Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 194507               September 8, 2014

FEDERAL BUILDERS, INC., Petitioner, 

vs.
FOUNDATION SPECIALISTS, INC., Respondent,

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

G.R. No. 194621

FOUNDATION SPECIALISTS, INC., Petitioner, 

vs.
FEDERAL BUILDERS, INC., Respondent.

DECISION

PERALTA, J.:

Before the Court are two consolidated cases, namely: (1) Petition for review on certiorari under Rule 45 of the Rules of Court, docketed
as G.R. No. 194507, filed by Federal Builders, Inc., assailing the Decision1 and Resolution,2 dated July 15, 2010 and November 23,
2010, respectively, of the Court of Appeals (CA) in CA-G.R. CV No. 70849, which affirmed with modification the Decision 3 dated May 3,
2001 of the Regional Trial Court (RTC) in Civil Case No. 92-075; and (2) Petition for review on certiorari under Rule 45 of the Rules of
Court,docketed as G.R. No. 194621, filed by Foundation Specialists, Inc., assailing the same Decision4 and Resolution,5 dated July 15,
2010 and November 23, 2010,respectively, of the CA in CA- G.R. CV No. 70849, which affirmed with modification the Decision6 dated
May 3, 2001 of the RTC in Civil Case No. 92-075.

The antecedent facts are as follows:

On August 20, 1990, Federal Builders, Inc. (FBI) entered into an agreement with Foundation Specialists, Inc. (FSI) whereby the latter,
as subcontractor, undertook the construction of the diaphragm wall, capping beam, and guide walls of the Trafalgar Plaza located at
Salcedo Village, Makati City (the Project), for a total contract price of Seven Million Four Hundred Thousand Pesos
(P7,400,000.00).7 Under the agreement,8 FBI was to pay a downpayment equivalent to twenty percent (20%) of the contract price and
the balance, through a progress billing every fifteen (15) days, payable not later than one (1) week from presentation of the billing.

On January 9, 1992, FSI filed a complaint for Sum of Money against FBI before the RTC of Makati City seeking to collect the amount of
One Million Six Hundred Thirty-Five Thousand Two Hundred Seventy-Eight Pesos and Ninety-One Centavos (P1,635,278.91),
representing Billings No. 3 and 4, with accrued interest from August 1, 1991 plus moral and exemplary damages with attorney’s
fees.9 In its complaint, FSI alleged that FBI refused to pay said amount despite demand and itscompletion of ninety-seven percent
(97%) of the contracted works.

In its Answer with Counterclaim, FBI claimed that FSI completed only eighty-five percent (85%) of the contracted works, failing to finish
the diaphragm wall and component works in accordance with the plans and specifications and abandoning the jobsite. FBI maintains
that because of FSI’s inadequacy, its schedule in finishing the Project has been delayed resulting in the Project owner’s deferment of its
own progress billings.10 It further interposed counterclaims for amounts it spent for the remedial works on the alleged defects in FSI’s
work.

On May 3, 2001, after evaluating the evidence of both parties, the RTC ruled in favor of FSI, the dispositive portion of its Decision
reads:

WHEREFORE, on the basis of the foregoing, judgment is rendered ordering defendant to pay plaintiff the following:

1. The sum of P1,024,600.00 representing billings 3 and 4, less the amount of P33,354.40 plus 12% legal interest from August
30, 1991;

2. The sum of P279,585.00 representing the cost of undelivered cement;

3. The sum of P200,000.00 as attorney’s fees; and

 4. The cost of suit.

Defendant’s counterclaim is deniedfor lack of factual and legal basis.

SO ORDERED.11

On appeal, the CA affirmed the Decision of the lower court, but deleted the sum of P279,585.00 representing the cost of undelivered
cement and reduced the award of attorney’s fees to P50,000.00. In its Decision12 dated July 15, 2010, the CA explained that FSI failed
to substantiate how and in what manner it incurred the cost of cement by stressing that its claim was not supported by actual receipts.
Also, it found that while the trial court did not err in awarding attorney’s fees, the same should be reduced for being unconscionable and
excessive. On FBI’s rejection of the 12% annual interest rate on the amount of Billings 3 and 4, the CA ruled that the lower court did not
err in imposing the same in the following wise:

x x x The rule is well-settled that when an obligation is breached, and it consists in the payment of a sum of money, the interest due
shall itself earn legal interest from the time it is judicially demanded (BPI Family Savings Bank, Inc. vs. First Metro Investment
Corporation, 429 SCRA 30). When there is no rate of interest stipulated, such as in the present case, the legal rate of interest shall be
imposed, pursuant to Article 2209 of the New Civil Code. In the absence of a stipulated interest rate on a loan due, the legal rate of
interest shall be 12% per annum.13

Both parties filed separate Motions for Reconsideration assailing different portions of the CADecision, but to no avail.14 Undaunted, they
subsequently elevated their claims withthis Court via petitions for review on certiorari.

On the one hand, FSI asserted that the CA should not have deleted the sum of P279,585.00 representing the cost of undelivered
cement and reduced the award of attorney’s fees to P50,000.00, since it was an undisputed fact that FBI failed to deliver the agreed
quantity of cement. On the other hand, FBI faulted the CA for affirming the decision of the lower court insofar as the award of the sum
representing Billings 3 and 4, the interest imposed thereon, and the rejection of his counterclaim were concerned. In a
Resolution15 dated February 21, 2011, however, this Court denied, with finality, the petition filed by FSI in G.R. No. 194621 for having
been filed late.

Hence, the present petition filed byFBI in G.R. No. 194507 invoking the following arguments:

I.

THE COURT OF APPEALS COMMITTED A CLEAR, REVERSABLE ERROR WHEN IT AFFIRMED THE TRIAL COURT’S
JUDGMENT THAT FEDERAL BUILDERS, INC. WAS LIABLE TO PAY THE BALANCE OFP1,024,600.00 LESS THE
AMOUNT OF P33,354.40 NOTWITHSTANDING THAT THE DIAPHRAGM WALL CONSTRUCTED BY FOUNDATION
SPECIALIST, INC. WAS CONCEDEDLY DEFECTIVE AND OUT-OF-SPECIFICATIONS AND THAT PETITIONER HAD TO
REDO IT AT ITS OWN EXPENSE.

II.

THE COURT OF APPEALS COMMITTED SERIOUS, REVERSABLE ERROR WHEN IT IMPOSED THE 12% LEGAL
INTEREST FROM AUGUST 30, 1991 ON THE DISPUTED CLAIM OF P1,024,600.00 LESS THE AMOUNT OF P33,354.40
DESPITE THE FACT THAT THERE WAS NO STIPULATION IN THE AGREEMENT OF THE PARTIES WITH REGARD TO
INTEREST AND DESPITE THE FACT THAT THEIR AGREEMENT WAS NOT A "LOAN OR FORBEARANCE OF MONEY."

III.

THE COURT OF APPEALS COMMITTED GRAVE AND SERIOUS REVERSABLE ERROR WHEN IT DISMISSED THE
COUNTERCLAIM OF PETITIONER NOTWITHSTANDING OVERWHELMING EVIDENCE SUPPORTING ITS CLAIM
OF P8,582,756.29 AS ACTUAL DAMAGES.

The petition is partly meritorious.

We agree with the courts below and reject FBI’s first and third arguments. Well-entrenched in jurisprudence is the rule that factual
findings of the trial court, especially when affirmed by the appellate court, are accorded the highest degree of respectand considered
conclusive between the parties, save for the following exceptional and meritorious circumstances: (1) when the factual findings of the
appellate court and the trial court are contradictory; (2) whenthe findings of the trial court are grounded entirely on speculation,
surmises or conjectures; (3) when the lower court’s inference from its factual findings is manifestly mistaken, absurd or impossible; (4)
when there is grave abuse of discretion in the appreciation of facts; (5) when the findings of the appellate court go beyond the issues of
the case, or fail to notice certain relevant facts which, if properly considered, will justify a different conclusion; (6) when there is a
misappreciation of facts; (7) when the findings of fact are themselves conflicting; and (8) when the findings of fact are conclusions
without mention of the specific evidence on which they are based, are premised on the absence of evidence, or are contradicted by
evidence on record.16
None of the aforementioned exceptions are present herein. In the assailed Decision, the RTC meticulously discussed the obligations of
each party, the degree of their compliance therewith, as well as their respective shortcomings, all of which were properly substantiated
with the corresponding documentary and testimonial evidence.

Under the construction agreement, FSI’s scope of work consisted in (1) the construction of the guide walls, diaphragm walls, and
capping beam; and (2) the installation of steel props.17 As the lower courts aptly observed from the records at hand, FSI had, indeed,
completed ninety-seven percent (97%) of its contracted works and the non-completion of the remaining three percent (3%), as well as
the alleged defects in the said works, are actually attributable to FBI’s own fault such as, but not limited to, the failure to deliver the
needed cement as agreed upon in the contract, to wit:

On March 8, 1991, plaintiff had finished the construction of the guide wall and diaphragm wall (Exh. "R") but had not yet constructed the
capping beam as of April 22, 1991 for defendant’s failure to deliver the needed cement in accordance with their agreement(Exhibit "I").
The diaphragm wall had likewise been concrete tested and was found to have conformed with the required design strength (Exh. "R").

Subsequently, plaintiff was paid the aggregate amount of P5,814,000.00. But as of May 30, 1991, plaintiff’s billings numbers 3 and 4
had remained unpaid (Exhs. "L", "M", and "M-1").

xxxx

On the misaligned diaphragm wall from top to bottom and inbetween panels, plaintiff explained thatin the excavation of the soil where
the rebar cages are lowered and later poured with concrete cement, the characteristics of the soil is not the same or homogenous all
throughout. Because of this property of the soil,in the process of excavation, it may erode in some places that may cause spaces that
the cement may fill or occupy which would naturally cause bulges, protrusions and misalignment in the concrete cast into the excavated
ground(tsn., June 1, 2000, pp 14-18). This, in fact was anticipated when the agreement was executed and included as provision 6.4
thereof.

The construction of the diaphragm wall panel by panel caused misalignment and the chipping off of the portions misaligned is
considered a matter of course. Defendant, as the main contractor of the project, has the responsibility of chopping or chipping off of
bulges(tsn., ibid, pp 20-21). Wrong location of rebar dowels was anticipated by both contractor and subcontractor as the latter
submitted a plan called "Detail of Sheer Connectors" (Exh "T") which was approved.The plan provided two alternatives by which the
wrong location of rebar dowels may be remedied. Hence, defendant, aware of the possibility of inaccurate location of these bars,
cannot therefore ascribe the same to the plaintiff as defective work.

Construction of the capping beam required the use of cement. Records, however, show that from September 14, 1990 up to May 30,
1991 (Exhs. "B" to "L"), plaintiff had repeatedly requested defendant to deliver cement. Finally, on April 22, 1991, plaintiff notified
defendant of its inability to construct the capping beam for the latter’s failure to deliver the cement as provided in their agreement(Exh.
"I"). Although records show that there was mention of revision of design, there was no evidence presented to show such revision
required less amount of cement than what was agreed on by plaintiff and defendant.

The seventh phase of the construction of the diaphragm wall is the construction of the steel props which could be installed only after the
soil has been excavated by the main contractor. When defendant directed plaintiff to install the props, the latter requested for a site
inspection to determine if the excavation of the soil was finished up to the 4th level basement. Plaintiff, however, did not receive any
response.It later learned that defendant had contracted out that portion of work to another sub-contractor (Exhs. "O" and "P").
Nevertheless, plaintiff informed defendant of its willingness to execute that portion of its work.18

It is clear from the foregoing that contrary to the allegations of FBI, FSI had indeed completed its assigned obligations, with the
exception of certain assigned tasks, which was due to the failure of FBI to fulfil its end of the bargain.

It can similarly be deduced that the defects FBI complained of, such as the misaligned diaphragm wall and the erroneous location of the
rebar dowels, were not only anticipated by the parties, having stipulated alternative plans to remedy the same, but more importantly,
are also attributable to the very actions of FBI. Accordingly, considering that the alleged defects in FSI’s contracted works were not so
much due to the fault or negligence of the FSI, but were satisfactorily proven to be caused by FBI’s own acts, FBI’s claim
of P8,582,756.29 representing the cost of the measures it undertook to rectify the alleged defects must necessarily fail. In fact, as the
lower court noted, at the time when FBI had evaluated FSI’s works, it did not categorically pose any objection thereto, viz:

Defendant admitted that it had paid P6 million based on its evaluation of plaintiff’s accomplishments (tsn., Sept. 28, 2000, p. 17) and its
payment was made without objection on plaintiff’s works, the majority of which were for the accomplishments in the construction of the
diaphragm wall (tsn., ibid, p. 70).

xxxx

While there is no evidence to show the scope of work for these billings, it is safe to assume that these were also works in the
construction of the diaphragm wall considering that as of May 16, 1991, plaintiff had only the installation of the steel props and welding
works to complete (Exh. "H"). If defendant was able to evaluate the work finished by plaintiff the majority of which was the construction
of the diaphragm wall and paid it about P6 million as accomplishment, there was no reason why it could not evaluate plaintiff’s works
covered by billings 3 and 4.In other words, defendants did nothave to excavate in order to determine and evaluate plaintiff’s works.
Hence, defendant’s refusal to pay was not justified and the alleged defects of the diaphragm wall (tsn, Sept. 28, 2000, p. 17) which it
claims to have discovered only after January 1992 were mere afterthoughts.19

Thus, in the absence of any record to otherwise prove FSI’s neglect in the fulfilment of its obligations under the contract, this Court shall
refrain from reversing the findings of the courts below, which are fully supported by and deducible from, the evidence on record. Indeed,
FBI failed to present any evidence to justify its refusal to pay FSI for the works it was contracted to perform. As such, We do not see
any reason to deviate from the assailed rulings.

Anent FBI’s second assignment of error, however, We find merit in the argument that the 12% interest rateis inapplicable, since this
case does not involve a loan or forbearance ofmoney. In the landmark case of Eastern Shipping Lines, Inc. v. Court of Appeals,20 We
laid down the following guidelines in computing legal interest:

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

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article1169 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.21

In line, however, with the recent circular of the Monetary Board of the Bangko Sentral ng Pilipinas (BSP-MB) No. 799, we have modified
the guidelines in Nacar v. Gallery Frames,22 as follows:

I. When an obligation, regardless of itssource, i.e., law, contracts, quasicontracts, 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 annumfrom 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.23

It should be noted, however, that the new rate could only be applied prospectively and not retroactively. Consequently, the twelve
percent (12%) per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013, the new rate of six percent (6%) per
annum shall be the prevailing rate of interest when applicable. Thus, the need to determine whether the obligation involved herein is a
loan and forbearance of money nonetheless exists.

In S.C. Megaworld Construction and Development Corporation v. Engr. Parada,24 We clarified the meaning of obligations constituting
loans or forbearance of money in the following wise:

As further clarified in the case of Sunga-Chan v. CA, a loan or forbearance of money, goods or credit describes a contractual obligation
whereby a lender or creditor has refrained during a given period from requiring the borrower or debtor to repay the loan or debt then
due and payable. Thus:

In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum under Central Bank (CB) Circular No. 416 shall be
adjudged only in cases involving the loan or forbearance of money. And for transactions involving payment of indemnities in the
concept of damages arising from default in the performance of obligations in general and/or for money judgment not involving a loan or
forbearance of money, goods, or credit, the governing provision is Art. 2209 of the Civil Code prescribing a yearly 6% interest. Art. 2209
pertinently provides:

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there
being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum.

The term "forbearance," within the context of usury law, has been described as a contractual obligation ofa lender or creditor to refrain,
during a given period of time, from requiring the borrower or debtor to repay the loan or debt then due and payable.25

Forbearance of money, goods or credits, therefore, refers to arrangements other than loan agreements, where a person acquiesces to
the temporary use of his money, goods orcredits pending the happening of certain events or fulfilment of certain
conditions.26 Consequently, if those conditions are breached, said person is entitled not only to the return of the principal amount paid,
but also to compensation for the use of his money which would be the same rateof legal interest applicable to a loan since the use or
deprivation of funds therein is similar to a loan.27

This case, however, does not involve an acquiescence to the temporary use of a party’s money but a performance of a particular
service, specifically the construction of the diaphragm wall, capping beam, and guide walls of the Trafalgar Plaza.

A review of similar jurisprudence would tell us that this Court had repeatedly recognized this distinction and awarded interest at a rate of
6% on actual or compensatory damages arising from a breach not only of construction contracts,28 such as the one subject ofthis case,
but also of contracts wherein one of the parties reneged on its obligation to perform messengerial services,29 deliver certain quantities
of molasses,30 undertake the reforestation of a denuded forest land,31 as well as breaches of contracts of carriage,32 and trucking
agreements.33 We have explained therein that the reason behind such is that said contracts do not partake of loans or forbearance of
money but are more in the nature of contracts of service.

Thus, in the absence of any stipulation as to interest in the agreement between the parties herein, the matter of interest award arising
from the dispute in this case would actually fall under the second paragraph of the above-quoted guidelines inthe landmark case of
Eastern Shipping Lines, which necessitates the imposition of interestat the rate of 6%, instead of the 12% imposed by the courts below.

The 6% interest rate shall further be imposed from the finality of the judgment herein until satisfaction thereof, in light of our recent
ruling in Nacar v. Gallery Frames.34

Note, however, that contrary to FBI’sassertion, We find no error in the RTC’s ruling that the interest shall begin to run from August 30,
1991 as this is the date when FSI extrajudicially made its claim against FBI through a letter demanding payment for its services.35

In view of the foregoing, therefore, We find no compelling reason to disturb the factual findings of the RTC and the CA, which are fully
supported by and deducible from, the evidence on record, insofar as the sum representing Billings 3 and 4 is concerned. As to the rate
of interest due thereon, however, We note that the same should be reduced to 6% per annum considering the fact that the obligation
involved herein does not partake of a loan or forbearance of money.

WHEREFORE, premises considered, the instant petition is DENIED. The Decision and Resolution, dated July 15, 2010 and November
23, 2010, respectively, of the Court of Appeals in CA-G.R. CV No. 70849 are hereby AFFIRMED with MODIFICATION. Federal
Builders, Inc. is ORDERED to pay Foundation Specialists, Inc. the sum of Pl ,024,600.00 representing billings 3 and 4, less the amount
of P33,354.40, plus interest at six percent (6%) per annum reckoned from August 30, 1991 until full payment thereof.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 199990               February 4, 2015

SPOUSES ROLANDO and HERMINIA SALVADOR, Petitioners, 

vs.
SPOUSES ROGELIO AND ELIZABETH RABAJA and ROSARIO GONZALES, Respondents.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari seeking to reverse and set aside the August 22, 2011 Decision1 and the January 5, 2012
Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 90296 which affirmed with modification the March 29, 2007 Decision of the
Regional Trial Court Branch 214 (RTC-Branch 214), Mandaluyong City in Civil Case No. MC-03-2175, for rescission of a contract
(rescission case).

The Facts

This case stemmed from a dispute involving the sellers, petitioner spouses Rolando and Herminia Salvador (Spouses Salvador); the
sellers' agent, Rosario Gonzales (Gonzales),· and the buyers, respondent Spouses Rogelio and Elizabeth Rabaja (Spouses Rabaja),
over a parcel of land situated at No. 25, Merryland Village, 375 Jose Rizal Street, Mandaluyong City (subject property),covered by
Transfer Certificate of Title (TCT) No. 13426 and registered in the names of Spouses Salvador. From 1994 until 2002, Spouses Rabaja
were leasing an apartment in the subject lot.

Sometime in July 1998, Spouses Rabaja learned that Spouses Salvador were looking for a buyer of the subject property. Petitioner
Herminia Salvador (Herminia)personally introduced Gonzales to them as the administrator of the said property. Spouses Salvador even
handed to Gonzales the owner’s duplicate certificate of title over the subject property. On July, 3, 1998, Spouses Rabaja made an initial
payment of P48,000.00 to Gonzales in the presence of Herminia. Gonzales then presented the Special Power of
Attorney3 (SPA),executed by Rolando Salvador (Rolando) and dated July 24, 1998. On the same day, the parties executed the Contract
to Sell4 which stipulated that for a consideration of P5,000,000.00, Spouses Salvador sold, transferred and conveyed in favor of
Spouses Rabaja the subject property. Spouses Rabaja made several payments totalling P950,000.00, which were received by
Gonzales pursuant to the SPA provided earlier as evidenced by the check vouchers signed by Gonzales and the improvised
receiptssigned by Herminia.

Sometime in June 1999, however, Spouses Salvador complained to Spouses Rabaja that they did not receive any payment from
Gonzales. This prompted Spouses Rabaja to suspend further payment of the purchase price; and as a consequence, they received a
notice to vacate the subject property from Spouses Salvador for non-payment of rentals.

Thereafter, Spouses Salvador instituted an action for ejectment against Spouses Rabaja. In turn, Spouses Rabaja filed an action for
rescission of contract against Spouses Salvador and Gonzales, the subject matter of the present petition.

In the action for ejectment, the complaint was filed before the Metropolitan Trial Court of Mandaluyong City, Branch 60 (MeTC),where it
was docketed as Civil Case No. 17344. In its August 14, 2002 Decision,5 the MeTC ruled in favor of Spouses Salvador finding that valid
grounds existed for the eviction of Spouses Rabaja from the subject property and ordering them to pay back rentals. Spouses Salvador
were able to garnish the amount ofP593,400.006 from Spouses Rabaja’s time deposit account pursuant to a writ of execution issued by
the MeTC.7Spouses Rabaja appealed to the Regional Trial Court, Branch 212, Mandaluyong City (RTC-Br. 212)which reversed the
MeTC ruling in its March 1, 2005 decision.8 The RTC-Br. 212 found that no lease agreement existed between the parties. Thereafter,
Spouses Salvador filed an appeal with the CA which was docketed as CAG.R. SP No. 89259. On March 31, 2006, the CA ruled in favor
of Spouses Salvador and reinstated the MeTC ruling ejecting Spouses Rabaja.9 Not having been appealed, the CA decision in CA-G.R.
SP No. 89259 became final and executory on May 12, 2006.10

Meanwhile, the rescission case filed by Spouses Rabaja against Spouses Salvador and Gonzales and docketed as Civil Case No. MC
No. 03-2175 was also raffled to RTC-Br. 212. In their complaint,11 dated July 7, 2003, Spouses Rabaja demanded the rescission of the
contract to sell praying that the amount of P950,000.00 they previously paid to Spouses Salvador be returned to them. They likewise
prayed that damages be awarded due to the contractual breach committed by Spouses Salvador.

Spouses Salvador filed their answer with counterclaim and cross-claim12 contending that there was no meeting of the minds between
the parties and that the SPA in favor of Gonzales was falsified. In fact, they filed a case for falsification against Gonzales, but it was
dismissed because the original of the alleged falsified SPAcould not be produced. They further averred that they did not receive any
payment from Spouses Rabaja through Gonzales. In her defense, Gonzales filed her answer13 stating that the SPA was not falsified
and that the payments of Spouses Rabaja amounting to P950,000.00 were all handed over to Spouses Salvador.

The pre-trial conference began but attempts to amicably settle the case were unsuccessful. It was formally reset to February 4, 2005,
but Spouses Salvador and their counsel failed to attend. Consequently, the RTC issued the pre-trial order14 declaring Spouses Salvador
in default and allowing Spouses Rabaja to present their evidence ex parte against Spouses Salvador and Gonzales to present
evidence in her favor.

A motion for reconsideration,15 dated March 28, 2005, was filed by Spouses Salvador on the said pre-trial order beseeching the
liberality of the court. The rescission case was then re-raffled to RTC-Br. 214 after the Presiding Judge of RTC-Br. 212 inhibited herself.
In the Order,16 dated October 24, 2005, the RTC-Br. 214 denied the motion for reconsideration because Spouses Salvador provided a
flimsy excuse for their non-appearance in the pre-trial conference. Thereafter, trial proceeded and Spouses Rabaja and Gonzales
presented their respective testimonial and documentary evidence.

RTC Ruling

On March 29, 2007, the RTC-Br. 214 rendered a decision17 in favor of Spouses Rabaja. It held that the signature of Spouses Salvador
affixed in the contract to sell appeared to be authentic. It also held that the contract, although denominated as "contract to sell," was
actually a contract of sale because Spouses Salvador, as vendors, did not reserve their title to the property until the vendees had fully
paid the purchase price. Since the contract entered into was a reciprocal contract, it could bevalidly rescinded by Spouses Rabaja, and
in the process, they could recover the amount of P950,000.00 jointly and severally from Spouses Salvador and Gonzales. The RTC
stated that Gonzales was undoubtedly the attorney-in-fact of Spouses Salvador absent any taint of irregularity. Spouses Rabaja could
not be faulted in dealing with Gonzales who was duly equipped with the SPA from Spouses Salvador.

The RTC-Br. 214 then ruled that the amount of P593,400.00 garnished from the time deposit account of Spouses Rabaja, representing
the award of rental arrearages in the separate ejectment suit, should be returned by Spouses Salvador.18 The court viewed that such
amount was part of the purchase price of the subject property which must be returned. It also awarded moral and exemplary damages
in favor of Spouses Rabaja and attorney’s fees in favor of Gonzales. The dispositive portion of the said decision reads:

WHEREFORE, this court renders judgment as follows:

a. Ordering the "Contract to Sell" entered into by the plaintiff and defendant spouses Rolando and Herminia Salvador on July
24, 1998 as RESCINDED;

b. Ordering defendant spouses Rolando and Herminia Salvador and defendant Rosario S. Gonzales jointly and severally liable
to pay plaintiffs:

1. the amount of NINE HUNDRED FIFTY THOUSAND PESOS (P950,000.00), representing the payments made by
the latter for the purchase of subject property;

2. the amount of TWENTY THOUSAND PESOS (P20,000.00), as moral damages;

3. the amount of TWENTY THOUSAND PESOS (P20,000.00), as exemplary damages;

4. the amount of ONE HUNDRED THOUSAND PESOS (P100,000.00), as attorney’s fees;

5. the cost of suit.

c. Ordering defendant Spouses Rolando and Herminia Salvador to pay plaintiffs the amount of FIVE HUNDRED NINETY
THREE THOUSAND PESOS (P593,000.00) (sic), representing the amount garnished from the Metrobank deposit of plaintiffs
as payment for their alleged back rentals;

d. Ordering the defendant Spouses Rolando and Herminia Salvador to pay defendant Rosario Gonzales on her cross-claim in
the amount of ONE HUNDRED THOUSAND PESOS (P100,000.00);

e. Dismissing the counterclaims of the defendants against the plaintiff.

SO ORDERED.19

Gonzales filed a motion for partial reconsideration, but it was denied by the RTC-Br. 114 in its Order,20 dated September 12, 2007.
Undaunted, Spouses Salvador and Gonzales filed an appeal before the CA.
CA Ruling

On March 29, 2007, the CA affirmed the decision of the RTC-Br. 114 with modifications. It ruled that the "contract to sell" was indeed a
contract of sale and that Gonzales was armed with an SPA and was, in fact, introduced to Spouses Rabaja by Spouses Salvador as the
administrator of the property. Spouses Rabaja could not be blamed if they had transacted with Gonzales. The CA then held that
Spouses Salvador should return the amount ofP593,400.00 pursuant to a separate ejectment case, reasoning that Spouses Salvador
misled the court because an examination of CA-G.R. SP No. 89260showed that Spouses Rabaja were not involved in that case. CA-
G.R. SP No. 59260 was an action between Spouses Salvador and Gonzales only and involved a completely different residential
apartment located at 302-C Jupiter Street, Dreamland Subdivision, Mandaluyong City.

The CA, however, ruled that Gonzales was not solidarily liable with Spouses Salvador. The agent must expressly bind himself or
exceed the limit of his authority in order to be solidarily liable. It was not shown that Gonzales as agent of Spouses Salvador exceeded
her authority or expressly bound herself to be solidarily liable. The decretal portion of the CA decision reads: WHEREFORE, the appeal
is PARTLY GRANTED. The assailed Decision dated March 29, 2007 and the Order dated September 12, 2007, of the Regional Trial
Court, Branch 214, Mandaluyong City, in Civil Case No. MC-03-2175, are AFFIRMED with MODIFICATION in that Rosario Gonzalez is
not jointly and severally liable to pay Spouses Rabaja the amounts enumerated in paragraph (b) of the Decision dated March 29, 2007.

SO ORDERED.21

Spouses Salvador filed a motion for reconsideration but it was denied by the CA in its January 5, 2012 Resolution.

Hence, this petition.

ASSIGNMENT OF ERRORS

THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE LOWER COURT GRAVELY ABUSED ITS DISCRETION IN
DECLARING PETITIONERS IN DEFAULT AND IN DEPRIVING THEM OF THE OPPORTUNITY TO CROSS-EXAMINE
RESPONDENTS SPS. RABAJA AS WELL AS TO PRESENT EVIDENCE FOR AND IN THEIR BEHALF, GIVEN THE MERITORIOUS
DEFENSES RAISED IN THEIR ANSWER THAT CATEGORICALLY AND DIRECTLY DISPUTE RESPONDENTS SPS. RABAJA’S
CAUSE OF ACTION.

II

THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE TRIAL COURT GRAVELY ERRED IN GIVING CREDENCE TO THE
TESTIMONY OF RESPONDENT GONZALES THAT PAYMENTS WERE INDEED REMITTED TO AND RECEIVED BY PETITIONER
HERMINIA SALVADOR EVEN AS THE IMPROVISED RECEIPTS WEREEVIDENTLY MADE UP AND FALSIFIED BY RESPONDENT
GONZALES.

III

THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE TRIAL COURT GRAVELY ERRED IN RESCINDING THE
CONTRACT TO SELL WHENTHERE IS NOTHING TO RESCIND AS NO VALID CONTRACT TO SELL WAS ENTERED INTO, AND
IN DIRECTING THE REFUND OF THE AMOUNT OF P950,000.00 WHEN THE EVIDENCECLEARLY SHOWS THAT SAID AMOUNT
WAS PAIDTO AND RECEIVED BY RESPONDENT GONZALES ALONE WHO MISAPPROPRIATED THE SAME.

IV

THE COURT OF APPEALS ERRED IN AFFIRMING THE TRIAL COURT’S DECISION FOR PETITIONERS TO RETURN THE
AMOUNT OF P543,400.00 REPRESENTING RENTALS IN ARREARS GARNISHED OR WITHDRAWN BY VIRTUE OF A WRIT OF
EXECUTION ISSUED IN AN EJECTMENT CASE WHICH WAS TRIED AND DECIDED BY ANOTHER COURT.

THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE LOWER COURT GRAVELY ERRED IN AWARDING DAMAGES TO
RESPONDENTS SPS. RABAJA, THERE BEING NO FACTUAL AND LEGAL BASES FOR SUCH AWARD. VI THE COURT OF
APPEALS ERRED IN NOT HOLDING THAT THE TRIAL COURT GRAVELY ERRED IN AWARDING P100,000.00 TO RESPONDENT
GONZALES AS ATTORNEY’S FEES WHEN RESPONDENT GONZALES, IN FACT, COMMITTED FORGERY AND FALSIFICATION
IN DEALING WITH THE PROPERTY OF PETITIONERS AND MISAPPROPRIATED THE MONIES PAID TO HER BY
RESPONDENTS SPS. RABAJA, THUS GIVING PREMIUM TO HER FRAUDULENT ACTS. 22
The foregoing can be synthesized into three main issues. First, Spouses Salvador contend that the order of default must be lifted
because reasonable grounds exist to justify their failure to attend the pre-trial conference on February 4, 2005. Second, Spouses
Salvador raise in issue the veracity of the receipts given by Gonzales, the SPA and the validity of the contract to sell. They claim that
the improvised receipts should not be given credence because these were crude and suspicious, measuring only by 2 x 2 inches which
showed that Gonzales misappropriated the payments of Spouses Rabaja for herself and did not remit the amount of P950,000.00 to
them. As there was no consideration, then no valid contract to sell existed. Third, Spouses Salvador argue that the ejectment case,
from which the amount of P593,400.00 was garnished, already became final and executory and could not anymore be disturbed. Lastly,
the award of damages in favor of Spouses Rabaja and Gonzales was improper absent any legal and factual bases.

On January 21, 2013, Spouses Salvador filed their supplemental petition23 informing the Court that RTC-Br. 213 had rendered a
decision in Civil Case No. MC00-1082, an action for rescission of the SPA. The said decision held that Spouses Salvador properly
revoked the SPA in favor of Gonzales due to loss of trust and confidence. On September 11, 2013, Gonzales filed her comment to the
supplemental petition,24 contending that the RTC-Branch 213 decision had no bearing because it had not yet attained finality. On even
date, Spouses Rabaja filed their Comment,25 asserting that the present petition is a mere rehash of the previous arguments of Spouses
Salvador before the CA. On November 15, 2013, Spouses Salvador replied that they merely wanted to show that the findings by the
RTC-Br. 213 should be given weight as a full-blown trial was conducted therein.26

The Court’s Ruling

As a general rule, the Court’s jurisdiction in a Rule 45 petition is limited to the review of pure questions of law. A question of law arises
when the doubt or difference exists as to what the law is on a certain state of facts. Negatively put, Rule 45 does not allow the review of
questions of fact. A question of fact exists when the doubt or difference arises as to the truth or falsity of the allegations.27

The present petition presents questions of fact because it requires the Court to examine the veracity of the evidence presented during
the trial, such as the improvised receipts, the SPA given to Gonzales and the contract to sell. Even the petitioner spouses themselves
concede and ask the Court to consider questions of fact,28 but the Court finds no reason to disturb the findings of fact of the lower
courts absent any compelling reason to the contrary.

The failure of Spouses Salvador

to attend pre-trial conference
warrants the presentation of
evidence ex parte by Spouses
Rabaja

On the procedural aspect, the Court reiterates the rule that the failure to attend the pre-trial conference does not result in the default of
an absent party. Under the 1997 Rules of Civil Procedure, a defendant is only declared in default if he fails to file his Answer within the
reglementary period.29 On the other hand, if a defendant fails to attend the pre-trial conference, the plaintiff can present his evidence ex
parte. Sections 4 and 5, Rule 18 of the Rules of Court provide:

Sec. 4. Appearance of parties.

It shall be the duty of the parties and their counsel to appear at the pre-trial. The non-appearance of a party may be excused only if a
valid cause is shown therefor or if a representative shall appear in his behalf fully authorized in writing to enter into an amicable
settlement, to submit to alternative modes of dispute resolution, and to enter into stipulations or admissions of facts and of documents.

Sec. 5. Effect of failure to appear.

The failure of the plaintiff to appear when so required pursuant to the next preceding section shall be cause for dismissal of the action.
The dismissal shall be with prejudice, unless otherwise ordered by the court. A similar failure on the part of the defendant shall be
cause to allow the plaintiff to present his evidence ex parteand the court to render judgment on the basis thereof.

[Emphasis supplied]

The case of Philippine American Life & General Insurance Company v. Joseph Enario30 discussed the difference between the non-
appearance of a defendant in a pre-trial conference and the declaration of a defendant in default in the present Rules of Civil
Procedure. The decision instructs:

Prior to the 1997 Revised Rules of Civil Procedure, the phrase "as in default" was initially included in Rule 20 of the old rules, and which
read as follows:

Sec. 2. A party who fails to appear at a pre-trial conference may be non-suited or considered as in default.

It was, however, amended in the 1997 Revised Rules of Civil Procedure. Justice Regalado, in his book, REMEDIAL LAW
COMPENDIUM, explained the rationale for the deletion of the phrase "as in default" in the amended provision, to wit:
1. This is a substantial reproduction of Section 2 of the former Rule 20 with the change that, instead of defendant being declared "as in
default" by reason of his non-appearance, this section now spells out that the procedure will be to allow the ex parte presentation of
plaintiff’s evidence and the rendition of judgment on the basis thereof. While actually the procedure remains the same, the purpose is
one of semantical propriety or terminological accuracy as there were criticisms on the use of the word "default" in the former provision
since that term is identified with the failure to file a required answer, not appearance in court.

Still, in the same book, Justice Regalado clarified that while the order of default no longer obtained, its effects were retained, thus:

Failure to file a responsive pleading within the reglementary period, and not failure to appear at the hearing, is the sole ground for an
order of default, except the failure to appear at a pre-trial conference wherein the effects of a default on the part of the defendant are
followed, that is, the plaintiff shall be allowed to present evidence ex parte and a judgment based thereon may be rendered against
defendant.

From the foregoing, the failure of a party to appear at the pre-trial has indeed adverse consequences. If the absent party is the plaintiff,
then his case shall be dismissed. If it is the defendant who fails to appear, then the plaintiff is allowed to present his evidence ex parte
and the court shall render judgment based on the evidence presented. Thus, the plaintiff is given the privilege to present his evidence
without objection from the defendant, the likelihood being that the court will decide in favor of the plaintiff, the defendant having forfeited
the opportunity to rebut or present its own evidence.31 The stringent application of the rules on pre-trial is necessitated from the
significant role of the pre-trial stage in the litigation process. Pretrial is an answer to the clarion call for the speedy disposition of cases.
Although it was discretionary under the 1940 Rules of Court, it was made mandatory under the 1964 Rules and the subsequent
amendments in 1997.32 "The importance of pre-trial in civil actions cannot be overemphasized."33

There is no dispute that Spouses Salvador and their counsel failed to attend the pre-trial conference set on February 4, 2005 despite
proper notice. Spouses Salvador aver that their non-attendance was due to the fault of their counsel as he forgot to update his
calendar.34 This excuse smacks of carelessness, and indifference to the pre-trial stage. It simply cannot be considered as a justifiable
excuse by the Court. As a result of their inattentiveness, Spouses Salvador could no longer present any evidence in their favor.
Spouses Rabaja, as plaintiffs, were properly allowed by the RTC to present evidence ex parte against Spouses Salvador as
defendants. Considering that Gonzales as co-defendant was able to attend the pre-trial conference, she was allowed to present her
evidence. The RTC could only render judgment based on the evidence presented during the trial.

Gonzales, as agent of Spouses

Salvador, could validly receive
the payments of Spouses
Rabaja

Even on the substantial aspect, the petition does not warrant consideration. The Court agrees with the courts below in finding that the
contract entered into by the parties was essentially a contract of sale which could be validly rescinded. Spouses Salvador insist that
they did not receive the payments made by Spouses Rabaja from Gonzales which totalled P950,000.00 and that Gonzales was not
their duly authorized agent. These contentions, however, must fail in light of the applicable provisions of the New Civil Code which
state:

Art. 1900. So far as third persons are concerned, an act is deemed to have been performed within the scope of the agent's authority, if
such act is within the terms of the power of attorney, as written, even if the agent has in fact exceeded the limits of his authority
according to an understanding between the principal and the agent.

xxxx

Art. 1902. A third person with whom the agent wishes to contract on behalf of the principal may require the presentation of the power of
attorney, or the instructions as regards the agency. Private or secret orders and instructions of the principal do not prejudice third
persons who have relied upon the power of attorney or instructions shown them.

xxxx

Art. 1910. The principal must comply with all the obligations which the agent may have contracted within the scope of his authority.

Persons dealing with an agent must ascertain not only the fact of agency, but also the nature and extent of the agent’s authority. A third
person with whom the agent wishes to contract on behalf of the principal may require the presentation of the power of attorney, or the
instructions as regards the agency. The basis for agency is representation and a person dealing with an agent is put upon inquiry and
must discover on his own peril the authority of the agent.35

According to Article 1990 of the New Civil Code, insofar as third persons are concerned, an act is deemed to have been performed
within the scope of the agent's authority, if such act is within the terms of the power of attorney, as written. In this case, Spouses
Rabaja did not recklessly enter into a contract to sell with Gonzales. They required her presentation of the power of attorney before they
transacted with her principal. And when Gonzales presented the SPA to Spouses Rabaja, the latter had no reason not to rely on it.
The law mandates an agent to act within the scope of his authority which what appears in the written terms of the power of attorney
granted upon him.36 The Court holds that, indeed, Gonzales acted within the scope of her authority. The SPA precisely stated that she
could administer the property, negotiate the sale and collect any document and all payments related to the subject property.37 As the
agent acted within the scope of his authority, the principal must comply with all the obligations.38 As correctly held by the CA,
considering that it was not shown that Gonzales exceeded her authority or that she expressly bound herself to be liable, then she could
not be considered personally and solidarily liable with the principal, Spouses Salvador.39

Perhaps the most significant point which defeats the petition would be the fact that it was Herminia herself who personally introduced
Gonzalez to Spouses Rabaja as the administrator of the subject property. By their own ostensible acts, Spouses Salvador made third
persons believe that Gonzales was duly authorized to administer, negotiate and sell the subject property. This fact was even affirmed
by Spouses Salvador themselves in their petition where they stated that they had authorized Gonzales to look for a buyer of their
property.40 It is already too late in the day for Spouses Salvador to retract the representation to unjustifiably escape their principal
obligation.

As correctly held by the CA and the RTC, considering that there was a valid SPA, then Spouses Rabaja properly made payments to
Gonzales, as agent of Spouses Salvador; and it was as if they paid to Spouses Salvador. It is of no moment, insofar as Spouses
Rabaja are concerned, whether or not the payments were actually remitted to Spouses Salvador. Any internal matter, arrangement,
grievance or strife between the principal and the agent is theirs alone and should not affect third persons. If Spouses Salvador did not
receive the payments or they wish to specifically revoke the SPA, then their recourse is to institute a separate action against Gonzales.
Such action, however, is not any more covered by the present proceeding.

The amount of P593,400.00

should not be returned by
Spouses Salvador

Nevertheless, the assailed decision of the CA must be modified with respect to the amount of P593,400.00 garnished by Spouses
Salvador and ordered returned to Spouses Rabaja. The RTC ordered the return of the amount garnished holding that it constituted a
part of the purchase price. The CA ruled that Spouses Salvador misled the Court when they improperly cited CA-G.R. SP No. 89260 to
prove their entitlement to the said amount. Both courts erred in their ruling. First, the garnishment of the amount of P593,400.00 against
Spouses Rabaja was pursuant to the CA decision in CA-G.R. SP No. 89259, an entirely different case involving an action for ejectment,
and it does not concern the rescission case which is on appeal before this Court. Moreover, the decision on the ejectment case is final
and executory and an entry of judgment has already been made.41 Nothing is more settled in law than that when a final judgment is
executory, it thereby becomes immutable and unalterable. The judgment may no longer be modified in any respect, even if the
modification is meant to correct what is perceived to be an erroneous conclusion of fact or law, and regardless of whether the
modification is attempted to be made by the court which rendered it or by the highest Court of the land. The doctrine is founded on
consideration of public policy and sound practice that, at the risk of occasional errors, judgments must become final at some definite
point in time.42

The March 31, 2006 CA decision43 in CA-G.R. SP No. 89259has long been final and executory and cannot any more be disturbed by
the Court. Public policy dictates that once a judgment becomes final, executory and unappealable, the prevailing party should not be
denied the fruits of his victory by some subterfuge devised by the losing party. Unjustified delay in the enforcement of a judgment sets
at naught the role and purpose of the courts to resolve justiciable controversies with finality.44

Meanwhile, in ruling that the garnishment was improper and thus ordering the return of the garnished amount, the CA referred to its
decision in CA-G.R. SP No. 89260. Spouses Salvador, however, clarified in its motion for reconsideration45 before the CA and in the
present petition46 that the garnishment was pursuant to CA-G.R. SP No. 89259, and not CA-G.R. SP No. 89260, another ejectment
case involving another property. A perusal of the records reveals that indeed the garnishment was pursuant to the ejectment case in
the MeTC, docketed as Civil Case No. 17344,47 where Spouses Rabaja were the defendants. The MeTC decision was then reinstated
by the CA in CA-G.R. SP No. 89259, not CA-G.R. SP No. 89260. There, a writ of execution 48 and notice of pay49 were issued against
Spouses Rabaja in the amount of P591,900.00.

Second, Spouses Rabaja’s appeal with the RTC never sought relief in returning the garnished amount.50 Such issue simply emerged in
the RTC decision. This is highly improper because the court’s grant of relief is limited only to what has been prayed for in the complaint
or related thereto, supported by evidence, and covered by the party’s cause of action.51

If Spouses Rabaja would have any objection on the manner and propriety of the execution, then they must institute their opposition to
the execution proceeding a separate case. Spouses Rabaja can invoke the Civil Code provisions on legal compensation or set-off
under Articles 1278, 1279 and 1270.52 The two obligations appear to have respectively offset each other, compensation having taken
effectby operation of law pursuant to the said provisions of the Civil Code, since all the requisites provided in Art. 1279 of the said Code
for automatic compensation are duly present.

No award of actual, moral and

exemplary damages

The award of damages to Spouses Rabaja cannot be sustained by this Court. The filing alone of a civil action should not be a ground
for an award of moral damages in the same way that a clearly unfounded civil action is not among the grounds for moral
damages.53 Article 2220 of the New Civil Code provides that to award moral damages in a breach of contract, the defendant must act
fraudulently or in bad faith. In this case, Spouses Rabaja failed to sufficiently show that Spouses Salvador acted in a fraudulent manner
or with bad faith when it breached the contract of sale. Thus, the award of moral damages cannot be warranted.

As to the award of exemplary damages, Article 2229 of the New Civil Code provides that exemplary damages may be imposed by way
of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages.54 The claimant
must first establish his right to moral, temperate, liquidated or compensatory damages. In this case, considering that Spouses Rabaja
failed to prove moral or compensatory damages, then there could be no award of exemplary damages.

With regard to attorney’s fees, neither Spouses Rabaja nor Gonzales is entitled to the award.1âwphi1 The settled rule is that no
premium should be placed on the right to litigate and that not every winning party is entitled to an automatic grant of attorney’s
fees.55 The RTC reasoned that Gonzales was forced to litigate due to the acts of Spouses Salvador. The Court does not agree.
Gonzales, as agent of Spouses Salvador, should have expected that she would be called to litigation in connection with her fiduciary
duties to the principal.

In view of all the foregoing, the CA decision should be affirmed with the following modifications:

1. The order requiring defendant Spouses Rolando and Herminia Salvador to pay plaintiffs the amount of Five Hundred Ninety
Three Thousand (P593,000.00) Pesos, representing the amount garnished from the Metrobank deposit of plaintiffs as for their
back rentals should be deleted;

2. The award of moral damages in the amount of Twenty Thousand (P20,000.00) Pesos; exemplary damages in the amount of
Twenty Thousand (P20,000.00) Pesos, and attorney’s fees in the amount of One Hundred Thousand (P100,000.00) Pesos in
favor of Spouses Rabaja should be deleted; and

3. The award of attorney’s fees in amount of One Hundred Thousand (P100,000.00) Pesos in favor of Gonzales should be
deleted.

The other amounts awarded are subject to interest at the legal rate of 6% per annum, to be reckoned from the date of finality of this
judgment until fully paid.

WHEREFORE, the petition is PARTLY GRANTED. The March 29, 2007 Decision of the Regional Trial Court, Branch 214,
Mandaluyong City, in Civil Case No. MC-03-2175, is MODIFIED to read as follows:

"WHEREFORE, this Court renders judgment as follows:

a. Ordering the "Contract to Sell" entered into by Spouses Rogelio and Elizabeth Rabaja and Spouses Rolando and Herminia
Salvador on July 24, 1998 as RESCINDED;

b. Ordering Spouses Rolando and Herminia Salvador to pay Spouses Rogelio and Elizabeth Rabaja:

1. The amount of Nine Hundred Fifty Thousand (P950,000.00) Pesos, representing the payments made by the latter
for the purchase of the subject property; and

2. The cost of suit;

c. Dismissing the counterclaims of Spouses Rolando and Herminia Salvador and Rosario Gonzales against Spouses Rogelio
and Elizabeth Rabaja.

The amounts awarded are subject to interest at the legal rate of 6% per annum to be reckoned from the date of finality of this judgment
until fully paid."

As aforestated, this is without prejudice to the invocation by either party of the Civil Code provisions on legal compensation or set-off
under Articles 1278, 1279 and 1270.

SO ORDERED.

JOSE CATRAL MENDOZA

Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 190080               June 11, 2014

GOLDEN VALLEY EXPLORATION, INC., Petitioner, 

vs.
PINKIAN MINING COMPANY and COPPER VALLEY, INC., Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated July 23, 2009 and the Resolution3 dated October 23, 2009 of
the Court of Appeals (CA) in CA-G.R. CV. No. 90682 which reversed the Decision4 dated August 18, 2006 of the Regional Trial Court of
Makati City, Branch 145 (RTC) in Civil Case No. 01-324 and, consequently, affirmed the validity of the rescission of the Operating
Agreement between petitioner Golden Valley Exploration, Inc. (GVEI) and respondent Pinkian Mining Company (PMC) covering various
mining claims in Kayapa, Nueva Vizcaya, as well as the Memorandum of Agreement between PMC and respondent Copper Valley, Inc.
(CVI).

The Facts

PMC is the owner of 81 mining claims located in Kayapa, Nueva Vizcaya, 15 of which were covered by Mining Lease Contract (MLC)
No. MRD-56,5 while the remaining 66 had pending applications for lease.6 On October 30, 1987, PMC entered into an Operating
Agreement7 (OA) with GVEI, granting the latter "full, exclusive and irrevocable possession, use, occupancy , and control over the
[mining claims], and every matter pertaining to the examination, exploration, development and mining of the [mining claims] and the
processing and marketing of the products x x x ,"8 for a period of 25 years.9

In a Letter10 dated June 8, 1999, PMC extra-judicially rescinded the OA upon GVEI’s violation of Section 5.01,11Article V thereof. Cited
as further justification for its action were reasons such as: (a) violation of Section 2.03, Article II of the OA, or the failure of GVEI to
advance the actual cost for the perfection of the mining claims or for the acquisition of mining rights, cost of lease applications, lease
surveys and legal expenses incidental thereto; (b) GVEI’s non-reimbursement of the expenses incurred by PMC General Manager
Benjamin Saguid in connection with the visit of a financier to the mineral property in 1996; (c) its non-remittance of the US$300,000.00
received from Excelsior Resources, Ltd.; (d) its nondisclosure of contracts entered into with other mining companies with respect to the
mining claims; (e) its being a mere "promoter/broker" of PMC’s mining claims instead of being the operator thereof; and (f) its
nonperformance of the necessary works on the mining claims.12

GVEI contested PMC’s extra-judicial rescission of the OA through a Letter dated December 7, 1999, averring therein that its obligation
to pay royalties to PMC arises only when the mining claims are placed in commercial production which condition has not yet taken
place. It also reminded PMC of its prior payment of the amount ofP185,000.00 as future royalties in exchange for PMC’s express waiver
of any breach or default on the part of GVEI.13

PMC no longer responded to GVEI’s letter. Instead, it entered into a Memorandum of Agreement dated May 2, 2000 (MOA) with CVI,
whereby the latter was granted the right to "enter, possess, occupy and control the mining claims" and "to explore and develop the
mining claims, mine or extract the ores, mill, process and beneficiate and/or dispose the mineral products in any method or process,"
among others, for a period of 25 years.14

Due to the foregoing, GVEI filed a Complaint15 for Specific Performance, Annulment of Contract and Damages against PMC and CVI
before the RTC, docketed as Civil Case No. 01-324.

The RTC Ruling

On August 18, 2006, the RTC rendered a Decision16 in favor of GVEI, holding that since the mining claims have not been placed in
commercial production, there is no demandable obligation yet for GVEI to pay royalties to PMC. It further declared that no fault or
negligence may be attributed to GVEI for the delay in the commercial production of the mining claims because the non-issuance of the
requisite Mineral Production Sharing Agreement (MPSA) and other government permits, licenses, and consent were all affected by
factors beyond GVEI’s control.17 The RTC, thus, declared the rescission of the OA void and the execution of the MOA between PMC
and CVI without force and effect. In this relation, it ordered PMC to comply with the terms and conditions of the OA until the expiration
of its period.18

At odds with the RTC’s ruling, PMC elevated the case on appeal to the CA.
 The CA Ruling

In a Decision19 dated July 23, 2009, the CA reversed the RTC ruling, finding that while the OA gives PMC the right to rescind only on
the ground of (GVEI’s) failure to pay the stipulated royalties, Article 1191 of the Civil Code allows PMC the right to rescind the
agreement based on a breach of any of its provisions.20 It further held that the inaction of GVEI for a period of more than seven (7)
years to operate the areas that were already covered by a perfected mining lease contract and to acquire the necessary permits and
licenses amounted to a substantial breach of the OA, the very purpose of which was the mining and commercial distribution of
derivative products that may be recovered from the mining property.21 For the foregoing reasons, the CA upheld the validity of PMC’s
rescission of the OA and its subsequent execution of the MOA with CVI.22

Dissatisfied with the CA’s ruling, GVEI filed a motion for reconsideration which was, however, denied by the CA in a Resolution23 dated
October 23, 2009, hence, this petition.

The Issue Before the Court

The central issue for the Court’s resolution is whether or not there was a valid rescission of the OA.

The Court’s Ruling

The Court resolves the issue in the affirmative.

In reciprocal obligations, either party may rescind the contract upon the other’s substantial breach of the obligation/s he had assumed
thereunder. The basis therefor is Article 1191 of the Civil Code which states as follows:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is
incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case.
He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385
and 1388 and the Mortgage Law.

More accurately referred to as resolution, the right of rescission under Article 1191 is predicated on a breach of faith that violates the
reciprocity between parties to the contract.24 This retaliatory remedy is given to the contracting party who suffers the injurious breach on
the premise that it is "unjust that a party be held bound to fulfill his promises when the other violates his."25

As a general rule, the power to rescind an obligation must be invoked judicially and cannot be exercised solely on a party’s own
judgment that the other has committed a breach of the obligation.26 This is so because rescission of a contract will not be permitted for
a slight or casual breach, but only for such substantial and fundamental violations as would defeat the very object of the parties in
making the agreement.27 As a well-established exception, however, an injured party need not resort to court action in order to rescind a
contract when the contract itself provides that it may be revoked or cancelled upon violation of its terms and conditions.28 As elucidated
in Froilan v. Pan Oriental Shipping Co.,29 "there is x x x nothing in the law that prohibits the parties from entering into agreement that
violation of the terms of the contract would cause cancellation thereof, even without court intervention."30 Similarly, in Dela Rama
Steamship Co., Inc. v. Tan,31 it was held that judicial permission to rescind an obligation is not necessary if a contract contains a special
provision granting the power of cancellation to a party.32

With this in mind, the Court therefore affirms the correctness of the CA’s Decision upholding PMC’s unilateral rescission of the OA due
to GVEI’s non-payment of royalties considering the parties’ express stipulation in the OA that said agreement may be cancelled on such
ground. This is found in Section 8.01, Article VIII33 in relation to Section 5.01, Article V34 of the OA which provides:

ARTICLE VIII
CANCELLATION/TERMINATION OF AGREEMENT

8.01 This Agreement may be cancelled or terminated prior to the expiration of the period, original or renewal mentioned in the next
preceding Section only in either of the following ways:

a. By written advance notice of sixty (60) days from OPERATOR to PINKIAN with or without cause by registered mail or
personal delivery of the notice to PINKIAN.
 b. By written notice from PINKIAN by registered or personal deliver of the notice to OPERATOR based on the failure to
OPERATOR to make any payments determined to be due PINKIAN under Section 5.01 hereof after written demand for
payment has been made on OPERATOR: Provided that OPERATOR shall have a grace period of ninety (90) days from
receipt of such written demand within which to make the said payments to PINKIAN.

ARTICLE V
ROYALTIES

5.01 Should the PROPERTIES be placed in commercial production the PINKIAN shall be entitled to a Royalty computed as follows:

(a) For gold – 3.0 percent of net realizable value of gold

(b) For copper and others – 2.0 percent of net realizable value

"Net REALIZABLE Value" is gross value less the sum of the following:

(1) marketing expenses including freight and insurance;

(2) all smelter charges and deductions;

(3) royalty payments to the government;

(4) ad valorem and export taxes, if any, paid to the government.

The aforesaid royalties shall be paid to PINKIAN within five (5) days after receipt of the smelter or refinery returns. (Emphases and
underscoring supplied)

By expressly stipulating in the OA that GVEI’s non-payment of royalties would give PMC sufficient cause to cancel or rescind the OA,
the parties clearly had considered such violation to be a substantial breach of their agreement. Thus, in view of the above-stated
jurisprudence on the matter, PMC’s extra-judicial rescission of the OA based on the said ground was valid.

In this relation, the Court finds it apt to clarify that the following defenses raised by GVEI in its petition would not impel a different
conclusion:

First, GVEI cannot excuse its non-payment of royalties on the argument that no commercial mining was yet in place. This is precisely
because the obligation to develop the mining areas and put them in commercial operation also belonged to GVEI as it expressly
undertook "to explore, develop, and equip the Claims to mine and beneficiate the ore thereof by any method or process"35 and "to enter
into contract, agreement, assignments, conveyances and understandings of any kind whatsoever with reference to the exploration,
development, equipping and operation of the Claims, and the mining and beneficiation of the ore derived therefrom, and marketing the
resulting marketable products."36

Records reveal that when the OA was signed on October 30, 1987, 15 mining claims were already covered by a perfected mining lease
contract, i.e., MLC No. MRD-56, granting to the holder thereof "the right to extract all mineral deposits found on or underneath the
surface of his mining claims x x x; to remove, process and otherwise utilize the mineral deposits for his own benefit."37 This meant that
GVEI could have immediately extracted mineral deposits from the covered mineral land and carried out commercial mining operations
from the very start. However, despite earlier demands made by PMC, no meaningful steps were taken by GVEI towards the commercial
production of the 15 perfected mining claims and the beneficial exploration of those remaining. Consequently, seven years into the life
of the OA, no royalties were paid to PMC. Compounding its breach, GVEI not only failed to pay royalties to PMC but also did not carry
out its obligation to conduct operations on and/or commercialize the mining claims already covered by MLC No. MRD-56. Truth be told,
GVEI’s non-performance of the latter obligation under the OA actually made the payment of royalties to PMC virtually impossible.
Hence, GVEI cannot blame anyone but itself for its breach of the OA, which, in turn, gave PMC the right to unilaterally rescind the
same.

Second, neither can GVEI successfully oppose PMC’s rescission of the OA on the argument that the ground to rescind the OA was only
limited to its non-payment of royalties precisely because said ground was actually among the reasons for PMC’s rescission thereof.
Considering the stipulations above-cited, the ground for non-payment of royalties was in itself sufficient for PMC to extra-judicially
rescind the OA.

In any event, even discounting the ground of non-payment of royalties, PMC still had the right to rescind the OA based on the other
grounds it had invoked therefor, namely, (a) violation of Section 2.03, Article II of the OA, or the failure of GVEI to advance the actual
cost for the perfection of the mining claims or for the acquisition of mining rights, cost of lease applications, lease surveys and legal
expenses incidental thereto, (b) GVEI’s non-reimbursement of the expenses incurred by PMC General Manager Benjamin Saguid in
connection with the visit of a financier to the mineral property in 1996, (c) its non-remittance of the US$300,000.00 received from
Excelsior Resources, Ltd., (d) its non-disclosure of contracts entered into with other mining companies with respect to the mining
claims, (e) its being a mere "promoter/broker" of PMC’s mining claims instead of being the operator thereof, and (f) its non-performance
of the necessary works on the mining claims, albeit the said grounds should have been invoked judicially since the court would still
need to determine if the same would constitute substantial breach and not merely a slight or casual breach of the contract. While
Section 8.01, Article VIII of the OA as above-cited appears to expressly restrict the availability of an extra-judicial rescission only to the
grounds stated thereunder, the Court finds that the said stipulation does not negate PMC’s implied statutory right to judicially rescind
the contract for other unspecified acts that may actually amount to a substantial breach of the contract. This is based on Article 1191 of
the Civil Code (also above-cited) which pertinently provides that the "power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him" and that "[t]he court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period."

While it remains apparent that PMC had not judicially invoked the other grounds to rescind in this case, the only recognizable effect,
however, is with respect to the reckoning point as to when the contract would be formally regarded as rescinded. Where parties agree
to a stipulation allowing extra-judicial rescission, no judicial decree is necessary for rescission to take place; the extra-judicial rescission
immediately releases the party from its obligation under the contract, subject only to court reversal if found improper.1âwphi1 On the
other hand, without a stipulation allowing extra-judicial rescission, it is the judicial decree that rescinds, and not the will of the rescinding
party. This may be gathered from previous Court rulings on the matter.

For instance, in Ocejo, Perez & Co. v. International Banking Corporation,38 where the seller, without having reserved title to the thing
sold, sought to re-possess the subject matter of the sale through an action for replevin after the buyer failed to pay its purchase price,
the Court ruled that the action of replevin (which operates on the assumption that the plaintiff is the owner of the thing subject of the
suit) "will not lie upon the theory that the rescission has already taken place and that the seller has recovered title to the thing sold." It
held that the title which had already passed by delivery to the buyer is not ipso facto re-vested in the seller upon the latter’s own
determination to rescind the sale because it is the judgment of the court that produces the rescission.

On the other hand, in De Luna v. Abrigo39 (De Luna), the Court upheld the validity of a stipulation providing for the automatic reversion
of donated property to the donor upon non-compliance of certain conditions therefor as the same was akin to an agreement granting a
party the right to extra-judicially rescind the contract in case of breach. The Court ruled, in effect, that a subsequent court judgment
does not rescind the contract but merely declares the fact that the same has been rescinded, viz.:

[J]udicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a contract already deemed rescinded
by virtue of an agreement providing for rescission even without judicial intervention, but in order to determine whether or not the
rescission was proper.40 (Emphases and underscoring supplied)

A similar agreement in Roman Catholic Archbishop of Manila v. CA41 allowing the ipso facto reversion of the donated property upon
noncompliance with the conditions was likewise upheld, with the Court reiterating De Luna and declaring in unmistakable terms that:42

Where [the propriety of the automatic rescission] is sustained, the decision of the court will be merely declaratory of the revocation, but
it is not in itself the revocatory act. (Emphasis and underscoring supplied)

This notwithstanding, jurisprudence still indicates that an extra-judicial rescission based on grounds not specified in the contract would
not preclude a party to treat the same as rescinded. The rescinding party, however, by such course of action, subjects himself to the
risk of being held liable for damages when the extra-judicial rescission is questioned by the opposing party in court. This was made
clear in the case of U.P. v. De Los Angeles,43 wherein the Court held as follows:

Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of infractions by the
other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the
proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the
matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible
party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the
party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous
court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally
settle whether the action taken was or was not correct in law. x x x.44 (Emphases and underscoring supplied)

The pronouncement, which was also reiterated in the case of Angeles v. Calasanz,45 sought to explain various rulings that continued to
require judicial confirmation even in cases when the rescinding party has a proven contractual right to extra-judicially rescind the
contract. The observation then was mainly on the practical effect of a stipulation allowing extra-judicial rescission being merely "to
transfer to the defaulter the initiative on instituting suit, instead of the rescinder."46

Proceeding from the foregoing, the Court has determined that the other grounds raised by PMC in its Letter dated June 8, 1999 to GVEI
(the existence of which had not been convincingly disputed herein) amounts to the latter's substantial breach of the OA. To the Court's
mind, said infractions, when taken together, ultimately resulted in GVEI's failure to faithfully perform its primordial obligation under the
OA to explore and develop PMC's mining claims as well as to put the same into commercial operation. Accordingly, PMC's rescission of
the OA on the foregoing grounds, in addition to the ground of non-payment of royalties, is equally valid.

Finally, the Court cannot lend credence to GVEI's contention that when PMC entered into an agreement with CVI covering the mining
claims, it was committing a violation of the terms and conditions of the OA. As above-explained, the invocation of a stipulation allowing
extra-judicial rescission effectively puts an end to the contract and, thus, releases the parties from the obligations thereunder,
notwithstanding the lack of a judicial decree for the purpose. In the case at bar, PMC, through its Letter dated June 8, 1999 to GVEI,
invoked Section 8.01, Article VIII in relation to Section 5.01, Article V of the OA which allows it to extra-judicially rescind the contract for
GVEI's non-payment of royalties. Thus, at that point in time, PMC had effectively rescinded the OA and was then considered to have
been released from its legal effects. Accordingly, there stood no legal impediment so as to hinder PMC from entering into a contract
with CVI covering the same mining claims subject of this case.

In fine, the Court denies the instant petition and affirms the assailed CA Decision and Resolution. WHEREFORE, the petition is
DENIED. The Decision dated July 23, 2009 and the Resolution dated October 23, 2009 of the Court of Appeals in CA-G.R. CV. No.
90682 are hereby AFFIRMED.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 177050               July 01, 2013

CARLOS LIM, CONSOLACION LIM, EDMUNDO LIM,* CARLITO LIM, SHIRLEY LEODADIA DIZON,** AND ARLEEN LIM
FERNANDEZ, PETITIONERS, 
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, RESPONDENT.

DECISION

DEL CASTILLO, J.:

"While the law recognizes the right of a bank to foreclose a mortgage upon the mortgagor’s failure to pay his obligation, it is imperative
that such right be exercised according to its clear mandate. Each and every requirement of the law must be complied with, lest, the
valid exercise of the right would end."1

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the February 22, 2007 Decision3 of the Court of
Appeals (CA) in CA-G.R. CV No. 59275.

Factual Antecedents

On November 24, 1969, petitioners Carlos, Consolacion, and Carlito, all surnamed Lim, obtained a loan ofP40,000.00 (Lim Account)
from respondent Development Bank of the Philippines (DBP) to finance their cattle raising business.4 On the same day, they executed a
Promissory Note5 undertaking to pay the annual amortization with an interest rate of 9% per annum and penalty charge of 11% per
annum.

On December 30, 1970, petitioners Carlos, Consolacion, Carlito, and Edmundo, all surnamed Lim; Shirley Leodadia Dizon, Arleen Lim
Fernandez, Juan S. Chua,6 and Trinidad D. Chua7 obtained another loan from DBP8in the amount of P960,000.00 (Diamond L Ranch
Account).9 They also executed a Promissory Note,10 promising to pay the loan annually from August 22, 1973 until August 22, 1982 with
an interest rate of 12% per annum and a penalty charge of 1/3% per month on the overdue amortization.

To secure the loans, petitioners executed a Mortgage11 in favor of DBP over real properties covered by the following titles registered in
the Registry of Deeds for the Province of South Cotabato:

(a) TCT No. T-6005 x x x in the name of Edmundo Lim;

(b) TCT No. T-6182 x x x in the name of Carlos Lim;

(c) TCT No. T-7013 x x x in the name of Carlos Lim;

(d) TCT No. T-7012 x x x in the name of Carlos Lim;

(e) TCT No. T-7014 x x x in the name of Edmundo Lim;

(f) TCT No. T-7016 x x x in the name of Carlito Lim;

(g) TCT No. T-28922 x x x in the name of Consolacion Lim;

(h) TCT No. T-29480 x x x in the name of Shirley Leodadia Dizon;

(i) TCT No. T-24654 x x x in the name of Trinidad D. Chua; and

(j) TCT No. T-25018 x x x in the name of Trinidad D. Chua’s deceased husband Juan Chua.12

Due to violent confrontations between government troops and Muslim rebels in Mindanao from 1972 to 1977, petitioners were forced to
abandon their cattle ranch.13 As a result, their business collapsed and they failed to pay the loan amortizations.14
In 1978, petitioners made a partial payment in the amount of P902,800.00,15 leaving an outstanding loan balance of P610,498.30,
inclusive of charges and unpaid interest, as of September 30, 1978.16

In 1989, petitioners, represented by Edmundo Lim (Edmundo), requested from DBP Statements of Account for the "Lim Account" and
the "Diamond L Ranch Account."17 Quoted below are the computations in the Statements of Account, as of January 31, 1989 which
were stamped with the words "Errors & Omissions Excepted/Subject to Audit:"

1âwphi1

Diamond L Ranch Account:

Matured [Obligation]:

Principal P 939,973.33

Regular Interest 561,037.14

Advances 34,589.45

Additional Interest 2,590,786.26

Penalty Charges 1,068,147.19

18
Total claims as of January 31, 1989 P 5,194,533.37
Lim Account:
Matured [Obligation]:
Principal P 40,000.00
Regular Interest 5,046.97
Additional Interest 92,113.56
Penalty Charges 39,915.46
19
Total claims as of January 31, 1989 P 177,075.99

Claiming to have already paid P902,800.00, Edmundo requested for an amended statement of account.20

On May 4, 1990, Edmundo made a follow-up on the request for recomputation of the two accounts.21 On May 17, 1990, DBP’s General
Santos Branch informed Edmundo that the Diamond L Ranch Account amounted toP2,542,285.60 as of May 31, 199022 and that the
mortgaged properties located at San Isidro, Lagao, General Santos City, had been subjected to Operation Land Transfer under the
Comprehensive Agrarian Reform Program (CARP) of the government.23 Edmundo was also advised to discuss with the Department of
Agrarian Reform (DAR) and the Main Office of DBP24 the matter of the expropriated properties.

Edmundo asked DBP how the mortgaged properties were ceded by DAR to other persons without their knowledge.25 No reply was
made.26

On April 30, 1991, Edmundo again signified petitioners’ intention to settle the Diamond L Ranch Account.27 Again, no reply was made.28

On February 21, 1992, Edmundo received a Notice of Foreclosure scheduled the following day.29 To stop the foreclosure, he was
advised by the bank’s Chief Legal Counsel to pay an interest covering a 60-days period or the amount of P60,000.00 to postpone the
foreclosure for 60 days.30 He was also advised to submit a written proposal for the settlement of the loan accounts.31

In a letter32 dated March 20, 1992, Edmundo proposed the settlement of the accounts through dacion en pago, with the balance to be
paid in equal quarterly payments over five years.

In a reply-letter33 dated May 29, 1992, DBP rejected the proposal and informed Edmundo that unless the accounts are fully settled as
soon as possible, the bank will pursue foreclosure proceedings.
DBP then sent Edmundo the Statements of Account34 as of June 15, 1992 which were stamped with the words "Errors & Omissions
Excepted/Subject to Audit" indicating the following amounts: (1) Diamond L Ranch:P7,210,990.27 and (2) Lim Account: P187,494.40.

On June 11, 1992, Edmundo proposed to pay the principal and the regular interest of the loans in 36 equal monthly installments.35

On July 3, 1992, DBP advised Edmundo to coordinate with Branch Head Bonifacio Tamayo, Jr. (Tamayo).36Tamayo promised to review
the accounts.37

On September 21, 1992, Edmundo received another Notice from the Sheriff that the mortgaged properties would be auctioned on
November 22, 1992.38 Edmundo again paid P30,000.00 as additional interest to postpone the auction.39 But despite payment
of P30,000.00, the mortgaged properties were still auctioned with DBP emerging as the highest bidder in the amount
of P1,086,867.26.40 The auction sale, however, was later withdrawn by DBP for lack of jurisdiction.41

Thereafter, Tamayo informed Edmundo of the bank’s new guidelines for the settlement of outstanding loan accounts under Board
Resolution No. 0290-92.42 Based on these guidelines, petitioners’ outstanding loan obligation was computed at P3,500,000.00
plus.43 Tamayo then proposed that petitioners pay 10% downpayment and the remaining balance in 36 monthly installments.44 He also
informed Edmundo that the bank would immediately prepare the Restructuring Agreement upon receipt of the downpayment and that
the conditions for the settlement have been "pre-cleared" with the bank’s Regional Credit Committee.45 Thus, Edmundo wrote a
letter46 on October 30, 1992 manifesting petitioners’ assent to the proposal.

On November 20, 1992, Tamayo informed Edmundo that the proposal was accepted with some minor adjustments and that an initial
payment should be made by November 27, 1992.47

On December 15, 1992, Edmundo paid the downpayment of P362,271.7548 and was asked to wait for the draft Restructuring
Agreement.49

However, on March 16, 1993, Edmundo received a letter50 from Tamayo informing him that the Regional Credit Committee rejected the
proposed Restructuring Agreement; that it required downpayment of 50% of the total obligation; that the remaining balance should be
paid within one year; that the interest rate should be non prime or 18.5%, whichever is higher; and that the proposal is effective only for
90 days from March 5, 1993 to June 2, 1993.51

Edmundo, in a letter52 dated May 28, 1993, asked for the restoration of their previous agreement.53 On June 5, 1993, the bank
replied,54 viz:

This has reference to your letter dated May 28, 1993, which has connection to your desire to restructure the Diamond L Ranch/Carlos
Lim Accounts.

We wish to clarify that what have been agreed between you and the Branch are not final until [the] same has been approved by higher
authorities of the Bank. We did [tell] you during our discussion that we will be recommending the restructuring of your accounts with the
terms and conditions as agreed. Unfortunately, our Regional Credit Committee did not agree to the terms and conditions as
recommended, hence, the subject of our letter to you on March 15, 1993.

Please be informed further, that the Branch cannot do otherwise but to comply with the conditions imposed by the Regional Credit
Committee. More so, the time frame given had already lapsed on June 2, 1993.

Unless we will receive a favorable action on your part soonest, the Branch will be constrained to do appropriate action to protect the
interest of the Bank."55

On July 28, 1993, Edmundo wrote a letter56 of appeal to the Regional Credit Committee.

In a letter57 dated August 16, 1993, Tamayo informed Edmundo that the previous Restructuring Agreement was reconsidered and
approved by the Regional Credit Committee subject to the following additional conditions, to wit:

1) Submission of Board Resolution and Secretary’s Certificate designating you as authorized representative in behalf of
Diamond L Ranch;

2) Payment of March 15 and June 15, 1993 amortizations within 30 days from date hereof; and

3) Submission of SEC registration.

In this connection, please call immediately x x x our Legal Division to guide you for the early documentation of your approved
restructuring.
Likewise, please be reminded that upon failure on your part to sign and perfect the documents and comply [with] other conditions within
(30) days from date of receipt, your approved recommendation shall be deemed CANCELLED and your deposit of P362,271.75 shall
be applied to your account.

No compliance was made by Edmundo.58

On September 21, 1993, Edmundo received Notice that the mortgaged properties were scheduled to be auctioned on that day.59 To
stop the auction sale, Edmundo asked for an extension until November 15, 199360which was approved subject to additional conditions:

Your request for extension is hereby granted with the conditions that:

1) This will be the last and final extension to be granted your accounts; and

2) That all amortizations due from March 1993 to November 1993 shall be paid including the additional interest computed at
straight 18.5% from date of your receipt of notice of approval, viz:

xxxx

Failure on your part to comply with these conditions, the Bank will undertake appropriate legal measures to protect its interest.

Please give this matter your preferential attention.61

On November 8, 1993, Edmundo sent Tamayo a telegram, which reads:

Acknowledge receipt of your Sept. 27 letter. I would like to finalize documentation of restructuring Diamond L Ranch and Carlos Lim
Accounts. However, we would need clarification on amortizations due on NTFI means [sic]. I will call x x x your Legal Department at
DBP Head Office by Nov. 11. Pls. advise who[m] I should contact. Thank you.62

Receiving no response, Edmundo scheduled a meeting with Tamayo in Manila.63 During their meeting, Tamayo told Edmundo that he
would send the draft of the Restructuring Agreement by courier on November 15, 1993 to the Main Office of DBP in Makati, and that
Diamond L Ranch need not submit the Board Resolution, the Secretary’s Certificate, and the SEC Registration since it is a single
proprietorship.64

On November 24, 1993 and December 3, 1993, Edmundo sent telegrams to Tamayo asking for the draft of the Restructuring
Agreement.65

On November 29, 1993, the documents were forwarded to the Legal Services Department of DBP in Makati for the parties’ signatures.
At the same time, Edmundo was required to pay the amount of P1,300,672.75, plus a daily interest of P632.15 starting November 16,
1993 up to the date of actual payment of the said amount.66

On December 19, 1993, Edmundo received the draft of the Restructuring Agreement.67

In a letter68 dated January 6, 1994, Tamayo informed Edmundo that the bank cancelled the Restructuring Agreement due to his failure
to comply with the conditions within a reasonable time.

On January 10, 1994, DBP sent Edmundo a Final Demand Letter asking that he pay the outstanding amount ofP6,404,412.92, as of
November 16, 1993, exclusive of interest and penalty charges.69

Edmundo, in a letter70 dated January 18, 1994, explained that his lawyer was not able to review the agreement due to the Christmas
holidays. He also said that his lawyer was requesting clarification on the following points:

Can the existing obligations of the Mortgagors, if any, be specified in the Restructuring Agreement already?

Is there a statement showing all the accrued interest and advances that shall first be paid before the restructuring shall be
implemented?

Should Mr. Jun Sarenas Chua and his wife Mrs. Trinidad Chua be required to sign as Mortgagors considering that Mr. Chua is
deceased and the pasture lease which he used to hold has already expired?71

Edmundo also indicated that he was prepared to pay the first quarterly amortization on March 15, 1994 based on the total obligations
of P3,260,445.71, as of December 15, 1992, plus interest.72
On January 28, 1994, Edmundo received from the bank a telegram73 which reads:

We refer to your cattle ranch loan carried at our DBP General Santos City Branch.

Please coordinate immediately with our Branch Head not later than 29 January 1994, to forestall the impending foreclosure action on
your account.

Please give the matter your utmost attention.

The bank also answered Edmundo’s queries, viz:

In view of the extended leave of absence of AVP Bonifacio A. Tamayo, Jr. due to the untimely demise of his father, we regret [that] he
cannot personally respond to your letter of January 18, 1994. However, he gave us the instruction to answer your letter on direct to the
point basis as follows:

- Yes to Items No. 1 and 2,

- No longer needed on Item No. 3

AVP Tamayo would like us also to convey to you to hurry up with your move to settle the obligation, while the foreclosure action is still
pending with the legal division. He is afraid you might miss your last chance to settle the account of your parents.74

Edmundo then asked about the status of the Restructuring Agreement as well as the computation of the accrued interest and
advances75 but the bank could not provide any definite answer.76

On June 8, 1994, the Office of the Clerk of Court and Ex-Officio Provincial Sheriff of the RTC of General Santos City issued a
Notice77 resetting the public auction sale of the mortgaged properties on July 11, 1994. Said Notice was published for three consecutive
weeks in a newspaper of general circulation in General Santos City.78

On July 11, 1994, the Ex-Officio Sheriff conducted a public auction sale of the mortgaged properties for the satisfaction of petitioners’
total obligations in the amount of P5,902,476.34. DBP was the highest bidder in the amount of P3,310,176.55.79

On July 13, 1994, the Ex-Officio Sheriff issued the Sheriff’s Certificate of Extra-Judicial Sale in favor of DBP covering 11 parcels of
land.80

In a letter81 dated September 16, 1994, DBP informed Edmundo that their right of redemption over the foreclosed properties would
expire on July 28, 1995, to wit:

This is to inform you that your right of redemption over your former property/ies acquired by the Bank on July 13, 1994, thru Extra-
Judicial Foreclosure under Act 3135 will lapse on July 28, 1995.

In view thereof, to entitle you of the maximum condonable amount (Penal Clause, AI on Interest, PC/Default Charges) allowed by the
Bank, we are urging you to exercise your right within six (6) months from the date of auction sale on or before January 12, 1995.

Further, failure on your part to exercise your redemption right by July 28, 1995 will constrain us to offer your former property/ies in a
public bidding.

Please give this matter your preferential attention. Thank you.82

On July 28, 1995, petitioners filed before the RTC of General Santos City, a Complaint83 against DBP for Annulment of Foreclosure and
Damages with Prayer for Issuance of a Writ of Preliminary Injunction and/or Temporary Restraining Order. Petitioners alleged that
DBP’s acts and omissions prevented them from fulfilling their obligation; thus, they prayed that they be discharged from their obligation
and that the foreclosure of the mortgaged properties be declared void. They likewise prayed for actual damages for loss of business
opportunities, moral and exemplary damages, attorney’s fees, and expenses of litigation.84

On same date, the RTC issued a Temporary Restraining Order85 directing DBP to cease and desist from consolidating the titles over
petitioners’ foreclosed properties and from disposing the same.

In an Order86 dated August 18, 1995, the RTC granted the Writ of Preliminary Injunction and directed petitioners to post a bond in the
amount of P3,000,000.00.
DBP filed its Answer,87 arguing that petitioners have no cause of action;88 that petitioners failed to pay their loan obligation;89 that as
mandated by Presidential Decree No. 385, initial foreclosure proceedings were undertaken in 1977 but were aborted because
petitioners were able to obtain a restraining order;90 that on December 18, 1990, DBP revived its application for foreclosure but it was
again held in abeyance upon petitioners’ request;91 that DBP gave petitioners written and verbal demands as well as sufficient time to
settle their obligations;92 and that under Act 3135,93 DBP has the right to foreclose the properties.94

Ruling of the Regional Trial Court

On December 10, 1996, the RTC rendered a Decision,95 the dispositive portion of which reads:

WHEREFORE, in light of the foregoing, judgment is hereby rendered:

(1) Declaring that the [petitioners] have fully extinguished and discharged their obligation to the [respondent] Bank;

(2) Declaring the foreclosure of [petitioners’] mortgaged properties, the sale of the properties under the foreclosure
proceedings and the resultant certificate of sale issued by the foreclosing Sheriff by reason of the foreclosure NULL and VOID;

(3) Ordering the return of the [properties] to [petitioners] free from mortgage liens;

(4) Ordering [respondent] bank to pay [petitioners], actual and compensatory damages of P170,325.80;

(5) Temperate damages of P50,000.00;

(c) Moral damages of P500,000.00;

(d) Exemplary damages of P500,000.00;

(e) Attorney’s fees in the amount of P100,000.00; and

(f) Expenses of litigation in the amount of P20,000.00.

[Respondent] Bank’s counterclaims are hereby DISMISSED.

[Respondent] Bank is likewise ordered to pay the costs of suit.

SO ORDERED.96

Ruling of the Court of Appeals

On appeal, the CA reversed and set aside the RTC Decision. Thus:

WHEREFORE, in view of the foregoing, the instant appeal is hereby GRANTED. The assailed Decision dated 10 December 1996 is
hereby REVERSED and SET ASIDE. A new judgment is hereby rendered. It shall now read as follows:

WHEREFORE, premises considered, judgment is hereby rendered:

Ordering the dismissal of the Complaint in Civil Case No. 5608;

Declaring the extrajudicial foreclosure of [petitioners’] mortgaged properties as valid;

Ordering [petitioners] to pay the [respondent] the amount of Two Million Five Hundred Ninety Two Thousand Two Hundred Ninety Nine
[Pesos] and Seventy-Nine Centavos (P2,592,299.79) plus interest and penalties as stipulated in the Promissory Note computed from
11 July 1994 until full payment; and

Ordering [petitioners] to pay the costs.

SO ORDERED.

SO ORDERED.97
 Issues

Hence, the instant recourse by petitioners raising the following issues:

1. Whether x x x respondent’s own wanton, reckless and oppressive acts and omissions in discharging its reciprocal
obligations to petitioners effectively prevented the petitioners from paying their loan obligations in a proper and suitable
manner;

2. Whether x x x as a result of respondent’s said acts and omissions, petitioners’ obligations should be deemed fully complied
with and extinguished in accordance with the principle of constructive fulfillment;

3. Whether x x x the return by the trial Court of the mortgaged properties to petitioners free from mortgage liens constitutes
unjust enrichment;

4. Whether x x x the low bid price made by the respondent for petitioners’ mortgaged properties during the foreclosure sale is
so gross, shocking to the conscience and inherently iniquitous as to constitute sufficient ground for setting aside the
foreclosure sale;

5. Whether x x x the restructuring agreement reached and perfected between the petitioners and the respondent novated and
extinguished petitioners’ loan obligations to respondent under the Promissory Notes sued upon; and

6. Whether x x x the respondent should be held liable to pay petitioners actual and compensatory damages, temperate
damages, moral damages, exemplary damages, attorney’s fees and expenses of litigation.98

Petitioners’ Arguments

Petitioners seek the reinstatement of the RTC Decision which declared their obligation fully extinguished and the foreclosure
proceedings of their mortgaged properties void.

Relying on the Principle of Constructive Fulfillment, petitioners insist that their obligation should be deemed fulfilled since DBP
prevented them from performing their obligation by charging excessive interest and penalties not stipulated in the Promissory Notes, by
failing to promptly provide them with the correct Statements of Account, and by cancelling the Restructuring Agreement even if they
already paid P362,271.75 as downpayment.99 They likewise deny any fault or delay on their part in finalizing the Restructuring
Agreement.100

In addition, petitioners insist that the foreclosure sale is void for lack of personal notice101 and the inadequacy of the bid price.102 They
contend that at the time of the foreclosure, petitioners’ obligation was not yet due and demandable,103 and that the restructuring
agreement novated and extinguished petitioners’ loan obligation.104

Finally, petitioners claim that DBP acted in bad faith or in a wanton, reckless, or oppressive manner; hence, they are entitled to actual,
temperate, moral and exemplary damages, attorney’s fees, and expenses of litigation.105

Respondent’s Arguments

DBP, on the other hand, denies acting in bad faith or in a wanton, reckless, or oppressive manner106 and in charging excessive interest
and penalties.107 According to it, the amounts in the Statements of Account vary because the computations were based on different cut-
off dates and different incentive schemes.108

DBP further argues that the foreclosure sale is valid because gross inadequacy of the bid price as a ground for the annulment of the
sale applies only to judicial foreclosure.109 It likewise maintains that the Promissory Notes and the Mortgage were not novated by the
proposed Restructuring Agreement.110

As to petitioners’ claim for damages, DBP contends it is without basis because it did not act in bad faith or in a wanton, reckless, or
oppressive manner.111

Our Ruling

The Petition is partly meritorious.

The obligation was not extinguished

or discharged.
The Promissory Notes subject of the instant case became due and demandable as early as 1972 and 1976. The only reason the
mortgaged properties were not foreclosed in 1977 was because of the restraining order from the court. In 1978, petitioners made a
partial payment of P902,800.00. No subsequent payments were made. It was only in 1989 that petitioners tried to negotiate the
settlement of their loan obligations. And although DBP could have foreclosed the mortgaged properties, it instead agreed to restructure
the loan. In fact, from 1989 to 1994, DBP gave several extensions for petitioners to settle their loans, but they never did, thus,
prompting DBP to cancel the Restructuring Agreement.

Petitioners, however, insist that DBP’s cancellation of the Restructuring Agreement justifies the extinguishment of their loan obligation
under the Principle of Constructive Fulfillment found in Article 1186 of the Civil Code.

We do not agree.

As aptly pointed out by the CA, Article 1186 of the Civil Code, which states that "the condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment," does not apply in this case,112 viz:

Article 1186 enunciates the doctrine of constructive fulfillment of suspensive conditions, which applies when the following three (3)
requisites concur, viz: (1) The condition is suspensive; (2) The obligor actually prevents the fulfillment of the condition; and (3) He acts
voluntarily. Suspensive condition is one the happening of which gives rise to the obligation. It will be irrational for any Bank to provide a
suspensive condition in the Promissory Note or the Restructuring Agreement that will allow the debtor-promissor to be freed from the
duty to pay the loan without paying it.113

Besides, petitioners have no one to blame but themselves for the cancellation of the Restructuring Agreement. It is significant to point
out that when the Regional Credit Committee reconsidered petitioners’ proposal to restructure the loan, it imposed additional
conditions. In fact, when DBP’s General Santos Branch forwarded the Restructuring Agreement to the Legal Services Department of
DBP in Makati, petitioners were required to pay the amount of P1,300,672.75, plus a daily interest of P632.15 starting November 16,
1993 up to the date of actual payment of the said amount.114 This, petitioners failed to do. DBP therefore had reason to cancel the
Restructuring Agreement.

Moreover, since the Restructuring Agreement was cancelled, it could not have novated or extinguished petitioners’ loan obligation. And
in the absence of a perfected Restructuring Agreement, there was no impediment for DBP to exercise its right to foreclose the
mortgaged properties.115

The foreclosure sale is not valid.

But while DBP had a right to foreclose the mortgage, we are constrained to nullify the foreclosure sale due to the bank’s failure to send
a notice of foreclosure to petitioners.

We have consistently held that unless the parties stipulate, "personal notice to the mortgagor in extrajudicial foreclosure proceedings is
not necessary"116 because Section 3117 of Act 3135 only requires the posting of the notice of sale in three public places and the
publication of that notice in a newspaper of general circulation.

In this case, the parties stipulated in paragraph 11 of the Mortgage that:

11. All correspondence relative to this mortgage, including demand letters, summons, subpoenas, or notification of any judicial or extra-
judicial action shall be sent to the Mortgagor at xxx or at the address that may hereafter be given in writing by the Mortgagor or the
Mortgagee;118

However, no notice of the extrajudicial foreclosure was sent by DBP to petitioners about the foreclosure sale scheduled on July 11,
1994. The letters dated January 28, 1994 and March 11, 1994 advising petitioners to immediately pay their obligation to avoid the
impending foreclosure of their mortgaged properties are not the notices required in paragraph 11 of the Mortgage. The failure of DBP to
comply with their contractual agreement with petitioners, i.e., to send notice, is a breach sufficient to invalidate the foreclosure sale.

In Metropolitan Bank and Trust Company v. Wong,119 we explained that:

x x x a contract is the law between the parties and, that absent any showing that its provisions are wholly or in part contrary to law,
morals, good customs, public order, or public policy, it shall be enforced to the letter by the courts. Section 3, Act No. 3135 reads:

Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the
municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be
published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality and city.

The Act only requires (1) the posting of notices of sale in three public places, and (2) the publication of the same in a newspaper of
general circulation. Personal notice to the mortgagor is not necessary. Nevertheless, the parties to the mortgage contract are not
precluded from exacting additional requirements. In this case, petitioner and respondent in entering into a contract of real estate
mortgage, agreed inter alia:

all correspondence relative to this mortgage, including demand letters, summonses, subpoenas, or notifications of any judicial or extra-
judicial action shall be sent to the MORTGAGOR at 40-42 Aldeguer St. Iloilo City, or at the address that may hereafter be given in
writing by the MORTGAGOR to the MORTGAGEE.

Precisely, the purpose of the foregoing stipulation is to apprise respondent of any action which petitioner might take on the subject
property, thus according him the opportunity to safeguard his rights. When petitioner failed to send the notice of foreclosure sale to
respondent, he committed a contractual breach sufficient to render the foreclosure sale on November 23, 1981 null and
void.120 (Emphasis supplied)

In view of foregoing, the CA erred in finding the foreclosure sale valid.

Penalties and interest rates should

be expressly stipulated in writing.

As to the imposition of additional interest and penalties not stipulated in the Promissory Notes, this should not be allowed. Article 1956
of the Civil Code specifically states that "no interest shall be due unless it has been expressly stipulated in writing." Thus, the payment
of interest and penalties in loans is allowed only if the parties agreed to it and reduced their agreement in writing.121

In this case, petitioners never agreed to pay additional interest and penalties. Hence, we agree with the RTC that these are illegal, and
thus, void. Quoted below are the findings of the RTC on the matter, to wit:

Moreover, in its various statements of account, [respondent] Bank charged [petitioners] for additional interests and penalties which were
not stipulated in the promissory notes.

In the Promissory Note, Exhibit "A," for the principal amount of P960,000.00, only the following interest and penalty charges were
stipulated:

(1) interest at the rate of twelve percent (12%) per annum;

(2) penalty charge of one-third percent (1/3%) per month on overdue amortization;

(3) attorney’s fees equivalent to ten percent (10%) of the total indebtedness then unpaid; and

(4) advances and interest thereon at one percent (1%) per month.

[Respondent] bank, however, charged [petitioners] the following items as shown in its Statement of Account for the period as of 31
January 1989, Exhibit "D:"

(1) regular interest in the amount of P561,037.14;

(2) advances in the amount of P34,589.45;

(3) additional interest in the amount of P2,590,786.26; and

(4) penalty charges in the amount of P1,068,147.19.

The Court finds no basis under the Promissory Note, Exhibit "A," for charging the additional interest in the amount of P2,590,786.26.
Moreover, it is incomprehensible how the penalty charge of 1/3% per month on the overdue amortization could amount
to P1,086,147.19 while the regular interest, which was stipulated at the higher rate of 12% per annum, amounted to only P561,037.14
or about half of the amount allegedly due as penalties.

In Exhibit "N," which is the statement of account x x x as of 15 June 1992, [respondent] bank charged plaintiffs the following items:

(1) regular interest in the amount of P561,037.14;

(2) advances in the amount of P106,893.93;

(3) additional interest on principal in the amount of P1,233,893.79;

(4) additional interest on regular interest in the amount of P859,966.83;

(5) additional interest on advances in the amount of P27,206.45;

(6) penalty charges on principal in the amount of P1,639,331.15;

(7) penalty charges on regular interest in the amount of P1,146,622.55;

(8) penalty charges on advances in the amount of P40,520.53.

Again, the Court finds no basis in the Promissory Note, Exhibit "A," for the imposition of additional interest on principal in the amount
of P1,233,893.79, additional interest on regular interest in the amount of P859,966.83, penalty charges on regular interest in the
amount of P1,146,622.55 and penalty charges on advances in the amount of P40,520.53.

In the Promissory Note, Exhibit "C," for the principal amount of P40,000.00, only the following charges were stipulated:

(1) interest at the rate of nine percent (9%) per annum;

(2) all unpaid amortization[s] shall bear interest at the rate of eleven percent (11%) per annum; and,

(3) attorney’s fees equivalent to ten percent (10%) of the total indebtedness then unpaid.

In its statement of account x x x as of 31 January 1989, Exhibit "E," [respondent] bank charged [petitioners] with the following items:

(1) regular interest in the amount of P5,046.97

(2) additional interest in the amount of P92,113.56; and

(3) penalty charges in the amount of P39,915.46.

There was nothing in the Promissory Note, Exhibit "C," which authorized the imposition of additional interest. Again, this Court notes
that the additional interest in the amount of P92,113.56 is even larger than the regular interest in the amount of P5,046.97. Moreover,
based on the Promissory Note, Exhibit "C," if the 11% interest on unpaid amortization is considered an "additional interest," then there
is no basis for [respondent] bank to add penalty charges as there is no other provision providing for this charge. If, on the other hand,
the 11% interest on unpaid amortization is considered the penalty charge, then there is no basis to separately charge plaintiffs
additional interest. The same provision cannot be used to charge plaintiffs both interest and penalties.

In Exhibit "O," which is the statement of account x x x as of 15 June 1992, [respondent] charged [petitioners] with the following:

(1) regular interest in the amount of P4,621.25;

(2) additional interest on principal in the amount of P65,303.33;

(3) additional interest on regular interest in the amount of P7,544.58;

(4) penalty charges on principal in the amount of P47,493.33;

(5) penalty charges on regular interest in the amount of P5,486.97;

(6) penalty charges on advances in the amount of P40,520.53.

[Respondent] bank failed to show the basis for charging additional interest on principal, additional interest on regular interest and
penalty charges on principal and penalty charges on regular interest under items (2), (3), (4) and (5) above.

Moreover, [respondent] bank charged [petitioners] twice under the same provisions in the promissory notes. It categorically admitted
that the additional interests and penalty charges separately being charged [petitioners] referred to the same provision of the Promissory
Notes, Exhibits "A" and "C." Thus, for the Lim Account in the amount of P40,000.00, [respondent’s] Mr. Ancheta stated:

Q:
In Exhibit 14, it is stated that for a principal amount of P40,000.00 you imposed an additional interest in the amount of P65,303.33 in
addition to the regular interest of P7,544.58, can you tell us looking [at] the mortgage contract and promissory note what is your basis
for charging that additional interest?

A:

The same as that when I answered Exhibit No. 3, which shall cover amortization on the principal and interest at the above-mentioned
rate. All unpaid amortization[s] shall bear interest at the rate of eleven per centum (11%) per annum.

Q:

You also imposed penalty which is on the principal in the amount of P40,000.00 in the amount of P47,493.33 in addition to regular
interest of P5,486.96. Can you point what portion of Exhibit 3 gives DBP the right to impose such penalty?

A:

The same paragraph as stated.

Q:

Can you please read the portion referring to penalty?

A:

All unpaid amortization shall bear interest at the rate of 11% per annum.

Q:

The additional interest is based on 11% per annum and the penalty is likewise based on the same rate?

A:

Yes, it is combined (TSN, 28 May 1996, pp. 39-40.)

With respect to the Diamond L. Ranch account in the amount of P960,000.00, Mr. Ancheta testified as follows:

Q:

Going back to Exhibit 14 Statement of Accounts. Out of the principal of P939,973.33 you imposed an additional interest
of P1,233,893.79 plus P859,966.83 plus P27,206.45. Can you tell us what is the basis of the imposition?

A:

As earlier stated, it is only the Promissory Note as well as the Mortgage Contract.

Q:

Please point to us where in the Promissory Note is the specific portion?

A:

In Exhibit 1: "in case of failure to pay in full any amortization when due, a penalty charge of 1/3% per month on the overdue
amortization shall be paid."

Q:

What is the rate?

A:
1/3% per month.

Q:

So, the imposition of the additional interest and the penalty charge is based on the same provision?

A:

Yes (TSN, 28 May 1996, pp. 41-42.)

A perusal of the promissory notes, however, failed to justify [respondent] bank’s computation of both interest and penalty under the
same provision in each of the promissory notes.

[Respondent] bank also admitted that the additional interests and penalties being charged [petitioners] were not based on the
stipulations in the Promissory Notes but were imposed unilaterally as a matter of its internal banking policies. (TSN, 19 March 1996, pp.
23-24.) This banking policy, however, has been declared null and void in Philippine National Bank vs. CA, 196 SCRA 536 (1991). The
act of [respondent] bank in unilaterally changing the stipulated interest rate is violative of the principle of mutuality of contracts under
1308 of the Civil Code and contravenes 1956 of the Civil Code. [Respondent] bank completely ignored [petitioners’] "right to assent to
an important modification in their agreement and (negated) the element of mutuality in contracts." (Philippine National Bank vs. CA,
G.R. No. 109563, 9 July 1996; Philippine National Bank vs. CA, 238 SCRA 20 1994). As in the PNB cases, [petitioners] herein never
agreed in writing to pay the additional interest, or the penalties, as fixed by [respondent] bank; hence [respondent] bank’s imposition of
additional interest and penalties is null and void.122 (Emphasis supplied)

Consequently, this case should be remanded to the RTC for the proper determination of petitioners’ total loan obligation based on the
interest and penalties stipulated in the Promissory Notes.

DBP did not act in bad faith or in a

wanton, reckless, or oppressive manner.

Finally, as to petitioners’ claim for damages, we find the same devoid of merit.

DBP did not act in bad faith or in a wanton, reckless, or oppressive manner in cancelling the Restructuring Agreement. As we have
said, DBP had reason to cancel the Restructuring Agreement because petitioners failed to pay the amount required by it when it
reconsidered petitioners’ request to restructure the loan.

Likewise, DBP’s failure to send a notice of the foreclosure sale to petitioners and its imposition of additional interest and penalties do
not constitute bad faith. There is no showing that these contractual breaches were done in bad faith or in a wanton, reckless, or
oppressive manner.1âwphi1

In Philippine National Bank v. Spouses Rocamora,123 we said that:

Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the defendant 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. Likewise, a breach of contract may give rise to exemplary damages only if the guilty party acted in
a wanton, fraudulent, reckless, oppressive or malevolent manner.

We are not sufficiently convinced that PNB acted fraudulently, in bad faith, or in wanton disregard of its contractual obligations, simply
because it increased the interest rates and delayed the foreclosure of the mortgages. Bad faith cannot be imputed simply because the
defendant acted with bad judgment or with attendant negligence. Bad faith is more than these; it pertains to a dishonest purpose, to
some moral obliquity, or to the conscious doing of a wrong, a breach of a known duty attributable to a motive, interest or ill will that
partakes of the nature of fraud. Proof of actions of this character is undisputably lacking in this case. Consequently, we do not find the
spouses Rocamora entitled to an award of moral and exemplary damages. Under these circumstances, neither should they recover
attorney’s fees and litigation expense. These awards are accordingly deleted.124 (Emphasis supplied)

WHEREFORE, the Petition is PARTLY GRANTED. The assailed February 22, 2007 Decision of the Court of Appeals in CA-G.R. CV
No. 59275 is hereby MODIFIED in accordance with this Decision. The case is hereby REMANDED to the Regional Trial Court of
General Santos City, Branch 22, for the proper determination of petitioners’ total loan obligations based on the interest and penalties
stipulated in the Promissory Notes dated November 24, 1969 and December 30, 1970. The foreclosure sale of the mortgaged
properties held on July 11, 1994 is DECLARED void ab initio for failure to comply with paragraph 11 of the Mortgage, without prejudice
to the conduct of another foreclosure sale based on the recomputed amount of the loan obligations, if necessary.

SO ORDERED.
Carpio, (Chairperson), Brion, Perez, and Perlas-Bernabe, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 184458               January 14, 2015

RODRIGO RIVERA, Petitioner, 
vs.
SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA, Respondents.

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

G.R. No. 184472

SPS. SALVADOR CHUA and VIOLETA S. CHUA, Petitioners, 

vs.
RODRIGO RIVERA, Respondent.

DECISION

PEREZ, J.:

Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court assailing the Decision1 of the Court of
Appeals in CA-G.R. SP No. 90609 which affirmed with modification the separate rulings of the Manila City trial courts, the Regional Trial
Court, Branch 17 in Civil Case No. 02-1052562 and the Metropolitan Trial Court (MeTC), Branch 30, in Civil Case No. 163661,3 a case
for collection of a sum of money due a promissory note. While all three (3) lower courts upheld the validity and authenticity of the
promissory note as duly signed by the obligor, Rodrigo Rivera (Rivera), petitioner in G.R. No. 184458, the appellate court modified the
trial courts’ consistent awards: (1) the stipulated interest rate of sixty percent (60%) reduced to twelve percent (12%) per
annumcomputed from the date of judicial or extrajudicial demand, and (2) reinstatement of the award of attorney’s fees also in a
reduced amount of P50,000.00.

In G.R. No. 184458, Rivera persists in his contention that there was no valid promissory note and questions the entire ruling of the
lower courts. On the other hand, petitioners in G.R. No. 184472, Spouses Salvador and Violeta Chua (Spouses Chua), take exception
to the appellate court’s reduction of the stipulated interest rate of sixty percent (60%) to twelve percent (12%) per annum.

We proceed to the facts.

The parties were friends of long standing having known each other since 1973: Rivera and Salvador are kumpadres, the former is the
godfather of the Spouses Chua’s son.

On 24 February 1995, Rivera obtained a loan from the Spouses Chua:

PROMISSORY NOTE

120,000.00

FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and VIOLETA SY CHUA, the sum of
One Hundred Twenty Thousand Philippine Currency (P120,000.00) on December 31, 1995.

It is agreed and understood that failure on my part to pay the amount of (120,000.00) One Hundred Twenty Thousand Pesos on
December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the date of default until the
entire obligation is fully paid for.

Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to twenty percent (20%) of the total
amount due and payable as and for attorney’s fees which in no case shall be less than P5,000.00 and to pay in addition the cost of suit
and other incidental litigation expense.

Any action which may arise in connection with this note shall be brought in the proper Court of the City of Manila.
Manila, February 24, 1995[.]

(SGD.) RODRIGO RIVERA4

In October 1998, almost three years from the date of payment stipulated in the promissory note, Rivera, as partial payment for the loan,
issued and delivered to the SpousesChua, as payee, a check numbered 012467, dated 30 December 1998, drawn against Rivera’s
current account with the Philippine Commercial International Bank (PCIB) in the amount of P25,000.00.

On 21 December 1998, the Spouses Chua received another check presumably issued by Rivera, likewise drawn against Rivera’s PCIB
current account, numbered 013224, duly signed and dated, but blank as to payee and amount. Ostensibly, as per understanding by the
parties, PCIB Check No. 013224 was issued in the amount ofP133,454.00 with "cash" as payee. Purportedly, both checks were simply
partial payment for Rivera’s loan in the principal amount of P120,000.00.

Upon presentment for payment, the two checks were dishonored for the reason "account closed."

As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00 covering the principal ofP120,000.00 plus five
percent (5%) interest per month from 1 January 1996 to 31 May 1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail. Because of Rivera’s unjustified
refusal to pay, the Spouses Chua were constrained to file a suit on 11 June 1999. The case was raffled before the MeTC, Branch 30,
Manila and docketed as Civil Case No. 163661.

In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed the subject Promissory Note; (2) in all
instances when he obtained a loan from the Spouses Chua, the loans were always covered by a security; (3) at the time of the filing of
the complaint, he still had an existing indebtedness to the Spouses Chua, secured by a real estate mortgage, but not yet in default; (4)
PCIB Check No. 132224 signed by him which he delivered to the Spouses Chua on 21 December 1998, should have been issued in
the amount of only 1,300.00, representing the amount he received from the Spouses Chua’s saleslady; (5) contrary to the supposed
agreement, the Spouses Chua presented the check for payment in the amount of P133,454.00; and (6) there was no demand for
payment of the amount of P120,000.00 prior to the encashment of PCIB Check No. 0132224.5

In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness thereunder.

The MeTC summarized the testimonies of both parties’ respective witnesses:

[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence (consisting of the testimonies of [the spouses]
Chua and NBI Senior Documents Examiner Antonio Magbojos). x x x

xxxx

Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI document examiner (1989); NBI Senior Document
Examiner (1994 to the date he testified); registered criminologist; graduate of 18th Basic Training Course [i]n Questioned Document
Examination conducted by the NBI; twice attended a seminar on US Dollar Counterfeit Detection conducted by the US Embassy in
Manila; attended a seminar on Effective Methodology in Teaching and Instructional design conducted by the NBI Academy; seminar
lecturer on Questioned Documents, Signature Verification and/or Detection; had examined more than a hundred thousand questioned
documents at the time he testified.

Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera] appearing in the Promissory Note and compared
the signature thereon with the specimen signatures of [Rivera] appearing on several documents. After a thorough study, examination,
and comparison of the signature on the questioned document (Promissory Note) and the specimen signatures on the documents
submitted to him, he concluded that the questioned signature appearing in the Promissory Note and the specimen signatures of
[Rivera] appearing on the other documents submitted were written by one and the same person. In connection with his findings,
Magbojos prepared Questioned Documents Report No. 712-1000 dated 8 January 2001, with the following conclusion: "The questioned
and the standard specimen signatures RODGRIGO RIVERA were written by one and the same person."

[Rivera] testified as follows: he and [respondent] Salvador are "kumpadres;" in May 1998, he obtained a loan from [respondent]
Salvador and executed a real estate mortgage over a parcel of land in favor of [respondent Salvador] as collateral; aside from this loan,
in October, 1998 he borrowed P25,000.00 from Salvador and issued PCIB Check No. 126407 dated 30 December 1998; he expressly
denied execution of the Promissory Note dated 24 February 1995 and alleged that the signature appearing thereon was not his
signature; [respondent Salvador’s] claim that PCIB Check No. 0132224 was partial payment for the Promissory Note was not true, the
truth being that he delivered the check to [respondent Salvador] with the space for amount left blank as he and [respondent] Salvador
had agreed that the latter was to fill it in with the amount of P1,300.00 which amount he owed [the spouses Chua]; however, on 29
December 1998 [respondent] Salvador called him and told him that he had written P133,454.00 instead of P1,300.00; x x x. To rebut
the testimony of NBI Senior Document Examiner Magbojos, [Rivera] reiterated his averment that the signature appearing on the
Promissory Note was not his signature and that he did not execute the Promissory Note.6
After trial, the MeTC ruled in favor of the Spouses Chua:

WHEREFORE, [Rivera] is required to pay [the spouses Chua]: P120,000.00 plus stipulated interest at the rate of 5% per month from 1
January 1996, and legal interest at the rate of 12% percent per annum from 11 June 1999, as actual and compensatory damages; 20%
of the whole amount due as attorney’s fees.7

On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC, but deleted the award of attorney’s fees to
the Spouses Chua:

WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the rest of the Decision dated October 21, 2002 is
hereby AFFIRMED.8

Both trial courts found the Promissory Note as authentic and validly bore the signature of Rivera. Undaunted, Rivera appealed to the
Court of Appeals which affirmed Rivera’s liability under the Promissory Note, reduced the imposition of interest on the loan from 60% to
12% per annum, and reinstated the award of attorney’s fees in favor of the Spouses Chua:

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the interest rate of 60% per
annum is hereby reduced to12% per annum and the award of attorney’s fees is reinstated atthe reduced amount of P50,000.00 Costs
against [Rivera].9

Hence, these consolidated petitions for review on certiorariof Rivera in G.R. No. 184458 and the Spouses Chua in G.R. No. 184472,
respectively raising the following issues:

A. In G.R. No. 184458

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE RULING OF THE
RTC AND M[e]TC THAT THERE WAS A VALID PROMISSORY NOTE EXECUTED BY [RIVERA].

2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT DEMAND IS NO
LONGER NECESSARY AND IN APPLYING THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW.

3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING ATTORNEY’S FEES
DESPITE THE FACT THAT THE SAME HAS NO BASIS IN FACT AND IN LAW AND DESPITE THE FACT THAT
[THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION OF THE RTC DELETING THE AWARD OF
ATTORNEY’S FEES.10

B. In G.R. No. 184472

[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL ERROR WHEN IT MODIFIED THE
APPEALED JUDGMENT BY REDUCING THE INTEREST RATE FROM 60% PER ANNUM TO 12% PER ANNUM IN SPITE OF THE
FACT THAT RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE SAID STIPULATED RATE OF INTEREST IS
EXORBITANT, UNCONSCIONABLE, UNREASONABLE, INEQUITABLE, ILLEGAL, IMMORAL OR VOID. 11

As early as 15 December 2008, wealready disposed of G.R. No. 184472 and denied the petition, via a Minute Resolution, for failure to
sufficiently show any reversible error in the ruling of the appellate court specifically concerning the correct rate of interest on Rivera’s
indebtedness under the Promissory Note.12

On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.

Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera questioning the entire ruling of the Court of Appeals in
CA-G.R. SP No. 90609.

Rivera continues to deny that heexecuted the Promissory Note; he claims that given his friendship withthe Spouses Chua who were
money lenders, he has been able to maintain a loan account with them. However, each of these loan transactions was respectively
"secured by checks or sufficient collateral."

Rivera points out that the Spouses Chua "never demanded payment for the loan nor interest thereof (sic) from [Rivera] for almost four
(4) years from the time of the alleged default in payment [i.e., after December 31, 1995]."13

On the issue of the supposed forgery of the promissory note, we are not inclined to depart from the lower courts’ uniform rulings that
Rivera indeed signed it.
Rivera offers no evidence for his asseveration that his signature on the promissory note was forged, only that the signature is not his
and varies from his usual signature. He likewise makes a confusing defense of having previously obtained loans from the Spouses
Chua who were money lenders and who had allowed him a period of "almost four (4) years" before demanding payment of the loan
under the Promissory Note.

First, we cannot give credence to such a naked claim of forgery over the testimony of the National Bureau of Investigation (NBI)
handwriting expert on the integrity of the promissory note. On that score, the appellate court aptly disabled Rivera’s contention:

[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory note is a forgery. The fact of forgery
cannot be presumed but must be proved by clear, positive and convincing evidence. Mere variance of signatures cannot be considered
as conclusive proof that the same was forged. Save for the denial of Rivera that the signature on the note was not his, there is nothing
in the records to support his claim of forgery. And while it is true that resort to experts is not mandatory or indispensable to the
examination of alleged forged documents, the opinions of handwriting experts are nevertheless helpful in the court’s determination of a
document’s authenticity.

To be sure, a bare denial will not suffice to overcome the positive value of the promissory note and the testimony of the NBI witness. In
fact, even a perfunctory comparison of the signatures offered in evidence would lead to the conclusion that the signatures were made
by one and the same person.

It is a basic rule in civil cases that the party having the burden of proof must establish his case by preponderance of evidence, which
simply means "evidence which is of greater weight, or more convincing than that which is offered in opposition to it."

Evaluating the evidence on record, we are convinced that [the Spouses Chua] have established a prima faciecase in their favor, hence,
the burden of evidence has shifted to [Rivera] to prove his allegation of forgery. Unfortunately for [Rivera], he failed to substantiate his
defense.14 Well-entrenched in jurisprudence is the rule that factual findings of the trial court, especially when affirmed by the appellate
court, are accorded the highest degree of respect and are considered conclusive between the parties.15 A review of such findings by
this Court is not warranted except upon a showing of highly meritorious circumstances, such as: (1) when the findings of a trial court are
grounded entirely on speculation, surmises or conjectures; (2) when a lower court's inference from its factual findings is manifestly
mistaken, absurd or impossible; (3) when there is grave abuse of discretion in the appreciation of facts; (4) when the findings of the
appellate court go beyond the issues of the case, or fail to notice certain relevant facts which, if properly considered, will justify a
different conclusion; (5) when there is a misappreciation of facts; (6) when the findings of fact are conclusions without mention of the
specific evidence on which they are based, are premised on the absence of evidence, or are contradicted by evidence on record.16None
of these exceptions obtains in this instance. There is no reason to depart from the separate factual findings of the three (3) lower courts
on the validity of Rivera’s signature reflected in the Promissory Note.

Indeed, Rivera had the burden ofproving the material allegations which he sets up in his Answer to the plaintiff’s claim or cause of
action, upon which issue is joined, whether they relate to the whole case or only to certain issues in the case.17

In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the testimony of a handwriting expert from the NBI.
While it is true that resort to experts is not mandatory or indispensable to the examination or the comparison of handwriting, the trial
courts in this case, on its own, using the handwriting expert testimony only as an aid, found the disputed document valid.18

Hence, the MeTC ruled that:

[Rivera] executed the Promissory Note after consideration of the following: categorical statement of [respondent] Salvador that [Rivera]
signed the Promissory Note before him, in his ([Rivera’s]) house; the conclusion of NBI Senior Documents Examiner that the
questioned signature (appearing on the Promissory Note) and standard specimen signatures "Rodrigo Rivera" "were written by one and
the same person"; actual view at the hearing of the enlarged photographs of the questioned signature and the standard specimen
signatures.19

Specifically, Rivera insists that: "[i]f that promissory note indeed exists, it is beyond logic for a money lender to extend another loan on
May 4, 1998 secured by a real estate mortgage, when he was already in default and has not been paying any interest for a loan
incurred in February 1995."20

We disagree.

It is likewise likely that precisely because of the long standing friendship of the parties as "kumpadres," Rivera was allowed another
loan, albeit this time secured by a real estate mortgage, which will cover Rivera’s loan should Rivera fail to pay. There is nothing
inconsistent with the Spouses Chua’s two (2) and successive loan accommodations to Rivera: one, secured by a real estate mortgage
and the other, secured by only a Promissory Note.

Also completely plausible is thatgiven the relationship between the parties, Rivera was allowed a substantial amount of time before the
Spouses Chua demanded payment of the obligation due under the Promissory Note.
In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery and a discordant defense to assail the
authenticity and validity of the Promissory Note. Although the burden of proof rested on the Spouses Chua having instituted the civil
case and after they established a prima facie case against Rivera, the burden of evidence shifted to the latter to establish his
defense.21 Consequently, Rivera failed to discharge the burden of evidence, refute the existence of the Promissory Note duly signed by
him and subsequently, that he did not fail to pay his obligation thereunder. On the whole, there was no question left on where the
respective evidence of the parties preponderated—in favor of plaintiffs, the Spouses Chua. Rivera next argues that even assuming the
validity of the Promissory Note, demand was still necessary in order to charge him liable thereunder. Rivera argues that it was grave
error on the part of the appellate court to apply Section 70 of the Negotiable Instruments Law (NIL).22

We agree that the subject promissory note is not a negotiable instrument and the provisions of the NIL do not apply to this case.
Section 1 of the NIL requires the concurrence of the following elements to be a negotiable instrument:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable
certainty.

On the other hand, Section 184 of the NIL defines what negotiable promissory note is: SECTION 184. Promissory Note, Defined. – A
negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person to another, signed
by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer.
Where a note is drawn to the maker’s own order, it is not complete until indorsed by him.

The Promissory Note in this case is made out to specific persons, herein respondents, the Spouses Chua, and not to order or to bearer,
or to the order of the Spouses Chua as payees. However, even if Rivera’s Promissory Note is not a negotiable instrument and therefore
outside the coverage of Section 70 of the NIL which provides that presentment for payment is not necessary to charge the person liable
on the instrument, Rivera is still liable under the terms of the Promissory Note that he issued.

The Promissory Note is unequivocal about the date when the obligation falls due and becomes demandable—31 December 1995. As
of 1 January 1996, Rivera had already incurred in delay when he failed to pay the amount ofP120,000.00 due to the Spouses Chua on
31 December 1995 under the Promissory Note.

Article 1169 of the Civil Code explicitly provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is
to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. (Emphasis supplied)

There are four instances when demand is not necessary to constitute the debtor in default: (1) when there is an express stipulation to
that effect; (2) where the law so provides; (3) when the period is the controlling motive or the principal inducement for the creation of the
obligation; and (4) where demand would be useless. In the first two paragraphs, it is not sufficient that the law or obligation fixes a date
for performance; it must further state expressly that after the period lapses, default will commence.

We refer to the clause in the Promissory Note containing the stipulation of interest:
It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred Twenty Thousand Pesos on
December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the date of default until the
entire obligation is fully paid for.23

which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the "date of default" until the entire obligation is fully
paid for. The parties evidently agreed that the maturity of the obligation at a date certain, 31 December 1995, will give rise to the
obligation to pay interest. The Promissory Note expressly provided that after 31 December 1995, default commences and the
stipulation on payment of interest starts.

The date of default under the Promissory Note is 1 January 1996, the day following 31 December 1995, the due date of the obligation.
On that date, Rivera became liable for the stipulated interest which the Promissory Note says is equivalent to 5% a month. In sum, until
31 December 1995, demand was not necessary before Rivera could be held liable for the principal amount of P120,000.00. Thereafter,
on 1 January 1996, upon default, Rivera became liable to pay the Spouses Chua damages, in the form of stipulated interest.

The liability for damages of those who default, including those who are guilty of delay, in the performance of their obligations is laid
down on Article 117024 of the Civil Code.

Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an indemnity for damages when the obligor incurs in
delay:

Art. 2209. If the obligation consists inthe payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there
being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal
interest, which is six percent per annum. (Emphasis supplied)

Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of money; (2) the debtor, Rivera, incurred in
delay when he failed to pay on or before 31 December 1995; and (3) the Promissory Note provides for an indemnity for damages upon
default of Rivera which is the payment of a 5%monthly interest from the date of default.

We do not consider the stipulation on payment of interest in this case as a penal clause although Rivera, as obligor, assumed to pay
additional 5% monthly interest on the principal amount of P120,000.00 upon default.

Article 1226 of the Civil Code provides:

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in
case of noncompliance, if there isno stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the
penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

The penal clause is generally undertaken to insure performance and works as either, or both, punishment and reparation. It is an
exception to the general rules on recovery of losses and damages. As an exception to the general rule, a penal clause must be
specifically set forth in the obligation.25

In high relief, the stipulation in the Promissory Note is designated as payment of interest, not as a penal clause, and is simply an
indemnity for damages incurred by the Spouses Chua because Rivera defaulted in the payment of the amount of P120,000.00. The
measure of damages for the Rivera’s delay is limited to the interest stipulated in the Promissory Note. In apt instances, in default of
stipulation, the interest is that provided by law.26

In this instance, the parties stipulated that in case of default, Rivera will pay interest at the rate of 5% a month or 60% per annum. On
this score, the appellate court ruled:

It bears emphasizing that the undertaking based on the note clearly states the date of payment tobe 31 December 1995. Given this
circumstance, demand by the creditor isno longer necessary in order that delay may exist since the contract itself already expressly so
declares. The mere failure of [Spouses Chua] to immediately demand or collect payment of the value of the note does not exonerate
[Rivera] from his liability therefrom. Verily, the trial court committed no reversible error when it imposed interest from 1 January 1996 on
the ratiocination that [Spouses Chua] were relieved from making demand under Article 1169 of the Civil Code.

xxxx

As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to legal interests and attorney’s fees is,
indeed, highly iniquitous and unreasonable. Stipulated interest rates are illegal if they are unconscionable and the Court is allowed to
temper interest rates when necessary. Since the interest rate agreed upon is void, the parties are considered to have no stipulation
regarding the interest rate, thus, the rate of interest should be 12% per annum computed from the date of judicial or extrajudicial
demand.27

The appellate court found the 5% a month or 60% per annum interest rate, on top of the legal interest and attorney’s fees, steep,
tantamount to it being illegal, iniquitous and unconscionable. Significantly, the issue on payment of interest has been squarely disposed
of in G.R. No. 184472 denying the petition of the Spouses Chua for failure to sufficiently showany reversible error in the ruling of the
appellate court, specifically the reduction of the interest rate imposed on Rivera’s indebtedness under the Promissory Note. Ultimately,
the denial of the petition in G.R. No. 184472 is res judicata in its concept of "bar by prior judgment" on whether the Court of Appeals
correctly reduced the interest rate stipulated in the Promissory Note.

Res judicata applies in the concept of "bar by prior judgment" if the following requisites concur: (1) the former judgment or order must
be final; (2) the judgment or order must be on the merits; (3) the decision must have been rendered by a court having jurisdiction over
the subject matter and the parties; and (4) there must be, between the first and the second action, identity of parties, of subject matter
and of causes of action.28

In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject matter raising specifically errors in
the Decision of the Court of Appeals. Where the Court of Appeals’ disposition on the propriety of the reduction of the interest rate was
raised by the Spouses Chua in G.R. No. 184472, our ruling thereon affirming the Court of Appeals is a "bar by prior judgment."

At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the then prevailing rate of legal
interest was 12% per annum under Central Bank (CB) Circular No. 416 in cases involving the loan or for bearance of money.29 Thus,
the legal interest accruing from the Promissory Note is 12% per annum from the date of default on 1 January 1996. However, the 12%
per annumrate of legal interest is only applicable until 30 June 2013, before the advent and effectivity of Bangko Sentral ng Pilipinas
(BSP) Circular No. 799, Series of 2013 reducing the rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery
Frames,30 BSP Circular No. 799 is prospectively applied from 1 July 2013. In short, the applicable rate of legal interest from 1 January
1996, the date when Rivera defaulted, to date when this Decision becomes final and executor is divided into two periods reflecting two
rates of legal interest: (1) 12% per annum from 1 January 1996 to 30 June 2013; and (2) 6% per annum FROM 1 July 2013 to date
when this Decision becomes final and executory.

As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the date when this Decision becomes final
and executory, such is likewise divided into two periods: (1) 12% per annum from 11 June 1999, the date of judicial demand to 30 June
2013; and (2) 6% per annum from 1 July 2013 to date when this Decision becomes final and executor.31 We base this imposition of
interest on interest due earning legal interest on Article 2212 of the Civil Code which provides that "interest due shall earn legal interest
from the time it is judicially demanded, although the obligation may be silent on this point."

From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the Spouses Chua could already be determined
with reasonable certainty given the wording of the Promissory Note.32

We cite our recent ruling in Nacar v. Gallery Frames:33

I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, 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 for bearance 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 extra judicial demand under and subject to the
provisions ofArticle 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.1âwphi1 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 for bearance
 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)

On the reinstatement of the award of attorney’s fees based on the stipulation in the Promissory Note, weagree with the reduction
thereof but not the ratiocination of the appellate court that the attorney’s fees are in the nature of liquidated damages or penalty. The
interest imposed in the Promissory Note already answers as liquidated damages for Rivera’s default in paying his obligation. We award
attorney’s fees, albeit in a reduced amount, in recognition that the Spouses Chua were compelled to litigate and incurred expenses to
protect their interests.34Thus, the award of P50,000.00 as attorney’s fees is proper.

For clarity and to obviate confusion, we chart the breakdown of the total amount owed by Rivera to the Spouses Chua:

Face value of the Stipulated Interest A & B Interest due earning legal Attorney’s fees Total
Promissory Note interest A & B Amount
February 24, 1995 to A. January 1, 1996 to A. June 11, 1999 (date of Wholesale  
December 31, 1995 June 30, 2013 judicial demand) to June 30, Amount
2013
B. July 1 2013 to date when B. July 1, 2013 to date when
this Decision becomes final this Decision becomes final
and executory and executory
P120,000.00 A. 12 % per annumon the A. 12% per annumon the P50,000.00 Total amount of
principal amount total amount of column 2 Columns 1-4
ofP120,000.00 B. 6% per annumon the total
B. 6% per annumon the amount of column 235
principal amount
ofP120,000.00

The total amount owing to the Spouses Chua set forth in this Decision shall further earn legal interest at the rate of 6% per annum
computed from its finality until full payment thereof, the interim period being deemed to be a forbearance of credit.

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of Appeals in CA-G.R. SP No. 90609 is
MODIFIED. Petitioner Rodrigo Rivera is ordered to pay respondents Spouse Salvador and Violeta Chua the following:

(1) the principal amount of P120,000.00;

(2) legal interest of 12% per annumof the principal amount of P120,000.00 reckoned from 1 January 1996 until 30 June 2013;

(3) legal interest of 6% per annumof the principal amount of P120,000.00 form 1 July 2013 to date when this Decision
becomes final and executory;

(4) 12% per annumapplied to the total of paragraphs 2 and 3 from 11 June 1999, date of judicial demand, to 30 June 2013, as
interest due earning legal interest;

(5) 6% per annumapplied to the total amount of paragraphs 2 and 3 from 1 July 2013 to date when this Decision becomes final
and executor, asinterest due earning legal interest;

(6) Attorney’s fees in the amount of P50,000.00; and

(7) 6% per annum interest on the total of the monetary awards from the finality of this Decision until full payment thereof.

Costs against petitioner Rodrigo Rivera.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 187930               February 23, 2015

NEW WORLD DEVELOPERS AND MANAGEMENT, INC., Petitioner, 

vs.
AMA COMPUTER LEARNING CENTER, INC., Respondent.

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

G.R. No. 188250

AMA COMPUTER LEARNING CENTER, INC., Petitioner. 

vs.
NEW WORLD DEVELOPERS AND MANAGEMENT, INC., Respondent,

DECISION

SERENO, CJ:

Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court assailing the Court of Appeals (CA)
Decision1 dated 22 January 2009 and Resolution2 dated 18 May 2009 in CA-G.R. CV No. 89483.

The CA Decision ordered AMA Computer Learning Center, Inc. (AMA) to pay New World Developers and Management, Inc. (New
World) unpaid rentals for 2 months, as well asliquidated damages equivalent to 4 months’ rent. The CA Resolution denied the separate
motions for reconsideration filed by the parties.

FACTS

New World is the owner of a commercial building located at No. 1104-1118 España corner Paredes Streets, Sampaloc, Manila.3 In
1998, AMA agreed to lease the entire second floor of the building for its computer learning center, and the parties entered into a
Contract of Lease4 covering the eight-year period from 15 June 1998 to 14 March 2006.

The monthly rental for the first year was set at P181,500, with an annual escalation rate equivalent to 15% for the succeeding years.5 It
was also provided that AMA may preterminate the contract by sending notice in writing to New World at least six months before the
intended date.6 In case of pretermination, AMA shall be liable for liquidated damages in an amount equivalent to six months of the
prevailing rent.

In compliance with the contract, AMA paid New World the amount of P450,000 as advance rental and anotherP450,000 as security
deposit.7

For the first three years, AMA paid the monthly rent as stipulated in the contract, with the required adjustment in accordance with the
escalation rate for the second and the third years.8

In a letter dated 18 March 2002, AMA requested the deferment of the annual increase in the monthly rent by citing financial constraints
brought about by a decrease in its enrollment. New World agreed to reduce the escalation rate by 50% for the next six months. The
following year, AMA again requested the adjustment of the monthly rent and New World obliged by granting a 45% reduction of the
monthly rent and a 5% reduction of the escalation rate for the remaining term of the lease. For this purpose, the parties entered into an
Addendum to the Contract of Lease.9

On the evening of 6 July 2004, AMA removed all its office equipment and furniture from the leased premises. The following day, New
World received a letter from AMA dated 6 July 200410 stating that the former had decided to preterminate the contract effective
immediately on the ground of business losses due to a drastic decline in enrollment. AMA also demanded the refund of its advance
rental and security deposit.
New World replied in a letter dated 12 July 2004,11 to which was attached a Statement of Account12 indicating the following amounts to
be paid by AMA: 1) unpaid two months’ rent in the amount of P466,620; 2) 3% monthly interest for the unpaid rent in the amount
of P67,426.59; 3) liquidated damages equivalent to six months of the prevailing rent in the amount of P1,399,860; and 4) damage to the
leased premises amounting to P15,580. The deduction of the advance rental and security deposit paid by AMA still left an unpaid
balance in the amount ofP1,049,486.59.

Despite the meetings between the parties, they failed to arrive at a settlement regarding the payment of the foregoing amounts.13

On 27 October 2004, New World filed a complaint for a sum of money and damages against AMA before the Regional Trial Court of
Marikina City, Branch 156 (RTC).14

RULING OF THE RTC

In a Decision15 dated 31 January 2007, the RTC ordered AMA to pay New World P466,620 as unpaid rentals plus 3% monthly penalty
interest until payment; P1,399,860 as liquidated damages equivalent to six months’ rent, with the advance rental and security deposit
paid by AMA to be deducted therefrom; P15,580 for the damage to the leased premises; P100,000 as attorney’s fees; and costs of the
suit.

According to the RTC, AMA never denied that it had arrearages equivalent to two months’ rent. Other than its allegation that it did not
participate in the preparation of the Statement of Account, AMA did not proffer any evidence disputing the unpaid rent. For its part, New
World clearly explained the existence of the arrears.

While sympathizing with AMA in view of its business losses, the RTC ruled that AMA could not shirk from its contractual obligations,
which provided that it had to pay liquidated damages equivalent to six months’ rent in case of a pretermination of the lease.

The RTC provided no bases for awarding P15,580 for the damage to the leased premises and P100,000 for attorney’s fees, while
denying the prayer for exemplary and moral damages.

Upon the denial of its motion for reconsideration, AMA filed an appeal before the CA.16

RULING OF THE CA

In the assailed Decision dated 22 January 2009, the CA ordered AMA to pay New World P466,620 for unpaid rentals and P933,240 for
liquidated damages equivalent to four months’ rent, with the advance rental and security deposit paid by AMA to be deducted
therefrom.17

The appellate court ruled that the RTC erred in imposing a 3% monthly penalty interest on the unpaid rent, because there was no
stipulation either in the Contract of Lease or in the Addendum to the Contract of Lease concerning the imposition of interest in the event
of a delay in the payment of the rent.18 Thus, the CA ruled that the rent in arrears should earn interest at the rate of 6% per annum only,
reckoned from the date of the extrajudicial demand on 12 July 2004 until the finality of the Decision. Thereafter, interest at the rate
of12% per annum shall be imposed until full payment.

The CA also ruled that the RTC’s imposition of liquidated damages equivalent to six months’ rent was iniquitous.19While conceding that
AMA was liable for liquidated damages for preterminating the lease, the CA also recognized that stipulated penalties may be equitably
reduced by the courts based on its sound discretion. Considering that the unexpired portion of the term of lease was already less than
two years, and that AMA had suffered business losses rendering it incapable of paying for its expenses, the CA deemed that liquidated
damages equivalent to four months’ rent was reasonable.20

The appellate court deleted the award for the damage to the leased premises, because no proof other than the Statement of Account
was presented by New World.21 Furthermore, noting that the latter was already entitled to liquidated damages, and that the trial court
did not give any justification for attorney’s fees, the CA disallowed the award thereof.22

Both parties filed their respective motions for reconsideration, which were denied in the assailed Resolution dated 10 May 2009.

Hence, the present petitions for review on certiorari. On 3 August 2009, the Court resolved to consolidate the petitions, considering that
they involve the same parties and assail the same CA Decision and Resolution.23

PARTIES’ POSITIONS

According to New World, when parties freely stipulate on the manner by which one may preterminate the lease, that stipulation has the
force of law between them and should be complied with in good faith.24 Since AMA preterminated the lease, it became liable to
liquidated damages equivalent to six months’ rent. Furthermore, its failure to give notice to New World six months prior to the intended
pretermination of the contract and its leaving the leased premises in the middle of the night, with all its office equipment and furniture,
smacked of gross bad faith that renders it undeserving of sympathy from the courts.25 Thus, the CA erred in reducing the liquidated
damages from an amount equivalent to six months’ rent to only four months.

New World also challenges the CA Decision and Resolution for disallowing the imposition of the 3% monthly interest on the unpaid
rentals. It is argued that AMA never disputed the imposition of the 3% monthly interest; rather, it only requested that the interest rate be
reduced.26

On the other hand, AMA assails the CA ruling for not recognizing the fact that compensation took place between the unpaid rentals and
the advance rental paid by AMA.27 Considering that the obligation of AMA as to the arrears has been extinguished by operation of law,
there would be no occasion for the imposition of interest.28

AMA also prays for the further reduction of the liquidated damages to an amount equivalent to one month’s rent up to one and a half
months, arguing that four months’ worth of rent is still iniquitous on account of the severe financial losses it suffered.29

ISSUES

1. Whether AMA is liable to pay six months’ worth of rent as liquidated damages.

2. Whether AMA remained liable for the rental arrears.

OUR RULING

I.

AMA is liable for six months’ worth of rent as liquidated damages.

Item No. 14 of the Contract of Lease states:

That [AMA] may pre-terminate this Contract of Lease by notice in writing to [New World] at least six (6) months before the intended date
of pretermination, provided, however, that in such case, [AMA] shall be liable to [New World] for an amount equivalent to six (6) months
current rental as liquidated damages;30

Quite notable is the fact that AMA never denied its liability for the payment of liquidated damages in view of its pretermination of the
lease contract with New World. What it claims, however, is that it is entitled to the reduction of the amount due to the serious business
losses it suffered as a result of a drastic decrease in its enrollment.

This Court is, first and foremost, one of law. While we are also a court of equity, we do not employ equitable principles when well-
established doctrines and positive provisions of the law clearly apply.31

The law does not relieve a party from the consequences of a contract it entered into with all the required formalities.32 Courts have no
power to ease the burden of obligations voluntarily assumed by parties, just because things did not turn out as expected at the
inception of the contract.33 It must also be emphasized that AMA is an entity that has had significant business experience, and is not a
mere babe in the woods.

Articles 1159 and 1306 of the Civil Code state:

Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good
faith.

xxxx

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

The fundamental rule is that a contract is the law between the parties. Unless it has been shown that its provisions are wholly or in part
contrary to law, morals, good customs, public order, or public policy, the contract will be strictly enforced by the courts.34

In rebuttal, AMA invokes Article 2227 of the Civil Code, to wit:

Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable.
In Ligutan v. CA, we held that the resolution of the question of whether a penalty is reasonable, or iniquitous or unconscionable would
depend on factors including but not limited to the type, extent and purpose of the penalty; the nature of the obligation; the mode of the
breach and its consequences; the supervening realities; and the standing and relationship of the parties.35 The appreciation of these
factors is essentially addressed to the sound discretion of the court.36

It is quite easy to understand the reason why a lessor would impose liquidated damages in the event of the pretermination of a lease
contract. Pretermination is effectively the breach of a contract, that was originally intended to cover an agreed upon period of time. A
definite period assures the lessor a steady income for the duration. A pretermination would suddenly cut short what would otherwise
have been a longer profitable relationship. Along the way, the lessor is bound to incur losses until it is able to find a new lessee, and it is
this loss of income that is sought to be compensated by the payment of liquidated damages.

There might have been other ways to work around its difficult financial situation and lessen the impact of the pretermination to both
parties. However, AMA opted to do the following:

1. It preterminated the lease without notifying New World at least six months before the intended date.

2. It removed all its office equipment and left the premises in the middle of the night.

3. Only after it had cleared the premises did it send New World a notice of pretermination effective immediately.

4. It had the gall to demand a full refund of the advance rental and security deposit, albeit without prejudice to their removal of
the improvements introduced in the premises.

We cannot understand the inability of AMA to be forthright with New World, considering that the former had been transparent about its
business losses in its previous requests for the reduction of the monthly rental. The drastic decrease in AMA’s enrollment had been
unfolding since 2002. Thus, it cannot be said that the business losses had taken it by surprise. It is also highly unlikely that the decision
to preterminate the lease contract was made at the last minute. The cancellation of classes, the transfer of students, and administrative
preparations for the closure of the computer learning center and the removal of office equipment therefrom should take at least weeks,
if not months, of logistic planning. Had AMA come clean about the impending pretermination, measures beneficial to both parties could
have been arrived at, and the instant cases would not have reached this Court. Instead, AMA forced New World to share in the former’s
losses, causing the latter to scramble for new lessees while the premises remained untenanted and unproductive.

In the sphere of personal and contractual relations governed by laws, rules and regulations created to promote justice and fairness,
equity is deserved, not demanded. The application of equity necessitates a balancing of the equities involved in a case,37 for "[h]e who
seeks equity must do equity, and he who comes into equity must come with clean hands."38 Persons in dire straits are never justified in
trampling on other persons’ rights. Litigants shall be denied relief if their conduct has been inequitable, unfair and dishonest as to the
controversy in issue.39 The actions of AMA smack of bad faith.

We cannot abide by the prayer for the further reduction of the liquidated damages. We find that, in view of the surrounding
circumstances, the CA even erred in reducing the liquidated damages to four month’s worth of rent. Under the terms of the contract,
and in light of the failure of AMA to show that it is deserving of this Court’s indulgence, the payment of liquidated damages in an amount
equivalent to six months’ rent is proper.

Also proper is an award of exemplary damages. Article 2234 of the Civil Code provides:

Art. 2234. While the amount of the exemplary damages need not be proved, 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 case liquidated damages have been agreed upon, although no proof of loss is necessary in order that such liquidated
damages may be recovered, nevertheless, before the court may consider the question of granting exemplary in addition to the
liquidated damages, the plaintiff must show that he would be entitled to moral, temperate or compensatory damages were it not for the
stipulation for liquidated damages. (Emphasis supplied)

In this case, it is quite clear that New World sustained losses as a result of the unwarranted acts of AMA. Further, were it not for the
stipulation in the contract regarding the payment of liquidated damages, we would be awarding compensatory damages to New World.

"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."40 As such, they may be awarded even when not
pleaded or prayed for.41 In order to prevent the commission of a similar act in the future, AMA shall pay New World exemplary damages
in the amount of P100,000.

II.

AMA’s liability for the rental arrears has already been extinguished.
AMA assails the CA ruling mainly for the imposition of legal interest on the rent in arrears. AMA argues that the advance rental has
extinguished its obligation as to the arrears. Thus, it says, there is no more basis for the imposition of interest at the rate of 6% per
annum from the date of extrajudicial demand on 12 July 2004 until the finality of the Decision, plus interest at the rate of 12% per
annum from finality until full payment.

At this juncture, it is necessary to look into the contract to determine the purpose of the advance rental and security deposit.

Item Nos. 2, 3 and 4 of the Contract of Lease provide:

xxxx

2. That [AMA] shall pay to [New World] in advance within the first 5 days of each calendar month a monthly rental in
accordance with the following schedule for the entire term of this Contract of Lease;

PERIOD MONTHLY RENTAL RATES

Year 1 June 15, 1998 – Mar 14, 1999 181,500.00
Year 2 Mar 15, 1999 – Mar 14, 2000 P208,725.00
Year 3 Mar 15, 2000 – Mar 14, 2001 P240,033.75
Year 4 Mar 15, 2001 – Mar 14, 2002 P276,038.81
Year 5 Mar 15, 2002 – Mar 14, 2003 P317,444.63
Year 6 Mar 15, 2003 – Mar 14, 2004 P365,061.33
Year 7 Mar 15, 2004 – Mar 14, 2005 P419,820.53
Year 8 Mar 15, 2005 – Mar 14, 2006 P482,793.61
(P482,793.61 – 37,500 =
P445,293.61)

The monthly rentals referred to above were computed at an escalation rate of Fifteen Percent (15%) every year for the entire
duration of this lease contract.

3. Upon signing of this Contract, [AMA] shall pay advance rental in the amount of FOUR HUNDRED FIFTY THOUSAND
PESOS (P450,000.00); Said advance rental shall be applied as part of the rental for the last year of the Contract with a
remaining balance of Four Hundred Forty Five Thousand Two Hundred Ninety Three and 61/100 Pesos (P445,293.61) as
monthly rental for the tenth [sic] and last year of the lease term;

4. Upon signing of the Contract, [AMA] shall pay [New World] a Security Deposit in the amount of FOUR HUNDRED FIFTY
THOUSAND PESOS (P450,000.00) which shall be applied for any unpaid rental balance and damages on the leased
premises, and the balance of which shall be refunded by [New World] to [AMA] within sixty (60) days after the termination of
the Contract, it being understood that such balance is being held by [New World] in trust for [AMA].42

Based on Item No. 4, the security deposit was paid precisely to answer for unpaid rentals that may be incurred by AMA while the
contract was in force. The security deposit was held in trust by New World, and whatever may have been left of it after the termination
of the lease shall be refunded to AMA.

Based on Item No. 3 in relation to Item No. 2, the parties divided the advance rental of P450,000 by 12 months. They came up
with P37,500, which they intended to deduct from the monthly rental to be paid by AMA for the last year of the lease term. Thus, unlike
the security deposit, no part of the advance rental was ever meant to be refunded to AMA. Instead, the parties intended to apply the
advance rental, on a staggered basis, to a portion of the monthly rental in the last year of the lease term.

Considering the pretermination of the lease contract in the present case, this intent of the parties as regards the advance rental failed to
take effect. The advance rental, however, retains its purpose of answering for the outstanding amounts that AMA may owe New World.

We now delve into the actual application of the security deposit and the advance rental.

At the time of the pretermination of the contract of lease, the monthly rent stood at P233,310, inclusive of taxes;43hence, the two-month
rental arrears in the amount of P466,620.
Applying the security deposit of P450,000 to the arrears will leave a balance of P16,620 in New World’s favor.1âwphi1Given that we
have found AMA liable for liquidated damages equivalent to six months’ rent in the amount ofP1,399,860 (monthly rent of P233,310
multiplied by 6 months), its total liability to New World is P1,416,480.

We then apply the advance rental of P450,000 to this amount to arrive at a total extinguishment of the liability for the unpaid rentals and
a partial extinguishment of the liability for liquidated damages. This shall leave AMA still liable to New World in the amount of P966,480
(P1,416,480 total liability less P450,000 advance rental).

Not constituting a forbearance of money,44 this amount shall earn interest pursuant to Item II(2)45 of our pronouncement in Eastern
Shipping Lines v. CA.46 This item remained unchanged by the modification made in Nacar v. Gallery Frames.47 Interest at the rate of 6%
per annum is hereby imposed on the amount of 966,480 from the time of extrajudicial demand on 12 July 2004 until the finality of this
Decision.

Thereafter – this time pursuant to the modification in Nacar– the amount due shall earn interest at the rate of 6% per annum until
satisfaction, this interim period being deemed to be by then equivalent to a forbearance of credit.48

Considering the foregoing, there was no occasion for the unpaid two months’ rental to earn interest. Besides, we cannot sanction the
imposition of 3% monthly penalty interest thereon. We quote with approval the ruling of the CA on this issue:

If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed upon and in the absence of stipulation, the legal interest, which is
six per cent per annum.

In the instant case, the Contract of Lease and the Addendum to the Contract of Lease do not specify any interest in the event of delay
of payment of rentals. Accordingly, there being no stipulation concerning interest, the trial court erred in imposing 3% interest per month
on the two-month unpaid rentals.

[New World] argues that the said3% interest per month on the unpaid rentals was agreed upon by the parties as allegedly shown in
Exhibits "A-4", "A-5", "A-6", "B-4", and "B-5".

We are not persuaded.

[New World’s] letter dated 12 July 2004 to [AMA], Statement of Account dated 07 July 2004; and another Statement of Account dated
27 October 2004 were all prepared by [New World], with no participation or any indication of agreement on [AMA’s] part. The alleged
proposal of [AMA] as contained in the Schedule of Receivable/Payable is just a computer print-out and does not contain any signature
showing [AMA’s] conformity to the same.49

Having relied on the Contract of Lease for its demand for payment of liquidated damages, New World should have also referred to the
contract to determine the proper application of the advance rental and security deposit. Had it done so in the first instance, it would
have known that there is no occasion for the imposition of interest, 3% or otherwise, on the unpaid rentals. WHEREFORE, the Court of
Appeals Decision dated 22 January 2009 and Resolution dated 10 May 2009 in CA-G.R. CV No. 89483 is AFFIRMED with
MODIFICATION.

AMA Computer Learning Center, Inc. is ordered to pay New World Developers and Management, Inc. the amount of P966,480, with
interest at the rate of 6% per annum from 12 July 2004 until full payment.

In addition, AMA shall pay New World exemplary damages in the amount of P100,000, which shall earn interest at the rate of 6% per
annum from the finality of this Decision until full payment.

SO ORDERED.

MARIA LOURDES P.A. SERENO

Chief Justice, Chairperson
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 171626               August 6, 2014

OLONGAPO CITY, Petitioner, 
vs.
SUBIC WATER AND SEWERAGE CO., INC., Respondent.

DECISION

BRION, J.:

We resolve in this petition for certiorari1 under Rule 65 the challenge to the July 6, 2005 decision2 and the January 3, 2006
resolution3 (assailed CA rulings) of the Court of Appeals (CA) in CAG.R. SP No. 80947.

These assailed CA rulings annulled and set aside: a) the July 29, 2003 order4 of the Regional Trial Court of Olongapo, Br. 75 (RTC
Olongapo ), which directed the issuance of a writ of execution in Civil Case No. 582-0-90, against respondent Subic Water and
Sewerage Co., Inc. (Subic Water); b) the July 31, 2003 writ of execution5subsequently issued by the same court; and c) the October 7,
2003 order6 of R TC Olongapo, denying Subic Water's special appearance with motion to reconsider order dated July 29, 2003 and to
quash writ of execution dated July 31, 2003.7

Factual Antecedents

On May 25, 1973, Presidential Decree No. 1988 (PD 198) took effect. This law authorized the creation of local water districts which may
acquire, install, maintain and operate water supply and distribution systems for domestic, industrial, municipal and agricultural uses.9

Pursuant to PD 198, petitioner Olongapo City (petitioner) passed Resolution No. 161, which transferred all itsexisting water facilities
and assets under the Olongapo City Public Utilities Department Waterworks Division, to the jurisdiction and ownership of the Olongapo
City Water District (OCWD).10

PD 198, as amended,11 allows local water districts (LWDs)which have acquired an existing water system of a localgovernment unit
(LGU) to enter into a contract to pay the concerned LGU. In lieu of the LGU’s share in the acquired water utility plant, it shall be paid by
the LWD an amount not exceeding three percent (3%) of the LWD’s gross receipts from water sales in any year.12

On October 24, 1990, petitioner filed a complaint for sum of money and damages against OCWD. Among others, petitioner alleged that
OCWD failed to pay its electricity bills to petitioner and remit its payment under the contract to pay, pursuant to OCWD’s acquisition of
petitioner’s water system. In its complaint, petitioner prayed for the following reliefs:

"WHEREOF, it is respectfully prayed of this Honorable Court that after due hearing and notice, judgment be rendered in favor of plaintiff
ordering the defendant to:

(a) pay the amount of P26,798,223.70 plus legal interests from the filing of the Complaint to actual full payment;

(b) pay the amount of its in lieu share representing three percent of the defendant’s gross receipts from water sales starting
1981 up to present;

(c) pay the amount of P1,000,000 as moral damages; and

(d) pay the cost of suit and other litigation expenses."13

In its answer,14 OCWD posed a counterclaim against petitioner for unpaid water bills amounting toP3,080,357.00.15

In the interim, OCWD entered into a Joint Venture Agreement16 (JVA) with Subic Bay Metropolitan Authority (SBMA), Biwater
International Limited (Biwater), and D.M. Consunji, Inc. (DMCI) on November 24, 1996. Pursuant to this agreement, Subic Water– a
new corporate entity – was incorporated, withthe following equity participation from its shareholders:

SBMA 19.99% or 20%

OCWD 9.99% or 10%

Biwater 29.99% or 30%

DMCI 39.99% or 40%17

On November 24, 1996, Subic Water was granted the franchise to operate and to carry on the businessof providing water and
sewerage services in the Subic BayFree Port Zone, as well as in Olongapo City.18 Hence, Subic Water took over OCWD’s water
operations in Olongapo City.19

To finally settle their money claims against each other, petitioner and OCWD entered into a compromise agreement20 on June 4, 1997.
In this agreement, petitioner and OCWD offset their respective claims and counterclaims. OCWD also undertook to pay to petitioner its
net obligation amounting to P135,909,467.09, to be amortized for a period of not exceeding twenty-five (25) years at twenty-fourpercent
(24%) per annum.21

The compromise agreement also contained a provision regarding the parties’ requestthat Subic Water, Philippines,which took over the
operations of the defendant Olongapo City Water District be made the co-makerfor OCWD’s obligations. Mr. Noli Aldip, then chairman
of Subic Water, acted as its representative and signed the agreement on behalf of Subic Water.

Subsequently, the parties submitted the compromise agreement to RTC Olongapo for approval. In its decision dated June 13,
1997,22 the trial court approved the compromiseagreement and adopted it as its judgment in Civil Case No. 580-0-90.

Pursuant to the compromise agreement and in payment of OCWD’s obligations to petitioner,petitioner and OCWD executed a Deed of
Assignment onNovember 24, 1997.23 OCWD assigned all of its rights in the JVA in favor of the petitioner, including but not limited to the
assignment of its shares, lease payments, regulatory assistance fees and other receivables arising out of or related to the Joint Venture
Agreement and the Lease Agreement.24 On December 15,1998, OCWD was judicially dissolved.25

On May 7, 1999, to enforce the compromise agreement, the petitioner filed a motion for the issuance of a writ of execution26 with the
trial court. In its July 23, 1999 order,27 the trial court granted the motion, but did not issue the corresponding writ of execution.

Almost four years later, on May 30, 2003, the petitioner, through its new counsel, filed a notice of appearance with urgent
motion/manifestation28 and prayed again for the issuance of a writ of execution against OCWD. A certain Atty. Segundo Mangohig,
claiming to be OCWD’s former counsel, filed a manifestation alleging that OCWD had already been dissolved and that Subic Water is
now the former OCWD.29

Because of this assertion, Subic Water also filed a manifestation informing the trial court that as borne out by the articles of
incorporation and general information sheet of Subic Water x x x defendant OCWD is not Subic Water.30The manifestation also
indicated that OCWD was only a ten percent (10%) shareholder of Subic Water; and that its 10% share was already inthe process of
being transferred to petitioner pursuant to the Deed of Assignment dated November 24, 1997.31

The trial court granted the motion for execution and directed its issuance against OCWD and/or Subic Water. Because of this
unfavorable order, Subic Water filed a special appearance with motion to: (1) reconsider order dated July29, 2003; and (2) quash writ of
execution dated July 31, 2003.32

The trial court denied Subic Water’s special appearance, motion for reconsideration, and its motion to quash. Subic Water then filed a
petition for certiorari33 with the CA, imputing grave abuse of discretion amounting to lack or excess of jurisdiction to RTC Olongapo for
issuing its July 29, 2003 and October 7, 2003 orders aswell as the writ of execution dated July 31, 2003. The CA’s Ruling

In its decision dated July 6, 2005,34 the CA granted Subic Water’s petition for certiorariand reversed the trial court’s rulings.

The CA found that the writ ofexecution dated July 31, 200335 did not comply with Section 6, Rule 39 of the Rules of Court, to wit:

Section 6. Execution by motion orby independent action. — A final and executory judgment or order may be executed on motion within
five (5) years from the date of its entry. After the lapse of such time, and before it is barred by the statute of limitations, a judgment may
be enforced by action. The revived judgment may also be enforced by motion within five (5) years from the date of its entry and
thereafter by action before it is barred by the statute of limitations. (6a)[emphasis ours]

A judgment on a compromiseagreement is immediately executory and is considered to have been entered on the date it was approved
by the trial court.36 Since the compromise agreement was approved and adoptedby the trial court on June 13, 1997, this should be the
reckoning date for the counting of the period for the filing of a valid motion for issuance of a writ of execution. Petitioner thus had until
June 13, 2002, to file its motion.
The CA further remarked that whileit was true that a motion for execution was filed by petitioner on May 7, 1999, and the same was
granted by the trial court in its July 23, 1999 order,37 no writ of execution was actually issued.

As the CA looked at the case, petitioner, instead of following up with the trial court the issuance ofthe writ of execution, did not do
anything to secure its prompt issuance. It waitedanother four years to file a second motion for execution on May 30, 2003.38 By this
time, the allowed period for the filing of a motion for the issuance of the writ had already lapsed. Hence, the trial court’s July 29, 2003
order granting the issuance of the writ was null and void for having been issued by a court without jurisdiction.

The CA denied petitioner’s subsequentmotion for reconsideration. Petitioner is now before us on a petition for certiorari under Rule 65.

The Petition

The petitioner acknowledged the rule that the execution of a judgment could no longer be made by mere motion after the prescribed
five-year period had already lapsed. However, it argued that the delay for the issuance of the writ of execution was caused by OCWD
and Subic Water. The petitioner submitted that this Court had allowed execution by mere motion even after the lapse ofthe five-year
period, when the delay was caused or occasioned by the actions of the judgment debtor.39

Also, the petitioner asserted that although Subic Water was not a party in the case, it could still be subjected to a writ of execution,
since it was identified as OCWD’s co-maker and successor-in-interest in the compromise agreement.40

Lastly, the petitioner contended that the compromise agreement was signed by Mr. Noli R. Aldip,then Subic Water’s chairman,
signifying Subic Water’s consent to the agreement.

The Court’s Ruling

We DISMISSthe petition for being the wrong remedy and, in any case, for lack of merit; what we have before us is a final judgment that
we can no longer touch unless there is grave abuse of discretion.

A. Procedural Law Aspect

Certiorari is not a substitute for a lost appeal.

At the outset, we emphasize thatthe present petition, brought under Rule 65, merits outright dismissal for having availed an improper
remedy.

The instant petition should havebeen brought under Rule 45 in a petition for review on certiorari. Section 1 of this Rule mandates:

Section 1. Filing of petition with Supreme Court. — A party desiring to appeal by certiorari from a judgment or final order or resolution of
the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts whenever authorized by law, may file with the
Supreme Court a verified petition for review on certiorari. The petition shall raise only questions of law which must be distinctly set forth.
(1a, 2a) [emphasis supplied]

Supplementing Rule 45 are Sections 341 and 442 of Rule 56 which govern the applicable procedure in the Supreme Court.

Appeals from judgmentsor final orders or resolutions of the CA should be made through a verified petition for review on certiorari under
Rule 45.43 In this case, petitioner questioned the July 6, 2005 decision44 and the January 3, 2006 resolution45 of the CA which declared
as null and void the writ of execution issued by the trial court. Since the CA’s pronouncement completely disposed of the case and the
issues raised by the parties, it was the proper subject of a Rule 45 petition. It was already a final order that resolved the subject matter
in its entirety, leaving nothing else to be done.

A petition for certiorari under Rule 65 is appropriate only if there is no appeal, or any plain, speedy, and adequate remedy in the
ordinary course of law available tothe aggrieved party. As we have distinctly explained in the case of Pasiona v. Court of Appeals:46

The aggrieved party is proscribed from assailing a decision or final order of the CA viaRule 65 because such recourse is proper only if
the party has no plain,speedy and adequate remedy in the course of law. In this case, petitioner had an adequate remedy, namely, a
petition for review on certiorari under Rule 45 ofthe Rules of Court.A petition for review on certiorari, not a special civil action for
certiorari was, therefore, the correct remedy.

xxxx

Settled is the rule that where appeal is available to the aggrieved party, the special civil actionfor certiorari will not be entertained –
remedies of appealand certiorari are mutually exclusive, not alternative or successive. Hence, certiorari is not and cannot be a
substitute for a lost appeal,especially if one's own negligence or error in one's choice of remedy occasioned such loss or
lapse.47 [emphasis ours]

The petitioner received the CA’s assailed resolution denying its motion for reconsideration on January 9, 2006. Following Rule 45,
Section 2 of the Rules of Court,48 the petitioner had until January 24, 2006 to file its petition for review. It could have even filed a motion
for a 30-day extension of time, a motion that this Court grants for justifiable reasons.49 But all of these, it failed to do. Thus, the assailed
CA rulings became final and executory and could no longer be the subject of an appeal.

Apparently, to revive its lost appeal, petitioner filed the present petition for certiorari that – under Rule 65 – may be filed within sixty
days from the promulgation of the assailed CA resolution (on January 3, 2006). A Rule 65 petition for certiorari, however, cannot be a
substitute for a lost appeal. With the lapse of the prescribed period for appeal without an action from the petitioner, the present petition
for certiorari– a mere replacement –must be dismissed.

But even without the procedural infirmity, the present recourse to us has no basis on the merits and must be denied.

Execution by motion is only available within the five-year period from entry of judgment.

Under Rule 39, Section 6,50 a judgment creditor has two modes in enforcing the court’s judgment. Execution may be either through
motion or an independent action.

These two modes of execution are available depending on the timing when the judgmentcreditor invoked its right to enforce the court’s
judgment. Execution by motion is only available if the enforcement of the judgment was sought within five (5) years from the date of its
entry. On the other hand, execution by independent action is mandatory if the five-year prescriptive period for execution by motion had
already elapsed.51 However, for execution by independent action to prosper – the Rules impose another limitation – the action must be
filed before it is barred by the statute of limitations which, under the Civil Code, is ten (10) years from the finality of the judgment.52

On May 7, 1999, within the five-year period from the trial court’s judgment, petitioner filed its motion for the issuance of a writ of
execution. However, despite the grant of the motion, the court did not issue an actual writ. It was only onMay 30, 2003 that petitioner
filed a second motion to ask again for the writ’s issuance. By this time, the allowed five-year period for execution by motion had already
lapsed.

As will be discussed below, since the second motion was filed beyond the five-year prescriptive period set by the Rules, then the writ of
execution issued by the trial court on July 31, 2003 was null and void for having been issued by a court already ousted ofits jurisdiction.

In Arambulo v. Court of First Instance of Laguna,53 we explained the rule that the jurisdiction of a court to issue a writ of execution by
motion is only effective within the five-year period from the entry of judgment. Outside this five-year period, any writ of execution issued
pursuant to a motion filed by the judgment creditor, is null and void. If no writ of execution was issued by the court within the five-year
period, even a motion filed within such prescriptive period would not suffice. A writ issued by the court after the lapse of the five-year
period is already null and void.54 The judgment creditor’s only recourse then is to file an independent action, which must also be within
the prescriptive period set by law for the enforcement of judgments.

This Court subsequently reiterated its Arambuloruling in Ramos v. Garciano,55 where we said:

There seems to be no serious dispute that the 4th alias writ of execution was issued eight (8) daysafter the lapse of the five (5) year
period from the dateof the entry of judgment in Civil Case No. 367. As a general rule, after the lapse of such period a judgment may be
enforced only by ordinary action, not by mere motion (Section 6, Rule 39, Rules of Court).

xxxx

The limitation that a judgment beenforced by execution within five years, otherwise itloses efficacy, goes tothe very jurisdiction of the
Court.A writ issued after such period is void, and the failure to object thereto does notvalidate it, for the reason that jurisdiction of courts
is solely conferred by law and not by express or implied will of the parties.56 [emphasis supplied]

To clearly restate these rulings, for execution by motion to be valid, the judgment creditor mustensure the accomplishment of two acts
within the five-year prescriptive period. These are:a) the filing of the motion for the issuance of the writ of execution; and b) the court’s
actual issuance of the writ.In the instanceswhen the Court allowed execution by motion even after the lapse of five years, we only
recognized one exception, i.e., when the delay is caused or occasioned by actions of the judgment debtor and/or is incurred for his
benefit or advantage.57However, petitioner failed toshow or cite circumstances showing how OCWD or Subic Water caused it to
belatedly file its second motion for execution.

Strictly speaking, the issuance of the writ should have been a ministerial duty on the partof the trial court after it gave its July 23, 1999
order, approving the first motion and directing the issuance of such writ. The petitioner could have easily compelled the court to actually
issue the writ by filing a manifestation onthe existence of the July 23, 1999 order. However, petitioner idly sat and waited for the five-
year period to lapse before it filed its second motion. Having slept on its rights, petitioner had no one to blame but itself.
A writ of execution cannot affect a non- party to a case.

Strangers to a case are not bound by the judgment rendered in it. Thus, a writ of execution can only beissued against a party and not
against one who did not have his day in court.58

Subic Water never participated in the proceedings in Civil Case No. 580-0-90, where OCWD and petitioner were the contending parties.
Subic Water only came into the picture when one Atty. Segundo Mangohig, claiming to beOCWD’s former counsel, manifested before
the trial court that OCWD had already been judicially dissolved and thatSubic Water assumed OCWD’s personality.

In the present case, the compromise agreement, although signed by Mr. Noli Aldip, did not carry the express conformity of Subic Water.
Mr. Aldip was never given any authorization to conform to or bind Subic Water in the compromiseagreement. Also, the agreement
merely labeled Subic Water as a co-maker. It did not contain any provision where Subic Water acknowledged its solidary liability with
OCWD.

Lastly, Subic Water did not voluntarily submit tothe court’s jurisdiction. In fact, the motion it filed was only made as a special
appearance, precisely toavoid the court’s acquisition of jurisdiction over its person. Without any participation inthe proceedings below, it
cannot be made liable on the writ ofexecution issuedby the court a quo.

B. Substantive Law Aspect

Solidary liability mustbe expressly stated.

The petitioner also argued that Subic Water could be held solidarily liable under the writ of execution since it was identified as OCWD’s
co-maker in the compromise agreement.The petitioner’s basis for this is the following provision of the agreement:

4. Both parties also requestthat Subic Water,Philippines which took over the operations of the defendant Olongapo City Water District
be made as co-makerfor the obligation herein abovecited.59 [emphasis supplied]

As the rule stands, solidary liability is not presumed. This stems from Art. 1207 of the Civil Code, which provides:

Art. 1207. x x x There is a solidary liability only when the obligation expressly so states, or when the law orthe nature of the obligation
requiressolidarity. [emphasis supplied]

In Palmares v. Court of Appeals,60 the Court did not hesitate to rule that although a party to a promissory note was onlylabeled as a
comaker, his liability was that ofa surety, since the instrument expressly provided for his joint and several liabilitywith the principal.

In the present case, the joint and several liability of Subic Water and OCWD was nowhere clear in the agreement. The agreement
simply and plainly stated that petitioner and OCWD were only requestingSubic Water to be a co-maker, in view of its assumption of
OCWD’s water operations. No evidence was presented to show that such request was ever approved by Subic Water’s board of
directors.

Under these circumstances, petitioner cannot proceed after Subic Water for OCWD’s unpaid obligations. The law explicitly states that
solidary liability is not presumed and must be expressly provided for. Not being a surety, Subic Water is not an insurer of OCWD’s
obligations under the compromise agreement. At best, Subic Water was merely a guarantor against whom petitioner can claim,
provided it was first shown that: a) petitioner had already proceeded after the properties of OCWD, the principal debtor; b) and despite
this, the obligation under the compromise agreement, remains to be not fully satisfied.61 But as will be discussed next, Subic Water
could not also be recognized as a guarantorof OCWD’s obligations.

An officer’s actions can only bind the corporation ifhe had been authorized to do so.

An examination of the compromise agreement reveals that it was not accompanied by any document showing a grant of authority to Mr.
Noli Aldip to sign on behalf of Subic Water.

Subic Water is a corporation. A corporation, as a juridical entity, primarily acts through its board ofdirectors, which exercises its
corporate powers. In this capacity, the general rule is that, in the absence of authority from the board ofdirectors, no person, not even
its officers, can validly bind a corporation.62 Section 23 of the Corporation Code provides:

Section 23. The board of directors or trustees.– Unless otherwise provided in this Code, the corporate powers of all corporations formed
under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of
directors or trusteesto be elected from among the holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) [emphasis supplied]
In People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals,63 we held that under Section 23 of the Corporation Code, the
power and responsibility to decide whether a corporation can enter into a binding contract is lodged with the board of directors, subject
to the articles of incorporation, by-laws, or relevant provisions of law. As we have clearly explained in another case:

A corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that [the] authority to
do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the
usual courseof the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added
bycustom and usage, as usually pertaining to the particular officer or agent,and such apparent powers as the corporation has caused
persons dealing with the officer oragent to believe that ithas conferred.64 [emphasis ours]

Mr. Noli Aldip signedthe compromise agreement purely in his own capacity. Moreover, the compromise agreement did not expressly
provide that Subic Water consented to become OCWD’s co-maker. As worded, the compromise agreement merely provided that both
parties [also]requestSubic Water, Philippines, which took over the operations of Olongapo City Water District be made asco-maker [for
the obligations above-cited].This request was never forwarded to Subic Water’s board of directors. Even if due notification had been
made (which does not appearin the records), Subic Water’s board does not appear to have given any approval tosuch request.
Nodocument such as the minutes of Subic Water’s board of directors’ meeting or a secretary’s certificate, purporting to be an
authorization to Mr. Aldip to conform to the compromise agreement, was everpresented. In effect, Mr. Aldip’s act of signing the
compromise agreement was outside of his authority to undertake.

Since Mr. Aldip was never authorized and there was no showing that Subic Water’s articles of incorporation or by-laws granted him
such authority, then the compromise agreement he signed cannot bind Subic Water. Subic Water cannot likewise be made a surety or
even a guarantor for OCWD’s obligations. OCWD’s debts under the compromise agreement are its own corporate obligations to
petitioner.

OCWD and Subic Water are two separate and different entities.

Petitioner practically suggests that since Subic Water took over OCWD’s water operations in OlongapoCity, it also acquired OCWD’s
juridical personality, making the two entities one and the same.

This is an interpretation that we cannot make or adopt under the facts and the evidence of this case. Subic Water clearly demonstrated
that it was a separate corporate entity from OCWD. OCWD is just a ten percent (10%) shareholder of Subic Water. As a mere
shareholder, OCWD’s juridical personality cannot be equated nor confused with that ofSubic Water. It is basic in corporation law that a
corporation is a juridical entity vested with a legal personality separate and distinct from those acting for and in its behalf and, in
general, from the people comprising it.65 Under this corporate reality, Subic Water cannot be held liable for OCWD’s corporate
obligations in the same manner that OCWD cannot be held liable for the obligations incurred by Subic Water as a separate entity. The
corporate veilshould not and cannot be pierced unless it is clearly established that the separate and distinct personality of the
corporation was used to justify a wrong, protect fraud, or perpetrate a deception.66

In Concept Builders, Inc. v. NLRC,67 the Court enumerated the possible probative factors of identity which could justify the application of
the doctrine of piercing the corporate veil. These are:

(1) Stock ownership by one or common ownership of both corporations;

(2) Identity of directors and officers;

(3) The manner of keeping corporate books and records; and

(4) Methods of conducting the business.68

The burden of proving the presence of any of these probative factors lies with the one alleging it. Unfortunately, petitioner simply
claimed that Subic Water took over OCWD's water operations in Olongapo City. Apart from this allegation, petitioner failed to
demonstrate any link to justify the construction that Subic Water and OCWD are one and the same.

Under this evidentiary situation, our duty is to respect the separate and distinct personalities of these two juridical entities.1âwphi1

We thus deny the present petition. The writ of execution issued by RTC Olongapo, Br. 75, in favor of Olongapo City, is hereby
confirmed to be null and void. Accordingly, respondent Subic Water cannot be made liable under this writ.

WHEREFORE, premises considered, we hereby DISMISS the petition. The Court of Appeals' decision dated July 6, 2005 and
resolution dated January 3, 2006, annulling and setting aside the orders of the Regional Trial Court of Olongapo, Branch 75 dated July
29, 2003 and October 7, 2003, and the writ of execution dated July 31, 2003, are hereby AFFIRMED. Costs against the City of
Olongapo.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 188944               July 9, 2014

SPOUSES RODOLFO BEROT AND LILIA BEROT, Petitioners, 

vs.
FELIPE C. SIAPNO, Respondent.

DECISION

SERENO, CJ:

Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 Revised Rules on Civil Procedure assailing the Court of
Appeals (CA) Decision dated 29 January 2009 in CA-G.R. CV No. 87995.1 The assailed CA Decision affirmed with modification the
Decision2 in Civil Case No. 2004-0246-D issued by the Regional Trial Court (RTC), First Judicial Region of Dagupan City, Branch 42.
The RTC Decision allowed the foreclosure of a mortgaged property despite the objections of petitioners claiming, among others, that its
registered owner was impleaded in the suit despite being deceased.

THE FACTS

Considering that there are no factual issues in this case, we adopt the findings of fact of the CA, as follows:

On May 23, 2002, Macaria Berot (or "Macaria") and spouses Rodolfo A. Berot (or "appellant") and Lilia P. Berot (or "Lilia") obtained a
loan from Felipe C. Siapno (or "appellee") in the sum of P250,000.00, payable within one year together with interest thereon at the rate
of 2% per annum from that date until fully paid.

As security for the loan, Macaria, appellant and Lilia (or "mortgagors", when collectively)mortgaged to appellee a portion, consisting of
147 square meters (or "contested property"), of that parcel of land with an area of 718 square meters, situated in Banaoang, Calasiao,
Pangasinan and covered by Tax Declaration No. 1123 in the names of Macaria and her husband Pedro Berot (or "Pedro"), deceased.
On June 23, 2003, Macaria died.

Because of the mortgagors’ default,appellee filed an action against them for foreclosure of mortgageand damages on July 15, 2004 in
the Regional Trial Court of Dagupan City (Branch 42). The action was anchored on the averment that the mortgagors failed and refused
to pay the abovementioned sum of P250,000.00 plus the stipulated interest of 2% per month despite lapse of one year from May 23,
2002.

In answer, appellant and Lilia (or "Berot spouses", when collectively [referred to]) alleged that the contested property was the
inheritance of the former from his deceased father, Pedro; that on said property is their family home; that the mortgage is void as it was
constituted over the family home without the consent of their children, who are the beneficiaries thereof; thattheir obligation is only joint;
and that the lower court has no jurisdiction over Macaria for the reason that no summons was served on her as she was already dead.

With leave of court, the complaint was amended by substituting the estate of Macaria in her stead. Thus, the defendants named in the
amended complaint are now the "ESTATE OF MACARIA BEROT, represented by Rodolfo A. Berot, RODOLFO A. BEROT and LILIA
P. BEROT".

After trial, the lower court rendered a decision dated June 30, 2006, the decretal portion of which reads:

WHEREFORE, the Court hereby renders judgment allowing the foreclosure of the subject mortgage. Accordingly, the defendants are
hereby ordered to pay to the plaintiff within ninety (90) days from notice of thisDecision the amount of P250,000.00 representing the
principal loan, with interest at two (2%) percent monthly from February, 2004 the month when they stopped paying the agreed interest
up to satisfaction of the claim and 30% of the amount to be collected as and for attorney’s fees. Defendants are also assessed to pay
the sum of P20,000.00 as litigation expenses and another sum of P10,000.00 as exemplary damages for their refusal to pay their
aforestated loan obligation. If within the aforestated 90-day period the defendants fail to pay plaintiff the above-mentioned amounts, the
sale of the property subject of the mortgage shall be made and the proceeds of the sale to be delivered to the plaintiff to cover the debt
and charges mentioned above, and after such payments the excess, if any shall be delivered to the defendants.

SO ORDERED.
Appellant filed a motion for reconsideration of the decision but it was denied per order dated September 8, 2006. Hence, this appeal
interposed by appellant imputing errors to the lower court in –

1. SUBSTITUTING AS DEFENDANT THE ESTATE OF MACARIA BEROT WHICH HAS NO PERSONALITY TO SUE AND TO BE
SUED;

2. APPOINTING RODOLFO BEROT AS A REPRESENTATIVE OF THE ESTATE OF THE DECEASED MACARIA BEROT TO THE
PREJUDICE OF THE OTHER HEIRS, GRANTING FOR THE SAKE OF ARGUMENT THAT THE ESTATE OF MACARIA BEROT HAS
A PERSONALITY TO SUE AND BE SUED;

3. NOT FINDING THE MORTGAGE NULL AND VOID, WHICH WAS ENTERED INTOWITHOUT THE WRITTEN CONSENT OF THE
BENEFICIARIES OF THE FAMILY HOME WHO WERE OF LEGAL AGE;

4. MAKING DEFENDANTS LIABLE FOR THE ENTIRE OBLIGATION OF PH250,000.00, WHEN THE OBLIGATION IS ONLY JOINT;

5. IMPOSING ATTORNEY’S FEE(S) IN THE DISPOSITIVE PORTION WITHOUT MAKING A FINDING OF THE BASIS THEREOF IN
THE BODY; and

6. IMPOSING EXEMPLARY DAMAGES AND LITIGATION EXPENSES.

Appellant contends that the substitution of the estate of Macaria for her is improper as the estate has no legal personality to be sued.3

On 29 January 2009, the CA, through its Seventh Division, promulgated a Decision that affirmed the RTC Decision but with modification
where it deleted the award of exemplary damages, attorney’s fees and expenses of litigation. The appellate court explained in its ruling
that petitioners correctly argued that a decedent’s estate is not a legal entity and thus, cannot sue or be sued. However,it noted that
petitioners failed to object to the trial court’s exercise of jurisdiction over the estate of Macaria when the latter was impleaded by
respondents by amending the original complaint.4 Adopting the rationale of the trial court on this matter, the CA held:

As aptly observed by the trial court:

It may be recalled that when the plaintiff filed his Amended Complaint substituting the estate of Macaria Berot in place of Macaria Berot
as party defendant, defendants made no objection thereto. Not even an amended answer was filed by the defendants questioning the
substitution of the estate of Macaria Berot. For these reasons, the defendants are deemed to have waivedany objection on the
personality of the estate of Macaria Berot. Section 1, Rule 9 of the Rules of Court provides that, ‘Defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived. (Order dated September 8, 2006)5 [Underscoring supplied]

The CA also found the action of respondent to be procedurally correct under Section 7, Rule 86 of the Rules ofCourt, when it decided to
foreclose on the mortgage of petitioner and prove his deficiency as an ordinary claim.6The CA did not make a categorical finding that
the nature of the obligation was joint or solidary on the part of petitioners.7 It neither sustained their argument that the mortgage was
invalidfor having beenconstituted over a family home without the written consent of the beneficiaries who were of legal age.8 However, it
upheld their argument that the award of exemplary damages and attorney’s fees in favor ofrespondent was improper for lack of
basis,9 when it ruled thus:

WHEREFORE, the appealed decision is AFFIRMED with MODIFICATION in that the award of exemplary damages, attorney’s fees and
expenses of litigation is DELETED.

SO ORDERED.10

Petitioners moved for the reconsideration of the CA Decision, but their motion was denied through a Resolution dated 9 July
2009.11 Aggrieved by the denial of their Motion for Reconsideration, they now come to us through a Petition for Review on Certiorari
under Rule 45, proffering purely questions of law.

THE ISSUES

The following are the issues presented by petitioners for resolution by this Court:

The Court of Appeals erred in:

1. Holding that the intestate estate of Macaria Berot could be a proper party by waiver expressly or impliedly by voluntary appearance;

2. In not holding that the obligation is joint12

THE COURT’S RULING

We DENYthe Petition for lack of merit.

Petitioners were correct when they argued that upon Macaria Berot’s death on 23 June 2003, her legal personality ceased, and she
could no longer be impleaded as respondent in the foreclosure suit. It is also true that her death opened to her heirs the succession of
her estate, which in this case was an intestate succession. The CA, in fact, sustained petitioners’ position that a deceased person’s
estate has no legal personality to be sued. Citing the Court’s ruling in Ventura v. Militante,13 it correctly ruled that a decedent does not
have the capacity to be sued and may not be madea defendant in a case:

A deceased person does not have suchlegal entity asis necessary to bring action so much so that a motion to substitute cannot lie and
should be denied by the court. An action begun by a decedent’s estate cannot be said to have been begun by a legal person, since an
estate is not a legal entity; such an action is a nullity and a motion to amend the party plaintiff will not, likewise, lie, there being nothing
before the court to amend. Considering that capacity to be sued isa correlative of the capacity to sue, to the same extent, a decedent
does not have the capacity to be sued and may not be named a party defendant in a court action.

When respondent filed the foreclosure case on 15 June 2004 and impleaded Macaria Berot as respondent, the latter had already
passed away the previous year, on 23 June 2003. In their Answer14 to the Complaint, petitioners countered among others, that the trial
court did not have jurisdiction over Macaria, because no summons was served on her, precisely for the reason that she had already
died. Respondent then amended his Complaint with leave of court and substituted the deceased Macaria by impleading her intestate
estate and identified Rodolfo Berot as the estate’s representative. Thereafter, the case proceeded on the merits at the trial, where this
case originated and where the Decision was promulgated.

It can be gleaned from the records ofthe case that petitioners did not object when the estate of Macaria was impleaded as respondent
in the foreclosure case. Petitioner Rodolfo Berot did not object either when the original Complaint was amended and respondent
impleaded him as the administrator of Macaria’s estate, in addition to his being impleaded as an individual respondent in the case.
Thus, the trial and appellate courts were correct in ruling that, indeed, petitionersimpliedly waived any objection to the trial court’s
exercise of jurisdiction over their persons at the inception of the case. In resolving the Motion for Reconsideration of petitioners as
defendants in Civil Case No. 2004-0246-D, the RTC was in point when it ruled:

It may be recalled that when the plaintiff filed his Amended Complaint substituting the estate of Macaria Berot in place of Macaria Berot
as party defendant, defendants made no objections thereto. Not even an amended answer was filed by the defendants questioning the
substitution of the estate of Macaria Berot. For these reasons, the defendants are deemed to have waivedany objection on the
personality of the estate of Macaria Berot. Section 1, Rule 9 of the Rules of Court provides that, "Defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived. x x x. (Underscoring ours)15

Indeed, the defense of lack of jurisdiction over the person of the defendant is one that may bewaived by a party to a case. In order to
avail of that defense, one must timely raise an objection before the court.16

The records of the case show that on 9 November 2004, a hearing was held on the Motion for Leave to Filefiled by respondent to have
her amended Complaint admitted. During the said hearing, the counsel for petitioners did not interpose an objection to the said Motion
for Leave.17 On 18 March 2005, a hearing was held on respondent’s Motion to Admit Amended Complaint, wherein counselfor
petitioners again failed to interpose any objection.18Thus, the trial court admitted respondent’s Amended Complaint and ordered thata
copy and a summons be served anew on petitioners.19

In an Order20 dated 14 April 2005, the RTC noted that petitioners received the summons and the copy of the amended Complaint on 3
February 2005 and yet they did not file an Answer. During the trial on the merits that followed, petitioners failed to interpose any
objection to the trial court’s exercise of jurisdiction over the estate of Macaria Berot. Clearly, their full participation in the proceedings of
the case can only be construed as a waiver of any objection to or defense of the trial court’s supposed lack of jurisdiction over the
estate.

In Gonzales v. Balikatan Kilusang Bayan sa Panlalapi, Inc.,21 we held that a party’s appearance in a case is equivalent to a service of
summons and that objections must be timely raised:

In this regard, petitioners should be reminded of the provision in the Rules of Court that a defendant’svoluntary appearance in an action
shall be equivalent to service of summons. Further, the lack of jurisdiction over the person of the defendant may be waived either
expressly or impliedly. When a defendant voluntarily appears, he is deemed to have submitted himself to the jurisdiction of the court. If
he does not wish to waive this defense, he must do so seasonably by motion, and object thereto.

It should be noted that Rodolfo Berot is the son of the deceased Macaria22 and as such, he is a compulsory heir of his mother. His
substitution is mandated by Section 16, Rule 3 of the Revised Rules of Court. Notably, there is no indication inthe records of the case
that he had other siblings who would have been his co-heirs. The lower and appellate courts veered from the real issue whether the
proper parties have been impleaded. They instead focused on the issue whether there was need for a formal substitution when the
deceasedMacaria, and later its estate, was impleaded. As the compulsory heir of the estate of Macaria, Rodolfo is the real party in
interest in accordance with Section 2, Rule 3 of the Revised Rules of Court. At the time of the filing of the complaint for foreclosure, as
well as the time it was amended to implead the estate of Macaria, it is Rodolfo – as heir – who is the real party in interest. He stands to
be benefitted or injured by the judgment in the suit.

Rodolfo is also Macaria’s co-defendant in the foreclosure proceedings in his own capacity as co-borrower ofthe loan. He participated in
the proceedings of the case, from the initial hearing of the case, and most particularly when respondent filed his amended complaint
impleading the estate of Macaria. When respondent amended his complaint, Rodolfo did not file an amended Answer nor raise any
objection, even if he was also identified therein as the representative ofthe estate of the deceased Macaria. The lower court noted this
omission by Rodolfo in its Order dated 8 September 2006 ruling on his Motionfor Reconsideration to the said court’s Decision dated 30
June 2006. Thus, his continued participation in the proceedings clearly shows that the lower court acquired jurisdiction over the heir of
Macaria.

In Regional Agrarian Reform Adjudication Board v. Court of Appeals,23 we ruled that:

[W]e have to point out that the confusion in this case was brought about by respondents themselves when they included in their
complaint two defendants who were already dead. Instead of impleading the decedent’s heirs and current occupants of the landholding,
respondents filed their complaint against the decedents, contrary to the following provision of the 1994 DARAB Rules of Procedure:

RULE V

PARTIES, CAPTION AND SERVICE OF PLEADINGS

SECTION 1. Parties in Interest. Every agrarian case must be initiated and defended inthe name of the real party in interest. x x x.

A real party in interest is defined as "the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to
the avails of a suit." The real parties in interest, at the time the complaint was filed, were no longer the decedents Avelino and Pedro,
but rather their respective heirs who are entitled to succeed to their rights (whether as agricultural lessees or as farmers-beneficiaries)
under our agrarian laws. They are the ones who, as heirs of the decedents and actualtillers, stand to be removed from the landholding
and made to pay back rentals to respondents if the complaint is sustained.

Since respondents failed to correcttheir error (they did not amend the erroneous caption of their complaint to include the real parties-
ininterest), they cannot be insulated from the confusion which it engendered in the proceedings below. But at any rate, notwithstanding
the erroneous caption and the absence of a formal substitution of parties, jurisdiction was acquired over the heirs of Avelino and Pedro
who voluntarily participated in the proceedings below. This Court has ruled that formal substitution of parties is not necessary when the
heirs themselves voluntarily appeared, participated, and presented evidence during the proceedings.

As such, formal substitution of the parties in this case is not necessary.

In Vda. De Salazar v. Court of Appeals24 we ruled that a formal substitution of the heirs in place of the deceased is no longer necessary
if the heirs continued to appear and participated in the proceedings of the case. In the cited case, we explained the rationale of our
ruling and related it to the due process issue, to wit:

We are not unaware of several cases where we have ruled that a party having died in an action that survives, the trial held by the court
without appearance of the deceased's legal representative or substitution of heirs and the judgment rendered after such trial, are null
and void because the court acquired no jurisdiction over the persons of the legal representatives or of the heirs upon whom the trial and
the judgment would be binding. This general rule notwithstanding, in denying petitioner's motion for reconsideration, the Court of
Appeals correctly ruled that formal substitution of heirs is not necessary when the heirs themselves voluntarily appeared, participated in
the case and presented evidence in defense of deceased defendant. Attending the case at bench, after all, are these particular
circumstances which negate petitioner's belated and seemingly ostensible claim of violation of her rights to due process. We should not
lose sight of the principle underlying the general rule that formal substitution of heirs must be effectuated for them to be bound by a
subsequent judgment. Such had been the general rule established not because the rule on substitution of heirs and that on
appointment of a legal representative are jurisdictional requirements per se but because non-compliance therewith results in the
undeniable violation of the right to due process of those who, though not duly notified of the proceedings, are substantially affected by
the decision rendered therein. Viewing the rule on substitution of heirs in this light, the Court of Appeals,in the resolution denying
petitioner's motion for reconsideration, thus expounded:

Although the jurisprudential rule is that failure to make the substitution is a jurisdictional defect, it should be noted that the purpose of
this procedural rule is to comply with due process requirements. The original party having died, he could not continue, to defend himself
in court despite the fact that the action survived him. For the case to continue, the real party in interest must be substituted for the
deceased. The real party in interest is the one who would beaffected by the judgment. It could be the administrator or executor or the
heirs. In the instant case, the heirs are the proper substitutes. Substitution gives them the opportunity to continue the defense for the
deceased. Substitution is important because such opportunity to defend is a requirement to comply with due process. Such substitution
consists of making the proper changes in the caption of the case which may be called the formal aspect of it. Such substitution also
includes the process of letting the substitutes know that they shall be bound by any judgment in the case and that they should therefore
actively participate in the defense of the deceased. This part may be called the substantive aspect. This is the heart of the procedural
rule because this substantive aspect is the one that truly embodies and gives effect to the purpose of the rule. It is this court's view that
compliance with the substantive aspect of the rule despite failure to comply with the formal aspect may he considered substantial
compliance.Such is the situation in the case at bench because the only inference that could be deduced from the following facts was
that there was active participation of the heirs in the defense ofthe deceased after his death:

1. The original lawyer did not stop representing the deceased. It would be absurd to think that the lawyer would continue to represent
somebody if nobody is paying him his fees. The lawyer continued to represent him in the litigation before the trial court which lasted for
about two more years. A dead party cannot pay him any fee. With or without payment of fees, the fact remains that the said counsel
was allowed by the petitioner who was well aware of the instant litigation to continue appearing as counsel until August 23, 1993 when
the challenged decision was rendered;

2. After the death of the defendant, his wife, who is the petitioner in the instant case, even testified in the court and declared that her
husband is already deceased. She knew therefore that there was a litigation against her husband and that somehow her interest and
those of her children were involved;

3. This petition for annulmentof judgment was filed only after the appeal was decided against the defendant on April 3, 1995, more than
one and a half year (sic) after the decision was rendered (even if we were to give credence to petitioner's manifestation that she was
notaware that an appeal had been made);

4. The Supreme Court has already established that there is such a thing as jurisdiction byestoppel. This principle was established even
in cases where jurisdiction over the subject matter was being questioned. In the instant case, only jurisdiction over the person of the
heirs is in issue. Jurisdiction over the person may be acquired by the court more easily than jurisdiction over the subject matter.
Jurisdiction over the person may be acquired by the simple appearance of the person in court as did herein petitioner appear;

5. The case cited by the herein petitioner (Ferreria et al. vs. Manuela Ibarra vda. de Gonzales, etal.) cannot be availed of to support the
said petitioner's contention relative to nonacquisition of jurisdiction by the court. In that case, Manolita Gonzales was not served notice
and, more importantly, she never appeared in court, unlike herein petitioner who appeared and even testified regarding the death of her
husband.

In this case, Rodolfo’s continued appearance and participation in the proceedings of the case dispensed with the formal substitution of
the heirs in place of the deceased Macaria. The failure of petitioners to timely object to the trial court’s exercise of jurisdiction over the
estate of Macaria Berot amounted to a waiver on their part. Consequently, it would be too late for them at this point to raise that
defense to merit the reversal of the assailed decision of the trial court. We are left with no option other than to sustain the CA’s
affirmation of the trial court’s Decision on this matter.

On the second issue of whether the nature of the loan obligation contracted by petitioners is joint or solidary, we rule that it is joint.

Under Article 1207 of the Civil Code of the Philippines, the general rule is that when there is a concurrence of two or more debtors
under a single obligation, the obligation is presumed to be joint:

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each
one of the former has a right to demand, orthat each one of the latter is bound to render, entire compliance with the prestations. There
is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.

The law further provides that to consider the obligation as solidary in nature, it must expressly be stated as such, or the law or the
nature of the obligation itself must require solidarity. In PH Credit Corporation v. Court of Appeals,25 we held that:

A solidaryobligation is one in which each of the debtors is liable for the entire obligation, and each of the creditors is entitled to demand
the satisfaction of the whole obligation from any or all of the debtors. On the other hand, a jointobligation is one in which each debtors is
liable only for a proportionate part of the debt, and the creditor is entitled to demand only a proportionate part of the credit from each
debtor. The wellentrenched rule is that solidary obligations cannot be inferred lightly. They must be positively and clearly expressed. A
liability is solidary "only when the obligation expressly so states, when the law so provides or when the nature of the obligation so
requires."

In the instant case, the trial court expressly ruled that the nature of petitioners’ obligation to respondent was solidary.26 It scrutinized the
real estate mortgage and arrived at the conclusion that petitioners had bound themselves to secure their loan obligation by way of a
realestate mortgage in the event that they failed to settle it.27 But such pronouncement was not expressly stated in its 30 June 2006
Decision. This was probably the reason why, when the trial court Decision was appealed to it, the CA did not squarely address the
issue when the latter ruled that:

It is noteworthy that the appealed decision makes no pronouncement that the obligation of the mortgagors is solidary; and that said
decision has not been modifiedby the trial court. Hence, it is unnecessary for US to make a declaration on the nature of the obligation of
the mortgagors.28 However, a closer scrutiny of the records would reveal that the RTC expressly pronounced that the obligation of
petitioners to the respondent was solidary. In resolving petitioners’ Motion for Reconsideration to its 30 June 2006 Decision, the trial
court categorically ruled that:
Defendants [sic] obligation with plaintiff is solidary. A careful scrutiny of the Real Estate Mortgage(Exh. "A") will show that all the
defendants, for a single loan, bind themselves to cede, transfer, and convey by way of real estate mortgage all their rights, interest and
participation in the subject parcelof land including the improvements thereon in favor of the plaintiff, and warrant the same to be free
from liens and encumbrances, and that should theyfail to perform their obligation the mortgage will be foreclosed. From this it can be
gleaned that each of the defendants obligated himself/herself to perform the said solidary obligation with the plaintiff.29 We do not agree
with this finding by the trial court.

We have scoured the records of the case, but found no record of the principal loan instrument, except an evidence that the realestate
mortgage was executed by Macaria and petitioners. When petitioner Rodolfo Berot testified in court, he admitted that heand his mother,
Macaria had contracted the loan for their benefit:

Q: On the Real Estate Mortgage, you and your mother obtained a loan from Mr. Siapno in the amountofP250,000.00, now as between
you and your mother whose loan is that?

A: It is the loan of my mother and myself, sir.30

The testimony of petitioner Rodolfo only established that there was that existing loan to respondent, and that the subject property was
mortgaged as security for the said obligation. His admission of the existence of the loan made him and his late mother liable to
respondent. We have examined the contents of the real estate mortgagebut found no indication in the plain wordings of the instrument
that the debtors – the late Macaria and herein petitioners – had expressly intended to make their obligation to respondent solidary in
nature. Absent from the mortgage are the express and indubitable terms characterizing the obligation as solidary. Respondent was not
able to prove by a preponderance of evidence that petitioners' obligation to him was solidary. Hence, applicable to this case is the
presumption under the law that the nature of the obligation herein can only be considered as joint. It is incumbent upon the party
alleging otherwise to prove with a preponderance of evidence that petitioners' obligation under the loan contract is indeed solidary in
character.31

The CA properly upheld respondent's course of action as an availment of the second remedy provided under Section 7, Rule 86 of the
1997 Revised Rules of Court.32 Under the said provision for claims against an estate, a mortgagee has the legal option to institute a
foreclosure suit and to recover upon the security, which is the mortgaged property.

During her lifetime, Macaria was the registered owner of the mortgaged property, subject of the assailed foreclosure. Considering that
she had validly mortgaged the property to secure a loan obligation, and given our ruling in this case that the obligation is joint, her
intestate estate is liable to a third of the loan contracted during her lifetime. Thus, the foreclosure of the property may proceed, but
would be answerable only to the extent of the liability of Macaria to respondent. WHEREFORE, the CA Decision in CA-G.R. CV No.
87995 sustaining the RTC Decision in Civil Case No. 2004-0246-D is hereby AFFIRMED with the MODIFICATION that the obligation of
petitioners and the estate of Macaria Berot is declared as joint in nature.

SO ORDERED.

MARIA LOURDES P.A. SERENO

Chief Justice, Chairperson
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 207348               August 19, 2014

ROWENA R. SALONTE, Petitioner, 
vs.
COMMISSION ON AUDIT, CHAIRPERSON MA. GRACIA PULIDO-TAN, COMMISSIONER JUANITO G. ESPINO, JR.,
COMMISSIONER HEIDI L. MENDOZA, and FORTUNATA M. RUBICO, DIRECTOR IV, COA COMMISSION SECRETARIAT, in their
official capacities, Respondents.

DECISION

VELASCO, JR., J.:

The Case

This is a petition for review filed under Rule 64 assailing the February 15, 2008 Decision1 and November 5, 2012
Resolution,2 denominated as Decision Nos. 2008-018 and 2012-190, respectively, of the Commission on Audit (COA). The assailed
issuances affirmed the Notice of Disallowance No. (ND) 2000-002-101(97) dated November 14, 2001 issued by Rexy M. Ramos, COA
State Auditor IV, pursuant to COA Assignment Order No. 2000-63.3

The Facts

On April 26, 1989, the City of Mandaue and F.F. Cruz and Co., Inc. (F.F. Cruz) entered into a Contract of Reclamation4 in which F.F.
Cruz, in consideration of a defined land sharing formula thus stipulated, agreed to undertake, at its own expense, the reclamation of
180 hectares, more or less, of foreshore and submerged lands fromthe Cabahug Causeway in that city. The timetables, i.e.,
commencement of the contract and project completion, are provided in paragraphs 2 and 15 of the Contract which state:

2. COMMENCEMENT. Work on the reclamation shall commence not later than [July 1989], after thiscontract shall be ratified by the
Sanggunian Panlungsod;

xxxx

15. CONTRACT DURATION. The project is estimated to be completed in six (6) years: (3 years for the dredge-filling and seawall
construction and 3 years for the infrastructures completion). However, if all the infrastructures within the OWNERS’ share of the project
are already completed within the six (6) year period agreed upon, any extension of time for works to bedone within the share of the
DEVELOPERS, shall be at the discretion of the DEVELOPERS, as a growing city, changes in requirements of the lot buyers are
inevitable.

On a best effort basis, the construction of roadways, drainage system and open spaces in the area designated as share of the City of
Mandaue, shall be completed not later than December 31, 1991. (emphasis supplied)

Subsequently, the parties inked inrelation to the above project a Memorandum of Agreement (MOA) dated October 24, 19895 whereby
the City of Mandaue allowed F.F. Cruz to put up structures on a portion of a parcel of land owned by the city for the use of and to house
F.F. Cruz personnel assigned at the project site, subject to terms particularly provided in paragraphs 3, 4 and 5 of the MOA:

3) That [F.F. Cruz] desires to use a portion of a parcel of land of the [City of Mandaue] described under paragraph 1 hereof to
the extent of 495 square meters x x x to be used by them in the construction of their offices to house its personnel to supervise
the Mandaue City Reclamation Project x x x.

xxxx

4) That the [City of Mandaue] agrees to the desire of [F.F. Cruz] to use a portion of the parcel of land described under
paragraph 1 by [F.F. Cruz] for the latter to use for the construction of their offices to house its personnel to supervise the said
Mandaue City Reclamation Project with no rental to be paid by [F.F. Cruz] to the [City of Mandaue].

5) That the [City of Mandaue] and [F.F. Cruz] have agreed that upon the completion of the Mandaue City Reclamation Project,
all improvements introduced by [F.F. Cruz] to the portion of the parcel of land owned by the [City of Mandaue]as described
under paragraph 3 hereof existing upon the completion of the said Mandaue City Reclamation Project shall ipso facto belong
 to the [City of Mandaue] in ownershipas compensation for the use of said parcel of land by [F.F. Cruz] without any rental
whatsoever. (emphasis supplied)

Pursuant to the MOA, F.F. Cruz proceeded to construct the contemplated housing units and other facilities which included a canteen
and a septic tank.

Later developments saw the City of Mandaue undertaking the Metro Cebu Development Project II (MCDP II), part of which required the
widening of the Plaridel Extension Mandaue Causeway. However, the structures and facilities built by F.F. Cruz subject of the MOA
stood in the direct path of the road widening project. Thus, the Department of Public Works and Highways (DPWH) and Samuel B.
Darza, MCDP II project director, entered into an Agreement to Demolish, Remove and Reconstruct Improvement dated July 23,
19976 with F.F. Cruz whereby the latter would demolish the improvements outside of the boundary of the road widening project and, in
return, receive the total amount of PhP 1,084,836.42 in compensation.

Accordingly, petitioner Rowena B.Rances (now Rowena RancesSolante), Human Resource Management Officer III, prepared and, with
the approval of Samuel B. Darza (Darza), then issued Disbursement Voucher (DV) No. 102-07-88-97 dated July 24, 19977 for PhP
1,084,836.42 in favor of F.F. Cruz. In the voucher, Solante certified that the expense covered by it was "necessary, lawful and incurred
under my direct supervision."

Thereafter, Darza addressed a letter-complaint to the Office of the Ombudsman, Visayas, inviting attention to several irregularities
regarding the implementation of MCDP II. The letter was referred to the COA which then issued Assignment Order No. 2000-063 for a
team to audit the accounts of MCDP II. Following an audit, the audit team issued Special Audit Office (SAO) Report No. 2000-28, par. 5
of which states:

F.F. Cruz and Company, Inc. was paid P1,084,836.42 for the cost of the property affected by the widening of Plaridel Extension,
Mandaue Causeway. However, under Section 5 of its MOA with Mandaue City, the former was no longer the lawful owner of the
properties at the time the payment was made.8

Based on the above findings, the SAO audit team, through Rexy Ramos, issued the adverted ND 2000-002-101-(97)9 disallowing the
payment of PhP 1,084,836.42 to F.F. Cruz and naming that company, Darza and Solante liable for the transaction. Therefrom, Solante
sought reconsideration, while F.F. Cruz appealed, but the motion for reconsideration and the appeal were jointly denied in Legal and
Adjudication Office (LAO) Local Decision No. 2004-040 dated March 5, 2004, which F.F. Cruz in time appealed to COA Central.

In the meantime, the adverted letter-complaint of Darza was upgraded as an Ombudsman case, docketed as OMB-V-C-03-0173-C,
against Solante, et al., albeit the Ombudsman, by Resolution of June 29, 2006,10 would subsequently dismiss the same for lack of merit.

The Ruling of the Commission on Audit

In its February 15, 2008 Decision,11 the COA, as indicated at the outset, affirmed ND 2000-002-101-97 on the strength of the following
premises:

From the above provision of the MOA, it is clear that the improvements introduced by F.F. Cruz x x x would be owned by the City upon
completion of the project which under the Contract of reclamation should have been in 1995. However, the project was not completed
in 1995 and even in 1997 when MDCP paid for these improvements. The fact that the reclamation project had not yet been completed
or turned over to the City of Mandaue by F.F. Cruz in 1997 or two years after it should have been completed, does not negate the right
over such improvements by the City x x x. Clearly, the intention of the stipulation is for F.F. Cruz x x x to compensate the government
for the use of the land on which the office, pavement, canteen, extension shed, house and septic tank were erected. Thus, to make the
government pay for the cost of the demolished improvements will defeat the intention of parties as regards compensation due from the
contractor for its use of [the] subject land. Under Article 1315 of the Civil Code, from the moment a contract is perfected, the parties are
bound to the fulfillment to what has been expressly stipulated and all the consequences which according to their nature, may be in
keeping with good faith, usage and law. Thus, even if the contractual stipulations may turn out to be financially disadvantageous to any
party, such will not relieve any or both parties fromtheir contractual obligations.12(emphasis supplied)

From such decision, Solante filed a Motion for Reconsideration dated June 28, 2010 purportedly with Audit Team Leader, Leila Socorro
P. Domantay. This motion was denied by the COA in a Resolution dated November 5, 201213 wherein the commission held:

x x x The arguments of Ms. Solante that as long as the Project has not yet been turned over, the ownership of the said improvements
would not be acquired yet by the City would put the entire contract at the mercy of F.F. Cruz & Co., Inc., thus, negating the mutuality of
contracts principle expressed in Article 1308 ofthe New Civil Code, which states:

Art. 1308. The contracts must bindboth contracting parties; its validity or compliance cannot be leftto the will of one of them.

On February 15, 2013, Solante received a Notice of Finality of Decision (NFD)14 stating that the COA Decision dated February 15, 2008
and Resolution dated November 5, 2012 have become final and executory, a copy of the Resolution having been served on the parties
on November 9, 2012 by registered mail. Notably, Solante never received a copy of the COA Resolution. She came to get one only on
May 8, 2013 after inquiring from the Cebu Central Post Office, which, in a Certification of Deliverydated May 8, 2013,15 stated that the
registered mail containing said copy was in fact not delivered.

Hence, the instant petition.

The Issue

The resolution of the present controversy rests on the determination of a sole issue: who between the City ofMandaue and F.F. Cruz
owned during the period material the properties that were demolished.

The Court’s Ruling

The petition is meritorious. The COA and its audit team obviously misread the relevant stipulations of the MOA in relation to the
provisions on project completion and termination of contract of the Mandaue-F.F. Cruz reclamation contract.

Essentially, the COA is alleging that the Contract of Reclamation establishes an obligation on the part of F.F. Cruz to finish the project
within the allotted period of six (6) years from contract execution in August 1989. Prescinding from this premise, the COA would
conclude that after the six (6)-year period, F.F. Cruz is automatically deemed to be in delay, the contract considered as completed, and
the ownership of the structures built in accordance with the MOA transferred to the City of Mandaue.

COA’s basic position and the arguments holding it together is untenable.

On this point, the Civil Code provision on obligations with a period is relevant. Article 1193 thereof provides:

Article 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes.

Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain.

A day certain is understood to bethat which must necessarily come, although it may not be known when.

If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be regulated by the rules of the
preceding Section. (emphasis supplied)

A plain reading of the Contract ofReclamation reveals that the six (6)-year period provided for projectcompletion, or, with like effect,
termination of the contract was a mere estimateand cannot be considered a period or a "day certain" inthe context of the aforequoted
Art. 1193. To be clear, par. 15 of the Contract of Reclamation states: "[T]he project is estimated to be completed in six (6) years." As
such, the lapse of six (6) years from the perfection of the contract did not, by itself, make the obligation to finish the reclamation project
demandable, such as to put the obligor in a state of actionable delay for its inability to finish. Thus, F.F. Cruz cannot be deemed to be in
delay. Parenthetically, the Ombudsman, in a Resolution of June 29, 2006 in OMB-V-C-03-0173-C, espoused a similar view in
dismissing the complaint against Solante, thus:

A careful reading of the pertinent section of the Contract of Reclamation between F.F. Cruz and Mandaue City, however, would confirm
respondents Rances-Solante[’s]and Sungahid’s view that herein respondent Cruz was still the owner of the subject properties at the
time these were demolished. Indeed, the Contract specifies that the six (6)-year period was no more than an estimate of the project
completion. It was not a fixed period agreed upon. Being so, the mere lapse of six (6) years from the execution of the Contract, did not
by itself deem the reclamation project completed, muchless bring about the fulfillment of the condition stipulated in the MOA (on the
shift of ownership over the demolished properties). Herein respondent Cruz, and/or his company, at least on this particular regard, can
be said to be still the owner of the structures along Plaridel Extension x x x, when these were demolished to give way to road widening.
It was nothing but equitable that they get compensated for the damages caused by the demolition.16 (emphasis supplied)

Put a bit differently, the lapse of six (6) years from the perfection of the subject reclamation contract, withoutmore, could not have
automatically vested Mandaue City, under the MOA, with ownership of the structures.

Moreover, even if we consider the allotted six (6) years within which F.F. Cruz was supposed to completethe reclamation project, the
lapse thereof does not automatically mean thatF.F. Cruz was in delay. As may be noted, the City of Mandaue never madea demand for
the fulfillment of its obligation under the Contract of Reclamation. Article 1169 of the Civil Code on the interaction of demand and delay
and the exceptions to the requirement of demand relevantly states:

Article 1169. Those obliged to deliver orto do something incur in delay from the time the obligeejudicially or extrajudicially demands
from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:
 (1) When the obligation or the law expressly so declares; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is
to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. From the momentone of the parties fulfills his obligation, delay by the other begins.

Thus, in J Plus Asia Development Corporation v. Utility Assurance Corporation,17 the Court has held:

In this jurisdiction, the following requisites must be present in order that the debtor may be in default: (1) that the obligation be
demandable and already liquidated;(2) that the debtor delays performance; and (3) that the creditor requires the performance judicially
or extrajudicially. (emphasis supplied)

In the instant case, the records are bereft of any document whence to deduce that the City of Mandaue exactedfrom F.F. Cruz the
fulfillment of its obligation under the reclamation contract. And to be sure, not one of the exceptions to the requisite demand under Art.
1169 is established, let alone asserted. On the contrary, the then city mayor of Mandaue, no less, absolved F.F. Cruz from incurring
under the premises in delay. In his affidavit dated July 9, 2004,18 then Mayor Ouano stated:

That although x x x the reclamation wasestimatedto be completed in six years ending in 1995, the said project however, was not fully
completed when the demolition of the mentioned improvements of [F.F. Cruz] was made x x x [and in fact] up to now the said Mandaue
Reclamation Project has not yet been fully completed and turned over to the City of Mandaue.

x x x [S]ince at the time of the demolition the said improvements actually belonged to [F.F. Cruz] and the City of Mandaue has no claim
whatsoever on the said payment x x x for the demolished improvements. (emphasis supplied)

As it were, the Mandaue-F.F.Cruz MOA states that the structures built by F .F. Cruz on the property of the city will belong to the latter
only upon the completion of the project. Clearly, the completion of the project is a suspensive condition that has yet to be
fulfilled.1âwphi1 Until the condition arises, ownership of the structures properly pertains to F .F. Cruz.

To be clear, the MOA does not state that the structures shall inure in ownership to the City of Mandaue after the lapse of six ( 6) years
from the execution of the Contract of Reclamation. What the MOA does provide is that ownership of the structures shall vest upon, or
ipso facto belong to, the City of Mandaue when the Contract of Reclamation shall have been completed. Logically, before such time, or
until the agreed reclamation project is actually finished, F.F. Cruz owns the structures. The payment of compensation for the demolition
thereof is justified. The disallowance of the payment is without factual and legal basis. COA then gravely abused its discretion when it
decreed the disallowance.

WHEREFORE, the instant petition is GRANTED. Accordingly, the assailed February 15, 2008 Decision, November 5, 2012 Resolution,
and Notice of Disallowance No. 2000-002-101 (97) dated November 14, 2001 issued by the Commission on Audit are hereby
REVERSED and SET ASIDE.

No costs.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 199650               June 26, 2013

J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner, 

vs.
UTILITY ASSURANCE CORPORATION, Respondent.

DECISION

VILLARAMA, JR., J.:

Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the
Decision1 dated January 27,2011 and Resolution2 dated December 8, 2011 of the Court of Appeals (CA) in CA-G.R. SP No. 112808.

The Facts

On December 24, 2007, petitioner J Plus Asia Development Corporation represented by its Chairman, Joo Han Lee, and Martin E.
Mabunay, doing business under the name and style of Seven Shades of Blue Trading and Services, entered into a Construction
Agreement3 whereby the latter undertook to build the former's 72-room condominium/hotel (Condotel Building 25) located at the
Fairways & Bluewaters Golf & Resort in Boracay Island, Malay, Aklan. The project, costing P42,000,000.00, was to be completed within
one year or 365 days reckoned from the first calendar day after signing of the Notice of Award and Notice to Proceed and receipt of
down payment (20% of contract price). The P8,400,000.00 down payment was fully paid on January 14, 2008.4Payment of the balance
of the contract price will be based on actual work finished within 15 days from receipt of the monthly progress billings. Per the agreed
work schedule, the completion date of the project was December 2008.5 Mabuhay also submitted the required Performance
Bond6 issued by respondent Utility Assurance Corporation (UTASSCO) in the amount equivalent to 20% down payment or P8.4 million.

Mabunay commenced work at the project site on January 7, 2008. Petitioner paid up to the 7th monthly progress billing sent by
Mabunay. As of September 16, 2008, petitioner had paid the total amount of P15,979,472.03 inclusive of the 20% down payment.
However, as of said date, Mabunay had accomplished only 27.5% of the project.7

In the Joint Construction Evaluation Result and Status Report8 signed by Mabunay assisted by Arch. Elwin Olavario, and Joo Han Lee
assisted by Roy V. Movido, the following findings were accepted as true, accurate and correct:

III STATUS OF PROJECT AS OF 14 NOVEMBER 2008

1) After conducting a joint inspection and evaluation of the project to determine the actual percentage of accomplishment, the
contracting parties, assisted by their respective technical groups, SSB assisted by Arch. Elwin Olavario and JPLUS assisted
by Engrs. Joey Rojas and Shiela Botardo, concluded and agreed that as of 14 November 2008, the project is only Thirty One
point Thirty Nine Percent (31.39%) complete.

2) Furthermore, the value of construction materials allocated for the completion of the project and currently on site has been
determined and agreed to be ONE MILLION FORTY NINE THOUSAND THREE HUNDRED SIXTY FOUR PESOS AND
FORTY FIVE CENTAVOS (P1,049,364.45)

3) The additional accomplishment of SSB, reflected in its reconciled and consolidated 8th and 9th billings, is Three point
Eighty Five Percent (3.85%) with a gross value of P1,563,553.34 amount creditable to SSB after deducting the withholding tax
is P1,538,424.84

4) The unrecouped amount of the down payment is P2,379,441.53 after deducting the cost of materials on site and the net
billable amount reflected in the reconciled and consolidated 8th and 9th billings. The uncompleted portion of the project is
68.61% with an estimated value per construction agreement signed isP27,880,419.52.9 (Emphasis supplied.)

On November 19, 2008, petitioner terminated the contract and sent demand letters to Mabunay and respondent surety. As its demands
went unheeded, petitioner filed a Request for Arbitration10 before the Construction Industry Arbitration Commission (CIAC). Petitioner
prayed that Mabunay and respondent be ordered to pay the sums of P8,980,575.89 as liquidated damages and P2,379,441.53
corresponding to the unrecouped down payment or overpayment petitioner made to Mabunay.11
In his Answer,12 Mabunay claimed that the delay was caused by retrofitting and other revision works ordered by Joo Han Lee. He
asserted that he actually had until April 30, 2009 to finish the project since the 365 days period of completion started only on May 2,
2008 after clearing the retrofitted old structure. Hence, the termination of the contract by petitioner was premature and the filing of the
complaint against him was baseless, malicious and in bad faith.

Respondent, on the other hand, filed a motion to dismiss on the ground that petitioner has no cause of action and the complaint states
no cause of action against it. The CIAC denied the motion to dismiss. Respondent’s motion for reconsideration was likewise denied.13

In its Answer Ex Abundante Ad Cautelam With Compulsory Counterclaims and Cross-claims,14 respondent argued that the
performance bond merely guaranteed the 20% down payment and not the entire obligation of Mabunay under the Construction
Agreement. Since the value of the project’s accomplishment already exceeded the said amount, respondent’s obligation under the
performance bond had been fully extinguished. As to the claim for alleged overpayment to Mabunay, respondent contended that it
should not be credited against the 20% down payment which was already exhausted and such application by petitioner is tantamount to
reviving an obligation that had been legally extinguished by payment. Respondent also set up a cross-claim against Mabunay who
executed in its favor an Indemnity Agreement whereby Mabunay undertook to indemnify respondent for whatever amounts it may be
adjudged liable to pay petitioner under the surety bond.

Both petitioner and respondent submitted their respective documentary and testimonial evidence. Mabunay failed to appear in the
scheduled hearings and to present his evidence despite due notice to his counsel of record. The CIAC thus declared that Mabunay is
deemed to have waived his right to present evidence.15

On February 2, 2010, the CIAC rendered its Decision16 and made the following award:

Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders and directs:

1. Respondents Mabunay and Utassco to jointly and severally pay claimant the following:

a) P4,469,969.90, as liquidated damages, plus legal interest thereon at the rate of 6% per annum computed from the
date of this decision up to the time this decision becomes final, and 12% per annum computed from the date this
decision becomes final until fully paid, and

b) P2,379,441.53 as unrecouped down payment plus interest thereon at the rate of 6% per annum computed from the
date of this decision up to the time this decision becomes final, and 12% per annum computed from the date this
decision becomes final until fully paid.

It being understood that respondent Utassco’s liability shall in no case exceed P8.4 million.

2. Respondent Mabunay to pay to claimant the amount of P98,435.89, which is respondent Mabunay’s share in the arbitration
cost claimant had advanced, with legal interest thereon from January 8, 2010 until fully paid.

3. Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have paid to claimant
under this decision, plus interest thereon at the rate of 12% per annum computed from the date he is notified of such payment
made by respondent Utassco to claimant until fully paid, and to pay Utassco P100,000.00 as attorney’s fees.

SO ORDERED.17

Dissatisfied, respondent filed in the CA a petition for review under Rule 43 of the 1997 Rules of Civil Procedure, as amended.

In the assailed decision, the CA agreed with the CIAC that the specific condition in the Performance Bond did not clearly state the
limitation of the surety’s liability. Pursuant to Article 137718 of the Civil Code, the CA said that the provision should be construed in favor
of petitioner considering that the obscurely phrased provision was drawn up by respondent and Mabunay. Further, the appellate court
stated that respondent could not possibly guarantee the down payment because it is not Mabunay who owed the down payment to
petitioner but the other way around. Consequently, the completion by Mabunay of 31.39% of the construction would not lead to the
extinguishment of respondent’s liability. The P8.4 million was a limit on the amount of respondent’s liability and not a limitation as to the
obligation or undertaking it guaranteed.

However, the CA reversed the CIAC’s ruling that Mabunay had incurred delay which entitled petitioner to the stipulated liquidated
damages and unrecouped down payment. Citing Aerospace Chemical Industries, Inc. v. Court of Appeals,19 the appellate court said
that not all requisites in order to consider the obligor or debtor in default were present in this case. It held that it is only from December
24, 2008 (completion date) that we should reckon default because the Construction Agreement provided only for delay in the
completion of the project and not delay on a monthly basis using the work schedule approved by petitioner as the reference point.
Hence, petitioner’s termination of the contract was premature since the delay in this case was merely speculative; the obligation was
not yet demandable.
The dispositive portion of the CA Decision reads:

WHEREFORE, premises considered, the instant petition for review is GRANTED. The assailed Decision dated 13 January 2010
rendered by the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby REVERSED and SET ASIDE. Accordingly, the Writ of
Execution dated 24 November 2010 issued by the same tribunal is hereby ANNULLED and SET ASIDE.

SO ORDERED.20

Petitioner moved for reconsideration of the CA decision while respondent filed a motion for partial reconsideration. Both motions were
denied.

The Issues

Before this Court petitioner seeks to reverse the CA insofar as it denied petitioner’s claims under the Performance Bond and to
reinstate in its entirety the February 2, 2010 CIAC Decision. Specifically, petitioner alleged that –

A. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT HOLDING THAT THE ALTERNATIVE DISPUTE RESOLUTION
ACT AND THE SPECIAL RULES ON ALTERNATIVE DISPUTE RESOLUTION HAVE STRIPPED THE COURT OF APPEALS
OF JURISDICTION TO REVIEW ARBITRAL AWARDS.

B. THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING THE ARBITRAL AWARD ON AN ISSUE THAT WAS
NOT RAISED IN THE ANSWER. NOT IDENTIFIED IN THE TERMS OF REFERENCE, NOT ASSIGNED AS ANERROR, AND
NOT ARGUED IN ANY OF THE PLEADINGS FILED BEFORE THE COURT.

C. THE COURT OF APPEALS SERIOUSLY ERRED IN RELYING ON THE CASE OF AEROSPACE CHEMICAL
INDUSTRIES, INC. v. COURT OF APPEALS, 315 SCRA 94, WHICH HAS NOTHING TO DO WITH CONSTRUCTION
AGREEMENTS.21

Our Ruling

On the procedural issues raised, we find no merit in petitioner’s contention that with the institutionalization of alternative dispute
resolution under Republic Act (R.A.) No. 9285,22 otherwise known as the Alternative Dispute Resolution Act of 2004, the CA was
divested of jurisdiction to review the decisions or awards of the CIAC. Petitioner erroneously relied on the provision in said law allowing
any party to a domestic arbitration to file in the Regional Trial Court (RTC) a petition either to confirm, correct or vacate a domestic
arbitral award.

We hold that R.A. No. 9285 did not confer on regional trial courts jurisdiction to review awards or decisions of the CIAC in construction
disputes. On the contrary, Section 40 thereof expressly declares that confirmation by the RTC is not required, thus:

SEC. 40. Confirmation of Award. – The confirmation of a domestic arbitral award shall be governed by Section 23 of R.A. 876.

A domestic arbitral award when confirmed shall be enforced in the same manner as final and executory decisions of the Regional Trial
Court.

The confirmation of a domestic award shall be made by the regional trial court in accordance with the Rules of Procedure to be
promulgated by the Supreme Court.

A CIAC arbitral award need not be confirmed by the regional trial court to be executory as provided under E.O. No. 1008. (Emphasis
supplied.)

Executive Order (EO) No. 1008 vests upon the CIAC original and exclusive jurisdiction over disputes arising from, or connected with,
contracts entered into by parties involved in construction in the Philippines, whether the dispute arises before or after the completion of
the contract, or after the abandonment or breach thereof. By express provision of Section 19 thereof, the arbitral award of the CIAC is
final and unappealable, except on questions of law, which are appealable to the Supreme Court. With the amendments introduced by
R.A. No. 7902 and promulgation of the 1997 Rules of Civil Procedure, as amended, the CIAC was included in the enumeration of
quasijudicial agencies whose decisions or awards may be appealed to the CA in a petition for review under Rule 43. Such review of the
CIAC award may involve either questions of fact, of law, or of fact and law.23

Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR Rules) promulgated by this Court and which took effect on
October 30, 2009. Since R.A. No. 9285 explicitly excluded CIAC awards from domestic arbitration awards that need to be confirmed to
be executory, said awards are therefore not covered by Rule 11 of the Special ADR Rules,24 as they continue to be governed by EO
No. 1008, as amended and the rules of procedure of the CIAC. The CIAC Revised Rules of Procedure Governing Construction
Arbitration25 provide for the manner and mode of appeal from CIAC decisions or awards in Section 18 thereof, which reads:
SECTION 18.2 Petition for review. – A petition for review from a final award may be taken by any of the parties within fifteen (15) days
from receipt thereof in accordance with the provisions of Rule 43 of the Rules of Court.

As to the alleged error committed by the CA in deciding the case upon an issue not raised or litigated before the CIAC, this assertion
has no basis. Whether or not Mabunay had incurred delay in the performance of his obligations under the Construction Agreement was
the very first issue stipulated in the Terms of Reference26(TOR), which is distinct from the issue of the extent of respondent’s liability
under the Performance Bond.

Indeed, resolution of the issue of delay was crucial upon which depends petitioner’s right to the liquidated damages pursuant to the
Construction Agreement. Contrary to the CIAC’s findings, the CA opined that delay should be reckoned only after the lapse of the one-
year contract period, and consequently Mabunay’s liability for liquidated damages arises only upon the happening of such condition.

We reverse the CA.

Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause imputable to the former. It
is the non-fulfillment of an obligation with respect to time.27

Article 1169 of the Civil Code provides:

ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands
from them the fulfillment of their obligation.

xxxx

It is a general rule that one who contracts to complete certain work within a certain time is liable for the damage for not completing it
within such time, unless the delay is excused or waived.28

The Construction Agreement provides in Article 10 thereof the following conditions as to completion time for the project

1. The CONTRACTOR shall complete the works called for under this Agreement within ONE (1) YEAR or 365 Days reckoned
from the 1st calendar day after signing of the Notice of Award and Notice to Proceed and receipt of down payment.

2. In this regard the CONTRACTOR shall submit a detailed work schedule for approval by OWNER within Seven (7) days after
signing of this Agreement and full payment of 20% of the agreed contract price. Said detailed work schedule shall follow the
general schedule of activities and shall serve as basis for the evaluation of the progress of work by CONTRACTOR.29

In this jurisdiction, the following requisites must be present in order that the debtor may be in default: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially
or extrajudicially.30

In holding that Mabunay has not at all incurred delay, the CA pointed out that the obligation to perform or complete the project was not
yet demandable as of November 19, 2008 when petitioner terminated the contract, because the agreed completion date was still more
than one month away (December 24, 2008). Since the parties contemplated delay in the completion of the entire project, the CA
concluded that the failure of the contractor to catch up with schedule of work activities did not constitute delay giving rise to the
contractor’s liability for damages.

We cannot sustain the appellate court’s interpretation as it is inconsistent with the terms of the Construction Agreement. Article 1374 of
the Civil Code requires that the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken jointly. Here, the work schedule approved by petitioner was intended, not only to serve as its
basis for the payment of monthly progress billings, but also for evaluation of the progress of work by the contractor. Article 13.01 (g) (iii)
of the Construction Agreement provides that the contractor shall be deemed in default if, among others, it had delayed without
justifiable cause the completion of the project "by more than thirty (30) calendar days based on official work schedule duly approved by
the OWNER."31

Records showed that as early as April 2008, or within four months after Mabunay commenced work activities, the project was already
behind schedule for reasons not attributable to petitioner. In the succeeding months, Mabunay was still unable to catch up with his
accomplishment even as petitioner constantly advised him of the delays, as can be gleaned from the following notices of delay sent by
petitioner’s engineer and construction manager, Engr. Sheila N. Botardo:

April 30, 2008

Seven Shades of Blue
Boracay Island
Malay, Aklan

1âwphi1

Attention : Mr. Martin Mabunay

General Manager
Thru : Engr. Reynaldo Gapasin
Project : Villa Beatriz
Subject : Notice of Delay

Dear Mr. Mabunay:

This is to formalize our discussion with your Engineers during our meeting last April 23, 2008 regarding the delay in the implementation
of major activities based on your submitted construction schedule. Substantial delay was noted in concreting works that affects your
roof framing that should have been 40% completed as of this date. This delay will create major impact on your over-all schedule as the
finishing works will all be dependent on the enclosure of the building.

In this regard, we recommend that you prepare a catch-up schedule and expedite the delivery of critical materials on site. We would
highly appreciate if you could attend our next regular meeting so we could immediately address this matter. Thank you.

Very truly yours,

Engr. Sheila N. Botardo

Construction Manager – LMI/FEPI32

October 15, 2008

xxxx

Dear Mr. Mabunay,

We have noticed continuous absence of all the Engineers that you have assigned on-site to administer and supervise your contracted
work. For the past two (2) weeks, your company does not have a Technical Representative manning the jobsite considering the critical
activities that are in progress and the delays in schedule that you have already incurred. In this regard, we would highly recommend the
immediate replacement of your Project Engineer within the week.

We would highly appreciate your usual attention on this matter.

x x x x33

November 5, 2008

xxxx

Dear Mr. Mabunay,

This is in reference to your discussion during the meeting with Mr. Joohan Lee last October 30, 2008 regarding the construction of the
Field Office and Stock Room for Materials intended for Villa Beatriz use only. We understand that you have committed to complete it
November 5, 2008 but as of this date there is no improvement or any ongoing construction activity on the said field office and
stockroom.

We are expecting deliveries of Owner Supplied Materials very soon, therefore, this stockroom is badly needed. We will highly
appreciate if this matter will be given your immediate attention.

Thank you.

x x x x34
November 6, 2008

xxxx

Dear Mr. Mabunay,

We would like to call your attention regarding the decrease in your manpower assigned on site. We have observed that for the past
three (3) weeks instead of increasing your manpower to catch up with the delay it was reduced to only 8 workers today from an average
of 35 workers in the previous months.

Please note that based on your submitted revised schedule you are already delayed by approximately 57% and this will worsen should
you not address this matter properly.

We are looking forward for [sic] your cooperation and continuous commitment in delivering this project as per contract agreement.

x x x x35

Subsequently, a joint inspection and evaluation was conducted with the assistance of the architects and engineers of petitioner and
Mabunay and it was found that as of November 14, 2008, the project was only 31.39% complete and that the uncompleted portion was
68.61% with an estimated value per Construction Agreement asP27,880,419.52. Instead of doubling his efforts as the scheduled
completion date approached, Mabunay did nothing to remedy the delays and even reduced the deployment of workers at the project
site. Neither did Mabunay, at anytime, ask for an extension to complete the project. Thus, on November 19, 2008, petitioner advised
Mabunay of its decision to terminate the contract on account of the tremendous delay the latter incurred. This was followed by the claim
against the Performance Bond upon the respondent on December 18, 2008.

Petitioner’s claim against the Performance Bond included the liquidated damages provided in the Construction Agreement, as follows:

ARTICLE 12 – LIQUIDATED DAMAGES:

12.01 Time is of the essence in this Agreement. Should the CONTRACTOR fail to complete the PROJECT within the period stipulated
herein or within the period of extension granted by the OWNER, plus One (1) Week grace period, without any justifiable reason, the
CONTRACTOR hereby agrees –

a. The CONTRACTOR shall pay the OWNER liquidated damages equivalent to One Tenth of One Percent (1/10 of 1%) of the
Contract Amount for each day of delay after any and all extensions and the One (1) week Grace Period until completed by the
CONTRACTOR.

b. The CONTRACTOR, even after paying for the liquidated damages due to unexecuted works and/or delays shall not relieve
it of the obligation to complete and finish the construction.

Any sum which maybe payable to the OWNER for such loss may be deducted from the amounts retained under Article 9 or retained by
the OWNER when the works called for under this Agreement have been finished and completed.

Liquidated Damage[s] payable to the OWNER shall be automatically deducted from the contractors collectibles without prior consent
and concurrence by the CONTRACTOR.

12.02 To give full force and effect to the foregoing, the CONTRACTOR hereby, without necessity of any further act and deed,
authorizes the OWNER to deduct any amount that may be due under Item (a) above, from any and all money or amounts due or which
will become due to the CONTRACTOR by virtue of this Agreement and/or to collect such amounts from the Performance Bond filed by
the CONTRACTOR in this Agreement.36 (Emphasis supplied.)

Liability for liquidated damages is governed by Articles 2226 to 2228 of the Civil Code, which provide:

ART. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof.

ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable.

ART. 2228. When the breach of the contract committed by the defendant is not the one contemplated by the parties in agreeing upon
the liquidated damages, the law shall determine the measure of damages, and not the stipulation.
A stipulation for liquidated damages is attached to an obligation in order to ensure performance and has a double function: (1) to
provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the
event of breach.37 The amount agreed upon answers for damages suffered by the owner due to delays in the completion of the
project.38 As a precondition to such award, however, there must be proof of the fact of delay in the performance of the obligation.39

Concededly, Article 12.01 of the Construction Agreement mentioned only the failure of the contractor to complete the project within the
stipulated period or the extension granted by the owner. However, this will not defeat petitioner’s claim for damages nor respondent’s
liability under the Performance Bond. Mabunay was clearly in default considering the dismal percentage of his accomplishment
(32.38%) of the work he contracted on account of delays in executing the scheduled work activities and repeated failure to provide
sufficient manpower to expedite construction works. The events of default and remedies of the Owner are set forth in Article 13, which
reads:

ARTICLE 13 – DEFAULT OF CONTRACTOR:

13.01 Any of the following shall constitute an Event of Default on the part of the CONTRACTOR.

xxxx

g. In case the CONTRACTOR has done any of the following:

(i.) has abandoned the Project

(ii.) without reasonable cause, has failed to commence the construction or has suspended the progress of the Project for
twenty-eight days

(iii.) without justifiable cause, has delayed the completion of the Project by more than thirty (30) calendar days based on official
work schedule duly approved by the OWNER

(iv.) despite previous written warning by the OWNER, is not executing the construction works in accordance with the
Agreement or is persistently or flagrantly neglecting to carry out its obligations under the Agreement.

(v.) has, to the detriment of good workmanship or in defiance of the Owner’s instructions to the contrary, sublet any part of the
Agreement.

13.02 If the CONTRACTOR has committed any of the above reasons cited in Item 13.01, the OWNER may after giving fourteen (14)
calendar days notice in writing to the CONTRACTOR, enter upon the site and expel the CONTRACTOR therefrom without voiding this
Agreement, or releasing the CONTRACTOR from any of its obligations, and liabilities under this Agreement. Also without diminishing or
affecting the rights and powers conferred on the OWNER by this Agreement and the OWNER may himself complete the work or may
employ any other contractor to complete the work. If the OWNER shall enter and expel the CONTRACTOR under this clause, the
OWNER shall be entitled to confiscate the performance bond of the CONTRACTOR to compensate for all kinds of damages the
OWNER may suffer. All expenses incurred to finish the Project shall be charged to the CONTRACTOR and/or his bond. Further, the
OWNER shall not be liable to pay the CONTRACTOR until the cost of execution, damages for the delay in the completion, if any, and
all; other expenses incurred by the OWNER have been ascertained which amount shall be deducted from any money due to the
CONTRACTOR on account of this Agreement. The CONTRACTOR will not be compensated for any loss of profit, loss of goodwill, loss
of use of any equipment or property, loss of business opportunity, additional financing cost or overhead or opportunity losses related to
the unaccomplished portions of the work.40 (Emphasis supplied.)

As already demonstrated, the contractor’s default in this case pertains to his failure to substantially perform the work on account of
tremendous delays in executing the scheduled work activities. Where a party to a building construction contract fails to comply with the
duty imposed by the terms of the contract, a breach results for which an action may be maintained to recover the damages sustained
thereby, and of course, a breach occurs where the contractor inexcusably fails to perform substantially in accordance with the terms of
the contract.41

The plain and unambiguous terms of the Construction Agreement authorize petitioner to confiscate the Performance Bond to answer for
all kinds of damages it may suffer as a result of the contractor’s failure to complete the building. Having elected to terminate the
contract and expel the contractor from the project site under Article 13 of the said Agreement, petitioner is clearly entitled to the
proceeds of the bond as indemnification for damages it sustained due to the breach committed by Mabunay. Such stipulation allowing
the confiscation of the contractor’s performance bond partakes of the nature of a penalty clause. A penalty clause, expressly
recognized by law, is an accessory undertaking to assume greater liability on the part of the obligor in case of breach of an obligation. It
functions to strengthen the coercive force of obligation and to provide, in effect, for what could be the liquidated damages resulting from
such a breach. The obligor would then be bound to pay the stipulated indemnity without the necessity of proof on the existence and on
the measure of damages caused by the breach. It is well-settled that so long as such stipulation does not contravene law, morals, or
public order, it is strictly binding upon the obligor.42
Respondent, however, insists that it is not liable for the breach committed by Mabunay because by the terms of the surety bond it
issued, its liability is limited to the performance by said contractor to the extent equivalent to 20% of the down payment. It stresses that
with the 32.38% completion of the project by Mabunay, its liability was extinguished because the value of such accomplishment already
exceeded the sum equivalent to 20% down payment (P8.4 million).

The appellate court correctly rejected this theory of respondent when it ruled that the Performance Bond guaranteed the full and faithful
compliance of Mabunay’s obligations under the Construction Agreement, and that nowhere in law or jurisprudence does it state that the
obligation or undertaking by a surety may be apportioned.

The pertinent portions of the Performance Bond provide:

The conditions of this obligation are as follows:

Whereas the JPLUS ASIA, requires the principal SEVEN SHADES OF BLUE CONSTRUCTION AND DEVELOPMENT, INC. to post a
bond of the abovestated sum to guarantee 20% down payment for the construction of Building 25 (Villa Beatriz) 72-Room Condotel,
The Lodgings inside Fairways and Bluewater, Boracay Island, Malay, Aklan.

Whereas, said contract required said Principal to give a good and sufficient bond in the above-stated sum to secure the full and faithful
performance on his part of said contract.

It is a special provision of this undertaking that the liability of the surety under this bond shall in no case exceed the sum
of P8,400,000.00 Philippine Currency.

Now, Therefore, if the Principal shall well and truly perform and fulfill all the undertakings, covenants, terms, conditions and agreements
stipulated in said contract, then this obligation shall be null and void; otherwise to remain in full force and effect.43 (Emphasis supplied.)

While the above condition or specific guarantee is unclear, the rest of the recitals in the bond unequivocally declare that it secures the
full and faithful performance of Mabunay’s obligations under the Construction Agreement with petitioner. By its nature, a performance
bond guarantees that the contractor will perform the contract, and usually provides that if the contractor defaults and fails to complete
the contract, the surety can itself complete the contract or pay damages up to the limit of the bond.44 Moreover, the rule is that if the
language of the bond is ambiguous or uncertain, it will be construed most strongly against a compensated surety and in favor of the
obligees or beneficiaries under the bond, in this case petitioner as the Project Owner, for whose benefit it was ostensibly executed.45

The imposition of interest on the claims of petitioner is likewise in order. As we held in Commonwealth Insurance Corporation v. Court
of Appeals46

Petitioner argues that it should not be made to pay interest because its issuance of the surety bonds was made on the condition that its
liability shall in no case exceed the amount of the said bonds.

We are not persuaded. Petitioner’s argument is misplaced.

Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co. and reiterated in Plaridel Surety &
Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., and more recently, in Republic vs. Court of Appeals and R & B Surety and
Insurance Company, Inc., we have sustained the principle that if a surety upon demand fails to pay, he can be held liable for interest,
even if in thus paying, its liability becomes more than the principal obligation. The increased liability is not because of the contract but
because of the default and the necessity of judicial collection.

Petitioner’s liability under the suretyship contract is different from its liability under the law.1âwphi1 There is no question that as a
surety, petitioner should not be made to pay more than its assumed obligation under the surety bonds. However, it is clear from the
above-cited jurisprudence that petitioner’s liability for the payment of interest is not by reason of the suretyship agreement itself but
because of the delay in the payment of its obligation under the said agreement.47 (Emphasis supplied; citations omitted.)

WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated January 27, 2011 and Resolution dated
December 8, 2011 of the Court of Appeals in CA-G.R. SP No. 112808 are hereby REVERSED and SET ASIDE.

The Award made in the Decision dated February 2, 2010 of the Construction Industry Arbitration Commission Is hereby REINSTATED
with the following MODIFICATIONS:

"Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders and directs:

1) Respondent Utassco to pay to petitioner J Plus Asia Development Corporation the full amount of the Performance
Bond, P8,400,000.00, pursuant to Art. 13 of the Construction Agreement dated December 24, 2007, with interest at the rate of
 6% per annum computed from the date of the filing of the complaint until the finality of this decision, and 12% per annum
computed from the date this decision becomes final until fully paid; and

2) Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have paid to claimant
under this decision, plus interest thereon at the rate of 12% per annum computed from the date he is notified of such payment
made by respondent Utassco to claimant until fully paid, and to pay Utassco P100,000.00 as attorney's fees.

SO ORDERED.

With the above modifications, the Writ of Execution dated November 24, 2010 issued by the CIAC Arbitral Tribunal in CIAC Case No.
03-2009 is hereby REINSTATED and UPHELD.

No pronouncement as to costs.

SO ORDERED.

MARTIN S. VILLARAMA, JR.

Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 181983               November 13, 2013

CONSOLIDATED INDUSTRIAL GASES, INC., Petitioner, 

vs.
ALABANG MEDICAL CENTER, Respondent.

DECISION

REYES, J.:

This is a petition for review on Certiorari1 under Rule 45 of the Rules of Court seeking to annul and set aside the Amended
Decision2 dated March 4, 2008 of the Court of Appeals CA) in CA-G.R. CV No. 84988 which, among others, reversed the
Decision3 dated June 30, 2004 of the Regional Trial Court (RTC) of Mandaluyong City, Branch 213, finding respondent Alabang
Medical Center (AMC) to have breached its contract with petitioner Consolidated Industrial Gases, Inc. (CIGI).

The Antecedents

CIGI is a domestic corporation engaged in the business of selling industrial gases (i.e., oxygen, hydrogen and acetylene) and installing
centralized medical and vacuum pipeline system. Respondent AMC, on the other hand, is a domestic corporation operating a hospital
business.

On August 14, 1995, CIGI, as contractor and AMC, as owner, entered into a contract4 whereby the former bound itself to provide labor
and materials for the installation of a medical gas pipeline system for the first, second and third floors (Phase 1 installation project) of
the hospital for the contract price of Nine Million Eight Hundred Fifty-Six Thousand Seven Hundred Twenty-Five Pesos and 18/100
(P9,856,725.18) which AMC duly paid in full.

The herein legal controversy arose after the parties entered into another agreement on October 3, 1996 this time for the continuation of
the centralized medical oxygen and vacuum pipeline system in the hospital’s fourth & fifth floors (Phase 2 installation project) at the cost
of Two Million Two Hundred Sixty-Seven Thousand Three Hundred Forty-Four Pesos and 42/100 (P2,267,344.42). This second
contract followed the same terms and conditions of the contract for the Phase 1 installation project. CIGI forthwith commenced
installation works for Phase 2 while AMC paid the partial amount of One Million Pesos (P1,000,000.00) with the agreement that the
balance shall be paid through progress billing and within fifteen (15) days from the date of receipt of the original invoice sent by CIGI.5

On August 4, 1997, CIGI sent AMC Charge Sales Invoice No. 125847 as completion billing for the unpaid balance of P1,267,344.42 for
the Phase 2 installation project. When the sales invoice was left unheeded, CIGI sent a demand letter to AMC on January 7, 1998.
AMC, however, still failed to pay thus prompting CIGI to file a collection suit before the RTC on September 15, 1998.6

CIGI claimed that AMC’s obligation to pay the outstanding balance of the contract price for the Phase 2 installation project is already
due and demandable pursuant to Article II, page 4 of the contract stating that the project shall be paid through progress billing within
fifteen (15) days from the date of receipt of original invoice.

In its Answer with Counterclaim,7 AMC averred that its obligation to pay the balance of the contract price has not yet accrued because
CIGI still has not turned over a complete and functional medical oxygen and vacuum pipeline system. AMC alleged that CIGI has not
yet tested Phases 1 and 2 which constitute one centralized medical oxygen and vacuum pipeline system of the hospital despite
substantial payments already made. As counterclaim, AMC prayed for actual, moral and exemplary damages, and attorney’s fees.

During trial, CIGI presented the testimonies of its officers, James Rodriguez Gillego (Gillego), Credit Manager and Marcelino Tolentino
(Tolentino), Installation Manager. Gillego confirmed the unpaid balance of AMC as well as its additional liabilities for interest and
penalty charges at 17% per annum and 2% per month, respectively.8

Tolentino, on the other hand, declared that CIGI failed to test the installed system because AMC did not supply the necessary electrical
power.9 He claimed that they finished the installation project in October 1997 or within the period specified in the contract.10 CIGI
verbally notified Dr. Anita Ty (Dr. Ty), AMC’s Medical Director, on the need for electrical power for the test run but she did not respond.
On August 23, 1999, they put the request in writing.11
Tolentino also stated that Phase 2 is an extension of the Phase 1 installation project such that both phases are not independent of each
other. If Phase 2 is not subjected to test run, Phase 1 will not run.12 It was Mr. Gavino Pineda (Pineda), his supervisor, and not him, who
personally informed Dr. Ty that CIGI is ready to conduct a test run.13

Tolentino admitted that, contrary to what was agreed in the contract, CIGI has not conducted commissioning and lecture on the proper
operation and preventive maintenance of the installed system and that the said seminar/orientation does not require the use of
electricity.14 However, the seminar can only be conducted once they have already fully turned over the system which can only happen
after they have performed a test run, which likewise did not materialize because AMC did not supply the necessary electrical power.15

AMC presented Dr. Ty and Melinda Constantino (Constantino), account and administrative officer of AMC. Dr. Ty testified that the
payment of the unpaid balance is not yet due because the project is incomplete, defective and non-functional.16 She claimed that CIGI
failed to comply with its obligation under paragraph 12 of the October 3, 1996 contract for Phase 2 installation project stating that the
scope of CIGI’s work shall include pressure drop, leak testing, painting/color coding and test run of the installed centralized medical
oxygen and vacuum pipeline system.17 On cross-examination, Dr. Ty asserted that as agreed, the balance of the contract price shall be
paid once CIGI finishes its work under the contract.18 She denied receiving any request from CIGI regarding the installation of electricity
for purposes of test run. She claimed that CIGI brought up the matter on electricity when it was already collecting the unpaid balance
but no such request was made prior to their demand for payment.19Before the hospital became operational, it was equipped with
electrical facilities for construction which can adequately support the power need of a mere test run.20

Constantino testified on the total payments already made by AMC to CIGI in the sum of P10,856,000.00 as shown by several
Metropolitan Bank (Metrobank) checks payable to CIGI marked as Exhibits "5" to "5-1".21

CIGI submitted in evidence photographs of allegedly defective and incomplete parts of the installed medical oxygen and vacuum
pipeline system, such as: (a) a rusting pendant which is supposed to be stainless and anti-rust; (b) incomplete assembly of alarm
system; (c) incomplete assembly of isolation valve; and (d) incomplete electrical wiring of Pegasus and leaking oil.22

On June 11, 2003, AMC filed a Motion for Leave of Court to Admit Amended Answer with Counterclaims23seeking, in addition, the
rescission of the subject contracts, return of its payment of P10,856,000.00 for an unfinished project. AMC also asked that it be
recompensed in the sum of P17,220,084.90 for interest expense on the loans obtained from Metrobank which were used to fund the
installation projects. It further averred that CIGI’s failure to complete the system is shown not only in its failure to conduct the agreed
test run and orientation/seminar but also in the patently defective and incomplete parts of the installation.

In its Order24 dated September 11, 2003, the RTC denied the motion because its admission will compel CIGI to substantially alter the
presentation of its evidence and thus delay the resolution of the case. The RTC further reasoned that AMC’s failure to amend its
answer will not affect the result of the trial.

Ruling of the RTC

After the parties have submitted their respective memorandum, the RTC rendered its Decision25 dated June 30, 2004, wherein it
adjudged AMC to have breached the contract for failure to perform its obligation of paying the remaining balance of the contract price.
CIGI, on the other hand, was found to have faithfully complied with its contractual obligations. In so ruling, the RTC relied on Tolentino’s
testimony that they were unable to test run the installed system because AMC failed to provide the necessary electrical power despite
repeated requests made to Dr. Ty.26 AMC’s counterclaim for damages was dismissed. Accordingly, the decision disposed as follows:

Prescinding from the foregoing considerations, judgment is hereby rendered in favor of the [petitioner] CONSOLIDATED INDUSTRIAL
GASES, INC., and against the [respondent] ALABANG MEDICAL CENTER represented by its owner/Chairman of the Board Anita Ty.
The counterclaim is likewise, accordingly ordered D[IS]MISSED.

As PRAYED FOR, the [respondent] is hereby ordered:

[a] To pay the amount of ONE MILLION TWO HUNDRED SIXTY[-]SEVEN THOUSAND THREE HUNDRED FORTY[-]FOUR
AND 42/100 [Php 1,267,344.42] Philippine Currency, representing the balance of the principal obligations.

[b] To pay the corresponding legal interest until said obligation shall have been paid and settled and cost of suit.

SO ORDERED.27

Ruling of the CA

AMC appealed to the CA which in its Decision28 dated September 14, 2007 granted the appeal and reversed the RTC judgment. The
CA ruled that it was CIGI who breached the contract when it failed to complete the project and to turn over a fully functional centralized
medical oxygen and vacuum pipeline system. Consequently, the CA declared the complaint dismissed and ordered CIGI to
correct/replace the defective parts installed. AMC was adjudged entitled to attorney’s fees for CIGI’s unfounded action. AMC’s
counterclaim for P17,220,084.90 as actual damages representing alleged interest payments on the loans it obtained from Metrobank
was denied for lack of factual and legal basis. The decretal portion of the Decision reads:

WHEREFORE, the decision of the Regional Trial Court dated June 30, 2004 is hereby REVERSED and SET ASIDE. The complaint is
hereby dismissed and CIGI is hereby ordered to pay AMC the sum of P50,000.00 by way of attorney’s fees plus costs.

SO ORDERED.29

AMC moved for partial reconsideration raising the propriety of its counterclaim for the refund of theP10,856,725.18 paid to CIGI since
the project never became operational.30

In its Comment31 and own Motion for Reconsideration32, CIGI countered that a refund will amount to rescission, an issue which was
denied deliberation by the RTC. As such, the same cannot be raised and threshed out for the first time on appeal. CIGI shifted the
blame to AMC and claims that it could have easily conducted a test run on the system if the latter supplied the electricity needed in
accordance with the contract. Anent the alleged defective parts, CIGI asserted that it is highly suspect for AMC to raise the same four
years after the filing of the complaint. CIGI also stated that being idle and exposed to various elements, the condition of certain parts of
the system will definitely deteriorate.

The CA re-examined its earlier decision and issued an Amended Decision33 dated March 4, 2008. It took into consideration AMC’s
manifestation that it is willing to pay the balance of P1,267,344.42 on the condition that CIGI will turn over a fully functional centralized
medical oxygen and vacuum pipeline system.34 The CA found that CIGI reneged on its obligation under the contract when it failed to
test run the installed system. The Amended Decision disposed as follows, viz:

WHEREFORE, this Amended Decision is rendered [PARTIALLY] GRANTING AMC’s Partial Motion for Reconsideration dated 25
September 2007. Accordingly, CIGI is given a reasonable period of sixty (60) days from the finality of this Decision to correct and/or
replace the defective parts mentioned in this Decision and turn over a fully functional centralized medical oxygen and vacuum pipeline
system. AMC, in turn, is directed to provide the required facilities such as water and electricity during installation free of charge and to
pay within five (5) days from the turn over the unpaid balance in the sum of P1,267,344.42 to CIGI. Failure of CIGI to turn over a fully
functional centralized medical oxygen and vacuum pipeline system will result to the rescission of the contract. As a legal consequence,
within ten (10) days from the rescission of the contract CIGI should return the sum ofP10,856,725.18 to AMC and remove the materials
and equipments it installed at AMC within ninety (90) days from the rescission of the contract, at its own expense. The motion for
reconsideration dated 08 October 2007 filed by CIGI is DENIEDfor lack of merit. The Decision dated 30 June 2004 of the Regional Trial
Court is hereby REVERSED and SET ASIDE. The complaint is dismissed and CIGI is ordered to pay AMC the sum of P50,000.00 by
way of attorney’s fees plus costs.

SO ORDERED.35

Dismayed, CIGI interposed the present recourse alleging, in the main, that the CA committed misapprehension of facts. CIGI
maintained that AMC refused to provide the necessary electrical facilities for the test run and that under the contract, CIGI was merely
required to provide labor and materials. CIGI averred that the CA erred in relying on the testimony of Tolentino because he never
specifically declared that CIGI did not complete the project. CIGI prayed that the decision of the RTC ordering AMC to pay the balance
of the contract price be reinstated.

The Issue

The core issue for resolution is whether or not CIGI’s demand for payment upon AMC is proper.

Ruling of the Court

Primarily, the arguments proffered by CIGI involve questions of fact which are beyond the scope of the Court’s judicial review under
Rule 45 of the Rules of Court. It is a settled rule that the Court examines only questions of law on appeal and not questions of facts.
However, jurisprudence has recognized several exceptions in which factual issues may be resolved by the Court, such as when the
factual findings of the courts a quo are conflicting,36 as in this case.

The incongruity in the findings of the RTC and CA is conspicuous. On one hand, the RTC granted CIGI’s complaint for sum of money
and adjudged AMC as the defaulting party. On the other hand, the CA, while sustaining AMC’s liability for CIGI’s monetary claim, held
the latter as the party who breached the installation contracts. A review of the contradicting findings of the courts a quo is thus in order
so as to finally settle the conflicting claims of the parties.

The subject installation contracts

bear the features of reciprocal
obligations.
"Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such
that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously, so that the
performance of one is conditioned upon the simultaneous fulfillment of the other."37 In reciprocal obligations, neither party incurs in
delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one
of the parties fulfils his obligation, delay by the other begins.38

Under the subject contracts, CIGI as contractor bound itself to install a centralized medical oxygen and vacuum pipeline system for the
first to fifth floors of AMC, which in turn, undertook to pay the contract price therefor in the manner prescribed in the contract. Being
reciprocal in nature, the respective obligations of AMC and CIGI are dependent upon the performance of the other of its end of the deal
such that any claim of delay or non-performance can only prosper if the complaining party has faithfully complied with its own
obligation.

Here, CIGI complains that AMC refused to abide by its undertaking of full payment. While AMC does not dispute its liability to pay the
balance of P1,267,344.42 being claimed by CIGI, it asserts, however that the same is not yet due because CIGI still has not turned over
a complete and functional medical oxygen and vacuum pipeline system. CIGI is yet to conduct a test run of the installation and an
orientation/seminar of AMC employees who will be involved in the operation of the system. CIGI, on the other hand, does not deny that
it failed to conduct the agreed orientation/seminar and test run but it blames AMC for such omission and asserts that the latter failed to
heed CIGI’s request for electrical facilities necessary for the test run. CIGI also contends that its obligation is merely to provide labor
and installation.

The Court has painstakingly evaluated the records of the case and based thereon, there can be no other conclusion than that CIGI’s
allegations failed to muster merit. The Court finds that CIGI did not faithfully complete its prestations and hence, its demand for
payment cannot prosper based on the following grounds: (a) under the two installation contracts, CIGI was bound to perform more
prestations than merely supplying labor and materials; and (b) CIGI failed to prove by substantial evidence that it requested AMC for
electrical facilities as such, its failure to conduct a test run and orientation/seminar is unjustified.

A. Under the installation

contracts, CIGI was bound to
perform more prestations than
merely supplying labor and
materials.

It is hornbook doctrine in the law on contracts that the parties are bound by the stipulations, clauses, terms and conditions they have
agreed to provided that such stipulations, clauses, terms and conditions are not contrary to law, morals, public order or public
policy.39 In the present case, we find no legal proscription infringed by the terms and conditions of the contracts between AMC and
CIGI. As such, the said terms and conditions must be held to be the law between them40 and the parties are bound to fulfill what has
been stipulated.

Both of the installation contracts clearly show that CIGI undertook to carry out more prestations than merely supplying labor and
materials for the medical oxygen and vacuum pipeline system. CIGI agreed also: (a) to perform a pressure drop, leak testing, test run,
painting/color coding of the installed centralized medical oxygen, vacuum and nitrous oxide pipeline system; and (b) to conduct
orientation, seminars and training for the AMC employees who will be involved in the operation of the centralized pipeline system before
the formal turnover of the project. This is evident from the herein reproduced provisions of the installation contracts.

Article I of the Phase 1 installation contract enumerates the following undertakings of CIGI, viz:

1.1 Preparation and delivery of materials, tools and equipment from CIGI, Mandaluyong, to Alabang Medical Center’s site of
installation.

1.2 Degreasing and proper cleaning of deoxidized hard seamless copper tubes, fittings, valves and other parts prior to
installations.

1.3 Supply, fabrication and installation of necessary brackets and clamps to comply with the standard Medical gas pipeline and
other equipment installation.

1.4 Chiseling, boring and re-plastering of affected concrete walls for pipeline route.

[1.5 -1. 23 Supply and installation of various structures and parts of the medical oxygen and vacuum pipeline system].

1.24 Pressure drop, leak testing, test-run, painting/color coding of the installed centralized medical oxygen, vacuum and
nitrous oxide pipeline system.41 (Emphasis ours)

Meanwhile, Phase 2 installation contract, which follows the same terms and conditions of the Phase 1 installation contract, itemizes the
prestations due from CIGI as follows:
 1. Preparation and delivery of materials, tools and equipment from CIGI-Head Office to Alabang Medical Center site of
installation.

2. Degreasing and proper cleaning of deoxidized hard seamless copper tubes, fittings, valves and other parts prior to
installation.

3. Chiselling, boring and replastering of affected concrete walls for pipeline route.

4. Supply, fabrication and installation necessary brackets and clamps to comply with the standard medical gases pipeline and
other equipment installation.

5. Supply, layout and installation of deoxidized hard seamless copper tubes and fittings and to be tapped from the existing
riser of medical oxygen and vacuum pipeline system installed at third floor.

6. Supply and installation of two (2) units OHMEDA flush mount wall type isolation valve panel, each equipped with shut-off
valve for oxygen and vacuum pipeline with corresponding pressure indicator.

7. Supply and installation of sixty[-]nine (69) sets OHMEDA flush mount wall type medical Oxygen and Vacuum Outlets, each
consist of rough-in and finish assembly.

xxxx

8. Supply and installation of sixty[-]nine (69) sets MEDAES DISS III flush mount wall type medical vacuum outlets, each
consists of rough in and finish assembly.

9. Supply and installation of sixty[-]nine (69) sets MEDAES stainless steel surface mount wall type vacuum bottle slides each
complete with stainless mounting screw.

10. Supply and installation of two (2) sets MEDAES Area Line Pressure Alarm for Oxygen and Vacuum Pipeline System, each
equipped with pressure switch, pressure indicator, lights indicator for each gas supply status and necessary electrical wiring
materials which are to be installed at the Nurses station of Fourth Floor.

11. Supply of [certain] secondary equipments.

xxxx

12. Pressure drop, leak testing, painting/color coding and test run of the installed centralized medical oxygen and vacuum
pipeline system.42 (Emphasis ours)

Anent the conduct of orientation/seminar on the operation of the centralized medical oxygen and vacuum pipeline system, both
contracts state:

Article 10 of Phase 1 installation contract:

10. SEMINARS/TRAINING:

The CONTRACTOR shall conduct orientation, seminars and training to the center’s employees involved in the operation of the
centralized pipeline system before the formal turn-over of the project. Such training includes proper operation and preventive
maintenance of the system.43

Articles VI(c) and VII(3) of Phase 2 installation contract:

c. Seminars/Training

CIGI shall conduct orientation, seminars and training to AMC’s employees involved in the operation of the centralized pipeline system
before the formal turn-over of the project. Such training includes proper operation and preventive [sic]

xxxx

3. CIGI to execute all necessary commissioning and lecture re-proper operation and preventive maintenance of the installed system
and shall hand-over to Alabang Medical Center fully operational.44
Clearly, CIGI’s reciprocal obligation was not merely to supply labor and materials for the project. It is unmistakable from the foregoing
contractual provisions that CIGI agreed to carry out a test run of the installation as well as to conduct an orientation/seminar of AMC
employees who will be involved in its operation. CIGI cannot be permitted to disregard the binding effect of the contracts it voluntarily
assumed by conveniently renouncing its above-mentioned contractual commitments. Otherwise, the sanctity of its contracts with AMC
will be defiled.

B. CIGI failed to prove by

substantial evidence that it
requested AMC for electrical
facilities as such, its failure to
conduct a test run and
orientation/seminar is unjustified.

CIGI failed to amply support its allegation that it requested for electrical facilities from AMC. Tolentino, CIGI’s installation manager,
testified that on August 23, 1999 they requested in writing for the electrical facilities but no evidence of such document was submitted. It
is but a self-serving allegation, which by law is not equivalent to proof.45 In addition, Pineda, the one who actually sent the request was
not presented as witness thereby making Tolentino’s statement mere hearsay evidence bearing no probative value.

Settled is the rule that a witness can testify only to those facts which he knows of his personal knowledge, which means those facts
which are derived from his own perception. A witness may not testify as to what he merely learned from others either because he was
told or read or heard the same. Such testimony is considered hearsay and may not be received as proof of the truth of what he has
learned.46

While Tolentino’s testimony may be considered as independently relevant statement and may be admitted as to the fact that Pineda
made utterances to him about the request for electricity, it is still inadequate to support the claim that AMC reneged on its obligation to
provide electrical facilities. Admissibility of testimony should not be equated with its weight and sufficiency. Admissibility of evidence
depends on its relevance and competence, while the weight of evidence pertains to evidence already admitted and its tendency to
convince and persuade.47 Here, the Court finds no reason to doubt and overturn the CA’s evaluation of Tolentino’s testimony.

Even assuming that CIGI indeed made such request, it is unbelievable for AMC not to furnish electrical facilities. As correctly observed
by the CA, it is unlikely for AMC not to spend minimal amount for the test run and risk the completion of its multi-million peso medical
oxygen and vacuum pipeline system. Further, the language of Article VII(2) of the Phase 2 installation contract, which embodies AMC’s
duty to provide electrical facilities for the test run, indicates the availability of electrical facilities in the installation site such that AMC
needed only to allow CIGI personnel/technicians to use or access the same, viz:

2. Alabang Medical Center to allow CIGI personnel/technicians to utilize the required facilities such as water and power during
installation free of charge.48

It is thus highly improbable for AMC to deny CIGI personnel and technicians mere access to already existing electrical facilities and
thereby jeopardize the operations of the hospital.

From the foregoing, it is clear

that AMC’s obligation to pay
and CIGI’s right to demand the
unpaid balance for the Phase 2
installation project have not yet
accrued.

For failure to prove that it requested for electrical facilities from AMC, the undisputed matter remains – CIGI failed to conduct the
stipulated test run and seminar/orientation. Consequently, the dismissal of CIGI’s collection suit is imperative as the balance of the
contract price is not yet demandable. For having failed to perform its correlative obligation to AMC under their reciprocal contract, CIGI
cannot unilaterally demand for the payment of the remaining balance by simply sending an invoice and billing statement to the former.
Its right to demand for and collect payment will only arise upon its completion of ALL its prestations under the subject contracts.

In reciprocal obligations, before a party can demand the performance of the obligation of the other, the former must also perform its
own obligation.49 For its failure to turn over a complete project in accordance with the terms and conditions of the installation contracts,
CIGI cannot demand for the payment of the contract price balance from AMC, which, in turn, cannot legally be ordered to pay.
Otherwise, AMC will be effectively forced to accept an incomplete performance contrary to Article 1248 of the Civil Code which states
that "(u)nless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which
the obligation consists."

Considering that AMC’s obligation to pay the balance of the contract price did not accrue, the stipulated interest thereon also did not
begin to run.
CIGI also failed to fully comply
with its prestations under the
Phase 1 installation contract.

It must be noted that, although Phases 1 and 2 installation projects are covered by separate contracts, they nonetheless comprise one
centralized medical oxygen system such that the agreed test run and seminar/orientation under the Phase 1 contract cannot be
performed unless and until the Phase 2 installation project is finished and completed.50 In other words, both phases will have to undergo
a single and simultaneous test run and orientation on their manner of operation.

As such, while the subject of the herein complaint for sum of money pertained only to the Phase 2 installation contract, the violations
committed by CIGI that prevented its cause of action to accrue broadly affected the initially non-issue Phase 1 contract.

It having been established that CIGI’s avowed but infringed duty to perform a test run and orientation/seminar was contained in both
Phases 1 and 2 installation contracts, it is imperative to declare that it is liable not only for the herein subject Phase 2 contract but under
the Phase 1 contract as well so as to arrive at an absolute and comprehensive resolution of the impasse between the parties.

Hence, regardless of whether or not the Phases 1 and 2 installation projects are independent of each other, CIGI violated the terms of
the individual contracts for both.
The foregoing pronouncement
notwithstanding, the Court finds
that the breach committed by CIGI
does not justify the rescission of the
installation contracts.

The denial of AMC’s amended counterclaim specifically praying for rescission does not bar a discussion of such issue on appeal.
Rescission was pleaded in AMC’s original Answer with Counterclaim when it implored the RTC for "other reliefs and remedies
consistent with law and equity are prayed for."51 The standing rule is that "[t]he prayer in the complaint for other reliefs equitable and
just in the premises justifies the grant of a relief not otherwise specifically prayed for."52 This rule conveys the inference that reliefs not
specifically pleaded but included in a general prayer for other equitable reliefs may be threshed out by the courts.

The Court, however, finds that AMC has no legal basis to demand the rescission of the installation contracts. "[R]escission of a contract
will not be permitted for a slight or casual breach, but only for such substantial and fundamental violations as would defeat the very
object of the parties in making the agreement. Whether a breach is substantial is largely determined by the attendant
circumstances."53 The provisions on the test run of and seminar on the medical oxygen system are not essential parts of the installation
contracts as they do not constitute a vital fragment/part of the centralized medical oxygen system.

Further, the allegedly defective and incomplete parts cannot substantiate rescission. The photographs submitted by AMC are not
adequate to establish that certain parts of the installed system are indeed defective or incomplete especially so that the installation
never became operational. Unless and until the medical oxygen and vacuum pipeline actually runs, there is no way of conclusively
verifying that some of its parts are defective or incomplete. In addition, AMC failed to allege much less show whether the alleged
defects and incomplete components were caused by factory defect, negligence on the part of CIGI or ordinary wear and tear.

At any rate, the parties have specified clauses in the subject contracts to answer for such contingency.1awp++i1 Article VI(b) of the
Phase 2 installation contract provides:

VI. CONDITIONS:

xxxx

b. Warranty

CIGI guarantees all materials involved against factory defect for one (1) year period from the date of project completion. CIGI shall also
provide maintenance services for this pipeline project after the one (1) year warranty period provided that Alabang Medical Center shall
purchase its Medical Gases requirements exclusively to CIGI. [sic]

During the lifetime of the Supply of Medical Gases Contract, CIGI shall undertake the maintenance of the system on a semi-annual
basis which shall include visual leak testing and minor repairs and spare parts for replacement shall be "Free of Charge". Major repairs
and spare parts for replacement shall be charged to [A]labang Medical Center on a cost plus basis.54 [sic]

Article 4.1 of the Phase 1 installation contract contains similar terms, viz:

4.1 The CONTRACTOR guarantees all materials involved against factory defect for one (1) year period from the date of project
completion. CONTRACTOR shall also provide maintenance services for this pipeline project after the one (1) year warranty period
provided that the ‘OWNER" shall purchase its Medical gases requirements exclusively to the CONTRACTOR. [sic]
During the lifetime of the SUPPLY CONTRACT, the CONTRACTOR shall undertake the maintenance of the system on semi-annual
basis which shall include visual leak testing and minor repairs which shall be "Free of Charge". Major repairs and spare parts for
replacement shall be charged to Customer on a cost plus basis.55

Since, as discussed above, the agreed test run and orientation/seminar for both Phases 1 and 2 installation projects were yet to be
performed, both projects are not yet complete and the one year warranty period has not yet commenced to run.

In view of the fact that rescission is not permissible, the installation contracts of the parties stand and the terms thereof must be duly
fulfilled. CIGI is obliged to comply with its undertakings to conduct a test run and hold a seminar/orientation of concerned AMC
employees, after which, turn over the system fully functional and operational to AMC. Simultaneously with the turnover, AMC shall pay
the remaining balance of P1,267,344.42 to CIGI.

Also, the Court finds it proper that after CIGI has turned over a complete and functional medical oxygen and vacuum pipeline system, it
must be given the opportunity to inspect the allegedly defective and incomplete parts. The results of such inspection will in turn
determine which part of the aforementioned warranty clauses shall govern.

AMC is not entitled to actual damages. AMC is not entitled to actual damages representing interest payments on the loan it obtained
from Metrobank in order to fund the installation projects. For damages to be recovered, the best evidence obtainable by the injured
party must be presented. Actual or compensatory damages cannot be presumed, but must be proved with reasonable degree of
certainty. The Court cannot rely on speculation, conjecture or guesswork as to the fact and amount of damages, but must depend upon
competent proof that they have been suffered and on evidence of the actual amount. If the proof is flimsy and unsubstantial, no
damages will be awarded.56

AMC failed to prove by substantial evidence any direct correlation between the interest charges on its loan and CIGI’s failure to perform
a test run of, conduct seminar on and turn over the oxygen system. AMC presented no evidence except bare allegations, which by law,
do not amount to competent proof of actual pecuniary loss.57What is actually borne out by the records is that the interest charges are
imposed on the loan and were payable by AMC regardless of the progress of the installation projects.

Moreover, the CA was correct in finding that such loan was not exclusively devoted to the installation projects but was also utilized in
financing the construction and air-conditioning system of AMC. It would be certainly unfair to reimburse AMC for such interest payments
absent any factual proof of its fraction that pertains to the installation projects themselves. "[O]ne is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly proved."58

WHEREFORE, all the foregoing considered, the Amended Decision dated March 4, 2008 of the Court of Appeals in CA-G.R. CV No.
84988 s SET ASIDE. Consolidated Industrial Gases, Inc. is hereby ORDERED to faithfully comply, within a period of sixty (60) days,
with ALL its obligations under the installation contracts, including but not limited to the following: (a) perform a pressure drop, leak
testing, test run, painting/color coding of the installed centralized medical oxygen, vacuum and nitrous oxide pipeline system; (b)
conduct orientation, seminars and training of Alabang Medical Center employees who will be involved in the operation of the centralized
medical oxygen, vacuum and nitrous oxide pipeline system; and (c) turn over a fully functional and fully operational centralized medical
oxygen, vacuum and nitrous oxide pipeline system to Alabang Medical Center.

Alabang Medical Center is hereby ORDERED to (a) allow the personnel/technicians of Consolidated Industrial Gases, Inc. to access
and utilize, free of charge, the hospital's electrical facilities in such a manner and quantity necessary for he complete performance of its
above-enumerated undertakings, and (b) pay the balance ofP1,267,344.42 upon and simultaneously with the turnover of a fully
functional and fully operational centralized medical oxygen, vacuum and nitrous oxide pipeline system by Consolidated Industrial
Gases, Inc.

The award of attorney's fees in favor of Alabang Medical Center is deleted.

SO ORDERED.

BIENVENIDO L. REYES
Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 162802               October 9, 2013

EDS MANUFACTURING, INC., Petitioner, 

vs.
HEALTHCHECK INTERNATIONAL INC., Respondent.

DECISION

PERALTA, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the reversal of the Decision1 dated November 28,
2003 and Resolution2 dated March 16, 2004 of the Court of Appeals (CA) in CA-G.R. CV No. 69420.

The facts, as found by the CA, are as follows:

The plaintiff Healthcheck Inc. is a 1-lcalth Maintenance Organization HMO) that provides prepaid health and medical insurance
coverage to its clients. To under gird its program, it maintains a network of accredited hospitals and medical clinics, one of which is the
De La Salle University Medical Center located at Dasmariñas. Cavite. Being within the access of this medical facility, the defendant Eds
Manufacturing Inc. with about 5,000 employees at Imus, Cavite saw fit in April 1998 to obtain insurance coverage from it. They entered
into a one-year contract from May 1, 1998 to April 30, 1999 in which HCI was to provide the 4,191 employees of EMI and their 4,592
dependents as host of medical services and benefits. Attached to the Agreement was a Service Program which listed the services that
HCI would provide and the responsibilities that EMI would undertake in order to avail of the services. Putting the Agreement into effect,
EMI paid the full premium for the coverage in the staggering amount of P8,826,307.50.

Only two months into the program, problems began to loom in the horizon. On July 17, HCI notified EMI that its accreditation with
DLSUMC was suspended and advised it to avail of the services of nearby accredited institutions. A more detailed communication to
subscribers came out days later informing them of the problems of the HMO industry in the wake of the Asian regional financial crisis
and proposing interim measures for the unexpired service contracts. In a quickly convened meeting, EMI and HCI hammered out this
handwritten 5-point agreement:

"1) Healthcheck to furnish EMI with list of procedural enhancements by 7/24 (FRI)-hospitals & professional fees payment.

2) Healthcheck to reduce no. of accredited hospitals to improve monitoring of bills for payment & other problems.

3) EMI to study the possibility of adding ‘LIABILITY CLAUSE’ to existing contract; to furnish HC copy for its review.

4) No renewal of contract w/ HC should there be another suspension of services in any hospitals to be chosen (w/ regard to
item #2.) w/in the present contract period.

5) HC decision on APE provided by 7/24(FRI)."

Although HCI had yet to settle its accounts with it, DLSUMC resumed services on July 24. In another meeting with EMI on August 3,
HCI undertook to settle all its accounts with DLSUMC in order to maintain its accreditation. Despite this commitment, HCI failed to
preserve its credit standing with DLSUMC prompting the latter to suspend its accreditation for a second time from August 15 to 20. A
third suspension was still to follow on September 9 and remained in force until the end of the contract period.

Until the difficulties between HCI and its client came to a head in September 1998, complaints from EMI employees and workers were
pouring in that their HMO cards were not being honored by the DLSUMC and other hospitals and physicians. On September 3, EMI
formally notified HCI that it was rescinding their April 1998 Agreement on account of HCI’s serious and repeated breach of its
undertaking including but not limited to the unjustified non-availability of services. It demanded a return of premium for the unused
period after September 3, giving a ballpark figure of P6 million.

What went in the way of the rescission of the contract, the fly in the ointment so to speak, was the failure of EMI to collect all the HMO
cards of the employees and surrender them to HCI as stipulated in the Agreement. HCI had to tell EMI on October 12, 1998 that its
employees were still utilizing the cards even beyond the pretermination date set by EMI. It asked for the surrender of the cards so that it
could process the pretermination of the contract and finalize the reconciliation of accounts. Until we have received the IDs, HCI said, we
will consider your account with us ongoing and existing, thus subject for inclusion to present billing and payment.
Without responding to this reminder, EMI sent HCI two letters in January 1999 demanding for the payment ofP5,884,205 as the 2/3
portion of the premium that remained unutilized after the Agreement was rescinded in the previous September. The computation was
made on the basis of these observations:

- that EMI paid premium of P8,826,307.50

- Healthcheck’s accreditation with DLSUMC was suspended on July 17, August 15 and Sept. 9, 1998 by reason of
Healthcheck’s unjustified failure to pay its benefits to the hospital.

- That Healthcheck’s accreditation with other hospitals and individual physicians was also suspended on various dates for the
same reason.

- That, in effect Healthcheck managed to comply with its obligation only for the first 4 months of the year-long contract, or 1/3
thereof.

HCI pre-empted EMI’s threat of legal action by instituting the present case before the Regional Trial Court of Pasig. The cause of action
it presented was the unlawful pretermination of the contract and failure of EMI to submit to a joint reconciliation of accounts and deliver
such assets as properly belonged to HCI. EMI responded with an answer alleging that HCI reneged on its duty to provide adequate
medical coverage after EMI paid the premium in full. Having rescinded the contract, it claimed that it was entitled to the unutilized
portion of the premium, and that the accounting required by HCI could not be undertaken until it submitted the monthly utilization
reports mentioned in the Agreement. EMI asked for the dismissal of the complaint and interposed a counterclaim for damages and
unutilized premium of P5,884,205.

In September 2000, after trial, the court ruled in favor of HCI. It found that EMI’s rescission of the Agreement on September 3, 1998
was not done through court action or by a notarial act and was based on casual or slight breaches of the contract. Moreover, despite
the announced rescission, the employees of EMI continued to avail of HCI’s services until March 1999. The services rendered by HCI
from May 1998 to March 1999 purportedly came to a total of P10,149,821.13. The court deducted from this figure the premium paid by
EMI, leaving a net payable to HCI of P1,323,513.63, in addition to moral damages and attorney’s fees. EMI’s counterclaims, on the
other hand, were dismissed for lack of merit.3

On appeal, the CA reversed the decision of the Regional Trial Court (RTC) of Pasig City and ruled that although Healthcheck
International, (HCI) substantially breached their agreement, it also appears that Eds Manufacturing, Inc. (EMI) did not validly rescind the
contract between them. Thus, the CA dismissed the complaint filed by HCI, while at the same time dismissing the counterclaim filed by
EMI.

Undeterred, EMI filed a Motion for Partial Reconsideration against said decision. However, the same was denied in a Resolution dated
March 16, 2004.

Hence, EMI filed the present petition raising the following issues for our resolution:

THE COURT OF APPEALS, WHILE CORRECTLY OVERTURNING THE RTC’S DECISION BY DISMISSING THE
COMPLAINT, COMMITTED A REVERSIBLE AND GROSS ERROR WHEN IT LIKEWISE DISMISSED THE COUNTERCLAIM
ON THE GROUND THAT PETITIONER EMI DID NOT ACTUALLY RESCIND THE CONTRACT WHICH RULING BY THE
APPELLATE COURT ALREADY WENT BEYOND THE AGREED/SUBMITTED ISSUES FOR ADJUDICATION.

THE COURT OF APPEALS COMMITTED SERIOUS ERROR OF LAW IN ADMITTING THE UTILIZATION REPORTS AS
COMPETENT EVIDENCE OF THE PURPORTED NON-RESCISSION, WHEN SUCH EVIDENCE IS DOUBLE HEARSAY
INASMUCH AS THE PERSON WHO PREPARED THE SAME DID NOT TESTIFY IN COURT AND HIS UNAVAILABILITY
WAS UNEXPLAINED.

THE COURT OF APPEALS MADE A GRAVE ERROR WHEN IT DECLARED THAT PETITIONER, BY SUPPOSEDLY
ALLOWING THE UTILIZATIONS AFTER THE RESCISSION, NEGATED ITS CLAIMED PRE-TERMINATION OF THE
CONTRACT AND THEREFORE FORFEITED ITS P5.8M CLAIMS FOR UNUTILIZED PREMIUMS.4

Simply, the issue is whether or not there was a valid rescission of the Agreement between the parties.

We rule in the negative.

First, Article 1191 of the Civil Code states:

The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent
upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case.
He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385
and 1388 and the Mortgage Law.5

The general rule is that rescission (more appropriately, resolution ) of a contract will not be permitted for a slight or casual breach, but
only for such substantial and fundamental violations as would defeat the very object of the parties in making the agreement.6

In his concurring opinion in Universal Food Corporation v. Court of Appeals,7 Justice J.B.L. Reyes clarifies:

It is probable that the petitioner’s confusion arose from the defective technique of the new Code that terms both instances as
"rescission" without distinction between them; unlike the previous Spanish Code of 1889 that differentiated between "resolution" for
breach of stipulations from "rescission" by reason of lesion or damage. But the terminological vagueness does not justify confusing one
case with the other, considering the patent difference in causes and results of either action.8

Reiterating the aforementioned pronouncement, this Court in Pryce Corporation v. Philippine Amusement Gaming Corporation9 held
that:

Relevantly, it has been pointed out that resolution was originally used in Article 1124 of the old Civil Code, and that the term became
the basis for rescission under Article 1191 (and conformably, also Article 1659).10

Thus, the rescission referred to in Article 1191, more appropriately referred to as resolution, is on the breach of faith by one of the
parties which is violative of the reciprocity between them.11

In the present case, it is apparent that HCI violated its contract with EMI to provide medical service to its employees in a substantial
way. As aptly found by the CA, the various reports made by the EMI employees from July to August 1998 are living testaments to the
gross denial of services to them at a time when the delivery was crucial to their health and lives.

However, although a ground exists to validly rescind the contract between the parties, it appears that EMI failed to judicially rescind the
same. In Iringan v. Court of Appeals,12 this Court reiterated the rule that in the absence of a stipulation, a party cannot unilaterally and
extrajudicially rescind a contract. A judicial or notarial act is necessary before a valid rescission (or resolution) can take place. Thus –

Clearly, a judicial or notarial act is necessary before a valid rescission can take place, whether or not automatic rescission has been
stipulated. It is to be noted that the law uses the phrase "even though" emphasizing that when no stipulation is found on automatic
rescission, the judicial or notarial requirement still applies.

xxxx

But in our view, even if Article 1191 were applicable, petitioner would still not be entitled to automatic rescission. In Escueta v. Pando,
we ruled that under Article 1124 (now Article 1191) of the Civil Code, the right to resolve reciprocal obligations, is deemed implied in
case one of the obligors shall fail to comply with what is incumbent upon him. But that right must be invoked judicially. The same article
also provides: "The Court shall decree the resolution demanded, unless there should be grounds which justify the allowance of a term
for the performance of the obligation."

This requirement has been retained in the third paragraph of Article 1191, which states that "the court shall decree the rescission
claimed, unless there be just cause authorizing the fixing of a period."

Consequently, even if the right to rescind is made available to the injured party, the obligation is not ipso facto erased by the failure of
the other party to comply with what is incumbent upon him.

The party entitled to rescind should apply to the court for a decree of rescission.1âwphi1 The right cannot be exercised solely on a
party’s own judgment that the other committed a breach of the obligation. The operative act which produces the resolution of the
contract is the decree of the court and not the mere act of the vendor. Since a judicial or notarial act is required by law for a valid
rescission to take place, the letter written by respondent declaring his intention to rescind did not operate to validly rescind the
contract.13
What is more, it is evident that EMI had not rescinded the contract at all. As observed by the CA, despite EMI s pronouncement, it failed
to surrender the HMO cards of its employees although this was required by the Agreement, and allowed them to continue using them
beyond the date of the rescission. The in-patient and the out-patient utilization reports submitted by 1 ICI shows entries as late as
March 1999, signifying that EMI employees 1 were availing of the services until the contract period were almost over. The continued
use by them of their privileges under the contract, with the apparent consent of EMI, belies any intention to cancel or rescind it, even as
they felt that they ought to have received more than what they got.

WHEREFORE premises considered, the Decision dated November 28, 2003 and Resolution dated March 16, 2004 of the Court of
Appeals, in CA-G.R. CV No. 69420, arc hereby AFFIRMED SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 177921               December 4, 2013

METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S. DYCHIAO AND TIUOH YAN, SPOUSES GUILLERMO AND
MERCEDES DYCHIAO, AND SPOUSES VICENTE AND FILOMENA DYCHIAO, Petitioners, 
vs.
ALLIED BANK CORPORATION, Respondent.

RESOLUTION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated February 12, 2007 and the Resolution3dated May 10, 2007 of
the Court of Appeals (CA) in CA-G.R. CV No. 86896 which reversed and set aside the Decision4 dated January 17, 2006 of the
Regional Trial Court of Makati, Branch 57 (RTC) in Civil Case No. 00-1563, thereby ordering petitioners Metro Concast Steel
Corporation (Metro Concast), Spouses Jose S. Dychiao and Tiu Oh Yan, Spouses Guillermo and Mercedes Dychiao, and Spouses
Vicente and Filomena Duchiao (individual petitioners) to solidarily pay respondent Allied Bank Corporation (Allied Bank) the aggregate
amount ofP51,064,094.28, with applicable interests and penalty charges.

The Facts

On various dates and for different amounts, Metro Concast, a corporation duly organized and existing under and by virtue of Philippine
laws and engaged in the business of manufacturing steel,5 through its officers, herein individual petitioners, obtained several loans from
Allied Bank. These loan transactions were covered by a promissory note and separate letters of credit/trust receipts, the details of
which are as follows:

<<Reference: http://www.scribd.com/doc/196404620/177921>>

Date Document Amount

December 13, 1996 Promissory Note No. 96-213016

P2,000,000.00 November 7, 1995 Trust Receipt No. 96-2023657

P608,603.04 May 13, 1996 Trust Receipt No. 96-9605228

P3,753,777.40 May 24, 1996 Trust Receipt No. 96-9605249

P4,602,648.08 March 21, 1997 Trust Receipt No. 97-20472410

P7,289,757.79 June 7, 1996 Trust Receipt No. 96-20328011

P17,340,360.73 July 26, 1995 Trust Receipt No. 95-20194312

P670,709.24 August 31, 1995 Trust Receipt No. 95-20205313

P313,797.41 November 16, 1995 Trust Receipt No. 96-20243914

P13,015,109.87 July 3, 1996 Trust Receipt No. 96-20355215

P401,608.89 June 20, 1995 Trust Receipt No. 95-20171016

P750,089.25 December 13, 1995 Trust Receipt No. 96-37908917

P92,919.00 December 13, 1995 Trust Receipt No. 96/20258118

P224,713.58

The interest rate under Promissory Note No. 96-21301 was pegged at 15.25% per annum (p.a.), with penalty charge of 3% per month
in case of default; while the twelve (12) trust receipts uniformly provided for an interest rate of 14% p.a. and 1% penalty charge. By way
of security, the individual petitioners executed several Continuing Guaranty/Comprehensive Surety Agreements19 in favor of Allied
Bank. Petitioners failed to settle their obligations under the aforementioned promissory note and trust receipts, hence, Allied Bank,
through counsel, sent them demand letters,20 all dated December 10, 1998, seeking payment of the total amount of P51,064,093.62,
but to no avail. Thus, Allied Bank was prompted to file a complaint for collection of sum of money21 (subject complaint) against
petitioners before the RTC, docketed as Civil Case No. 00-1563. In their second22 Amended Answer,23petitioners admitted their
indebtedness to Allied Bank but denied liability for the interests and penalties charged, claiming to have paid the total sum
of P65,073,055.73 by way of interest charges for the period covering 1992 to 1997.24

They also alleged that the economic reverses suffered by the Philippine economy in 1998 as well as the devaluation of the peso
against the US dollar contributed greatly to the downfall of the steel industry, directly affecting the business of Metro Concast and
eventually leading to its cessation. Hence, in order to settle their debts with Allied Bank, petitioners offered the sale of Metro Concast’s
remaining assets, consisting of machineries and equipment, to Allied Bank, which the latter, however, refused. Instead, Allied Bank
advised them to sell the equipment and apply the proceeds of the sale to their outstanding obligations. Accordingly, petitioners offered
the equipment for sale, but since there were no takers, the equipment was reduced into ferro scrap or scrap metal over the years. In
2002, Peakstar Oil Corporation (Peakstar), represented by one Crisanta Camiling (Camiling), expressed interest in buying the scrap
metal. During the negotiations with Peakstar, petitioners claimed that Atty. Peter Saw (Atty. Saw), a member of Allied Bank’s legal
department, acted as the latter’s agent. Eventually, with the alleged conformity of Allied Bank, through Atty. Saw, a Memorandum of
Agreement25 dated November 8, 2002 (MoA) was drawn between Metro Concast, represented by petitioner Jose Dychiao, and
Peakstar, through Camiling, under which Peakstar obligated itself to purchase the scrap metal for a total consideration
ofP34,000,000.00, payable as follows:

(a) P4,000,000.00 by way of earnest money – P2,000,000.00 to be paid in cash and the other P2,000,000.00 to be paid in two (2) post-
dated checks of P1,000,000.00 each;26 and

(b) the balance of P30,000,000.00 to be paid in ten (10) monthly installments of P3,000,000.00, secured by bank guarantees from
Bankwise, Inc. (Bankwise) in the form of separate post-dated checks.27

Unfortunately, Peakstar reneged on all its obligations under the MoA. In this regard, petitioners asseverated that:

(a) their failure to pay their outstanding loan obligations to Allied Bank must be considered as force majeure ; and

(b) since Allied Bank was the party that accepted the terms and conditions of payment proposed by Peakstar, petitioners must therefore
be deemed to have settled their obligations to Allied Bank. To bolster their defense, petitioner Jose Dychiao (Jose Dychiao)
testified28 during trial that it was Atty. Saw himself who drafted the MoA and subsequently received29 the P2,000,000.00 cash and the
two (2) Bankwise post-dated checks worthP1,000,000.00 each from Camiling. However, Atty. Saw turned over only the two (2) checks
and P1,500,000.00 in cash to the wife of Jose Dychiao.30

Claiming that the subject complaint was falsely and maliciously filed, petitioners prayed for the award of moral damages in the amount
of P20,000,000.00 in favor of Metro Concast and at least P25,000,000.00 for each individual petitioner, P25,000,000.00 as exemplary
damages, P1,000,000.00 as attorney’s fees, P500,000.00 for other litigation expenses, including costs of suit.

The RTC Ruling

After trial on the merits, the RTC, in a Decision31 dated January 17, 2006, dismissed the subject complaint, holding that the "causes of
action sued upon had been paid or otherwise extinguished." It ruled that since Allied Bank was duly represented by its agent, Atty. Saw,
in all the negotiations and transactions with Peakstar – considering that Atty. Saw

(a) drafted the MoA,

(b) accepted the bank guarantee issued by Bankwise, and

(c) was apprised of developments regarding the sale and disposition of the scrap metal – then it stands to reason that the MoA between
Metro Concast and Peakstar was binding upon said bank.

The CA Ruling

Allied Bank appealed to the CA which, in a Decision32 dated February 12, 2007, reversed and set aside the ruling of the RTC,
ratiocinating that there was "no legal basis in fact and in law to declare that when Bankwise reneged its guarantee under the [MoA],
herein [petitioners] should be deemed to be discharged from their obligations lawfully incurred in favor of [Allied Bank]."33
The CA examined the MoA executed between Metro Concast, as seller of the ferro scrap, and Peakstar, as the buyer thereof, and
found that the same did not indicate that Allied Bank intervened or was a party thereto. It also pointed out the fact that the post-dated
checks pursuant to the MoA were issued in favor of Jose Dychiao. Likewise, the CA found no sufficient evidence on record showing
that Atty. Saw was duly and legally authorized to act for and on behalf of Allied Bank, opining that the RTC was "indulging in hypothesis
and speculation"34 when it made a contrary pronouncement. While Atty. Saw received the earnest money from Peakstar, the receipt
was signed by him on behalf of Jose Dychiao.35

It also added that "[i]n the final analysis, the aforesaid checks and receipts were signed by [Atty.] Saw either as representative of
[petitioners] or as partner of the latter’s legal counsel, and not in anyway as representative of [Allied Bank]."36

Consequently, the CA granted the appeal and directed petitioners to solidarily pay Allied Bank their corresponding obligations under the
aforementioned promissory note and trust receipts, plus interests, penalty charges and attorney’s fees. Petitioners sought
reconsideration37 which was, however, denied in a Resolution38 dated May 10, 2007. Hence, this petition.

The Issue Before the Court

At the core of the present controversy is the sole issue of whether or not the loan obligations incurred by the petitioners under the
subject promissory note and various trust receipts have already been extinguished.

The Court’s Ruling

Article 1231 of the Civil Code states that obligations are extinguished either by payment or performance, the loss of the thing due, the
condonation or remission of the debt, the confusion or merger of the rights of creditor and debtor, compensation or novation.

In the present case, petitioners essentially argue that their loan obligations to Allied Bank had already been extinguished due to
Peakstar’s failure to perform its own obligations to Metro Concast pursuant to the MoA. Petitioners classify Peakstar’s default as a form
of force majeure in the sense that they have, beyond their control, lost the funds they expected to have received from the Peakstar (due
to the MoA) which they would, in turn, use to pay their own loan obligations to Allied Bank. They further state that Allied Bank was
equally bound by Metro Concast’s MoA with Peakstar since its agent, Atty. Saw, actively represented it during the negotiations and
execution of the said agreement. Petitioners’ arguments are untenable. At the outset, the Court must dispel the notion that the MoA
would have any relevance to the performance of petitioners’ obligations to Allied Bank. The MoA is a sale of assets contract, while
petitioners’ obligations to Allied Bank arose from various loan transactions. Absent any showing that the terms and conditions of the
latter transactions have been, in any way, modified or novated by the terms and conditions in the MoA, said contracts should be treated
separately and distinctly from each other, such that the existence, performance or breach of one would not depend on the existence,
performance or breach of the other. In the foregoing respect, the issue on whether or not Allied Bank expressed its conformity to the
assets sale transaction between Metro Concast and Peakstar (as evidenced by the MoA) is actually irrelevant to the issues related to
petitioners’ loan obligations to the bank. Besides, as the CA pointed out, the fact of Allied Bank’s representation has not been proven in
this case and hence, cannot be deemed as a sustainable defense to exculpate petitioners from their loan obligations to Allied Bank.
Now, anent petitioners’ reliance on force majeure, suffice it to state that Peakstar’s breach of its obligations to Metro Concast arising
from the MoA cannot be classified as a fortuitous event under jurisprudential formulation. As discussed in Sicam v. Jorge:39

Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the event should
not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid. The mere difficulty
to foresee the happening is not impossibility to foresee the same. To constitute a fortuitous event, the following elements must concur:
(a) the cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations must be
independent of human will; (b) it must be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen, it
must be impossible to avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill obligations in a
normal manner; and (d) the obligor must be free from any participation in the aggravation of the injury or loss.40 (Emphases supplied)

While it may be argued that Peakstar’s breach of the MoA was unforseen by petitioners, the same us clearly not "impossible"to foresee
or even an event which is independent of human will." Neither has it been shown that said occurrence rendered it impossible for
petitioners to pay their loan obligations to Allied Bank and thus, negates the former’s force majeure theory altogether. In any case, as
earlier stated, the performance or breach of the MoA bears no relation to the performance or breach of the subject loan transactions,
they being separate and distinct sources of obligations. The fact of the matter is that petitioners’ loan obligations to Allied Bank remain
subsisting for the basic reason that the former has not been able to prove that the same had already been paid41 or, in any way,
extinguished. In this regard, petitioners’ liability, as adjudged by the CA, must perforce stand. Considering, however, that Allied Bank’s
extra-judicial demand on petitioners appears to have been made only on December 10, 1998, the computation of the applicable
interests and penalty charges should be reckoned only from such date.

WHEREFORE, the petition is DENIED. The Decision dated February 12, 2007 and Resolution dated May 10, 2007 of the Court of
Appeals in CA-G.R. CV No. 86896 are hereby AFFIRMED with MODIFICATION reckoning the applicable interests and penalty charges
from the date of the extrajudicial demand or on December 10, 1998. The rest of the appellate court’s dispositions stand.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 160827               June 18, 2014

NETLINK COMPUTER INCORPORATED, Petitioner, 

vs.
ERIC DELMO, Respondent.

DECISION

BERSAMIN, J.:

In the absence of a written agreement between the employer and the employee that sales commissions shall be paid in a foreign
currency, the latter has the right to be paid in such foreign currency once the same has become an established practice of the former.
The rate of exchange at the time of payment, not the rate of exchange at the time of the sales, controls.

Antecedents

On November 3, 1991, Netlink Computer, Inc. Products and Services (Netlink) hired Eric S. Delmo (Delmo) as account manager tasked
to canvass and source clients and convince them to purchase the products and services of Netlink. Delmo worked in the field most of
the time. He and his fellow account managers were not required to accomplish time cards to record their personal presence in the office
of Netlink.1 He was able to generate sales worth P35,000,000.00, more or less, from which he earned commissions amounting
to P993,558.89 and US$7,588.30. He then requested payment of his commissions, but Netlink refused and only gave him partial cash
advances chargeable to his commissions. Later on, Netlink began to nitpick and fault find, like stressing his supposed absences and
tardiness. In order to force him to resign, Netlink issued several memoranda detailing his supposed infractions of the company’s
attendance policy. Despite the memoranda, Delmo continued to generate huge sales for Netlink.2

On November 28, 1996, Delmo was shocked when he was refused entry into the company premises by the security guard pursuant to
a memorandum to that effect. His personal belongings were still inside the company premises and he sought their return to him. This
incident prompted Delmo to file a complaint for illegal dismissal.3

In its answer to Delmo’s complaint,Netlink countered that there were guidelines regarding company working time and its utilization and
how the employees’ time would be recorded. Allegedly, all personnel were required to use the bundy clock to punch in and out in the
morning, and in and out in the afternoon. Excepted from the rules were the company officers, and the authorized personnel in the field
project assignments. Netlink claimed that it would be losing on the business transactions closed by Delmo due to the high costs of
equipment, and in fact his biggest client had not yet paid. Netlink pointed out that Delmo had becomevery lax in his obligations, with the
other account managers eventually having outperformed him. Netlink asserted that warning, reprimand, and suspension memoranda
were given to employees who violated company rules and regulations, but such actions were considered as a necessary management
tool to instill discipline.4

Ruling of the Labor Arbiter

On September 23, 1998, the Labor Arbiter ruled against Netlink and in favor of Delmo, to wit:

WHEREFORE, judgment is hereby rendered declaring complainant as illegally and unjustly dismissed and respondents are ordered to
reinstate complainant to his former position without loss of seniority rights with full backwages and other benefits and respondents are
hereby ordered to pay complainant as follows:

P161,000.00 - Backwages, basic pay and allowances from Nov. 1996 to Sept. 1998
15,000.00 - 13th month pay for 1996 to 1998
993,558.89 - unpaid commissions
P1,169,558.89 - Total

plus US$7,588.30 - unpaid commissions

plus 10% attorney’s fees
The reinstatement aspect is immediately executory even pending appeal. In case reinstatement is no longer feasible, complainant shall
be paid separation pay of one-month pay for every year of service. All other claims are hereby dismissed.

SO ORDERED.5

Decision of the NLRC

On appeal, the National Labor Relations Commission (NLRC) modified the decision of the Labor Arbiter by setting aside the backwages
and reinstatement decreed by the Labor Arbiter due to the existence of valid and just causes for the termination of Delmo’s
employment, to wit: WHEREFORE, premises considered, the decision of the Labor Arbiter a quo is hereby SET ASIDEand a new one
ENTERED, ordering the respondents-appellantsto pay the following:

1. TWO THOUSAND PESOS (P2,000.00) as indemnity for failure to observe procedural due process;

2. Unpaid commission in the amount of P993,558.89;

3. US$7,588.30 as unpaid commission;

4. P15,000.00 representing the 13th month pay for 1996, 1997, and 1998;

5. 10% attorney’s fees of the total amount awarded.

SO ORDERED.6

The NLRC denied the motion for reconsideration, after which Netlink filed a petition for certiorariin the CA.

Judgment of the CA

On May 9, 2003, the CA promulgated its assailed decision upholding the NLRC’s ruling subject to modifications,7viz:

In the present case, since the payment of the commission is made to depend on the future and uncertain event – which is the payment
of the accounts by the persons who have transacted business with the petitioner, without payment by the former to the latter, the
obligation to pay the commission has not yet arisen.

The evidence on record shows that the ALCATEL, private respondent’s biggest client has not paid fully the amount it owes to the
petitioner as of March 10, 1998. (Rollo, pp. 101, 397, 398) The obligation therefore, on the part of the petitioner to pay the private
respondent for his commission for the said unpaid account has not yet arisen. Thus it is a grave abuse of discretion on the part of the
public respondent to make petitioner liable to the private respondent for the payment of the said commission, when it is clear on the
record, as We have discussed above, that the obligation therefor has not yet arisen.

Perusal of the records, likewise, show that petitioner failed to refute by evidence that the private respondent is not entitled to the P993,
558.89 commission. Petitioner however claimed that since the amounts out of which the commission will be taken has not yet been paid
fully, petitioner must, likewise, not be made liable for the said commission. However, public respondent committed grave abuse of
discretion when it disregard the evidence on record which is not disputed by the private respondent that out of the total commissions of
the private respondent, petitioner has paid the petitioner in the amount of P216,799.45 in the form of advance payment. (Rollo, p. 12)

In view of the foregoing discussions, therefore, the advance payment made by the petitioner in favorof the private respondent in the
amount of P216, 799.45 must be deducted to the P993, 558.89 unpaid commission of the private respondent. The difference
amounting to P776, 779.44 must likewise be deducted to the amount of P4, 066.19 which represents the amount which the petitioner
had admitted as the net commission payable to private respondent. The difference thereof amounting to P772, 713.25 shall represent
the unpaid commission which shall be payable to the private respondent by the petitioner upon payment of the accounts out of which
such commission shall be taken.

We, likewise, agree with the petitioner that the private respondent is not entitled to 13th month pay in the years 1997 and 1998. The
order of the public respondent making the petitioner liable to the private respondent for the 13th month pay of the latter in the years
1997 and 1998 is contrary to its findings that there are valid and just cause for the termination of the private respondent from
employment, although private respondent was not given his right to due process. (Rollo, pp. 32-33) The rule applicable in the present
case is the decision of the Supreme Court in the case of Sebuguero vs National Labor Relations Commission [248 SCRA 532, 547
(1995)] where it was ruled that "where the dismissal of an employee is in fact for a just and valid cause and is so proven to be but he is
not accorded his right to due process,i.e., he was not furnished the twin requirements of notice and the opportunityto be heard, the
dismissal shall be upheld but the employer must be sanctioned for non-compliance with the requirements of or for failureto observe due
process." Hence, petitioner should not be made to pay the 13th month pay to private respondent whose employment was terminated for
cause but without due process in 1996.
 xxxx

Thus, private respondent is entitled only to a 13th month pay computed pro-rata from January 1996 to November 1996 which as
properly computed by the petitioner amounts to P4, 584.00. (Rollo, p. 11)

With respect to the other arguments of the petitioner, this Court is not persuaded. Petitioner failed to refute by evidence that private
respondent is not entitled to the commissions payable in US dollars. Neither is there any reason for us to agree with the petitioner that
the computation of these commissions must be based on the value of [the] Peso in relation to a Dollar at the time of sale. As properly
observed by the Labor Arbiter a quo, viz: "Likewise the devaluation of the peso cannot be used as a shield against the complainant
because that should have been the lookout of the respondent company in providing for such a clause that in case of devaluation, the
price agreed upon should be at the exchange rate when the contract of sale had been consummated. For the lack of foresight and
inefficiency of the respondent company and as regards its contracts or agreements with its clientele, the complainant should not be
made to suffer." (Labor Arbiter Ricardo Olairez’ Decision, September 23, 1998, pp. 11-12, Rollo,pp. 328-329) In this regardtherefore,
We uphold the well settled rule that "the findings of facts of the NLRC, particularly where the NLRC and the Labor Arbiter are in
agreement, are deemed binding and conclusive upon the Court." (Permex, Inc. vs National Labor Relations Commission, 323 SCRA
121, 126).

xxxx

WHEREFORE, premises considered, the assailed Resolutions are hereby AFFIRMED with MODIFICATION, ordering the petitioner to
pay the private respondent the following:

1. TWO-THOUSAND PESOS (P2,000.00) as indemnity for failure to observe procedural due process;

2. P4,066.19 representing the unpaid commissions that have accrued in favor of the private respondent;

3. P776,779.44 payable to the private respondent upon payment of the accounts out of which the said amount will be taken;

4. P4,584.00 representing the unpaid 13th month pay of the private respondent;

5. US$7,588.30 as unpaid commission;

6. 10% attorney’s fees of the total amount awarded excluding the amount contained in the No.3 of this Order.

SO ORDERED.

Issues

Hence, this appeal.

Netlink submits that the CA committed a palpable and reversible error of law in not holding that the applicable exchange rate for
computing the US dollar commissions of Delmo should be the rates prevailing at the time when the sales were actually generated, not
the rates prevailing at the time of the payment; and in awarding attorney’s fees.

In his comment,8 Delmo counters that because he had earned in US dollars it was only fair that his commissions be paid in US dollars;
that Netlink should not be allowed to flip-flop after it had paid commissions in US dollar on the sales generated by its sales agents on
US-dollar denominated transactions; and that attorney’s fees were warranted because of the unanimous finding that there was violation
of procedural due process.

In its reply,9 Netlink maintains that the commissions of Delmo should be based on sales generated, actually paid by and collected from
the customers; that commissions must be paid on the basis of the conversion of the US dollar to the Philippine peso at the time of sale;
and that no cogent and justifiable reason existed for the award of attorney’s fees.

To be considered for resolution are,therefore, the following, namely: (1) whether or not the payment of the commissions should be in
US dollars; and (2) whether or not the award ofattorney’s fees was warranted.

Ruling of the Court

The appeal lacks merit.

As a general rule, all obligations shall be paid in Philippine currency. However, the contracting parties may stipulate that foreign
currencies may be used for settling obligations. This is pursuant to Republic Act No. 8183,10which provides as follows:
Section 1. All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the
parties may agree that the obligation ortransaction shall be settled in any other currency at the time of payment.

We remarked in C.F. Sharp & Co. v. Northwest Airlines, Inc.11 that the repeal of Republic Act No. 529 had the effect of removing the
prohibition on the stipulation of currency other than Philippine currency, such that obligations or transactions could already be paid in
the currency agreed upon by the parties. However, both Republic Act No. 529 and Republic Act No. 8183 did not stipulate the
applicable rate of exchange for the conversion of foreign currency-incurred obligations to their peso equivalent. It follows, therefore, that
the jurisprudence established under Republic Act No. 529 with regard to the rate of conversion remains applicable. In C.F. Sharp, the
Court cited Asia World Recruitment,Inc. v. NLRC,12 to the effect that the real value of the foreign exchange-incurred obligation up to the
date of itspayment should be preserved.

There was no written contract between Netlink and Delmo stipulating that the latter’s commissions would be paid in US
dollars.1âwphi1 The absence of the contractual stipulation notwithstanding, Netlink was still liable to pay Delmo in US dollars because
the practice of paying its sales agents in US dollars for their US dollar-denominatedsales had become a company policy. This was
impliedly admitted by Netlink when it did not refute the allegation that the commissions earned by Delmo and its other sales agents had
been paid in US dollars. Instead of denying the allegation, Netlink only sought a declaration that the US dollar commissions be paid
using the exchange rate at the time of sale. The principle of non-diminution of benefits, which has been incorporated in Article 10013 of
the Labor Code, forbade Netlink from unilaterally reducing, diminishing, discontinuing or eliminating the practice. Verily, the phrase
"supplements, or other employee benefits" in Article 100 is construed to mean the compensation and privileges received by an
employee aside from regular salaries or wages.

With regard to the length of timethe company practice should have been observed to constitute a voluntary employer practice that
cannot be unilaterally reduced, diminished, discontinued or eliminated by the employer, we find that jurisprudence has not laid down
any rule requiring a specific mmimum number of years. In Davao Fruits Corporation v. Associated Labor Unions,14 the company
practice lasted for six years. In Davao Integrated Port Stevedoring Services v. Abarquez,15 the employer, for three years and nine
months, approved the commutation to cash of the unenjoyed portion of the sick leave with pay benefits of its intermittent workers. In
Tiangco v. Leogardo, Jr.,16 the employer carried on the practice of giving a fixed monthly emergency allowance from November 1976 to
February 1980, or three years and four months. In Sevilla Trading Company v. Semana, 17 the employer kept the practice of including
non-basic benefits such as paid leaves for unused sick leave and vacation in the computation of their 13th-month pay for at least two
years.

With the payment of US dollar commissions having ripened into a company practice, there is no way that the commissions due to
Delmo were to be paid in US dollars or their equivalent in Philippine currency determined at the time of the sales. To rule otherwise
would be to cause an unjust diminution of the commissions due and owing to Delmo.

Finally, we affirm the following justification of the CA in granting attorney's fees to Delmo, viz: The award of attorney's fees must,
likewise, be upheld in line of (sic) the decision of the Supreme Court in the case of Consolidated Rural Bank (Cagayan Valley), Inc. vs.
National Labor Relations Commission, 301 SCRA 223, 235, where it was held that "in actions for recovery of wages or where an
employee was forced to litigate and thus incur expenses to protect her rights and interests, even if not so claimed, an award of
attorney's fees equivalent to ten percent (10%) of the total award is legally and morally justifiable. There is no doubt that in the present
case, the private respondent has incurred expenses for the protection and enforcement of his right to his commissions.18

WHEREFORE, the Court DENIES the petition for review on certiorari; AFFIRMS the decision promulgated on May 9, 2003; and
ORDERS the petitioner to pay the costs of suit.

SO ORDERED

LUCAS P. BERSAMIN
Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 181723               August 11, 2014

ELIZABETH DEL CARMEN, Petitioner, 

vs.
SPOUSES RESTITUTO SABORDO and MIMA MAHILUM-SABORDO, Respondents.

DECISION

PERALTA, J.:

This treats of the petition for review on certiorari assailing the Decision1 and Resolution2 of the Court of Appeals (CA), dated May 25,
2007 and January 24, 2008, respectively, in CA-G.R. CV No. 75013.

The factual and procedural antecedents of the case are as follows:

Sometime in 1961, the spouses Toribio and Eufrocina Suico (Suico spouses), along with several business partners, entered into a
business venture by establishing a rice and com mill at Mandaue City, Cebu. As part of their capital, they obtained a loan from the
Development Bank of the Philippines (DBP), and to secure the said loan, four parcels of land owned by the Suico spouses,
denominated as Lots 506, 512, 513 and 514, and another lot owned by their business partner, Juliana Del Rosario, were mortgaged.
Subsequently, the Suico spouses and their business partners failed to pay their loan obligations forcing DBP to foreclose the mortgage.
After the Suico spouses and their partners failed to redeem the foreclosed properties, DBP consolidated its ownership over the same.
Nonetheless, DBP later allowed the Suico spouses and Reginald and Beatriz Flores (Flores spouses), as substitutes for Juliana Del
Rosario, to repurchase the subject lots by way of a conditional sale for the sum ofP240,571.00. The Suico and Flores spouses were
able to pay the downpayment and the first monthly amortization, but no monthly installments were made thereafter. Threatened with the
cancellation of the conditional sale, the Suico and Flores spouses sold their rights over the said properties to herein respondents
Restituto and Mima Sabordo, subject to the condition that the latter shall pay the balance of the sale price. On September 3, 1974,
respondents and the Suico and Flores spouses executed a supplemental agreement whereby they affirmed that what was actually sold
to respondents were Lots 512 and 513, while Lots 506 and 514 were given to them as usufructuaries. DBP approved the sale of rights
of the Suico and Flores spouses in favor of herein respondents. Subsequently, respondents were able to repurchase the foreclosed
properties of the Suico and Flores spouses.

On September 13, 1976, respondent Restituto Sabordo (Restituto) filed with the then Court of First Instance of Negros Occidental an
original action for declaratory relief with damages and prayer for a writ of preliminary injunction raising the issue of whether or not the
Suico spouses have the right to recover from respondents Lots 506 and 514.

In its Decision dated December 17, 1986, the Regional Trial Court (RTC) of San Carlos City, Negros Occidental, ruled in favor of the
Suico spouses directing that the latter have until August 31, 1987 within which to redeem or buy back from respondents Lots 506 and
514.

On appeal, the CA, in its Decision3 in CA-G.R. CV No. 13785, dated April 24, 1990, modified the RTC decision by giving the Suico
spouses until October 31, 1990 within which to exercise their option to purchase or redeem the subject lots from respondents by paying
the sum of P127,500.00. The dispositive portion of the CADecision reads as follows:

xxxx

For reasons given, judgment is hereby rendered modifying the dispositive portion of [the] decision of the lower court to read:

1) The defendants-appellees are granted up to October 31, 1990 within which toexercise their option to purchase from the
plaintiff-appellant Restituto Sabordo and Mima Mahilum Lot No. 506, covered by Transfer Certificate of Title No. T-102598 and
Lot No. 514, covered by Transfer Certificate of Title No. T-102599, both of Escalante Cadastre, Negros Occidental by
reimbursing or paying to the plaintiff the sum of ONE HUNDRED TWENTY-SEVEN THOUSAND FIVE HUNDRED PESOS
(P127,500.00);

2) Within said period, the defendants-appellees shall continue to have usufructuary rights on the coconut trees on Lots Nos.
506 and 514, Escalante Cadastre, Negros Occidental;
 3) The Writ of Preliminary Injunction dated August 12, 1977 shall be effective untildefendants-appellees shall have exercised
their option to purchase within said period by paying or reimbursing to the plaintiff-appellant the aforesaid amount.

No pronouncement as to costs.

SO ORDERED.4

In a Resolution5 dated February 13, 1991, the CA granted the Suico spouses an additional period of 90 days from notice within which to
exercise their option to purchase or redeem the disputed lots.

In the meantime, Toribio Suico (Toribio) died leaving his widow, Eufrocina, and several others, includingherein petitioner, as legal heirs.
Later, they discovered that respondents mortgaged Lots 506 and 514 with Republic Planters Bank (RPB) as security for a loan which,
subsequently, became delinquent.

Thereafter, claiming that theyare ready with the payment of P127,500.00, but alleging that they cannot determine as to whom such
payment shall be made, petitioner and her co-heirs filed a Complaint6 with the RTC of San Carlos City, Negros Occidental seeking to
compel herein respondents and RPB to interplead and litigate between themselves their respective interests on the abovementioned
sum of money.1âwphi1 The Complaint also prayed that respondents be directed to substitute Lots 506 and 514 with other real estate
properties as collateral for their outstanding obligation with RPB and that the latter be ordered toaccept the substitute collateral and
release the mortgage on Lots 506 and 514. Upon filing of their complaint, the heirs of Toribio deposited the amount ofP127,500.00 with
the RTC of San Carlos City, Branch 59.

Respondents filed their Answer7 with Counterclaim praying for the dismissal of the above Complaint on the grounds that (1) the action
for interpleader was improper since RPB isnot laying any claim on the sum ofP127,500.00; (2) that the period withinwhich the
complainants are allowed to purchase Lots 506 and 514 had already expired; (3) that there was no valid consignation, and (4) that the
case is barred by litis pendenciaor res judicata.

On the other hand, RPB filed a Motion to Dismiss the subject Complaint on the ground that petitioner and her co-heirs had no valid
cause of action and that they have no primary legal right which is enforceable and binding against RPB.

On December 5, 2001, the RTC rendered judgment, dismissing the Complaint of petitioner and her co-heirs for lack of
merit.8 Respondents' Counterclaim was likewise dismissed.

Petitioner and her co-heirs filed an appeal with the CA contending that the judicial deposit or consignation of the amount
of P127,500.00 was valid and binding and produced the effect of payment of the purchase price of the subject lots.

In its assailed Decision, the CA denied the above appeal for lack of merit and affirmed the disputed RTC Decision.

Petitioner and her co-heirs filed a Motion for Reconsideration,9 but it was likewise denied by the CA.

Hence, the present petition for review on certiorariwith a lone Assignment of Error, to wit:

THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE LOWER COURT WHICH HELD THAT THE JUDICIAL
DEPOSIT OF P127,500.00 MADE BY THE SUICOS WITH THE CLERK OF COURT OF THE RTC, SAN CARLOS CITY, IN
COMPLIANCE WITH THE FINAL AND EXECUTORY DECISION OF THE COURT OF APPEALS IN CA-G.R. CV-13785 WAS NOT
VALID.10

Petitioner's main contention is that the consignation which she and her co-heirs made was a judicial deposit based on a final judgment
and, as such, does not require compliance with the requirements of Articles 125611 and 125712 of the Civil Code.

The petition lacks merit. At the outset, the Court quotes withapproval the discussion of the CA regarding the definition and nature of
consignation, to wit: … consignation [is] the act of depositing the thing due with the court or judicial authorities whenever the creditor
cannot accept or refuses to accept payment, and it generally requires a prior tender of payment. It should be distinguished from tender
of payment which is the manifestation by the debtor to the creditor of his desire to comply with his obligation, with the offer of immediate
performance.Tender is the antecedent of consignation, thatis, an act preparatory to the consignation, which is the principal, and from
which are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial,
while consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement before proceeding to the
solemnities of consignation. Tender and consignation, where validly made, produces the effect of payment and extinguishes the
obligation.13

In the case of Arzaga v. Rumbaoa,14 which was cited by petitioner in support of his contention, this Court ruled that the deposit made
with the court by the plaintiff-appellee in the saidcase is considered a valid payment of the amount adjudged, even without a prior
tender of payment thereof to the defendants-appellants,because the plaintiff-appellee, upon making such deposit, expressly petitioned
the court that the defendants-appellees be notified to receive the tender of payment.This Court held that while "[t]he deposit, by itself
alone, may not have been sufficient, but with the express terms of the petition, there was full and complete offer of payment made
directly to defendants-appellants."15 In the instant case, however, petitioner and her co-heirs, upon making the deposit with the RTC,
did not ask the trial court that respondents be notified to receive the amount that they have deposited. In fact, there was no tender of
payment. Instead, what petitioner and her co-heirs prayed for is thatrespondents and RPB be directed to interplead with one another to
determine their alleged respective rights over the consigned amount; that respondents be likewise directed to substitute the subject lots
with other real properties as collateral for their loan with RPB and that RPB be also directed to accept the substitute real properties as
collateral for the said loan. Nonetheless,the trial court correctly ruled that interpleader is not the proper remedy because RPB did
notmake any claim whatsoever over the amount consigned by petitioner and her co-heirs with the court.

In the cases of Del Rosario v. Sandico16 and Salvante v. Cruz,17 likewise cited as authority by petitioner, this Court held that, for a
consignation or deposit with the court of an amount due on a judgment to be considered as payment, there must beprior tender to the
judgment creditor who refuses to accept it. The same principle was reiterated in the later case of Pabugais v. Sahijwani.18 As stated
above, tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as payment to the
obligee for the former’s obligation and demanding that the latter accept the same.19 In the instant case, the Court finds no cogent
reason to depart from the findings of the CA and the RTC that petitioner and her co-heirs failed to make a prior valid tender of payment
to respondents.

It is settled that compliance with the requisites of a valid consignation is mandatory.20 Failure to comply strictly with any of the requisites
will render the consignation void. One of these requisites is a valid prior tender of payment.21

Under Article 1256, the only instances where prior tender of payment is excused are: (1) when the creditor is absent or unknown, or
does not appear at the place of payment; (2) when the creditor is incapacitated to receive the payment at the time it is due; (3) when,
without just cause, the creditor refuses to give a receipt; (4) when two or more persons claim the same right to collect; and (5) when the
title of the obligation has been lost. None of these instances are present in the instant case. Hence, the fact that the subject lots are in
danger of being foreclosed does not excuse petitioner and her co-heirs from tendering payment to respondents, as directed by the
court.

WHEREFORE, the instant petition is DENIED. The Decision of the Court of Appeals, dated May 25, 2007, and its Resolution dated
January 24, 2008, both in CA-G.R. CV No. 75013, are AFFIRMED.

SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 180144               September 24, 2014

LEONARDO BOGNOT, Petitioner, 
vs.
RRI LENDING CORPORATION, represented by its General Manager, DARIO J. BERNARDEZ, Respondent.

DECISION

BRION, J.:

Before the Court is the petition for review on certiorari1 filed by Leonardo Bognot (petitioner) assailing the March 28, 2007 decision2 and
the October 15, 2007 resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 66915.

Background Facts

RRI Lending Corporation (respondent) is an entity engaged in the business of lending money to its borrowers within Metro Manila. It is
duly represented by its General Manager, Mr. Dario J. Bernardez (Bernardez).

Sometime in September 1996, the petitioner and his younger brother, Rolando A. Bognot (collectively referred to as the "Bognot
siblings"), applied for and obtained a loan of Five Hundred Thousand Pesos (P500,000.00) from the respondent, payable on November
30, 1996.4 The loan was evidenced by a promissory note and was secured by a post dated check5 dated November 30, 1996.

Evidence on record shows that the petitioner renewed the loan several times on a monthly basis. He paid a renewal fee of P54,600.00
for each renewal, issued a new post-dated checkas security, and executed and/or renewed the promissory note previouslyissued. The
respondent on the other hand, cancelled and returned to the petitioner the post-dated checks issued prior to their renewal.

Sometime in March 1997, the petitioner applied for another loan renewal. He again executed as principal and signed Promissory Note
No. 97-0356 payable on April 1, 1997; his co-maker was again Rolando. As security for the loan, the petitioner also issued BPI Check
No. 0595236,7 post dated to April 1, 1997.8

Subsequently, the loan was again renewed on a monthly basis (until June 30, 1997), as shown by the Official Receipt No. 7979 dated
May 5, 1997, and the Disclosure Statement dated May 30, 1997 duly signed by Bernardez. The petitioner purportedly paid the renewal
fees and issued a post-dated check dated June 30, 1997 as security. As had been done in the past, the respondent superimposed the
date "June 30, 1997" on the upper right portion of Promissory Note No. 97-035 to make it appear that it would mature on the said date.

Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot (Mrs. Bognot), went to the respondent’s office and applied for
another renewal of the loan. She issued in favor of the respondent Promissory Note No. 97-051, and International Bank Exchange (IBE)
Check No. 00012522, dated July 30, 1997, in the amount ofP54,600.00 as renewal fee.

On the excuse that she needs to bring home the loan documents for the Bognot siblings’ signatures and replacement, Mrs. Bognot
asked the respondent’s clerk to release to her the promissory note, the disclosure statement, and the check dated July 30, 1997. Mrs.
Bognot, however, never returned these documents nor issued a new post-dated check. Consequently, the respondent sent the
petitioner follow-up letters demanding payment of the loan, plus interest and penalty charges. These demands went unheeded.

On November 27, 1997, the respondent, through Bernardez, filed a complaint for sum of money before the Regional Trial Court (RTC)
against the Bognot siblings. The respondent mainly alleged that the loan renewal payable on June 30, 1997 which the Bognot siblings
applied for remained unpaid; that before June30, 1997, Mrs. Bognot applied for another loan extension and issued IBE Check No.
00012522 as payment for the renewal fee; that Mrs. Bognot convinced the respondent’s clerk to release to her the promissory note and
the other loan documents; that since Mrs. Bognot never issued any replacement check, no loanextension took place and the loan,
originally payable on June 30, 1997, became due on this date; and despite repeated demands, the Bognot siblings failed to pay their
joint and solidary obligation.

Summons were served on the Bognotsiblings. However, only the petitioner filed his answer.

In his Answer,10 the petitioner claimed that the complaint states no cause of action because the respondent’s claim had been paid,
waived, abandoned or otherwise extinguished. He denied being a party to any loan application and/or renewal in May 1997. He also
denied having issued the BPI check post-dated to June 30, 1997, as well as the promissory note dated June 30, 1997, claiming that
this note had been tampered. He claimed that the one (1) month loan contracted by Rolando and his wife in November 1996 which was
lastly renewed in March 1997 had already been fully paid and extinguished in April 1997.11

Trial on the merits thereafter ensued.

The Regional Trial Court Ruling

In a decision12 dated January 17, 2000,the RTC ruled in the respondent’s favor and ordered the Bognot siblings to pay the amount of
the loan, plus interest and penalty charges. It considered the wordings of the promissory note and found that the loan they contracted
was joint and solidary. It also noted that the petitioner signed the promissory note as a principal (and not merely as a guarantor), while
Rolando was the co-maker. It brushed the petitioner’s defense of full payment aside, ruling that the respondent had successfully
proven, by preponderance of evidence, the nonpayment of the loan. The trial court said:

Records likewise reveal that while he claims that the obligation had been fully paid in his Answer, he did not, in order to protect his right
filed (sic) a cross-claim against his co-defendant Rolando Bognot despite the fact that the latter did not file any responsive pleading.

In fine, defendants are liable solidarily to plaintiff and must pay the loan of P500,000.00 plus 5% interest monthly as well as 10%
monthly penalty charges from the filing of the complaint on December 3, 1997 until fully paid. As plaintiff was constrained to engage the
services of counsel in order to protect his right,defendants are directed to pay the former jointly and severally the amount of P50,000.00
as and by way of attorney’s fee.

The petitioner appealed the decision to the Court of Appeals.

The Court of Appeals Ruling

In its decision dated March 28, 2007, the CA affirmed the RTC’s findings. It found the petitioner’s defense of payment untenable and
unsupported by clear and convincing evidence. It observed that the petitioner did not present any evidence showing that the check
dated June 30, 1997 had, in fact, been encashed by the respondent and the proceeds applied to the loan, or any official receipt
evidencing the payment of the loan. It further stated that the only document relied uponby the petitioner to substantiate his defense was
the April 1, 1997 checkhe issued which was cancelled and returned to him by the respondent.

The CA, however, noted the respondent’s established policy of cancelling and returning the post-dated checks previously issued, as
well as the subsequent loan renewals applied for by the petitioner, as manifested by the official receipts under his name. The CA thus
ruled that the petitioner failed to discharge the burden of proving payment.

The petitioner moved for the reconsideration of the decision, but the CA denied his motion in its resolution of October 15, 2007, hence,
the present recourse to us pursuant toRule 45 of the Rules of Court.

The Petition

The petitioner submits that the CA erred in holding him solidarily liable with Rolando and his wife. Heclaimed that based on the legal
presumption provided by Article 1271 of the Civil Code,13 his obligation had been discharged by virtue of his possession of the post-
dated check (stamped "CANCELLED") that evidenced his indebtedness. He argued that it was Mrs. Bognot who subsequently
assumed the obligation by renewing the loan, paying the fees and charges, and issuing a check. Thus, there is an entirely new
obligation whose payment is her sole responsibility.

The petitioner also argued that as a result of the alteration of the promissory note without his consent (e.g., the superimposition of the
date "June 30, 1997" on the upper right portion of Promissory Note No. 97-035 to make it appear that it would mature on this date), the
respondent can no longer collect on the tampered note, let alone, hold him solidarily liable with Rolando for the payment of the loan. He
maintained that even without the proof of payment, the material alteration of the promissory note is sufficient to extinguish his liability.

Lastly, he claimed that he had been released from his indebtedness by novation when Mrs. Bognot renewed the loan and assumed the
indebtedness.

The Case for the Respondents

The respondent submits that the issues the petitioner raised hinge on the appreciation of the adduced evidence and of the factual lower
courts’ findings that, as a rule, are notreviewable by this Court.

The Issues

The case presents to us the following issues:

 1. Whether the CA committed a reversible error in holding the petitioner solidarily liable with Rolando;

2. Whether the petitioner is relieved from liability by reason of the material alteration in the promissory note; and

3. Whether the parties’ obligation was extinguished by: (i) payment; and (ii) novation by substitution of debtors.

Our Ruling

We find the petition partly meritorious.

As a rule, the Court’s jurisdiction in a Rule 45 petition is limited to the review of pure questions of law.14Appreciation of evidence and
inquiry on the correctness of the appellate court's factual findings are not the functions of this Court; we are not a trier of facts.15

A question of law exists when the doubt or dispute relates to the application of the law on given facts. On the other hand, a question of
fact exists when the doubt or dispute relates to the truth or falsity of the parties’ factual allegations.16

As the respondent correctly pointedout, the petitioner’s allegations are factual issuesthat are not proper for the petition he filed. In the
absence of compelling reasons, the Court cannot re-examine, review or re-evaluate the evidence and the lower courts’ factual
conclusions. This is especially true when the CA affirmed the lower court’s findings, as in this case. Since the CA’s findings of facts
affirmed those of the trial court, they are binding on this Court, rendering any further factual review unnecessary.

If only to lay the issues raised - both factual and legal – to rest, we shall proceed to discuss their merits and demerits.

No Evidence Was Presented to Establish the Fact of Payment

Jurisprudence tells us that one who pleads payment has the burden of proving it;17 the burden rests on the defendant to prove payment,
rather than on the plaintiff to prove non-payment.18 Indeed, once the existence of an indebtedness is duly established by evidence, the
burden of showing with legal certainty that the obligation has been discharged by payment rests on the debtor.19

In the present case, the petitioner failed to satisfactorily prove that his obligation had already been extinguished by payment. As the CA
correctly noted, the petitioner failed to present any evidence that the respondent had in fact encashed his check and applied the
proceeds to the payment of the loan. Neither did he present official receipts evidencing payment, nor any proof that the check had been
dishonored.

We note that the petitioner merely relied on the respondent’s cancellation and return to him of the check dated April 1, 1997. The
evidence shows that this check was issued to secure the indebtedness. The acts imputed on the respondent, standing alone, do not
constitute sufficient evidence of payment.

Article 1249, paragraph 2 of the Civil Code provides:

xxxx

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the fault of the creditor they have been impaired. (Emphasis supplied)

Also, we held in Bank of the Philippine Islands v. Spouses Royeca:20

Settled is the rule that payment must be made in legal tender. A check is not legal tender and, therefore, cannot constitute a valid
tender of payment. Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does
not, by itself, operate as payment. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by commercial document is actually realized.(Emphasis supplied)

Although Article 1271 of the Civil Code provides for a legal presumption of renunciation of action (in cases where a private document
evidencing a credit was voluntarily returned by the creditor to the debtor), this presumption is merely prima facieand is not conclusive;
the presumption loses efficacy when faced with evidence to the contrary.

Moreover, the cited provision merely raises a presumption, not of payment, but of the renunciation of the credit where more convincing
evidence would be required than what normally would be called for to prove payment.21Thus, reliance by the petitioner on the legal
presumption to prove payment is misplaced.

To reiterate, no cash payment was proven by the petitioner. The cancellation and return of the check dated April 1, 1997, simply
established his renewal of the loan – not the fact of payment. Furthermore, it has been established during trial, through repeated acts,
that the respondent cancelled and surrendered the post-dated check previously issued whenever the loan is renewed. We trace
whatwould amount to a practice under the facts of this case, to the following testimonial exchanges:

Civil Case No. 97-0572

TSN December 14, 1998, Page 13.

Atty. Almeda:

Q: In the case of the renewal of the loan you admitted that a renewal fee is charged to the debtor which he or she must pay before a
renewal is allowed. I show you Exhibit "3" official receipt of plaintiff dated July 3, 1997, would this be your official receipt which you
issued to your client which they make renewal of the loan?

A: Yes, sir.

x x x           x x x          x x x

Q: And naturally when a loan has been renewed, the old one which is replaced by the renewal has already been cancelled, is that
correct?

A: Yes, sir.

Q: It is also true to say that all promissory notes and all postdated checks covered by the old loan which have been the subject of the
renewal are deemed cancelled and replaced is that correct?

A: Yes, sir. xxx22

Civil Case No. 97-0572

TSN November 27, 1998, Page 27.

Q: What happened to the check that Mr. Bognot issued?

Court: There are two Bognots. Who in particular?

Q: Leonardo Bognot, Your Honor.

A: Every month, they were renewed, he issued a new check, sir.

Q: Do you have a copy of the checks?

A: We returned the check upon renewing the loan.23

In light of these exchanges, wefind that the petitioner failed to discharge his burden ofproving payment.

The Alteration of the Promissory Note

Did Not Relieve the Petitioner From Liability

We now come to the issue of material alteration. The petitioner raised as defense the alleged material alteration of Promissory Note No.
97-035 as basis to claim release from his loan. He alleged that the respondent’s superimposition of the due date "June 30, 1997" on the
promissory note without his consent effectively relieved him of liability.

We find this defense untenable.

Although the respondent did not dispute the fact of alteration, he nevertheless denied that the alteration was done without the
petitioner’s consent. The parties’ Pre-Trial Order dated November 3, 199824 states that:

xxx There being no possibility of a possible compromise agreement, stipulations, admissions, and denials were made, to wit:
FOR DEFENDANT LEONARDO BOGNOT

13. That the promissory note subject of this case marked as Annex "A" of the complaint was originally dated April 1, 1997 with a
superimposed rubber stamp mark "June 30, 1997" to which the plaintiff admitted the superimposition.

14. The superimposition was done without the knowledge, consent or prior consultation with Leonardo Bognot which was denied by
plaintiff."25 (Emphasis supplied)

Significantly, the respondent also admitted in the Pre-Trial Order that part of its company practice is to rubber stamp, or make a
superimposition through a rubber stamp, the old promissory note which has been renewed to make it appear that there is a new loan
obligation. The petitioner did not rebut this statement. To our mind, the failure to rebut is tantamount to an admission of the
respondent’s allegations:

"22. That it is the practice of plaintiff to just rubber stamp or make superimposition through a rubber stamp on old promissory note
which has been renewed to make it appear that there is a new loan obligation to which the plaintiff admitted." (Emphasis Supplied).26

Even assuming that the note had indeed been tampered without the petitioner’s consent, the latter cannot totally avoid payment of his
obligation to the respondent based on the contract of loan.

Based on the records, the Bognot Siblings had applied for and were granted a loan of P500,000.00 by the respondent. The loan was
evidenced by a promissory note and secured by a post-dated check27 dated November 30, 1996. In fact, the petitioner himself admitted
his loan application was evidenced by the Promissory Note dated April 1, 1997.28 This loan was renewed several times by the
petitioner, after paying the renewal fees, as shown by the Official Receipt Nos. 79729 and 58730 dated May 5 and July 3, 1997,
respectively. These official receipts were issued in the name of the petitioner. Although the petitioner had insisted that the loan had
been extinguished, no other evidence was presented to prove payment other than the cancelled and returnedpost-dated check.

Under this evidentiary situation, the petitioner cannot validly deny his obligation and liability to the respondent solely on the ground that
the Promissory Note in question was tampered. Notably, the existence of the obligation, as well as its subsequent renewals, have been
duly established by: first, the petitioner’s application for the loan; second, his admission that the loan had been obtained from the
respondent; third, the post-dated checks issued by the petitioner to secure the loan; fourth, the testimony of Mr. Bernardez on the grant,
renewal and non-payment of the loan; fifth, proof of non-payment of the loan; sixth, the loan renewals; and seventh, the approval and
receipt of the loan renewals.

In Guinsatao v. Court of Appeals,31 this Court pointed out that while a promissory note is evidence of an indebtedness, it is not the only
evidence, for the existence of the obligation can be proven by other documentary evidence such as a written memorandum signed by
the parties. In Pacheco v. Court of Appeals,32 this Court likewise expressly recognized that a check constitutes anevidence of
indebtedness and is a veritable proof of an obligation. It canbe used in lieu of and for the same purpose as a promissory note and can
therefore be presented to establish the existence of indebtedness.33

In the present petition, we find that the totality of the evidence on record sufficiently established the existence of the petitioner’s
indebtedness (and liability) based on the contract ofloan. Even with the tampered promissory note, we hold that the petitioner can still
be held liable for the unpaid loan.

The Petitioner’s BelatedClaim of Novation by Substitution May no Longer be Entertained

It has not escaped the Court’s attention that the petitioner raised the argument that the obligation had been extinguished by novation.
The petitioner never raised this issue before the lower courts.

It is a settled principle of law thatno issue may be raised on appeal unless it has been brought before the lower tribunal for its
consideration.34 Matters neither alleged in the pleadingsnor raised during the proceedings below cannot be ventilated for the first time
on appeal before the Supreme Court.35

In any event, we find no merit in the defense of novation as we discuss at length below. Novation cannot be presumed and must be
clearly and unequivocably proven.

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.36

Article 1293 of the Civil Code defines novation as follows:

"Art. 1293. Novation which consists insubstituting a new debtor in the place of the originalone, 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."
To give novation legal effect, the original debtor must be expressly released from the obligation, and the new debtor must assume the
original debtor’s place in the contractual relationship. Depending on who took the initiative, novation by substitution of debtor has two
forms – substitution by expromision and substitution by delegacion. The difference between these two was explained in Garcia v.
Llamas:37

"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."

In both cases, the original debtor must be released from the obligation; otherwise, there can be no valid novation.38 Furthermore,
novation by substitution of debtor must alwaysbe made with the consent of the creditor.39

The petitioner contends thatnovation took place through a substitution of debtors when Mrs. Bognot renewed the loan and assumed the
debt. He alleged that Mrs. Bognot assumed the obligation by paying the renewal fees and charges, and by executing a new promissory
note. He further claimed that she issued her own check40 to cover the renewal fees, which fact, according to the petitioner, was done
with the respondent’s consent.

Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the petitioner as debtor. She merely attempted to renew the
original loan by executing a new promissory note41 and check. The purported one month renewal of the loan, however, did not push
through, as Mrs. Bognot did not return the documents or issue a new post dated check. Since the loan was not renewed for another
month, the originaldue date, June 30,1997, continued to stand.

More importantly, the respondent never agreed to release the petitioner from his obligation. That the respondent initially allowed Mrs.
Bognot to bring home the promissory note, disclosure statement and the petitioner’s previous check dated June 30, 1997, does not ipso
factoresult in novation. Neither will this acquiescence constitute an implied acceptance of the substitution of the debtor.

In order to give novation legal effect, the creditor should consent to the substitution of a new debtor. Novation must be clearly and
unequivocally shown, and cannot be presumed.

Since the petitioner failed to show thatthe respondent assented to the substitution, no valid novation took place with the effect of
releasing the petitioner from his obligation to the respondent.

Moreover, in the absence of showing that Mrs. Bognot and the respondent had agreed to release the petitioner, the respondent can still
enforce the payment of the obligation against the original debtor. Mere acquiescence to the renewal of the loan, when there is clearly
no agreement to release the petitioner from his responsibility, does not constitute novation.

The Nature of the Petitioner’s Liability

On the nature of the petitioner’s liability, we rule however, that the CA erred in holding the petitioner solidarily liable with Rolando.

A solidary obligation is one in which each of the debtors is liable for the entire obligation, and each of the creditors is entitled to demand
the satisfaction of the whole obligation from any or all of the debtors.42 There is solidary liability when the obligation expressly so states,
when the law so provides, or when the nature of the obligation so requires.43 Thus, when the obligor undertakes to be "jointly and
severally" liable, the obligation is solidary,

In this case, both the RTC and the CA found the petitioner solidarily liable with Rolando based on Promissory Note No. 97-035 dated
June 30, 1997. Under the promissory note, the Bognot Siblings defined the parameters of their obligation as follows:

"FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay to READY RESOURCES INVESTORS RRI LENDING CORPO.
or Order, its office at Paranaque, M.M. the principal sum of Five Hundred Thousand PESOS (P500,000.00), PhilippineCurrency, with
interest thereon at the rate of Five percent (5%) per month/annum, payable in One Installment (01) equal daily/weekly/semi-
monthly/monthly of PESOS Five Hundred Thousand Pesos (P500,000.00), first installment to become due on June 30, 1997.
xxx"44 (Emphasis Ours).

Although the phrase "jointly and severally" in the promissory note clearly and unmistakably provided for the solidary liability of the
parties, we note and stress that the promissory note is merely a photocopyof the original, which was never produced.

Under the best evidence rule, whenthe subject of inquiry is the contents of a document, no evidence isadmissible other than the original
document itself except in the instances mentioned in Section 3, Rule 130 of the Revised Rules of Court.45

The records show that the respondenthad the custody of the original promissory note dated April 1, 1997, with a superimposed rubber
stamp mark "June 30, 1997", and that it had been given every opportunity to present it. The respondent even admitted during pre-trial
that it could not present the original promissory note because it is in the custody of its cashier who is stranded in Bicol.46 Since the
respondent never produced the original of the promissory note, much less offered to produce it, the photocopy of the promissory note
cannot be admitted as evidence. Other than the promissory note in question, the respondent has not presented any other evidence to
support a finding of solidary liability. As we earlier noted, both lower courts completely relied on the note when they found the Bognot
siblingssolidarily liable.

The well-entrenched rule is that solidary obligation cannot be inferred lightly. It must be positively and clearly expressed and cannot be
presumed.47

In view of the inadmissibility of the promissory note, and in the absence of evidence showing that the petitioner had bound himself
solidarily with Rolando for the payment of the loan, we cannot but conclude that the obligation to pay is only joint.48

The 5% Monthly Interest Stipulated in the Promissory Note is Unconscionable and Should be Equitably Reduced

Finally, on the issue of interest, while we agree with the CA that the petitioner is liable to the respondentfor the unpaid loan, we find the
imposition of the 5% monthly interest to be excessive, iniquitous, unconscionable and exorbitant, and hence, contrary to morals and
jurisprudence. Although parties to a loan agreement have wide latitude to stipulate on the applicable interest rate under Central Bank
Circular No. 905 s. 1982 (which suspended the Usury Law ceiling on interest effective January 1, 1983), we stress that unconscionable
interest rates may still be declared illegal.49

In several cases, we haveruled that stipulations authorizing iniquitous or unconscionable interests are contrary to morals and are illegal.
In Medel v. Court of Appeals,50 we annulled a stipulated 5.5% per month or 66% per annum interest on a P500,000.00 loan, and a 6%
per month or 72% per annum interest on a P60,000.00 loan, respectively, for being excessive, iniquitous, unconscionableand
exorbitant.1âwphi1

We reiterated this ruling in Chua v. Timan,51 where we held that the stipulated interest rates of 3% per month and higher are excessive,
iniquitous, unconscionable and exorbitant, and must therefore be reduced to 12% per annum.

Applying these cited rulings, we now accordingly hold that the stipulated interest rate of 5% per month, (or 60% per annum) in the
promissory note is excessive, unconscionable, contrary to morals and is thus illegal. It is void ab initiofor violating Article 130652 of the
Civil Code.1âwphi1 We accordingly find it equitable to reduce the interest rate from 5% per month to 1% per month or 12% per annum
in line with the prevailing jurisprudence.

WHEREFORE, premises considered, the Decision dated March 28, 2007 of the Court of Appeals in CA-G.R. CV No. 66915 is hereby
AFFIRMED with MODIFICATION, as follows:

1. The petitioner Leonardo A. Bognotand his brother, Rolando A. Bognot are JOINTLY LIABLE to pay the sum of P500,000.00
plus 12% interest per annum from December 3, 1997 until fully paid.

2. The rest of the Court of Appeals' dispositions are hereby AFFIRMED.

Costs against petitioner Leonardo A. Bognot.

SO ORDERED.

ARTURO D. BRION
Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 181359               August 5, 2013

SPOUSES CLEMENCIO C. SABITSANA, JR. and MA. ROSARIO M. SABITSANA, Petitioners, 

vs.
JUANITO F. MUERTEGUI, represented by his Attorney-in-Fact DOMINGO A. MUERTEGUI, JR., Respondent.

DECISION

DEL CASTILLO, J.:

A lawyer may not, for his own personal interest and benefit, gamble on his client's word, believing it at one time and disbelieving it the
next. He owes his client his undivided loyalty.

Assailed in this Petition for Review on Certiorari1 are the January 25, 2007 Decision2 of the Court of Appeals (CA) which denied the
appeal in CA-G.R. CV No. 79250, and its January 11, 2008 Resolution3 denying petitioner’s Motion for Reconsideration.4

Factual Antecedents

On September 2, 1981, Alberto Garcia (Garcia) executed an unnotarized Deed of Sale5 in favor of respondent Juanito
Muertegui6 (Juanito) over a 7,500-square meter parcel of unregistered land (the lot) located in Dalutan Island, Talahid, Almeira, Biliran,
Leyte del Norte covered by Tax Declaration (TD) No. 1996 issued in 1985 in Garcia’s name.7

Juanito’s father Domingo Muertegui, Sr. (Domingo Sr.) and brother Domingo Jr. took actual possession of the lot and planted thereon
coconut and ipil-ipil trees. They also paid the real property taxes on the lot for the years 1980 up to 1998.

On October 17, 1991, Garcia sold the lot to the Muertegui family lawyer, petitioner Atty. Clemencio C. Sabitsana, Jr. (Atty. Sabitsana),
through a notarized deed of absolute sale.8 The sale was registered with the Register of Deeds on February 6, 1992.9 TD No. 1996 was
cancelled and a new one, TD No. 5327,10 was issued in Atty. Sabitsana’s name. Although Domingo Jr. and Sr. paid the real estate
taxes, Atty. Sabitsana also paid real property taxes in 1992, 1993, and 1999. In 1996, he introduced concrete improvements on the
property, which shortly thereafter were destroyed by a typhoon.

When Domingo Sr. passed away, his heirs applied for registration and coverage of the lot under the Public Land Act or Commonwealth
Act No. 141. Atty. Sabitsana, in a letter11 dated August 24, 1998 addressed to the Department of Environment and Natural Resources’
CENRO/PENRO office in Naval, Biliran, opposed the application, claiming that he was the true owner of the lot. He asked that the
application for registration be held in abeyance until the issue of conflicting ownership has been resolved.

On April 11, 2000, Juanito, through his attorney-in-fact Domingo Jr., filed Civil Case No. B-109712 for quieting of title and preliminary
injunction, against herein petitioners Atty. Sabitsana and his wife, Rosario, claiming that they bought the lot in bad faith and are
exercising acts of possession and ownership over the same, which acts thus constitute a cloud over his title. The Complaint13 prayed,
among others, that the Sabitsana Deed of Sale, the August 24, 1998 letter, and TD No. 5327 be declared null and void and of no effect;
that petitioners be ordered to respect and recognize Juanito’s title over the lot; and that moral and exemplary damages, attorney’s fees,
and litigation expenses be awarded to him.

In their Answer with Counterclaim,14 petitioners asserted mainly that the sale to Juanito is null and void absent the marital consent of
Garcia’s wife, Soledad Corto (Soledad); that they acquired the property in good faith and for value; and that the Complaint is barred by
prescription and laches. They likewise insisted that the Regional Trial Court (RTC) of Naval, Biliran did not have jurisdiction over the
case, which involved title to or interest in a parcel of land the assessed value of which is merely P1,230.00.

The evidence and testimonies of the respondent’s witnesses during trial reveal that petitioner Atty. Sabitsana was the Muertegui
family’s lawyer at the time Garcia sold the lot to Juanito, and that as such, he was consulted by the family before the sale was
executed; that after the sale to Juanito, Domingo Sr. entered into actual, public, adverse and continuous possession of the lot, and
planted the same to coconut and ipil-ipil; and that after Domingo Sr.’s death, his wife Caseldita, succeeded him in the possession and
exercise of rights over the lot.

On the other hand, Atty. Sabitsana testified that before purchasing the lot, he was told by a member of the Muertegui family, Carmen
Muertegui Davies (Carmen), that the Muertegui family had bought the lot, but she could not show the document of sale; that he then
conducted an investigation with the offices of the municipal and provincial assessors; that he failed to find any document, record, or
other proof of the sale by Garcia to Juanito, and instead discovered that the lot was still in the name of Garcia; that given the foregoing
revelations, he concluded that the Muerteguis were merely bluffing, and that they probably did not want him to buy the property
because they were interested in buying it for themselves considering that it was adjacent to a lot which they owned; that he then
proceeded to purchase the lot from Garcia; that after purchasing the lot, he wrote Caseldita in October 1991 to inform her of the sale;
that he then took possession of the lot and gathered ipil-ipil for firewood and harvested coconuts and calamansi from the lot; and that
he constructed a rip-rap on the property sometime in 1996 and 1997.

Ruling of the Regional Trial Court

On October 28, 2002, the trial court issued its Decision15 which decrees as follows:

WHEREFORE, in view of the foregoing considerations, this Court finds in favor of the plaintiff and against the defendants, hereby
declaring the Deed of Sale dated 2 September 1981 as valid and preferred while the Deed of Absolute Sale dated 17 October 1991 and
Tax Declaration No. 5327 in the name of Atty. Clemencio C. Sabitsana, Jr. are VOID and of no legal effect.

The Provincial Assessor and the Municipal Assessor of Naval are directed to cancel Tax Declaration No. 5327 as void and done in bad
faith.

Further, Atty. Clemencio C. Sabitsana, Jr. is ordered to pay plaintiff Juanito Muertigui, represented by his attorney-in-fact Domingo
Muertigui, Jr. the amounts of:

a) P30,000.00 as attorney’s fees;

b) P10,000.00 as litigation expenses; and

c) Costs.

SO ORDERED.16

The trial court held that petitioners are not buyers in good faith. Petitioner Atty. Sabitsana was the Muertegui family’s lawyer, and was
informed beforehand by Carmen that her family had purchased the lot; thus, he knew of the sale to Juanito. After conducting an
investigation, he found out that the sale was not registered. With this information in mind, Atty. Sabitsana went on to purchase the same
lot and raced to register the sale ahead of the Muerteguis, expecting that his purchase and prior registration would prevail over that of
his clients, the Muerteguis. Applying Article 1544 of the Civil Code,17 the trial court declared that even though petitioners were first to
register their sale, the same was not done in good faith. And because petitioners’ registration was not in good faith, preference should
be given to the sale in favor of Juanito, as he was the first to take possession of the lot in good faith, and the sale to petitioners must be
declared null and void for it casts a cloud upon the Muertegui title.

Petitioners filed a Motion for Reconsideration18 but the trial court denied19 the same.

Ruling of the Court of Appeals

Petitioners appealed to the CA20 asserting that the sale to Juanito was null and void for lack of marital consent; that the sale to them is
valid; that the lower court erred in applying Article 1544 of the Civil Code; that the Complaint should have been barred by prescription,
laches and estoppel; that respondent had no cause of action; that respondent was not entitled to an award of attorney’s fees and
litigation expenses; and that they should be the ones awarded attorney’s fees and litigation expenses.

The CA, through its questioned January 25, 2007 Decision,21 denied the appeal and affirmed the trial court’s Decision in toto. It held
that even though the lot admittedly was conjugal property, the absence of Soledad’s signature and consent to the deed did not render
the sale to Juanito absolutely null and void, but merely voidable. Since Garcia and his wife were married prior to the effectivity of the
Family Code, Article 173 of the Civil Code22should apply; and under the said provision, the disposition of conjugal property without the
wife’s consent is not void, but merely voidable. In the absence of a decree annulling the deed of sale in favor of Juanito, the same
remains valid.

The CA added that the fact that the Deed of Sale in favor of Juanito was not notarized could not affect its validity. As against the
notarized deed of sale in favor of petitioners, the CA held that the sale in favor of Juanito still prevails. Applying Article 1544 of the Civil
Code, the CA said that the determining factor is petitioners’ good faith, or the lack of it. It held that even though petitioners were first to
register the sale in their favor, they did not do so in good faith, for they already knew beforehand of Garcia’s prior sale to Juanito. By
virtue of Atty. Sabitsana’s professional and confidential relationship with the Muertegui family, petitioners came to know about the prior
sale to the Muerteguis and the latter’s possession of the lot, and yet they pushed through with the second sale. Far from acting in good
faith, petitioner Atty. Sabitsana used his legal knowledge to take advantage of his clients by registering his purchase ahead of them.
Finally, the CA declared that Juanito, as the rightful owner of the lot, possessed the requisite cause of action to institute the suit for
quieting of title and obtain judgment in his favor, and is entitled as well to an award for attorney’s fees and litigation expenses, which the
trial court correctly held to be just and equitable under the circumstances.

The dispositive portion of the CA Decision reads:

WHEREFORE, premises considered, the instant appeal is DENIED and the Decision dated October 28, 2002 of the Regional Trial
Court, 8th Judicial Region, Branch 16, Naval, Biliran, is hereby AFFIRMED. Costs against defendants-appellants.

SO ORDERED.23

Issues

Petitioners now raise the following issues for resolution:

I. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE REGIONAL TRIAL COURT DID NOT HAVE
JURISDICTION OVER THE CASE IN VIEW OF THE FACT THAT THE ASSESSED VALUE OF THE SUBJECT LAND WAS
ONLY P1,230.00 (AND STATED MARKET VALUE OF ONLY P3,450.00).

II. THE COURT OF APPEALS ERRED IN APPLYING ART. 1544 OF THE CIVIL CODE INSTEAD OF THE PROPERTY
REGISTRATION DECREE (P.D. NO. 1529) CONSIDERING THAT THE SUBJECT LAND WAS UNREGISTERED.

III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE COMPLAINT WAS ALREADY BARRED [BY] LACHES
AND THE STATUTE OF LIMITATIONS.

IV. THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE REGIONAL TRIAL COURT ORDERING
THE PETITIONERS TO PAY ATTORNEY’S FEES AND LITIGATION EXPENSES TO THE RESPONDENT. 24

Petitioners’ Arguments

Petitioners assert that the RTC of Naval, Biliran did not have jurisdiction over the case. They argue that since the assessed value of the
lot was a mere P1,230.00, jurisdiction over the case lies with the first level courts, pursuant to Republic Act No. 7691,25 which expanded
their exclusive original jurisdiction to include "all civil actions which involve title to, or possession of, real property, or any interest therein
where the assessed value of the property or interest therein does not exceed Twenty thousand pesos (P20,000.00) or, in civil actions in
Metro Manila, where such assessed value does not exceed Fifty thousand pesos (P50,000.00) exclusive of interest, damages of
whatever kind, attorney’s fees, litigation expenses and costs."26 Petitioners thus conclude that the Decision in Civil Case No. B-1097 is
null and void for lack of jurisdiction.

Petitioners next insist that the lot, being unregistered land, is beyond the coverage of Article 1544 of the Civil Code, and instead, the
provisions of Presidential Decree (PD) No. 1529 should apply. This being the case, the Deed of Sale in favor of Juanito is valid only as
between him and the seller Garcia, pursuant to Section 113 of PD 1529;27 it cannot affect petitioners who are not parties thereto.

On the issue of estoppel, laches and prescription, petitioners insist that from the time they informed the Muerteguis in writing about their
purchase of the lot, or in October 1991, the latter did not notify them of their prior purchase of the lot, nor did respondent interpose any
objection to the sale in their favor. It was only in 1998 that Domingo Jr. showed to petitioners the unnotarized deed of sale. According to
petitioners, this seven-year period of silence and inaction on the Muerteguis’ part should be taken against them and construed as
neglect on their part to assert their rights for an unreasonable length of time. As such, their action to quiet title should be deemed
barred by laches and estoppel.

Lastly, petitioners take exception to the award of attorney’s fees and litigation expenses, claiming that since there was no bad faith on
their part, such award may not be considered just and equitable under the circumstances. Still, an award of attorney’s fees should
remain the exception rather than the rule; and in awarding the same, there must have been an express finding of facts and law
justifying such award, a requirement that is absent in this case.

Petitioners thus pray for the reversal of the questioned CA Decision and Resolution; the dismissal of the Complaint in Civil Case No. B-
1097; the deletion of the award of attorney’s fees and litigation expenses in respondent’s favor; and a declaration that they are the true
and rightful owners of the lot.

Respondent’s Arguments

Respondent, on the other hand, counters that a suit for quieting of title is one whose subject matter is incapable of pecuniary
estimation, and thus falls within the jurisdiction of the RTC. He likewise insists that Article 1544 applies to the case because there is a
clear case of double sale of the same property to different buyers, and the bottom line thereof lies in petitioners’ lack of good faith in
entering into the subsequent sale. On the issue of laches/estoppel, respondent echoes the CA’s view that he was persistent in the
exercise of his rights over the lot, having previously filed a complaint for recovery of the lot, which unfortunately was dismissed based
on technicality.

On the issue of attorney’s fees and litigation expenses, respondent finds refuge in Article 2208 of the Civil Code,28 citing three instances
which fortify the award in his favor – petitioners’ acts compelled him to litigate and incur expenses to protect his interests; their gross
and evident bad faith in refusing to recognize his ownership and possession over the lot; and the justness and equitableness of his
case.

Our Ruling

The Petition must be denied.

The Regional Trial Court has jurisdiction over the suit for quieting of title.

On the question of jurisdiction, it is clear under the Rules that an action for quieting of title may be instituted in the RTCs, regardless of
the assessed value of the real property in dispute. Under Rule 63 of the Rules of Court,29 an action to quiet title to real property or
remove clouds therefrom may be brought in the appropriate RTC.

It must be remembered that the suit for quieting of title was prompted by petitioners’ August 24, 1998 letter-opposition to respondent’s
application for registration. Thus, in order to prevent30 a cloud from being cast upon his application for a title, respondent filed Civil Case
No. B-1097 to obtain a declaration of his rights. In this sense, the action is one for declaratory relief, which properly falls within the
jurisdiction of the RTC pursuant to Rule 63 of the Rules.

Article 1544 of the Civil Code does not apply to sales involving unregistered land.

Both the trial court and the CA are, however, wrong in applying Article 1544 of the Civil Code. Both courts seem to have forgotten that
the provision does not apply to sales involving unregistered land. Suffice it to state that the issue of the buyer’s good or bad faith is
relevant only where the subject of the sale is registered land, and the purchaser is buying the same from the registered owner whose
title to the land is clean. In such case, the purchaser who relies on the clean title of the registered owner is protected if he is a
purchaser in good faith for value.31

Act No. 3344 applies to sale of unregistered lands.

What applies in this case is Act No. 3344,32 as amended, which provides for the system of recording of transactions over unregistered
real estate. Act No. 3344 expressly declares that any registration made shall be without prejudice to a third party with a better right. The
question to be resolved therefore is: who between petitioners and respondent has a better right to the disputed lot?

Respondent has a better right to the lot.

The sale to respondent Juanito was executed on September 2, 1981 via an unnotarized deed of sale, while the sale to petitioners was
made via a notarized document only on October 17, 1991, or ten years thereafter. Thus, Juanito who was the first buyer has a better
right to the lot, while the subsequent sale to petitioners is null and void, because when it was made, the seller Garcia was no longer the
owner of the lot. Nemo dat quod non habet.

The fact that the sale to Juanito was not notarized does not alter anything, since the sale between him and Garcia remains valid
nonetheless. Notarization, or the requirement of a public document under the Civil Code,33 is only for convenience, and not for validity
or enforceability.34 And because it remained valid as between Juanito and Garcia, the latter no longer had the right to sell the lot to
petitioners, for his ownership thereof had ceased.

Nor can petitioners’ registration of their purchase have any effect on Juanito’s rights. The mere registration of a sale in one’s favor does
not give him any right over the land if the vendor was no longer the owner of the land, having previously sold the same to another even
if the earlier sale was unrecorded.35 Neither could it validate the purchase thereof by petitioners, which is null and void. Registration
does not vest title; it is merely the evidence of such title. Our land registration laws do not give the holder any better title than what he
actually has.36

Specifically, we held in Radiowealth Finance Co. v. Palileo37 that:

Under Act No. 3344, registration of instruments affecting unregistered lands is ‘without prejudice to a third party with a better right.’ The
aforequoted phrase has been held by this Court to mean that the mere registration of a sale in one’s favor does not give him any right
over the land if the vendor was not anymore the owner of the land having previously sold the same to somebody else even if the earlier
sale was unrecorded.
Petitioners’ defense of prescription, laches and estoppel are unavailing since their claim is based on a null and void deed of sale. The
fact that the Muerteguis failed to interpose any objection to the sale in petitioners’ favor does not change anything, nor could it give rise
to a right in their favor; their purchase remains void and ineffective as far as the Muerteguis are concerned.

The award of attorney’s fees and litigation expenses is proper because of petitioners’ bad faith.

Petitioners’ actual and prior knowledge of the first sale to Juanito makes them purchasers in bad faith. It also appears that petitioner
Atty. Sabitsana was remiss in his duties as counsel to the Muertegui family. Instead of advising the Muerteguis to register their
purchase as soon as possible to forestall any legal complications that accompany unregistered sales of real property, he did exactly the
opposite: taking advantage of the situation and the information he gathered from his inquiries and investigation, he bought the very
same lot and immediately caused the registration thereof ahead of his clients, thinking that his purchase and prior registration would
prevail. The Court cannot tolerate this mercenary attitude. Instead of protecting his client’s interest, Atty. Sabitsana practically preyed
on him.

Petitioner Atty. Sabitsana took advantage of confidential information disclosed to him by his client, using the same to defeat him and
beat him to the draw, so to speak. He rushed the sale and registration thereof ahead of his client. He may not be afforded the excuse
that he nonetheless proceeded to buy the lot because he believed or assumed that the Muerteguis were simply bluffing when Carmen
told him that they had already bought the same; this is too convenient an excuse to be believed. As the Muertegui family lawyer, he had
no right to take a position, using information disclosed to him in confidence by his client, that would place him in possible conflict with
his duty. He may not, for his own personal interest and benefit, gamble on his client’s word, believing it at one time and disbelieving it
the next. He owed the Muerteguis his undivided loyalty. He had the duty to protect the client, at all hazards and costs even to himself.38

Petitioner Atty. Sabitsana is enjoined to "look at any representation situation from the point of view that there are possible conflicts, and
further to think in terms of impaired loyalty, that is, to evaluate if his representation in any way will impair his loyalty to a client."39

Moreover, as the Muertegui family’s lawyer, Atty. Sabitsana was under obligation to safeguard his client's property, and not jeopardize
it. Such is his duty as an attorney, and pursuant to his general agency.40

Even granting that Atty. Sabitsana has ceased to act as the Muertegui family's lawyer, he still owed them his loyalty.1âwphi1 The
termination of attorney-client relation provides no justification for a lawyer to represent an interest adverse to or in conflict with that of
the former client on a matter involving confidential information which the lawyer acquired when he was counsel. The client's confidence
once reposed should not be divested by mere expiration of professional employment.41 This is underscored by the fact that Atty.
Sabitsana obtained information from Carmen which he used to his advantage and to the detriment of his client.

from the foregoing disquisition, it can be seen that petitioners are guilty of bad faith in pursuing the sale of the lot despite being apprised
of the prior sale in respondent's favor. Moreover, petitioner Atty. Sabitsana has exhibited a lack of loyalty toward his clients, the
Muerteguis, and by his acts, jeopardized their interests instead of protecting them. Over and above the trial court's and the CA's
findings, this provides further justification for the award of attorney's fees, litigation expenses and costs in favor of the respondent.

Thus said, judgment must be rendered in favor of respondent to prevent the petitioners' void sale from casting a cloud upon his valid
title.

WHEREFORE, premises considered, the Petition is DENIED. The January 25, 2007 Decision and the January 11, 2008 Resolution of
the Court of Appeals in CA-G.R. CV No. 79250 are AFFIRMED. Costs against petitioners.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice
 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 certiorari1 assailing the Court of Appeals’ decision2 in CA-G.R. CV No. 95709, which stemmed from
a complaint3 filed in the Regional Trial Court of Valenzuela City, Branch 171, for collection of sum of money.

The facts are as follows:

Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the name Quality Paper and
Plastic Products, Enterprises, to factories engaged in the paper mill business.4 From February 2007 to March 2007, he delivered scrap
papers worth 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.5 The parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw
materials or deliver to him their finished products of equivalent value.6

Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated check dated April 18, 20077 in
the amount of 1,487,766.68 as partial payment, with the assurance that the check would not bounce.8 When he deposited the check on
April 18, 2007, it was dishonored for being drawn against a closed account.9

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement10 where Arco Pulp and Paper
bound themselves to deliver their finished products to Megapack Container Corporation, owned by Eric Sy, for his account. According
to the memorandum, the raw materials would be supplied by Dan T. Lim, through his company, Quality Paper and Plastic Products.
The memorandum of agreement reads as follows:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric Sy that ARCO
will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches at the price of P18.50 per kg. to Megapack Container for Mr. Eric Sy’s
account. Schedule of deliveries are as follows:

....

It has been agreed further that the Local OCC materials to be used for the production of the above Test Liners will be supplied by
Quality Paper & Plastic Products Ent., total of 600 Metric Tons at P6.50 per kg. (price subject to change per advance notice). Quantity
of Local OCC delivery will be based on the quantity of Test Liner delivered to Megapack Container Corp. based on the above
production schedule.11

On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper demanding payment of the amount of 7,220,968.31, but no payment
was made to him.13

Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment with the Regional Trial Court, Branch 171,
Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its answer15 but failed to have its representatives attend the pre-trial
hearing. Hence, the trial court allowed Dan T. Lim to present his evidence ex parte.16

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 appealed18 the judgment with the Court of Appeals. According to him, novation did not take place since the memorandum of
agreement between Arco Pulp and Paper and Eric Sy was an exclusive and private agreement between them. He argued that if his
name was mentioned in the contract, it was only for supplying the parties their required scrap papers, where his conformity through a
separate contract was indispensable.19

On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting aside the judgment dated September 19, 2008
and ordering Arco Pulp and Paper to jointly and severally pay Dan T. Lim the amount of P7,220,968.31 with interest at 12% per annum
from the time of demand; P50,000.00 moral damages;P50,000.00 exemplary damages; and P50,000.00 attorney’s fees.22

The appellate court ruled that the facts and circumstances in this case clearly showed the existence of an alternative obligation.23 It also
ruled that Dan T. Lim was entitled to damages and attorney’s fees due to the bad faith exhibited by Arco Pulp and Paper in not
honoring its undertaking.24

Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its President and Chief Executive Officer, Candida A.
Santos, bring this petition for review on certiorari.

On one hand, petitioners argue that the execution of the memorandum of agreement constituted a novation of the original obligation
since Eric Sy became the new debtor of respondent. They also argue that there is no legal basis to hold petitioner Candida A. Santos
personally liable for the transaction that petitioner corporation entered into with respondent. The Court of Appeals, they allege, also
erred in awarding moral and exemplary damages and attorney’s fees to respondent who did not show proof that he was entitled to
damages.27

Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was no proper novation in this case.
He argues that the Court of Appeals was correct in ordering the payment of 7,220,968.31 with damages since the debt of petitioners
remains unpaid.28 He also argues that the Court of Appeals was correct in holding petitioners solidarily liable since petitioner Candida A.
Santos was "the prime mover for such outstanding corporate liability."29 In their reply, petitioners reiterate that novation took place since
there was nothing in the memorandum of agreement showing that the obligation was alternative. They also argue that when respondent
allowed them to deliver the finished products to Eric Sy, the original obligation was novated.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."32 The right of election is extinguished when the party who may exercise that option categorically
and unequivocally makes his or her choice known.33

The choice of the debtor must also be communicated to the creditor who must receive notice of it since: The object of this notice is to
give the creditor . . . opportunity to express his consent, or to impugn the election made by the debtor, and only after said notice shall
the election take legal effect when consented by the creditor, or if impugned by the latter, when declared proper by a competent court.34

According to the factual findings of the trial court and the appellate court, the original contract between the parties was for respondent
to deliver scrap papers worth P7,220,968.31 to petitioner Arco Pulp and Paper. The payment for this delivery became petitioner Arco
Pulp and Paper’s obligation. By agreement, petitioner Arco Pulp and Paper, as the debtor, had the option to either (1) pay the price
or(2) deliver the finished products of equivalent value to respondent.35
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.38 (Emphasis supplied)

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.39 (Emphasis supplied) There is nothing in
the memorandum of agreement that states that with its execution, the obligation of petitioner Arco Pulp and Paper to respondent would
be extinguished. It also does not state that Eric Sy somehow substituted petitioner Arco Pulp and Paper as respondent’s debtor. It
merely shows that petitioner Arco Pulp and Paper opted to deliver the finished products to a third person instead.

The consent of the creditor must also be secured for the novation to be valid:

Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties underscore the absence of any
express disclosure or circumstances with which to deduce a clear and unequivocal intent by the parties to novate the old
agreement.40 (Emphasis supplied)

In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the contract need not be secured. This
is clear from the first line of the memorandum, which states:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric Sy. . . .41

If the memorandum of agreement was intended to novate the original agreement between the parties, respondent must have first
agreed to the substitution of Eric Sy as his new debtor. The memorandum of agreement must also state in clear and unequivocal terms
that it has replaced the original obligation of petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is present in
this case.

Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with their alleged intent to pass on their
obligation to Eric Sy. When respondent sent his letter of demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that
the former neither acknowledged nor consented to the latter as his new debtor. These acts, when taken together, clearly show that
novation did not take place. Since there was no novation, petitioner Arco Pulp and Paper’s obligation to respondent remains valid and
existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full amount of P7,220,968.31.

Petitioners are liable for

damages

Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract where the breach is due to fraud or
bad faith:

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 P7,220,968.31 from his business. This has remained unpaid since 2007. This
injury undoubtedly was caused by petitioner Arco Pulp and Paper’s act of refusing to pay its obligations.

When the obligation became due and demandable, petitioner Arco Pulp and Paper not only issued an unfunded check but also entered
into a contract with a third person in an effort to evade its liability. This proves the third requirement.

As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be awarded in the following instances:

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.47 (Emphasis supplied)

Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination of the circumstances in each case.

When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to respondent, it was presumably with the
knowledge that it was being drawn against a closed account. Worse, it attempted to shift their obligations to a third person without the
consent of respondent.

Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest purpose or some moral obliquity and conscious doing of a wrong, a
breach of known duty through some motive or interest or ill will that partakes of the nature of fraud."48 Moral damages may, therefore,
be awarded.

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

Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner.

Article 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide whether or not they should be
adjudicated.

Article 2234. While the amount of the exemplary damages need not be proven, the plaintiff must show that he is entitled to moral,
temperate or compensatory damages before the court may consider the question of whether or not exemplary damages should be
awarded.

In Tankeh v. Development Bank of the Philippines,49 we stated that:

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.50 (Emphasis 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,52 we stated that:

Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal personality separate and distinct
from those acting for and in its behalf and, in general, from the people comprising it. Following this principle, obligations incurred by the
corporation, acting through its directors, officers and employees, are its sole liabilities. A director, officer or employee of a corporation is
generally not held personally liable for obligations incurred by the corporation. Nevertheless, this legal fiction may be disregarded if it is
used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues.

....

Before a director or officer of a corporation can be held personally liable for corporate obligations, however, the following requisites
must concur: (1) the complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith.

While it is true that the determination of the existence of any of the circumstances that would warrant the piercing of the veil of
corporate fiction is a question of fact which cannot be the subject of a petition for review on certiorari under Rule 45, this Court can take
cognizance of factual issues if the findings of the lower court are not supported by the evidence on record or are based on a
misapprehension of facts.53 (Emphasis supplied)

As a general rule, directors, officers, or employees of a corporation cannot be held personally liable for obligations incurred by the
corporation. However, this veil of corporate fiction may be pierced if complainant is able to prove, as in this case, that (1) the officer is
guilty of negligence or bad faith, and (2) such negligence or bad faith was clearly and convincingly proven.

Here, petitioner Santos entered into a contract with respondent in her capacity as the President and Chief Executive Officer of Arco
Pulp and Paper. She also issued the check in partial payment of petitioner corporation’s obligations to respondent on behalf of
petitioner Arco Pulp and Paper. This is clear on the face of the check bearing the account name, "Arco Pulp & Paper, Co., Inc."54 Any
obligation arising from these acts would not, ordinarily, be petitioner Santos’ personal undertaking for which she would be solidarily
liable with petitioner Arco Pulp and Paper.
We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines:55

Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate personality
of a corporation is abused or used for wrongful purposes. Under the doctrine, the corporate existence may be disregarded where the
entity is formed or used for non-legitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or
perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or intentions, in which case, the fiction will
be disregarded and the individuals composing it and the two corporations will be treated as identical.56 (Emphasis supplied)

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

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.1âwphi1 When petitioner
Arco Pulp and Paper’s obligation to respondent became due and demandable, she not only issued an unfunded check but also
contracted with a third party in an effort to shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor petitioner
corporation’s obligations to respondent. These acts clearly amount to bad faith. In this instance, the corporate veil may be pierced, and
petitioner Santos may be held solidarily liable with petitioner Arco Pulp and Paper.

The rate of interest due on

the obligation must be
reduced in view of Nacar v.
Gallery Frames58

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

Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,60 and we have laid down the following
guidelines with regard to the rate of legal interest:

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.61 (Emphasis supplied; citations omitted.)
According to these guidelines, the interest due on the obligation of P7,220,968.31 should now be at 6% per annum, computed from
May 5, 2007, when respondent sent his letter of demand to petitioners. This interest shall continue to be due from the finality of this
decision until its full satisfaction.

WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is AFFIRMED.

Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay respondent Dan T. Lim the amount
of P7,220,968.31 with interest of 6% per annum at the time of demand until finality of judgment and its full satisfaction, with moral
damages in the amount of P50,000.00, exemplary damages in the amount of P50,000.00, and attorney's fees in the amount
of P50,000.00.

SO ORDERED.

MARVIC MARIO VICTOR F. LEONEN

Associate Justice
 Republic of the Philippines
Supreme Court
Manila
 
 
THIRD DIVISION
 
 
SPOUSES SOFRONIO SANTOS and NATIVIDAD G.R. No. 151016
SANTOS,FROILAN SANTOS, CECILIA M.  
MACASPAC, and  
R TRANSPORT CORPORATION,  
Petitioners,  
  Present:
   
  YNARES-SANTIAGO, J.,
- versus - Chairperson,
  AUSTRIA-MARTINEZ,
  CHICO-NAZARIO,
  NACHURA, and
HEIRS OF DOMINGA LUSTRE, namely TARCISIO REYES, JJ.
MANIQUIZ, TERESITA BURGOS, FLORITA M. REYES  
and LERMIE MANIQUIZ,  
Respondents. Promulgated:
 
August 6, 2008

x-----------------------------------------------------------------------------------------x
 
DECISION
 
NACHURA, J.:
This petition for review seeks the reversal of the Court of Appeals (CA) Decision [1] dated August 23, 2001, and Resolution
dated December 10, 2001, which denied petitioners Motion to Dismiss Civil Case No. 2115, an action for Annulment of Transfer
Certificate of Title and Deed of Absolute Sale.
 
The facts, as borne by the records, are as follows:
 
Dominga Lustre, who died on October 15, 1989, owned a residential lot which is located in San Antonio, Nueva Ecija, with an
area of 390 square meters, and covered by Transfer Certificate of Title (TCT) No. NT-50384. On September 20, 1974, Dominga Lustre
mortgaged the lot to spouses Sofronio and Natividad Santos (spouses Santos) forP38,000.00.[2]
 
On May 16, 1976, Dominga Lustre sold the property to Natividad M. Santos for P15,000.00 through a Deed of Absolute Sale.
[3]
 The mortgage appears to have been canceled on March 20, 1976.[4] The cancellation of the mortgage and the sale of the property
were both inscribed at the back of TCT No. NT-50384 on April 17, 1984.
 
As a result of the sale, TCT No. NT-50384 was canceled and TCT No. NT-183029 was issued in the name of the
spouses Santos. Subsequently, the latter executed a Deed of Sale transferring the property to their son, Froilan M. Santos
(petitioner). By virtue of this deed, TCT No. NT-183029 was canceled and TCT No. 193973[5] issued in the name of Froilan Santos.
 
On April 14, 1994, Cecilia Macaspac (also a petitioner) and Tarcisio Maniquiz, both heirs of Dominga Lustre, filed  with the
Regional Trial Court (RTC) of Gapan, Nueva Ecija, a Complaint for Declaration of the Inexistence of Contract, Annulment of Title,
Reconveyance and Damages[6] against Froilan M. Santos. That case was docketed as Civil Case No. 1330. Later, the plaintiffs sought
the amendment of the complaint to include Eusebio Maniquiz as plaintiff and to include a certification against forum shopping.However,
the records in this case are bereft of any information as to whether the same was allowed by the trial court. [7] We note, however, that
only Cecilia Macaspac executed a Verification and Certification against Forum Shopping[8] in that case.
 
According to the Amended Complaint in Civil Case No. 1330, plaintiffs Cecilia and Tarcisio are the legitimate children, while
Eusebio is the spouse of Dominga Lustre, who allegedly left them the subject property when she died on October 15, 1989. They
averred that the sale of the property to Natividad Santos was simulated, spurious or fake, and that they discovered that
spouses Santos transferred the property to Froilan Santos when the latter filed an ejectment suit against them. Thereafter, Froilan
Santos, through fraud and deceit, succeeded in transferring the property. On the mistaken belief that the sale between Dominga Lustre
and Natividad Santos occurred on April 17, 1984, plaintiffs prayed that the trial court issue judgment
  
1. Ordering the inexistence of sale dated April 17, 1984 between Dominga Lustre and Natividad Santos and
subsequent thereto;
 
2. Ordering the cancellation of TCT No. NT-193973 in favor of defendant and reconvey the same to the
plaintiff;
 
3. Ordering the defendant to pay plaintiffs the sum of P20,000.00 as attorneys fee, P20,000.00 as moral
damages; P20,000.00 as litigation expenses; P20,000.00 as exemplary damages;
 
4. Ordering defendant to pay the cost of the suit;
 
5. General relief[s] are likewise prayed for in the premises. (Emphasis ours.)[9]
 
 
On September 12, 1994, the RTC, Branch 87, to which Civil Case No. 1330 was raffled, ordered the records of the case to be
referred to the municipal trial court for adjudication on the ground that the assessed value of the subject property was below the amount
within its jurisdiction.[10]
 
On May 14, 1999, while Civil Case No. 1330 was still pending, Dominga Lustres other heirs, namely, Eusebio Maniquiz,
Teresita Burgos, Tarcisio Maniquiz, Florita M. Reyes and Lermie Maniquiz filed a Complaint for Annulment of Transfer Certificate of
Title and Deed of Absolute Sale[11] against spouses Sofronio and Natividad Santos, Froilan Santos, Cecilia M. Macaspac, R Transport
Corporation, and the Register of Deeds of Cabanatuan City, with the same RTC. Cecilia Macaspac, plaintiff in Civil Case No. 1330, was
impleaded as defendant because she refused to join the other heirs as plaintiffs. The case was docketed as Civil Case No. 2115 and
was raffled to Branch 34.
 
The complaint alleged that the spouses Santos simulated the Deed of Sale dated May 16, 1976 by forging Dominga Lustres
signature; that thereafter, the spouses Santossimulated another Deed of Sale transferring the property to Froilan Santos, which led to
the issuance of TCT No. 193973 in his name; that this title became the basis of Froilans ejectment suit against them; and that R
Transport Corporation (also a petitioner), was claiming that it bought the property from Froilan but there was no evidence to prove such
claim. According to the plaintiffs (herein respondents), they had been residing in the property since birth and the house standing on the
lot was built by their ancestors. They posited that the transferees of the property could not be considered as buyers in good faith. The
complaint prayed that judgment be rendered:
 
a.       Annulling and declaring null and void the Deed of Absolute Sale, Annex C hereof; that between
spouses Santos and their son Froilan; and that purportedly between defendant Froilan and defendant
corporation;
 
b.      Annulling and declaring null and void Transfer Certificate of Title No. NT-183029 appearing to be in the name of
defendant spouses; TCT No. NT-193973 in the name of defendant Froilan M. Santos and Transfer Certificate of
Title, if any, in the name of defendant corporation;
 
c.       Reinstating Transfer Certificate of Title No. NT-50384 in the name of Dominga Lustre and directing the Register
of Deeds to do so or to issue [a] new one in the name of the deceased Dominga Lustre and canceling all titles
mentioned in the immediately preceding paragraph which [were] made to cancel Lustres title;
 
d.      Ordering defendants, jointly and severally, to pay plaintiffs the following:
 
1.)    Moral damages of P200,000.00;
2.)    Exemplary damages of P100,000.00;
3.)    Attorneys fee of P50,000.00, plus cost of suit.
 
Plaintiffs further pray for such other affirmative reliefs as are deemed just and equitable in the premises. [12]
 
 
Alleging that the plaintiffs right of action for annulment of the Deed of Sale and TCT Nos. 183029 and 193973 had long
prescribed and was barred by laches, petitioners filed a Motion to Dismiss Civil Case No. 2115. [13] They later filed an
Omnibus/Supplemental Motion to Dismiss on the ground of litis pendentia.[14]
 
On January 11, 2000, the RTC denied the Motion to Dismiss as well as the Supplemental Motion to Dismiss for lack of merit.
[15]
 On April 5, 2000, the RTC denied the Joint Motion for Reconsideration filed by petitioners.[16]
 
They then filed a petition for certiorari with the Court of Appeals (CA), assailing the denial of their motion to dismiss. On August
23, 2001, the CA dismissed the petition for lack of merit based on its finding that the RTC did not commit grave abuse of discretion in
denying the motion to dismiss.[17] On December 10, 2001, the CA denied petitioners motion for reconsideration.[18]
 
In the assailed decision, the CA pronounced that the respondents were not guilty of forum shopping. There was no identity of
parties because Cecilia Macaspac, who was a plaintiff in Civil Case No. 1330, was a defendant in Civil Case No. 2115; and there was
only one defendant in Civil Case No. 1330, while there were several additional defendants in Civil Case No. 2115. Moreover, the reliefs
demanded in the two cases differed. In Civil Case No. 1330, plaintiffs were seeking the declaration of the inexistence of a sale
dated April 17, 1984, cancellation of Froilan M. Santos certificate of title, and the reconveyance of the property to plaintiffs. On the other
hand, plaintiffs in Civil Case No. 2115 were praying for the annulment of the Deed of Absolute Sale dated  May 16, 1976, cancellation of
TCT No. NT-183029 and the succeeding TCTs, and reinstatement of TCT No. NT-50384 in the name of Dominga Lustre.[19]
 
On the issue of prescription and laches, the CA declared that an action for the declaration of the inexistence of a contract does
not prescribe, and laches could not have set in since there was no unreasonable delay in the filing of the case.[20]
 
In this petition for review, the sole issue submitted for resolution is whether the RTC committed grave abuse of discretion in
not dismissing the case based on forum shopping and prescription or laches.[21]
 
The petition has no merit. The RTC did not commit grave abuse of discretion in denying petitioners motion to dismiss.
Forum shopping exists when the elements of litis pendentia are present or when a final judgment in one case will amount
to res judicata in the other.[22] Among its elements are identity of the parties, identity of the subject matter and identity of the causes of
action in the two cases.[23]
The dispute in this case centers on whether there exist identity of causes of action and identity of parties between Civil Case
No. 1330 and Civil Case No. 2115.
Concededly, the causes of action in Civil Case No. 1330 and Civil Case No. 2115 are identical. There is identity of causes of
action if the same evidence needed in the first case will sustain the second action, and this principle applies even if the reliefs sought in
the two cases are different.[24] Without a doubt, the same evidence will be necessary to sustain the causes of action in these two cases
which are substantially based on the same series of transactions. In fact, similar reliefs are prayed for in the two cases. Both complaints
ultimately seek the cancellation of the title of the alleged transferees and the recovery of the subject property.
 
Despite this similarity, however, we hold that respondents are not guilty of forum shopping because the element of identity of
parties is not present.
 
In insisting that the parties are identical, petitioners stress that all the plaintiffs are heirs of Dominga Lustre, while the
defendants are past and present holders of the certificates of title covering the subject property. They argue that Cecilia Macaspacs
being a defendant in the second case does not change whatever interest she has in the former case, considering that she is an
indispensable party in both cases. They posit that additional parties will not prevent the application of the rule on res judicata.[25]
 
While we agree with the CA that there is no identity of parties in the two cases, we do not agree with the rationale behind its
conclusion. To recall, the CA ratiocinated that there was no identity of parties because Cecilia Macaspac, while a plaintiff in Civil Case
No. 1330, is a defendant in Civil Case No. 2115, and there are several additional defendants in Civil Case No. 2115.
 
The CA appears to have overlooked the principle that what is required is only substantial, and not absolute, identity of
parties. There is substantial identity of parties when there is a community of interest between a party in the first case and a party in the
second case, even if the latter was not impleaded in the first case. [26] Moreover, the fact that the positions of the parties are
reversed, i.e., the plaintiffs in the first case are the defendants in the second case, or vice versa, does not negate the identity of
parties for purposes of determining whether the case is dismissible on the ground of litis pendentia.[27]
 
Following these legal principles, it appears that there is identity of parties in the two cases.  However, a closer look at the facts
and a deeper understanding of pertinent jurisprudence will lead to a different conclusion: there is actually no identity of parties because
the plaintiff in Civil Case No. 1330 does not, in fact, share a common interest with the plaintiffs in Civil Case No. 2115.
 
As pointed out by petitioners, plaintiffs in both cases are the heirs of Dominga Lustre; they are therefore co-owners of the
property. However, the fact of being a co-owner does not necessarily mean that a plaintiff is acting for the benefit of the co-ownership
when he files an action respecting the co-owned property. Co-owners are not parties inter sein relation to the property owned in
common. The test is whether the additional party, the co-owner in this case, acts in the same capacity or is in privity with the parties in
the former action. [28]
 
Notably, plaintiff Cecilia Macaspac in Civil Case No. 1330 filed the complaint seeking the reconveyance of the property to her,
and not to Dominga Lustre or her heirs.This is a clear act of repudiation of the co-ownership which would negate a conclusion that she
acted in privity with the other heirs or that she filed the complaint in behalf of the co-ownership.  In contrast, respondents were evidently
acting for the benefit of the co-ownership when they filed the complaint in Civil Case No. 2115 wherein they prayed that TCT No. NT-
50384 in the name of Dominga Lustre be reinstated, or a new certificate of title be issued in her name.
 
The petitioners and respondents have squabbled over whether the additional parties in the second case are indispensable or
necessary parties on the assumption that the proper characterization of the parties will have a bearing on the determination of the
existence of identity of parties. In support of their position, the petitioners cite Juan v. Go Cotay[29] when they theorize that there is still
identity of parties although in the second action there is one party who was not joined in the former action, if it appears that such party
is not a necessary party either in the first or in the second action.[30]
 
We note, however, that the party who was not impleaded in  Go Cotay was, technically speaking, a necessary party (as
opposed to an indispensable party as defined under the Rules of Court), being the plaintiffs wife who also had an interest in the
case. Possibly, and, indeed, it seems probable that the petitioners may not have used the term necessary party in the strict legal
sense. They could really have been referring to an indispensable party. In challenging petitioners allegation, respondents obviously
understood the statement as referring to an indispensable party. They were, therefore, quick to point out that the additional plaintiffs in
Civil Case No. 2115 are indispensable parties, being co-owners of the property.[31]
  
By this debate, the parties have only muddled the issue. The determination of whether there is identity of parties rests on the
commonality of the parties interest, regardless of whether they are indispensable parties or not. The issue of whether the additional
parties are indispensable parties or not acquires real significance only when considering the validity of the judgment that will be
rendered in the earlier case. This is so, because if the additional parties are indispensable parties, then no valid judgment can be
rendered against them in the earlier case in which they did not participate, and this will foreclose the application of res judicata which
requires the existence of a final judgment.
 
Without question, a co-owner may bring an action to recover the co-owned property without the necessity of joining all the
other co-owners as co-plaintiffs because the suit is deemed to be instituted for the benefit of all. In such case, the other heirs are merely
necessary parties. Parenthetically, the inclusion among the defendants of Cecilia Macaspac, who refused to join the other heirs as
plaintiffs in Civil Case No. 2115, was not actually necessary.
 
However, if the action is for the benefit of the plaintiff alone, as in Civil Case No. 1330, the action will not prosper unless he
impleads the other co-owners who are indispensable parties.[32] The absence of an indispensable party renders all subsequent actions
of the court null and void for want of authority to act, not only as to the absent parties but even as to those present. [33] The trial court
does not acquire jurisdiction over the indispensable parties who are not impleaded in the case, and judgment thereon cannot be valid
and binding against them. A decision that is null and void for want of jurisdiction on the part of the trial court is not a decision in
contemplation of law; hence, it can never become final and executory.[34]
 
Worth mentioning is the doctrine that any adverse ruling in the earlier case will not, in any way, prejudice the heirs who did not
join, even if such case was actually filed in behalf of all the co-owners. In fact, if an action for recovery of property is
dismissed, a subsequent action by a co-heir who did not join the earlier case should not be barred by prior judgment. [35] Any judgment
of the court in favor of the co-owner will benefit the others, but if the judgment is adverse, the same cannot prejudice the rights of the
unimpleaded co-owners.[36] 
 
Applying these principles to the instant case, we rule that there is no identity of parties and thus, the second action is not
barred by litis pendentia.
 
On the issue of prescription and laches, we fully agree with the CA. The action for reconveyance on the ground that the
certificate of title was obtained by means of a fictitious deed of sale is virtually an action for the declaration of its nullity, which does not
prescribe.[37] Moreover, a person acquiring property through fraud becomes, by operation of law, a trustee of an implied trust  for the
benefit of the real owner of the property. An action for reconveyance based on an implied trust prescribes in ten years. And in such
case, the prescriptive period applies only if there is an actual need to reconvey the property as when the plaintiff is not in possession of
the property. Otherwise, if plaintiff isin possession of the property, prescription does not commence to run against him. Thus, when an
action for reconveyance is nonetheless filed, it would be in the nature of a suit for quieting of title, an action that is imprescriptible. [38]
 
It follows then that the respondents present action should not be barred by laches. Laches is a doctrine in equity, which may
be used only in the absence of, and never against, statutory law. Obviously, it cannot be set up to resist the enforcement of an
imprescriptible legal right.[39]
 
Finally, it is true that an action for reconveyance will not prosper when the property sought to be reconveyed is in the hands of
an innocent purchaser for value. In this case, however, the protection of the rights of any alleged innocent purchaser is a matter that
should be threshed out in the main case and not in these proceedings.
 
WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated August 23, 2001, and
Resolution dated December 10, 2001, areAFFIRMED.
 
SO ORDERED.
 
 
 
ANTONIO EDUARDO B. NACHURA
Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-11897            October 31, 1964

FERNANDO A. FROILAN, plaintiff-appellee, 
vs.
PAN ORIENTAL SHIPPING COMPANY, defendant-appellant, 
REPUBLIC OF THE PHILIPPINES, and COMPANIA MARITIMA, intervenors-appellees.

Sycip, Salazar & Associates and Enrique Fernando & Emma Quisumbing-Fernando for defendant-appellant. 
The Government Corporate Counsel for intervenors-appellees. 
Rafael Dinglasan for plaintiff-appellee.

BARRERA, J.:

On March 7, 1947, Fernando A. Froilan purchased from the Shipping Administration a boat described as MV/FS 197 for the sum of
P200,000.00, with a down payment of P50,000,00. To secure payment of the unpaid balance of the purchase price, a mortgage was
constituted on the vessel in favor of the Shipping Administration in a contract which provides, among others, the following:

In the event that the FIRST PARTY should elect to exercise its rights to rescind under the terms of this contract, it shall have
the right to take possession of the vessel herein sold in the condition that it is at the time of rescission but in no case in a
worse condition than when originally delivered to the second party, ordinary wear and tear excepted and in case at the time of
rescission the condition of the vessel is not satisfactory to the FIRST PARTY, it shall have the right to have the vessel
reconditioned, repaired, dry-docked at the expense of the SECOND PARTY. The same right is hereby granted to the FIRST
PARTY in case the SECOND PARTY should for any reason refuse or fail to comply with this condition of sale and return the
vessel herein sold in a condition not satisfactory to the FIRST PARTY.

The right of rescission shall be considered as a cumulative remedy granted to the FIRST PARTY and shall not in any way
prejudice his right to demand immediate and complete payment of the purchase price of the vessel under the terms herein
provided, and to demand and collect from the SECOND PARTY such damages caused by the non-compliance with this
contract.

This contract was duly approved by the President of the Philippines.

Froilan appeared to have defaulted in spite of demands, not only in the payment of the first installment on the unpaid balance of the
purchase price and the interest thereon when they fell due, but also failed in his express undertaking to pay the premiums on the
insurance coverage of the vessel, obliging the Shipping Administration to advance such payment to the insurance company.
Consequently, the Shipping Administration requested the Commissioner of Customs on June 1, 1948 to refuse clearance on the vessel
and the voyage thereof was ordered suspended.

Thereafter, Froilan asked for a reconsideration of the action taken by the Shipping Administration, claiming that his failure to pay the
required installments was due to the fact that he was awaiting the decision of the President on the petition of the shipowners for an
extension of the period of payment of the purchased vessels, which petition was favorably acted upon.

On July 3, 1948, the Shipping Administration and Froilan entered into an agreement whereby the latter undertook to liquidate
immediately all of his outstanding accounts, including the insurance premiums, within 30 days, and have the vessel overhauled, and
promised that in case of his default, he shall "waive, any formal notice of demand and to redeliver the said vessel peaceably and
amicably without any other proceedings" (Exh. 39).

Again, Froilan failed to settle his accounts within the prescribed period, thus, the Shipping Administration threatened to rescind the
contract unless payment be immediately made. On August 28, 1948, upon Froilan's request, the Shipping Administration agreed to
release the vessel on condition that the same would be overhauled and repaired and the accrued interest on the first installment would
be paid. The Administration also allowed the mortgagor to pay his overdue accounts, amounting now to P48,500.00 in monthly
installments, with warming that in case of further default, it would immediately repossess the vessel and rescind the contract. Froilan
failed to pay. On January 17, 1949, the Shipping Administration required him to return the vessel or else file a bond for P25,000.00 in
five days. In a letter dated January 28, 1949, Froilan requested that the period for filing the bond be extended to February 15, 1949,
upon the express condition and understanding that:
 ... . If I fail to file the required bond on the said date, February 15, 1949, to the satisfaction of the Shipping Administration, I am
willing to relinquish and I do hereby relinquish any and all rights I have or may have on the said vessel including any payments
made thereon to the Shipping Administration, without prejudice to other rights the Shipping Administration may have against
me under the contract of sale executed in my favor.

I wish to reiterate that if I fail to file the bond within the period I have requested, any and all rights I have on the vessel and any
payments made to the Shipping Administration shall be considered automatically forfeited in favor of the Shipping
Administration and the ownership of the said vessel will be as it is hereby automatically transferred to the Shipping
Administration which is then hereby authorized to take immediate possession of said vessel. (Exh. 66)

This letter of Froilan was submitted by the General Manager of the Shipping Administration to the board of directors for proper
consideration. By resolution of January 31, 1949, the petition was granted subject specifically to the conditions set forth therein. Froilan
again failed to make good his promises. Hence, on February 18, 1949, the General Manager of the Shipping Ad-ministration wrote the
Collector of Customs of Manila, advising the latter that the Shipping Administration, by action of its board, terminated the contract with
Froilan, and requesting the suspension of the clearance of the boat effective that date (Exh. 70).

On February 21, 1949, the General Manager directed its officers, Capt. Laconico and others, to take immediate possession of the
vessel and to suspend the unloading of all cargoes on the same until the owners thereof made the corresponding arrangement with the
Shipping Administration. Pursuant to these instructions, the boat was, not only actually repossessed, but the title thereto was registered
again in the name of the Shipping Administration, thereby re-transferring the ownership thereof to the government.

On February 22, 1949, Pan Oriental Shipping Co., hereinafter referred to as Pan Oriental, offered to charter said vessel FS-197 for a
monthly rent of P3,000.00. Because the government was then spending for the guarding of the boat and subsistence of the crew-
members since repossession, the Shipping Administration on April 1, 1949, accepted Pan Oriental's offer "in principle" subject to the
condition that the latter shall cause the repair of the vessel, advancing the cost of labor and drydocking thereof, and the Shipping
Administration to furnish the necessary spare parts. In accordance with this charter contract, the vessel was delivered to the possession
of Pan Oriental.

In the meantime, or on February 22, 1949, Froilan tried to explain his failure to comply with the obligations he assumed and asked that
he be given another extension up to March 15, 1949 to file the necessary bond. Then on March 8, Froilan offered to pay all his overdue
accounts. However, as he failed to fulfill even these offers made by him in these two communications, the Shipping Administration
denied his petition for reconsideration (of the rescission of the contract) on March 22, 1949. It should be noted that while his petition for
reconsideration was denied on March 22, it does not appear when he formally formulated his appeal. In the meantime, as already
stated, the boat has being repossessed by the Shipping Administration and the title thereto re-registered in the name of the
government, and delivered to the Pan Oriental in virtue of the charter agreement. On June 2, 1949, Froilan protested to the President
against the charter of the vessel.

On the same date, the Executive Office advised the Administration and the Commissioner of Customs not to dispose of the vessel in
favor of another party pending final decision by the President on the appeal of Froilan (Exhs. 93-A and 93-D). But since the vessel was
already cleared in favor of Pan Oriental prior to the receipt of the foregoing communication, and allegedly in order to prevent its being
made answerable for damages, the General Manager of the Shipping Administration advised the Collector of Customs not to suspend
the voyage of the vessel pending final decision on the appeal of Froilan. Similar manifestation, to allow the Pan Oriental's operation of
the vessel without prejudice to whatever action the President may take in the case, was also made by the Administration to the
Executive Secretary.

On June 4, 1949, the Shipping Administration and the Pan Oriental formalized the charter agreement and signed a bareboat contract
with option to purchase, containing the following pertinent provisions:

III. CHARTER HIRE, TIME OF PAYMENT. — The CHARTERER shall pay to the owner a monthly charter hire of THREE
THOUSAND (P3,000.00) PESOS from date of delivery of the vessel, payable in advance on or before the 5th of every current
month until the return of the vessel to OWNER or purchase of the vessel by CHARTERER.

XII. RIGHT OF OPTION TO PURCHASE. — The right of option to purchase the vessel at the price of P150,000.00 plus the
amount expended for its present repairs is hereby granted to the CHARTERER within 120 days from the execution of this
Contract, unless otherwise extended by the OWNER. This right shall be deemed exercised only if, before the expiration of the
said period, or its extension by the OWNER the CHARTERER completes the payment, including any amount paid as Charter
hire, of a total sum of not less than twenty-five percentum (25%) of said price of the vessel.

The period of option may be extended by the OWNER without in any way affecting the other provisions, stipulations, and
terms of this contract.

If, for any reason whatsoever, the CHARTERER fails to exercise its option to purchase within the period stipulated, or within
the extension thereof by the OWNER, its right of option to purchase shall be deemed terminated, without prejudice to the
continuance of the Charter Party provisions of this contract. The right to dispose of the vessel or terminate the Charter Party at
its discretion is reserved to the OWNER.
 XIII. TRANSFER OF OWNERSHIP OF THE VESSEL. — After the CHARTERER has exercised his right of option as provided
in the preceding paragraph (XII), the vessel shall be deemed conditionally sold to the purchaser, but the ownership thereof
shall not be deemed transferred unless and until all the price of the vessel, together with the interests thereon, and any other
obligation due and payable to the OWNER under this contract, have been fully paid by the CHARTERER.

xxx           xxx           xxx

XXI. APPROVAL OF THE PRESIDENT. — This contract shall take effect only upon approval of His Excellency, the President.

On September 6, 1949, the Cabinet revoked the cancellation of Froilan's contract of sale and restored to him all his rights thereunder,
on condition that he would give not less than P10,000.00 to settle partially his overdue accounts and that reimbursement of the
expenses incurred for the repair and drydocking of the vessel performed by Pan Oriental was to be made in accordance with future
adjustment between him and the Shipping Administration (Exh. I). Later, pursuant to this reservation, Froilan's request to the Executive
Secretary that the Administration advance the payment of the expenses incurred by Pan Oriental in the drydocking and repair of the
vessel, was granted on condition that Froilan assume to pay the same and file a bond to cover said undertaking (Exh. 111).

On September 7, 1949, the formal bareboat charter with option to purchase filed on June 4, 1949, in favor of the Pan Oriental was
returned to the General Manager of the Shipping Administration without action (not disapproval), only because of the Cabinet resolution
of September 6, 1949 restoring Froilan to his rights under the conditions set forth therein, namely, the payment of P10,000.00 to settle
partially his overdue accounts and the filing of a bond to guarantee the reimbursement of the expenses incurred by the Pan Oriental in
the drydocking and repair of the vessel. But Froilan again failed to comply with these conditions. And so the Cabinet, considering
Froilan's consistent failure to comply with his obligations, including those imposed in the resolution of September 6, 1949, resolved to
reconsider said previous resolution restoring him to his previous rights. And, in a letter dated December 3, 1949, the Executive
Secretary authorized the Administration to continue its charter contract with Pan Oriental in respect to FS-197 and enforce whatever
rights it may still have under the original contract with Froilan (Exh. 188).

Froilan, for his part, petitioned anew for a reconsideration of this action of the Cabinet, claiming that other ship purchasers, including the
President-Treasurer of the Pan Oriental himself, had also defaulted in payment and yet no action to rescind their contracts had been
taken against them. He also offered to make a cash partial payment of P10,000.00 on his overdue accounts and reimburse Pan
Oriental of all its necessary expense on the vessel. Pan Oriental, however, not only expressed its unwillingness to relinquish
possession of the vessel, but also tendered the sum of P15,000.00 which, together with its alleged expenses already made on the
vessel, cover 25% of the cost of the vessel, as provided in the option granted in the bareboat contract (Exh. 122). This amount was
accepted by the Administration as deposit, subject to the final determination of Froilan's appeal by the President. The Executive
Secretary was also informed of the exercise by Pan Oriental of said option to purchase.

On August 25, 1950, the Cabinet resolved once more to restore Froilan to his rights under the original contract of sale, on condition that
he shall pay the sum of P10,000.00 upon delivery of the vessel to him, said amount to be credited to his outstanding accounts; that he
shall continue paying the remaining installments due, and that he shall assume the expenses incurred for the repair and drydocking of
the vessel (Exh. 134). Pan Oriental protested to this restoration of Froilan's rights under the contract of sale, for the reason that when
the vessel was delivered to it, the Shipping Administration had authority to dispose of the said property, Froilan having already
relinquished whatever rights he may have thereon. Froilan paid the required cash of P10,000.00, and as Pan Oriental refused to
surrender possession of the vessel, he filed an action for replevin in the Court of First Instance of Manila (Civil Case No. 13196) to
recover possession thereof and to have him declared the rightful owner of said property.

Upon plaintiff's filing a bond of P400,000.00, the court ordered the seizure of the vessel from Pan Oriental and its delivery to the
plaintiff. Pan Oriental tried to question the validity of this order in a petition for certiorari filed in this Court (G.R. No. L-4577), but the
same was dismissed for lack of merit by resolution of February 22, 1951. Defendant accordingly filed an answer, denying the
averments of the complaint.

The Republic of the Philippines, having been allowed to intervene in the proceeding, also prayed for the possession of the vessel in
order that the chattel mortgage constituted thereon may be foreclosed. Defendant Pan Oriental resisted said intervention, claiming to
have a better right to the possession of the vessel by reason of a valid and subsisting contract in its favor, and of its right of retention, in
view of the expenses it had incurred for the repair of the said vessel. As counterclaim, defendant demanded of the intervenor to comply
with the latter's obligation to deliver the vessel pursuant to the provisions of the charter contract.

Thereafter, and upon plaintiff's presenting proof that he had made payment to the intervenor Republic of the Philippines, of the sum of
P162,576.96, covering the insurance premiums, unpaid balance of the purchase price of the vessel and interest thereon, the lower
court by order of February 8, 1952, dismissed the complaint in intervention on the ground that the claim or demand therein had already
been released. Said dismissal, however, was made without prejudice to the determination of defendant's right, and that the release and
cancellation of the chattel mortgage did not "prejudge the question involved between the plaintiff and the defendant which is still the
subject of determination in this case."

In view of the dismissal of its complaint, intervenor Republic of the Philippines also moved for the dismissal of defendant's
counterclaims against it, which was granted by the court. On appeal by Pan Oriental to this Court (G.R. No. L-6060), said order was
reversed and the case remanded to the lower court for further proceedings.
Subsequently, Compañia Maritima, as purchaser of the vessel from Froilan, was allowed to intervene in the proceedings (in the lower
court), said intervenor taking common cause with the plaintiff Froilan. In its answer to the complaint in intervention, defendant set up a
counterclaim for damages in the sum of P50,000.00, alleging that plaintiff secured the Cabinet resolutions and the writ of replevin,
resulting in its deprivation of possession of the, vessel, at the instigation and inducement of Compañia Maritima. This counterclaim was
denied by both plaintiff and intervenor Maritima.

On September 28, 1956, the lower court rendered a decision upholding Froilan's (and Compañia Maritima's) right to the ownership and
possession of the FS-197. It was ruled that Froilan's violations of the conditions of the contract of sale in his favor did not automatically
deprive him of his right of ownership of the vessel, which passed to him upon execution of the contract, but merely gave rise to the
Shipping Administration's right either to foreclose the mortgage or rescind the contract by court action. As the Shipping Administration
failed to avail itself of any of these remedies, Froilan's right of ownership remained unaffected. And the subsequent resolutions of the
Cabinet, restoring him to his rights under the said contract, reaffirmed the same. The charter contract between the Shipping
Administration and defendant was declared null and void, not only because the former could not have legally bound the vessel, but also
due to the fact that said agreement has not been perfected for lack of approval by the President of the Philippines. And, even assuming
that the said charter contract was valid, the lower court held that, as the owner (Republic of the Philippines) under the same agreement
was given the right to terminate the charter or dispose of the vessel anytime, the action of the Cabinet in cancelling or withdrawing the
rescission of Froilan's contract, had the effect of terminating the charter agreement with the defendant. The court also dismissed (1)
defendant's counterclaims against plaintiff Froilan and intervenor Compañia Maritima, on the ground that it (defendant) was a
possessor in bad faith, and consequently, not entitled to damages; (2) plaintiff's counterclaims against defendant, for the reason that
the same should have been directed against intervenor Republic of the Philippines; and (3) defendant's counterclaims said intervenor
Republic, on the ground that the order dismissing the complaint in intervention had already become final and it was materially
impossible for the latter to secure possession of the vessel. From this decision, Pan Oriental brought the instant appeal.

Contrary to appellant's contention, the ruling of the lower court that under the contract of sale with mortgage, ownership of the vessel
passed to Froilan, upon delivery of the property to the latter, must be sustained. It is to be noted that unlike in the charter contract
where it was specifically prescribed that ownership of the vessel shall be transferred to the vendee only upon full payment of the
purchase price, no similar provision appears in the contract of sale in favor of Froilan. In the absence of stipulation to the contrary, the
ownership of the thing sold passes to the vendee upon the actual or constructive delivery thereof (Art. 1477, new Civil Code). It is for
this reason that Froilan was able to constitute a mortgage on the vessel in favor of the Administration, to secure payment of the unpaid
balance of the purchase price.

There is no gainsaying the fact that there was continuous violation by Froilan of the terms of said contract of sale. The records
conclusively show that notwithstanding the numerous opportunities given him, Froilan had been remiss in the fulfillment of his
obligations thereunder. Nevertheless, the lower court upheld his allegation that the Administration may not legally rescind the contract
without filing the corresponding complaint in court.

Under Article 11911 of the Civil Code, in case of reciprocal obligations, the power to rescind the contract where a party incurs in default,
is impliedly given to the injured party. Appellee maintains however, that the law contemplates of rescission of contract by judicial action
and not a unilateral act by the injured party; consequently, the action of the Shipping Administration contravenes said provision of the
law. This is not entirely correct, because there is also nothing in the law that prohibits the parties from entering into agreement that
violation of the terms of the contract would cause cancellation thereof, even without court intervention. In other words, it is not always
necessary for the injured party to resort to court for rescission of the contract. As already held2judicial action is needed where there, is
absence of special provision in the contract granting to a party the right of rescission.

In the instant case, while it may be true that the contract of sale did not expressly give to the mortgagee the right to cancel the
agreement it was, nevertheless, provided therein that said party may rescind the contract as it may see fit in case of breach of the terms
thereof by the mortgagor. Taking into account the promises, waivers and representations made by Froilan, to the extent that he agreed
to the automatic transfer of ownership of the vessel to the Administration, should he fall to fulfill what was incumbent upon him, which
did happen, the rescission of the contract without judicial action is proper.

The next question to be determined is whether there had been a valid and enforceable charter contract in favor of appellant Pan
Oriental, and what was the effect thereon of the subsequent restoration to Froilan by the Cabinet, of his rights under the original
contract of sale with mortgage.

It is not disputed that appellant Pan Oriental took possession of the vessel in question after it had been repossessed by the Shipping
Administration and title thereto reacquired by the government, and operated the same from June 2, 1949 after it had repaired the
vessel until it was dispossessed of the property on February 3, 1951, in virtue of a bareboat charter contract entered into between said
company and the Shipping Administration. In the same agreement, appellant as charterer, was given the option to purchase the vessel,
which may be exercised upon payment of a certain amount within a specified period. The President and Treasurer of the appellant
company, tendered the stipulated initial payment on January 16, 1950. Appellant now contends that having exercised the option, the
subsequent Cabinet resolutions restoring Froilan's rights on the vessel violated its existing rights over the same property. To the
contention of plaintiff Froilan that the charter contract never became effective because it never received presidential approval, as
required therein, Pan Oriental answers that the letter of the Executive Secretary dated December 3, 1949 (Exh. 118), authorizing the
Shipping Administration to continue its charter contract with appellant, satisfies such requirement (of presidential approval). It is to be
noted, however, that said letter was signed by the Executive Secretary only and not under authority of the President. The same,
therefore, cannot be considered to have attached unto the charter contract the required consent of the Chief Executive for its validity.
Upon the other hand, the Cabinet resolutions purporting to restore Froilan to his former rights under the deed of sale, cannot also be
considered as an act of the President which is specifically required in all contracts relating to these vessels (Executive Order No. 31,
series of 1946). Actions of the Cabinet are merely recommendatory or advisory in character. Unless afterwards specifically adopted by
the President as his own executive act, they cannot be considered as equivalent to the act of approval of the President expressly
required in cases involving disposition of these vessels.

In the circumstances of this case, therefore, the resulting situation is that neither Froilan nor the Pan Oriental holds a valid contract over
the vessel. However, since the intervenor Shipping Administration, representing the government practically ratified its proposed contract
with Froilan by receiving the full consideration of the sale to the latter, for which reason the complaint in intervention was dismissed as
to Froilan, and since Pan Oriental has no capacity to question this actuation of the Shipping Administration because it had no valid
contract in its favor, the decision of the lower court adjudicating the vessel to FroiIan and its successor Compañia Maritima, must be
sustained. Nevertheless, under the circumstances already adverted to, Pan Oriental cannot be considered a possessor in bad faith until
after the institution of the instant case. However, since it is not disputed that said appellant made useful and necessary expenses on the
vessel, appellant is entitled to the refund of such expenses with the right to retain the vessel until he has been reimbursed therefor (Art.
546, Civil Code). As it is by the concerted acts of defendants and intervenor Republic of the Philippines that appellant was deprived of
the possession of the vessel over which appellant had a lien for his expenses, appellees Froilan, Compañia Maritima, and the Republic
of the Philippines3are declared liable for the reimbursement to appellant of its legitimate expenses, as allowed by law, with legal interest
from the time of disbursement.

Modified in this manner, the decision appealed from is affirmed, without costs. Case is remanded to the lower court for further
proceedings in the matter of expenses. So ordered.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Paredes, Bengzon, J.P., and Zaldivar, JJ., concur. 
Dizon, Regala and Makalintal, JJ.,  took no part.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 189145               December 4, 2013

OPTIMUM DEVELOPMENT BANK, Petitioner, 

vs.
SPOUSES BENIGNO V. JOVELLANOS and LOURDES R. JOVELLANOS, Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated May 29, 2009 and Resolution 3 dated August 10, 2009 of the
Court of Appeals (CA) in CA-G.R. SP No. 104487 which reversed the Decision4 dated December 27, 2007 of the Regional Trial Court of
Caloocan City, Branch 128 (RTC) in Civil Case No. C-21867 that, in turn, affirmed the Decision5 dated June 8, 2007 of the Metropolitan
Trial Court, Branch 53 of that same city (MeTC) in Civil Case No. 06-28830 ordering respondents-spouses Benigno and Lourdes
Jovellanos (Sps. Jovellanos) to, inter alia, vacate the premises of the property subject of this case.

The Facts

On April 26, 2005, Sps. Jovellanos entered into a Contract to Sell6 with Palmera Homes, Inc. (Palmera Homes) for the purchase of a
residential house and lot situated in Block 3, Lot 14, Villa Alegria Subdivision, Caloocan City (subject property) for a total consideration
of P1,015,000.00. Pursuant to the contract, Sps. Jovellanos took possession of the subject property upon a down payment
of P91,500.00, undertaking to pay the remaining balance of the contract price in equal monthly installments of P13,107.00 for a period
of 10 years starting June 12, 2005.7

On August 22, 2006, Palmera Homes assigned all its rights, title and interest in the Contract to Sell in favor of petitioner Optimum
Development Bank (Optimum) through a Deed of Assignment of even date.8

On April 10, 2006, Optimum issued a Notice of Delinquency and Cancellation of Contract to Sell9 for Sps. Jovellanos’s failure to pay
their monthly installments despite several written and verbal notices.10

In a final Demand Letter dated May 25, 2006,11 Optimum required Sps. Jovellanos to vacate and deliver possession of the subject
property within seven (7) days which, however, remained unheeded. Hence, Optimum filed, on November 3, 2006, a complaint for
unlawful detainer12 before the MeTC, docketed as Civil Case No. 06-28830. Despite having been served with summons, together with a
copy of the complaint,13 Sps. Jovellanos failed to file their answer within the prescribed reglementary period, thus prompting Optimum to
move for the rendition of judgment.14

Thereafter, Sps. Jovellanos filed their opposition with motion to admit answer, questioning the jurisdiction of the court, among others.
Further, they filed a Motion to Reopen and Set the Case for Preliminary Conference, which the MeTC denied.

The MeTC Ruling

In a Decision15 dated June 8, 2007, the MeTC ordered Sps. Jovellanos to vacate the subject property and pay Optimum reasonable
compensation in the amount of P5,000.00 for its use and occupation until possession has been surrendered. It held that Sps.
Jovellanos’s possession of the said property was by virtue of a Contract to Sell which had already been cancelled for non-payment of
the stipulated monthly installment payments. As such, their "rights of possession over the subject property necessarily terminated or
expired and hence, their continued possession thereof constitute[d] unlawful detainer."16

Dissatisfied, Sps. Jovellanos appealed to the RTC, claiming that Optimum counsel made them believe that a compromise agreement
was being prepared, thus their decision not to engage the services of counsel and their concomitant failure to file an answer.17

They also assailed the jurisdiction of the MeTC, claiming that the case did not merely involve the issue of physical possession but
rather, questions arising from their rights under a contract to sell which is a matter that is incapable of pecuniary estimation and,
therefore, within the jurisdiction of the RTC.18

The RTC Ruling

In a Decision19 dated December 27, 2007, the RTC affirmed the MeTC’s judgment, holding that the latter did not err in refusing to admit
Sps. Jovellanos’ s belatedly filed answer considering the mandatory period for its filing. It also affirmed the MeTC’s finding that the
action does not involve the rights of the respective parties under the contract but merely the recovery of possession by Optimum of the
subject property after the spouses’ default.20

Aggrieved, Sps. Jovellanos moved for reconsideration which was, however, denied in a Resolution21 dated June 27, 2008. Hence, the
petition before the CA reiterating that the RTC erred in affirming the decision of the MeTC with respect to:

(a) the non-admission of their answer to the complaint; and

(b) the jurisdiction of the MeTC over the complaint for unlawful detainer.22

The CA Ruling

In an Amended Decision23 dated May 29, 2009, the CA reversed and set aside the RTC’s decision, ruling to dismiss the complaint for
lack of jurisdiction. It found that the controversy does not only involve the issue of possession but also the validity of the cancellation of
the Contract to Sell and the determination of the rights of the parties thereunder as well as the governing law, among others, Republic
Act No. (RA) 6552.24

Accordingly, it concluded that the subject matter is one which is incapable of pecuniary estimation and thus, within the jurisdiction of the
RTC.25

Undaunted, Optimum moved for reconsideration which was denied in a Resolution26 dated August 10, 2009. Hence, the instant petition,
submitting that the case is one for unlawful detainer, which falls within the exclusive original jurisdiction of the municipal trial courts, and
not a case incapable of pecuniary estimation cognizable solely by the regional trial courts.

The Court’s Ruling

The petition is meritorious. What is determinative of the nature of the action and the court with jurisdiction over it are the allegations in
the complaint and the character of the relief sought, not the defenses set up in an answer.27

A complaint sufficiently alleges a cause of action for unlawful detainer if it recites that:

(a) initially, possession of the property by the defendant was by contract with or by tolerance of the plaintiff;

(b) eventually, such possession became illegal upon notice by plaintiff to defendant of the termination of the latter's right of
possession;

(c) thereafter, defendant remained in possession of the property and deprived plaintiff of the enjoyment thereof; and

(d) within one year from the last demand on defendant to vacate the property, plaintiff instituted the complaint for ejectment.28

Corollarily, the only issue to be resolved in an unlawful detainer case is physical or material possession of the property involved,
independent of any claim of ownership by any of the parties involved.29

In its complaint, Optimum alleged that it was by virtue of the April 26, 2005 Contract to Sell that Sps. Jovellanos were allowed to take
possession of the subject property. However, since the latter failed to pay the stipulated monthly installments, notwithstanding several
written and verbal notices made upon them, it cancelled the said contract as per the Notice of Delinquency and Cancellation dated April
10, 2006. When Sps. Jovellanos refused to vacate the subject property despite repeated demands, Optimum instituted the present
action for unlawful detainer on November 3, 2006, or within one year from the final demand made on May 25, 2006.

While the RTC upheld the MeTC’s ruling in favor of Optimum, the CA, on the other hand, declared that the MeTC had no jurisdiction
over the complaint for unlawful detainer, reasoning that the case involves a matter which is incapable of pecuniary estimation – i.e., the
validity of the cancellation of the Contract to Sell and the determination of the rights of the parties under the contract and law – and
hence, within the jurisdiction of the RTC. The Court disagrees. Metropolitan Trial Courts are conditionally vested with authority to
resolve the question of ownership raised as an incident in an ejectment case where the determination is essential to a complete
adjudication of the issue of possession.30 Concomitant to the ejectment court’s authority to look into the claim of ownership for purposes
of resolving the issue of possession is its authority to interpret the contract or agreement upon which the claim is premised. Thus, in the
case of Oronce v. CA,31 wherein the litigants’ opposing claims for possession was hinged on whether their written agreement reflected
the intention to enter into a sale or merely an equitable mortgage, the Court affirmed the propriety of the ejectment court’s examination
of the terms of the agreement in question by holding that, "because metropolitan trial courts are authorized to look into the ownership of
the property in controversy in ejectment cases, it behooved MTC Branch 41 to examine the bases for petitioners’ claim of ownership
that entailed interpretation of the Deed of Sale with Assumption of Mortgage."32Also, in Union Bank of the Philippines v. Maunlad
Homes, Inc.33 (Union Bank), citing Sps. Refugia v. CA,34 the Court declared that MeTCs have authority to interpret contracts in unlawful
detainer cases, viz.:35

The authority granted to the MeTC to preliminarily resolve the issue of ownership to determine the issue of possession ultimately allows
it to interpret and enforce the contract or agreement between the plaintiff and the defendant. To deny the MeTC jurisdiction over a
complaint merely because the issue of possession requires the interpretation of a contract will effectively rule out unlawful detainer as a
remedy. As stated, in an action for unlawful detainer, the defendant’s right to possess the property may be by virtue of a contract,
express or implied;

corollarily, the termination of the defendant’s right to possess would be governed by the terms of the same contract.

Interpretation of the contract between the plaintiff and the defendant is inevitable because it is the contract that initially granted the
defendant the right to possess the property; it is this same contract that the plaintiff subsequently claims was violated or extinguished,
terminating the defendant’s right to possess. We ruled in Sps. Refugia v. CA that – where the resolution of the issue of possession
hinges on a determination of the validity and interpretation of the document of title or any other contract on which the claim of
possession is premised, the inferior court may likewise pass upon these issues.

The MeTC’s ruling on the rights of the parties based on its interpretation of their contract is, of course, not conclusive, but is merely
provisional and is binding only with respect to the issue of possession. (Emphases supplied; citations omitted)

In the case at bar, the unlawful detainer suit filed by Optimum against Sps. Jovellanos for illegally withholding possession of the subject
property is similarly premised upon the cancellation or termination of the Contract to Sell between them. Indeed, it was well within the
jurisdiction of the MeTC to consider the terms of the parties’ agreement in order to ultimately determine the factual bases of Optimum’s
possessory claims over the subject property. Proceeding accordingly, the MeTC held that Sps. Jovellanos’s non-payment of the
installments due had rendered the Contract to Sell without force and effect, thus depriving the latter of their right to possess the
property subject of said contract.36 The foregoing disposition aptly squares with existing jurisprudence. As the Court similarly held in the
Union Bank case, the seller’s cancellation of the contract to sell necessarily extinguished the buyer’s right of possession over the
property that was the subject of the terminated agreement.37

Verily, in a contract to sell, the prospective seller binds himself to sell the property subject of the agreement exclusively to the
prospective buyer upon fulfillment of the condition agreed upon which is the full payment of the purchase price but reserving to himself
the ownership of the subject property despite delivery thereof to the prospective buyer.38

The full payment of the purchase price in a contract to sell is a suspensive condition, the non-fulfillment of which prevents the
prospective seller’s obligation to convey title from becoming effective,39 as in this case. Further, it is significant to note that given that
the Contract to Sell in this case is one which has for its object real property to be sold on an installment basis, the said contract is
especially governed by – and thus, must be examined under the provisions of – RA 6552, or the "Realty Installment Buyer Protection
Act", which provides for the rights of the buyer in case of his default in the payment of succeeding installments. Breaking down the
provisions of the law, the Court, in the case of Rillo v. CA,40 explained the mechanics of cancellation under RA 6552 which are based
mainly on the amount of installments already paid by the buyer under the subject contract, to wit:41

Given the nature of the contract of the parties, the respondent court correctly applied Republic Act No. 6552. Known as the Maceda
Law, R.A. No. 6552 recognizes in conditional sales of all kinds of real estate (industrial, commercial, residential) the right of the seller to
cancel the contract upon non-payment of an installment by the buyer, which is simply an event that prevents the obligation of the
vendor to convey title from acquiring binding force. It also provides the right of the buyer on installments in case he defaults in the
payment of succeeding installments, viz.:

(1) Where he has paid at least two years of installments,

(a) To pay, without additional interest, the unpaid installments due within the total grace period earned by him, which is hereby fixed at
the rate of one month grace period for every one year of installment payments made:

Provided, That this right shall be exercised by the buyer only once in every five years of the life of the contract and its extensions, if any.
(b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent
to fifty per cent of the total payments made and, after five years of installments, an additional five per cent every year but not to exceed
ninety per cent of the total payments made:

Provided, That the actual cancellation of the contract shall take place after cancellation or the demand for rescission of the contract by a
notarial act and upon full payment of the cash surrender value to the buyer.

Down payments, deposits or options on the contract shall be included in the computation of the total number of installments made.

(2) Where he has paid less than two years in installments, Sec. 4. x x x the seller shall give the buyer a grace period of not less than
sixty days from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace period,
the seller may cancel the contract after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of
the contract by a notarial act. (Emphasis and underscoring supplied)

Pertinently, since Sps. Jovellanos failed to pay their stipulated monthly installments as found by the MeTC, the Court examines
Optimum’s compliance with Section 4 of RA 6552, as above-quoted and highlighted, which is the provision applicable to buyers who
have paid less than two (2) years-worth of installments. Essentially, the said provision provides for three (3) requisites before the seller
may actually cancel the subject contract: first, the seller shall give the buyer a 60-day grace period to be reckoned from the date the
installment became due; second, the seller must give the buyer a notice of cancellation/demand for rescission by notarial act if the
buyer fails to pay the installments due at the expiration of the said grace period; and third, the seller may actually cancel the contract
only after thirty (30) days from the buyer’s receipt of the said notice of cancellation/demand for rescission by notarial act. In the present
case, the 60-day grace period automatically operated42 in favor of the buyers, Sps. Jovellanos, and took effect from the time that the
maturity dates of the installment payments lapsed. With the said grace period having expired bereft of any installment payment on the
part of Sps. Jovellanos,43 Optimum then issued a notarized Notice of Delinquency and Cancellation of Contract on April 10, 2006.
Finally, in proceeding with the actual cancellation of the contract to sell, Optimum gave Sps. Jovellanos an additional thirty (30) days
within which to settle their arrears and reinstate the contract, or sell or assign their rights to another.44

It was only after the expiration of the thirty day (30) period did Optimum treat the contract to sell as effectively cancelled – making as it
did a final demand upon Sps. Jovellanos to vacate the subject property only on May 25, 2006. Thus, based on the foregoing, the Court
finds that there was a valid and effective cancellation of the Contract to Sell in accordance with Section 4 of RA 6552 and since Sps.
Jovellanos had already lost their right to retain possession of the subject property as a consequence of such cancellation, their refusal
to vacate and turn over possession to Optimum makes out a valid case for unlawful detainer as properly adjudged by the MeTC.

WHEREFORE, the petition is GRANTED. The Decision dated May 29, 2009 and Resolution dated August 10, 2009 of the Court of
Appeals in CA-G.R. SP No. 104487 are SET ASIDE. The Decision dated June 8, 2007 of Metropolitan Trial Court, Branch 53, Caloocan
City in Civil Case No. 06-28830 is hereby REINSTATED.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 202358               November 27, 2013

GATCHALIAN REALTY, INC., Petitioner, 

vs.
EVELYN M. ANGELES, Respondent.

DECISION

CARPIO, J.:

The Case G.R. No. 202358 is a petition for review1 assailing the Decision2 promulgated on 11 November 2011 as well as the
Resolution3 promulgated on 19 June 2012 by the Court of Appeals (CA) in CA-G.R. SP No. 105964. The CA reversed and set aside the
8 October 2008 Order4 of Branch 197 of the Regional Trial Court of Las Piñas City (RTC) in Civil Case No. LP-07-0143. The CA also
dismissed the unlawful detainer case filed by Gatchalian Realty, Inc. GRI) against Evelyn M. Angeles (Angeles).

The Metropolitan Trial Court (MeTC) rendered on 28 February 2006 a decision5 in Civil Case No. 6809 in favor of GRI and against
Angeles. In its decision6 dated 13 February 2008, the RTC set aside the decision of the MeTC and dismissed the ejectment case filed
by GRI against Angeles. The RTC reversed itself in an Order7 dated 17 June 2008, and affirmed with modification the decision of the
MeTC. The RTC denied Angeles’ Motion for Reconsideration in an Order dated 8 October 2008.

The Facts

The CA recited the facts as follows:

On 28 December 1994, [Angeles] purchased a house (under Contract to Sell No. 2272) and lot (under Contract to Sell No. 2271) from
[GRI] valued at Seven Hundred Fifty Thousand Pesos (Php 750,000.00) and Four Hundred Fifty Thousand Pesos (Php 450,000.00),
respectively, with twenty-four percent (24%) interest per annum to be paid by installment within a period of ten years.

The house and lot were delivered to [Angeles] in 1995. Nonetheless, under the contracts to sell executed between the parties, [GRI]
retained ownership of the property until full payment of the purchase price.

After sometime, [Angeles] failed to satisfy her monthly installments with [GRI]. [Angeles] was only able to pay thirty-five (35)
installments for Contract to Sell No. 2271 and forty-eight (48) installments for Contract to Sell No. 2272. According to [GRI], [Angeles]
was given at least twelve (12) notices for payment in a span of three (3) years but she still failed to settle her account despite receipt of
said notices and without any valid reason. [Angeles] was again given more time to pay her dues and likewise furnished with three (3)
notices reminding her to pay her outstanding balance with warning of impending legal action and/or rescission of the contracts, but to
no avail. After giving a total of fifty-one (51) months grace period for both contracts and in consideration of the continued disregard of
the demands of [GRI], [Angeles] was served with a notice of notarial rescission dated 11 September 2003 by registered mail which she
allegedly received on 19 September 2003 as evidenced by a registry return receipt.

Consequently [Angeles] was furnished by [GRI] with a demand letter dated 26 September 2003 demanding her to pay the amount of
One Hundred Twelve Thousand Three Hundred Four Pesos and Forty Two Centavos (Php 112,304.42) as outstanding reasonable
rentals for her use and occupation of the house and lot as of August 2003 and to vacate the same. She was informed in said letter that
the fifty percent (50%) refundable amount that she is entitled to has already been deducted with the reasonable value for the use of the
properties or the reasonable rentals she incurred during such period that she was not able to pay the installments due her. After
deducting the rentals from the refundable amount, she still had a balance of One Hundred Twelve Thousand Three Hundred Four
Pesos and Forty Two Centavos (Php 112,304.42) which she was required to settle within fifteen (15) days from receipt of the letter.

Allegedly, [Angeles] subsequently sent postal money orders through registered mail to [GRI]. In a letter dated 27 January 2004
[Angeles] was notified by [GRI] of its receipt of a postal money order sent by [Angeles]. More so, she was requested to notify [GRI] of
the purpose of the payment. [Angeles] was informed that if the postal money order was for her monthly amortization, the same will not
be accepted and she was likewise requested to pick it up from [GRI’s] office. On 29 January 2004, another mail with a postal money
order was sent by [Angeles] to [GRI]. In her 6 February 2004 letter, [GRI] was informed that the postal money orders were supposed to
be payments for her monthly amortization. Again, in its 8 February 2004 letter, it was reiterated by [GRI] that the postal money orders
will only be accepted if the same will serve as payment of her outstanding rentals and not as monthly amortization. Four (4) more postal
money orders were sent by [Angeles] by registered mail to [GRI].
For her continued failure to satisfy her obligations with [GRI] and her refusal to vacate the house and lot, [GRI] filed a complaint for
unlawful detainer against [Angeles] on 11 November 2003.8

The MeTC’s Ruling

The MeTC of Branch 79, Las Piñas City ruled in favor of GRI. The MeTC determined that the case was for an unlawful detainer, and
thus assumed jurisdiction. The MeTC further held that the facts show that GRI was able to establish the validity of the rescission:

A careful scrutiny of the evidence presented by both parties regarding payments made clearly show that [Angeles] defaulted in the
payment of the monthly installments due. Repeated notices and warnings were given to her but she still and failed to update her
account (Exhibits "E" to "E-1" and "G" to "G-2", [GRI’s] Position Paper). This is a clear violation of the condition of their contracts. An
ample grace period, i.e., 51 months, was granted to her by [GRI] but she still failed to pay the whole amount due as provided in
paragraph 6 of the contracts and Section 3 of RA 6552. [Angeles] has been in arrears beyond the grace period provided under the
contracts and law. The last payment received by [GRI], which represents [Angeles’] 35th installment, was made in July 2002. On the
other hand, the last payment, which represents her 48th installment, [was] received [by GRI] in April 1999. Thus, [GRI], as seller, can
terminate or rescind the contract by giving her the notice of notarial rescission of the contracts. The notarial rescission of the contracts
was executed on September 26, 2003 and served upon [Angeles].9

Although the MeTC agreed with Angeles that her total payment is already more than the contracted amount, the MeTC found that
Angeles did not pay the monthly amortizations in accordance with the terms of the contract. Interests and penalties accumulated and
increased the amount due. Furthermore, the MeTC found the monthly rentals imposed by GRI reasonable and within the range of the
prevailing rental rates in the vicinity. Compensation between GRI and Angeles legally took effect in accordance with Article 129010 of
the Civil Code. The MeTC ruled that GRI is entitled to P1,060,896.39 by way of reasonable rental fee less P574,148.40 as of May 2005,
thus leaving a balance of P486,747.99 plus the amount accruing until Angeles finally vacates the subject premises.

The dispositive portion of the MeTC’s Decision reads:

WHEREFORE, in view of the foregoing, the Court renders judgment for [GRI] and against [Angeles] and all persons claiming rights
under her, as follows:

1. Ordering [Angeles] and all persons claiming rights under her to immediately vacate the property subject of this
case situated at Blk. 3, Lot 8, Lanzones St., Phase 3-C, Gatchalian Subdivision, Las Piñas City and surrender
possession thereof to [GRI];

2. Ordering the encashment of the Postal Money Order (PMO) in the total amount of Php 120,000.00 in favor of
[GRI];

3. Ordering [Angeles] to pay [GRI] the outstanding amount of Php 486,747.99 representing reasonable monthly
rentals of the subject premises as of May 2005 less the amount of the postal money orders [worth] Php 120,000.00
and all the monthly rentals that will accrue until she vacates the subject premises and have possession thereof turned
over to [GRI], plus the interests due thereon at the rate of twelve percent (12%) per annum from the time of extra-
judicial demand;

4. Ordering [Angeles] to pay [GRI] the amount of Php 20,000.00 as attorney’s fees; and

5. Costs of suit.

[Angeles’] counterclaims are hereby dismissed for lack of merit.

SO ORDERED.11

On 21 March 2006, Angeles filed a notice of appeal with the MeTC. A week later, on 28 March 2006, Angeles filed a motion to dismiss
based on lack of jurisdiction. The Las Piñas RTC denied Angeles’ motion to dismiss in an order dated 28 July 2006.

Angeles also filed on 2 October 2006 a Petition for Certiorari with Immediate Issuance of Temporary Restraining Order and Injunction,
which was docketed as SCA Case No. 06-008.12 On 3 May 2007, Branch 201 of the Las Piñas RTC dismissed Angeles’ Petition for
Certiorari for forum-shopping.13

GRI, on the other hand, filed a Motion for Execution Pending Appeal. A Writ of Execution Pending Appeal was issued in favor of GRI on
25 August 2006, and the properties were turned over to GRI on 10 October 2006.14

The RTC’s Ruling

Angeles’ appeal before Branch 197 of the Las Piñas RTC initially produced a result favorable to her. The RTC found that the case was
one for ejectment. As an ejectment court, the MeTC’s jurisdiction is limited only to the issue of possession and does not include the title
or ownership of the properties in question.

The RTC pointed out that Republic Act No. 6552 (R.A. 6552) provides that the non-payment by the buyer of an installment prevents the
obligation of the seller to convey title from acquiring binding force. Moreover, cancellation of the contract to sell may be done outside
the court when the buyer agrees to the cancellation. In the present case, Angeles denied knowledge of GRI’s notice of cancellation.
Cancellation of the contract must be done in accordance with Section 3 of R.A. 6552, which requires a notarial act of rescission and
refund to the buyer of the cash surrender value of the payments on the properties. Thus, GRI cannot insist on compliance with Section
3(b) of R.A. 6552 by applying Angeles’ cash surrender value to the rentals of the properties after Angeles failed to pay the installments
due. Contrary to the MeTC’s ruling, there was no legal compensation between GRI and Angeles. The RTC ruled:

There being no valid cancellation of the Contract to Sell, this Court finds merit in the appeal filed by [Angeles] and REVERSES the
decision of the court a quo. This Court recognized [Angeles’] right to continue occupying the property subject of the Contract to Sell.

WHEREFORE, premises considered, the decision of the lower court is hereby SET ASIDE and the ejectment case filed by [GRI] is
hereby DISMISSED.

SO ORDERED.15

GRI filed a Motion for Reconsideration. The RTC issued an Order on 17 June 2008 which ruled that GRI had complied with the
provisions of R.A. 6552, and had refunded the cash surrender value to Angeles upon its cancellation of the contract to sell when it
deducted the amount of the cash surrender value from rentals due on the subject properties. The RTC relied on this Court’s ruling in
Pilar Development Corporation v. Spouses Villar.16The RTC ruled:

Applying the above Pilar ruling in the present case, the cash surrender value of the payments made by [Angeles] shall be applied to the
rentals that accrued on the property occupied by [Angeles], which rental is fixed by this Court in the amount of seven thousand pesos
per month (P7,000.00). The total rental payment due to Gatchalian Realty Inc. is six hundred twenty three thousand (P623,000.00)
counted from June 1999 to October 2006. According to R.A. 6552, the cash surrender value, which in this case is equivalent to fifty
percent (50%) of the total payment made by [Angeles], should be returned to her by [GRI] upon cancellation of the contract to sell on
September 11, 2003. Admittedly no such return was ever made by [GRI]. Thus, the cash surrender value, which in this case is
equivalent to P182,094.48 for Contract to Sell No. 2271 and P392,053.92 for Contract to Sell No. 2272 or a total cash surrender value
of P574,148.40 should be deducted from the rental payment or award owing to [Angeles].

WHEREFORE, premises considered, the Motion for Reconsideration is hereby GRANTED. The earlier decision dated February 13,
2008 is SET ASIDE and the decision of the court a quo is MODIFIED to wit:

1. Ordering [Angeles] and all persons claiming rights under her to immediately vacate the property subject of this
case situated at Blk. 3, Lot 8, Lanzones St., Phase 3-C, Gatchalian Subdivision, Las Piñas City and surrender
possession thereof to [GRI];

2. Ordering the encashment of the Postal Money Order (PMO) in the total amount of Php 120,000.00 in favor of
[GRI];

3. Ordering defendant, Evelyn M. Angeles, to pay plaintiff, Gatchalian Realty Inc., the outstanding rental amount of
forty eight thousand eight hundred fifty one pesos and sixty centavos (P48,851.60) and legal interest of six percent
(6%) per annum, until the above amount is paid;

4. Ordering [Angeles] to pay [GRI] the amount of Php 20,000.00 as attorney’s fees; and

5. Costs of suit.

SO ORDERED.17

The Court of Appeals’ Ruling

The CA dismissed GRI’s complaint for unlawful detainer, and reversed and set aside the RTC’s decision. Although the CA ruled that
Angeles received the notice of notarial rescission, it ruled that the actual cancellation of the contract between the parties did not take
place because GRI failed to refund to Angeles the cash surrender value. The CA denied GRI’s motion for reconsideration.

GRI filed the present petition for review before this Court on 10 August 2012.

The Issues
GRI assigned the following errors of the CA:

The court a quo committed reversible error when it declared that there was no refund of the cash surrender value in favor of [Angeles]
pursuant to R.A. No. 6552; and

The court a quo erred in holding that the actual cancellation of the contract between the parties did not take place.18

The Court’s Ruling

GRI’s petition has no merit. We affirm the ruling of the CA with modification.

Validity of GRI’s
Cancellation of the Contracts

Republic Act No. 6552, also known as the Maceda Law, or the Realty Installment Buyer Protection Act, has the declared public policy of
"protecting buyers of real estate on installment payments against onerous and oppressive conditions."19 Section 3 of R.A. 6552
provides for the rights of a buyer who has paid at least two years of installments but defaults in the payment of succeeding installments.
Section 3 reads:

Section 3. In all transactions or contracts involving the sale or financing of real estate on installment payments, including residential
condominium apartments but excluding industrial lots, commercial buildings and sales to tenants under Republic Act Numbered Thirty-
eight hundred forty-four, as amended by Republic Act Numbered Sixty-three hundred eighty-nine, where the buyer has paid at least two
years of installments, the buyer is entitled to the following rights in case he defaults in the payment of succeeding installments:

(a) To pay, without additional interest, the unpaid installments due within the total grace period earned by him which
is hereby fixed at the rate of one month grace period for every one year of installment payments made: Provided,
That this right shall be exercised by the buyer only once in every five years of the life of the contract and its
extensions, if any.

(b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the payments on the
property equivalent to fifty per cent of the total payments made, and, after five years of installments, an additional five
per cent every year but not to exceed ninety per cent of the total payments made: Provided, That the actual
cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of cancellation or
the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to the
buyer.

Down payments, deposits or options on the contract shall be included in the computation of the total number of installment payments
made.

The sixth paragraph of the contracts between Angeles and GRI similarly provides:

SIXTH - Should the VENDEE/S fail to pay due any monthly installment the VENDOR shall have the right to cancel this Contract and
resell the lot/s subject matter of this contract to another buyer, provided, however, that where the VENDEE/S has/have already paid at
least two years of installments, the VENDEE/S will have the right:

a) to pay without additional interest, the installments in arrears within the total grace period earned by him/her/them
which is hereby fixed at the rate of one (1) month grace period for every one (1) year of installment payment made,
but this right can be exercised by the VENDEE/S only once in every five (5) years of the life of this contract and its
extension, if any, and

b) if the contract is cancelled, the VENDOR shall refund to the VENDEE/S the cash surrender value of the payments
made on the lot/s equivalent to fifty per cent (50%) of the total payments made, and after five (5) years of installment,
an additional five per cent (5%) every year but not to exceed ninety per cent (90%) of the total payments made;
Provided, that the actual cancellation of the contract shall take place after thirty (30) days from the receipt by the
VENDEE/S of the notice of cancellation or the demand for rescission of the contract by a notarial act upon full
payment of the cash surrender value to the VENDEE/S; where, however, the VENDEE/S has/have paid less than two
(2) years of installments, the VENDOR shall give the VENDEE/S [a] grace period of sixty (60) days from the date the
installment became due; and if the VENDEE/S fail/s to pay the installment due after the expiration of the grace
period, the VENDOR may cancel the contract after thirty (30) days from receipt by the VENDEE/S of the notice of
cancellation or the demand for rescission of the contract by a notarial act; and in case of cancellation and/or
rescission of this contract, all improvements on the lot/s above-described shall be forfeited in favor of the VENDOR,
and in this connection, the VENDEE/S obligate/s himself/herself/themselves to peacefully vacate the premises
mentioned above without necessity of notice or demand by the VENDOR.20
We examine GRI’s compliance with the requirements of R.A. 6552, as it insists that it extended to Angeles considerations that are
beyond what the law provides.

Grace Period

It should be noted that Section 3 of R.A. 6552 and paragraph six of Contract Nos. 2271 and 2272, speak of "two years of installments."
The basis for computation of the term refers to the installments that correspond to the number of months of payments, and not to the
number of months that the contract is in effect as well as any grace period that has been given. Both the law and the contracts thus
prevent any buyer who has not been diligent in paying his monthly installments from unduly claiming the rights provided in Section 3 of
R.A. 6552.

The MeTC, the RTC, and the CA all found that Angeles was able to pay 35 installments for the lot (Contract No. 2271) and 48
installments for the house (Contract No. 2272).21 Angeles thus made installment payments for less than three years on the lot, and
exactly four years on the house.

Section 3(a) of R.A. 6552 provides that the total grace period corresponds to one month for every one year of installment payments
made, provided that the buyer may exercise this right only once in every five years of the life of the contract and its extensions. The
buyer’s failure to pay the installments due at the expiration of the grace period allows the seller to cancel the contract after 30 days from
the buyer’s receipt of the notice of cancellation or demand for rescission of the contract by a notarial act. Paragraph 6(a) of the contract
gave Angeles the same rights.

Both the RTC and the CA found that GRI gave Angeles an accumulated grace period of 51 months.22 This extension went beyond what
was provided in R.A. 6552 and in their contracts.

Receipt of the Notice of Notarial Rescission

The registry return of the registered mail is prima facie proof of the facts indicated therein.23 Angeles failed to present contrary evidence
to rebut this presumption with competent and proper evidence. To establish its claim of service of the notarial rescission upon Angeles,
GRI presented the affidavit of its liaison officer Fortunato Gumahad,24 the registry receipt from the Greenhills Post Office,25 and the
registry return receipt.26 We affirm the CA’s ruling that GRI was able to substantiate its claim that it served Angeles the notarial
rescission sent through registered mail in accordance with the requirements of R.A. 6552.

Amount of the Cash Surrender Value

GRI claims that it gave Angeles a refund of the cash surrender value of both the house and the lot in the total amount of P574,148.40
when it deducted the amount of the cash surrender value from the amount of rentals due.

For paying more than two years of installments on the lot, Angeles was entitled to receive cash surrender value of her payments on the
lot equivalent to fifty per cent of the total payments made. This right is provided by Section 3(b) of R.A. 6552, as well as paragraph 6(b)
of the contract. Out of the contract price of P450,000, Angeles paid GRI a total of P364,188.96 consisting of P135,000 as downpayment
and P229,188.96 as installments and penalties.27 The cash surrender value of Angeles’ payments on the lot amounted
to P182,094.48.28

For the same reasons, Angeles was also entitled to receive cash surrender value of the payments on the house equivalent to fifty per
cent of the total payments made. Out of the contract price of P750,000, Angeles paid GRI a total of P784,107.84 consisting of P165,000
as downpayment and P619,107.84 as installments and penalties.29The cash surrender value of Angeles’ payments on the house
amounted to P392,053.92.30

Actual Cancellation of the Contracts

There was no actual cancellation of the contracts because of GRI’s failure to actually refund the cash surrender value to Angeles.

Cancellation of the contracts for the house and lot was contained in a notice of notarial rescission dated 11 September 2003.31 The
registry return receipts show that Angeles received this notice on 19 September 2003.32GRI’s demand for rentals on the properties,
where GRI offset Angeles’ accrued rentals by the refundable cash surrender value, was contained in another letter dated 26 September
2003.33 The registry return receipts show that Angeles received this letter on 29 September 2003.34 GRI filed a complaint for unlawful
detainer against Angeles on 11 November 2003, 61 days after the date of its notice of notarial rescission, and 46 days after the date of
its demand for rentals. For her part, Angeles sent GRI postal money orders in the total amount ofP120,000.35

The MeTC ruled that it was proper for GRI to compensate the rentals due from Angeles’ occupation of the property from the cash
surrender value due to Angeles from GRI. The MeTC stated that compensation legally took effect in accordance with Article 1290 of the
Civil Code, which reads: "When all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law
and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation." In
turn, Article 1279 of the Civil Code provides:
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 of a sum of money, or if the things due are consumable, they be of the same kind, and also of the
same quality if the latter has been stated;

(3) That the two debts are due;

(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.

However, it was error for the MeTC to apply Article 1279 as there was nothing in the contracts which provided for the amount of rentals
in case the buyer defaults in her installment payments. The rentals due to GRI were not liquidated. GRI, in its letter to Angeles dated 26
September 2003, unilaterally imposed the amount of rentals, as well as an annual 10% increase:

PERIOD COVERED NO. OF RENTALS AMOUNT DUE

MONTHS PER MONTH
June to December 1999 7 11,000.00 77,000.00
January to December 2000 12 12,100.00 145,200.00
January to December 2001 12 13,310.00 159,720.00
January to December 2002 12 14,641.00 175,692.02 [sic]
January to August 2003 8 16,105.10 128,840.80
TOTAL AMOUNT DUE: P 686,452.82 [sic]36

We cannot subscribe to GRI’s view that it merely followed our ruling in Pilar Development Corporation v. Spouses Villar37 (Pilar) when it
deducted the cash surrender value from the rentals due. In Pilar, the developer also failed to refund the cash surrender value to the
defaulting buyer when it cancelled the Contract to Sell through a Notice of Cancellation. It was this Court, and not the developer, that
deducted the amount of the cash surrender value from the accrued rentals. Moreover, the developer in Pilar did not unilaterally impose
rentals. It was the MeTC that decreed the amount of monthly rent. Neither did the developer unilaterally reduce the accrued rentals by
the refundable cash surrender value. The cancellation of the contract took effect only by virtue of this Court’s judgment because of the
developer’s failure to return the cash surrender value.

This was how we ruled in Pilar:

According to R.A. 6552, the cash surrender value, which in this case is equivalent to fifty percent (50%) of the total payment made by
the respondent spouses, should be returned to them by the petitioner upon the cancellation of the contract to sell on August 31, 1998
for the cancellation to take effect. Admittedly, no such return was ever made by petitioner. Thus, the said cash surrender value is
hereby ordered deducted from the award owing to the petitioner based on the MeTC judgment, and cancellation takes effect by virtue
of this judgment.

Finally, as regards the award of P7,000.00/month as rental payment decreed by the MeTC for the use of the property in question from
the time the respondent spouses obtained possession thereof up to the time that its actual possession is surrendered or restored to the
petitioner, the Court finds the same just and equitable to prevent the respondent spouses, who breached their contract to sell, from
unjustly enriching themselves at the expense of the petitioner which, for all legal intents and purposes, never ceased to be the owner of
the same property because of the respondents’ non-fulfillment of the indispensable condition of full payment of the purchase price, as
embodied in the parties’ contract to sell. However, as earlier explained, this sum is to be reduced by the cash surrender value of the
payments so far made by the spouses, and the resulting net amount still owing as accrued rentals shall be subject to legal interest from
finality of this Decision up to the time of actual payment thereof.38

Mandatory Twin Requirements:

Notarized Notice of Cancellation and
Refund of Cash Surrender Value

This Court has been consistent in ruling that a valid and effective cancellation under R.A. 6552 must comply with the mandatory twin
requirements of a notarized notice of cancellation and a refund of the cash surrender value.
In Olympia Housing, Inc. v. Panasiatic Travel Corp.,39 we ruled that the notarial act of rescission must be accompanied by the refund of
the cash surrender value.

x x x The actual cancellation of the contract can only be deemed to take place upon the expiry of a 30-day period following the receipt
by the buyer of the notice of cancellation or demand for rescission by a notarial act and the full payment of the cash surrender value.

In Pagtalunan v. Dela Cruz Vda. De Manzano,40 we ruled that there is no valid cancellation of the Contract to Sell in the absence of a
refund of the cash surrender value. We stated that:

x x x Sec. 3 (b) of R.A. No. 6552 requires refund of the cash surrender value of the payments on the property to the buyer before
cancellation of the contract. The provision does not provide a different requirement for contracts to sell which allow possession of the
property by the buyer upon execution of the contract like the instant case. Hence, petitioner cannot insist on compliance with the
requirement by assuming that the cash surrender value payable to the buyer had been applied to rentals of the property after
respondent failed to pay the installments due. (Emphasis supplied)

Remedies of the Buyer

in the Absence of a Valid Cancellation of a Contract to Sell

In view of the absence of a valid cancellation, the Contract to Sell between GRI and Angeles remains valid and subsisting. Apart from
Olympia and Pagtalunan, we are guided by our rulings in Active Realty & Development Corp. v. Daroya41 (Active) and Associated
Marine Officers and Seamen’s Union of the Philippines PTGWO-ITF v. Decena42 (Associated).

In Olympia , this Court dismissed the complaint for recovery of possession for having been prematurely filed without complying with the
mandate of R.A. 6552. We ordered the defaulting buyer to pay the developer the balance as of the date of the filing of the complaint
plus 18% interest per annum computed from the day after the date of the filing of the complaint, but within 60 days from the receipt of a
copy of the decision. Upon payment, the developer shall issue the corresponding certificate of title in favor of the defaulting buyer. If the
defaulting buyer fails to pay the full amount, then the defaulting buyer shall vacate the subject property without need of demand and all
payments will be charged as rentals to the property. There was no award for damages and attorney’s fees, and no costs were charged
to the parties.

In Pagtalunan, this Court dismissed the complaint for unlawful detainer. We also ordered the defaulting buyer to pay the developer the
balance of the purchase price plus interest at 6% per annum from the date of filing of the complaint up to the finality of judgment, and
thereafter, at the rate of 12% per annum. Upon payment, the developer shall issue a Deed of Absolute Sale of the subject property and
deliver the corresponding certificate of title in favor of the defaulting buyer. If the defaulting buyer fails to pay the full amount within 60
days from finality of the decision, then the defaulting buyer should vacate the subject property without need of demand and all
payments will be charged as rentals to the property. No costs were charged to the parties.

In Active, this Court held that the Contract to Sell between the parties remained valid because of the developer’s failure to send a
notarized notice of cancellation and to refund the cash surrender value. The defaulting buyer thus had the right to offer to pay the
balance of the purchase price, and the developer had no choice but to accept payment. However, the defaulting buyer was unable to
exercise this right because the developer sold the subject lot. This Court ordered the developer to refund to the defaulting buyer the
actual value of the lot with 12% interest per annum computed from the date of the filing of the complaint until fully paid, or to deliver a
substitute lot at the option of the defaulting buyer.

In Associated, this Court dismissed the complaint for unlawful detainer. We held that the Contract to Sell between the parties remained
valid because the developer failed to send to the defaulting buyer a notarized notice of cancellation and to refund the cash surrender
value. We ordered the MeTC to conduct a hearing within 30 days from receipt of the decision to determine the unpaid balance of the
full value of the subject properties as well as the current reasonable amount of rent for the subject properties. We ordered the defaulting
buyer to pay, within 60 days from the trial court’s determination of the amounts, the unpaid balance of the full value of the subject
properties with interest at 6% per annum computed from the date of sending of the notice of final demand up to the date of actual
payment. Upon payment, we ordered the developer to execute a Deed of Absolute Sale over the subject properties and deliver the
transfer certificate of title to the defaulting buyer. In case of failure to pay within the mandated 60-day period, we ordered the defaulting
buyer to immediately vacate the premises without need for further demand. The developer should also pay the defaulting buyer the
cash surrender value, and the contract should be deemed cancelled 30 days after the defaulting buyer’s receipt of the full payment of
the cash surrender value. If the defaulting buyer failed to vacate the premises, he should be charged reasonable rental in the amount
determined by the trial court.

We observe that this case has, from the institution of the complaint, been pending with the courts for 10 years. As both parties prayed
for the issuance of reliefs that are just and equitable under the premises, and in the exercise of our discretion, we resolve to dispose of
this case in an equitable manner. Considering that GRI did not validly rescind Contracts to Sell Nos. 2271 and 2272, Angeles has two
options:

1. The option to pay, within 60 days from the MeTC’s determination of the proper amounts, the unpaid balance of the full value
of the purchase price of the subject properties plus interest at 6% per annum from 11 November 2003, the date of filing of the
complaint, up to the finality of this Decision, and thereafter, at the rate of 6% per annum.43 Upon payment of the full amount,
 GRI shall immediately execute Deeds of Absolute Sale over the subject properties and deliver the corresponding transfer
certificate of title to Angeles.

In the event that the subject properties are no longer available, GRI should offer substitute properties of equal
value.1âwphi1 Acceptance of the suitability of the substitute properties is Angeles’ sole prerogative. Should Angeles refuse the
substitute properties, GRI shall refund to Angeles the actual value of the subject properties with 6% interest per
annum44 computed from 11 November 2003, the date of the filing of the complaint, until fully paid; and

2. The option to accept from GRI ₱574,148.40, the cash surrender value of the subject properties, with interest at 6% per
annum,45 computed from 11 November 2003, the date of the filing of the complaint, until fully paid. Contracts to Sell Nos. 2271
and 2272 shall be deemed cancelled 30 days after Angeles’ receipt of GRI’s full payment of the cash surrender value. No rent
is further charged upon Angeles as GRI already had possession of the subject properties on 10 October 2006.

WHEREFORE, we DENY the petition. The Decision of the Court of Appeals in CA-G.R. SP No. 105964 promulgated on 11 November
2011 and the Resolution promulgated on 19 June 2012 are AFFIRMED with MODIFICATIONS.

1. The Metropolitan Trial Court of Las Piñas City is directed to conduct a hearing within a maximum period of 30 days from
finality of this Decision to (1) determine Evelyn M. Angeles’ unpaid balance on Contracts to Sell Nos. 2271 and 2272; and (2)
the actual value of the subject properties as of 11 November 2003.

2. Evelyn M. Angeles shall notify the Metropolitan Trial Court of Las Piñas City and Gatchalian Realty, Inc. within a maximum
period of 60 days from the Metropolitan Trial Court of Las Piñas City’s determination of the unpaid balance whether she will
pay the unpaid balance or accept the cash surrender value.

Should Evelyn M. Angeles choose to pay the unpaid balance, she shall pay, within 60 days from the MeTC’s determination of the
proper amounts, the unpaid balance of the full value of the purchase price of the subject properties plus interest at 6% per annum from
11 November 2003, the date of filing of the complaint, up to the finality of this Decision, and thereafter, at the rate of 6% per annum.
Upon payment of the full amount, GRI shall immediately execute Deeds of Absolute Sale over the subject properties and deliver the
corresponding transfer certificate of title to Angeles.

In the event that the subject properties are no longer available, GRI should offer substitute properties of equal value. Should Angeles
refuse the substitute properties, GRI shall refund to Angeles the actual value of the subject properties with 6 interest per annum
computed from November 2003, the date of the filing of the complaint, until fully paid. Should Evelyn M. Angeles choose to accept
payment of the cash surrender value, she shall receive from GRI P574,148.40 with interest at 6 per annum computed from November
2003, the date of the filing of the complaint, until fully paid. Contracts to Sell Nos. 2271 and 2272 shall be deemed cancelled 30 days
after Angeles' receipt of GRI's full payment of the cash surrender value. No rent is further charged upon Evelyn M. Angeles.

No costs.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 172036               April 23, 2010

SPOUSES FAUSTINO AND JOSEFINA GARCIA, SPOUSES MELITON GALVEZ AND HELEN GALVEZ, and CONSTANCIA
ARCAIRA represented by their Attorney-in-Fact JULIANA O. MOTAS, Petitioners, 
vs.
COURT OF APPEALS, EMERLITA DE LA CRUZ, and DIOGENES G. BARTOLOME, Respondents.

DECISION

CARPIO, J.:

G.R. No. 172036 is a petition for review1 assailing the Decision2 promulgated on 25 January 2006 as well as the
Resolution3 promulgated on 16 March 2006 of the Court of Appeals (appellate court) in CA-G.R. CV No. 63651. The appellate court
reversed and set aside the decision of Branch 23 of the Regional Trial Court of Trece Martires City, Cavite (trial court) in Civil Case No.
TM-622. The appellate court ordered Emerlita Dela Cruz (Dela Cruz) to return to spouses Faustino and Josefina Garcia, spouses
Meliton and Helen Galvez, and Constancia Arcaira (collectively, petitioners) the amount in excess of one-half percent of P1,500,000.
Dela Cruz’s co-defendant, Diogenes Bartolome (Bartolome), did not incur any liability.

The appellate court narrated the facts as follows:

On May 28, 1993, plaintiffs spouses Faustino and Josefina Garcia and spouses Meliton and Helen Galvez (herein appellees) and
defendant Emerlita dela Cruz (herein appellant) entered into a Contract to Sell wherein the latter agreed to sell to the former, for Three
Million One Hundred Seventy Thousand Two Hundred Twenty (P3,170,220.00) Pesos, five (5) parcels of land situated at Tanza, Cavite
particularly known as Lot Nos. 47, 2768, 2776, 2767, 2769 and covered by Transfer Certificate of Title Nos. T-340674, T-340673, T-
29028, T-29026, T-29027, respectively. At the time of the execution of the said contract, three of the subject lots, namely, Lot Nos.
2776, 2767, and 2769 were registered in the name of one Angel Abelida from whom defendant allegedly acquired said properties by
virtue of a Deed of Absolute Sale dated March 31, 1989.

As agreed upon, plaintiffs shall make a down payment of Five Hundred Thousand (P500,000.00) Pesos upon signing of the contract.
The balance of Two Million Six Hundred Seventy Thousand Two Hundred Twenty (P2,670,220.00) Pesos shall be paid in three
installments, viz: Five Hundred Thousand (P500,000.00) Pesos on June 30, 1993; Five Hundred Thousand (P500,000.00) Pesos on
August 30, 1993; One Million Six Hundred Seventy Thousand Two Hundred Twenty (P1,670,220.00) Pesos on December 31, 1993.

On its due date, December 31, 1993, plaintiffs failed to pay the last installment in the amount of One Million Six Hundred Seventy
Thousand Two Hundred Twenty (P1,670,220.00) Pesos. Sometime in July 1995, plaintiffs offered to pay the unpaid balance, which had
already been delayed by one and [a] half year, which defendant refused to accept. On September 23, 1995, defendant sold the same
parcels of land to intervenor Diogenes G. Bartolome for Seven Million Seven Hundred Ninety Three Thousand (P7,793,000.00) Pesos.

In order to compel defendant to accept plaintiffs’ payment in full satisfaction of the purchase price and, thereafter, execute the
necessary document of transfer in their favor, plaintiffs filed before the RTC a complaint for specific performance.

In their complaint, plaintiffs alleged that they discovered the infirmity of the Deed of Absolute Sale covering Lot Nos. 2776, 2767 and
2769, between their former owner Angel Abelida and defendant, the same being spurious because the signature of Angel Abelida and
his wife were falsified; that at the time of the execution of the said deed, said spouses were in the United States; that due to their
apprehension regarding the authenticity of the document, they withheld payment of the last installment which was supposedly due on
December 31, 1993; that they tendered payment of the unpaid balance sometime in July 1995, after Angel Abelida ratified the sale
made in favor [of] defendant, but defendant refused to accept their payment for no jusitifiable reason.

In her answer, defendant denied the allegation that the Deed of Absolute Sale was spurious and argued that plaintiffs failed to pay in
full the agreed purchase price on its due date despite repeated demands; that the Contract to Sell contains a proviso that failure of
plaintiffs to pay the purchase price in full shall cause the rescission of the contract and forfeiture of one-half (1/2%) percent of the total
amount paid to defendant; that a notarized letter stating the indended rescission of the contract to sell and forfeiture of payments was
sent to plaintiffs at their last known address but it was returned with a notation "insufficient address."

Intervenor Diogenes G. Bartolome filed a complaint in intervention alleging that the Contract to Sell dated May 31, 1993 between
plaintiffs and defendant was rescinded and became ineffective due to unwarranted failure of the plaintiffs to pay the unpaid balance of
the purchase price on or before the stipulated date; that he became interested in the subject parcels of land because of their clean
titles; that he purchased the same from defendant by virtue of an Absolute Deed of Sale executed on September 23, 1995 in
consideration of the sum of Seven Million Seven Hundred Ninety Three Thousand (P7,793,000.00) Pesos.4

The Decision of the Trial Court

In its Decision dated 15 April 1999, the trial court ruled that Dela Cruz’s rescission of the contract was not valid. The trial court applied
Republic Act No. 6552 (Maceda Law) and stated that Dela Cruz is not allowed to unilaterally cancel the Contract to Sell. The trial court
found that petitioners are justified in withholding the payment of the balance of the consideration because of the alleged spurious sale
between Angel Abelida and Emerlita Dela Cruz. Moreover, intervenor Diogenes Bartolome (Bartolome) is not a purchaser in good faith
because he was aware of petitioners’ interest in the subject parcels of land.

The dispositive portion of the trial court’s decision reads:

ACCORDINGLY, defendant Emerlita dela Cruz is ordered to accept the balance of the purchase price in the amount of P1,670,220.00
within ten (10) days after the judgment of this Court in the above-entitled case has become final and executory and to execute
immediately the final deed of sale in favor of plaintiffs.

Defendant is further directed to pay plaintiffs the amount of P400,000.00 as moral damages and P100,000.00 as exemplary damages.

The deed of sale executed by defendant Emerlita dela Cruz in favor of Atty. Diogenes Bartolome is declared null and void and the
amount of P7,793,000.00 which was paid by intervenor Bartolome to Emerlita dela Cruz as the consideration of the sale of the five (5)
parcels of land is hereby directed to be returned by Emerlita dela Cruz to Atty. Diogenes Bartolome within ten (10) days from the finality
of judgment.

Further, defendant is directed to pay plaintiff the sum of P100,000.00 as attorney’s fees.

SO ORDERED.5

Dela Cruz and Bartolome appealed from the judgment of the trial court.

The Decision of the Appellate Court

The appellate court reversed the trial court’s decision and dismissed Civil Case No. TM-622. Dela Cruz’s obligation under the Contract
to Sell did not arise because of petitioners’ undue failure to pay in full the agreed purchase price on the stipulated date. Moreover,
judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for
violation of any of its terms and conditions. The dispositive portion of the appellate court’s decision reads:

WHEREFORE, in view of all the foregoing, the appealed decision of the Regional Trial Court is hereby REVERSED and SET ASIDE
and Civil Case No. TM-622 is, consequently, DISMISSED. Defendant is however ordered to return to plaintiffs the amount in excess of
one-half (1/2%) percent of One Million Five Hundred Thousand (P1,500,000.00) Pesos which was earlier paid by plaintiffs.

SO ORDERED.6

The appellate court likewise resolved to deny petitioners’ Motion for Reconsideration for lack of merit.7

Hence, this petition.

Issues

Petitioners raised the following grounds for the grant of their petition:

I. The Honorable Court of Appeals erred when it failed to consider the provisions of Republic Act 6552, otherwise known as
the Maceda Law.

II. The Honorable Court of Appeals erred when it failed to consider that Respondent Dela Cruz could not pass title over the
three (3) properties at the time she entered to a Contract to Sell as her purported ownership was tainted with fraud, thereby
justifying Petitioners Spouses Garcia, Spouses Galvez and Arcaira’s suspension of payment.

III. The Honorable Court of Appeals gravely erred when it failed to consider that Respondent Dela Cruz’s "rescission" was
done in evident bad faith and malice on account of a second sale she entered with Respondent Bartolome for a much bigger
amount.
 IV. The Honorable Court of Appeals erred when it failed to declare Respondent Bartolome is not an innocent purchaser for
value despite the presence of evidence as to his bad faith.8

The Court’s Ruling

The petition has no merit.

Both parties admit the following: (1) the contract between petitioners and Dela Cruz was a contract to sell; (2) petitioners failed to pay in
full the agreed purchase price of the subject property on the stipulated date; and (3) Dela Cruz did not want to accept petitioners’ offer
of payment and did not want to execute a document of transfer in petitioners’ favor.

The pertinent provisions of the contract, denominated Contract to Sell, between the parties read:

Failure on the part of the vendees to comply with the herein stipulation as to the terms of payment shall cause the rescission of this
contract and the payments made shall be returned to the vendees subject however, to forfeiture in favor of the Vendor equivalent to
1/2% of the total amount paid.

xxx

It is hereby agreed and covenanted that possession shall be retained by the VENDOR until a Deed of Absolute Sale shall be executed
by her in favor of the Vendees. Violation of this provision shall authorize/empower the VENDOR [to] demolish any
construction/improvement without need of judicial action or court order.

That upon and after the full payment of the balance, a Deed of Absolute Sale shall be executed by the Vendor in favor of the Vendees.

That the duplicate original of the owner’s copy of the Transfer Certificate of Title of the above subject parcels of land shall remain in the
possession of the Vendor until the execution of the Deed of Absolute Sale.9

Contracts are law between the parties, and they are bound by its stipulations. It is clear from the above-quoted provisions that the
parties intended their agreement to be a Contract to Sell: Dela Cruz retains ownership of the subject lands and does not have the
obligation to execute a Deed of Absolute Sale until petitioners’ payment of the full purchase price. Payment of the price is a positive
suspensive condition, failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from
becoming effective. Strictly speaking, there can be no rescission or resolution of an obligation that is still non-existent due to the non-
happening of the suspensive condition.10 Dela Cruz is thus not obliged to execute a Deed of Absolute Sale in petitioners’ favor because
of petitioners’ failure to make full payment on the stipulated date.

We ruled thus in Pangilinan v. Court of Appeals:11

Article 1592 of the New Civil Code, requiring demand by suit or by notarial act in case the vendor of realty wants to rescind does not
apply to a contract to sell but only to contract of sale. In contracts to sell, where ownership is retained by the seller and is not to pass
until the full payment, such payment, as we said, is a positive suspensive condition, the failure of which is not a breach, casual or
serious, but simply an event that prevented the obligation of the vendor to convey title from acquiring binding force. To argue that there
was only a casual breach is to proceed from the assumption that the contract is one of absolute sale, where non-payment is a
resolutory condition, which is not the case.

The applicable provision of law in instant case is Article 1191 of the New Civil Code which provides as follows:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is
incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case.
He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The Court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385
and 1388 and the Mortgage Law. (1124)

Pursuant to the above, the law makes it available to the injured party alternative remedies such as the power to rescind or enforce
fulfillment of the contract, with damages in either case if the obligor does not comply with what is incumbent upon him. There is nothing
in this law which prohibits the parties from entering into an agreement that a violation of the terms of the contract would cause its
cancellation even without court intervention. The rationale for the foregoing is that in contracts providing for automatic revocation,
judicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a contract already deemed rescinded by
virtue of an agreement providing for rescission even without judicial intervention, but in order to determine whether or not the rescission
was proper. Where such propriety is sustained, the decision of the court will be merely declaratory of the revocation, but it is not in itself
the revocatory act. Moreover, the vendor’s right in contracts to sell with reserved title to extrajudicially cancel the sale upon failure of the
vendee to pay the stipulated installments and retain the sums and installments already received has long been recognized by the well-
established doctrine of 39 years standing. The validity of the stipulation in the contract providing for automatic rescission upon non-
payment cannot be doubted. It is in the nature of an agreement granting a party the right to rescind a contract unilaterally in case of
breach without need of going to court. Thus, rescission under Article 1191 was inevitable due to petitioners’ failure to pay the stipulated
price within the original period fixed in the agreement.

Petitioners justify the delay in payment by stating that they had notice that Dela Cruz is not the owner of the subject land, and that they
took pains to rectify the alleged defect in Dela Cruz’s title. Be that as it may, Angel Abelida’s (Abelida) affidavit 12 confirming the sale to
Dela Cruz only serves to strengthen Dela Cruz’s claim that she is the absolute owner of the subject lands at the time the Contract to
Sell between herself and petitioners was executed. Dela Cruz did not conceal from petitioners that the title to Lot Nos. 2776, 2767
and 2769 still remained under Abelida’s name, and the Contract to Sell13 even provided that petitioners should shoulder
the attendant expenses for the transfer of ownership from Abelida to Dela Cruz.

The trial court erred in applying R.A. 6552,14 or the Maceda Law, to the present case. The Maceda Law applies to contracts of sale of
real estate on installment payments, including residential condominium apartments but excluding industrial lots, commercial buildings
and sales to tenants. The subject lands, comprising five (5) parcels and aggregating 69,028 square meters, do not comprise residential
real estate within the contemplation of the Maceda Law.15 Moreover, even if we apply the Maceda Law to the present case, petitioners’
offer of payment to Dela Cruz was made a year and a half after the stipulated date. This is beyond the sixty-day grace period under
Section 4 of the Maceda Law.16 Petitioners still cannot use the second sentence of Section 4 of the Maceda Law against Dela Cruz for
Dela Cruz’s alleged failure to give an effective notice of cancellation or demand for rescission because Dela Cruz merely sent the notice
to the address supplied by petitioners in the Contract to Sell.

It is undeniable that petitioners failed to pay the balance of the purchase price on the stipulated date of the Contract to Sell. Thus, Dela
Cruz is within her rights to sell the subject lands to Bartolome. Neither Dela Cruz nor Bartolome can be said to be in bad faith.

WHEREFORE, we DENY the petition. We AFFIRM in toto the Court of Appeals’ Decision promulgated on 25 January 2006 as well as
the Resolution promulgated on 16 March 2006 in CA-G.R. CV No. 63651.

Costs against petitioners.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice