of private respondent's property from which the alleged deficiency arose.
(Annex "AA", Rollo, pp. 181-189). Therefore, the validity of the extrajudicial foreclosure sale and petitioner's claim
for deficiency are still in question, so much so that it is evident, that the requirement of Article 1279 that the debts
must be liquidated and demandable has not yet been met. For this reason, legal compensation cannot take place
under Article 1290 of the Civil Code.

Petitioner now assails the motion of the plaintiff (now private respondent) filed in the trial court for the release of the
proceeds of the money market investment, arguing that it is deficient in form, the same being unverified (petitioner's
Memorandum, Rollo, p. 266). On this score, it has been held that "as enjoined by the Rules of Court and the
controlling jurisprudence, a liberal construction of the rules and the pleadings is the controlling principle to effect
substantial justice." (Maturan v. Araula, 111 SCRA 615 [1982]).

Finally, the filing of insufficient or defective bond does not dissolve absolutely and unconditionally the injunction
issued. Whatever defect the bond possessed was cured when private respondent filed another bond in the trial
court.

PREMISES CONSIDERED, the questioned Decision and Resolution of the respondent Court of Appeals are hereby
AFFIRMED.

SO ORDERED.

MINDANAO PORTLAND CEMENT V. CA

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-62169 February 28, 1983

MINDANAO PORTLAND CEMENT CORPORATION, petitioner,

vs.
COURT OF APPEALS, PACWELD STEEL CORPORATION and ATTY. CASIANO P. LAQUIHON respondents.
Tolentino, Garcia, Cruz Reyes Law Office for petitioner.

Casiano P. Laquihon for respondents.

TEEHANKEE, J.:

The Court of Appeals (now Intermediate Appellate Court) certified petitioner's appeal therein as defendant-
appellant, docketed as C.A.-G.R. No. 65102 thereof, to this Court as involving only questions of law in its Resolution
of August 31, 1982, reading as follows:

The 'Statement of the Case and the Statement of Facts' contained in appellant's brief follow:

STATEMENT OF FACTS

On January 3, 1978, one Atty. Casiano P. Laquihon, in behalf of third-party defendant Pacweld Steel
Corporation (Pacweld for short) as the latter's attorney, filed a pleading addressed to the defendant
& Third-Party Plaintiff Mindanao Portland Cement Corporation (MPCC) for short), herein appellant,
entitled 'motion to direct payment of attorney's fee to counsel' (himself ), invoking in his motion the
fact that in the decision of the court of Sept. 14, 1976, MPCC was adjudged to pay Pacweld the sum
of P10,000.00 as attorney's fees (Record on Appeal, pp. 1, 6-9).

On March 14, 1978, MPCC filed an opposition to Atty. Laquihon's motion, stating, as grounds
therefor, that said amount is set-off by a like sum of P10,000.00 which it MPCC has collectible in its
favor from Pacweld also by way of attorney's fees which MPCC recovered from the same Court of
First Instance of Manila (Branch XX) in Civil Case No. 68346, entitled Pacweld Steel Corporation, et
al. writ of execution to this effect having been issued by said court (Record on Appeal, pp, 2,10- 14).

On June 26, 1978 the court issued the order appealed from (Record on Appeal, pp. 24-25) and
despite MPCCs motion for reconsideration of said order, citing the law applicable and Supreme
Court decisions (Record on Appeal, pp. 26-33), denied the same in its order of August 28, 1978
(Record on Appeal, p. 37), also subject matter of this appeal.

The writ of execution referred to above which MPCC has invoked to set- off the amount sought to be
collected by Pacweld through the latter's lawyer, Atty. Casiano P. Laquihon, is hereunder quoted in
full.

In his brief, appellee comments that the statements in appellant's brief are 'substantially correct,' as
follows:

STATEMENT OF THE CASE

This is an appeal from the Order of the Court of First Instance of Manila (Branch X dated June 26,
1978 ordering the appellant (MINDANAO PORTLAND CEMENT CORPORATION) to pay the
amount of P10,000.00 attorney's fees directly to Atty. Casiano B. Laquihon (Record on Appeal, pp.
24-25) and from the Order dated August 28, 1978 denying appellant's motion for reconsideration
(Record on Appeal, p. 37).

There was no trial or submission of documentary evidence. Against the orders of June 26. 1978, and
August 28, 1978, appellant has brought this appeal to this Court, contending that:
 The lower court erred in not holding that the two obligations are extinguished reciprocally by
operation of law.' (p. 6, Appellant's Brief)

This appeal calls for the application of Arts. 1278, 1279 and 1290 of the Civil Code, as urged by the
appellant. Another question is: The judgment in Civil Case No. 75179 being already final at the time
the motion under consideration was filed, does not the order of June 26, 1976 constitute a change or
alteration of the said judgment, though issued by the very same court that rendered the judgment?

WHEREFORE, since only questions of law are involved and there is no factual issue left for us to
determine, let the records of the appeal in this case be certified to the Honorable Supreme Court for
determination.

After considering the briefs of the parties in the appellate court and the additional pleadings required of them by this
Court, the Court finds merit in the appeal and sets aside the appealed orders of June 26 and August 28, 1978 of the
Court of First Instance (now Regional Trial Court) of Manila, Branch XX.

It is clear from the record that both corporations, petitioner Mindanao Portland Cement Corporation (appellant) and
respondent Pacweld Steel Corporation (appellee), were creditors and debtors of each other, their debts to each
other consisting in final and executory judgments of the Court of First Instance in two (2) separate cases, ordering
the payment to each other of the sum of P10,000.00 by way of attorney's fees. The two (2) obligations, therefore,
respectively offset each other, compensation having taken effect by operation of law and extinguished both debts to
the concurrent amount of P10,000.00, pursuant to the provisions of Arts. 1278, 1279 and 1290 of the Civil Code,
since all the requisites provided in Art. 1279 of the said Code for automatic compensation "even though the creditors
and debtors are not aware of the compensation" were duly present.**

Necessarily, the appealed order of June 26, 1978 granting Atty. Laquihon's motion for amendment of the judgment
of September 14, 1976 against Mindanao Portland Cement Corporation so as to make the award therein of
P10,000.00 as attorney's fees payable directly to himself as counsel of Pacweld Steel Corporation instead of
payable directly to said corporation as provided in the judgment, which had become final and executory long before
the issuance of said "amendatory" order was a void alteration of judgment. It was a substantial change or
amendment beyond the trial court's jurisdiction and authority and it could not defeat the compensation or set-off of
the two (2) obligations of the corporations to each other which had already extinguished both debts by operation of
law.

ACCORDINGLY. the appealed orders are hereby annulled and set aside. No costs.

Melencio-Herrera, Plana, Vasquez, Relova and Gutierrez, Jr., JJ., concur.

BANK OF THE PHILIPPINES V. CA

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 136202             January 25, 2007

BANK OF THE PHILIPPINE ISLANDS, Petitioner,
vs.
COURT OF APPEALS, ANNABELLE A. SALAZAR, and JULIO R. TEMPLONUEVO, Respondents

DECISION

AZCUNA, J.:

This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the Decision 1 dated April 3,
1998, and the Resolution2 dated November 9, 1998, of the Court of Appeals in CA-G.R. CV No. 42241.

The facts3 are as follows:

A.A. Salazar Construction and Engineering Services filed an action for a sum of money with damages against herein
petitioner Bank of the Philippine Islands (BPI) on December 5, 1991 before Branch 156 of the Regional Trial Court
(RTC) of Pasig City. The complaint was later amended by substituting the name of Annabelle A. Salazar as the real
party in interest in place of A.A. Salazar Construction and Engineering Services. Private respondent Salazar prayed
for the recovery of the amount of Two Hundred Sixty-Seven Thousand, Seven Hundred Seven Pesos and Seventy
Centavos (P267,707.70) debited by petitioner BPI from her account. She likewise prayed for damages and
attorney’s fees.

Petitioner BPI, in its answer, alleged that on August 31, 1991, Julio R. Templonuevo, third-party defendant and
herein also a private respondent, demanded from the former payment of the amount of Two Hundred Sixty-Seven
Thousand, Six Hundred Ninety-Two Pesos and Fifty Centavos (P267,692.50) representing the aggregate value of
three (3) checks, which were allegedly payable to him, but which were deposited with the petitioner bank to private
respondent Salazar’s account (Account No. 0203-1187-67) without his knowledge and corresponding endorsement.

Accepting that Templonuevo’s claim was a valid one, petitioner BPI froze Account No. 0201-0588-48 of A.A. Salazar
and Construction and Engineering Services, instead of Account No. 0203-1187-67 where the checks were
deposited, since this account was already closed by private respondent Salazar or had an insufficient balance.

Private respondent Salazar was advised to settle the matter with Templonuevo but they did not arrive at any
settlement. As it appeared that private respondent Salazar was not entitled to the funds represented by the checks
which were deposited and accepted for deposit, petitioner BPI decided to debit the amount of P267,707.70 from her
Account No. 0201-0588-48 and the sum of P267,692.50 was paid to Templonuevo by means of a cashier’s check.
The difference between the value of the checks (P267,692.50) and the amount actually debited from her account
(P267,707.70) represented bank charges in connection with the issuance of a cashier’s check to Templonuevo.

In the answer to the third-party complaint, private respondent Templonuevo admitted the payment to him
of P267,692.50 and argued that said payment was to correct the malicious deposit made by private respondent
Salazar to her private account, and that petitioner bank’s negligence and tolerance regarding the matter was
violative of the primary and ordinary rules of banking. He likewise contended that the debiting or taking of the
reimbursed amount from the account of private respondent Salazar by petitioner BPI was a matter exclusively
between said parties and may be pursuant to banking rules and regulations, but did not in any way affect him. The
debiting from another account of private respondent Salazar, considering that her other account was effectively
closed, was not his concern.

After trial, the RTC rendered a decision, the dispositive portion of which reads thus:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff [private respondent
Salazar] and against the defendant [petitioner BPI] and ordering the latter to pay as follows:
 1. The amount of P267,707.70 with 12% interest thereon from September 16, 1991 until the said amount is
fully paid;

2. The amount of P30,000.00 as and for actual damages;

3. The amount of P50,000.00 as and for moral damages;

4. The amount of P50,000.00 as and for exemplary damages;

5. The amount of P30,000.00 as and for attorney’s fees; and

6. Costs of suit.

The counterclaim is hereby ordered DISMISSED for lack of factual basis.

The third-party complaint [filed by petitioner] is hereby likewise ordered DISMISSED for lack of merit.

Third-party defendant’s [i.e., private respondent Templonuevo’s] counterclaim is hereby likewise DISMISSED for
lack of factual basis.

SO ORDERED.4

On appeal, the Court of Appeals (CA) affirmed the decision of the RTC and held that respondent Salazar was
entitled to the proceeds of the three (3) checks notwithstanding the lack of endorsement thereon by the payee. The
CA concluded that Salazar and Templonuevo had previously agreed that the checks payable to JRT Construction
and Trading5 actually belonged to Salazar and would be deposited to her account, with petitioner acquiescing to the
arrangement.6

Petitioner therefore filed this petition on these grounds:

I.

The Court of Appeals committed reversible error in misinterpreting Section 49 of the Negotiable Instruments Law
and Section 3 (r and s) of Rule 131 of the New Rules on Evidence.

II.

The Court of Appeals committed reversible error in NOT applying the provisions of Articles 22, 1278 and 1290 of the
Civil Code in favor of BPI.

III.

The Court of Appeals committed a reversible error in holding, based on a misapprehension of facts, that the account
from which BPI debited the amount of P267,707.70 belonged to a corporation with a separate and distinct
personality.

IV.

The Court of Appeals committed a reversible error in holding, based entirely on speculations, surmises or
conjectures, that there was an agreement between SALAZAR and TEMPLONUEVO that checks payable to
TEMPLONUEVO may be deposited by SALAZAR to her personal account and that BPI was privy to this agreement.
V.

The Court of Appeals committed reversible error in holding, based entirely on speculation, surmises or conjectures,
that SALAZAR suffered great damage and prejudice and that her business standing was eroded.

VI.

The Court of Appeals erred in affirming instead of reversing the decision of the lower court against BPI and
dismissing SALAZAR’s complaint.

VII.

The Honorable Court erred in affirming the decision of the lower court dismissing the third-party complaint of BPI. 7

The issues center on the propriety of the deductions made by petitioner from private respondent Salazar’s account.
Stated otherwise, does a collecting bank, over the objections of its depositor, have the authority to withdraw
unilaterally from such depositor’s account the amount it had previously paid upon certain unendorsed order
instruments deposited by the depositor to another account that she later closed?

Petitioner argues thus:

1. There is no presumption in law that a check payable to order, when found in the possession of a person
who is neither a payee nor the indorsee thereof, has been lawfully transferred for value. Hence, the CA
should not have presumed that Salazar was a transferee for value within the contemplation of Section 49 of
the Negotiable Instruments Law,8 as the latter applies only to a holder defined under Section 191of the
same.9

2. Salazar failed to adduce sufficient evidence to prove that her possession of the three checks was lawful
despite her allegations that these checks were deposited pursuant to a prior internal arrangement with
Templonuevo and that petitioner was privy to the arrangement.

3. The CA should have applied the Civil Code provisions on legal compensation because in deducting the
subject amount from Salazar’s account, petitioner was merely rectifying the undue payment it made upon
the checks and exercising its prerogative to alter or modify an erroneous credit entry in the regular course of
its business.

4. The debit of the amount from the account of A.A. Salazar Construction and Engineering Services was
proper even though the value of the checks had been originally credited to the personal account of Salazar
because A.A. Salazar Construction and Engineering Services, an unincorporated single proprietorship, had
no separate and distinct personality from Salazar.

5. Assuming the deduction from Salazar’s account was improper, the CA should not have dismissed
petitioner’s third-party complaint against Templonuevo because the latter would have the legal duty to return
to petitioner the proceeds of the checks which he previously received from it.

6. There was no factual basis for the award of damages to Salazar.

The petition is partly meritorious.

First, the issue raised by petitioner requires an inquiry into the factual findings made by the CA. The CA’s conclusion
that the deductions from the bank account of A.A. Salazar Construction and Engineering Services were improper
stemmed from its finding that there was no ineffective payment to Salazar which would call for the exercise of
petitioner’s right to set off against the former’s bank deposits. This finding, in turn, was drawn from the pleadings of
the parties, the evidence adduced during trial and upon the admissions and stipulations of fact made during the pre-
trial, most significantly the following:

(a) That Salazar previously had in her possession the following checks:

(1) Solid Bank Check No. CB766556 dated January 30, 1990 in the amount of P57,712.50;

(2) Solid Bank Check No. CB898978 dated July 31, 1990 in the amount of P55,180.00; and,

(3) Equitable Banking Corporation Check No. 32380638 dated August 28, 1990 for the amount
of P154,800.00;

(b) That these checks which had an aggregate amount of P267,692.50 were payable to the order of JRT
Construction and Trading, the name and style under which Templonuevo does business;

(c) That despite the lack of endorsement of the designated payee upon such checks, Salazar was able to
deposit the checks in her personal savings account with petitioner and encash the same;

(d) That petitioner accepted and paid the checks on three (3) separate occasions over a span of eight
months in 1990; and

(e) That Templonuevo only protested the purportedly unauthorized encashment of the checks after the lapse
of one year from the date of the last check.10

Petitioner concedes that when it credited the value of the checks to the account of private respondent Salazar, it
made a mistake because it failed to notice the lack of endorsement thereon by the designated payee. The CA,
however, did not lend credence to this claim and concluded that petitioner’s actions were deliberate, in view of its
admission that the "mistake" was committed three times on three separate occasions, indicating acquiescence to
the internal arrangement between Salazar and Templonuevo. The CA explained thus:

It was quite apparent that the three checks which appellee Salazar deposited were not indorsed. Three times she
deposited them to her account and three times the amounts borne by these checks were credited to the same. And
in those separate occasions, the bank did not return the checks to her so that she could have them indorsed.
Neither did the bank question her as to why she was depositing the checks to her account considering that she was
not the payee thereof, thus allowing us to come to the conclusion that defendant-appellant BPI was fully aware that
the proceeds of the three checks belong to appellee.

For if the bank was not privy to the agreement between Salazar and Templonuevo, it is most unlikely that appellant
BPI (or any bank for that matter) would have accepted the checks for deposit on three separate times nary any
question. Banks are most finicky over accepting checks for deposit without the corresponding indorsement by their
payee. In fact, they hesitate to accept indorsed checks for deposit if the depositor is not one they know very well. 11

The CA likewise sustained Salazar’s position that she received the checks from Templonuevo pursuant to an
internal arrangement between them, ratiocinating as follows:

If there was indeed no arrangement between Templonuevo and the plaintiff over the three questioned checks, it
baffles us why it was only on August 31, 1991 or more than a year after the third and last check was deposited that
he demanded for the refund of the total amount of P267,692.50.
A prudent man knowing that payment is due him would have demanded payment by his debtor from the moment the
same became due and demandable. More so if the sum involved runs in hundreds of thousand of pesos. By and
large, every person, at the very moment he learns that he was deprived of a thing which rightfully belongs to him,
would have created a big fuss. He would not have waited for a year within which to do so. It is most inconceivable
that Templonuevo did not do this.12

Generally, only questions of law may be raised in an appeal by certiorari under Rule 45 of the Rules of
Court.13 Factual findings of the CA are entitled to great weight and respect, especially when the CA affirms the
factual findings of the trial court. 14 Such questions on whether certain items of evidence should be accorded
probative value or weight, or rejected as feeble or spurious, or whether or not the proofs on one side or the other are
clear and convincing and adequate to establish a proposition in issue, are questions of fact. The same holds true for
questions on whether or not the body of proofs presented by a party, weighed and analyzed in relation to contrary
evidence submitted by the adverse party may be said to be strong, clear and convincing, or whether or not
inconsistencies in the body of proofs of a party are of such gravity as to justify refusing to give said proofs weight –
all these are issues of fact which are not reviewable by the Court. 15

This rule, however, is not absolute and admits of certain exceptions, namely: a) when the conclusion is a finding
grounded entirely on speculations, surmises, or conjectures; b) when the inference made is manifestly mistaken,
absurd, or impossible; c) when there is a grave abuse of discretion; d) when the judgment is based on a
misapprehension of facts; e) when the findings of fact are conflicting; f) when the CA, in making its findings, went
beyond the issues of the case and the same are contrary to the admissions of both appellant and appellee; g) when
the findings of the CA are contrary to those of the trial court; h) when the findings of fact are conclusions without
citation of specific evidence on which they are based; i) when the finding of fact of the CA is premised on the
supposed absence of evidence but is contradicted by the evidence on record; and j) when the CA manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a
different conclusion.16

In the present case, the records do not support the finding made by the CA and the trial court that a prior
arrangement existed between Salazar and Templonuevo regarding the transfer of ownership of the checks. This
fact is crucial as Salazar’s entitlement to the value of the instruments is based on the assumption that she is a
transferee within the contemplation of Section 49 of the Negotiable Instruments Law.

Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee or indorsee delivers a
negotiable instrument for value without indorsing it, thus:

Transfer without indorsement; effect of- Where the holder of an instrument payable to his order transfers it for value
without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee
acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether
the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually
made. 17

It bears stressing that the above transaction is an equitable assignment and the transferee acquires the instrument
subject to defenses and equities available among prior parties. Thus, if the transferor had legal title, the transferee
acquires such title and, in addition, the right to have the indorsement of the transferor and also the right, as holder of
the legal title, to maintain legal action against the maker or acceptor or other party liable to the transferor. The
underlying premise of this provision, however, is that a valid transfer of ownership of the negotiable instrument in
question has taken place.

Transferees in this situation do not enjoy the presumption of ownership in favor of holders since they are neither
payees nor indorsees of such instruments. The weight of authority is that the mere possession of a negotiable
instrument does not in itself conclusively establish either the right of the possessor to receive payment, or of the
right of one who has made payment to be discharged from liability. Thus, something more than mere possession by
persons who are not payees or indorsers of the instrument is necessary to authorize payment to them in the
absence of any other facts from which the authority to receive payment may be inferred. 18

The CA and the trial court surmised that the subject checks belonged to private respondent Salazar based on the
pre-trial stipulation that Templonuevo incurred a one-year delay in demanding reimbursement for the proceeds of
the same. To the Court’s mind, however, such period of delay is not of such unreasonable length as to estop
Templonuevo from asserting ownership over the checks especially considering that it was readily apparent on the
face of the instruments19 that these were crossed checks.

In State Investment House v. IAC,20 the Court enumerated the effects of crossing a check, thus: (1) that the check
may not be encashed but only deposited in the bank; (2) that the check may be negotiated only once - to one who
has an account with a bank; and (3) that the act of crossing the check serves as a warning to the holder that the
check has been issued for a definite purpose so that such holder must inquire if the check has been received
pursuant to that purpose.

Thus, even if the delay in the demand for reimbursement is taken in conjunction with Salazar’s possession of the
checks, it cannot be said that the presumption of ownership in Templonuevo’s favor as the designated payee
therein was sufficiently overcome. This is consistent with the principle that if instruments payable to named payees
or to their order have not been indorsed in blank, only such payees or their indorsees can be holders and entitled to
receive payment in their own right. 21

The presumption under Section 131(s) of the Rules of Court stating that a negotiable instrument was given for a
sufficient consideration will not inure to the benefit of Salazar because the term "given" does not pertain merely to a
transfer of physical possession of the instrument. The phrase "given or indorsed" in the context of a negotiable
instrument refers to the manner in which such instrument may be negotiated. Negotiable instruments are negotiated
by "transfer to one person or another in such a manner as to constitute the transferee the holder thereof. If payable
to bearer it is negotiated by delivery. If payable to order it is negotiated by the indorsement completed by
delivery."22 The present case involves checks payable to order. Not being a payee or indorsee of the checks,
private respondent Salazar could not be a holder thereof.

It is an exception to the general rule for a payee of an order instrument to transfer the instrument without
indorsement. Precisely because the situation is abnormal, it is but fair to the maker and to prior holders to require
possessors to prove without the aid of an initial presumption in their favor, that they came into possession by virtue
of a legitimate transaction with the last holder. 23 Salazar failed to discharge this burden, and the return of the check
proceeds to Templonuevo was therefore warranted under the circumstances despite the fact that Templonuevo may
not have clearly demonstrated that he never authorized Salazar to deposit the checks or to encash the same.
Noteworthy also is the fact that petitioner stamped on the back of the checks the words: "All prior endorsements
and/or lack of endorsements guaranteed," thereby making the assurance that it had ascertained the genuineness of
all prior endorsements. Having assumed the liability of a general indorser, petitioner’s liability to the designated
payee cannot be denied.

Consequently, petitioner, as the collecting bank, had the right to debit Salazar’s account for the value of the checks
it previously credited in her favor. It is of no moment that the account debited by petitioner was different from the
original account to which the proceeds of the check were credited because both admittedly belonged to Salazar, the
former being the account of the sole proprietorship which had no separate and distinct personality from her, and the
latter being her personal account.

The right of set-off was explained in Associated Bank v. Tan:24

A bank generally has a right of set-off 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
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
compensation under Article 1278 of the Civil Code may take place "when all the requisites mentioned in Article 1279
are present," as follows:

(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.

While, however, it is conceded that petitioner had the right of set-off over the amount it paid to Templonuevo against
the deposit of Salazar, the issue of whether it acted judiciously is an entirely different matter. 25 As businesses
affected with public interest, and because of the nature of their functions, banks are under obligation to treat the
accounts of their depositors with meticulous care, always having in mind the fiduciary nature of their relationship. 26 In
this regard, petitioner was clearly remiss in its duty to private respondent Salazar as its depositor.

To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of indorsement
thereon, petitioner permitted the encashment of these checks three times on three separate occasions. This
negates petitioner’s claim that it merely made a mistake in crediting the value of the checks to Salazar’s account
and instead bolsters the conclusion of the CA that petitioner recognized Salazar’s claim of ownership of checks and
acted deliberately in paying the same, contrary to ordinary banking policy and practice. It must be emphasized that
the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of
determining their genuineness and regularity. The collecting bank, being primarily engaged in banking, holds itself
out to the public as the expert on this field, and the law thus holds it to a high standard of conduct. 27 The taking and
collection of a check without the proper indorsement amount to a conversion of the check by the bank. 28

More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge of the brewing
dispute between Salazar and Templonuevo, petitioner debited the account held in the name of the sole
proprietorship of Salazar without even serving due notice upon her. This ran contrary to petitioner’s assurances to
private respondent Salazar that the account would remain untouched, pending the resolution of the controversy
between her and Templonuevo. 29 In this connection, the CA cited the letter dated September 5, 1991 of Mr. Manuel
Ablan, Senior Manager of petitioner bank’s Pasig/Ortigas branch, to private respondent Salazar informing her that
her account had been frozen, thus:

From the tenor of the letter of Manuel Ablan, it is safe to conclude that Account No. 0201-0588-48 will remain frozen
or untouched until herein [Salazar] has settled matters with Templonuevo. But, in an unexpected move, in less than
two weeks (eleven days to be precise) from the time that letter was written, [petitioner] bank issued a cashier’s
check in the name of Julio R. Templonuevo of the J.R.T. Construction and Trading for the sum of P267,692.50
(Exhibit "8") and debited said amount from Ms. Arcilla’s account No. 0201-0588-48 which was supposed to be
frozen or controlled. Such a move by BPI is, to Our minds, a clear case of negligence, if not a fraudulent, wanton
and reckless disregard of the right of its depositor.

The records further bear out the fact that respondent Salazar had issued several checks drawn against the account
of A.A. Salazar Construction and Engineering Services prior to any notice of deduction being served. The CA
sustained private respondent Salazar’s claim of damages in this regard:

The act of the bank in freezing and later debiting the amount of P267,692.50 from the account of A.A. Salazar
Construction and Engineering Services caused plaintiff-appellee great damage and prejudice particularly when she
had already issued checks drawn against the said account. As can be expected, the said checks bounced. To prove
this, plaintiff-appellee presented as exhibits photocopies of checks dated September 8, 1991, October 28, 1991, and
November 14, 1991 (Exhibits "D", "E" and "F" respectively) 30

These checks, it must be emphasized, were subsequently dishonored, thereby causing private respondent Salazar
undue embarrassment and inflicting damage to her standing in the business community. Under the circumstances,
she was clearly not given the opportunity to protect her interest when petitioner unilaterally withdrew the above
amount from her account without informing her that it had already done so.

For the above reasons, the Court finds no reason to disturb the award of damages granted by the CA against
petitioner. This whole incident would have been avoided had petitioner adhered to the standard of diligence
expected of one engaged in the banking business. A depositor has the right to recover reasonable moral damages
even if the bank’s negligence may not have been attended with malice and bad faith, if the former suffered mental
anguish, serious anxiety, embarrassment and humiliation. 31 Moral damages are not meant to enrich a complainant at
the expense of defendant. It is only intended to alleviate the moral suffering she has undergone. The award of
exemplary damages is justified, on the other hand, when the acts of the bank are attended by malice, bad faith or
gross negligence. The award of reasonable attorney’s fees is proper where exemplary damages are awarded. It is
proper where depositors are compelled to litigate to protect their interest. 32

WHEREFORE, the petition is partially GRANTED. The assailed Decision dated April 3, 1998 and Resolution dated
April 3, 1998 rendered by the Court of Appeals in CA-G.R. CV No. 42241 are MODIFIED insofar as it ordered
petitioner Bank of the Philippine Islands to return the amount of Two Hundred Sixty-seven Thousand Seven
Hundred and Seven and 70/100 Pesos (P267,707.70) to respondent Annabelle A. Salazar, which portion
is REVERSED and SET ASIDE. In all other respects, the same are AFFIRMED.

No costs.

SO ORDERED.

UNION BANK V. DBP

Republic of the Philippines

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 Court’s Ruling

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:

(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.  (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.
6. NOVATION

FUA V. YAP

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-48797             July 30, 1943

FUA CAM LU, plaintiff-appellee,

vs.
YAP FAUCO and YAP SINGCO, defendants-appellants.

Vicente J. Francisco for petitioner.

M.H. de Joya for respondents.

The plaintiff-appellee, Fua Cam Lu, obtained in civil case No. 42125 of the Court of First Instance of Manila a
judgment sentencing the defendants-appellants, Yap Fauco and Yap Singco, to pay P1,538.04 with legal interest
and costs. By virtue of a writ of execution, a certain parcel of land belonging to the appellants, assessed at P3,550
and situated in Donsol, Sorsogon was levied upon the provincial sheriff of Sorsogon who, on November 15, 1933,
made a notice, duly posted in three conspicuous places in the municipalities of Donsol and Sorsogon and published
in the Mamera Press, that said land would be sold at public auction on December 12, 1933. On December 16, 1933,
the appellants executed a mortgage in favor of the appellee, wherein it was stipulated that their obligation under the
judgment in civil case No. 41225 was reduced to P1,200 which was made payable in four installments of P300
during the period commencing on February 8, 1934, and ending on August 8, 1935l that to secure the payment of
the said P1,200, a camarin belonging to the appellants and built on the above-mentioned land, was mortgaged to
the appellee; that in case the appellants defaulted in the payment of any of the installments, they would pay ten per
cent of the unpaid balance as attorney's fees. plus the costs of the action to be brought by the appellee by reason of
such default, and the further amount of P338, representing the discount conceded to the appellants. As a result of
the agreement thus reached by the parties, the sale of the land advertised by the provincial sheriff did not take
place. However, pursuant to an alias writ of execution issued by the Court of First instance of manila in civil case
No. 42125 on March 31, 1934, the provincial sheriff, without publishing a new notice, sold said land at a public
auction held on May 28, 1934, to the appellee for P1,923.32. On June 13, 1935, the provincial sheriff executed a
final deed in favor of the appellee. On August 29, 1939, the appellee instituted the present action in the Court of
First Instance of Sorsogon against the appellants in view of their refusal to recognize appellee's title and to vacate
the land. The appellants relied on the legal defenses that their obligation under the judgment in civil case No. 42125
was novated by the mortgage executed by them in favor of the appellee and that the sheriffs sale was void for lack
of necessary publication. These contentions were overruled by the lower court which rendered judgment declaring
the appellee to be the owner of the land and ordering the appellants to deliver the same to him, without special
pronouncement as to costs. The appellants seek the reversal of this judgment.

We concur in the theory that appellants liability under the judgment in civil case No. 42125 had been extinguished
by the settlement evidenced by the mortgage executed by them in favor of the appellee on December 16, 1933.
Although said mortgage did not expressly cancel the old obligation, this was impliedly novated by reason of
incompatibly resulting from the fact that, whereas the judgment was for P1,538.04 payable at one time, did not
provide for attorney's fees, and was not secured, the new obligation is or P1,200 payable in installments, stipulated
for attorney's fees, and is secured by a mortgage. The appellee, however, argues that the later agreement merely
extended the time of payment and did not take away his concurrent right to have the judgment executed. This court
not have been the purpose for executive the mortgage, because it was therein recited that the appellants promised
to pay P1,200 to the appellee as a settlement of the judgment in civil case No. 42125 (en forma de transaccion de la
decision . . . en el asunto civil No. 42125). Said judgment cannot be said to have been settled, unless it was
extinguished.

Moreover, the sheriff's sale in favor of the appellee is void because no notice thereof was published other than that
which appeared in the Mamera Press regarding the sale to be held on December 12, 1933. Lack of new publication
is shown by appellee's own evidence and the issue, though not raised in the pleadings, was thereby tried by implied
consent of the parties, emphasized by the appellants in the memorandum filed by them in the lower court and
squarely threshed out in this Court by both the appellants and the appellee. The latter had, besides, admitted that
there was no new publication, and so much so that in his brief he merely resorted to the argument that "section 460
of Act 190 authorized the sheriff to adjourn any sale upon execution to any date agreed upon in writing by the
parties . . . and does not require the sheriff to publish anew the public sale which was adjourned." The appellee has
correctly stated the law but has failed to show that it supports his side, for it is not pretended that there was any
written agreement between the parties to adjourn the sale advertised for December 12, 1933, to May 28, 1934.
Neither may it be pretended that the sale in favor of the appellee was by virtue of a mere adjournment, it appearing
that it was made pursuant to an alias writ of execution. Appellee's admission has thus destroyed the legal
presumption that official duty was regularly performed.

The appealed judgment is, therefore, reversed and the defendants-appellants, who are hereby declared to be the
owners of the land in question are absolved from the complaint, with costs against the appellee. So ordered.

Yulo, C.J., Ozaeta and Bocobo, JJ., concur.

JAPAN AIRLINES V. SIMANGAN

Republic of the Philippines

SUPREME COURT
Baguio City

THIRD DIVISION

G.R. No. 170141             April 22, 2008

JAPAN AIRLINES, petitioner,
vs.
JESUS SIMANGAN, respondent.

DECISION

REYES R.T., J.:

WHEN an airline issues a ticket to a passenger confirmed on a particular flight on a certain date, a contract of
carriage arises, and the passenger has every right to expect that he would fly on that flight and on that date. If he
does not, then the carrier opens itself to a suit for breach of contract of carriage. 1

The power to admit or not an alien into the country is a sovereign act which cannot be interfered with even by Japan
Airlines (JAL).2
In this petition for review on certiorari,3 petitioner JAL appeals the: (1) Decision 4 dated May 31, 2005 of the Court of
Appeals (CA) ordering it to pay respondent Jesus Simangan moral and exemplary damages; and (2) Resolution 5 of
the same court dated September 28, 2005 denying JAL's motion for reconsideration.

The Facts

In 1991, respondent Jesus Simangan decided to donate a kidney to his ailing cousin, Loreto Simangan, in UCLA
School of Medicine in Los Angeles, California, U.S.A. Upon request of UCLA, respondent undertook a series of
laboratory tests at the National Kidney Institute in Quezon City to verify whether his blood and tissue type are
compatible with Loreto's.6 Fortunately, said tests proved that respondent's blood and tissue type were well-matched
with Loreto's.7

Respondent needed to go to the United States to complete his preliminary work-up and donation surgery. Hence, to
facilitate respondent's travel to the United States, UCLA wrote a letter to the American Consulate in Manila to
arrange for his visa. In due time, respondent was issued an emergency U.S. visa by the American Embassy in
Manila.8

Having obtained an emergency U.S. visa, respondent purchased a round trip plane ticket from petitioner JAL for
US$1,485.00 and was issued the corresponding boarding pass. 9 He was scheduled to a particular flight bound for
Los Angeles, California, U.S.A. via Narita, Japan. 10

On July 29, 1992, the date of his flight, respondent went to Ninoy Aquino International Airport in the company of
several relatives and friends. 11 He was allowed to check-in at JAL's counter. 12 His plane ticket, boarding pass, travel
authority and personal articles were subjected to rigid immigration and security routines. 13 After passing through said
immigration and security procedures, respondent was allowed by JAL to enter its airplane. 14

While inside the airplane, JAL's airline crew suspected respondent of carrying a falsified travel document and
imputed that he would only use the trip to the United States as a pretext to stay and work in Japan. 15 The
stewardess asked respondent to show his travel documents. Shortly after, the stewardess along with a Japanese
and a Filipino haughtily ordered him to stand up and leave the plane. 16 Respondent protested, explaining that he
was issued a U.S. visa. Just to allow him to board the plane, he pleaded with JAL to closely monitor his movements
when the aircraft stops over in Narita. 17 His pleas were ignored. He was then constrained to go out of the plane. 18 In
a nutshell, respondent was bumped off the flight.

Respondent went to JAL's ground office and waited there for three hours. Meanwhile, the plane took off and he was
left behind.19 Afterwards, he was informed that his travel documents were, indeed, in order. 20 Respondent was
refunded the cost of his plane ticket less the sum of US$500.00 which was deducted by JAL. 21 Subsequently,
respondent's U.S. visa was cancelled. 22

Displeased by the turn of events, respondent filed an action for damages against JAL with the Regional Trial Court
(RTC) in Valenzuela City, docketed as Civil Case No. 4195-V-93. He claimed he was not able to donate his kidney
to Loreto; and that he suffered terrible embarrassment and mental anguish. 23 He prayed that he be awarded P3
million as moral damages, P1.5 million as exemplary damages and P500,000.00 as attorney's fees.24

JAL denied the material allegations of the complaint. It argued, among others, that its failure to allow respondent to
fly on his scheduled departure was due to "a need for his travel documents to be authenticated by the United States
Embassy"25 because no one from JAL's airport staff had encountered a parole visa before. 26 It posited that the
authentication required additional time; that respondent was advised to take the flight the following day, July 30,
1992. JAL alleged that respondent agreed to be rebooked on July 30, 1992. 27
JAL also lodged a counterclaim anchored on respondent's alleged wrongful institution of the complaint. It prayed for
litigation expenses, exemplary damages and attorney's fees. 28

On September 21, 2000, the RTC presided by Judge Floro P. Alejo rendered its decision in favor of respondent
(plaintiff), disposing as follows:

WHEREFORE, judgment is hereby rendered ordering the defendant to pay the plaintiff the amount
of P1,000,000.00 as moral damages, the amount of P500,000.00 as exemplary damages and the amount
of P250,000.00 as attorney's fees, plus the cost of suit. 29

The RTC explained:

In summarily and insolently ordering the plaintiff to disembark while the latter was already settled in his
assigned seat, the defendant violated the contract of carriage; that when the plaintiff was ordered out of the
plane under the pretext that the genuineness of his travel documents would be verified it had caused him
embarrassment and besmirched reputation; and that when the plaintiff was finally not allowed to take the
flight, he suffered more wounded feelings and social humiliation for which the plaintiff was asking to be
awarded moral and exemplary damages as well as attorney's fees.

The reason given by the defendant that what prompted them to investigate the genuineness of the travel
documents of the plaintiff was that the plaintiff was not then carrying a regular visa but just a letter does not
appear satisfactory. The defendant is engaged in transporting passengers by plane from country to country
and is therefore conversant with the travel documents. The defendant should not be allowed to pretend, to
the prejudice of the plaintiff not to know that the travel documents of the plaintiff are valid documents to allow
him entry in the United States.

The foregoing act of the defendant in ordering the plaintiff to deplane while already settled in his assigned
seat clearly demonstrated that the defendant breached its contract of carriage with the plaintiff as passenger
in bad faith and as such the plaintiff is entitled to moral and exemplary damages as well as to an award of
attorney's fees.30

Disagreeing with the RTC judgment, JAL appealed to the CA contending that it is not guilty of breach of contract of
carriage, hence, not liable for damages.31 It posited that it is the one entitled to recover on its counterclaim. 32

CA Ruling

In a Decision33 dated May 31, 2005, the CA affirmed the decision of the RTC with modification in that it lowered the
amount of moral and exemplary damages and deleted the award of attorney's fees. The fallo of the CA decision
reads:

WHEREFORE, the appealed Decision is AFFIRMED with MODIFICATION. Appellant JAPAN AIR LINES is
ordered to pay appellee JESUS SIMANGAN the reduced sums, as follows: Five Hundred Thousand Pesos
(P500,000.00) as moral damages, and Two Hundred Fifty Thousand Pesos (P250,000.00) as exemplary
damages. The award of attorney's fees is hereby DELETED. 34

The CA elucidated that since JAL issued to respondent a round trip plane ticket for a lawful consideration, "there
arose a perfected contract between them." 35 It found that respondent was "haughtily ejected" 36 by JAL and that "he
was certainly embarrassed and humiliated" 37 when, in the presence of other passengers, JAL's airline staff "shouted
at him to stand up and arrogantly asked him to produce his travel papers, without the least courtesy every human
being is entitled to";38 and that "he was compelled to deplane on the grounds that his papers were fake." 39
The CA ratiocinated:

While the protection of passengers must take precedence over convenience, the implementation of security
measures must be attended by basic courtesies.

In fact, breach of the contract of carriage creates against the carrier a presumption of liability, by a simple
proof of injury, relieving the injured passenger of the duty to establish the fault of the carrier or of his
employees; and placing on the carrier the burden to prove that it was due to an unforeseen event or to  force
majeure.

That appellee possessed bogus travel documents and that he might stay illegally in Japan are allegations
without substantiation. Also, appellant's attempt to rebook appellee the following day was too late and did
not relieve it from liability. The damage had been done. Besides, its belated theory of novation, i.e., that
appellant's original obligation to carry appellee to Narita and Los Angeles on July 29, 1992 was extinguished
by novation when appellant and appellant agreed that appellee will instead take appellant's flight to Narita
on the following day, July 30, 1992, deserves little attention. It is inappropriate at bar. Questions not taken
up during the trial cannot be raised for the first time on appeal. 40 (Underscoring ours and citations were
omitted)

Citing Ortigas, Jr. v. Lufthansa German Airlines,41 the CA declared that "(i)n contracts of common carriage,
inattention and lack of care on the part of the carrier resulting in the failure of the passenger to be accommodated in
the class contracted for amounts to bad faith or fraud which entitles the passengers to the award of moral damages
in accordance with Article 2220 of the Civil Code." 42

Nevertheless, the CA modified the damages awarded by the RTC. It explained:

Fundamental in the law on damages is that one injured by a breach of a contract, or by a wrongful or
negligent act or omission shall have a fair and just compensation commensurate to the loss sustained as
consequence of the defendant's act. Being discretionary on the court, the amount, however, should not be
palpably and scandalously excessive.

Here, the trial court's award of P1,000,000.00 as moral damages appears to be overblown. No other proof of
appellee's social standing, profession, financial capabilities was presented except that he was single and a
businessman. To Us, the sum of 500,000.00 is just and fair. For, moral damages are emphatically not
intended to enrich a complainant at the expense of the defendant. They are awarded only to enable the
injured party to obtain means, diversion or amusements that will serve to alleviate the moral suffering he has
undergone, by reason of the defendant's culpable action.

Moreover, the grant of P500,000.00 as exemplary damages needs to be reduced to a reasonable level. The
award of exemplary damages is designed to permit the courts to mould behavior that has socially
deleterious consequences and its imposition is required by public policy to suppress the wanton acts of the
offender. Hence, the sum of P250,000.00 is adequate under the circumstances.

The award of P250,000.00 as attorney's fees lacks factual basis. Appellee was definitely compelled to
litigate in protecting his rights and in seeking relief from appellant's misdeeds. Yet, the record is devoid of
evidence to show the cost of the services of his counsel and/or the actual expenses incurred in prosecuting
his action.43 (Citations were omitted)

When JAL's motion for reconsideration was denied, it resorted to the petition at bar.

Issues
JAL poses the following issues -

I.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT RESPONDENT WAS
ENTITLED TO MORAL DAMAGES, CONSIDERING THAT:

A. JAL WAS NOT GUILTY OF BREACH OF CONTRACT.

B. MORAL DAMAGES MAY BE AWARDED IN BREACH OF CONTRACT CASES ONLY WHEN

THE BREACH IS ATTENDED BY FRAUD OR BAD FAITH. ASSUMING ARGUENDO THAT JAL
WAS GUILTY OF BREACH, JAL DID NOT ACT FRAUDULENTLY OR IN BAD FAITH AS TO
ENTITLE RESPONDENT TO MORAL DAMAGES.

C. THE LAW DISTINGUISHES A CONTRACTUAL BREACH EFFECTED IN GOOD FAITH FROM

ONE ATTENDED BY BAD FAITH.

II.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT RESPONDENT WAS
ENTITLED TO EXEMPLARY DAMAGES CONSIDERING THAT:

A. EXEMPLARY DAMAGES ARE NOT RECOVERABLE IN BREACH OF CONTRACT OF

CARRIAGE UNLESS THE CARRIER IS GUILTY OF WANTON, FRAUDULENT, RECKLESS,
OPPRESSIVE OR MALEVOLENT CONDUCT.

B. ASSUMING ARGUENDO THAT JAL WAS GUILTY OF BREACH, JAL DID NOT ACT IN A

WANTON FRAUDULENT, RECKLESS, OPPRESSIVE OR MALEVOLENT MANNER AS TO
ENTITLE RESPONDENT TO EXEMPLARY DAMAGES.

III.

ASSUMING ARGUENDO THAT RESPONDENT WAS ENTITLED TO AN AWARD OF DAMAGES,

WHETHER OR NOT THE COURT OF APPEALS AWARD OF P750,000 IN DAMAGES WAS
EXCESSIVE AND UNPRECEDENTED.

IV.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT FINDING FOR JAL ON
ITS COUNTERCLAIM.44 (Underscoring Ours)

Basically, there are three (3) issues to resolve here: (1) whether or not JAL is guilty of contract of carriage; (2)
whether or not respondent is entitled to moral and exemplary damages; and (3) whether or not JAL is entitled to its
counterclaim for damages.

Our Ruling

This Court is not a trier of facts.

Chiefly, the issues are factual. The RTC findings of facts were affirmed by the CA. The CA also gave its nod to the
reasoning of the RTC except as to the awards of damages, which were reduced, and that of attorney's fees, which
was deleted.

We are not a trier of facts. We generally rely upon, and are bound by, the conclusions on this matter of the lower
courts, which are better equipped and have better opportunity to assess the evidence first-hand, including the
testimony of the witnesses.45

We have repeatedly held that the findings of fact of the CA are final and conclusive and cannot be reviewed on
appeal to the Supreme Court provided they are based on substantial evidence. 46 We have no jurisdiction, as a rule,
to reverse their findings. 47 Among the exceptions to this rule are: (a) when the conclusion is a finding grounded
entirely on speculations, surmises or conjectures; (b) when the inference made is manifestly mistaken, absurd or
impossible; (c) where there is grave abuse of discretion; (d) when the judgment is based on a misapprehension of
facts; (e) when the findings of facts are conflicting; (f) when the CA, in making its findings, went beyond the issues of
the case and the same is contrary to the admissions of both appellant and appellee. 48

The said exceptions, which are being invoked by JAL, are not found here. There is no indication that the findings of
the CA are contrary to the evidence on record or that vital testimonies of JAL's witnesses were disregarded. Neither
did the CA commit misapprehension of facts nor did it fail to consider relevant facts. Likewise, there was no grave
abuse of discretion in the appreciation of facts or mistaken and absurd inferences.

We thus sustain the coherent facts as established by the courts below, there being no sufficient showing that the
said courts committed reversible error in reaching their conclusions.

JAL is guilty of breach of

contract of carriage.

That respondent purchased a round trip plane ticket from JAL and was issued the corresponding boarding pass is
uncontroverted.49 His plane ticket, boarding pass, travel authority and personal articles were subjected to rigid
immigration and security procedure. 50 After passing through said immigration and security procedure, he was
allowed by JAL to enter its airplane to fly to Los Angeles, California, U.S.A. via Narita, Japan. 51 Concisely, there was
a contract of carriage between JAL and respondent.

Nevertheless, JAL made respondent get off the plane on his scheduled departure on July 29, 1992. He was not
allowed by JAL to fly. JAL thus failed to comply with its obligation under the contract of carriage.

JAL justifies its action by arguing that there was "a need to verify the authenticity of respondent's travel
document."52 It alleged that no one from its airport staff had encountered a parole visa before. 53 It further contended
that respondent agreed to fly the next day so that it could first verify his travel document, hence, there was
novation.54 It maintained that it was not guilty of breach of contract of carriage as respondent was not able to travel
to the United States due to his own voluntary desistance. 55

We cannot agree. JAL did not allow respondent to fly. It informed respondent that there was a need to first check the
authenticity of his travel documents with the U.S. Embassy. 56 As admitted by JAL, "the flight could not wait for Mr.
Simangan because it was ready to depart."57

Since JAL definitely declared that the flight could not wait for respondent, it gave respondent no choice but to be left
behind. The latter was unceremoniously bumped off despite his protestations and valid travel documents and
notwithstanding his contract of carriage with JAL. Damage had already been done when respondent was offered to
fly the next day on July 30, 1992. Said offer did not cure JAL's default.
Considering that respondent was forced to get out of the plane and left behind against his will, he could not have
freely consented to be rebooked the next day. In short, he did not agree to the alleged novation. Since novation
implies a waiver of the right the creditor had before the novation, such waiver must be express. 58 It cannot be
supposed, without clear proof, that respondent had willingly done away with his right to fly on July 29, 1992.

Moreover, the reason behind the bumping off incident, as found by the RTC and CA, was that JAL personnel
imputed that respondent would only use the trip to the United States as a pretext to stay and work in Japan. 59

Apart from the fact that respondent's plane ticket, boarding pass, travel authority and personal articles already
passed the rigid immigration and security routines, 60 JAL, as a common carrier, ought to know the kind of valid travel
documents respondent carried. As provided in Article 1755 of the New Civil Code: "A common carrier is bound to
carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very
cautious persons, with a due regard for all the circumstances."61 Thus, We find untenable JAL's defense of
"verification of respondent's documents" in its breach of contract of carriage.

It bears repeating that the power to admit or not an alien into the country is a sovereign act which cannot be
interfered with even by JAL.62

In an action for breach of contract of carriage, all that is required of plaintiff is to prove the existence of such contract
and its non-performance by the carrier through the latter's failure to carry the passenger safely to his
destination.63 Respondent has complied with these twin requisites.

Respondent is entitled to moral and exemplary damages and attorney's fees plus legal interest.

With reference to moral damages, JAL alleged that they are not recoverable in actions ex contractu except only
when the breach is attended by fraud or bad faith. It is contended that it did not act fraudulently or in bad faith
towards respondent, hence, it may not be held liable for moral damages.

As a general rule, moral damages are not recoverable in actions for damages predicated on a breach of contract for
it is not one of the items enumerated under Article 2219 of the Civil Code. 64 As an exception, such damages are
recoverable: (1) in cases in which the mishap results in the death of a passenger, as provided in Article 1764, in
relation to Article 2206(3) of the Civil Code; and (2) in the cases in which the carrier is guilty of fraud or bad faith, as
provided in Article 2220.65

The acts committed by JAL against respondent amounts to bad faith. As found by the RTC, JAL breached its
contract of carriage with respondent in bad faith. JAL personnel summarily and insolently ordered respondent to
disembark while the latter was already settled in his assigned seat. He was ordered out of the plane under the
alleged reason that the genuineness of his travel documents should be verified.

These findings of facts were upheld by the CA, to wit:

x x x he was haughtily ejected by appellant. He was certainly embarrassed and humiliated when, in the
presence of other passengers, the appellant's airline staff shouted at him to stand up and arrogantly asked
him to produce his travel papers, without the least courtesy every human being is entitled to. Then,  he was
compelled to deplane on the grounds that his papers were fake. His protestation of having been issued a
U.S. visa coupled with his plea to appellant to closely monitor his movements when the aircraft stops over in
Narita, were ignored. Worse, he was made to wait for many hours at the office of appellant only to be told
later that he has valid travel documents.66 (Underscoring ours)

Clearly, JAL is liable for moral damages. It is firmly settled that moral damages are recoverable in suits predicated
on breach of a contract of carriage where it is proved that the carrier was guilty of fraud or bad faith, as in this case.
Inattention to and lack of care for the interests of its passengers who are entitled to its utmost consideration,
particularly as to their convenience, amount to bad faith which entitles the passenger to an award of moral
damages. What the law considers as bad faith which may furnish the ground for an award of moral damages would
be bad faith in securing the contract and in the execution thereof, as well as in the enforcement of its terms, or any
other kind of deceit.67

JAL is also liable for exemplary damages as its above-mentioned acts constitute wanton, oppressive and malevolent
acts against respondent. Exemplary damages, which are awarded by way of example or correction for the public
good, may be recovered in contractual obligations, as in this case, if defendant acted in wanton, fraudulent,
reckless, oppressive, or malevolent manner.68

Exemplary damages are designed by our civil law to permit the courts to reshape behaviour that is socially
deleterious in its consequence by creating negative incentives or deterrents against such behaviour. In requiring
compliance with the standard of extraordinary diligence, a standard which is, in fact, that of the highest possible
degree of diligence, from common carriers and in creating a presumption of negligence against them, the law seeks
to compel them to control their employees, to tame their reckless instincts and to force them to take adequate care
of human beings and their property.69

Neglect or malfeasance of the carrier's employees could give ground for an action for damages. Passengers have a
right to be treated by the carrier's employees with kindness, respect, courtesy and due consideration and are
entitled to be protected against personal misconduct, injurious language, indignities and abuses from such
employees.70

The assessment of P500,000.00 as moral damages and P100,000.00 as exemplary damages in respondent's favor
is, in Our view, reasonable and realistic. This award is reasonably sufficient to indemnify him for the humiliation and
embarrassment he suffered. This also serves as an example to discourage the repetition of similar oppressive acts.

With respect to attorney's fees, they may be awarded when defendant's act or omission has compelled plaintiff to
litigate with third persons or to incur expenses to protect his interest. 71 The Court, in Construction Development
Corporation of the Philippines v. Estrella,72 citing Traders Royal Bank Employees Union-Independent v. National
Labor Relations Commission,73 elucidated thus:

There are two commonly accepted concepts of attorney's fees, the so-called ordinary and extraordinary. In
its ordinary concept, an attorney's fee is the reasonable compensation paid to a lawyer by his client for the
legal services he has rendered to the latter. The basis of this compensation is the fact of his employment by
and his agreement with the client.

In its extraordinary concept, an attorney's fee is an indemnity for damages ordered by the court to
be paid by the losing party in a litigation. The basis of this is any of the cases provided by law where
such award can be made, such as those authorized in Article 2208, Civil Code, and is payable not to the
lawyer but to the client, unless they have agreed that the award shall pertain to the lawyer as
additional compensation or as part thereof.74

It was therefore erroneous for the CA to delete the award of attorney's fees on the ground that the record is devoid
of evidence to show the cost of the services of respondent's counsel. The amount is actually discretionary upon the
Court so long as it passes the test of reasonableness. They may be recovered as actual or compensatory damages
when exemplary damages are awarded and whenever the court deems it just and equitable, 75 as in this case.

Considering the factual backdrop of this case, attorney's fees in the amount of P200,000.00 is reasonably modest.
The above liabilities of JAL in the total amount of P800,000.00 earn legal interest pursuant to the Court's ruling
in Construction Development Corporation of the Philippines v. Estrella,76 citing Eastern Shipping Lines, Inc. v. Court
of Appeals,77 to wit:

Regarding the imposition of legal interest at the rate of 6% from the time of the filing of the complaint, we
held in Eastern Shipping Lines, Inc. v. Court of Appeals, that 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 payment of interest in the concept of actual and compensatory damages, subject to the following
rules, to wit -

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.78 (Emphasis supplied and
citations omitted)

Accordingly, in addition to the said total amount of P800,000.00, JAL is liable to pay respondent legal interest.
Pursuant to the above ruling of the Court, the legal interest is 6% and it shall be reckoned from September 21, 2000
when the RTC rendered its judgment. From the time this Decision becomes final and executory, the interest rate
shall be 12% until its satisfaction.

JAL is not entitled to its counterclaim for damages.

The counterclaim of JAL in its Answer 79 is a compulsory counterclaim for damages and attorney's fees arising from
the filing of the complaint. There is no mention of any other counter claims.

This compulsory counterclaim of JAL arising from the filing of the complaint may not be granted inasmuch as the
complaint against it is obviously not malicious or unfounded. It was filed by respondent precisely to claim his right to
damages against JAL. Well-settled is the rule that the commencement of an action does not per se make the action
wrongful and subject the action to damages, for the law could not have meant to impose a penalty on the right to
litigate.80
We reiterate case law that if damages result from a party's exercise of a right, it is damnum absque injuria.81 Lawful
acts give rise to no injury. Walang perhuwisyong maaring idulot ang paggamit sa sariling karapatan.

During the trial, however, JAL presented a witness who testified that JAL suffered further damages. Allegedly,
respondent caused the publications of his subject complaint against JAL in the newspaper for which JAL suffered
damages.82

Although these additional damages allegedly suffered by JAL were not incorporated in its Answer as they arose
subsequent to its filing, JAL's witness was able to testify on the same before the RTC. 83 Hence, although these
issues were not raised by the pleadings, they shall be treated in all respects as if they had been raised in the
pleadings.

As provided in Section 5, Rule 10 of the Rules of Court, "(w)hen issues not raised by the pleadings are tried with the
express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the
pleadings."

Nevertheless, JAL's counterclaim cannot be granted.

JAL is a common carrier. JAL's business is mainly with the traveling public. It invites people to avail themselves of
the comforts and advantages it offers.84 Since JAL deals with the public, its bumping off of respondent without a valid
reason naturally drew public attention and generated a public issue.

The publications involved matters about which the public has the right to be informed because they relate to a public
issue. This public issue or concern is a legitimate topic of a public comment that may be validly published.

Assuming that respondent, indeed, caused the publication of his complaint, he may not be held liable for damages
for it. The constitutional guarantee of freedom of the speech and of the press includes fair commentaries on matters
of public interest. This is explained by the Court in Borjal v. Court of Appeals,85 to wit:

To reiterate, fair commentaries on matters of public interest are privileged and constitute a valid defense in
an action for libel or slander. The doctrine of fair comment means that while in general every discreditable
imputation publicly made is deemed false, because every man is presumed innocent until his guilt is
judicially proved, and every false imputation is deemed malicious, nevertheless, when the discreditable
imputation is directed against a public person in his public capacity, it is not necessarily actionable. In order
that such discreditable imputation to a public official may be actionable, it must either be a false allegation of
fact or a comment based on a false supposition. If the comment is an expression of opinion, based on
established facts, then it is immaterial that the opinion happens to be mistaken, as long as it might
reasonably be inferred from the facts.86 (Citations omitted and underscoring ours)

Even though JAL is not a public official, the rule on privileged commentaries on matters of public interest applies to
it. The privilege applies not only to public officials but extends to a great variety of subjects, and includes matters of
public concern, public men, and candidates for office. 87

Hence, pursuant to the Borjal case, there must be an actual malice in order that a discreditable imputation to a
public person in his public capacity or to a public official may be actionable. To be considered malicious, the libelous
statements must be shown to have been written or published with the knowledge that they are false or in reckless
disregard of whether they are false or not.88

Considering that the published articles involve matters of public interest and that its expressed opinion is not
malicious but based on established facts, the imputations against JAL are not actionable. Therefore, JAL may not
claim damages for them.
WHEREFORE, the petition is DENIED. The appealed Decision of the Court of Appeals is AFFIRMED WITH
MODIFICATION. As modified, petitioner Japan Airlines is ordered to pay respondent Jesus Simangan the following:
(1) P500,000.00 as moral damages; (2) P100,000.00 as exemplary damages; and (3) P200,000.00 as attorney's
fees.

The total amount adjudged shall earn legal interest at the rate of 6% per annum from the date of judgment of the
Regional Trial Court on September 21, 2000 until the finality of this Decision. From the time this Decision becomes
final and executory, the unpaid amount, if any, shall earn legal interest at the rate of 12% per annum until its
satisfaction.

SO ORDERED.

ANAMER SALAZAR V. J.Y. BROTHERS MARKETING CORP

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 171998               October 20, 2010

ANAMER SALAZAR, Petitioner,
vs.
J.Y. BROTHERS MARKETING CORPORATION, Respondent.

DECISION

PERALTA, J.:

Before us is a petition for review seeking to annul and set aside the Decision 1 dated September 29, 2005 and the
Resolution2 dated March 2, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 83104.

The facts, as found by the Court of Appeals, are not disputed, thus:

J.Y. Brothers Marketing (J.Y. Bros., for short) is a corporation engaged in the business of selling sugar, rice and
other commodities. On October 15, 1996, Anamer Salazar, a freelance sales agent, was approached by Isagani
Calleja and Jess Kallos, if she knew a supplier of rice. Answering in the positive, Salazar accompanied the two to
J.Y. Bros. As a consequence, Salazar with Calleja and Kallos procured from J. Y. Bros. 300 cavans of rice worth
₱214,000.00. As payment, Salazar negotiated and indorsed to J.Y. Bros. Prudential Bank Check No. 067481 dated
October 15, 1996 issued by Nena Jaucian Timario in the amount of ₱214,000.00 with the assurance that the check
is good as cash. On that assurance, J.Y. Bros. parted with 300 cavans of rice to Salazar. However, upon
presentment, the check was dishonored due to "closed account."

Informed of the dishonor of the check, Calleja, Kallos and Salazar delivered to J.Y. Bros. a replacement cross Solid
Bank Check No. PA365704 dated October 29, 1996 again issued by Nena Jaucian Timario in the amount of
₱214,000.00 but which, just the same, bounced due to insufficient funds. When despite the demand letter dated
February 27, 1997, Salazar failed to settle the amount due J.Y. Bros., the latter charged Salazar and Timario with
the crime of estafa before the Regional Trial Court of Legaspi City, docketed as Criminal Case No. 7474.
After the prosecution rested its case and with prior leave of court, Salazar submitted a demurrer to evidence. On
November 19, 2001, the court a quo rendered an Order, the dispositive portion of which reads:

WHEREFORE, premises considered, the accused Anamer D. Salazar is hereby ACQUITTED of the crime charged
but is hereby held liable for the value of the 300 bags of rice. Accused Anamer D. Salazar is therefore ordered to
pay J.Y. Brothers Marketing Corporation the sum of ₱214,000.00. Costs against the accused.

SO ORDERED.

Aggrieved, accused attempted a reconsideration on the civil aspect of the order and to allow her to present
evidence thereon. The motion was denied. Accused went up to the Supreme Court on a petition for review on
certiorari under Rule 45 of the Rules of Court. Docketed as G.R. 151931, in its Decision dated September 23, 2003,
the High Court ruled:

IN LIGHT OF ALL THE FOREGOING, the Petition is GRANTED. The Orders dated November 19, 2001 and
January 14, 2002 are SET ASIDE and NULLIFIED. The Regional Trial Court of Legaspi City, Branch 5, is hereby
DIRECTED to set Criminal Case No. 7474 for the continuation of trial for the reception of the evidence-in-chief of the
petitioner on the civil aspect of the case and for the rebuttal evidence of the private complainant and the sur-rebuttal
evidence of the parties if they opt to adduce any.

SO ORDERED.3

The Regional Trial Court (RTC) of Legaspi City, Branch 5, then proceeded with the trial on the civil aspect of the
criminal case.

On April 1, 2004, the RTC rendered its Decision,4 the dispositive portion of which reads:

WHEREFORE, Premises Considered, judgment is rendered DISMISSING as against Anamer D. Salazar the civil
aspect of the above-entitled case. No pronouncement as to costs.

Place into the files (archive) the record of the above-entitled case as against the other accused Nena Jaucian
Timario. Let an alias (bench) warrant of arrest without expiry dated issue for her apprehension, and fix the amount
of the bail bond for her provisional liberty at 59,000.00 pesos.

SO ORDERED.5

The RTC found that the Prudential Bank check drawn by Timario for the amount of ₱214,000.00 was payable to the
order of respondent, and such check was a negotiable order instrument; that petitioner was not the payee appearing
in the check, but respondent who had not endorsed the check, much less delivered it to petitioner. It then found that
petitioner’s liability should be limited to the allegation in the amended information that "she endorsed and negotiated
said check," and since she had never been the holder of the check, petitioner's signing of her name on the face of
the dorsal side of the check did not produce the technical effect of an indorsement arising from negotiation. The
RTC ruled that after the Prudential Bank check was dishonored, it was replaced by a Solid Bank check which,
however, was also subsequently dishonored; that since the Solid Bank check was a crossed check, which meant
that such check was only for deposit in payee’s account, a condition that rendered such check non-negotiable, the
substitution of a non-negotiable Solid Bank check for a negotiable Prudential Bank check was an essential change
which had the effect of discharging from the obligation whoever may be the endorser of the negotiable check. The
RTC concluded that the absence of negotiability rendered nugatory the obligation arising from the technical act of
indorsing a check and, thus, had the effect of novation; and that the ultimate effect of such substitution was to
extinguish the obligation arising from the issuance of the Prudential Bank check.
Respondent filed an appeal with the CA on the sole assignment of error that:

IN BRIEF, THE LOWER COURT ERRED IN RULING THAT ACCUSED ANAMER SALAZAR BY INDORSING THE
CHECK (A) DID NOT BECOME A HOLDER OF THE CHECK, (B) DID NOT PRODUCE THE TECHNICAL EFFECT
OF AN INDORSEMENT ARISING FROM NEGOTIATION; AND (C) DID NOT INCUR CIVIL LIABILITY. 6

After petitioner filed her appellees' brief, the case was submitted for decision. On September 29, 2005, the CA
rendered its assailed Decision, the decretal portion of which reads:

IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged Decision is REVERSED and
SET ASIDE, and a new one entered ordering the appellee to pay the appellant the amount of ₱214,000.00, plus
interest at the legal rate from the written demand until full payment. Costs against the appellee. 7

In so ruling, the CA found that petitioner indorsed the Prudential Bank check, which was later replaced by a Solid
Bank check issued by Timario, also indorsed by petitioner as payment for the 300 cavans of rice bought from
respondent. The CA, applying Sections 63, 8 669 and 2910 of the Negotiable Instruments Law, found that petitioner
was considered an indorser of the checks paid to respondent and considered her as an accommodation indorser,
who was liable on the instrument to a holder for value, notwithstanding that such holder at the time of the taking of
the instrument knew her only to be an accommodation party.

Respondent filed a motion for reconsideration, which the CA denied in a Resolution dated March 2, 2006.

Hence this petition, wherein petitioner raises the following assignment of errors:

1. THE COURT OF APPEALS ERRED IN IGNORING THE RAMIFICATIONS OF THE ISSUANCE OF THE
SOLIDBANK CHECK IN REPLACEMENT OF THE PRUDENTIAL BANK CHECK WHICH WOULD HAVE
RESULTED TO THE NOVATION OF THE OBLIGATION ARISING FROM THE ISSUANCE OF THE
LATTER CHECK.

2. THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL
COURT OF LEGASPI CITY, BRANCH 5, DISMISSING AS AGAINST THE PETITIONER THE CIVIL
ASPECT OF THE CRIMINAL ACTION ON THE GROUND OF NOVATION OF OBLIGATION ARISING
FROM THE ISSUANCE OF THE PRUDENTIAL BANK CHECK.

3. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK

OR EXCESS OF JURISDICTION WHEN IT DENIED THE MOTION FOR RECONSIDERATION OF THE
PETITIONER ON THE GROUND THAT THE ISSUE RAISED THEREIN HAD ALREADY BEEN PASSED
UPON AND CONSIDERED IN THE DECISION SOUGHT TO BE RECONSIDERED WHEN IN TRUTH AND
IN FACT SUCH ISSUE HAD NOT BEEN RESOLVED AS YET. 11

Petitioner contends that the issuance of the Solid Bank check and the acceptance thereof by the respondent, in
replacement of the dishonored Prudential Bank check, amounted to novation that discharged the latter check; that
respondent's acceptance of the Solid Bank check, notwithstanding its eventual dishonor by the drawee bank, had
the effect of erasing whatever criminal responsibility, under Article 315 of the Revised Penal Code, the drawer or
indorser of the Prudential Bank check would have incurred in the issuance thereof in the amount of ₱214,000.00;
and that a check is a contract which is susceptible to a novation just like any other contract.

Respondent filed its Comment, echoing the findings of the CA. Petitioner filed her Reply thereto.

We find no merit in this petition.

Section 119 of the Negotiable Instrument Law provides, thus:

SECTION 119. Instrument; how discharged. – A negotiable instrument is discharged:

(a) By payment in due course by or on behalf of the principal debtor;

(b) By payment in due course by the party accommodated, where the instrument is made or accepted for his
accommodation;

(c) By the intentional cancellation thereof by the holder;

(d) By any other act which will discharge a simple contract for the payment of money;

(e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.
(Emphasis ours)

And, under Article 1231 of the Civil Code, obligations are extinguished:

xxxx

(6) By novation.

Petitioner's claim that respondent's acceptance of the Solid Bank check which replaced the dishonored Prudential
bank check resulted to novation which discharged the latter check is unmeritorious.

In Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc. and Stronghold Insurance Co., Inc.,12 we stated the
concept of novation, thus:

x x x Novation is done by the substitution or change of the obligation by a subsequent one which extinguishes the
first, either by changing the object or principal conditions, or by substituting the person of the debtor, or by
subrogating a third person in the rights of the creditor. Novation may:

[E]ither be extinctive or modificatory, much being dependent on the nature of the change and the intention of the
parties. Extinctive novation is never presumed; there must be an express intention to novate; in cases where it is
implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving
consideration for the emergence of the new one. Implied novation necessitates that the incompatibility between the
old and new obligation be total on every point such that the old obligation is completely superceded by the new one.
The test of incompatibility is whether they can stand together, each one having an independent existence; if they
cannot and are irreconcilable, the subsequent obligation would also extinguish the first.

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

The obligation to pay a sum of money 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.13
In Nyco Sales Corporation v. BA Finance Corporation,14 we found untenable petitioner Nyco's claim that novation
took place when the dishonored BPI check it endorsed to BA Finance Corporation was subsequently replaced by a
Security Bank check,15 and said:

There are only two ways which indicate the presence of novation and thereby produce the effect of extinguishing an
obligation by another which substitutes the same. First, novation must be explicitly stated and declared in
unequivocal terms as novation is never presumed. Secondly, the old and the new obligations must be incompatible
on every point.  The test of incompatibility is whether or not the two obligations can stand together, each one having
1avvphi1

its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. In the
instant case, there was no express agreement that BA Finance's acceptance of the SBTC check will discharge Nyco
from liability. Neither is there incompatibility because both checks were given precisely to terminate a single
obligation arising from Nyco's sale of credit to BA Finance. As novation speaks of two distinct obligations, such is
inapplicable to this case.16

In this case, respondent’s acceptance of the Solid Bank check, which replaced the dishonored Prudential Bank
check, did not result to novation as there was no express agreement to establish that petitioner was already
discharged from his liability to pay respondent the amount of ₱214,000.00 as payment for the 300 bags of rice. As
we said, novation is never presumed, there must be an express intention to novate. In fact, when the Solid Bank
check was delivered to respondent, the same was also indorsed by petitioner which shows petitioner’s recognition of
the existing obligation to respondent to pay ₱214,000.00 subject of the replaced Prudential Bank check.

Moreover, respondent’s acceptance of the Solid Bank check did not result to any incompatibility, since the two
checks − Prudential and Solid Bank checks − were precisely for the purpose of paying the amount of
₱214,000.00, i.e., the credit obtained from the purchase of the 300 bags of rice from respondent. Indeed, there was
no substantial change in the object or principal condition of the obligation of petitioner as the indorser of the check to
pay the amount of ₱214,000.00. It would appear that respondent accepted the Solid Bank check to give petitioner
the chance to pay her obligation.

Petitioner also contends that the acceptance of the Solid Bank check, a non-negotiable check being a crossed
check, which replaced the dishonored Prudential Bank check, a negotiable check, is a new obligation in lieu of the
old obligation arising from the issuance of the Prudential Bank check, since there was an essential change in the
circumstance of each check.

Such argument deserves scant consideration.

Among the different types of checks issued by a drawer is the crossed check. 17 The Negotiable Instruments Law is
silent with respect to crossed checks,18 although the Code of Commerce  makes reference to such instruments. 19 We
have taken judicial cognizance of the practice that a check with two parallel lines in the upper left hand corner
means that it could only be deposited and could not be converted into cash. 20 Thus, the effect of crossing a check
relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the rightful
person, i.e., the payee named therein. 21 The change in the mode of paying the obligation was not a change in any of
the objects or principal condition of the contract for novation to take place. 22

Considering that when the Solid Bank check, which replaced the Prudential Bank check, was presented for
payment, the same was again dishonored; thus, the obligation which was secured by the Prudential Bank check
was not extinguished and the Prudential Bank check was not discharged. Thus, we found no reversible error
committed by the CA in holding petitioner liable as an accommodation indorser for the payment of the dishonored
Prudential Bank check.

WHEREFORE, the petition is DENIED. The Decision dated September 29, 2005 and the Resolution dated March 2,
2006, of the Court of Appeals in CA-G.R. CV No. 83104, are AFFIRMED.
SO ORDERED.

METROPOLITAN BANK V. RURAL BANK OF GERONA, INC.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 159097               July 5, 2010

METROPOLITAN BANK AND TRUST COMPANY, Petitioner,

vs.
RURAL BANK OF GERONA, INC. Respondent.

DECISION

BRION, J.:

Petitioner Metropolitan Bank and Trust Company (Metrobank) filed this Petition for Review on Certiorari 1 under Rule
45 of the Rules of Court to challenge the Court of Appeals (CA) decision dated December 17, 2002 2 and the
resolution dated July 14, 2003 3 in CA-G.R. CV No. 46777. The CA decision set aside the July 7, 1994 decision 4 of
the Regional Trial Court (RTC) of Tarlac, Branch 65, in Civil Case No. 6028 (a collection case filed by Metrobank
against respondent Rural Bank of Gerona, Inc. [RBG]), and ordered the remand of the case to include the Central
Bank of the Philippines5 (Central Bank) as a necessary party.

THE FACTUAL ANTECEDENTS

RBG is a rural banking corporation organized under Philippine laws and located in Gerona, Tarlac. In the 1970s, the
Central Bank and the RBG entered into an agreement providing that RBG shall facilitate the loan applications of
farmers-borrowers under the Central Bank-International Bank for Reconstruction and Development’s (IBRD’s) 4th
Rural Credit Project. The agreement required RBG to open a separate bank account where the IBRD loan proceeds
shall be deposited. The RBG accordingly opened a special savings account with Metrobank’s Tarlac Branch. As the
depository bank of RBG, Metrobank was designated to receive the credit advice released by the Central Bank
representing the proceeds of the IBRD loan of the farmers-borrowers; Metrobank, in turn, credited the proceeds to
RBG’s special savings account for the latter’s release to the farmers-borrowers.

On September 27, 1978, the Central Bank released a credit advice in Metrobank’s favor and accordingly credited
Metrobank’s demand deposit account in the amount of ₱178,652.00, for the account of RBG. The amount, which
was credited to RBG’s special savings account represented the approved loan application of farmer-borrower
Dominador de Jesus. RBG withdrew the ₱178,652.00 from its account.

On the same date, the Central Bank approved the loan application of another farmer-borrower, Basilio Panopio, for
₱189,052.00, and credited the amount to Metrobank’s demand deposit account. Metrobank, in turn, credited RBG’s
special savings account. Metrobank claims that the RBG also withdrew the entire credited amount from its account.

On October 3, 1978, the Central Bank approved Ponciano Lagman’s loan application for ₱220,000.00. As with the
two other IBRD loans, the amount was credited to Metrobank’s demand deposit account, which amount Metrobank
later credited in favor of RBG’s special savings account. Of the ₱220,000.00, RBG only withdrew ₱75,375.00.
On November 3, 1978, more than a month after RBG had made the above withdrawals from its account with
Metrobank, the Central Bank issued debit advices, reversing all the approved IBRD loans. 6 The Central Bank
implemented the reversal by debiting from Metrobank’s demand deposit account the amount corresponding to all
three IBRD loans.

Upon receipt of the November 3, 1978 debit advices, Metrobank, in turn, debited the following amounts from RBG’s
special savings account: ₱189,052.00, ₱115,000.00, and ₱8,000.41. Metrobank, however, claimed that these
amounts were insufficient to cover all the credit advices that were reversed by the Central Bank. It demanded
payment from RBG which could make partial payments. As of October 17, 1979, Metrobank claimed that RBG had
an outstanding balance of ₱334,220.00. To collect this amount, it filed a complaint for collection of sum of money
against RBG before the RTC, docketed as Civil Case No. 6028. 7

In its July 7, 1994 decision,8 the RTC ruled for Metrobank, finding that legal subrogation had ensued:

[Metrobank] had allowed releases of the amounts in the credit advices it credited in favor of [RBG’s special savings
account] which credit advices and deposits were under its supervision. Being faulted in these acts or omissions, the
Central Bank [sic] debited these amounts against [Metrobank’s] demand [deposit] reserve; thus[, Metrobank’s]
demand deposit reserves diminished correspondingly, [Metrobank as of this time,] suffers prejudice in which case
legal subrogation has ensued. 9

It thus ordered RBG to pay Metrobank the sum of ₱334,200.00, plus interest at 14% per annum until the amount is
fully paid.

On appeal, the CA noted that this was not a case of legal subrogation under Article 1302 of the Civil Code.
Nevertheless, the CA recognized that Metrobank had a right to be reimbursed of the amount it had paid and failed to
recover, as it suffered loss in an agreement that involved only the Central Bank and the RBG. It clarified, however,
that a determination still had to be made on who should reimburse Metrobank. Noting that no evidence exists why
the Central Bank reversed the credit advices it had previously confirmed, the CA declared that the Central Bank
should be impleaded as a necessary party so it could shed light on the IBRD loan reversals. Thus, the CA set aside
the RTC decision, and remanded the case to the trial court for further proceedings after the Central Bank is
impleaded as a necessary party.10 After the CA denied its motion for reconsideration, Metrobank filed the present
petition for review on certiorari.

THE PETITION FOR REVIEW ON CERTIORARI

Metrobank disagrees with the CA’s ruling to implead the Central Bank as a necessary party and to remand the case
to the RTC for further proceedings. It argues that the inclusion of the Central Bank as party to the case is
unnecessary since RBG has already admitted its liability for the amount Metrobank failed to recover. In two
letters,11 RBG’s President/Manager made proposals to Metrobank for the repayment of the amounts involved. Even
assuming that no legal subrogation took place, Metrobank claims that RBG’s letters more than sufficiently proved its
liability.

Metrobank additionally contends that a remand of the case would unduly delay the proceedings. The transactions
involved in this case took place in 1978, and the case was commenced before the RTC more than 20 years ago.
The RTC resolved the complaint for collection in 1994, while the CA decided the appeal in 2002. To implead Central
Bank, as a necessary party in the case, means a return to square one and the restart of the entire proceedings.

THE COURT’S RULING

The petition is impressed with merit.

A basic first step in resolving this case is to determine who the liable parties are on the IBRD loans that the Central
Bank extended. The Terms and Conditions of the IBRD 4th Rural Credit Project 12 (Project Terms and Conditions)
executed by the Central Bank and the RBG shows that the farmers-borrowers to whom credits have been extended,
are primarily liable for the payment of the borrowed amounts. The loans were extended through the RBG which also
took care of the collection and of the remittance of the collection to the Central Bank. RBG, however, was not a
mere conduit and collector.  While the farmers-borrowers were the principal debtors, RBG assumed liability under
1avvphil

the Project Terms and Conditions by solidarily binding itself with the principal debtors to fulfill the obligation.
1awphi1

How RBG profited from the transaction is not clear from the records and is not part of the issues before us, but if it
delays in remitting the amounts due, the Central Bank imposed a 14% per annum penalty rate on RBG until the
amount is actually remitted. The Central Bank was further authorized to deduct the amount due from RBG’s demand
deposit reserve should the latter become delinquent in payment. On these points, paragraphs 5 and 6 of the Project
Terms and Conditions read:

5. Collection received representing repayments of borrowers shall be immediately remitted to the Central Bank,
otherwise[,] the Rural Bank/SLA shall be charged a penalty of fourteen [percent] (14%) p.a. until date of remittance.

6. In case the rural bank becomes delinquent in the payment of amortizations due[,] the Central Bank is authorized
to deduct the corresponding amount from the rural bank’s demand deposit reserve 13 at any time to cover any
delinquency. [Emphasis supplied.]

Based on these arrangements, the Central Bank’s immediate recourse, therefore should have been against the
farmers-borrowers and the RBG; thus, it erred when it deducted the amounts covered by the debit advices from
Metrobank’s demand deposit account. Under the Project Terms and Conditions, Metrobank had no responsibility
over the proceeds of the IBRD loans other than serving as a conduit for their transfer from the Central Bank to the
RBG once credit advice has been issued. Thus, we agree with the CA’s conclusion that the agreement governed
only the parties involved – the Central Bank and the RBG. Metrobank was simply an outsider to the agreement. Our
disagreement with the appellate court is in its conclusion that no legal subrogation took place; the present case, in
fact, exemplifies the circumstance contemplated under paragraph 2, of Article 1302 of the Civil Code which
provides:

Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtor’s knowledge;

(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the
debtor;

(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation
pays, without prejudice to the effects of confusion as to the latter’s share. [Emphasis supplied.]

As discussed, Metrobank was a third party to the Central Bank-RBG agreement, had no interest except as a
conduit, and was not legally answerable for the IBRD loans. Despite this, it was Metrobank’s demand deposit
account, instead of RBG’s, which the Central Bank proceeded against, on the assumption perhaps that this was the
most convenient means of recovering the cancelled loans. That Metrobank’s payment was involuntarily made does
not change the reality that it was Metrobank which effectively answered for RBG’s obligations.

Was there express or tacit approval by RBG of the payment enforced against Metrobank? After Metrobank received
the Central Bank’s debit advices in November 1978, it (Metrobank) accordingly debited the amounts it could from
RBG’s special savings account without any objection from RBG. 14 RBG’s President and Manager, Dr. Aquiles
Abellar, even wrote Metrobank, on August 14, 1979, with proposals regarding possible means of settling the
amounts debited by Central Bank from Metrobank’s demand deposit account. 15 These instances are all indicative of
RBG’s approval of Metrobank’s payment of the IBRD loans. That RBG’s tacit approval came after payment had
been made does not completely negate the legal subrogation that had taken place.

Article 1303 of the Civil Code states that subrogation transfers to the person subrogated the credit with all the rights
thereto appertaining, either against the debtor or against third persons. As the entity against which the collection
was enforced, Metrobank was subrogated to the rights of Central Bank and has a cause of action to recover from
RBG the amounts it paid to the Central Bank, plus 14% per annum interest.

Under this situation, impleading the Central Bank as a party is completely unnecessary. We note that the CA
erroneously believed that the Central Bank’s presence is necessary "in order x x x to shed light on the matter of
reversals made by it concerning the loan applications of the end users and to have a complete determination or
settlement of the claim."16 In so far as Metrobank is concerned, however, the Central Bank’s presence and the
reasons for its reversals of the IBRD loans are immaterial after subrogation has taken place; Metrobank’s interest is
simply to collect the amounts it paid the Central Bank. Whatever cause of action RBG may have against the Central
Bank for the unexplained reversals and any undue deductions is for RBG to ventilate as a third-party claim; if it has
not done so at this point, then the matter should be dealt with in a separate case that should not in any way further
delay the disposition of the present case that had been pending before the courts since 1980.

While we would like to fully and finally resolve this case, certain factual matters prevent us from doing so. Metrobank
contends in its petition that it credited RBG’s special savings account with three amounts corresponding to the three
credit advices issued by the Central Bank: the ₱178,652.00 for Dominador de Jesus; the ₱189,052.00 for Basilio
Panopio; and the ₱220,000.00 for Ponciano Lagman. Metrobank claims that all of the three credit advices were
subsequently reversed by the Central Bank, evidenced by three debit advices. The records, however, contained
only the credit and debit advices for the amounts set aside for de Jesus and Lagman; 17 nothing in the findings of fact
by the RTC and the CA referred to the amount set aside for Panopio.

Thus, what were sufficiently proven as credited and later on debited from Metrobank’s demand deposit account
were only the amounts of ₱178,652.00 and ₱189,052.00. With these amounts combined, RBG’s liability would
amount to ₱398,652.00 – the same amount RBG acknowledged as due to Metrobank in its August 14, 1979
letter.18 Significantly, Metrobank likewise quoted this amount in its July 11, 1979 19 and July 26, 1979 20 demand letters
to RBG and its Statement of Account dated December 23, 1982. 21

RBG asserts that it made partial payments amounting to ₱145,197.40, 22 but neither the RTC nor the CA made a
conclusive finding as to the accuracy of this claim. Although Metrobank admitted that RBG indeed made partial
payments, it never mentioned the actual amount paid; neither did it state that the ₱145,197.40 was part of the
₱312,052.41 that, it admitted, it debited from RBG’s special savings account.

Deducting ₱312,052.41 (representing the amounts debited from RBG’s special savings account, as admitted by
Metrobank) from ₱398,652.00 amount due to Metrobank from RBG, the difference would only be ₱86,599.59. We
are, therefore, at a loss on how Metrobank computed the amount of ₱334,220.00 it claims as the balance of RBG’s
loan. As this Court is not a trier of facts, we deem it proper to remand this factual issue to the RTC for determination
and computation of the actual amount RBG owes to Metrobank, plus the corresponding interest and penalties.

WHEREFORE, we GRANT the petition for review on certiorari, and REVERSE the decision and the resolution of the
Court of Appeals, in CA-G.R. CV No. 46777, promulgated on December 17, 2002 and July 14, 2003, respectively.
We AFFIRM the decision of the Regional Trial Court, Branch 65, Tarlac, promulgated on July 7, 1994, insofar as it
found respondent liable to the petitioner Metropolitan Bank and Trust Company, but order the REMAND of the case
to the trial court to determine the actual amounts due to the petitioner. Costs against respondent Rural Bank of
Gerona, Inc.
SO ORDERED.

ARCO PULP AND PAPER CO. AND SANTOS V. LIM

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 206806               June 25, 2014

ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners,

vs.
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  assailing the Court of Appeals’ decision  in CA-G.R. CV No. 95709,
1 2

which stemmed from a complaint  filed in the Regional Trial Court of Valenzuela City, Branch 171, for collection of
3

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.  From February
4

2007 to March 2007, he delivered scrap papers worth 7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco
Pulp and Paper) through its Chief Executive Officer and President, Candida A. Santos.  The parties allegedly agreed
5

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. 6

Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated check dated
April 18, 2007  in the amount of 1,487,766.68 as partial payment, with the assurance that the check would not
7

bounce.  When he deposited the check on April 18, 2007, it was dishonored for being drawn against a closed
8

account. 9

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement  where Arco
10

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:

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 ₱18.50 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 ₱6.50 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  to Arco Pulp and Paper demanding payment of the amount of
12

7,220,968.31, but no payment was made to him. 13

Dan T. Lim filed a complaint  for collection of sum of money with prayer for attachment with the Regional Trial Court,
14

Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its answer  but failed to have its
15

representatives attend the pre-trial hearing. Hence, the trial court allowed Dan T. Lim to present his evidence ex
parte. 16

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. 17

Dan T. Lim appealed  the judgment with the Court of Appeals. According to him, novation did not take place since
18

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

On January 11, 2013, the Court of Appeals  rendered a decision  reversing and setting aside the judgment dated
20 21

September 19, 2008 and ordering Arco Pulp and Paper to jointly and severally pay Dan T. Lim the amount of
₱7,220,968.31 with interest at 12% per annum from the time of demand; ₱50,000.00 moral damages; ₱50,000.00
exemplary damages; and ₱50,000.00 attorney’s fees. 22

The appellate court ruled that the facts and circumstances in this case clearly showed the existence of an alternative
obligation.  It also ruled that Dan T. Lim was entitled to damages and attorney’s fees due to the bad faith exhibited
23

by Arco Pulp and Paper in not honoring its undertaking. 24

Its motion for reconsideration  having been denied,  Arco Pulp and Paper and its President and Chief Executive
25 26

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

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.  He also argues that the Court of Appeals was correct in
28

holding petitioners solidarily liable since petitioner Candida A. Santos was "the prime mover for such outstanding
corporate liability."  In their reply, petitioners reiterate that novation took place since there was nothing in the
29

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. 30
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

The issues to be resolved by this court are as follows:

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:

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."  The right of election is extinguished when the party
32

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: 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 ₱7,220,968.31 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

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:

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." 36

Novation was extensively discussed by this court in Garcia v. Llamas: 37

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.  (Emphasis supplied)
38

Because novation requires that it be clear and unequivocal, it is never presumed, thus:

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
tobe a jural reality, its animus must be ever present, debitum pro debito — basically extinguishing the old obligation
for the new one.  (Emphasis supplied) There is nothing in the memorandum of agreement that states that with its
39

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:

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.  (Emphasis supplied)
40

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:

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 ₱7,220,968.31.
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:

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:

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:

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 ₱7,220,968.31 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:

Article 2219. Moral damages may be recovered in the following and analogous cases:

(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: 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:

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:

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:

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:

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

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.  (Emphasis supplied)
47

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."  Moral damages may, therefore, be awarded.
48

Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in the following
circumstances:

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,  we stated that:

49

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. Ranteciting People v. Dalisay held that:

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.  (Emphasis
50

supplied; citations omitted)

The requisites for the award of exemplary damages are as follows:

(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:

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,  we stated that:

52

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.  (Emphasis supplied)
53

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."  Any obligation arising from these acts would not, ordinarily, be petitioner
54

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

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.  (Emphasis supplied)
56

According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp and Paper, stating
that:

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 1,487,766.68 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 1âwphi1

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 Frames 58
In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar v. Gallery
Frames,  the rate of interest due on the obligation must be modified from 12% per annum to 6% per annum from the
59

time of demand.

Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,  and we have laid down
60

the following guidelines with regard to the rate of legal interest:

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Linesare
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.  (Emphasis supplied;
61

citations omitted.)

According to these guidelines, the interest due on the obligation of ₱7,220,968.31 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 ₱7,220,968.31 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 ₱50,000.00, exemplary damages in the amount of
₱50,000.00, and attorney's fees in the amount of ₱50,000.00.

SO ORDERED.

MILLAR V CA

Republic of the Philippines

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.

SANDICO V. PIGUING

Republic of the Philippines

SUPREME COURT
Manila

EN BANC
 

G.R. No. L-26115 November 29, 1971

CARLOS SANDICO, SR., and TEOPISTO P. TIMBOL, petitioners,

vs.
THE HONORABLE MINERVA R. INOCENCIO PIGUING, Judge of the Court of First Instance of Pampanga,
and DESIDERIO PARAS, respondents.

Lorenzo G. Timbol for petitioners.

Abel de Ocera for respondent Desiderio Paras.

CASTRO, J.:

On April 16, 1960 the spouses Carlos Sandico and Enrica Timbol, and Teopisto P. Timbol, administrator of the
estate of the late Sixta Paras, obtained a judgment in their favor against Desiderio Paras (hereinafter referred to as
the respondent) in civil case 1554, an action for easement and damages in the Court of First Instance of Pampanga.
On appeal, the Court of Appeals affirmed and modified the judgment, as follows:

IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant is condemned

to recognize the easement which is held binding as to him; he is sentenced to pay plaintiffs the sums
of P5,000.00 actual, and P500.00 exemplary damages, and P500.00 attorney's fees; plus costs in
both instances. 1

Thereafter, upon remand to the court a quo of civil case 1554, the Sandicos and Timbol (hereinafter referred to as
the petitioners) moved for the issuance of a writ of execution to enforce the appellate court's judgment which had
acquired finality. Acting upon the motion, the court a quo issued a writ of execution on July 22, 1964. This writ the
provincial sheriff served upon the respondent on August 22, 1964.

Meanwhile the petitioners and the respondent reached a settlement, finally agreeing to the reduction of the money
judgment from P6,000 to P4,000. Thus, the respondent, on August 5, 1964, paid the petitioners the sum of P3,000;
he made another payment in the amount of P1,000 as evidenced by a receipt issued by the petitioners' counsel.
This receipt is hereunder reproduced in full:

P1,000.00

RECEIVED from Mr. Desiderio Paras the sum of ONE THOUSAND PESOS (P1,000.00), Philippine
Currency, in full satisfaction of the money judgment rendered against him in Civil Case No. 1554 of
the Court of First Instance of Pampanga, it being understood that the portion of the final judgment
rendered in the said case ordering him to reconstruct the irrigation canal in question shall be
complied with by him immediately.

City of Angeles, August 31, 1964.

(SGD.) DALMACIO P. TIMBOL

Counsel for Plaintiffs
in Civil Case No. 1554
 I AGREE:
(SGD.) DESIDERIO PARAS

Subsequently, the petitioners sent the respondent a letter dated November 5, 1964 demanding compliance by the
latter with the portion of the judgment in civil case 1554 relative to the reconstruction and reopening of the irrigation
canal.

On February 12, 1965 the provincial sheriff returned the writ of execution issued on July 22, 1964 unsatisfied.

Upon failure and refusal of the respondent to rebuild and reopen the irrigation canal, the petitioners, on March 3,
1965, filed with the court a quo, with Judge Minerva R. Inocencio Piguing (hereinafter referred to as the respondent
judge) presiding, a motion to declare the said private respondent in contempt of court, pursuant to provisions of
section 9, Rule 39 of the Rules of Court. Opposing the motion, the respondent alleged recognition by him of the
existence of the easement and compliance with the appellate court's judgment, stating that he had dug a canal in its
former place, measuring about one and-a-half feet deep, for the petitioners' use.

On September 8, 1965 the respondent judge issued an order denying the petitioners' motion to declare the
respondents in contempt of court, ruling that.

... it appears from the dispositive part of the decision that the defendant was only ordered to
recognize the easement which is held binding as to him and to pay the plaintiffs the sums P5,000.00
of actual, and P500.00 exemplary damages.

Apparently, it is clear from the dispositive part of the decision that there is nothing to show that the
defendant was ordered to reconstruct the canal.

On September 16, 1965 the petitioners moved for issuance of an alias writ of execution to enforce the judgement of
the Court of Appeals. This motion the respondent judge granted in an order dated September 25, 1965. On
November 3, 1965. the respondent moved to set aside the said alias writ, alleging full satisfaction of the judgment
per agreement of the parties when the petitioner received the sum of P4,000 in August, 1964 as evidenced by the
receipt dated August 31, 1964.

The respondent judge then issued an order dated November 11, 1965 directing the provincial sheriff to suspend the
execution of the alias writ until further orders. On February 3, 1966 the respondent judge issued an order calling,
and directing the quashal of the alias writ of execution. The respondent judge stated in her order that the agreement
of the parties "novated" the money judgment provided for in the decision of the Court of Appeals, ruling that the said
decision.

... which is sought now to be executed by this Court, has already been fully satisfied as to the money
judgment and nothing more is left to be executed from the aforesaid Decision as it does not allege
(aside from money judgment) any other condition except for the defendants to recognize the
easement therein.

With their subsequent motion for reconsideration denied by the respondent judge, the petitioners, on May 27, 1966,
filed with this Court the present petition  for certiorari seeking to set aside (1) the order of the respondent judge
2

dated September 8, 1965 denying their motion to declare the respondent in contempt of court in civil case 1554, and
(2) the orders of the respondent judge dated February 3, 1966 and March 30, 1966 granting the respondent's
motion to set aside the alias writ of execution issued in the same civil case, on the ground that the respondent judge
acted in excess of jurisdiction or with grave abuse of discretion.

Here tendered for resolution are the following issues:

(1) Whether the respondent judge correctly constructed the judgment of the Court of Appeals as not requiring the
respondent to reconstruct and reopen the irrigation canal, and consequently, whether the said respondent judge
acted in excess of jurisdiction or with grave abuse of discretion in denying the petitioners' motion to declare the
respondent in contempt of court for failing and refusing to comply with the appellate court's judgment; and

(2) Whether the payment by the respondent to the petioners of the amount of P4,000 extinguished the money
judgment, and, consequently, whether the respondent judge acted in excess of jurisdiction or with grave abuse of
discretion in ordering the recall and quashal of the alias writ of execution.

1. Anent the first issue, the petitioners argue that although the dispositive portion of the appellate court's judgment
omitted any directive to the respondent to reconstruct and reopen the irrigation canal, the Court of Appeals' order
requiring recognition of the easement on the part of the said respondent suffices to make him aware of his obligation
under the judgment. The only way of recognizing the easement, the petitioners continue, consists in performing
positive act — the reconstruction and restoration of the irrigation canal to its former condition. Moreover, to
understand the full intendment of the dispositive portion of the judgment directing the respondent "to recognize the
easement" necessitates reference to a statement in the decision of the Court of Appeals that reads:

... the result of this must be to justify the conclusion prayed for by the plaintiffs that the easement
should be held to be existing and binding upon defendant and he should be held to have acted
without authority in closing the canal which should be ordered reopened.

On the other hand, the respondent alleges that there is no ambiguity in the phraseology of the portion of the Court of
Appeals' judgment condemning to recognize the easement. Said decision requires him only to "recognize" the
easement and in compliance therewith, he gives the petitioners permission to reconstruct and reopen the irrigation
canal themselves. Neither the decision a quo nor that of the appellate court orders him to reconstruct and reopen
the irrigation canal.

The agreement reached by the petitioners and the respondent in August, 1964 relative to the judgment of the
appellate court which had acquired finality and the interpretation by the parties themselves of the said judgment,
specifically its dispositive portion, as embodied in the receipt dated August 31, 1964, constitute the considerations of
prime importance in the resolution of the first question. No doubt exists that the parties entered into the agreement,
fully aware of the judgment of the appellate court ordering the respondent to comply with two obligations, to wit,
payment of a sum of money and recognition of the easement. The receipt evidencing the agreement, aside from
providing for the reduction of the money judgment, provides for the reconstruction of the irrigation canal. Such
constitutes the interpretation accorded by the parties to that part of the dispositive portion of the appellate court's
judgment condemning the respondent to recognize the easement. This stipulation — one wherein the respondent
clearly recognizes his obligation "to reconstruct the irrigation canal" — embodied in precise and clear terms in the
receipt binds the said respondent, a signatory to the said receipt, and requires from him full compliance. We thus fail
to perceive any reason to sustain the contention of the respondent that he has no obligation at all to reconstruct and
reopen the irrigation canal, a position utterly inconsistent with his agreement with the petitioners as embodied in the
receipt dated August 31, 1964.

The record, however, shows that the respondent exerted efforts to reconstruct the portion of the irrigation canal
running through his land by digging a canal about one meter wide and about one-and-a-half feet deep. This partial
reconstruction of the irrigation canal the petitioners admit. Still, the petitioners demand the reconstruction of the
irrigation canal to its former condition — measuring four meters wide, five feet deep, and one-hundred and twenty-
eight meters long — contending that the rebuilt canal serves no useful purpose because the water passing through
it overflows, which overflow ultimately causes the destruction of the canal itself. Nonetheless, we believe that need
to give full force and effect to the existence of the easement demands that the respondent reconstruct the irrigation
canal to its condition before he closed and destroyed the same. After all, the respondent himself in his answer dated
June 16, 1959 filed with the court a quo admitted the original dimensions of the irrigation canal as four meters wide
and one-hundred and twenty-eight meters long. The respondent's attempt, to rebuild the irrigation canal, partially
and not in conformity with the dimensions of the original one, does not constitute satisfactory and substantial
compliance with his obligation to recognize the easement per the appellate court's judgment and to reconstruct the
irrigation canal pursuant to his agreement with the petitioners in August, 1964.

Due to the respondent's failure and refusal to reconstruct and reopen the irrigation canal, the petitioners sought to
declare him in contempt of court, under the provisions of section 9 of Rule 39 of the Rules of Court. The respondent
judge, however, believing that the appellate court's judgement required the respondent merely to recognize the
equipment without doing any positive act of reconstruction and reopening of the irrigation canal, dismissed the
petition motion to declare the respondent in contempt of court. In doing so, the petitioners allege, the respondent
judge acted in excess of jurisdiction or with grave abuse of discretion. The petitioners thus ask us now to annul the
order of the respondent judge denying their motion to declared the respondent in contempt of court or, by way of
native, to declare the respondent in contempt of court and to punish him accordingly.

The petitioners predicate their stand mainly upon the provisions of section 9 of Rule 39 of the Rules of Court. Said
section reads:

Sec. 9. Writ of execution of special judgment. — When judgment requires the performance of any
other act than the payment of money, or the sale or delivery of real or personal property, a certified
copy of the judgment shall be attached the writ of execution and shall be served by the officer upon
the party against whom the same is rendered, or upon any of person required thereby, or by law, to
obey the same, and party or person may be punished forcontempt if he disobeys such judgment.

Section 9 applies to specific acts other than those cover by section 10 of the same rule. Section 10 pertinently
provides:

See. 10. Judgment for an acts; vesting title. — If a judgment directs a party to execute a conveyance
of land, or to deliver deeds or other documents, or to perform any other specific act, and the party
fails to comply within the time specified, the court may direct the act to be done at the cost of
disobedient party by some other person appointed by the court and the act when so done shall have
like effect as if done by the party. ...

Section 9 refers to a judgment directing the performance of a specific act which the said judgment requires the party
or person to personally do because of his personal qualifications and circumstances. Section 10 refers to a
judgment requiring the execution of a conveyance of land or the delivery of deeds or other documents or the
performance of any other specific act susceptible of execution by some other person or in some other way provided
by law with the same effect. Under section 10, the court may designate some other person to do the act ordained to
be done by the judgment, the reasonable cost of its performance chargeable to the disobedient party. The act, when
so done, shall have the same effect as if performed by the party himself. In such an instance, the disobedient party
incurs no liability for contempt.  Under section 9, the court may resort to proceedings for contempt in order to
3

enforce obedience to a judgment which requires the personal performance of a specific act other than the payment
of money, or the sale or delivery of real or personal property.

An examination of the case at bar makes it apparent that the same falls within the contemplation of section 10, and
not of section 9 as the petitioners contend. The reconstruction and reopening of the irrigation canal may be done by
same other person designated by the court, at the cost of the respondent. In fact, the respondent in his attempt to
rebuild the irrigation canal, contracted the services of one Gerardo Salenga. Accordingly, in conformity with the
appellate court's judgment as further mutually interpreted by the parties themselves, the court a quo, because of the
failure and refusal of the respondent to restore the irrigation canal to its former condition and to reopen it, should
have appointed some other person to do the reconstruction, charging the expenses therefor to the said respondent.
2. As to the second question, which relates to the money judgment, the petitioners vehemently insist on their right to
recover an additional sum of P2,000 — the alleged unsatisfied portion of the appellate court's judgement requiring
the respondent to pay to the petitioners the total amount of P6,000 corresponding to damages and attorney's fees.
The petitioners allege that their agreement with the respondent in August, 1964, reducing the amount due from the
respondent, constitutes neither waiver of their claim for the sum of P2,000 nor novation of the money judgment
provided for in the Court of Appeals' decision. They state that their agreement with the respondent reduced the
amount of the money judgment, subject to the condition that the latter reconstruct and reopen the irrigation canal
immediately. This, they argue, does not constitute alteration of the appellate court's judgment.

For his part, the respondent contends that his payment of the sum of P4,000, received and acknowledged by the
petitioners through their counsel as "in full satisfaction of the money judgment" in civil case 1554, extinguished his
pecuniary liability. Thus, when the petitioners, notwithstanding the admitted payment of the judgment debt in the
lesser amount of P4,000, still sought to enforce the money judgment for the full amount of P6,000 through
an alias writ of execution, the court a quo, in recalling and quashing the alias writ previously issued, acted correctly
andwithin its authority.

Parenthetically, the petitioner's application for the issuance of the alias writ of execution dated September 16, 1965,
the alias writ of execution dated September 29, 1965, and the levy on execution and the notice of sheriff's sale, both
dated October 21, 1965, all refer to the amount of P6,000 and make no mention whatsoever of the true status of the
judgement debt. On this point the respondent charges the petitioners with concealing from the court  a quo the true
amount, if any, still due from him. And in effect, he alleges, the petitioners apparently seek the payment of the
judgment debt twice. The petitioners, however, emphasize that they demand payment of only the balance of
P2,000. To rebut the respondents charge of concealment, they state that they informed the court a quo that the
respondent already paid them the sum of P4,000. Furthermore, they allege that another lawyer, a former associate
of their counsel, prepared their motion for the issuance of the alias writ of execution, received the alias writ and
delivered the same to the sheriff. Impliedly, therefore, they attribute the inconsistency regarding the amount still
allegedly due from the respondent to the former associate of their counsel.

Reverting to the second question, the appellate court's judgment obliges the respondent to do two things: (1) to
recognize the easement, and (2) to pay the petitioners the sums of P5,000 actual and P500 exemplary damages
and P500 attorney's fees, or a total of P6,000. The full satisfaction of the said judgment requires specific
performance and payment of a sum of money by the respondent.

We adjudge the respondent's judgment debt as having been fully satisfied. We see no valid objection to the
petitioners and the respondent entering into an agreement regarding the monetary obligation of the latter under the
judgment of the Court of Appeals, reducing the same from P6,000 to P4,000. The payment by the respondent of the
lesser amount of P4,000, accepted by the petitioners without any protest or objection and acknowledged by them as
"in full satisfaction of the money judgment" in civil case 1554, completely extinguished the judgment debt and
released the respondent from his pecuniary liability.

Both the petitioners and the respondent take exception to the respondent judge's ruling that their agreement of
August, 1964 to reduce the judgment debt, as evidenced by the receipt hereinbefore adverted to, "novated" the
money judgment rendered by the appellate court.

Novation results in two stipulations — one to extinguish an existing obligation, the other to substitute a new one in
its place.  Fundamental it is that novation effects a substitution or modification of an obligation by another or an
4

extinguishment of one obligation in the creation of another. In the case at hand, we fail to see what new or modified
obligation arose out of the payment by the respondent of the reduced amount of P4,000 and substitute the monetary
liability for P6,000 of the said respondent under the appellate court's judgment. Additionally, to sustain novation
necessitates that the same be so declared in unequivocal terms — clearly and unmistakably shown by the express
agreement of the parties or by acts of equivalent import — or that there is complete and substantial incompatibility
between the two obligations. 5

Neither do we appreciate the petitioners' stand that, according to their agreement with the respondent, their assent
to the reduction of the money judgment was subject to the condition that the respondent reconstruct and reopen the
portion of the irrigation canal passing through his land immediately. The petitioners even state that the receipt of
August 31, 1964 embodies this condition.

The terms of the receipt dated August 31, 1964, we find clear and definite. The receipt neither expressly nor
impliedly declares that the reduction of the money judgment was conditioned on the respondent's reconstruction and
reopening of the irrigation canal. The receipt merely embodies the recognition by the respondent of his obligation to
reconstruct the irrigation canal. And the receipt simply requires the respondent to comply with such obligation
"immediately." The obligation of the respondent remains as a portion of the Court of Appeals' judgment. In fact, the
petitioners themselves, in their letter dated November 5, 1964, sent to the respondent, demanding that the latter
reconstruct the irrigation canal immediately, referred to the same not as a condition but as "the portion of the
judgment" in civil case 1594.

Consequently, the respondent judge, when she granted the motion of the respondent to set aside the alias writ of
execution and issued the order dated February 3, 1966 recalling and quashing the said alias writ, acted correctly.
Courts have jurisdiction to entertain motions to quash previously issued writs of execution because courts have the
inherent power, for the advancement of justice, to correct the errors of their ministerial officers and to control their
own processes. However, this power, well circumscribed, to quash the writ, may be exercised only in certain
situations, as when it appears that (a) the writ has been improvidently issued, or (b) the writ is defective in
substance, or (c) the writ has been issued against the wrong party, or (d) the judgment debt has been paid or
otherwise satisfied, or (e) the writ has been issued without authority, or (f) there has been a change in the situation
of the parties which renders such execution inequitable, or (g) the controversy has never been submitted to the
judgment of the court, and, therefore, no judgment at all has ever been rendered thereon.  In the instant case, the
6

payment of the judgment debt by the respondent, although in a reduced amount but accepted by the petitioners as
"in full satisfaction of the money judgment," warrants the quashal of the alias writ.

ACCORDINGLY, judgment is hereby rendered, (1) declaring that the respondent judge did not act in excess of
jurisdiction or with grave abuse of discretion in issuing the order dated February 3, 1966 (granting the respondent's
motion to set aside the alias writ of execution, and recalling and guashing the said alias writ) and the order dated
March 30, 1966 (denying the petitioners' motion for reconsideration, of the order dated February 3, 1966) ; and (2)
remanding the case to the court a quo with instructions that the respondent court (a) conduct an ocular inspection of
the irrigation canal passing through the respondent's land to determine whether or not the said canal has been
rebuilt in accordance with its original dimensions; (b) in the event that the said canal fails to meet the measurements
of the original one, order the respondent to reconstruct the same to its former condition; and (3) in the event of the
respondent's further refusal or failure to do so, appoint some other person to reconstruct the canal in accordance
with its original dimensions, at the cost of the said respondent, pursuant to section 10 of Rule 39 of the Rules of
Court. Without pronouncement as to costs.

Concepcion, C.J., Makalintal, Zaldivar, Fernando, Barredo, Villamor and Makasiar, JJ., concur.

Reyes, J.B.L., J., concurs in the result.

NPC V. DAYRIT

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

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

NATIONAL POWER CORPORATION, petitioner,

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

The Solicitor General for petitioner.

William C. Arceno for respondents.

ABAD SANTOS, J.: ñé+.£ªwph!1

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

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

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

In order to abbreviate the proceedings in this case, the parties, instead of going into trial, submitted a
compromise agreement, as follows:  têñ.£îhqwâ£

The parties, DANIEL E. ROXAS, etc. and NATIONAL POWER CORPORATION, ET

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

1. The defendant National Power Corporation shall pay to plaintiff the sum of
P7,277.45, representing the amount due to plaintiff for the services of one of
plaintiff's supervisors;

2. The defendant shall pay plaintiff the value of the line materials which were stolen
but recovered, by plaintiff's agency which value is to be determined after a joint
inventory by the representatives of both parties;
 3. The parties shall continue with the contract of security services under the same
terms and conditions as the previous contract effective upon the signing thereof;

4. The parties waive all their respective claims and counterclaims in favor of each
other;

5. The parties agree to faithfully comply with the foregoing agreement.

PRAYER

WHEREFORE, it is respectfully prayed that the Hon. Court approve the following compromise
agreement.'

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

CONFORMABLY, the Court hereby renders judgment in accordance with the terms and conditions
thereof, enjoining the parties to strictly comply with the terms and conditions of the compromise
agreement, without pronouncement as to cost. (Rollo, pp. 33-34.)

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

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

PLAINTIFF, by counsel, respectfully shows:

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

3. The parties shall continue with the contract of security services under the same
terms and conditions as the previous contract effective upon the signing thereof;

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

3. Hence, plaintiff is compelled to seek the assistance of this Honorable Court for the execution of its
decision.

PRAYER  têñ.£îhqwâ£

WHEREFORE, it is respectfully prayed that this Honorable Court order the issuance of the writ of
execution for the enforcement of the aforesaid portion of its decision. (Rollo, pp. 35-36.)

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

CONFORMABLY, let the corresponding writ of execution be issued to be served by the Deputy
Sheriff assigned to this branch. (Rollo, p. 54.)

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

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

ARTICLE I

DOCUMENTS COMPRISING THE CONTRACT

The letter proposal dated September 5, 1981; CORPORATION'S counter- proposal dated
September 11, 1981; Board Resolution No. 81-244 dated September 28, 1981; the Compromise
Agreement and Court Decision dated October 30, 1981 in Civil Case No. 133528 CFI-Manila; other
subsequent letters and the performance bond of AGENCY to be flied in favor of CORPORATION in
the manner hereinafter provided, are hereby expressly made integral parts of this contract by
reference. (Rollo, pp. 59-60.)

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

Art. 1292. In order that an obligation may be extinguished by another which substitutes the same, it
is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be
on every point incompatible with each other.

In the case at bar there is nothing in the May 14, 1982, agreement which supports the petitioner's contention. There
is neither explicit novation nor incompatibility on every point between the "old" and the "new" agreements.

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

SO ORDERED. 1äwphï1.ñët

INTEGRATED CONSTRUCTION V. RELOVA

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-41117 December 29, 1986

INTEGRATED CONSTRUCTION SERVICES, INC., and ENGINEERING CONSTRUCTION, INC., petitioners,
vs.
THE HONORABLE LORENZO RELOVA, as Judge of the Court of First Instance of Manila, and
METROPOLITAN WATERWORKS & SEWERAGE SYSTEM, respondents.

J.R. Blanco and Bengzon, Villegas, Zarraga, Narciso & Cudala for petitioners.

Raymundo A. Armovit for petitioner Engineering Construction, Inc.

PARAS, J.:

This is a petition   for mandamus as a special civil action and/or, in the alternative, an appeal from orders of the
1

Court of First Instance of Manila under Republic Act 5440 in Civil Case No. 80390 entitled  "Integrated Construction
Services, Inc. and Engineering Construction, Inc., plaintiffs, versus National Waterworks and Sewerage Authority
(now Metropolitan Waterworks & Sewerage System), defendant." Petitioners complied with the requisites for both
remedies.

The facts are not in dispute:

Petitioners on July 17, 1970 sued the respondent Metropolitan Waterworks and Sewerage System (MWSS),
formerly the National Waterworks and Sewerage Authority (NAWASA), in the Court of First Instance of Manila for
breach of contract, docketed as Civil Case No. 80390 in that Court. Meanwhile, the parties submitted the case to
arbitration.

The Arbitration Board, after extensive hearings, rendered its decision-award on August 11, 1972. Respondent
Judge confirmed the Award on September 9, 1972 and the same has long since become final and executory.

The decision-award ordered MWSS to pay petitioners P15,518,383.61-less P2,329,433.41, to be set aside as a
trust fund to pay creditors of the joint venture in connection with the projector a net award of P13,188,950.20 with
interest thereon from the filing of the complaint until fully paid.

Subsequently, however, petitioners agreed to give MWSS some discounts in consideration of an early payment of
the award. Thus, on September 21, 1972, MWSS adopted Board Resolution No. 132-72, embodying the terms and
conditions of their agreement. On October 2, 1972, MWSS sent a letter-agreement to petitioners, quoting Board
Resolution No. 13272, granting MWSS some discounts from the amount payable under the decision award
(consisting of certain reductions in interests, in the net principal award and in the trust fund), provided that MWSS
would pay the judgment, less the said discounts, within fifteen days therefrom or up to October 17, 1972.

Upon MWSS' request, the petitioners signed their "Conforme" to the said letter-agreement, and extended the period
to pay the judgment less the discounts aforesaid to October 31, 1972. MWSS, however, paid only on December 22,
1972, the amount stated in the decision but less the reductions provided for in the October 2, 1972 letter-agreement.

Three years thereafter, or on June, 1975, after the last balance of the trust fund had been released and used to
satisfy creditors' claims, the petitioners filed a motion for execution in said civil case against MWSS for the balance
due under the decision-award. Respondent MWSS opposed execution setting forth the defenses of payment and
estoppel. (p. 174, Rollo)
On July 10, 1975, respondent judge denied the motion for execution on the ground that the parties had novated the
award by their subsequent letter-agreement. Petitioners moved for reconsideration but respondent judge, likewise,
denied the same in his Order dated July 24, 1975.

Hence, this Petition for Mandamus, alleging that respondent judge unlawfully refused to comply with his mandatory
duty-to order the execution of the unsatisfied portion of the final and executory award.

In a Resolution dated October 17, 1975, the Supreme Court dismissed the Petition for lack of merit. (p. 107, Rollo )
and denied petitioners' Motion for Reconsideration of the same. (p. 131, Rollo)

At the hearing on petitioners' Second Motion for Reconsideration, however, respondent MWSS asserted new
matters, (p. 186, Rollo) arguing that: the delay in effecting payment was caused by an unforeseen circumstance the
declaration of martial law, thus, placing MWSS under the management of the Secretary of National Defense, which
impelled MWSS to refer the matter of payment to the Auditor General and/or the Secretary of National Defense; and
that the 15-day period was merely intended to pressure MWSS officials to process the voucher. Petitioners,
however, vehemently deny these matters which are not supported by the records.

We agree with the petitioners.

While the tenor of the subsequent letter-agreement in a sense novates the judgment award there being a shortening
of the period within which to pay (Kabangkalan Sugar Co. vs. Pacheco, 55 Phil. 555), the suspensive and
conditional nature of the said agreement (making the novation conditional) is expressly acknowledged and
stipulated in the 14th whereas clause of MWSS' Resolution No. 132-72, (p. 23, Rollo) which states:

WHEREAS, all the foregoing benefits and advantages secured by the MWSS out of said conferences were
accepted by the Joint Venture provided that the remaining net amount payable to the Joint Venture will be
paid by the MWSS within fifteen (15) days after the official release of this resolution and a written
CONFORME to be signed by the Joint Venture; (Emphasis supplied)

MWSS' failure to pay within the stipulated period removed the very cause and reason for the agreement, rendering
some ineffective. Petitioners, therefore, were remitted to their original rights under the judgment award.

The placing of MWSS under the control and management of the Secretary of National Defense thru Letter of
Instruction No. 2, dated September 22, 1972 was not an unforeseen supervening factor because when MWSS
forwarded the letter-agreement to the petitioners on October 2, 1972, the MWSS was already aware of LOI No. 2.

MWSS' contention that the stipulated period was intended to pressure MWSS officials to process the voucher is
untenable. As aforestated, it is apparent from the terms of the agreement that the 15-day period was intended to be
a suspensive condition. MWSS, admittedly, was aware of this, as shown by the internal memorandum of a
responsible MWSS official, stating that necessary steps should be taken to effect payment within 15 days, for
otherwise, MWSS would forego the advantages of the discount. " (p. 426, Rollo)

As to whether or not petitioners are now in estoppel to question the subsequent agreement, suffice it to state that
petitioners never acknowledged full payment; on the contrary, petitioners refused MWSS' request for a conforme or
quitclaim. (p. 125, Rollo)

Accordingly, the award is still subject to execution by mere motion, which may be availed of as a matter of right any
time within (5) years from entry of final judgment in accordance with Section 5, Rule 39 of the Rules of Court.
WHEREFORE, We hereby set aside the assailed orders, and issue the writ of mandamus directing the present
Regional Trial Judge of the Branch that handled this case originally to grant the writ of execution for the balance due
under the award.

SO ORDERED.

Teehankee, C.J., Feria, Yap, Fernan, Narvasa, Melencio-Herrera, Alampay, Gutierrez, Jr., Cruz and Feliciano, JJ.,
concur.

COCHINGYAN V. R&B SURETY

FIRST DIVISION

June 30, 1987

G.R. No. L-47369

JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners,

vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.

FELICIANO, J.:

This case was certified to us by the Court of Appeals in its resolution dated 11 November 1977 as one involving only
questions of law and, therefore, falling within the exclusive appellate jurisdiction of this Court under Section 17,
Republic Act 296, as amended.

In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase in its line
of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with the Philippine National Bank (PNB). To
secure PNB's approval, PAGRICO had to give a good and sufficient bond in the amount of P400,000.00,
representing the increment in its line of credit, to secure its faithful compliance with the terms and conditions under
which its line of credit was increased. In compliance with this requirement, PAGRICO submitted Surety Bond No.
4765, issued by the respondent R & B Surety and Insurance Co., Inc. (R & B Surety") in the specified amount in
favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselves jointly and
severally to comply with the "terms and conditions of the advance line [of credit] established by the [PNB]." PNB had
the right under the Surety Bond to proceed directly against R & B Surety "without the necessity of first exhausting
the assets" of the principal obligor, PAGRICO. The Surety Bond also provided that R & B Surety's liability was not to
be limited to the principal sum of P400,000.00, but would also include "accrued interest" on the said amount "plus all
expenses, charges or other legal costs incident to collection of the obligation [of R & B Surety]" under the Surety
Bond.

In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity agreements were entered
into with R & B Surety: (a) one agreement dated 23 December 1963 was executed by the Catholic Church Mart
(CCM) and by petitioner Joseph Cochingyan, Jr, the latter signed not only as President of CCM but also in his
personal and individual capacity; and (b) another agreement dated 24 December 1963 was executed by PAGRICO,
Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Ben Mr. Villanueva signed both as Manager of
PAGRICO and in his personal and individual capacity; Mr. Liu signed both as President of PACOCO and in his
individual and personal capacity.

Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to pay an
annual premium of P5,103.05 and "for the faithful compliance of the terms and conditions set forth in said SURETY
BOND for a period beginning ... until the same is CANCELLED and/or DISCHARGED." The Indemnity Agreements
further provided:

(b) INDEMNITY: — TO indemnify the SURETY COMPANY for any damage, prejudice, loss, costs,
payments, advances and expenses of whatever kind and nature, including [of] attorney's fees, which the
CORPORATION may, at any time, become liable for, sustain or incur as consequence of having executed
the above mentioned Bond, its renewals, extensions or substitutions and said attorney's fees [shall] not be
less than twenty [20%] per cent of the total amount claimed by the CORPORATION in each action, the
same to be due, demandable and payable, irrespective of whether the case is settled judicially or
extrajudicially and whether the amount has been actually paid or not;

(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: — The said indemnities will be
paid to the CORPORATION as soon as demand is received from the Creditor or upon receipt of Court order
or as soon as it becomes liable to make payment of any sum under the terms of the above-mentioned Bond,
its renewals, extensions, modifications or substitutions, whether the said sum or sums or part thereof, have
been actually paid or not.

We authorize the SURETY COMPANY, to accept in any case and at its entire discretion, from any of us,
payments on account of the pending obligations, and to grant extension to any of us, to liquidate said
obligations, without necessity of previous knowledge of [or] consent from the other obligors.

x x x           x x x          x x x

(e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. — Any payment or disbursement

made by the SURETY COMPANY on account of the above-mentioned Bonds, its renewals, extensions or
substitutions, either in the belief that the SURETY COMPANY was obligate[d] to make such payment or in
the belief that said payment was necessary in order to avoid greater losses or obligations for which the
SURETY COMPANY might be liable by virtue of the terms of the above-mentioned Bond, its renewals,
extensions or substitutions, shall be final and will not be disputed by the undersigned, who jointly and
severally bind themselves to indemnify the SURETY COMPANY of any and all such payments as stated in
the preceding clauses.

x x x           x x x          x x x

When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from R & B
Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety made a series of
payments to PNB by virtue of that demand totalling P70,000.00 evidenced by detailed vouchers and receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva for
reimbursement of the payments made by it to the PNB and for a discharge of its liability to the PNB under the Surety
Bond. When petitioners failed to heed its demands, R & B Surety brought suit against Joseph Cochingyan, Jr., Jose
K. Villanueva and Liu Tua Ben in the Court of First Instance of Manila, praying principally that judgment be
rendered:

b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum of P20,412.20 representing the
unpaid premiums for Surety Bond No. 4765 from 1965 up to 1968, and the additional amount of P5,103.05
yearly until the Surety Bond No. 4765 is discharged, with interest thereon at the rate of 12% per annum;
[and]

c. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of P400,000.00
representing the total amount of the Surety Bond No. 4765 with interest thereon at the rate of 12% per
annum on the amount of P70,000.00 which had been paid to the Phil. National Bank already, the interest to
begin from the month of September, 1966;

x x x           x x x          x x x

Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he executed in favor of R
& B Surety: (i) did not express the true intent of the parties thereto in that he had been asked by R & B Surety to
execute the Indemnity Agreement merely in order to make it appear that R & B Surety had complied with the
requirements of the PNB that credit lines be secured; (ii) was executed so that R & B Surety could show that it was
complying with the regulations of the Insurance Commission concerning bonding companies; (iii) that R & B Surety
had assured him that the execution of the agreement was a mere formality and that he was to be considered a
stranger to the transaction between the PNB and R & B Surety; and (iv) that R & B Surety was estopped from
enforcing the Indemnity Agreement as against him.

Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity Agreement in favor of R
& B Surety only "for accommodation purposes" and that it did not express their true intention; (ii) that the Principal
Obligation of PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM by virtue of a
Trust Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook to pay
the Principal Obligation of PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement was thereby
extinguished by novation arising from the change of debtor under the Principal Obligation; and (iv) that the filing of
the complaint was premature, considering that R & B Surety filed the case against him as indemnitor although the
PNB had not yet proceeded against R & B Surety to enforce the latter's liability under the Surety Bond.

Petitioner Cochingyan, however, did not present any evidence at all to support his asserted defenses. Petitioner
Villanueva did not submit any evidence either on his "accommodation" defense. The trial court was therefore
constrained to decide the case on the basis alone of the terms of the Trust Agreement and other documents
submitted in evidence.

In due time, the Court of First Instance of Manila, Branch 24   rendered a decision in favor of R & B Surety, the
1

dispositive portion of which reads as follows;

Premises considered, judgment is hereby rendered: (a) ordering the defendants Joseph Cochingyan, Jr. and
Jose K. Villanueva to pay, jointly and severally, unto the plaintiff the sum of 400,000,00, representing the
total amount of their liability on Surety Bond No. 4765, and interest at the rate of 6% per annum on the
following amounts:

On P14,000.00 from September 27, 1966;

 On P4,000.00 from November 28, 1966;

On P4,000.00 from December 14, 1966;

On P4,000.00 from January 19, 1967;

On P8,000.00 from February 13, 1967;

On P4,000.00 from March 6, 1967;

On P8,000.00 from June 24, 1967;

On P8,000. 00 from September 14, 1967;

On P8,000.00 from November 28, 1967; and

On P8,000. 00 from February 26, 1968

until full payment; (b) ordering said defendants to pay, jointly and severally, unto the plaintiff the sum of
P20,412.00 as the unpaid premiums for Surety Bond No. 4765, with legal interest thereon from the filing of
plaintiff's complaint on August 1, 1968 until fully paid, and the further sum of P4,000.00 as and for attorney's
fees and expenses of litigation which this Court deems just and equitable.

There being no showing the summons was duly served upon the defendant Liu Tua Ben who has filed no
answer in this case, plaintiff's complaint is hereby dismissed as against defendant Liu Tua Ben without
prejudice.

Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva.

Not satisfied with the decision of the trial court, the petitioners took this appeal to the Court of Appeals which, as
already noted, certified the case to us as one raising only questions of law.

The issues we must confront in this appeal are:

1. whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B Surety to the PNB
under the Surety Bond which, in turn, extinguished the obligations of the petitioners under the Indemnity
Agreements;

2. whether the Trust Agreement extended the term of the Surety Bond so as to release petitioners from their
obligation as indemnitors thereof as they did not give their consent to the execution of the Trust Agreement; and

3. whether or not the filing of this complaint was premature since the PNB had not yet filed a suit against R & B
Surety for the forfeiture of its Surety Bond.

We address these issues seriatim.

1. The Trust Agreement referred to by both petitioners in their separate briefs, was executed on 28 December 1965
(two years after the Surety Bond and the Indemnity Agreements were executed) between: (1) Jose and Susana
Cochingyan, Sr., doing business under the name and style of the Catholic Church Mart, represented by Joseph
Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB as beneficiary. The
Trust Agreement provided, in pertinent part, as follows:
 WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000.00 issued by the R & B
Surety and Insurance Co. (R & B) at the instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on
December 21, 1963, in favor of the BENEFICIARY in connection with the application of PAGRICO for an
advance line of P400,000.00 to P800,000.00;

WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance & Surety Co.,
Inc. (CONSOLACION) in the amount of P900,000.00 in favor of the BENEFICIARY to secure certain credit
facilities extended by the BENEFICIARY to the Pacific Copra Export Co., Inc. (PACOCO);

WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their respective obligations
in favor of the BENEFICIARY guaranteed by the bonds issued by the R & B and the
CONSOLACION, respectively, and by reason of said default, the BENEFICIARY has demanded compliance
by the R & B and the CONSOLACION of their respective obligations under the aforesaid bonds;

WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under the indemnity
agreements aforementioned executed by him in favor of R & B and the CONSOLACION, respectively and in
order to forestall impending suits by the BENEFICIARY against said companies, he is willing as he hereby
agrees to pay the obligations of said companies in favor of the BENEFICIARY in the total amount of
P1,300,000 without interest from the net profits arising from the procurement of reparations consumer goods
made thru the allocation of WARVETS; . . .

l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE for the purpose of paying to
the BENEFICIARY Philippine National Bank in the manner stated hereunder, the obligations of the R & B
under the R & B Bond No. G-4765 for P400,000.00 dated December 23, 1963, and of the CONSOLACION
under The Consolacion Bond No. G-5938 of June 3, 1964 for P900,000.00 or the total amount of
P1,300,000.00 without interest from the net profits arising from the procurement of reparations consumer
goods under the Memorandum of Settlement and Deeds of Assignment of February 2, 1959 through the
allocation of WARVETS;

x x x           x x x          x x x

6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its claims against R & B and
CONSOLACION, subject of the bond mentioned above. In the meantime that this TRUST AGREEMENT is
being implemented, the BENEFICIARY hereby agrees to forthwith reinstate the R & B and the
CONSOLACION as among the companies duly accredited to do business with the BENEFICIARY and its
branches, unless said companies have been blacklisted for reasons other than those relating to the
obligations subject of the herein TRUST AGREEMENT;

x x x           x x x          x x x

9. This agreement shall not in any manner release the R & B and CONSOLACION from their respective
liabilities under the bonds mentioned above. (emphasis supplied)

There is no question that the Surety Bond has not been cancelled or fully discharged    by payment of the Principal
2

Obligation. Unless, therefore, the Surety Bond has been extinguished by another means, it must still subsist. And so
must the supporting Indemnity Agreements.  3

We are unable to sustain petitioners' claim that the Surety Bond and their respective obligations under the Indemnity
Agreements were extinguished by novation brought about by the subsequent execution of the Trust Agreement.
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one
which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of
the old one, or by subrogating a third person to the rights of the creditor.    Novation through a change of the object
4

or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by the change
of either the person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may
also be both objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual
purpose is achieved-an obligation is extinguished and a new one is created in lieu thereof. 5

If objective novation is to take place, it is imperative that the new obligation expressly declare that the old obligation
is thereby extinguished, or that the new obligation be on every point incompatible with the old one.   Novation is
6

never presumed: it must be established either by the discharge of the old debt by the express terms of the new
agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the
emergence of the new one must be clearly discernible.  7

Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the juridical
relation between the parties to the original contract is extended to a third person. It is essential that the old debtor be
released from the obligation, and the third person or new debtor take his place in the new relation. If the old debtor
is not released, no novation occurs and the third person who has assumed the obligation of the debtor becomes
merely a co-debtor or surety or a co-surety.  8

Applying the above principles to the instant case, it is at once evident that the Trust Agreement does not expressly
terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly
provides for the continuing subsistence of that obligation by stipulating that "[the Trust Agreement] shall not in any
manner release" R & B Surety from its obligation under the Surety Bond.

Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of
extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new
obligation (and nothing else) would sustain a finding of novation by implication.    But where, as in this case, the
9

parties to the new obligation expressly recognize the continuing existence and validity of the old one, where, in other
words, the parties expressly negated the lapsing of the old obligation, there can be no novation. The issue of implied
novation is not reached at all.

What the trust agreement did was, at most, merely to bring in another person or persons-the Trustor[s]-to assume
the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not unusual in business for
a stranger to a contract to assume obligations thereunder; a contract of suretyship or guarantee is the classical
example. The precise legal effect is the increase of the number of persons liable to the obligee, and not the
extinguishment of the liability of the first debtor.   Thus, in Magdalena Estates vs. Rodriguez,   we held that:
10 11

[t]he 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.

In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already previously bound to
R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the Trustor also became directly liable to
the PNB. So far as the PNB was concerned, the effect of the Trust Agreement was that where there had been
only two, there would now be three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R & B
Surety and the Trustor. And the PNB could proceed against any of the three, in any order or sequence. Clearly,
PNB never intended to release, and never did release, R & B Surety. Thus, R & B Surety, which was not a party to
the Trust Agreement, could not have intended to release any of its own indemnitors simply because one of those
indemnitors, the Trustor under the Trust Agreement, became also directly liable to the PNB.
2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor under the 24
December 1963 Indemnity Agreement with R & B Surety was extinguished when the PNB agreed in the Trust
Agreement "to hold in abeyance any action to enforce its claims against R & B Surety .

The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in solidum) to the R &
B Surety] — to become SURETY upon a SURETY BOND demanded by and in favor of [PNB] in the sum of
[P400,000.00] for the faithful compliance of the terms and conditions set forth in said SURETY BOND — ." This part
of the Agreement suggests that the indemnitors (including the petitioners) would become co-sureties on the Security
Bond in favor of PNB. The record, however, is bereft of any indication that the petitioners-indemnitors ever in fact
became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained simply
indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly demanded payment of the
Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil Code-which provides in
part that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty" could apply in the instant case.

The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was concerned and any extension
of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B Surety and the trustors[s]) could not
prejudice the second-tier parties.

There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking under the Trust
Agreement "to hold in abeyance any action to enforce its claims" against R & B Surety did not extend the maturity of
R & B Surety's obligation under the Surety Bond. The Principal Obligation had in fact already matured, along with
that of R &B Surety, by the time the Trust Agreement was entered into. Petitioner's Obligation had in fact already
matured, for those obligations were to amture "as soon as [R & B Surety] became liable to make payment of any
sum under the terms of the [Surety Bond] — whether the said sum or sums or part thereof have been actually paid
or not." Thus, the situation was that precisely envisaged in Article 2079:

[t]he mere failure on the part of the creditor to demand payment after the debt has become due does not of
itself constitute any extension of the referred to herein.(emphasis supplied)

The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the
surety of his right to pay the creditor and to be immediately subrogated to the creditor's remedies against the
principal debtor upon the original maturity date. The surety is said to be entitled to protect himself against the
principal debtor upon the orginal maturity date. The surety is said to be entitled to protect himself against the
contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. The
underlying rationale is not present in the instant case. As this Court has held,

merely delay or negligence in proceeding against the principal will not discharge a surety unless there is
between the creditor and the principal debtor a valid and binding agreement therefor, one which tends to
prejudice [the surety] or to deprive it of the power of obtaining indemnity by presenting a legal objection for
the time, to the prosecution of an action on the original security.
12

In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so minded, to
PNB of the matured obligation on behalf of R & B Surety and thereupon becoming subrogated to such remedies as
R & B Surety may have against PAGRICO.

3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity Agreements (quoted above) allow
R & B Surety to recover from petitioners even before R & B Surety shall have paid the PNB. We have previously
held similar indemnity clauses to be enforceable and not violative of any public policy. 
13
The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification not only against
actual loss but against liability as well.   While in a contract of indemnity against loss as indemnitor will not be liable
14

until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in
this case, the indemnitor's liability arises as soon as the liability of the person to be indemnified has arisen without
regard to whether or not he has suffered actual loss.   Accordingly, R & B Surety was entitled to proceed against
15

petitioners not only for the partial payments already made but for the full amount owed by PAGRICO to the PNB.

Summarizing, we hold that :

(1) The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The Trust Agreement
merely furnished to PNB another party obligor to the Principal Obligation in addition to PAGRICO and R & B Surety.

(2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim" against R & B Surety did not
amount to an "extension granted to the debtor" without petitioner's consent so as to release petitioner's from their
undertaking as indemnitors of R & B Surety under the INdemnity Agreements; and

(3) Petitioner's are indemnitors of R & B Surety against both payments to and liability for payments to the PNB. The
present suit is therefore not premature despite the fact that the PNB has not instituted any action against R & B
Surety for the collection of its matured obligation under the Surety Bond.

WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the decision of the trial court is
AFFIRMED in toto. Costs against the petitioners.

SO ORDERED.

BALILA V. IAC

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-68477 October 29, 1987

SPOUSES ANICETO BALILA and EDITHA S. DE GUZ MAN, SPOUSES ASTERIO DE GUZMAN and ERLINDA
CONCEPCION and ENCARNACION OCAMPO VDA. DE CONCEPCION, petitioners,
vs.
HONORABLE INTERMEDIATE APPELLATE COURT, HONORABLE FLORANTE S. ABASOLO, in his capacity
as Judge, Regional Trial Court, First Judicial Region, Branch L, Villasis, Pangasinan, GUADALUPE C. VDA.
DE DEL CASTILLO and WALDO DEL CASTILLO, respondents.

PARAS, J.:

This is a Petition for Review on certiorari of (1) the decision 1 of the Intermediate Appellate Court (IAC) affirming in toto the order   dated 2

April 26, 1983 in Civil Case No. U-3501 of the trial court which ordered the consolidation of ownership in favor of private respondent Guadalupe C. Vda. del
Castillo over two (2) parcels of land including the improvements thereon, situated in Villasis, Pangasinan namely, Lot No. 965, with an area of 648 square meters
covered by TCT No. 93407 and Lot No. 16 with an area of 910 square meters covered by TCT No. 101794 and (2) the Order of the Intermediate Appellate Court
(IAC) dated July 25, 1984 denying petitioners' Motion for Reconsideration.
The petition at bar began as an amicable settlement between petitioners and private respondents as defendants
and plaintiffs in Civil Case No. U-3501, which was approved by the trial court and made as the basis of its
Decision   dated December 11, 1980 ordering the parties to comply strictly with the terms and conditions embodied
3

in said amicable settlement. The salient points therein show that defendants admitted "having sold under a pacto de
retro sale the parcels of land   described in the complaint in the amount of P84,000.00" and that they "hereby
4

promise to pay the said amount within the period of four (4) months but not later than May 15,1981."  5

On December 30, 1981 or more than seven months after the last day for making payments, defendants redeemed
from plaintiff Guadalupe (one of the private respondents herein) Lot No. 52 with an area of 294 sq.m. covered by
TCT 101352 which was one of the three parcels of land described in the complaint by paying the amount of
P20,000.00.

On August 4, 1982, plaintiff filed a motion for a hearing on the consolidation of title over the remaining two (2)
parcels of land namely Lot 965 and Lot 16 alleging that the court's decision dated December 11, 1980 remained
unenforced for no payment of the total obligation due from defendants. Defendants opposed said motion alleging
that they had made partial payments of their obligation through plaintiff's attorney in fact and son, Waldo del Castillo,
as well as to the Sheriff. On April 26, 1983, the lower court issued the questioned order affirming consolidation.

On June 8, 1983, while the Order of the lower court had not yet been enforced, defendants paid plaintiff Guadalupe
Vda. del Castillo by tendering the amount of P28,800.00 to her son Waldo del Castillo (one of the private
respondents herein) thus leaving an unpaid balance of P35,200.00. A Certification dated June 8, 1983, (Annex D,
Rollo, page 31) and signed by Waldo shows that defendants were given a period of 45 days from date or up to July
23, 1983 within which to pay the balance. Said Certification supported defendants' motion for reconsideration and
supplemental motion for reconsideration of the Order reconsolidation of title, which motions were both denied by the
lower court, prompting defendants to file a petition for certiorari, prohibition and mandamus with pre injunction
petition with the Intermediate Appellate Court to seeking to annul and set aside the assailed Order dated April 26,
1983 and the Order denying their motion for reconsideration. After due consideration of the records of the case, the
appellate tribunal sustained the lower court, hence the present petition for certiorari, defendants relying on the
following arguments:,

(1) The appellate court erred in not declaring that the contract between the petitioners and private
respondent Guadalupe is one of equitable mortgage and not a pacto de retro sale,

(2) The appellate court erred in not declaring that the decision dated 11, 1980, based upon the
agreement of the parties was novated upon subsequent mutual agreements of the said parties.

Petitioners contend that despite the rendition of the said decision by the appellate court, private respondent
Guadalupe Vda. de del Castillo, represented by her son Waldo del Castillo as for attorney-in-fact, accepted
payments from petitioners and gave petitioners several extensions of time to pay their remaining obligations thus:

5.A. On July 8, 1984, private respondents accepted the amounts of P6,130.00 from petitioners- and
gave petitioners up to August 30, 1984 to pay the latter's balance of P23,870.00; (Certification
Annex "J" Petition);

5.B. On September 9, 1984, private respondents accepted the amount of P1,100.00 from petitioners
and gave petitioners up to October 30, 1984 to pay the latter's balance of P21,624.00 ( Certification
Annex "L" Petition);

5.C. On October 30, 1984, private respondents accepted the amount of P2,500.00 from petitioners
and gave petitioners up to November 15, 1984 to pay the latter's balance of P19,124.00 (Receipt,
Annex "N" Reply);
 5.D. On November 13, 1984, private respondents accepted the amount of P3,124.00 from
petitioners and gave petitioners up to December 30, 1984 to pay the latter's balance of P16,000.00
and private respondent promised to deliver TCT Nos. 146360 and 146361 already in-the name of
private respondent Guadalupe Vda. de del Castillo, covering lots 965 and 16, respectively, in favor
of petitioners (Receipt, Annex "O," Reply);

5.E. On November 23, 1984, private respondents accepted the amount of P6,000.00 from petitioners
and gave petitioners up to December 30, 1984 to pay the latter's balance of P10,000.00 and private
respondents proposed to deliver TCT Nos. 146360 and 146361, covering Lots 965 and 16,
respectively, and promised to reconvey said lots in favor of petitioners (Receipt, Annex "P," Reply).

(Memo for Petitioners, pp. 175-176, Rollo)

Petitioners likewise allege that private respondents Guadalupe Vda. de del Castillo and son Waldo, were nowhere
to be found on December 30, 1984, the last day for petitioners to pay their balance of P10,000.00 and for private
respondents to reconvey the lands in question (Lots 965 and 16) in favor of petitioners and to deliver TCT Nos.
146360 and 146361 already in the name of private respondent Guadalupe Vda. de del Castillo, covering said lots
respectively. This incident compelled petitioners to deposit said amount with the Regional Trial Court as per receipt
OR No. 9764172 (Annex "Q") accompanied by a motion to deposit (Annex "R") which motion was granted as per
Order dated January 9, 1985 (Annex "S"). The aforementioned titles over the two parcels of lands are subject to
Notice of Lis Pendens dated August 15, 1983 (Annex "T").

On the other hand, some of the private respondents do not deny they received the amounts stated in Annexes "D,"
"F," "J," "L," N," and "P". They aver however that the amicable settlement entered into by and between the parties
duly assisted by their counsel was, with respect to Guadalupe, signed by her personally and that at no time
thereafter did she ever appoint Waldo del Castillo who is one of her children to receive for her any sum of money to
be paid by the petitioners for the settlement of their obligations arising out of their amicable settlement. Guadalupe
also questions the inclusion as private respondent of Waldo del Castillo in this Court and the inclusion of the alleged
receipts of payments as these receipts were never offered in evidence before the 'trial court or the appellate court
nor were the same admitted in evidence by said courts.

Petitioners' contentions deserve Our consideration.

The root of all the issues raised before Us is that judgment by compromise rendered by the lower court based on the
terms of the amicable settlement of the contending parties. Such agreement not being contrary to law, good morals
or public policy was approved by the lower court and therefore binds the parties who are enjoined to comply
therewith.

However, the records show that petitioners made partial payments to private respondent Waldo del Castillo after
May 15, 1981 or the last day for making payments, redeeming Lot No. 52 as earlier stated. (Annex "A," Petition).

There is no question that petitioners tendered several payments to Waldo del Castillo even after redeeming lot No.
52. A total of these payments reveals that petitioners share. fulIy paid the amount stated in the judgment by com
promise. The only issue is whether Waldo del Castillo was a person duly authorized by his mother Guadalupe Vda.
de del Castillo, as her attorney-in-fact to represent her in transactions involving the properties in question. We
believe that he was so authorized in the same way that the appellate court took cognizance of such fact as
embodied in its assailed decision. reading as follows:

It may be mentioned that on May 25,1981, Guadalupe Vda. de Del Castillo, represented by her
attorney in fact Waldo Castillo, filed a complaint for consolidation of ownership against the same
petitioners herein before the Court of First Instance of Pangasinan, docketed as Civil Case No. U-
 3650, the allegations of which are Identical to the complaint filed in Civil Case No. U-3501 of the
same court. This case U-3650 was, however, dismissed in an Order dated May 27, 1983, in view of
the order of consolidation issued in Civil Case No. U-350 1. (p. 37, Rollo) (Underscoring supplied)

The fact therefore remains that the amount of P84,000.00 payable on or before May 15, 1981 decreed by the trial
court in its judgment by compromise was novated and amended by the subsequent mutual agreements and actions
of petitioners and private respondents. Petitioners paid the aforestated amount on an insatalment basis and they
were given by private respondents no less than eight extensions of time pay their obligation. These transactions
took place during the pendency of the motion for reconsideration of the Order of the trial court dated April 26, 1983
in Civil Case No. U-3501, during the pendency of the petition for certiorari in AC-G.R. SP-01307 before the
Intermediate Appellate Court and after the filing of the petition before us. This answers the claim of the respondents
on the failure of the petitioners to present evidences or proofs of payment in the lower court and the appellate court.
We have touched on this issue, similarly, in the case of de los Santos vs. Rodriguez   wherein We ruled that: 6

As early as Molina vs. De la Riva   the principle has been laid down that, when, after judgment has
7

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.

For this reason, in Amor vs. Judge Jose,   we used the following language:
8

The Court cannot refuse to issue a writ of execution upon a final and executory
judgment, or quash it, or order its stay, for, as a general rule, parties will not be
allowed, after final judgment, to object to the execution by raising new issues of fact
or of law, except when there had been a change in the situation of the parties which
makes such execution in- equitable; or when it appears that the controversy has
never been submitted to the judgment of the court, or when it appears that the writ of
execution has been improvidently issued, or that it is defective in substance, or
issued against the wrong party or that judgment debt has been paid or otherwise
satisfied or when the writ has been issued without authority. (emphasis supplied)

Likewise in the case of Dormitorio vs. Fernandez,   We held: 9

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 Barretto v. Lopez 10 this
Court speaking through the then Chief Justice Paras: "Allegating 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. Acuna, 11 it was contended that a lower court decision was novated by the 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. ...

WHEREFORE, finding merit in the petition, the same is hereby given DUE COURSE and the assailed decision, SET
ASIDE. Private respondents are hereby ordered to reconvey and deliver lot No. 965 and Lot No. 16 as covered by
TCT Nos. 146360 and 146361 respectively in favor of petitioners. Should private respondents fail to do so, the Clerk
of Court of the Regional Trial Court concerned is ordered to execute the necessary deed of reconveyance,
conformably with the provisions of the Rules of Court. The local Register of Property is ordered to register said deed
of reconveyance. Private respondents are hereby authorized to withdraw the balance in the amount of P10,000
consigned by petitioners on January 9, 1985 with the trial court as per OR No. 9764172 (Annex "O") a full payment
of petitioners' obligation.

This decision is immediately executory and no motion for extension of the period within which to file a motion for
reconsideration will be granted.
SO ORDERED.

PEOPLE’S BANK V. SYVEL’S

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-29280 August 11, 1988

PEOPLE'S BANK AND TRUST COMPANY, plaintiff-appellee,

vs.
SYVEL'S INCORPORATED, ANTONIO Y. SYYAP and ANGEL Y SYYAP, defendants-appellants.

Araneta, Mendoza & Papa for plaintiff-appellee.

Quasha, Asperilia, Zafra, Tayag & Ancheta for defendants-appellants.

PARAS, J.:

This is an appeal from the decision dated May 16, 1968 rendered by the Court of First Instance of Manila, Branch
XII in Civil Case No. 68095, the decretal portion of which states:

IN VIEW OF THE FOREGOING, judgment is rendered sentencing all the defendants to pay the
plaintiff jointly and severally the sum of P601,633.01 with interest thereon at the rate of 11% per
annum from June 17, 1967, until the whole amount is paid, plus 10% of the total amount due for
attorney's fees and the costs of suit. Should the defendants fail to pay the same to the plaintiff, then
it is ordered that all the effects, materials and stocks covered by the chattel mortgages be sold at
public auction in conformity with the Provisions of Sec. 14 of the Chattel Mortgage Law, and the
proceeds thereof applied to satisfy the judgment herein rendered. The counterclaim of the
defendants, upon the evidence presented and in the light of the authorities above cited, is dismissed
for lack of merit.

SO ORDERED

(pp. 89-90, Record on Appeal; p. 15, Rollo)

The facts of the case based on the statement of facts, made by the trial court in its decision as cited in the briefs of
both parties are as follows:

This is an action for foreclosure of chattel mortgage executed in favor of the plaintiff by the
defendant Syvel's Incorporated on its stocks of goods, personal properties and other materials
owned by it and located at its stores or warehouses at No. 406, Escolta, Manila; Nos. 764-766 Rizal
Avenue, Manila; Nos. 10-11 Cartimar Avenue, Pasay City; No. 886 Nicanor Reyes, Sr. (formerly
Morayta), Manila; as evidenced by Annex"A."The chattel mortgage was duly registered in the
 corresponding registry of deeds of Manila and Pasay City. The chattel mortgage was in connection
with a credit commercial line in the amount of P900,000.00 granted the said defendant corporation,
the expiry date of which was May 20, 1966. On May 20, 1965, defendants Antonio V. Syyap and
Angel Y. Syyap executed an undertaking in favor of the plaintiff whereby they both agreed to
guarantee absolutely and unconditionally and without the benefit of excussion the full and prompt
payment of any indebtedness to be incurred on account of the said credit line. Against the credit line
granted the defendant Syvel's Incorporated the latter drew advances in the form of promissory notes
which are attached to the complaint as Annexes "C" to "l." In view of the failure of the defendant
corporation to make payment in accordance with the terms and conditions agreed upon in the
Commercial Credit Agreement the plaintiff started to foreclose extrajudicially the chattel mortgage.
However, because of an attempt to have the matter settled, the extra-judicial foreclosure was not
pushed thru. As no payment had been paid, this case was even tually filed in this Court.

On petition of the plaintiff based on the affidavits executed by Mr. Leopoldo R. Rivera, Assistant Vice
President of the plaintiff bank and Atty. Eduardo J. Berenguer on January 12, 1967, to the effect,
among others, that the defendants are disposing of their properties with intent to defraud their
creditors, particularly the plaintiff herein, a preliminary writ of attachment was issued. As a
consequence of the issuance of the writ of attachment, the defendants, in their answer to the
complaint set up a compulsory counterclaim for damages.

After the filing of this case in this court and during its pendency defendant Antonio v. Syyap
proposed to have the case settled amicably and to that end a conference was held in which Mr.
Antonio de las Alas, Jr., Vice President of the Bank, plaintiff, defendant Antonio V. Syyap and Atty.
Mendoza were present. Mr. Syyap requested that the plaintiff dismiss this case because he did not
want to have the goodwill of Syvel's Incorporated impaired, and offered to execute a real estate
mortgage on his real property located in Bacoor, Cavite. Mr. De las Alas consented, and so the Real
Estate Mortgage, marked as Exhibit A, was executed by the defendant Antonio V. Syyap and his
wife Margarita Bengco Syyap on June 22, 1967. In that deed of mortgage, defendant Syyap
admitted that as of June 16, 1967, the indebtedness of Syvel's Incorporated was P601,633.01, the
breakdown of which is as follows: P568,577.76 as principal and P33,055.25 as interest. Complying
with the promise of the plaintiff thru its Vice President to ask for the dismissal of this case, a motion
to dismiss this case without prejudice was prepared, Exhibit C, but the defendants did not want to
agree if the dismissal would mean also the dismissal of their counterclaim Against the plaintiff.
Hence, trial proceeded.

As regards the liabilities of the defendants, there is no dispute that a credit line to the maximum
amount of P900,000.00 was granted to the defendant corporation on the guaranty of the
merchandise or stocks in goods of the said corporation which were covered by chattel mortgage duly
registered as required by law. There is likewise no dispute that the defendants Syyap guaranteed
absolutely and unconditionally and without the benefit of excussion the full and prompt payment of
any indebtedness incurred by the defendant corporation under the credit line granted it by the
plaintiff. As of June 16, 1967, its indebtedness was in the total amount of P601,633.01. This was
admitted by defendant Antonio V. Syyap in the deed of real estate mortgage executed by him. No
part of the amount has been paid by either of the defendants. Hence their liabilities cannot be
questioned. (pp. 3-6, Brief for Appellee; p. 26, Rollo)

In their brief, appellants assign the following errors:

I
 The lower court erred in not holding that the obligation secured by the Chattel Mortgage sought to be
foreclosed in the above-entitled case was novated by the subsequent execution between appellee
and appellant Antonio V, Syyap of a real estate mortgage as additional collateral to the obligation
secured by said chattel mortgage.

II

The lower court erred in not dismissing the above-entitled case and in finding appellants liable under
the complaint.

III

The lower court erred in not holding that the writ of preliminary attachment is devoid of any legal and
factual basis whatsoever.

IV

The lower court erred in dismissing appellants'counterclaim and in not holding appellee liable to
appellants for the consequent damages arising out of a wrongful attachment. (pp. 1-2, Brief for the
Appellants, p. 25, Rollo)

Appellants admit that they are indebted to the appellee bank in the amount of P601,633.01, breakdown of which is
as follows: P568,577.76 as principal and P33,055.25 as interest. After the filing of the case and during its pendency,
defendant Antonio V. Syyap proposed to have the case amicably settled and for that purpose a conference was
held in which Mr. Antonio de las Alas, Jr., Vice President of plaintiff People's Bank and Trust Company, defendant
Antonio V. Syyap and Atty. Mendoza were present. Mr. Syyap requested that the plaintiff dismiss this case as he did
not want to have the goodwill of Syvel's Incorporated impaired, and offered to execute a real estate mortgage on his
real property located in Bacoor, Cavite. Mr. de las Alas consented, and so the Real Estate Mortgage (Exhibit "A")
was executed by defendant Antonio Syyap and his wife Margarita Bengco Syyap on June 22, 1967. Defendants did
not agree with plaintiffs motion to dismiss which included the dismissal of their counterclaim and filed instead their
own motion to dismiss (Record on Appeal, pp. 68-72) on the ground that by the execution of said real estate
mortgage, the obligation secured by the chattel mortgage subject of this case was novated, and therefore,
appellee's cause of action thereon was extinguished.

In an Order dated September 23, 1967, the motion was denied for not being well founded (record on Appeal, p. 78).

Appellants contention is without merit.

Novation takes place when the object or principal condition of an obligation is changed or altered. It is elementary
that novation is never presumed; it must be explicitly stated or there must be manifest incompatibility between the
old and the new obligations in every aspect (Goni v. CA, 144 SCRA 223 [1986]; National Power Corp. v. Dayrit, 125
SCRA 849 [1983]).

In the case at bar, there is nothing in the Real Estate Mortgage which supports appellants'submission. The contract
on its face does not show the existence of an explicit novation nor incompatibility on every point between the "old
and the "new" agreements as the second contract evidently indicates that the same was executed as new additional
security to the chattel mortgage previously entered into by the parties.

Moreover, records show that in the real estate mortgage, appellants agreed that the chattel mortgage "shall remain
in full force and shall not be impaired by this (real estate) mortgage."
The pertinent provision of the contract is quoted as follows:

That the chattel mortgage executed by Syvel's Inc. (Doc. No. 439, Book No. I, Series of 1965, Notary
Public Jose C. Merris, Manila); real estate mortgage executed by Angel V. Syyap and Rita V. Syyap
(Doc. No. 441, Page No. 90, Book No. I, Series of 1965, Notary Public Jose C. Merris, Manila) shall
remain in full force and shall not be impaired by this mortgage (par. 5, Exhibit"A," Emphasis ours).

It is clear, therefore, that a novation was not intended. The real estate mortgage was evidently taken as additional
security for the performance of the contract (Bank of P.I. v. Herrige, 47 Phil. 57).

In the determination of the legality of the writ of attachment by the Court of First Instance of Manila, it is a well
established rule that the grant or denial of a writ of attachment rests upon the sound discretion of the court. Records
are bereft of any evidence that grave abuse of discretion was committed by respondent judge in the issuance of the
writ of attachment.

Appellants contend that the affidavits of Messrs. Rivera and Berenguer on which the lower court based the issuance
of the writ of preliminary attachment relied on the reports of credit investigators sent to the field and not on the
personal knowledge of the affiants. Such contention deserves scant consideration. Evidence adduced during the
trial strongly shows that the witnesses have personal knowledge of the facts stated in their affidavits in support of
the application for the writ. They testified that Syvel's Inc. had disposed of all the articles covered by the chattel
mortgage but had not remitted the proceeds to appellee bank; that the Syvel's Stores at the Escolta, Rizal Avenue
and Morayta Street were no longer operated by appellants and that the latter were disposing of their properties to
defraud appellee bank. Such testimonies and circumstances were given full credit by the trial court in its decision
(Brief for Appellee, p. 14). Hence, the attachment sought on the ground of actual removal of property is justified
where there is physical removal thereof by the debtor, as shown by the records (McTaggert v. Putnam Corset Co., 8
N.Y. S 800 cited in Moran, Comments on the Rules of Court, 1970 Ed., Vol. 3, p. 7).

Besides, the actuations of appellants were clearly seen by the witnesses who "saw a Fiat Bantam Car-Fiat Car, a
small car and about three or four persons hurrying; they were carrying goods coming from the back portion of this
store of Syvels at the Escolta, between 5:30 and 6:00 o'clock in the evening." (Record on Appeal, pp. 45-46).
Therefore, "the act of debtor (appellant) in taking his stock of goods from the rear of his store at night, is sufficient to
support an attachment upon the ground of the fraudulent concealment of property for the purpose of delaying and
defrauding creditors." (4 Am. Jur., 841 cited in Francisco, Revised Rules of Court, Second Edition, 1985, p. 24).

In any case, intent to defraud may be and usually is inferred from the facts and circumstances of the case; it can
rarely be proved by direct evidence. It may be gleaned also from the statements and conduct of the debtor, and in
this connection, the principle may be applied that every person is presumed to intend the natural consequences of
his acts (Francisco, Revised Rules of Court, supra, pp. 24-25), In fact the trial court is impressed "that not only has
the plaintiff acted in perfect good faith but also on facts sufficient in themselves to convince an ordinary man that the
defendants were obviously trying to spirit away a port;.on of the stocks of Syvel's Incorporated in order to render
ineffectual at least partially anyjudgment that may be rendered in favor of the plaintiff." (Decision; Civil Case No.
68095; Record on Appeal, pp. 88-89).

Appellants having failed to adduce evidence of bad faith or malice on the part of appellee in the procurement of the
writ of preliminary attachment, the claim of the former for damages is evidently negated. In fact, the allegations in
the appellee's complaint more than justify the issuance of the writ of attachment.

PREMISES CONSIDERED, this appeal is DISMISSED for lack of merit and the judgment appealed from is
AFFIRMED.

SO ORDERED.
RODRIGUEZ V. REYES

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-22958 January 30, 1971

ESTRELLA BENIPAYO RODRIGUEZ, MANUEL D. BENIPAYO, DONATO BENIPAYO, JR., JAIME D.

BENIPAYO, MAXIMA BENIPAYO MORALES, AURORA BENIPAYO DE LEON, FRANCISCO D. BENIPAYO,
ALEJANDRO D. BENIPAYO, TERESITA BENIPAYO DE LOS SANTOS, LYDIA BENIPAYO CLEMENTE, and
JULIA C. MERCADO, petitioners,
vs.
HON. JUAN O. REYES, in his capacity as Presiding Judge of the Manila Court of First Instance, Branch XXI,
ALBERTO D. BENIPAYO, DR. JOSE N. DUALAN and VICENTE SAYSON, JR., respondents.

De Santos and Delfino for petitioners.

Padilla Law Offices for respondents Alberto D. Benipayo and Dr. Jose N. Dualan.

Ledesma, Guytingco, Mendoza and Associates for respondent Vicente Sayson, Jr.

REYES, J.B.L., J.:

Petition for certiorari, with a prayer for the issuance of a writ of preliminary injunction, filed by some 1 of the children of
the deceased spouses, Donato Benipayo, Jr., and Pura Disonglo, seeking to have this Court set aside the order issued on
28 April 1964 by the Hon. Juan O. Reyes in Civil Case No. 52188 of the Court of First Instance of Manila, entitled "Estrella
Benipayo-Rodriguez, et al. vs. Alberto D. Benipayo," approving the sheriff's sales of properties owned in common by the
plaintiffs and defendant aforesaid, subject to the condition that the vendors should clear the titles thereof from any
encumbrance in favor of the Development Bank of the Philippines.  The petition further sought to compel the respondent
lâwphî1.ñèt

judge to cause a re-bidding of the properties involved, at public auction, or to approve the sales aforementioned without
the condition imposed upon the vendors.

Upon the filing of a bond in the amount of P20,000.00 this Court ordered the issuance of a writ of preliminary
injunction on 25 June 1964. 2

It appears that on 13 November 1962, petitioners filed with the respondent court a complaint against their brother,
respondent Alberto D. Benipayo, for the partition of the properties held by them in common as heirs of the late
spouses, Donato D. Benipayo and Pura Disonglo (Civil Case No. 52188). After respondent Benipayo had answered
the complaint, the court set the case for a pre-trial conference, and in the course thereof the parties agreed to have
the properties in litigation sold at public auction to the highest bidder. Pursuant to an order issued by the respondent
judge, the parties submitted to the court a list of the properties to be sold, among which were some lots in Albay,
and the following parcels of land, with their improvements, that were at the time mortgaged to the Development
Bank of the Philippines:
 1. Lot No. 6-A, Block 2124, with an area of 314.70 square meters, evidenced by TCT No. 48978,
Manila;

2. Lot No. 6-B-2, Block No. 2124, with an area of 389.90 square meters, evidenced by TCT No.
48979, Manila;

3. The improvements erected on the above two lots denominated as No. 664 Misericordia, Manila.

The above improvements and two lots are mortgaged with the Development Bank of the Philippines
with an outstanding mortgage capital of about P50,000.00.

The respondent judge first directed the sale at public auction of properties located in Albay. After the consummation
of the sale and the approval thereof, His Honor ordered the sale of the two Manila lots and improvements described
above. Pursuant to the order, the sheriff of the City of Manila scheduled the auction sale on 30 March 1964 at 10:00
o'clock A.M. Notice thereof was duly posted and published, with the following warning:

NOTE: According to information furnished by the plaintiffs' counsel, Atty. Gonzalo D. David, the real
properties described above are mortgaged with (sic) the Development Bank of the Philippines, under
which there is allegedly an outstanding balance in the sum of P37,121.76.

Prospective buyers and bidders are hereby enjoined to investigate for themselves the titles to the
real properties described above, as well as the encumbrances thereon, if any there be.

On the date set for the sale, petitioners moved for its postponement on the ground that they were not in a position to
actively participate therein, but upon objection of respondent Benipayo's counsel, His honor denied the motion and
the sale was held as scheduled.

Herein respondent, Jose N. Dualan, successfully bid at the auction sale the sum of P235,000.0 for Lot No. 6-B-2,
Block No. 2124, covered by Transfer Certificate of Title No. 48979, issued by the Office of the Register of Deeds of
Manila; while respondent Vicente Sayson's bid of P173,000.00 was the highest for Lot No. 6-A of Block No. 2124,
covered by Transfer Certificate of Title No. 48978 issued by the same office. 3

After the sheriff had filed his return with the respondent judge, petitioners moved for the approval of the sale,
deducting from the total amount of P408,000.00 the sheriff's percentage, and the expenses incurred by petitioners
for the publication of the notice of sale. Commenting on the aforesaid motion, respondents Benipayo and Dualan
prayed that the respondent judge order (1) the payment of the mortgage debt in favor of the Development Bank of
the Philippines in the amount of P37,121.96 from the proceeds of the auction sale; (2) the issuance by the sheriff of
Manila of a certificate of sale in favor of Dualan of the property sold to him free from all liens and encumbrances;
and (3) the payment to respondent Benipayo of 1/12 of the proceeds of the sale after deducting therefrom the
payment to the Development Bank of the Philippines.

After hearing the arguments of the parties on the motion, the respondent judge apparently entertained some doubts
as to whether there had been a meeting of minds on the question of who was to discharge the mortgage obligation
in favor of the Development Bank, so he suggested that the properties be subjected to another "bidding" "with a
clear-cut understanding that the 12 heirs shall assume all obligations and that they should not be paid by the
buyers."4 The suggestion was not accepted by the buyers; and the respondent judge, on 28 April 1964, issued the order
complained of, the dispositive portion of which reads as follows:

WHEREFORE, the Manila Sheriff's Report dated March 30, 1964, and the Quezon City Sheriff's
Report dated April 6, 1964, are hereby approved, subject to the following conditions:
 1. That the vendors or the owners of the properties sold shall clear said properties of all
encumbrances that were incurred in them long before the auction sales;

2. That since the taxes on said real estates are not encumbrances incurred by the owners of the
properties, but are proper charges attached and against the properties themselves, the real estate
taxes shall be borne by the owner or owners of the said properties on the date when said taxes
become due for payment.

Petitioners' motion for reconsideration of the above-quoted order having been denied, the present petition
for certiorari was filed by them.

After the respondents had filed their answer to the petition and the parties had submitted their respective
memorandum, the petitioners, jointly with respondents Vicente Sayson and Alberto Benipayo, submitted a
compromise agreement, on 8 May 1970, cancelling the sale to respondent Vicente Sayson of the property (TCT No.
48978) previously bidded for by him, upon the consideration that the amount paid to the Sheriff by Sayson be
returned to the latter. As respondent Jose Dualan interposed no objection to the approval of the said compromise
agreement, this Court rendered, on 30 June 1970, a partial decision, approving the compromise agreement and
ordering the compliance with its provisions by the parties thereto, and, as prayed for, dismissed this case as against
Vicente Sayson, leaving only Jose N. Dualan, purchaser of the property covered by TCT No. 48979 of the City of
Manila, as party respondent.

The petitioners seek to apply the doctrine of caveat emptor to the successful bidder Dualan, and contend that under
said rule Dualan bought at his own peril and, having purchased the property with knowledge of the encumbrance he
should assume payment of the indebtedness secured thereby.

We find the stand of petitioners-appellants to be unmeritorious and untenable. The maxim "caveat emptor" applies
only to execution sales, and this was not one such.5 The mere fact that the purchaser of an immovable has notice that
the required realty is encumbered with a mortgage does not render him liable for the payment of the debt guaranteed by
the mortgage, in the absence of stipulation or condition that he is to assume payment of the mortgage debt. The reason is
plain: the mortgage is merely an encumbrance on the property, entitling the mortgagee to have the property foreclosed,
i.e., sold, in case the principal obligor does not pay the mortgage debt, and apply the proceeds of the sale to the
satisfaction of his credit. Mortgage is merely an accessory undertaking for the convenience and security of the mortgage
creditor, and exists independently of the obligation to pay the debt secured by it. The mortgagee, if he is so minded, can
waive the mortgage security and proceed to collect the principal debt by personal action against the original mortgagor.

By buying the property covered by TCT No. 48979 with notice that it was mortgaged, respondent Dualan only
undertook either to pay or else allow the land's being sold if the mortgage creditor could not or did no obtain
payment from the principal debtor when the debt matured. 6 Nothing else. Certainly the buyer did not obligate
himself to replace the debtor in the principal obligation, and he could not do so in law without the creditor's consent.
Our Civil Code, Article 1293, explicitly provides:

ART. 1293. Novation which consists in substituting a new debtor in the place of the original one, may
be made even with out 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.

The obligation to discharge the mortgage indebtedness, therefore, remained on the shoulders of the original debtors
and their heirs, petitioners herein, since the record is devoid of any evidence of contrary intent. This Court has so
ruled in Bank of the Philippine Islands vs. Concepcion e Hijos, Inc., 53 Phil. 806, from which We quote:

But the plaintiff argues that in American jurisprudence, the purchaser of mortgaged property who
assumes the payment of the mortgage debt, may for that reason alone be sued for the debt by the
creditor and that that rule is applicable in this jurisdiction. Aside from the fact we are not here dealing
 with a mere assumption of the debt, but with a subrogation, it may be noted that this court has
already held that the American doctrine in this respect is not in harmony with the spirit of our
legislation and has not been adopted in this country. In the case of E. C. McCullough & Co.  vs.
Veloso and Serna (46 Phil., 1), the court, speaking through its present Chief Justice, said:

The effects of a transfer of a mortgaged property to a third person are well

determined by the Civil Code. According to article 1879 7 of this Code, the creditor
may demand of the third person in possession of the property mortgaged payment of
such part of the debt, as is secured by the property in his possession, in the manner
and form established by the law. The Mortgage Law in force at the promulgation of
the Civil Code and referred to in the latter, exacted, among other conditions, also the
circumstance that after judicial or notarial demand, the original debtor had failed to
make payment of the debt at maturity. (Art. 135 of the Mortgage Law of the
Philippines of 1889.) According to this, the obligation of the new possessor to pay the
debt originated only from the right of the creditor to demand payment of him, it being
necessary that a demand for payment should have previously been made upon the
debtor and the latter should have failed to pay. And even if these requirements were
complied with, still the third possessor might abandon the property mortgaged, and
in that case it is considered to be in the possession of the debtor. (Art. 136 of the
same law.) This clearly shows that the spirit of the Civil Code is to let the obligation of
the debtor to pay the debt stand although the property mortgaged to secure the
payment of said debt may have been transferred to a third person. While the
Mortgage Law of 1893 eliminated these provisions, it contained nothing indicating
any change in the spirit of the law in this respect. Article 129 of this law, which
provides for the substitution of the debtor by the third person in possession of the
property, for the purposes of the giving of notice, does not show this change and has
reference to a case where the action is directed only against the property burdened
with the mortgage. (Art. 168 of the Regulation )

Upon the other hand, the orders complained of, in so far as they require the vendors-heirs to clear the title to the
land sold to respondent Dualan, when the latter bid for it with full knowledge that the same was subject to a valid
and subsisting mortgage, is plainly erroneous. In submitting his bid, Dualan is presumed to know, and in fact did
know, that the property was subject to a mortgage lien; that such encumbrance would make him, as purchaser,
eventually liable to discharge mortgage by paying or settling with the mortgage creditor, should the original
mortgagors fail to satisfy the debt. Normally, therefore, he would have taken this eventuality into account in making
his bid, and offer a lower amount for the lot than if it were not encumbered. If he intended his bid to be understood
as conditioned upon the property being conveyed to him free from encumbrance, it was his duty to have so stated in
his bid, or at least before depositing the purchase price. He did not do so, and the bid must be understood and
taken to conform to the normal practice of the buyer's taking the mortgaged property subject to the mortgage.
Consequently, he may not demand that the vendors should discharge the encumbrance aforesaid.

Thus, the questioned order of the trial court ordering the vendors-heirs to clear the property of all its encumbrances
is not in accordance with law.

The second and fourth grounds for the petition for certiorari are that the minds of the parties allegedly never met, so
that the court should have ordered a re-bidding. The claim that there was no meeting of the minds is not only
inconsistent with petitioners' own argument on the main issue, but is belied by their conduct. The fact is that an offer
to sell was advertised, a bidding was conducted, and the winning bidder deposited the price. A rebidding would
have been proper had all the parties agreed to it, but they did not. Instead, the petitioners authorized their lawyer to
negotiate for the redemption of the property, thereby implying that they have accepted the validity of the sale and
that their questioning it now is but an afterthought.
The third ground relied upon in the petition for annulling the sale is the participation of Atty. Ambrosio Padilla in the
auction sale on behalf of respondent Dualan while still the counsel of record for respondent Benipayo. The ground
lacks merit, for the reason that petitioners have not shown that they were in any way prejudiced, and they had, by
their conduct, accepted the validity of the sale.

FOR THE FOREGOING REASONS, the petition for certiorari is hereby granted and the orders complained of are
reversed and set aside in so far as they require petitioners to clear the property sold from the mortgage in favor of
the Development Bank. The writ of preliminary injunction heretofore issued is made permanent. No costs.

Dizon, Makalintal, Zaldivar Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ., concur.

Concepcion, C.J. and Castro, J., took no part.

ODIAMAR V. ODIAMAR VALENCIA

FIRST DIVISION

June 28, 2016

G.R. No. 213582

NYMPHA ODIAMAR,  Petitioner

1

vs.
LINDA ODIAMAR VALEN CIA, Respondent

DECISION

PERLAS-BERNABE, J.:

Before the Court is a petition for review on certiorari  assailing the Decision  dated March 16, 2012 and the
2 3

Resolution  dated July 14, 2014 of the Court of Appeals (CA) in C.A. G.R. CV No. 93624, which affirmed the
4

Decision  dated May 5, 2009 of the Regional Trial Court of San Jose, Camarines Sur, Branch 58 (RTC) in Civil Case
5

No. T-962 ordering petitioner Nympha S. Odiamar (petitioner) to pay respondent Linda Odiamar Valencia
(respondent) the amount of Pl,710,049.00 plus twelve percent (12%) interest, attorney's fees, litigation expenses,
and the costs of suit.

Facts

On August 20, 2003, respondent filed a complaint  for sum of money and damages against petitioner, alleging that
6

the latter owed her P2,100,000.00. Petitioner purportedly issued China Bank Check No. GH
B 114 7212  (the check) for the said amount to guarantee the payment of the debt, but upon presentment, the same
7

was dishonored.  Respondent lamented that petitioner refused to pay despite repeated demands, and that had she
8

invested the money loaned to petitioner or deposited the same in a bank, it would have earned interest at the rate of
36% per annum or three percent (3%) per month. 9

For her part, petitioner sought the dismissal  of the complaint on the ground that it was her deceased parents who
10

owed respondent money. Accordingly, respondent's claim should be filed in the proceedings for the settlement of
their estates. Petitioner averred that respondent had, in fact, participated in the settlement proceedings and had
issued a certification   stating that it was petitioner's deceased parents who were indebted to respondent for
11

P2,000,000.00. She further maintained that as administratix of her parents' estates, she agreed to pay such
indebtedness on installment but respondent refused to accept her payments. 12

Respondent countered  that petitioner personally borrowed almost half of the P2, 100,000.00 from her, as
13

evidenced by the check which she issued after agreeing to settle the same in installments.  While respondent
14

conceded that petitioner made several installment payments from December 29, 2000 until May 31, 2003, she
pointed out that the latter failed to make any succeeding payments.  Moreover, respondent denied participating in
15

the proceedings for the settlement of the estates of petitioner's parents, clarifying that petitioner was the one who
prepared the certification alluded to and that she (respondent) signed it on the belief that petitioner would make
good her promise to pay her (respondent). 16

In an Order  dated October 3, 2003, the RTC denied petitioner's motion to dismiss, thus prompting her to file an
17

answer.   She asserted that respondent merely persuaded her to issue the check to guarantee her deceased
18

parents' loan. She further claimed that the check was blank when she issued it and that despite having no authority
to fill up the same, respondent wrote the amount and date thereon.  She also maintained that from December 29,
19

2000 to May 31, 2003, she made, in almost daily installments, payments to respondent ranging from P500.00 to
Pl0,000.00, and that while she tried to make succeeding payments, respondent refused to accept the same,
demanding, instead, the payment of the entire balance.  As counterclaim, petitioner prayed that moral damages,
20

attorney's fees, litigation expenses, and exemplary and punitive damages be awarded to her. 21

The RTC Ruling

In a Decision  dated May 5, 2009, the RTC ruled in favor of respondent and ordered petitioner to
22

pay: (a) ₱1,710,049.00 which represents the unpaid portion of the ₱2,100,000.00 debt; (b) twelve percent (12%)
interest computed from the time judicial demand was made on August 20, 2003 until fully paid; (c) ₱10,000.00 as
attorney's fees; (d) litigation expenses amounting to ₱19,662.78; and (e) the costs of suit.
23

The RTC refused to give credence to petitioner's contention that it was her deceased parents who borrowed money
from respondent, observing that while the latter acknowledged that the former's deceased parents owed her
₱700,000.00 out of the ₱2,100,000.00, petitioner likewise admitted that she obtained personal loans from
respondent.  Hence, according to the RTC, petitioner cannot deny her liability to respondent. Further, by assuming
24

the liability of her deceased parents and agreeing to pay their debt in installments - which she in fact paid from
December 29, 2000 to May 31, 2003 in amounts of ₱500.00 to ₱10,000.00, and which payments respondent did
actually accept - a mixed novation took place and petitioner was substituted in their place as debtor. Thus, the
liabilities of the estates of petitioner's deceased parents were extinguished and transferred to petitioner.
25

Anent the sum due, the RTC surmised that petitioner and her deceased parents owed respondent the sum of
₱2,000,000.00 as principal and since petitioner undertook to pay the same in installments, ₱100,000.00 was added
as interest; hence, petitioner issued the check for ₱2,100,000.00.  Based on the receipts submitted by petitioner,
26

the genuineness and due execution of which were not put in issue, petitioner had paid a total of ₱389,95l.00 in
installments, leaving an unpaid balance of ₱l,710,049.00, subject to interest of twelve percent (12%) per
annum from the time judicial demand was made on August 20, 2003, in the absence of any written stipulation on
interest.
27

Aggrieved, petitioner appealed  to the CA, arguing that novation did not take place and no interest was due
28

respondent. 29

The CA Ruling

In a Decision  dated March 16, 2012, the CA affirmed the ruling of the RTC.  It agreed that petitioner cannot deny
30 31

her liability to respondent in view of her admission that she borrowed money from the latter several times.  The CA
32

also found petitioner's claim that she issued a blank check incredible, pointing out that petitioner testified in court
that she personally wrote the amount thereon after she and respondent agreed that the loans she and her deceased
parents obtained amounted to P2,100,000.00. 33

Anent the issue of novation, the CA concurred with the RTC that novation took place insofar as petitioner was
substituted in place of petitioner's late parents, considering that petitioner undertook to pay her deceased parents'
debt. However, the CA opined that there was no novation with respect to the object of the contract, following the rule
that an obligation is not novated by an instrument which expressly recognizes the old obligation and changes only
the terms of paying the same, as in this case where the parties merely modified the terms of payment of the
₱2,100,000.00. 34

Dissatisfied, petitioner moved for reconsideration,  which was, however, denied in a Resolution  dated July 14,
35 36

2014; hence, this petition.

The Issue Before the Court

The primary issue for the Court's resolution is whether or not petitioner should be held liable to respondent for the
entire debt in the amount of ₱2,100,000.00.

The Court's Ruling

At the outset, it must be emphasized that the fact of petitioner's liability to respondent is well-established. As
correctly pointed out by the RTC and the CA, while respondent acknowledged that petitioner's deceased parents
owed her money, petitioner also admitted obtaining loans from respondent, viz. :

From [respondent's] recollection, the amount due from [petitioner's] parents is ₱700,000.00. Aside from her parents'
loans, however, [petitioner] herself admitted having obtained personal loans from the respondent while her parents
were still alive. She testified:

ATTY. P ASA: You also know that [respondent] was also in [lending]?

[PETITIONER]: Yes, Madam.

Q: Because she was in lending you have borrowed money also? (sic)

A: Yes, Madam.

Q: Separate from your father?

A: Yes, Madam.
xxxx

Q: You borrowed money from [respondent] separate from your father prior to his death?

A: Yes, Madam. 37

Having admitted that she obtained loans from respondent without showing that the same had already been paid or
otherwise extinguished, petitioner cannot now aver otherwise. It is settled that judicial admissions made by the
parties in the pleadings or in the course of the trial or. Other proceedings in the same case are conclusive and do
not require further evidence to prove them.  They are legally binding on the party making it,   except when it is
38 39

shown that they have been made through palpable mistake or that no such admission was actually made,    neither
40

of which was shown to exist in this case. Accordingly, petitioner is bound by her admission of liability and the only
material question remaining is the extent of such liability.

Based on the records of this case, respondent, for her part, admitted that petitioner's deceased parents owed her
₱700,000.00 of the ₱2,100,000.00 debt and that petitioner owed her ₱l,400,000.00 only:

ATTY. VILLEGAS:

Q When was the first time that the [petitioner] obtained cash advances from you?

A About 1996, sir and then she made several others and she kept on borrowing money from me.

Q Do you mean to say that she obtained part of her loan while her father was still alive?

A Yes, when he was still alive she already borrowed.

Q Are you telling us that this 2.1 Million Pesos was entirely borrowed from you by the [petitioner]?

A There were loans which were obtained by her father, some by her mother and since they died already[,] when we
summarized the amount that was the total amount that she owes me, sir.

Q How much is the amount owe[d] to you by the [petitioner's] father?

A I could no longer recall, sir because that was already long time ago but it was part of the summary that we made,
sir.

Q Could it be P200,000.00?

A More or less, that much, sir.

Q What about the defendant's mother? How much was her obligation to you?

A ₱500,000.00, more or less, but I cannot exactly recall.

Q So, the defendant's parents owed you more than ₱700,000.00 is it not?

A Yes, sir.

xxxx
COURT:

Q Is it the impression of the Court that the x x x amount of ₱700,000.00 is not a personal indebtedness of
[petitioner] but that of her parents? Is that the impression xxx the Court is getting?

A Yes, Your Honor.

xxxx

ATTY. VILLEGAS:

Q Tell us, how much really to your recollection is the indebtedness of the [petitioner's] parents?

A To the best of my recollection, that is the amount. More or less [₱]700,000[.00] for both spouses,
sir.  (Emphases supplied)
41

ATTY. PASA:

Q Madam witness, during the last hearing you stated that the [petitioner's] parents were indebted [to] you for about
₱700,000.00?

A Yes, Madam.

Q How about the [petitioner], how much did she [owe] you?

A More or less 1.4 [Million] Madam.  (Emphasis supplied)

42

Applying the same principle on judicial admissions above, it is therefore incontrovertible that petitioner's debt to
respondent amounted to only ₱l,400,000.00 and not ₱2,100,000.00. Thus, respondent only remains liable to
petitioner for such amount. Considering that petitioner had already paid ₱389,951.00 in installments as evidenced
by the receipts submitted by petitioner - the genuineness and due execution of which were not put in issue - the
unpaid balance of petitioner's ₱l,400,000.00 debt to respondent stands at ₱l,010,049.00. On the other hand, the
remaining ₱700,000.00 of the total ₱2,100,000.00 debt to respondent is properly for the account of the estates of
petitioner's deceased parents and, hence, should be claimed in the relevant proceeding therefor.

At this juncture, the Court finds it apt to correct the mistaken notions that: (a) novation by substitution of the
debtor took place so as to release the estates of the petitioner's deceased parents from their obligation, which,
thus, rendered petitioner solely liable for the entire ₱2,100,000.00 debt; and (b) the ₱100,000.00 of the
₱2,100,000.00 debt was in the nature of accrued monetary interests.

On the first matter, while it is observed that petitioner had indeed admitted that she agreed to settle her late parents'
debt, which was supposedly evinced by (a) the ₱2,100,000.00 check she issued therefor, and (b) several
installment payments she made to respondent from December 29, 2000 to May 31, 2003, there was no allegation,
much less any proof to show, that the estates of her deceased parents were released from liability
thereby. In S.C. Megaworld Construction and Development Corporation v. Parada,  the Court held that to
43

constitute novation by substitution of debtor, the former debtor must be expressly released from the
obligation and the third person or new debtor must assume the former's place in the contractual
relations.  Moreover, the Court ruled that the "fact that the creditor accepts payments from a third person, who has
44

assumed the obligation, will result merely in the addition of debtors and not novation."  At its core, novation is
45

never presumed, and the animus novandi, whether totally or partially, must appear by express agreement of the
parties, or by their acts that are too clear and unequivocal to be mistaken.    Here, the intent to novate was not
46
satisfactorily proven by respondent. At best, petitioner only manifested her desire to shoulder the debt of her
parents, which, as above-discussed, does not amount to novation. Thus, the courts a quo erred in holding petitioner
liable for the debts obtained by her deceased parents on account of novation by substitution of the debtor.

Similarly, both courts faultily concluded that the principal sum loaned by petitioner and her deceased parents
amounted to ₱2,000,000.00 and the ₱100,000.00 was added as interest because petitioner undertook to pay the
loan in installments.

It is fundamental that for monetary interest to be due, there must be an express written agreement therefor.  Article 47

1956 of the Civil Code provides that "[n]o interest shall be due unless it bas been expressly stipulated in
writing." In this relation, case law states that the lack of a written stipulation to pay interest on the loaned amount
bars a creditor from charging monetary interest  and the collection of interest without any stipulation therefor in
48

writing is prohibited by law. 49

Here, respondent herself admitted that there was no written agreement that interest would be due on the sum
loaned, only that there was an implicit understanding that the same would be subject to interest since she also
borrowed the same from banks which, as a matter of course, charged interest. Respondent also testified on cross
examination that the ₱2,100,000.00 corresponds only to the principal and does not include

interest, viz. :

[Atty. Villegas]: Now, are these loans interest bearing?

[Respondent]: Yes, sir, because the money I loaned to them I have also obtained as a loan from the bank. 1âwphi1

Q: This 2.1 Million Pesos are included (sic) the interest that you charge[d] to the [petitioner's] parents and to the
petitioner, is it not?

A: That is the basis of the interest bearing, 2.1 Million Pesos at 3 percent per month.

Q: Are you telling us that when you summarized and computed the entire total obligations of the [petitioner and her
parents] you computed the interest and come out (sic) with 2.1 Million Pesos?

A: Interest has not yet been included in the 2.1 Million Pesos.

Q: This agreement of yours to pay interest is not in writing, is it not (sic)?

A: It is not in writing, sir. 

50

All told, having established that no novation took place and that no interest was actually due, and factoring in the
payments already made for her account, petitioner is, thus, ordered to pay respondent the amount of

₱l,010,049.00, which is the remaining balance of her principal debt to the latter in the original amount of
₱l,400,000.00.

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated March 16, 2012 and the Resolution dated
July 14, 2014 of the Court of Appeals (CA) in C.A. G.R. CV No. 93624 are hereby AFFIRMED with MODIFICATION
in that petitioner Nympha S. Odiamar is ORDERED to pay respondent Linda Odiamar Valencia the amount
of ₱l,010,049.00, which is the remaining balance of her principal debt to the latter in the original amount of
Pl,400,000.00.
SO ORDERED.