1. International Corporate Bank vs.

Gueco (SCRA 516)

FIRST DIVISION

G.R. No. 141968 February 12, 2001

THE INTERNATIONAL CORPORATE BANK (now UNION BANK OF THE

PHILIPPINES), petitioner,
vs.
SPS. FRANCIS S. GUECO and MA. LUZ E. GUECO, respondents.

KAPUNAN, J.:

Facts:

The respondent Gueco Spouses obtained a loan from petitioner International Corporate
Bank (now Union Bank of the Philippines) to purchase a car - a Nissan Sentra 1600 4DR,
1989 Model. In consideration thereof, the Spouses executed promissory notes which
were payable in monthly installments and chattel mortgage over the car to serve as
security for the notes.

The Spouses defaulted in payment of installments. Consequently, the Bank filed on

August 7, 1995 a civil action docketed as Civil Case No. 658-95 for "Sum of Money with
Prayer for a Writ of Replevin" before the Metropolitan Trial Court of Pasay City, Branch
45. On August 25, 1995, Dr. Francis Gueco was served summons and was fetched by the
sheriff and representative of the bank for a meeting in the bank premises. Desi Tomas,
the Bank's Assistant Vice President demanded payment of the amount of P184,000.00
which represents the unpaid balance for the car loan. After some negotiations and
computation, the amount was lowered to P154,000.00, However, as a result of the non-
payment of the reduced amount on that date, the car was detained inside the bank's
compound.

On August 28, 1995, Dr. Gueco went to the bank and talked with its Administrative
Support, Auto Loans/Credit Card Collection Head, Jefferson Rivera. The negotiations
resulted in the further reduction of the outstanding loan to P150,000.00.

On August 29, 1995, Dr. Gueco delivered a manager's check in amount of P150,000.00
but the car was not released because of his refusal to sign the Joint Motion to Dismiss. It
is the contention of the Gueco spouses and their counsel that Dr. Gueco need not sign
the motion for joint dismissal considering that they had not yet filed their Answer.
Petitioner, however, insisted that the joint motion to dismiss is standard operating
procedure in their bank to effect a compromise and to preclude future filing of claims,
counterclaims or suits for damages.

After several demand letters and meetings with bank representatives, the respondents
Gueco spouses initiated a civil action for damages before the Metropolitan Trial Court of
Quezon City, Branch 33. The Metropolitan Trial Court dismissed the complaint for lack of
merit.3

On appeal to the Regional Trial Court, Branch 227 of Quezon City, the decision of the
Metropolitan Trial Court was reversed. In its decision, the RTC held that there was a
meeting of the minds between the parties as to the reduction of the amount of
indebtedness and the release of the car but said agreement did not include the signing of
the joint motion to dismiss as a condition sine qua non for the effectivity of the
compromise. The court further ordered the bank:
1. to return immediately the subject car to the appellants in good working condition; Appellee
may deposit the Manager's check - the proceeds of which have long been under the
control of the issuing bank in favor of the appellee since its issuance, whereas the funds
have long been paid by appellants to .secure said Manager's Check, over which
appellants have no control;

2. to pay the appellants the sum of P50,000.00 as moral damages; P25,000.00 as

exemplary damages, and P25,000.00 as attorney's fees, and

3. to pay the cost of suit.

In other respect, the decision of the Metropolitan Trial Court Branch 33 is hereby
AFFIRMED.4

The case was elevated to the Court of Appeals, which on February 17, 2000, issued the
assailed decision, the decretal portion of which reads:

WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED
and the Decision of the Regional Trial Court of Quezon City, Branch 227, in Civil Case
No. Q-97-31176, for lack of any reversible error, is AFFIRMED in toto. Costs against
petitioner.

SO ORDERED.5

The Court of Appeals essentially relied on the respect accorded to the finality of the findings
of facts by the lower court and on the latter's finding of the existence of fraud which
constitutes the basis for the award of damages.

The petitioner comes to this Court by way of petition for review on certiorari under Rule 45 of
the Rules of Court, raising the following assigned errors:

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO AGREEMENT

WITH RESPECT TO THE EXECUTION OF THE JOINT MOTION TO DISMISS AS A
CONDITION FOR THE COMPROMISE AGREEMENT.

II

THE COURT OF APPEALS ERRED IN GRANTING MORAL AND EXEMPLARY DAMAGES

AND ATTORNEY'S FEES IN FAVOR OF THE RESPONDENTS.

III

THE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER RETURN THE
SUBJECT CAR TO THE RESPONDENTS, WITHOUT MAKING ANY PROVISION FOR
THE ISSUANCE OF THE NEW MANAGER'S/CASHIER'S CHECK BY THE
RESPONDENTS IN FAVOR OF THE PETITIONER IN LIEU OF THE ORIGINAL
CASHIER'S CHECK THAT ALREADY BECAME STALE.6

As to the first issue, we find for the respondents. The issue as to what constitutes the terms
of the oral compromise or any subsequent novation is a question of fact that was resolved
by the Regional Trial Court and the Court of Appeals in favor of respondents. It is well
settled that the findings of fact of the lower court, especially when affirmed by the Court of
 Appeals, are binding upon this Court.7 While there are exceptions to this rule,8 the
present case does not fall under anyone of them, the petitioner's claim to the contrary,
notwithstanding.

Being an affirmative allegation, petitioner has the burden of evidence to prove his claim that
the oral compromise entered into by the parties on August 28, 1995 included the
stipulation that the parties would jointly file a motion to dismiss. This petitioner failed to do.
Notably, even the Metropolitan Trial Court, while ruling in favor of the petitioner and
thereby dismissing the complaint, did not make a factual finding that the compromise
agreement included the condition of the signing of a joint motion to dismiss.

The Court of Appeals made the factual findings in this wise:

In support of its claim, petitioner presented the testimony of Mr. Jefferson Rivera who related
that respondent Dr. Gueco was aware that the signing of the draft of the Joint Motion to
Dismiss was one of the conditions set by the bank for the acceptance of the reduced
amount of indebtedness and the release of the car. (TSN, October 23, 1996, pp. 17-21,
Rollo, pp. 18, 5). Respondents, however, maintained that no such condition was ever
discussed during their meeting of August 28, 1995 (Rollo, p. 32).

The trial court, whose factual findings are entitled to respect since it has the 'opportunity to
directly observe the witnesses and to determine by their demeanor on the stand the
probative value of their testimonies' (People vs. Yadao, et al. 216 SCRA 1, 7 [1992]),
failed to make a categorical finding on the issue. In dismissing the claim of damages of
the respondents, it merely observed that respondents are not entitled to indemnity since it
was their unjustified reluctance to sign of the Joint Motion to Dismiss that delayed the
release of the car. The trial court opined, thus:

'As regards the third issue, plaintiffs' claim for damages is unavailing. First, the plaintiffs
could have avoided the renting of another car and could have avoided this litigation had
he signed the Joint Motion to Dismiss. While it is true that herein defendant can
unilaterally dismiss the case for collection of sum of money with replevin, it is equally true
that there is nothing wrong for the plaintiff to affix his signature in the Joint Motion to
Dismiss, for after all, the dismissal of the case against him is for his own good and benefit.
In fact, the signing of the Joint Motion to Dismiss gives the plaintiff three (3) advantages.
First, he will recover his car. Second, he will pay his obligation to the bank on its reduced
amount of P150,000.00 instead of its original claim of P184,985.09. And third, the case
against him will be dismissed. Plaintiffs, likewise, are not entitled to the award of moral
damages and exemplary damages as there is no showing that the defendant bank acted
fraudulently or in bad faith.' (Rollo, p. 15)

The Court has noted, however, that the trial court, in its findings of facts, clearly indicated
that the agreement of the parties on August 28, 1995 was merely for the lowering of the
price, hence -

'xxx On August 28, 1995, bank representative Jefferson Rivera and plaintiff entered into an
oral compromise agreement, whereby the original claim of the bank of P184,985.09 was
reduced to P150,000.00 and that upon payment of which, plaintiff was informed that the
subject motor vehicle would be released to him.' (Rollo, p. 12)

The lower court, on the other hand, expressly made a finding that petitioner failed to include
the aforesaid signing of the Joint Motion to Dismiss as part of the agreement. In
dismissing petitioner's claim, the lower court declared, thus:
'If it is true, as the appellees allege, that the signing of the joint motion was a condition sine
qua non for the reduction of the appellants' obligation, it is only reasonable and logical to
assume that the joint motion should have been shown to Dr. Gueco in the August 28,
1995 meeting. Why Dr. Gueco was not given a copy of the joint motion that day of August
28, 1995, for his family or legal counsel to see to be brought signed, together with the
P150,000.00 in manager's check form to be submitted on the following day on August 29,
1995? (sic) [I]s a question whereby the answer up to now eludes this Court's
comprehension. The appellees would like this Court to believe that Dr Gueco was
informed by Mr. Rivera Rivera of the bank requirement of signing the joint motion on
August 28, 1995 but he did not bother to show a copy thereof to his family or legal
counsel that day August 28, 1995. This part of the theory of appellee is too complicated
for any simple oral agreement. The idea of a Joint Motion to Dismiss being signed as a
condition to the pushing through a deal surfaced only on August 29, 1995.

'This Court is not convinced by the appellees' posturing. Such claim rests on too slender a
frame, being inconsistent with human experience. Considering the effect of the signing of
the Joint Motion to Dismiss on the appellants' substantive right, it is more in accord with
human experience to expect Dr. Gueco, upon being shown the Joint Motion to Dismiss, to
refuse to pay the Manager's Check and for the bank to refuse to accept the manager's
check. The only logical explanation for this inaction is that Dr. Gueco was not shown the
Joint Motion to Dismiss in the meeting of August 28, 1995, bolstering his claim that its
signing was never put into consideration in reaching a compromise.' xxx.9

We see no reason to reverse.

Anent the issue of award of damages, we find the claim of petitioner meritorious. In finding
the petitioner liable for damages, both .the Regional Trial Court and the Court of Appeals
ruled that there was fraud on the part of the petitioner. The CA thus declared:

The lower court's finding of fraud which became the basis of the award of damages was
likewise sufficiently proven. Fraud under Article 1170 of the Civil Code of the Philippines,
as amended is the 'deliberate and intentional evasion of the normal fulfillment of
obligation' When petitioner refused to release the car despite respondent's tender of
payment in the form of a manager's check, the former intentionally evaded its obligation
and thereby became liable for moral and exemplary damages, as well as attorney's
fees.10

We disagree.

Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the
voluntary execution of a wrongful act, or a willful omission, knowing and intending the
effects which naturally and necessarily arise from such act or omission; the fraud referred
to in Article 1170 of the Civil Code is the deliberate and intentional evasion of the normal
fulfillment of obligation.11 We fail to see how the act of the petitioner bank in requiring the
respondent to sign the joint motion to dismiss could constitute as fraud. True, petitioner
may have been remiss in informing Dr. Gueco that the signing of a joint motion to dismiss
is a standard operating procedure of petitioner bank. However, this can not in anyway
have prejudiced Dr. Gueco. The motion to dismiss was in fact also for the benefit of Dr.
Gueco, as the case filed by petitioner against it before the lower court would be dismissed
with prejudice. The whole point of the parties entering into the compromise agreement
was in order that Dr. Gueco would pay his outstanding account and in return petitioner
would return the car and drop the case for money and replevin before the Metropolitan
Trial Court. The joint motion to dismiss was but a natural consequence of the compromise
agreement and simply stated that Dr. Gueco had fully settled his obligation, hence, the
dismissal of the case. Petitioner's act of requiring Dr. Gueco to sign the joint motion to
 dismiss can not be said to be a deliberate attempt on the part of petitioner to renege on
the compromise agreement of the parties. It should, likewise, be noted that in cases of
breach of contract, moral damages may only be awarded when the breach was attended
by fraud or bad faith.12 The law presumes good faith. Dr. Gueco failed to present an iota
of evidence to overcome this presumption. In fact, the act of petitioner bank in lowering
the debt of Dr. Gueco from P184,000.00 to P150,000.00 is indicative of its good faith and
sincere desire to settle the case. If respondent did suffer any damage, as a result of the
withholding of his car by petitioner, he has only himself to blame. Necessarily, the claim
for exemplary damages must fait. In no way, may the conduct of petitioner be
characterized as "wanton, fraudulent, reckless, oppressive or malevolent."13

We, likewise, find for the petitioner with respect to the third assigned error. In the meeting of
August 29, 1995, respondent Dr. Gueco delivered a manager's check representing the
reduced amount of P150,000.00. Said check was given to Mr. Rivera, a representative of
respondent bank. However, since Dr. Gueco refused to sign the joint motion to dismiss,
he was made to execute a statement to the effect that he was withholding the payment of
the check.14 Subsequently, in a letter addressed to Ms. Desi Tomas, vice president of the
bank, dated September 4, 1995, Dr. Gueco instructed the bank to disregard the 'hold
order" letter and demanded the immediate release of his car,15 to which the former
replied that the condition of signing the joint motion to dismiss must be satisfied and that
they had kept the check which could be claimed by Dr. Gueco anytime.16 While there is
controversy as to whether the document evidencing the order to hold payment of the
check was formally offered as evidence by petitioners,17 it appears from the pleadings
that said check has not been encashed.

The decision of the Regional Trial Court, which was affirmed in toto by the Court of Appeals,
orders the petitioner:

1. to return immediately the subject car to the appellants in good working condition. Appellee
may deposit the Manager's Check - the proceeds of which have long been under the
control of the issuing bank in favor of the appellee since its issuance, whereas the funds
have long been paid by appellants to secure said Manager's Check over which appellants
have no control.18

Respondents would make us hold that petitioner should return the car or its value and that
the latter, because of its own negligence, should suffer the loss occasioned by the fact
that the check had become stale.19 It is their position that delivery of the manager's
check produced the effect of payment20 and, thus, petitioner was negligent in opting not
to deposit or use said check. Rudimentary sense of justice and fair play would not
countenance respondents' position.

A stale check is one which has not been presented for payment within a reasonable time
after its issue. It is valueless and, therefore, should not be paid. Under the negotiable
instruments law, an instrument not payable on demand must be presented for payment
on the day it falls due. When the instrument is payable on demand, presentment must be
made within a reasonable time after its issue. In the case of a bill of exchange,
presentment is sufficient if made within a reasonable time after the last negotiation
thereof.21

A check must be presented for payment within a reasonable time after its issue,22 and in
determining what is a "reasonable time," regard is to be had to the nature of the
instrument, the usage of trade or business with respect to such instruments, and the facts
of the particular case.23 The test is whether the payee employed such diligence as a
prudent man exercises in his own affairs.24 This is because the nature and theory behind
the use of a check points to its immediate use and payability. In a case, a check payable
 on demand which was long overdue by about two and a half (2-1/2) years was considered
a stale check.25 Failure of a payee to encash a check for more than ten (10) years
undoubtedly resulted in the check becoming stale.26 Thus, even a delay of one (1)
week27 or two (2) days,28 under the specific circumstances of the cited cases constituted
unreasonable time as a matter of law.

In the case at bar, however, the check involved is not an ordinary bill of exchange but a
manager's check. A manager's check is one drawn by the bank's manager upon the bank
itself. It is similar to a cashier's check both as to effect and use. A cashier's check is a
check of the bank's cashier on his own or another check. In effect, it is a bill of exchange
drawn by the cashier of a bank upon the bank itself, and accepted in advance by the act
of its issuance.29 It is really the bank's own check and may be treated as a promissory
note with the bank as a maker.30 The check becomes the primary obligation of the bank
which issues it and constitutes its written promise to pay upon demand. The mere
issuance of it is considered an acceptance thereof. If treated as promissory note, the
drawer would be the maker and in which case the holder need not prove presentment for
payment or present the bill to the drawee for acceptance.31

Even assuming that presentment is needed, failure to present for payment within a
reasonable time will result to the discharge of the drawer only to the extent of the loss
caused by the delay.32 Failure to present on time, thus, does not totally wipe out all
liability. In fact, the legal situation amounts to an acknowledgment of liability in the sum
stated in the check. In this case, the Gueco spouses have not alleged, much less shown
that they or the bank which issued the manager's check has suffered damage or loss
caused by the delay or non-presentment. Definitely, the original obligation to pay certainly
has not been erased.

It has been held that, if the check had become stale, it becomes imperative that the
circumstances that caused its non-presentment be determined.33 In the case at bar,
there is no doubt that the petitioner bank held on the check and refused to encash the
same because of the controversy surrounding the signing of the joint motion to dismiss.
We see no bad faith or negligence in this position taken by the Bank.1âwphi1.nêt

WHEREFORE, premises considered, the petition for review is given due course. The
decision of the Court of Appeals affirming the decision of the Regional Trial Court is SET
ASIDE. Respondents are further ordered to pay the original obligation amounting to
P150,000.00 to the petitioner upon surrender or cancellation of the manager's check in
the latter's possession, afterwhich, petitioner is to return the subject motor vehicle in good
working condition.

SO ORDERED.

Davide, Jr., Puno, Pardo, and Ynares-Santiago, JJ., concur.

2. Schmitz Transport & Brokerage Corporation vs. Transport Venture, Inc. (458 SCRA 557)

THIRD DIVISION

[G.R. NO. 150255. April 22, 2005]

SCHMITZ TRANSPORT & BROKERAGE CORPORATION, Petitioners, v. TRANSPORT

VENTURE, INC., INDUSTRIAL INSURANCE COMPANY, LTD., and BLACK SEA
SHIPPING AND DODWELL now INCHCAPE SHIPPING SERVICES, Respondents.

DECISION
CARPIO-MORALES, J.:

On Petition for Review is the June 27, 2001 Decision1 of the Court of Appeals, as well as its
Resolution2 dated September 28, 2001 denying the motion for reconsideration, which
affirmed that of Branch 21 of the Regional Trial Court (RTC) of Manila in Civil Case No.
92-631323 holding petitioner Schmitz Transport Brokerage Corporation (Schmitz
Transport), together with Black Sea Shipping Corporation (Black Sea), represented by its
ship agent Inchcape Shipping Inc. (Inchcape), and Transport Venture (TVI), solidarily
liable for the loss of 37 hot rolled steel sheets in coil that were washed overboard a barge.

On September 25, 1991, SYTCO Pte Ltd. Singapore shipped from the port of Ilyichevsk,
Russia on board M/V "Alexander Saveliev" (a vessel of Russian registry and owned by
Black Sea) 545 hot rolled steel sheets in coil weighing 6,992,450 metric tons.

The cargoes, which were to be discharged at the port of Manila in favor of the consignee,
Little Giant Steel Pipe Corporation (Little Giant),4 were insured against all risks with
Industrial Insurance Company Ltd. (Industrial Insurance) under Marine Policy No. M-91-
3747-TIS.5

The vessel arrived at the port of Manila on October 24, 1991 and the Philippine Ports
Authority (PPA) assigned it a place of berth at the outside breakwater at the Manila South
Harbor.6

Schmitz Transport, whose services the consignee engaged to secure the requisite
clearances, to receive the cargoes from the shipside, and to deliver them to its (the
consignee's) warehouse at Cainta, Rizal,7 in turn engaged the services of TVI to send a
barge and tugboat at shipside.

On October 26, 1991, around 4:30 p.m., TVI's tugboat "Lailani" towed the barge "Erika V" to
shipside.8

By 7:00 p.m. also of October 26, 1991, the tugboat, after positioning the barge alongside the
vessel, left and returned to the port terminal.9 At 9:00 p.m., arrastre operator Ocean
Terminal Services Inc. commenced to unload 37 of the 545 coils from the vessel unto the
barge.

By 12:30 a.m. of October 27, 1991 during which the weather condition had become
inclement due to an approaching storm, the unloading unto the barge of the 37 coils was
accomplished.10 No tugboat pulled the barge back to the pier, however.

At around 5:30 a.m. of October 27, 1991, due to strong waves,11 the crew of the barge
abandoned it and transferred to the vessel. The barge pitched and rolled with the waves
and eventually capsized, washing the 37 coils into the sea.12 At 7:00 a.m., a tugboat
finally arrived to pull the already empty and damaged barge back to the pier.13

Earnest efforts on the part of both the consignee Little Giant and Industrial Insurance to
recover the lost cargoes proved futile.14

Little Giant thus filed a formal claim against Industrial Insurance which paid it the amount of
P5,246,113.11. Little Giant thereupon executed a subrogation receipt15 in favor of
Industrial Insurance.

Industrial Insurance later filed a complaint against Schmitz Transport, TVI, and Black Sea
through its representative Inchcape (the defendants) before the RTC of Manila, for the
 recovery of the amount it paid to Little Giant plus adjustment fees, attorney's fees, and
litigation expenses.16

Industrial Insurance faulted the defendants for undertaking the unloading of the cargoes
while typhoon signal No. 1 was raised in Metro Manila.17

By Decision of November 24, 1997, Branch 21 of the RTC held all the defendants negligent
for unloading the cargoes outside of the breakwater notwithstanding the storm signal.18
The dispositive portion of the decision reads:

WHEREFORE, premises considered, the Court renders judgment in favor of the plaintiff,
ordering the defendants to pay plaintiff jointly and severally the sum of P5,246,113.11
with interest from the date the complaint was filed until fully satisfied, as well as the sum
of P5,000.00 representing the adjustment fee plus the sum of 20% of the amount
recoverable from the defendants as attorney's fees plus the costs of suit. The
counterclaims and cross claims of defendants are hereby DISMISSED for lack of
[m]erit.19

To the trial court's decision, the defendants Schmitz Transport and TVI filed a joint motion for
reconsideration assailing the finding that they are common carriers and the award of
excessive attorney's fees of more than P1,000,000. And they argued that they were not
motivated by gross or evident bad faith and that the incident was caused by a fortuitous
event.20

By resolution of February 4, 1998, the trial court denied the motion for reconsideration.21

All the defendants appealed to the Court of Appeals which, by decision of June 27, 2001,
affirmed in toto the decision of the trial court, 22 it finding that all the defendants were
common carriers - Black Sea and TVI for engaging in the transport of goods and cargoes
over the seas as a regular business and not as an isolated transaction,23 and Schmitz
Transport for entering into a contract with Little Giant to transport the cargoes from ship to
port for a fee.24

In holding all the defendants solidarily liable, the appellate court ruled that "each one was
essential such that without each other's contributory negligence the incident would not
have happened and so much so that the person principally liable cannot be distinguished
with sufficient accuracy."25

In discrediting the defense of fortuitous event, the appellate court held that "although
defendants obviously had nothing to do with the force of nature, they however had control
of where to anchor the vessel, where discharge will take place and even when the
discharging will commence."26

The defendants' respective motions for reconsideration having been denied by Resolution27
of September 28, 2001, Schmitz Transport (hereinafter referred to as petitioner) filed the
present petition against TVI, Industrial Insurance and Black Sea.

Petitioner asserts that in chartering the barge and tugboat of TVI, it was acting for its
principal, consignee Little Giant, hence, the transportation contract was by and between
Little Giant and TVI.28

By Resolution of January 23, 2002, herein respondents Industrial Insurance, Black Sea, and
TVI were required to file their respective Comments.29
By its Comment, Black Sea argued that the cargoes were received by the consignee through
petitioner in good order, hence, it cannot be faulted, it having had no control and
supervision thereover.30

For its part, TVI maintained that it acted as a passive party as it merely received the cargoes
and transferred them unto the barge upon the instruction of petitioner.31

In issue then are:

(1) Whether the loss of the cargoes was due to a fortuitous event, independent of any act of
negligence on the part of petitioner Black Sea and TVI, and

(2) If there was negligence, whether liability for the loss may attach to Black Sea, petitioner
and TVI.

When a fortuitous event occurs, Article 1174 of the Civil Code absolves any party from any
and all liability arising therefrom:

ART. 1174. Except in cases expressly specified by the law, or when it is otherwise declared
by stipulation, or when the nature of the obligation requires the assumption of risk, no
person shall be responsible for those events which could not be foreseen, or which
though foreseen, were inevitable.

In order, to be considered a fortuitous event, however, (1) the cause of the unforeseen and
unexpected occurrence, or the failure of the debtor to comply with his obligation, must be
independent of human will; (2) it must be impossible to foresee the event which constitute
the caso fortuito, or if it can be foreseen it must be impossible to avoid; (3) the occurrence
must be such as to render it impossible for the debtor to fulfill his obligation in any
manner; and (4) the obligor must be free from any participation in the aggravation of the
injury resulting to the creditor.32

[T]he principle embodied in the act of God doctrine strictly requires that the act must be
occasioned solely by the violence of nature. Human intervention is to be excluded from
creating or entering into the cause of the mischief. When the effect is found to be in part
the result of the participation of man, whether due to his active intervention or neglect or
failure to act, the whole occurrence is then humanized and removed from the rules
applicable to the acts of God.33

The appellate court, in affirming the finding of the trial court that human intervention in the
form of contributory negligence by all the defendants resulted to the loss of the
cargoes,34 held that unloading outside the breakwater, instead of inside the breakwater,
while a storm signal was up constitutes negligence.35 It thus concluded that the
proximate cause of the loss was Black Sea's negligence in deciding to unload the cargoes
at an unsafe place and while a typhoon was approaching.36

From a review of the records of the case, there is no indication that there was greater risk in
loading the cargoes outside the breakwater. As the defendants proffered, the weather on
October 26, 1991 remained normal with moderate sea condition such that port operations
continued and proceeded normally.37

The weather data report,38 furnished and verified by the Chief of the Climate Data Section
of PAG-ASA and marked as a common exhibit of the parties, states that while typhoon
signal No. 1 was hoisted over Metro Manila on October 23-31, 1991, the sea condition at
the port of Manila at 5:00 p.m. - 11:00 p.m. of October 26, 1991 was moderate. It cannot,
 therefore, be said that the defendants were negligent in not unloading the cargoes upon
the barge on October 26, 1991 inside the breakwater.

That no tugboat towed back the barge to the pier after the cargoes were completely loaded
by 12:30 in the morning39 is, however, a material fact which the appellate court failed to
properly consider and appreciate40 - the proximate cause of the loss of the cargoes. Had
the barge been towed back promptly to the pier, the deteriorating sea conditions
notwithstanding, the loss could have been avoided. But the barge was left floating in open
sea until big waves set in at 5:30 a.m., causing it to sink along with the cargoes.41 The
loss thus falls outside the "act of God doctrine."

The proximate cause of the loss having been determined, who among the parties is/are
responsible therefor?chanroblesvirtualawlibrary

Contrary to petitioner's insistence, this Court, as did the appellate court, finds that petitioner
is a common carrier. For it undertook to transport the cargoes from the shipside of "M/V
Alexander Saveliev" to the consignee's warehouse at Cainta, Rizal. As the appellate court
put it, "as long as a person or corporation holds [itself] to the public for the purpose of
transporting goods as [a] business, [it] is already considered a common carrier regardless
if [it] owns the vehicle to be used or has to hire one."42 That petitioner is a common
carrier, the testimony of its own Vice-President and General Manager Noel Aro that part
of the services it offers to its clients as a brokerage firm includes the transportation of
cargoes reflects so.

Atty. Jubay: Will you please tell us what [are you] functions x x x as Executive Vice-President
and General Manager of said Company?chanroblesvirtualawlibrary

Mr. Aro: Well, I oversee the entire operation of the brokerage and transport business of the
company. I also handle the various division heads of the company for operation matters,
and all other related functions that the President may assign to me from time to time, Sir.

Q: Now, in connection [with] your duties and functions as you mentioned, will you please tell
the Honorable Court if you came to know the company by the name Little Giant Steel
Pipe Corporation?chanroblesvirtualawlibrary

A: Yes, Sir. Actually, we are the brokerage firm of that Company.

Q: And since when have you been the brokerage firm of that company, if you can recall?
chanroblesvirtualawlibrary

A: Since 1990, Sir.

Q: Now, you said that you are the brokerage firm of this Company. What work or duty did
you perform in behalf of this company?chanroblesvirtualawlibrary

A: We handled the releases (sic) of their cargo[es] from the Bureau of Customs. We [are]
also in-charged of the delivery of the goods to their warehouses. We also handled the
clearances of their shipment at the Bureau of Customs, Sir.

xxx

Q: Now, what precisely [was] your agreement with this Little Giant Steel Pipe Corporation
with regards to this shipment? What work did you do with this shipment?
chanroblesvirtualawlibrary
A: We handled the unloading of the cargo[es] from vessel to lighter and then the delivery of
[the] cargo[es] from lighter to BASECO then to the truck and to the warehouse, Sir.

Q: Now, in connection with this work which you are doing, Mr. Witness, you are supposed to
perform, what equipment do (sic) you require or did you use in order to effect this
unloading, transfer and delivery to the warehouse?chanroblesvirtualawlibrary

A: Actually, we used the barges for the ship side operations, this unloading [from] vessel to
lighter, and on this we hired or we sub-contracted with [T]ransport Ventures, Inc. which
[was] in-charged (sic) of the barges. Also, in BASECO compound we are leasing cranes
to have the cargo unloaded from the barge to trucks, [and] then we used trucks to deliver
[the cargoes] to the consignee's warehouse, Sir.

Q: And whose trucks do you use from BASECO compound to the consignee's warehouse?
chanroblesvirtualawlibrary

A: We utilized of (sic) our own trucks and we have some other contracted trucks, Sir.

xxx

ATTY. JUBAY: Will you please explain to us, to the Honorable Court why is it you have to
contract for the barges of Transport Ventures Incorporated in this particular operation?
chanroblesvirtualawlibrary

A: Firstly, we don't own any barges. That is why we hired the services of another firm whom
we know [al]ready for quite sometime, which is Transport Ventures, Inc. (Emphasis
supplied)43

It is settled that under a given set of facts, a customs broker may be regarded as a common
carrier. Thus, this Court, in A.F. Sanchez Brokerage, Inc. v. The Honorable Court of
Appeals,44 held:

The appellate court did not err in finding petitioner, a customs broker, to be also a common
carrier, as defined under Article 1732 of the Civil Code, to wit,

Art. 1732. Common carriers are persons, corporations, firms or associations engaged in the
business of carrying or transporting passengers or goods or both, by land, water, or air,
for compensation, offering their services to the public.

xxx

Article 1732 does not distinguish between one whose principal business activity is the
carrying of goods and one who does such carrying only as an ancillary activity. The
contention, therefore, of petitioner that it is not a common carrier but a customs broker
whose principal function is to prepare the correct customs declaration and proper
shipping documents as required by law is bereft of merit. It suffices that petitioner
undertakes to deliver the goods for pecuniary consideration.45

And in Calvo v. UCPB General Insurance Co. Inc.,46 this Court held that as the
transportation of goods is an integral part of a customs broker, the customs broker is also
a common carrier. For to declare otherwise "would be to deprive those with whom [it]
contracts the protection which the law affords them notwithstanding the fact that the
obligation to carry goods for [its] customers, is part and parcel of petitioner's business."47
As for petitioner's argument that being the agent of Little Giant, any negligence it committed
was deemed the negligence of its principal, it does not persuade.

True, petitioner was the broker-agent of Little Giant in securing the release of the cargoes. In
effecting the transportation of the cargoes from the shipside and into Little Giant's
warehouse, however, petitioner was discharging its own personal obligation under a
contact of carriage.

Petitioner, which did not have any barge or tugboat, engaged the services of TVI as
handler48 to provide the barge and the tugboat. In their Service Contract,49 while Little
Giant was named as the consignee, petitioner did not disclose that it was acting on
commission and was chartering the vessel for Little Giant.50 Little Giant did not thus
automatically become a party to the Service Contract and was not, therefore, bound by
the terms and conditions therein.

Not being a party to the service contract, Little Giant cannot directly sue TVI based thereon
but it can maintain a cause of action for negligence.51

In the case of TVI, while it acted as a private carrier for which it was under no duty to
observe extraordinary diligence, it was still required to observe ordinary diligence to
ensure the proper and careful handling, care and discharge of the carried goods.

Thus, Articles 1170 and 1173 of the Civil Code provide:

ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence,
or delay, and those who in any manner contravene the tenor thereof, are liable for
damages.

ART. 1173. The fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation and corresponds with the circumstances
of the persons, of the time and of the place. When negligence shows bad faith, the
provisions of articles 1171 and 2202, paragraph 2, shall apply.

If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be required.

Was the reasonable care and caution which an ordinarily prudent person would have used in
the same situation exercised by TVI?52

This Court holds not.

TVI's failure to promptly provide a tugboat did not only increase the risk that might have
been reasonably anticipated during the shipside operation, but was the proximate cause
of the loss. A man of ordinary prudence would not leave a heavily loaded barge floating
for a considerable number of hours, at such a precarious time, and in the open sea,
knowing that the barge does not have any power of its own and is totally defenseless
from the ravages of the sea. That it was nighttime and, therefore, the members of the
crew of a tugboat would be charging overtime pay did not excuse TVI from calling for one
such tugboat.

As for petitioner, for it to be relieved of liability, it should, following Article 173953 of the Civil
Code, prove that it exercised due diligence to prevent or minimize the loss, before, during
and after the occurrence of the storm in order that it may be exempted from liability for the
loss of the goods.
While petitioner sent checkers54 and a supervisor55 on board the vessel to counter-check
the operations of TVI, it failed to take all available and reasonable precautions to avoid
the loss. After noting that TVI failed to arrange for the prompt towage of the barge despite
the deteriorating sea conditions, it should have summoned the same or another tugboat
to extend help, but it did not.

This Court holds then that petitioner and TVI are solidarily liable56 for the loss of the
cargoes. The following pronouncement of the Supreme Court is instructive:

The foundation of LRTA's liability is the contract of carriage and its obligation to indemnify
the victim arises from the breach of that contract by reason of its failure to exercise the
high diligence required of the common carrier. In the discharge of its commitment to
ensure the safety of passengers, a carrier may choose to hire its own employees or avail
itself of the services of an outsider or an independent firm to undertake the task. In either
case, the common carrier is not relieved of its responsibilities under the contract of
carriage.

Should Prudent be made likewise liable? If at all, that liability could only be for tort under the
provisions of Article 2176 and related provisions, in conjunction with Article 2180 of the
Civil Code. x x x [O]ne might ask further, how then must the liability of the common
carrier, on one hand, and an independent contractor, on the other hand, be described? It
would be solidary. A contractual obligation can be breached by tort and when the same
act or omission causes the injury, one resulting in culpa contractual and the other in culpa
aquiliana, Article 2194 of the Civil Code can well apply. In fine, a liability for tort may arise
even under a contract, where tort is that which breaches the contract. Stated differently,
when an act which constitutes a breach of contract would have itself constituted the
source of a quasi-delictual liability had no contract existed between the parties, the
contract can be said to have been breached by tort, thereby allowing the rules on tort to
apply.57

As for Black Sea, its duty as a common carrier extended only from the time the goods were
surrendered or unconditionally placed in its possession and received for transportation
until they were delivered actually or constructively to consignee Little Giant.58

Parties to a contract of carriage may, however, agree upon a definition of delivery that
extends the services rendered by the carrier. In the case at bar, Bill of Lading No. 2
covering the shipment provides that delivery be made "to the port of discharge or so near
thereto as she may safely get, always afloat."59 The delivery of the goods to the
consignee was not from "pier to pier" but from the shipside of "M/V Alexander Saveliev"
and into barges, for which reason the consignee contracted the services of petitioner.
Since Black Sea had constructively delivered the cargoes to Little Giant, through
petitioner, it had discharged its duty.60

In fine, no liability may thus attach to Black Sea.

Respecting the award of attorney's fees in an amount over P1,000,000.00 to Industrial

Insurance, for lack of factual and legal basis, this Court sets it aside. While Industrial
Insurance was compelled to litigate its rights, such fact by itself does not justify the award
of attorney's fees under Article 2208 of the Civil Code. For no sufficient showing of bad
faith would be reflected in a party's persistence in a case other than an erroneous
conviction of the righteousness of his cause.61 To award attorney's fees to a party just
because the judgment is rendered in its favor would be tantamount to imposing a
premium on one's right to litigate or seek judicial redress of legitimate grievances.62
On the award of adjustment fees: The adjustment fees and expense of divers were incurred
by Industrial Insurance in its voluntary but unsuccessful efforts to locate and retrieve the
lost cargo. They do not constitute actual damages.63

As for the court a quo's award of interest on the amount claimed, the same calls for
modification following the ruling in Eastern Shipping Lines, Inc. v. Court of Appeals64 that
when the demand cannot be reasonably established at the time the demand is made, the
interest shall begin to run not from the time the claim is made judicially or extrajudicially
but from the date the judgment of the court is made (at which the time the quantification of
damages may be deemed to have been reasonably ascertained).65

WHEREFORE, judgment is hereby rendered ordering petitioner Schmitz Transport &

Brokerage Corporation, and Transport Venture Incorporation jointly and severally liable
for the amount of P5,246,113.11 with the MODIFICATION that interest at SIX PERCENT
per annum of the amount due should be computed from the promulgation on November
24, 1997 of the decision of the trial court.

Costs against petitioner.

SO ORDERED.

3. Philippines Free Press, Inc. vs. Court of Appeals (473 SCRA 639)

THIRD DIVISION

G.R. No. 132864 October 24, 2005

PHILIPPINE FREE PRESS, INC., Petitioner,

vs.
COURT OF APPEALS (12th Division) and LIWAYWAY PUBLISHING, INC., Respondents.

DECISION

GARCIA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner
Philippine Free Press, Inc. seeks the reversal of the Decision1 dated February 25, 1998
of the Court of Appeals (CA) in CA-GR CV No. 52660, affirming, with modification, an
earlier decision of the Regional Trial Court at Makati, Branch 146, in an action for
annulment of deeds of sale thereat instituted by petitioner against the Presidential
Commission for Good

Government (PCGG) and the herein private respondent, Liwayway Publishing, Inc.

As found by the appellate court in the decision under review, the facts are:

xxx [Petitioner] . . . is a domestic corporation engaged in the publication of Philippine Free

Press Magazine, one of the . . . widely circulated political magazines in the Philippines.
Due to its wide circulation, the publication of the Free Press magazine enabled [petitioner]
to attain considerable prestige prior to the declaration of Martial Law as well as to achieve
a high profit margin. . . .

Sometime in . . . 1963, [petitioner] purchased a parcel of land situated at No. 2249, Pasong
Tamo Street, Makati which had an area of 5,000 square meters as evidenced by . . .
(TCT) No. 109767 issued by the Register of Deeds of Makati (Exh. Z). Upon taking
 possession of the subject land, [petitioner] constructed an office building thereon to house
its various machineries, equipment, office furniture and fixture. [Petitioner] thereafter
made the subject building its main office . . . .

During the 1965 presidential elections, [petitioner] supported the late President Diosdado
Macapagal against then Senate President Ferdinand Marcos. Upon the election of the
late President Ferdinand Marcos in 1965 and prior to the imposition of Martial law on
September 21, 1972, [petitioner] printed numerous articles highly critical of the Marcos
administration, exposing the corruption and abuses of the regime. The [petitioner] likewise
ran a series of articles exposing the plan of the Marcoses to impose a dictatorship in the
guise of Martial Law . . . .

In the evening of September 20, 1972, soldiers surrounded the Free Press Building, forced
out its employees at gunpoint and padlocked the said establishment. The soldier in
charge of the military contingent then informed Teodoro Locsin, Jr., the son of Teodoro
Locsin, Sr., the President of [petitioner], that Martial Law had been declared and that they
were instructed by the late President Marcos to take over the building and to close the
printing press. xxx.

On September 21, 1972 . . ., Teodoro Locsin, Sr. was arrested [and] . . . . was brought to
Camp Crame and was subsequently transferred to the maximum security bloc at Fort
Bonifacio.

Sometime in December, 1972, Locsin, Sr. was informed . . . that no charges were to be filed
against him and that he was to be provisionally released subject to the following
conditions, to wit: (1) he remained (sic) under ‘city arrest’; xxx (5) he was not to publish
the Philippine Free Press nor was he to do, say or write anything critical of the Marcos
administration . . . .

Consequently, the publication of the Philippine Free Press ceased. The subject building
remained padlocked and under heavy military guard (TSB, 27 May 1993, pp. 51-52;
stipulated). The cessation of the publication of the ... magazine led to the financial ruin of
[petitioner] . . . . [Petitioner’s] situation was further aggravated when its employees
demanded the payment of separation pay as a result of the cessation of its operations.
[Petitioner’s] minority stockholders, furthermore, made demands that Locsin, Sr. buy out
their shares. xxx.

On separate occasions in 1973, Locsin, Sr. was approached by the late Atty. Crispin Baizas
with offers from then President Marcos for the acquisition of the [petitioner]. However,
Locsin, Sr. refused the offer stating that [petitioner] was not for sale (TSN, 2 May 1988,
pp. 8-9, 40; 27 May 1993, pp. 66-67).

A few months later, the late Secretary Guillermo De Vega approached Locsin, Sr. reiterating
Marcos’s offer to purchase the name and the assets of the [petitioner].xxx

Sometime during the middle of 1973, Locsin, Sr. was contacted by Brig. Gen. Hans Menzi,
the former aide-de-camp of then President Marcos concerning the sale of the [petitioner].
Locsin, Sr. requested that the meeting be held inside the [petitioner] Building and this was
arranged by Menzi (TSN, 27 May 1993, pp. 69-70). During the said meeting, Menzi once
more reiterated Marcos’s offer to purchase both the name and the assets of [petitioner]
adding that "Marcos cannot be denied" (TSN, 27 May 1993, p. 71). Locsin, Sr. refused but
Menzi insisted that he had no choice but to sell. Locsin, Sr. then made a counteroffer that
he will sell the land, the building and all the machineries and equipment therein but he will
be allowed to keep the name of the [petitioner]. Menzi promised to clear the matter with
then President Marcos (TSN, 27 May 1993, p. 72). Menzi thereafter contacted Locsin, Sr.
 and informed him that President Marcos was amenable to his counteroffer and is offering
the purchase price of Five Million Seven Hundred Fifty Thousand (P5, 750,000.00) Pesos
for the land, the building, the machineries, the office furnishing and the fixtures of the
[petitioner] on a "take-it-or-leave-it" basis (TSN, 2 May 1988, pp.42-43; 27 May 1993, p.
88).

On August 22, 1973, Menzi tendered to Locsin, Sr. a check for One Million (P1, 000,000.00)
Pesos downpayment for the sale, . . . Locsin, Sr. accepted the check, subject to the
condition that he will refund the same in case the sale will not push through. (Exh. 7).

On August 23, 1973, the Board of Directors of [petitioner] held a meeting and reluctantly
passed a resolution authorizing Locsin, Sr. to sell the assets of the [petitioner] to Menzi
minus the name "Philippine Free Press (Exhs. A-1 and 1; TSN, 27 May 1993, pp. 73-76).

On October 23, 1973, the parties [petitioner, as vendor and private respondent, represented
by B/Gen. Menzi, as vendee] met . . . and executed two (2) notarized Deeds of Sale
covering the land, building and the machineries of the [petitioner]. Menzi paid the balance
of the purchase price in the amount of . . . (P4,750,000.00) Pesos (Exhs. A and (; B and
10;TSN, 27 May 1993, pp. 81-82; 3 June 1993, p. 89).

Locsin, Sr. thereafter used the proceeds of the sale to pay the separation pay of [petitioner’s]
employees, buy out the shares of the minority stockholders as well as to settle all its
obligations.

On February 26, 1987, [petitioner] filed a complaint for Annulment of Sale against
[respondent] Liwayway and the PCGG before the Regional Trail Court of Makati, Branch
146 on the grounds of vitiated consent and gross inadequacy of purchase price. On
motion of defendant PCGG, the complaint against it was dismissed on October 22, 1987.
(Words in bracket and underscoring added)

In a decision dated October 31, 1995,2 the trial court dismissed petitioner’s complaint and
granted private respondent’s counterclaim, to wit:

WHEREFORE, in view of all the foregoing premises, the herein complaint for annulment of
sales is hereby dismissed for lack of merit.

On [respondent] counterclaim, the court finds for [respondent] and against [petitioner] for the
recovery of attorney’s fees already paid for at P1,945,395.98, plus a further P316,405.00
remaining due and payable.

SO ORDERED. (Words in bracket added)

In time, petitioner appealed to the Court of Appeals (CA) whereat its appellate recourse was
docketed as CA-G.R. C.V. No. 52660.

As stated at the outset hereof, the appellate court, in a decision dated February 25, 1998,
affirmed with modification the appealed decision of the trial court, the modification
consisting of the deletion of the award of attorney’s fees to private respondent, thus:

WHEREFORE, with the sole modification that the award of attorney’s fees in favor of
[respondent] be deleted, the Decision appealed from is hereby AFFIRMED in all respects.

SO ORDERED.
Hence, petitioner’s present recourse, urging the setting aside of the decision under review
which, to petitioner, decided questions of substance in a way not in accord with law and
applicable jurisprudence considering that the appellate court gravely erred:

xxx IN ITS MISAPPLICATION OF THE DECISIONS OF THE HONORABLE COURT THAT

RESULTED IN ITS ERRONEOUS CONCLUSION THAT PETITIONER'S CAUSE OF
ACTION HAD ALREADY PRESCRIBED.

II

xxx IN CONCLUDING THAT THE UNDISPUTED FACTS AND CIRCUMSTANCES

PRECEDING THE EXECUTION OF THE CONTRACTS OF SALE FOR THE
PETITIONER'S PROPERTIES DID NOT ESTABLISH THE FORCE, INTIMIDATION,
DURESS AND UNDUE INFLUENCE WHICH VITIATED PETITIONER'S CONSENT.

A. xxx IN CONSIDERING AS HEARSAY THE TESTIMONIAL EVIDENCE WHICH

CLEARLY ESTABLISHED THE THREATS MADE UPON PETITIONER AND THAT
RESPONDENT LIWAYWAY WILL BE USED AS THE CORPORATE VEHICLE FOR THE
FORCED ACQUISITION OF PETITIONER'S PROPERTIES.

B. xxx IN CONCLUDING THAT THE ACTS OF THEN PRESIDENT MARCOS DURING

MARTIAL LAW DID NOT CONSTITUTE THE FORCE, INTIMIDATION, DURESS AND
UNDUE INFLUENCE WHICH VITIATED PETITIONER'S CONSENT.

C. xxx IN RESOLVING THE INSTANT CASE ON THE BASIS OF MERE SURMISES AND
SPECULATIONS INSTEAD OF THE UNDISPUTED EVIDENCE ON RECORD.

III

xxx IN CONCLUDING THAT THE GROSSLY INADEQUATE PURCHASE PRICE FOR

PETITIONER'S PROPERTIES DOES NOT INDICATE THE VITIATION OF
PETITIONER'S CONSENT TO THE CONTRACTS OF SALE.

IV

xxx IN CONCLUDING THAT PETITIONER'S USE OF THE PROCEEDS OF THE SALE

FOR ITS SURVIVAL CONSTITUTE AN IMPLIED RATIFICATION [OF] THE
CONTRACTS OF SALE.

xxx IN EXCLUDING PETITIONER'S EXHIBITS "X-6" TO "X-7" AND "Y-3" (PROFFER)

WHICH ARE ADMISSIBLE EVIDENCE WHICH COMPETENTLY PROVE THAT THEN
PRESIDENT MARCOS OWNED PRIVATE RESPONDENT LIWAYWAY, WHICH WAS
USED AS THE CORPORATE VEHICLE FOR THE ACQUISITION OF PETITIONER'S
PROPERTIES.

The petition lacks merit.

Petitioner starts off with its quest for the allowance of the instant recourse on the submission
that the martial law regime tolled the prescriptive period under Article 1391 of the Civil
Code, which pertinently reads:
Article 391. The action for annulment shall be brought within four years.

This period shall begin:

In cases of intimidation, violence or undue influence, from the time the defect of the consent
ceases.

xxx xxx xxx

It may be recalled that the separate deeds of sale3 sought to be annulled under petitioner’s
basic complaint were both executed on October 23, 1973. Per the appellate court, citing
Development Bank of the Philippines [DBP] vs. Pundogar4, the 4-year prescriptive period
for the annulment of the aforesaid deeds ended "in late 1977", doubtless suggesting that
petitioner’s right to seek such annulment accrued four (4) years earlier, a starting time-
point corresponding, more or less, to the date of the conveying deed, i.e., October 23,
1973. Petitioner contends, however, that the 4-year prescriptive period could not have
commenced to run on October 23, 1973, martial law being then in full swing. Plodding on,
petitioner avers that the continuing threats on the life of Mr. Teodoro Locsin, Sr. and his
family and other menacing effects of martial law – which should be considered as force
majeure - ceased only after the February 25, 1986 People Power uprising.

Petitioner instituted its complaint for annulment of contracts on February 26, 1987. The
question that now comes to the fore is: Did the 4-year prescriptive period start to run in
late October 1973, as postulated in the decision subject of review, or on February 25,
1986, as petitioner argues, on the theory that martial law has the effects of a force
majeure5, which, in turn, works to suspend the running of the prescriptive period for the
main case filed with the trial court.

Petitioner presently faults the Court of Appeals for its misapplication of the doctrinal rule laid
down in DBP vs. Pundogar6 where this Court, citing and quoting excerpts from the ruling
in Tan vs. Court of Appeals 7, as reiterated in National Development Company vs. Court
of Appeals, 8 wrote –

We can not accept the petitioners’ contention that the period during which authoritarian rule
was in force had interrupted prescription and that the same began to run only on February
25, 1986, when the Aquino government took power. It is true that under Article 1154 [of
the Civil Code] xxx fortuitous events have the effect of tolling the period of prescription.
However, we can not say, as a universal rule, that the period from September 21, 1972
through February 25, 1986 involves a force majeure. Plainly, we can not box in the
"dictatorial" period within the term without distinction, and without, by necessity,
suspending all liabilities, however demandable, incurred during that period, including
perhaps those ordered by this Court to be paid. While this Court is cognizant of acts of
the last regime, especially political acts, that might have indeed precluded the
enforcement of liability against that regime and/or its minions, the Court is not inclined to
make quite a sweeping pronouncement, . . . . It is our opinion that claims should be taken
on a case-to-case basis. This selective rule is compelled, among others, by the fact that
not all those imprisoned or detained by the past dictatorship were true political
oppositionists, or, for that matter, innocent of any crime or wrongdoing. Indeed, not a few
of them were manipulators and scoundrels. [Italization in the original; Underscoring and
words in bracket added]

According to petitioner, the appellate court misappreciated and thus misapplied the correct
thrust of the Tan case, as reiterated in DBP which, per petitioner’s own formulation, is the
following:9
The prevailing rule, therefore, is that on a case-to-case basis, the Martial Law regime may
be treated as force majeure that suspends the running of the applicable prescriptive
period provided that it is established that the party invoking the imposition of Martial Law
as a force majeure are true oppositionists during the Martial Law regime and that said
party was so circumstanced that is was impossible for said party to commence, continue
or to even resist an action during the dictatorial regime. (Emphasis and underscoring in
the original)

We are not persuaded.

It strains credulity to believe that petitioner found it impossible to commence and succeed in
an annulment suit during the entire stretch of the dictatorial regime. The Court can grant
that Mr. Locsin, Sr. and petitioner were, in the context of DBP and Tan, "true
oppositionists" during the period of material law. Petitioner, however, has failed to
convincingly prove that Mr. Locsin, Sr., as its then President, and/or its governing board,
were so circumstanced that it was well-nigh impossible for him/them to successfully
institute an action during the martial law years. Petitioner cannot plausibly feign ignorance
of the fact that shortly after his arrest in the evening of September 20, 1972, Mr. Locsin,
Sr., together with several other journalists10, dared to file suits against powerful figures of
the dictatorial regime and veritably challenged the legality of the declaration of martial law.
Docketed in this Court as GR No. L-35538, the case, after its consolidation with eight (8)
other petitions against the martial law regime, is now memorialized in books of
jurisprudence and cited in legal publications and case studies as Aquino vs. Enrile.11

Incidentally, Mr. Locsin Sr., as gathered from the ponencia of then Chief Justice Querube
Makalintal in Aquino, was released from detention notwithstanding his refusal to withdraw
from his petition in said case. Judging from the actuations of Mr. Locsin, Sr. during the
onset of martial law regime and immediately thereafter, any suggestion that intimidation or
duress forcibly stayed his hands during the dark days of martial law to seek judicial
assistance must be rejected.12

Given the foregoing perspective, the Court is not prepared to disturb the ensuing ruling of
the appellate court on the effects of martial law on petitioner’s right of action:

In their testimonies before the trial court, both Locsin, Sr. and Locsin, Jr. claimed that they
had not filed suit to recover the properties until 1987 as they could not expect justice to be
done because according to them, Marcos controlled every part of the government,
including the courts, (TSN, 2 May 1988, pp. 23-24; 27 May 1993, p. 121). While that
situation may have obtained during the early years of the martial law administration, We
could not agree with the proposition that it remained consistently unchanged until 1986, a
span of fourteen (14) years. The unfolding of subsequent events would show that while
dissent was momentarily stifled, it was not totally silenced. On the contrary, it steadily
simmered and smoldered beneath the political surface and culminated in that groundswell
of popular protest which swept the dictatorship from power.13

The judiciary too, as an institution, was no ivory tower so detached from the ever changing
political climate. While it was not totally impervious to the influence of the dictatorship’s
political power, it was not hamstrung as to render it inutile to perform its functions
normally. To say that the Judiciary was not able to render justice to the persons who
sought redress before it . . . during the Martial Law years is a sweeping and unwarranted
generalization as well as an unfounded indictment. The Judiciary, . . . did not lack in
gallant jurists and magistrates who refused to be cowed into silence by the Marcos
administration. Be that as it may, the Locsin’s mistrust of the courts and of judicial
processes is no excuse for their non-observance of the prescriptive period set down by
law.
Corollary to the presented issue of prescription of action for annulment of contract voidable
on account of defect of consent14 is the question of whether or not duress, intimidation or
undue influence vitiated the petitioner’s consent to the subject contracts of sale. Petitioner
delves at length on the vitiation issue and, relative thereto, ascribes the following errors to
the appellate court: first, in considering as hearsay the testimonial evidence that may
prove the element of "threat" against petitioner or Mr. Locsin, Sr., and the dictatorial
regime's use of private respondent as a corporate vehicle for forcibly acquiring petitioner’s
properties; second, in concluding that the acts of then President Marcos during the martial
law years did not have a consent-vitiating effect on petitioner; and third, in resolving the
case on the basis of mere surmises and speculations.

The evidence referred to as hearsay pertains mainly to the testimonies of Messrs. Locsin,
Sr. and Teodoro Locsin, Jr. (the Locsins, collectively), which, in gist, established the
following facts: 1) the widely circulated Free Press magazine, which, prior to the
declaration of Martial Law, took the strongest critical stand against the Marcos
administration, was closed down on the eve of such declaration, which closure eventually
drove petitioner to financial ruin; 2) upon Marcos’ orders, Mr. Locsin, Sr. was arrested and
detained for over 2 months without charges and, together with his family, was threatened
with execution; 3) Mr. Locsin, Sr. was provisionally released on the condition that he
refrains from reopening Free Press and writing anything critical of the Marcos
administration; and 4) Mr. Locsin, Sr. and his family remained fearful of reprisals from
Marcos until the 1986 EDSA Revolution.

Per the Locsins, it was amidst the foregoing circumstances that petitioner’s property in
question was sold to private respondent, represented by Gen. Menzi, who, before the
sale, allegedly applied the squeeze on Mr. Locsin, Sr. thru the medium of the "Marcos
cannot be denied" and "[you] have no choice but to sell" line.

The appellate court, in rejecting petitioner’s above posture of vitiation of consent, observed:

It was under the above-enumerated circumstances that the late Hans Menzi, allegedly acting
on behalf of the late President Marcos, made his offer to purchase the Free Press. It must
be noted, however, that the testimonies of Locsin, Sr. and Locsin, Jr. regarding Menzi’s
alleged implied threat that "Marcos cannot be denied" and that [respondent] was to be the
corporate vehicle for Marcos’s takeover of the Free Press is hearsay as Menzi already
passed away and is no longer in a position to defend himself; the same can be said of the
offers to purchase made by Atty. Crispin Baizas and Secretary Guillermo de Vega who
are also both dead. It is clear from the provisions of Section 36, Rule 130 of the 1989
Revised Rules on Evidence that any evidence, . . . is hearsay if its probative value is not
based on the personal knowledge of the witness but on the knowledge of some other
person not on the witness stand. Consequently, hearsay evidence, whether objected to or
not, has no probative value unless the proponent can show that the evidence falls within
the exceptions to the hearsay evidence rule (Citations omitted)

The appellate court’s disposition on the vitiation-of-consent angle and the ratio therefor
commends itself for concurrence.

Jurisprudence instructs that evidence of statement made or a testimony is hearsay if offered

against a party who has no opportunity to cross-examine the witness. Hearsay evidence
is excluded precisely because the party against whom it is presented is deprived of or is
bereft of opportunity to cross-examine the persons to whom the statements or writings are
attributed.15 And there can be no quibbling that because death has supervened, the late
Gen Menzi, like the other purported Marcos subalterns, Messrs. Baizas and De Vega,
 cannot cross-examine the Locsins for the threatening statements allegedly made by them
for the late President.

Like the Court of Appeals, we are not unmindful of the exception to the hearsay rule
provided in Section 38, Rule 130 of the Rules of Court, which reads:

SEC. 38. Declaration against interest. – The declaration made by a person deceased or
unable to testify, against the interest of the declarant, if the fact asserted in the
declaration was at the time it was made so far contrary to the declarant's own interest,
that a reasonable man in his position would not have made the declaration unless he
believed it to be true, may be received in evidence against himself or his successors-in-
interest and against third persons.

However, in assessing the probative value of Gen. Menzi’s supposed declaration against
interest, i.e., that he was acting for the late President Marcos when he purportedly
coerced Mr. Locsin, Sr. to sell the Free Press property, we are loathed to give it the
evidentiary weight petitioner endeavors to impress upon us. For, the Locsins can hardly
be considered as disinterested witnesses. They are likely to gain the most from the
annulment of the subject contracts. Moreover, allegations of duress or coercion should,
like fraud, be viewed with utmost caution. They should not be laid lightly at the door of
men whose lips had been sealed by death.16 Francisco explains why:

[I]t has been said that "of all evidence, the narration of a witness of his conversation with a
dead person is esteemed in justice the weakest.’" One reason for its unreliability is that
the alleged declarant can not recall to the witness the circumstances under which his
statement were made. The temptation and opportunity for fraud in such cases also
operate against the testimony. Testimony to statements of a deceased person, at least
where proof of them will prejudice his estate, is regarded as an unsafe foundation for
judicial action except in so far as such evidence is borne out by what is natural and
probable under the circumstances taken in connection with actual known facts. And a
court should be very slow to act upon the statement of one of the parties to a supposed
agreement after the death of the other party; such corroborative evidence should be
adduced as to satisfy the court of the truth of the story which is to benefit materially the
person telling it. 17

Excepting, petitioner insists that the testimonies of its witnesses – the Locsins - are not
hearsay because:

In this regard, hearsay evidence has been defined as "the evidence not of what the witness
knows himself but of what he has heard from others." xxx Thus, the mere fact that the
other parties to the conversations testified to by the witness are already deceased does
[not] render such testimony inadmissible for being hearsay. 18

xxx xxx xxx

The testimonies of Teodoro Locsin, Sr. and Teodoro Locsin, Jr. that the late Atty. Baizas,
Gen. Menzi and Secretary de Vega stated that they were representing Marcos, that
"Marcos cannot be denied", and the fact that Gen. Menzi stated that private respondent
Liwayway was to be the corporate vehicle for the then President Marcos' take-over of
petitioner Free Press are not hearsay. Teodoro Locsin, Sr. and Teodoro Locsin, Jr. were
in fact testifying to matters of their own personal knowledge because they were either
parties to the said conversation or were present at the time the said statements were
made. 19

Again, we disagree.
Even if petitioner succeeds in halving its testimonial evidence, one-half purporting to quote
the words of a live witness and the other half purporting to quote what the live witness
heard from one already dead, the other pertaining to the dead shall nevertheless remain
hearsay in character.

The all too familiar rule is that "a witness can testify only to those facts which he knows of his
own knowledge". 20 There can be no quibbling that petitioner’s witnesses cannot testify
respecting what President Marcos said to Gen. Menzi about the acquisition of petitioner’s
newspaper, if any there be, precisely because none of said witnesses ever had an
opportunity to hear what the two talked about.

Neither may petitioner circumvent the hearsay rule by invoking the exception under the
declaration-against-interest rule. In context, the only declaration supposedly made by
Gen. Menzi which can conceivably be labeled as adverse to his interest could be that he
was acting in behalf of Marcos in offering to acquire the physical assets of petitioner. Far
from making a statement contrary to his own interest, a declaration conveying the notion
that the declarant possessed the authority to speak and to act for the President of the
Republic can hardly be considered as a declaration against interest.

Petitioner next assails the Court of Appeals on its conclusion that Martial Law is not per se a
consent-vitiating phenomenon. Wrote the appellate court: 21

In other words, the act of the ruling power, in this case the martial law administration, was
not an act of mere trespass but a trespass in law - not a perturbacion de mero hecho but
a pertubacion de derecho - justified as it is by an act of government in legitimate self-
defense (IFC Leasing & Acceptance Corporation v. Sarmiento Distributors Corporation,
…, citing Caltex (Phils.) v. Reyes, 84 Phil. 654 [1949]. Consequently, the act of the
Philippine Government in declaring martial law can not be considered as an act of
intimidation of a third person who did not take part in the contract (Article 1336, Civil
Code). It is, therefore, incumbent on [petitioner] to present clear and convincing evidence
showing that the late President Marcos, acting through the late Hans Menzi, abused his
martial law powers by forcing plaintiff-appellant to sell its assets. In view of the largely
hearsay nature of appellant’s evidence on this point, appellant’s cause must fall.

According to petitioner, the reasoning of the appellate court is "flawed" because:22

It is implicit from the foregoing reasoning of the Court of Appeals that it treated the forced
closure of the petitioner's printing press, the arrest and incarceration without charges of
Teodoro Locsin, Sr., the threats that he will be shot and the threats that other members of
his family will be arrested as legal acts done by a dictator under the Martial Law regime.
The same flawed reasoning led the Court of Appeals to the erroneous conclusion that
such acts do not constitute force, intimidation, duress and undue influence that vitiated
petitioner's consent to the Contracts of Sale.

The contention is a rehash of petitioner’s bid to impute on private respondent acts of force
and intimidation that were made to bear on petitioner or Mr. Locsin, Sr. during the early
years of martial law. It failed to take stock of a very plausible situation depicted in the
appellate court’s decision which supports its case disposition on the issue respecting
vitiation. Wrote that court:

Even assuming that the late president Marcos is indeed the owner of [respondent], it does
not necessarily follow that he, acting through the late Hans Menzi, abused his power by
resorting to intimidation and undue influence to coerce the Locsins into selling the assets
of Free Press to them (sic).
It is an equally plausible scenario that Menzi convinced the Locsins to sell the assets of the
Free Press without resorting to threats or moral coercion by simply pointing out to them
the hard fact that the Free Press was in dire financial straits after the declaration of Martial
Law and was being sued by its former employees, minority stockholders and creditors.
Given such a state of affairs, the Locsins had no choice but to sell their assets.23

Petitioner laments that the scenario depicted in the immediately preceding quotation as a
case of a court resorting to "mere surmises and speculations", 24 oblivious that petitioner
itself can only offer, as counterpoint, also mere surmises and speculations, such as its
claim about Eugenio Lopez Sr. and Imelda R. Marcos offering "enticing amounts" to buy
Free Press.25

It bears stressing at this point that even after the imposition of martial law, petitioner,
represented by Mr. Locsin, Sr., appeared to have dared the ire of the powers-that-be. He
did not succumb to, but in fact spurned offers to buy, lock-stock-and-barrel, the Free
Press magazine, dispatching Marcos’ emissaries with what amounts to a curt "Free Press
is not for sale". This reality argues against petitioner’s thesis about vitiation of its
contracting mind, and, to be sure, belying the notion that Martial Law worked as a Sword
of Damocles that reduced petitioner or Mr. Locsin, Sr. into being a mere automaton. The
following excerpt from the Court of Appeals’ decision is self-explanatory: 26

Noteworthy is the fact that although the threat of arrest hung over his head like the Sword of
Damocles, Locsin Sr. was still able to reject the offers of Atty. Baizas and Secretary De
Vega, both of whom were supposedly acting on behalf of the late President Marcos,
without being subjected to reprisals. In fact, the Locsins testified that the initial offer of
Menzi was rejected even though it was supposedly accompanied by the threat that
"Marcos cannot be denied". Locsin, Sr. was, moreover, even able to secure a
compromise that only the assets of the Free Press will be sold. It is, therefore, quite
possible that plaintiff-appellant’s financial condition, albeit caused by the declaration of
Martial Law, was a major factor in influencing Locsin, Sr. to accept Menzi’s offer. It is not
farfetched to consider that Locsin, Sr. would have eventually proceeded with the sale
even in the absence of the alleged intimidation and undue influence because of the
absence of other buyers.

Petitioner’s third assigned error centers on the gross inadequacy of the purchase price,
referring to the amount of P5,775,000.00 private respondent paid for the property in
question. To petitioner, the amount thus paid does not even approximate the actual
market value of the assets and properties,27 and is very much less than the P18 Million
offered by Eugenio Lopez.28 Accordingly, petitioner urges the striking down, as
erroneous, the ruling of the Court of Appeals on purchase price inadequacy, stating in this
regard as follows: 29

Furthermore, the Court of Appeals in determining the adequacy of the price for the
properties and assets of petitioner Free Press relied heavily on the claim that the audited
financial statements for the years 1971 and 1972 stated that the book value of the land is
set at Two Hundred Thirty-Seven Thousand Five Hundred Pesos (P237,500.00).
However, the Court of Appeals' reliance on the book value of said assets is clearly
misplaced. It should be noted that the book value of fixed assets bears very little
correlation with the actual market value of an asset. (Emphasis and underscoring in the
original).

With the view we take of the matter, the book or actual market value of the property at the
time of sale is presently of little moment. For, petitioner is effectively precluded, by force
of the principle of estoppel ,30 from cavalierly disregarding with impunity its own books of
 account in which the property in question is assigned a value less than what was paid
therefor. And, in line with the rule on the quantum of evidence required in civil cases,
neither can we cavalierly brush aside private respondent’s evidence, cited with approval
by the appellate court, that tends to prove that-31

xxx the net book value of the Properties was actually only ₱994,723.66 as appearing in Free
Press's Balance Sheet as of November 30, 1972 (marked as Exh. 13 and Exh. V), which
was duly audited by SyCip, Gorres, and Velayo, thus clearly showing that Free Press
actually realized a hefty profit of ₱4,755,276.34 from the sale to Liwayway.

Lest it be overlooked, gross inadequacy of the purchase price does not, as a matter of civil
law, per se affect a contract of sale. Article 1470 of the Civil Code says so. It reads:

Article 1470. Gross inadequacy of price does not affect a contract of sale, except as it may
indicate a defect in the consent, or that the parties really intended a donation or some
other act or contract.

Following the aforequoted codal provision, it behooves petitioner to first prove "a defect in
the consent", failing which its case for annulment contract of sale on ground gross
inadequacy of price must fall. The categorical conclusion of the Court of Appeals,
confirmatory of that of the trial court, is that the price paid for the Free Press’ office
building, and other physical assets is not unreasonable to justify the nullification of the
sale. This factual determination, predicated as it were on offered evidence, notably
petitioner’s Balance Sheet as of November 30, 1972 (Exh. 13), must be accorded great
weight if not finality.32

In the light of the foregoing disquisition, the question of whether or not petitioner’s
undisputed utilization of the proceeds of the sale constitutes, within the purview of Article
1393 of the Civil Code,33 implied ratification of the contracts of sale need not detain us
long. Suffice it to state in this regard that the ruling of the Court of Appeals on the matter
is well-taken. Wrote the appellate court: 34

In the case at bench, Free Press’s own witnesses admitted that the proceeds of the 1973
sale were used to settle the claims of its employees, redeem the shares of its
stockholders and finance the company’s entry into money-market shareholdings and
fishpond business activities (TSN, 2 May 1988, pp. 16, 42-45). It need not be
overemphasized that by using the proceeds in this manner, Free Press only too clearly
confirmed the voluntaries of its consent and ratified the sale. Needless to state, such
ratification cleanses the assailed contract from any alleged defects from the moment it
was constituted (Art. 1396, Civil Code).

Petitioner’s posture that its use of the proceeds of the sale does not translate to tacit
ratification of what it viewed as voidable contracts of sale, such use being a "matter of [its
financial] survival",35 is untenable. As couched, Article 1393 of the Civil Code is
concerned only with the act which passes for ratification of contract, not the reason which
actuated the ratifying person to act the way he did. "Ubi lex non distinguit nec nos
distinguere debemus. When the law does not distinguish, neither should we". 36

Finally, petitioner would fault the Court of Appeals for excluding Exhibits "X-6" to "X-7" and
"Y-3" (proffer). These excluded documents which were apparently found in the
presidential palace or turned over by the US Government to the PCGG, consist of, among
others, what appears to be private respondent’s Certificate of Stock for 24,502 shares in
the name of Gen. Menzi, but endorsed in blank. The proffer was evidently intended to
show that then President Marcos owned private respondent, Liwayway Publishing Inc.
Said exhibits are of little relevance to the resolution of the main issue tendered in this
 case. Whether or not the contracts of sale in question are voidable is the issue, not the
ownership of Liwayway Publishing, Inc.

WHEREFORE, the petition is DENIED, and the challenged decision of the Court of Appeals
AFFIRMED.

Costs against petitioner.

SO ORDERED.

4. First Metro Investment Corporation vs. Estel del Sol Mountain Reserve, Inc. (362 SCRA
101)

SECOND DIVISION

G.R. No. 141811. November 15, 2001]

FIRST METRO INVESTMENT CORPORATION, Petitioner, vs. ESTE DEL SOL MOUNTAIN
RESERVE, INC., VALENTIN S. DAEZ, JR., MANUEL Q. SALIENTES, MA. ROCIO A. DE
VEGA, ALEXANDER G. ASUNCION, ALBERTO* M. LADORES, VICENTE M. DE VERA,
JR., and FELIPE B. SESE, Respondents.

DECISION

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision 1 of the Court of Appeals 2
dated November 8, 1999 in CA-G.R. CV No. 53328 reversing the Decision 3 of the
Regional Trial Court of Pasig City, Branch 159 dated June 2, 1994 in Civil Case No.
39224. Essentially, the Court of Appeals found and declared that the fees provided for in
the Underwriting and Consultancy Agreements executed by and between petitioner First
Metro Investment Corp. (FMIC) and respondent Este del Sol Mountain Reserve, Inc.
(Este del Sol) simultaneously with the Loan Agreement dated January 31, 1978 were
mere subterfuges to camouflage the usurious interest charged by petitioner FMIC.

The facts of the case are as follows:

It appears that on January 31, 1978, petitioner FMIC granted respondent Este del Sol a loan
of Seven Million Three Hundred Eighty-Five Thousand Five Hundred Pesos
(P7,385,500.00) to finance the construction and development of the Este del Sol
Mountain Reserve, a sports/resort complex project located at Barrio Puray, Montalban,
Rizal. 4cräläwvirtualibräry

Under the terms of the Loan Agreement, the proceeds of the loan were to be released on
staggered basis. Interest on the loan was pegged at sixteen (16%) percent per annum
based on the diminishing balance. The loan was payable in thirty-six (36) equal and
consecutive monthly amortizations to commence at the beginning of the thirteenth month
from the date of the first release in accordance with the Schedule of Amortization. 5 In
case of default, an acceleration clause was, among others, provided and the amount due
was made subject to a twenty (20%) percent one-time penalty on the amount due and
such amount shall bear interest at the highest rate permitted by law from the date of
default until full payment thereof plus liquidated damages at the rate of two (2%) percent
per month compounded quarterly on the unpaid balance and accrued interests together
with all the penalties, fees, expenses or charges thereon until the unpaid balance is fully
paid, plus attorneys fees equivalent to twenty-five (25%) percent of the sum sought to be
 recovered, which in no case shall be less than Twenty Thousand Pesos (P20,000.00) if
the services of a lawyer were hired. 6cräläwvirtualibräry

In accordance with the terms of the Loan Agreement, respondent Este del Sol executed
several documents 7 as security for payment, among them, (a) a Real Estate Mortgage
dated January 31, 1978 over two (2) parcels of land being utilized as the site of its
development project with an area of approximately One Million Twenty-Eight Thousand
and Twenty-Nine (1,028,029) square meters and particularly described in TCT Nos. N-
24332 and N-24356 of the Register of Deeds of Rizal, inclusive of all improvements, as
well as all the machineries, equipment, furnishings and furnitures existing thereon; and (b)
individual Continuing Suretyship agreements by co-respondents Valentin S. Daez, Jr.,
Manuel Q. Salientes, Ma. Rocio A. De Vega, Alexander G. Asuncion, Alberto M. Ladores,
Vicente M. De Vera, Jr. and Felipe B. Sese, all dated February 2, 1978, to guarantee the
payment of all the obligations of respondent Este del Sol up to the aggregate sum of
Seven Million Five Hundred Thousand Pesos (P7,500,000 00) each. 8cräläwvirtualibräry

Respondent Este del Sol also executed, as provided for by the Loan Agreement, an
Underwriting Agreement on January 31, 1978 whereby petitioner FMIC shall underwrite
on a best-efforts basis the public offering of One Hundred Twenty Thousand (120,000)
common shares of respondent Este del Sols capital stock for a one-time underwriting fee
of Two Hundred Thousand Pesos (P200,000.00). In addition to the underwriting fee, the
Underwriting Agreement provided that for supervising the public offering of the shares,
respondent Este del Sol shall pay petitioner FMIC an annual supervision fee of Two
Hundred Thousand Pesos (P200,000.00) per annum for a period of four (4) consecutive
years. The Underwriting Agreement also stipulated for the payment by respondent Este
del Sol to petitioner FMIC a consultancy fee of Three Hundred Thirty-Two Thousand Five
Hundred Pesos (P332,500.00) per annum for a period of four (4) consecutive years.
Simultaneous with the execution of and in accordance with the terms of the Underwriting
Agreement, a Consultancy Agreement was also executed on January 31, 1978 whereby
respondent Este del Sol engaged the services of petitioner FMIC for a fee as consultant
to render general consultancy services. 9cräläwvirtualibräry

In three (3) letters all dated February 22, 1978 petitioner billed respondent Este del Sol for
the amounts of [a] Two Hundred Thousand Pesos (P200,000.00) as the underwriting fee
of petitioner FMIC in connection with the public offering of the common shares of stock of
respondent Este del Sol; [b] One Million Three Hundred Thirty Thousand Pesos
(P1,330,000.00) as consultancy fee for a period of four (4) years; and [c] Two Hundred
Thousand Pesos (P200,000.00) as supervision fee for the year beginning February, 1978,
in accordance to the Underwriting Agreement. 10 The said amounts of fees were deemed
paid by respondent Este del Sol to petitioner FMIC which deducted the same from the first
release of the loan.

Since respondent Este del Sol failed to meet the schedule of repayment in accordance with
a revised Schedule of Amortization, it appeared to have incurred a total obligation of
Twelve Million Six Hundred Seventy-Nine Thousand Six Hundred Thirty Pesos and
Ninety-Eight Centavos (P12,679,630.98) per the petitioners Statement of Account dated
June 23, 1980, 11 to wit:

STATEMENT OF ACCOUNT OF

ESTE DEL SOL MOUNTAIN RESERVE, INC.

AS OF JUNE 23, 1980

PARTICULARS AMOUNT

Total amount due as of 11-22-78 per

revised amortization schedule dated

1-3-78 P7,999,631.42

Interest on P7,999,631.42 @ 16% p.a. from

11-22-78 to 2-22-79 (92 days) 327,096.04

Balance 8,326,727.46

One time penalty of 20% of the entire unpaid

obligations under Section 6.02 (ii) of

Loan Agreement 1,665,345.49

Past due interest under Section 6.02 (iii)

of loan Agreement:

@ 19% p.a. from 2-22-79 to 11-30-79

(281 days) 1,481,879.93

@ 21% p.a. from 11-30-79 to 6-23-80

(206 days) 1,200,714.10

Other charges publication of extra judicial

foreclosure of REM made on

5-23-80 & 6-6-80 4,964.00

Total Amount Due and Collectible as of

June 23, 1980 P12,679,630.98

Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage
on June 23, 1980. 12 At the public auction, petitioner FMIC was the highest bidder of the
mortgaged properties for Nine Million Pesos (P9,000,000.00). The total amount of Three
Million One Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos and Seventy-Five
Centavos (P3,188,630.75) was deducted therefrom, that is, for the publication fee for the
publication of the Sheriffs Notice of Sale, Four Thousand Nine Hundred Sixty-Four Pesos
(P4,964.00); for Sheriffs fees for conducting the foreclosure proceedings, Fifteen
Thousand Pesos (P15,000.00); and for Attorneys fees, Three Million One Hundred Sixty-
Eight Thousand Six Hundred Sixty-Six Pesos and Seventy-Five Centavos
(P3,168,666.75). The remaining balance of Five Million Eight Hundred Eleven Thousand
 Three Hundred Sixty-Nine Pesos and Twenty-Five Centavos (P5,811,369.25) was applied
to interests and penalty charges and partly against the principal, due as of June 23, 1980,
thereby leaving a balance of Six Million Eight Hundred Sixty-Three Thousand Two
Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) on the
principal amount of the loan as of June 23, 1980. 13cräläwvirtualibräry

Failing to secure from the individual respondents, as sureties of the loan of respondent Este
del Sol by virtue of their continuing surety agreements, the payment of the alleged
deficiency balance, despite individual demands sent to each of them, 14 petitioner
instituted on November 11, 1980 the instant collection suit 15against the respondents to
collect the alleged deficiency balance of Six Million Eight Hundred Sixty-Three Thousand
Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) plus
interest thereon at twenty-one (21%) percent per annum from June 24, 1980 until fully
paid, and twenty-five (25%) percent thereof as and for attorneys fees and costs.

In their Answer, the respondents sought the dismissal of the case and set up several special
and affirmative defenses, foremost of which is that the Underwriting and Consultancy
Agreements executed simultaneously with and as integral parts of the Loan Agreement
and which provided for the payment of Underwriting, Consultancy and Supervision fees
were in reality subterfuges resorted to by petitioner FMIC and imposed upon respondent
Este del Sol to camouflage the usurious interest being charged by petitioner FMIC.
16cräläwvirtualibräry

The petitioner FMIC presented as its witnesses during the trial: Cesar Valenzuela, its former
Senior Vice-President, Felipe Neri, its Vice-President for Marketing, and Dennis Aragon,
an Account Manager of its Account Management Group, as well as documentary
evidence. On the other hand, co-respondents Vicente M. De Vera, Jr. and Valentin S.
Daez, Jr., and Perfecto Doroja, former Senior Manager and Assistant Vice-President of
FMIC, testified for the Respondents.

After the trial, the trial court rendered its decision in favor of petitioner FMIC, the dispositive
portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants,

ordering defendants jointly and severally to pay to plaintiff the amount of P6,863,297.73
plus 21% interest per annum, from June 24, 1980, until the entire amount is fully paid,
plus the amount equivalent to 25% of the total amount due, as attorneys fees, plus costs
of suit.

Defendants counterclaims are dismissed, for lack of merit.

Finding the decision of the trial court unacceptable, respondents interposed an appeal to the
Court of Appeals. On November 8, 1999, the appellate court reversed the challenged
decision of the trial court. The appellate court found and declared that the fees provided
for in the Underwriting and Consultancy Agreements were mere subterfuges to
camouflage the excessively usurious interest charged by the petitioner FMIC on the loan
of respondent Este del Sol; and that the stipulated penalties, liquidated damages and
attorneys fees were excessive, iniquitous, unconscionable and revolting to the
conscience, and declared that in lieu thereof, the stipulated one time twenty (20%)
percent penalty on the amount due and ten (10%) percent of the amount due as attorneys
fees would be reasonable and suffice to compensate petitioner FMIC for those items.
Thus, the appellate court dismissed the complaint as against the individual respondents
sureties and ordered petitioner FMIC to pay or reimburse respondent Este del Sol the
amount of Nine Hundred Seventy-One Thousand Pesos (P971,000.00) representing the
 difference between what is due to the petitioner and what is due to respondent Este del
Sol, based on the following computation: 17cräläwvirtualibräry

A: DUE TO THE [PETITIONER]

Principal of Loan P7,382,500.00

Add: 20% one-time

Penalty 1,476,500.00

Attorneys fees 900,000.00 P9,759,000.00

Less: Proceeds of foreclosure

Sale 9,000,000.00

Deficiency P 759,000.00

B. DUE TO [RESPONDENT ESTE DEL SOL]

Return of usurious interest in the form of:

Underwriting fee P 200,000.00

Supervision fee 200,000.00

Consultancy fee 1,330,000.00

Total amount due Este P 1,730,000.00

The appellee is, therefore, obliged to return to the appellant Este del Sol the difference of
P971,000.00 or (P1,730,000.00 less P759,000.00).

Petitioner moved for reconsideration of the appellate courts adverse decision. However, this
was denied in a Resolution 18dated February 9, 2000 of the appellate court.

Hence, the instant petition anchored on the following assigned errors: 19cräläwvirtualibräry

THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT

IN ACCORD WITH LAW AND WITH APPLICABLE DECISIONS OF THIS HONORABLE
COURT WHEN IT:

a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY AGREEMENTS

SHOULD NOT BE CONSIDERED SEPARATE AND DISTINCT FROM THE LOAN
AGREEMENT, AND INSTEAD, THEY SHOULD BE CONSIDERED AS A SINGLE
CONTRACT.

b] HELD THAT THE UNDERWRITING AND CONSULTANCY AGREEMENTS ARE MERE

SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED BY THE
PETITIONER.

c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONERS WITNESSES ON

THE SERVICES PERFORMED BY PETITIONER.
d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD WAIVED THEIR
RIGHT TO SEEK RECOVERY OF THE AMOUNTS THEY PAID TO PETITIONER, AND
[ii] THAT RESPONDENTS HAD ADMITTED THE VALIDITY OF THE UNDERWRITING
AND CONSULTANCY AGREEMENTS.

e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY WHAT IS DUE TO EACH

PARTY AFTER THE FORECLOSURE SALE, AS SHOWN IN PP. 34-35 OF THE
ASSAILED DECISION, EVEN GRANTING JUST FOR THE SAKE OF ARGUMENT THAT
THE APPELLATE COURT WAS CORRECT IN STIGMATIZING [i] THE PROVISIONS OF
THE LOAN AGREEMENT THAT REFER TO STIPULATED PENALTIES, LIQUIDATED
DAMAGES AND ATTORNEYS FEES AS SUPPOSEDLY EXCESSIVE, INIQUITOUS
AND UNCONSCIONABLE AND REVOLTING TO THE CONSCIENCE AND [ii] THE
UNDERWRITING, SUPERVISION AND CONSULTANCY SERVICES AGREEMENT AS
SUPPOSEDLY MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST
CHARGED UPON THE RESPONDENT ESTE BY PETITIONER.

f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND THUS THE
INDIVIDUAL RESPONDENTS, ARE STILL OBLIGATED TO THE PETITIONER.

Petitioner essentially assails the factual findings and conclusion of the appellate court that
the Underwriting and Consultancy Agreements were executed to conceal a usurious loan.
Inquiry upon the veracity of the appellate courts factual findings and conclusion is not the
function of this Court for the Supreme Court is not a trier of facts. Only when the factual
findings of the trial court and the appellate court are opposed to each other does this
Court exercise its discretion to re-examine the factual findings of both courts and weigh
which, after considering the record of the case, is more in accord with law and justice.

After a careful and thorough review of the record including the evidence adduced, we find no
reason to depart from the findings of the appellate court.

First, there is no merit to petitioner FMICs contention that Central Bank Circular No. 905
which took effect on January 1, 1983 and removed the ceiling on interest rates for
secured and unsecured loans, regardless of maturity, should be applied retroactively to a
contract executed on January 31, 1978, as in the case at bar, that is, while the Usury Law
was in full force and effect. It is an elementary rule of contracts that the laws, in force at
the time the contract was made and entered into, govern it. 20 More significantly, Central
Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply
suspended the latters effectivity. 21 The illegality of usury is wholly the creature of
legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal another
law. 22 Thus, retroactive application of a Central Bank Circular cannot, and should not, be
presumed. 23cräläwvirtualibräry

Second, when a contract between two (2) parties is evidenced by a written instrument, such
document is ordinarily the best evidence of the terms of the contract. Courts only need to
rely on the face of written contracts to determine the intention of the parties. However, this
rule is not without exception. 24 The form of the contract is not conclusive for the law will
not permit a usurious loan to hide itself behind a legal form. Parol evidence is admissible
to show that a written document though legal in form was in fact a device to cover usury.
If from a construction of the whole transaction it becomes apparent that there exists a
corrupt intention to violate the Usury Law, the courts should and will permit no scheme,
however ingenious, to becloud the crime of usury. 25cräläwvirtualibräry

In the instant case, several facts and circumstances taken altogether show that the
Underwriting and Consultancy Agreements were simply cloaks or devices to cover an
 illegal scheme employed by petitioner FMIC to conceal and collect excessively usurious
interest, and these are:

a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is
the same date of the Loan Agreement. 26 Furthermore, under the Underwriting
Agreement payment of the supervision and consultancy fees was set for a period of four
(4) years 27 to coincide ultimately with the term of the Loan Agreement. 28 This fact
means that all the said agreements which were executed simultaneously were set to
mature or shall remain effective during the same period of time.

b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of
an underwriting agreement 29and specifically mentioned that such underwriting
agreement is a condition precedent 30for petitioner FMIC to extend the loan to
respondent Este del Sol, indicating and as admitted by petitioner FMICs employees, 31
that such Underwriting Agreement is part and parcel of the Loan Agreement.
32cräläwvirtualibräry

c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three
Hundred Thirty Thousand Pesos (P1,330,000.00) 33 as consultancy fee despite the clear
provision in the Consultancy Agreement that the said agreement is for Three Hundred
Thirty-Two Thousand Five Hundred Pesos (P332,500.00) per annum for four (4) years
and that only the first year consultancy fee shall be due upon signing of the said
consultancy agreement. 34cräläwvirtualibräry

d) The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred
Thousand Pesos (P200,000.00), Two Hundred Thousand Pesos (P200,000.00) and One
Million Three Hundred Thirty Thousand Pesos (P1,330,000.00), respectively, were billed
by petitioner to respondent Este del Sol on February 22, 1978, 35 that is, on the same
occasion of the first partial release of the loan in the amount of Two Million Three
Hundred Eighty-Two Thousand Five Hundred Pesos (P2,382,500.00). 36 It is from this
first partial release of the loan that the said corresponding bills for Underwriting,
Supervision and Consultancy fees were deducted and apparently paid, thus, reverting
back to petitioner FMIC the total amount of One Million Seven Hundred Thirty Thousand
Pesos (P1,730,000.00) as part of the amount loaned to respondent Este del Sol.
37cräläwvirtualibräry

e) Petitioner FMIC was in fact unable to organize an underwriting/selling syndicate to sell

any share of stock of respondent Este del Sol and much less to supervise such a
syndicate, thus failing to comply with its obligation under the Underwriting Agreement. 38
Besides, there was really no need for an Underwriting Agreement since respondent Este
del Sol had its own licensed marketing arm to sell its shares and all its shares have been
sold through its marketing arm. 39cräläwvirtualibräry

f) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement, 40
aside from the fact that there was no need for a Consultancy Agreement, since
respondent Este del Sols officers appeared to be more competent to be consultants in the
development of the projected sports/resort complex. 41cräläwvirtualibräry

All the foregoing established facts and circumstances clearly belie the contention of
petitioner FMIC that the Loan, Underwriting and Consultancy Agreements are separate
and independent transactions. The Underwriting and Consultancy Agreements which
were executed and delivered contemporaneously with the Loan Agreement on January
31, 1978 were exacted by petitioner FMIC as essential conditions for the grant of the
loan. An apparently lawful loan is usurious when it is intended that additional
compensation for the loan be disguised by an ostensibly unrelated contract providing for
 payment by the borrower for the lenders services which are of little value or which are not
in fact to be rendered, such as in the instant case. 42 In this connection, Article 1957 of
the New Civil Code clearly provides that:

Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to
circumvent the laws against usury shall be void. The borrower may recover in accordance
with the laws on usury.

In usurious loans, the entire obligation does not become void because of an agreement for
usurious interest; the unpaid principal debt still stands and remains valid but the
stipulation as to the usurious interest is void, consequently, the debt is to be considered
without stipulation as to the interest . 43 The reason for this rule was adequately
explained in the case of Angel Jose Warehousing Co., Inc. v. Child Enterprises 44where
this Court held:

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the
principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal.
The illegality lies only as to the prestation to pay the stipulated interest; hence, being
separable, the latter only should be deemed void, since it is the only one that is illegal.

Thus, the nullity of the stipulation on the usurious interest does not affect the lenders right to
receive back the principal amount of the loan. With respect to the debtor, the amount paid
as interest under a usurious agreement is recoverable by him, since the payment is
deemed to have been made under restraint, rather than voluntarily. 45cräläwvirtualibräry

This Court agrees with the factual findings and conclusion of the appellate court, to wit:

We find the stipulated penalties, liquidated damages and attorneys fees, excessive,
iniquitous and unconscionable and revolting to the conscience as they hardly allow the
borrower any chance of survival in case of default. And true enough, ESTE folded up
when the appellee extrajudicially foreclosed on its (ESTEs) development project and
literally closed its offices as both the appellee and ESTE were at the time holding office in
the same building. Accordingly, we hold that 20% penalty on the amount due and 10% of
the proceeds of the foreclosure sale as attorneys fees would suffice to compensate the
appellee, especially so because there is no clear showing that the appellee hired the
services of counsel to effect the foreclosure; it engaged counsel only when it was seeking
the recovery of the alleged deficiency.

Attorneys fees as provided in penal clauses are in the nature of liquidated damages. So long
as such stipulation does not contravene any law, morals, or public order, it is binding
upon the parties. Nonetheless, courts are empowered to reduce the amount of attorneys
fees if the same is iniquitous or unconscionable. 46 Articles 1229 and 2227 of the New
Civil Code provide that:

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.

Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be

equitably reduced if they are iniquitous or unconscionable.

In the case at bar, the amount of Three Million One Hundred Eighty-Eight Thousand Six
Hundred Thirty Pesos and Seventy-Five Centavos (P3,188,630.75) for the stipulated
attorneys fees equivalent to twenty-five (25%) percent of the alleged amount due, as of
 the date of the auction sale on June 23, 1980, is manifestly exorbitant and
unconscionable. Accordingly, we agree with the appellate court that a reduction of the
attorneys fees to ten (10%) percent is appropriate and reasonable under the facts and
circumstances of this case.

Lastly, there is no merit to petitioner FMICs contention that the appellate court erred in
awarding an amount allegedly not asked nor prayed for by respondents. Whether the
exact amount of the relief was not expressly prayed for is of no moment for the reason
that the relief was plainly warranted by the allegations of the respondents as well as by
the facts as found by the appellate court. A party is entitled to as much relief as the facts
may warrant. 47cräläwvirtualibräry

In view of all the foregoing, the Court is convinced that the appellate court committed no
reversible error in its challenged Decision.

WHEREFORE , the instant petition is hereby DENIED, and the assailed Decision of the
Court of Appeals is AFFIRMED. Costs against petitioner.

SO ORDERED.

5. Aguilar vs. Citytrust Finance Corporation (474 SCRA 285)

THIRD DIVISION

[G.R. NO. 159592 October 25, 2005]

Spouses FERDINAND AGUILAR and JOSEPHINE C. AGUILAR, Petitioners, v. CITYTRUST

FINANCE CORPORATION, Respondent.

[G.R. NO. 159706]

WORLD CARS, INC., Petitioner, v. Spouses FERDINAND and JOSEPHINE C. AGUILAR,

Respondents.

DECISION

CARPIO MORALES, J.:

Sometime in May 1992, Josephine Aguilar (Josephine) canvassed, via telephone, prices of
cars from different car dealers listed in the yellow pages of the Philippine Long Distance
Telephone directory.

On May 23, 1992, World Cars, Inc. (World Cars) sent its representative Joselito Perez
(Perez) and Vangie Tayag (Vangie) to the Aguilar residence in New Manila, Quezon City
bringing with them calling cards, brochures and price list for different car models, among
other things. The two representatives discussed with Josephine the advantages and
disadvantages of the different models, their prices and terms of payment.1

Josephine having decided to purchase a white 1992 Nissan California at the agreed price of
P370,000.00, payable in 90 days, Perez and Vangie repaired to the Aguilar residence on
May 30, 1992, bringing with them a white 1992 Nissan California bearing Motor No.
GA16-099086 and Chassis No. WGLB12-D10269, and the documents bearing on the
sale.
As Josephine and her husband Ferdinand Aguilar (the Aguilars) were being made to sign by
the two representatives a promissory note, chattel mortgage, disclosures and other
documents the dates of which were left blank and which showed that they would still be
obliged to pay on installment in 12 months for the car even if checks in full payment
thereof in 90 days were to be issued, the two replied that it was only for formality, for in
case the checks were not cleared, the documents would take effect, otherwise they would
be cancelled.2

The Aguilars did sign the promissory note3 binding them to be jointly and severally liable to
World Cars in the amount of P301,992.00, payable in 12 months, with a monthly
amortization of P25,166.00 and a late payment charge of 5% per month on each unpaid
installment from due date until fully paid.

By Josephine's claim, at the time she and her husband signed the promissory note, its date,
May 30, 1992, and the due date of the monthly amortization which was agreed to be
every 3rd day of each month starting July 1992 were not reflected therein.4

The Aguilars did execute too a chattel mortgage5 in favor of World Cars which embodied a
deed of assignment6 in favor of Citytrust Finance Corporation (Citytrust).7 Again by
Josephine's claim, the date May 30, 1992 appearing in the chattel mortgage cum deed of
assignment was not yet filled up at the time she and her husband signed it.8

After the Aguilars' signing of the documents, Perez asked Josephine to make the check
payments payable to him, prompting her to call up Perez's boss, a certain Lily Paloma, to
inquire whether Perez could collect payment to which Lily replied in the affirmative, the
latter advising her to just secure a receipt.9

Josephine thus issued four Far East Bank and Trust Company (FEBTC) checks, the details
of which are indicated below:

Check No.

Payable to

Amount

Dated

11270310

Joselito Perez

P148,000.00

May 30, 1992

11270411

World Cars

P16,000.00

May 30, 1992

11270512
Joselito Perez

P111,000.00

June 30, 1992

112706

Joselito Perez

P111,000.00

July 30, 1992

For Check Nos. 112703, 112705, and 112706 which were made payable to Perez in the total
amount of P370,000.00, Perez issued Josephine World Cars Provisional Receipt No.
5965.13 Check No. 112704 which was made payable to World Cars represented payment
of the premium on the car insurance, secured from Dominion Insurance which issued a
policy in the name of Josephine.14

Josephine was subsequently issued on June 2, 1992 Official Receipt No. 6111797515 by
the Land Transportation Office covering the payment of the fees for the registration of the
car.

In mid-June of 1992, Perez and Vangie went back to the Aguilar residence requesting that
Check No. 112705 dated June 30, 1992 payable to Perez in the amount of P111,000.00
be cancelled and that two checks in the total amount of P111,000.00 be issued in
replacement thereof, one in the amount of P4,150.00 to be made payable to Sunny
Motors, which appears to be a sales outlet of World Cars, for processing fee of the
documents, and the other in the amount of P106,850.00 to be again made payable to
Perez. Josephine obliged and accordingly issued Check No. 11272416 in the amount of
P4,150.00 payable to Sunny Motors, and Check No. 11272517 in the amount of
P106,850.00 payable to Perez.

Check Nos. 112703,18 11272419 and 11272520 were in the meantime cleared.21

No official receipt for the checks having been issued to Josephine, she warned Perez that if
she did not get any by the end of July 1992, she would request for stop payment of the
last check she issued in his name, Check No. 11270622 dated July 30, 1992 in the
amount of P111,000.00. Perez failed to deliver any receipt to Josephine, drawing her to
advise, by telefax, FEBTC Del Monte, Quezon City Branch a letter23 dated July 30, 1992
to stop the payment of Check No. 112706.

The clearing of Check No. 112706 having been stopped on Josephine's advice, Perez
repaired to the Aguilar residence, asking the reason therefor. On being informed by
Josephine of the reason, Perez explained that receipts were in Bulacan where the main
office of World Cars is, and he had no time to go there owing to its distance. Perez then
advised Josephine that if she did not issue another check to replace Check No. 112706,
the 12-month installment term of payment under the documents she and her husband
signed would take effect.24

Not wanting to be bound by the 12-month installment term, Josephine issued Check No.
11276725 dated August 4, 1992 in the amount of P111,000.00 payable to Perez who
issued her Sunny Motor Sales Provisional Receipt No. 5028.26
Check No. 112767 was also later cleared.27

In September 1992, Josephine received a letter28 dated August 20, 1992 from Ana Marie
Caber (Ana Marie), Account Specialist of Citytrust, advising her that as of August 20,
1992, her overdue account with it in connection with the purchase of the car had
amounted to "P1,045.39" inclusive of past due charges.

Josephine at once informed Ana Marie that she had fully paid the car to which Ana Marie
replied that "maybe not all of the papers have been processed yet," hence, she advised
Josephine not to worry about it.29

In December 1992, Josephine received another letter30 dated December 9, 1992 from
Citytrust advising her that her account had been, as of December 9, 1992, overdue in the
amount of P110,706.60 inclusive of unpaid installments for the months of August,
September, October, November and December 1992 plus accumulated penalty charges;
and that if she failed to arrange for another payment scheme, her account would be
referred to its legal counsel for collection.

Josephine again called Ana Marie inquiring what was going on and the latter replied that no
payment for the car had been received. Josephine also called up World Cars and spoke
to its Vice-President, a certain Domondon, who informed her that based on company
records, the last payment had not been received.31

The spouses Aguilar thus filed a complaint32 for "annulment of chattel mortgage plus
damages" against Citytrust and World Cars before the Regional Trial Court (RTC) of
Quezon City.

In its Answer with Counterclaims and Crossclaim against World Cars,33 Citytrust disclaimed
knowledge of the alleged prior arrangement and the alleged subsequent payments made
by the Aguilars to World Cars. And it claimed that it accepted the endorsement and
assignment of the promissory note and chattel mortgage in good faith, relying on the
terms and conditions thereof; and that assuming that the Aguilars' claim were true, World
Cars appeared to have violated the terms and conditions of the Receivables Financing
Agreement (RFA) it executed with it, the pertinent portions of which read:34

1. [World Cars] hereby agrees and covenants to discount with [Citytrust] subject to the terms
and conditions hereinafter stipulated, installment papers evidencing actual sales made by
[World Cars] of brand new automobiles, trucks, household appliances and other durable
goods acceptable to [Citytrust]. Wheresoever used herein, the term "installment paper"
shall refer to any document or documents evidencing sale of personalty on the installment
plan including "Conditional Sale Contracts, Deed of Chattel Mortgages, Trust Receipts,
Contracts of Lease and other evidences of indebtedness or choses in action, signed by
the customers evidencing the unpaid obligations duly negotiated and/or assigned in favor
of [Citytrust] by virtue of a Deed of Assignment duly notarized;

2. Discounting of the installment papers by virtues hereof shall be on without-recourse and

offer-and-acceptance basis, and that if [Citytrust] finds the same acceptable, it shall
purchase and pay [World Cars] the balance due and outstanding on the respective
installment papers so purchased after deducting the financing and other charges.
Discounting and purchase of installment papers shall be at the sole option and discretion
of [Citytrust];

xxx
5. As further warranties, [World Cars] hereby agrees and shall be bound by the following:

A. World Cars guarantees to [Citytrust] its successors, and assigns, that it has full right and
legal authority to make the assignment or discounting; that the installment papers so
discounted by virtue of this agreement, are subsisting, valid, enforceable and in all
respects what they purport to be; that the papers contain the entire agreement between
the customers and [World Cars]; that said papers are not subject to any defense, offset or
counterclaim; that the personalty covered by said papers have been delivered to and
accepted by the customers in full compliance with the orders and specifications of the
latter; that the required downpayment has been paid in full by the customer and that the
balances appearing in said documents are net and accurate and there are no contra-
accounts, set-offs, or counterclaims whatsoever against said amounts; that the payment
thereof is not contingent or conditioned on the fulfillment of any contract, condition or
warranty, past or future, express or implied; that it has absolute and good title to such
contracts and the personalties covered thereby and the right to sell and transfer the same
in favor of [Citytrust]; and that said contracts and personalties have not been previously
sold, discounted, assigned or pledged to any other party nor will [World Cars] sell, assign,
discount or pledge the same hereafter;

xxx

6. In the event that it shall at any time appear that an installment paper which [Citytrust]
purchased from [World Cars] do not conform to the warranties under this Agreement or to
the qualifications given in paragraph 5, [Citytrust] shall reassign, and [World Cars]
repurchase, the installment paper(s) and the latter shall pay [Citytrust] the unpaid balance
of the account less any unearned service charges within ten (10) days from [World Car's]
receipt of notice of reassignment. Said notice will contain a statement of the amount
payable by [World Cars] as aforesaid. No tender or presentation of the paper reassigned
shall be necessary.

x x x (Emphasis and underscoring supplied)ςrαlαωlιbrαrÿ

Citytrust prayed in its Crossclaim against World Cars that "in the remote event that the
complaint is not dismissed . . . [World Cars] be ordered to pay all and whatever unpaid
obligation due to [it] arising from [the] promissory note . . ."35

In its Answer with Counterclaim,36 World Cars claimed that, among other things, it received
only the check in the amount of P148,000.00 (Check No. 112703 payable to Perez) as
downpayment for the car; and that the Aguilars defaulted in the payment of their monthly
amortizations to Citytrust, and it should not be held accountable for the personal and
unilateral obligations of the Aguilars to Citytrust.

At the pre-trial conference, only the counsels for the Aguilars and Citytrust appeared. World
Cars was thus declared as in default.

As defined in the Pre-trial Order37 dated November 11, 1994, the issues of the case were:

1. Whether or not [the Aguilars] have duly paid the purchase price of the car, and if so,
whether or not [they] can still be held liable to pay under the promissory note and the
chattel mortgage.

2. Whether or not [Citytrust and World Cars] are liable to [the Aguilars] for damages and if
so, how much.
3. Whether or not [the Aguilars] have fully paid the balance installment price of the [car]
which was purchased from [World Cars].

4. Whether or not [the Aguilars] are entitled to the damages prayed for in the complaint.

5. Whether or not [Citytrust] is entitled to the cross-claim prayed for against [World Cars].

6. Whether or not [the Aguilars] are still liable for their unpaid obligations to [Citytrust].

7. Whether or not [World Cars] is liable to pay the unpaid obligations of [the Aguilars] if the
latter will be able to prove that they already fully paid the price of the subject car.

8. Who among the parties is entitled to damages and attorney's fees, and if so, how much?
cralawlibrary

By Decision38 dated January 12, 1999, Branch 77 of the Quezon City RTC found Perez to
be an agent of World Cars, hence, an extension of its personality as far as the sale of the
car to the Aguilars was concerned.

The trial court further found that Perez was authorized to receive payment for the car, hence,
all payments made to him for the purchase of the car were payments made to his
principal, World Cars; that the Aguilars had paid a total amount of P386,000.00 including
their final payment on July 30, 2002, which date World Cars admitted to be the deadline
therefor; and that the Aguilars had no intention to be bound by the promissory note which
they signed in favor of World Cars or its assignee nor by the terms of the Chattel
Mortgage, the conforme in the undated Letter (Notice of Assignment) of World Cars and
the Disclosure Statement of Loan/Credit Transaction having been predicated on the
validity of the promissory note.

Moreover, the trial court held that the fact that on May 30, 1992, the same date of the
promissory note, Josephine issued three checks to fully cover the purchase price of the
car (the fourth represented payment of insurance premium), the last of which was still to
mature on July 30, 1992, proves that the Aguilars signed the promissory note without
intending to be bound by its terms.

In fine, the trial court held that the Aguilars had paid World Cars the full purchase price of the
car, and Citytrust as the assignee of World Cars had no right to collect from them the
amount stated in the Chattel Mortgage cum Deed of Assignment which is simulated and,
therefore, void, following Art. 1346 of the Civil Code which provides:

Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it
does not prejudice a third person and is not intended for any purpose contrary to law,
morals, good customs, public order or public policy binds the parties to their real
agreement.

The trial court thus disposed:

WHEREFORE, premises considered, judgment is hereby rendered:

1. Finding [spouses Aguilar] to have fully paid the purchase price of the 1992 Nissan
California car, which they bought from Worlds Cars, Inc. on May 30, 1992, through its
agent, Joselito Perez;

2. Annulling the Promissory Note (Exhibit "D"), the Chattel Mortgage (Exhibit "D-1"), the
conforme in the undated Letter-Notice of Assignment of defendant World Cars, Inc.,
 (Exhibit "D-2"), and the Disclosure Statement Loan/Credit Transaction (Exhibit "D-3"), for
being void as they are simulated contracts, thereby releasing [spouses Aguilar] from any
liability arising from these documents;

3. Ordering [Citytrust and World Cars] to pay, jointly and severally, to [spouses Aguilar] the
following sums: P500,000.00 as moral damages; P100,000.00 as exemplary damages;
P50,000.00 as attorney es fees' and P20,000.00 as litigation expenses;

4. Dismissing the counterclaims and cross-claims of World Cars, Inc. and Citytrust Finance
Corporation; andcralawlibrary

5. Directing the [Citytrust and World Cars] to pay the costs of suit.

Citytrust appealed to the Court of Appeals on the following assigned errors:

I.

THE COURT A QUO COMMITTED SERIOUS ERRORS OF FACT AND OF LAW IN NOT
HOLDING THAT [SPOUSES AGUILAR] ARE LIABLE TO [CITYTRUST] FOR THE
PAYMENT OF THE PROMISSORY NOTE (PN) (EXH. "I") AND ARE BOUND BY THE
TERMS AND CONDITIONS OF SAID PN AND CHATTEL MORTGAGE (EXH. "2").

II.

THAT ASSUMING, THAT SPOUSES AGUILAR ARE NOT LIABLE ON THE PROMISSORY
NOTE, THE COURT A QUO COMMITTED SERIOUS ERRORS OF FACT AND OF LAW
IN NOT HOLDING THAT WORLD CARS IS LIABLE TO CITYTRUST AS GENERAL
ENDORSER OF THE PROMISSORY NOTE AND FOR VIOLATION OF ITS WARRANTY
UNDER THE RECEIVABLES FINANCING AGREEMENT (RFA).

III.

THE COURT A QUO, COMMITTED SERIOUS ERRORS IN FACT AND IN LAW WHEN IT
ADJUDGED CITYTRUST JOINTLY AND SEVERALLY LIABLE TO [SPOUSES
AGUILAR].39 (Emphasis supplied)ςrαlαωlιbrαrÿ

World Cars appealed too, contending that the trial court erred in:

I.

. . . HOLDING WORLD CARS, INC., LIABLE FOR THE PERSONAL ACTIONS OR

ACTIONS BEYOND THE SCOPE OF AUTHORITY OF ITS SALES AGENT JOSELITO
PEREZ.

II.

. . . HOLDING THAT THE SALE IS A CASH SALE AND NOT AN INSTALLMENT SALE AS
EVIDENCED BY THE PROMISSORY NOTE AND CHATTEL MORTGAGE EXECUTED
BY [SPOUSES AGUILAR] IN FAVOR OF [WORLD CARS] AND ASSIGNED TO
[CITYTRUST].

III.

. . . AWARDING DAMAGES TO [SPOUSES AGUILAR].40

By Decision41 of December 5, 2002, the appellate court modified that of the trial court, the
dispositive portion of which reads verbatim:

WHEREFORE, premises considered, the Decision of the court a quo is hereby MODIFIED to
read as follows:

1. Ordering [the Aguilars] to pay Citytrust the amount of P252,486.58 representing the
unpaid balance of the promissory note.

2. Ordering [World Cars] to pay [the Aguilars] the following amount, to wit:

(a) P252,486.58 representing the unpaid balance of the promissory note which [spouses
Aguilar] were heretofore ordered to pay Citytrust;

(b) P500,000.00 as moral damages; P100,000.00 as exemplary damages; P50,000.00 as

attorney's fees; and P20,000.00 as litigation expenses.

3. Ordering [World Cars] to pay [Citytrust] the following amount, to wit:

a) Penalty charges based on P252,486.58 at the rate of 5% per month from date of default
until fully paid;

b) P50,000.00 as attorney's fees and appearance fee of P500.00 per hearing.

c) P50,000.00 as liquidated damages, cost of suit and other litigation expenses.

(Underscoring supplied)ςrαlαωlιbrαrÿ

Hence, the present separate petitions of the Aguilars and World Cars.

The Aguilars fault the appellate court in:

A.

. . . GIVING LEGAL EFFECT TO THE PROMISSORY NOTE (PN) AND ITS DERIVATIVE
INSTRUMENTS WHEN IT RULED THE SAME NULL AND VOID SINCE IT IS NOT
REALLY DESIRED OR INTENDED TO PRODUCE LEGAL EFFECT.

B.

. . . RULING [CITYTRUST] A HOLDER IN DUE COURSE CONTRARY TO EVIDENCE ON

RECORD.

C.

. . . RULING [SPOUSES AGUILAR] LIABLE ON THE PN CONTRARY TO EVIDENCE ON

RECORD.

D.

. . . RULING [CITYTRUST NOT JOINTLY AND SEVERALLY LIABLE WITH WORLD CARS
FOR DAMAGES AND ATTORNEY'S FEES CONTRARY TO EVIDENCE ON
RECORD.42 (Underscoring supplied)ςrαlαωlιbrαrÿ

On the other hand, World Cars contend that:

A. THE ASSAILED DECISIONS OF THE HONORABLE COURT OF APPEALS ARE
CONTRARY TO LAW AND PREVAILING JURISPRUDENCE.

B. CONSIDERING THAT THE ASSAILED DECISIONS OF THE HONORABLE COURT OF

APPEALS ARE CONTRARY TO LAW AND PREVAILING JURISPRUDENCE THE
AWARDS OF MORAL DAMAGES AGAINST WORLD CARS, INC. ARE ALSO
CONTRARY TO LAW.

C. LIKEWISE, THE AWARDS OF EXEMPLARY DAMAGES, ATTORNEY'S FEES AND

APPEARANCE FEES, LITIGATION EXPENSES AND THE COST OF SUIT AGAINST
[WORLD CARS] ARE ALSO CONTRARY TO LAW.43 (Underscoring supplied)Ï‚rαlαÏ
‰lιbrαrÿ

Clearly, Perez was the agent of World Cars and was duly authorized to accept payment for
the car. Josephine's testimony that before issuing the checks in the name of Perez, she
verified from his supervisor and the latter confirmed Perez' authority to receive payment
remains unrefuted by World Cars. In fact, World Cars admitted in its Answer with
Counterclaim that "[w]hat was actually paid [by the Aguilars] and received by [it] was
[Josephine's] check in the amount of P148,000.00 as downpayment for the said car."44
Parenthetically, as earlier stated, when Josephine spoke to World Cars' Vice President
Domondon, the latter informed her that the last payment had not been received.45 This
information of Domondon does not jibe with the claim of World Cars that it received only
Josephine's first check in the amount of P148,000.00 as downpayment.

As the above table of checks issued by Josephine shows, the check in the amount of
P148,000.00, Check No. 112703 dated May 30, 1992, was payable to Perez.

Since the Aguilars' payment to Perez is deemed payment to World Cars, the promissory
note, chattel mortgage and other accessory documents they executed which were to take
effect only in the event the checks would be dishonored were deemed nullified, all the
checks having been cleared.

Since the condition for the instruments to become effective was fulfilled, the obligation on the
part of the Aguilars to be bound thereby did not arise and World Cars did not thus acquire
rights thereunder following Art. 1181 of the Civil Code which provides:

ARTICLE 1181. In conditional obligations, the acquisition of rights, as well as the

extinguishment or loss of those already acquired, shall depend upon the happening of the
event which constitutes the condition. (Emphasis supplied)ςrαlαωlιbrαrÿ

As no right against the Aguilars was acquired by World Cars under the promissory note and
chattel mortgage, it had nothing to assign to Citytrust. Consequently, Citytrust cannot
enforce the instruments against the Aguilars, for an assignee cannot acquire greater
rights than those pertaining to the assignor.46

At all events, the Aguilars having fully paid the car before they became aware of the
assignment of the instruments to Citytrust when they received notice thereof by Citytrust,
they were released of their obligation thereunder. The Civil Code so provides:

ARTICLE 1626. The debtor who, before having knowledge of the assignment, pays his
creditor, shall be released from the obligation.

While Citytrust cannot enforce the instruments against the Aguilars, since under the RFA,
specifically paragraph 5(a) thereof, World Cars guaranteed as follows:
5. As further warranties, [World Cars] hereby agrees and shall be bound by the following:

A. World Cars guarantees to [Citytrust] its successors, and assigns, that it has full right and
legal authority to make the assignment or discounting; that the installment papers so
discounted by virtue of this agreement, are subsisting, valid, enforceable and in all
respects what they purport to be; that the papers contain the entire agreement between
the customers and [World Cars]; x x x that it has absolute and good title to such contracts
and the personalties covered thereby and the right to sell and transfer the same in favor
of [Citytrust]; x x x (Emphasis and underscoring supplied),

Citytrust's allegations in its Crossclaim against World Cars Inc., to wit:

xxx

6. That under the terms and conditions of the RFA, upon violation of the dealer's warranties
and undertakings, defendant Citytrust Finance Corporation is entitled to recourse the
discounted/assigned installments papers to the former;

7. That assuming that plaintiff's complaint is correct, defendant World Cars, Inc., appears to
have violated the terms and conditions of the RFA it executed with Citytrust Finance
Corporation;

Moreover, if it is proven that said plaintiffs have already paid the amount on said promissory
note, then defendant World Cars Inc. would appear to have received twice the
considerations thereof because it likewise received the proceeds of discounting thereof,
from defendant Citytrust at the time said note was endorsed and assigned thus, unjustly
enriching itself;

xxx

9. Assuming that plaintiffs' claims are proven to be true and that defendant World Cars, Inc.
violated its warranties and undertakings to the defendant Citytrust, defendant World Cars,
Inc. should likewise be made liable to herein defendant Citytrust for all the unpaid
obligations arising from said promissory note above alleged, plus damages and attorney's
fees as maybe proven during the trial.47 (Emphasis and underscoring supplied),

are well-taken.

Respecting the award of moral and exemplary damages, attorney's fees and other litigation
expenses to the Aguilars which World Cars assails, the same is in order. For by
Josephine's testimony,48 she was "annoyed, upset and angry"; and her husband became
hypertensive on account of, and the credit line of their business was affected by World
Cars' fraudulent breach of its agreement with them.49

As for the award to Citytrust of attorney's fees, appearance fees, litigation expenses and
costs of suit against World Cars, the same is in order too, World Cars' violation of the
RFA having compelled Citytrust to incur expenses to protect its interest.50

WHEREFORE, the Court of Appeals' decision is REVERSED and SET ASIDE and another
rendered:

1. ANNULLING the promissory note, chattel mortgage and its accessory contracts;

2. ORDERING World Cars to PAY:

(a) Citytrust

(1) whatever unpaid obligation due to it arising from the assignment of the promissory note;

(2) P50,000.00 as attorney's fees and P500.00 per hearing; andcralawlibrary

(3) P50,000.00 as liquidated damages, cost of suit and other litigation expenses.

(b) spouses Aguilar

(1) P500,000.00 as moral damages;

(2) P100,000.00 as exemplary damages;

(3) P50,000.00 as attorney's fees; andcralawlibrary

(4) P20,000.00 as litigation expenses.

Costs against petitioner, World Cars, Inc.

SO ORDERED.

6. Velarde vs. Court of Appeals (361 SCRA 57)

THIRD DIVISION

G.R. No. 108346 July 11, 2001

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners,

vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.

PANGANIBAN, J.:

A substantial breach of a reciprocal obligation, like failure to pay the price in the manner
prescribed by the contract, entitled the injured party to rescind the obligation. Rescission
abrogates the contract from its inception and requires a mutual restitution of benefits
received.

The Case

Before us is a Petition for Review on Certiorari1 questioning the Decision2 of the Court of
Appeals (CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its Resolution3
dated December 29, 1992 denying petitioner's motion for reconsideration.4

The dispositive portion of the assailed Decision reads:

"WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and
the Decision dated November 14, 1990 dismissing the [C]omplaint is RESINSTATED.
The bonds posted by plaintiffs-appellees and defendants-appellants are hereby
RELEASED."5

The Facts

The factual antecedents of the case, as found by the CA, are as follows:
"x x x. David Raymundo [herein private respondent] is the absolute and registered owner of
a parcel of land, together with the house and other improvements thereon, located at
1918 Kamias St., Dasmariñas Village, Makati and covered by TCT No. 142177.
Defendant George Raymundo [herein private petitioners] is David's father who negotiated
with plaintiffs Avelina and Mariano Velarde [herein petitioners] for the sale of said
property, which was, however, under lease (Exh. '6', p. 232, Record of Civil Case No.
15952).

"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh. '1', pp. 11-
12, Record) was executed by defendant David Raymundo, as vendor, in favor of plaintiff
Avelina Velarde, as vendee, with the following terms and conditions:

'x x x xxx xxx

'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS
(P800,000.00), Philippine currency, receipt of which in full is hereby acknowledged by the
VENDOR from the VENDEE, to his entire and complete satisfaction, by these presents
the VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely
and voluntarily, with full warranty of a legal and valid title as provided by law, unto the
VENDEE, her heirs, successors and assigns, the parcel of land mentioned and described
above, together with the house and other improvements thereon.

'That the aforesaid parcel of land, together with the house and other improvements thereon,
were mortgaged by the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati,
Metro Manila to secure the payment of a loan of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, as evidenced by a Real
Estate Mortgage signed and executed by the VENDOR in favor of the said Bank of the
Philippine Islands, on _____ and which Real Estate Mortgage was ratified before Notary
Public for Makati, _____, as Doc. No. ______, Page No. _____, Book No. ___, Series of
1986 of his Notarial Register.

'That as part of the consideration of this sale, the VENDEE hereby assumes to pay the
mortgage obligations on the property herein sold in the amount of ONE MILLION EIGHT
HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in favor of Bank of
Philippine Islands, in the name of the VENDOR, and further agrees to strictly and faithfully
comply with all the terms and conditions appearing in the Real Estate Mortgage signed
and executed by the VENDOR in favor of BPI, including interests and other charges for
late payment levied by the Bank, as if the same were originally signed and executed by
the VENDEE.

'It is further agreed and understood by the parties herein that the capital gains tax and
documentary stamps on the sale shall be for the account of the VENDOR; whereas, the
registration fees and transfer tax thereon shall be the account of the VENDEE.' (Exh. 'A',
pp. 11-12, Record).'

"On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the
consent of her husband, Mariano, executed an Undertaking (Exh. 'C', pp. 13-14, Record).'

'x x x xxx xxx

'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo
the sum of EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency,
and assume the mortgage obligations on the property with the Bank of the Philippine
Islands in the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS
 (P1,800,000.00), Philippine currency, in accordance with the terms and conditions of the
Deed of Real Estate Mortgage dated _____, signed and executed by Mr. David A.
Raymundo with the said Bank, acknowledged before Notary Public for Makati, _____, as
Doc. No. _____, Page No. _____, Book No. _____, Series of 1986 of his Notarial
Register.

'WHEREAS, while my application for the assumption of the mortgage obligations on the
property is not yet approved by the mortgagee Bank, I have agreed to pay the mortgage
obligations on the property with the Bank in the name of Mr. David A. Raymundo, in
accordance with the terms and conditions of the said Deed of Real Estate Mortgage,
including all interests and other charges for late payment.

'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for
purposes of attesting and confirming our private understanding concerning the said
mortgage obligations to be assumed.

'NOW, THEREFORE, for and in consideration of the foregoing premises, and the
assumption of the mortgage obligations of ONE MILLION EIGHT HUNDRED THOUSAND
PESOS (P1,800,000.00), Philippine currency, with the bank of the Philippine Islands, I,
Mrs, Avelina D, Velarde with the consent of my husband, Mariano Z. Velardo, do hereby
bind and obligate myself, my heirs, successors and assigns, to strictly and faithfully
comply with the following terms and conditions:

'1. That until such time as my assumption of the mortgage obligations on the property
purchased is approved by the mortgagee bank, the Bank of the Philippine Islands, I shall
continue to pay the said loan in accordance with the terms and conditions of the Deed of
Real Estate Mortgage in the name of Mr. David A. Raymundo, the original Mortgagor.

'2. That, in the event I violate any of the terms and conditions of the said Deed of Real
Estate Mortgage, I hereby agree that my downpayment of P800,000.00, plus all payments
made with the Bank of the Philippine Islands on the mortgage loan, shall be forfeited in
favor of Mr. David A. Raymundo, as and by way of liquidated damages, without necessity
of notice or any judicial declaration to that effect, and Mr. David A. Raymundo shall
resume total and complete ownership and possession of the property sold by way of
Deed of Sale with Assumption of Mortgage, and the same shall be deemed automatically
cancelled and be of no further force or effect, in the same manner as it (the) same had
never been executed or entered into.

'3. That I am executing the Undertaking for purposes of binding myself, my heirs, successors
and assigns, to strictly and faithfully comply with the terms and conditions of the mortgage
obligations with the Bank of the Philippine Islands, and the covenants, stipulations and
provisions of this Undertaking.

'That, David A. Raymundo, the vendor of the property mentioned and identified above,
[does] hereby confirm and agree to the undertakings of the Vendee pertinent to the
assumption of the mortgage obligations by the Vendee with the Bank of the Philippine
Islands. (Exh. 'C', pp. 13-14, Record).'

"This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.

"It appears that the negotiated terms for the payment of the balance of P1.8 million was from
the proceeds of a loan that plaintiffs were to secure from a bank with defendant's help.
Defendants had a standing approved credit line with the Bank of the Philippine Islands
(BPI). The parties agreed to avail of this, subject to BPI's approval of an application for
assumption of mortgage by plaintiffs. Pending BPI's approval o[f] the application, plaintiffs
 were to continue paying the monthly interests of the loan secured by a real estate
mortgage.

"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by
the aforementioned mortgage for three (3) months as follows: September 19, 1986 at
P27,225.00; October 20, 1986 at P23,000.00; and November 19, 1986 at P23,925.00
(Exh. 'E', 'H' & 'J', pp. 15, 17and 18, Record).

"On December 15, 1986, plaintiffs were advised that the Application for Assumption of
Mortgage with BPI, was not approved (Exh. 'J', p. 133, Record). This prompted plaintiffs
not to make any further payment.

"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their
non-payment to the mortgage bank constitute[d] non-performance of their obligation (Exh.
'3', p. 220, Record).

"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:

'This is to advise you, therefore, that our client is willing to pay the balance in cash not later
than January 21, 1987 provided: (a) you deliver actual possession of the property to her
not later than January 15, 1987 for her immediate occupancy; (b) you cause the re- lease
of title and mortgage from the Bank of P.I. and make the title available and free from any
liens and encumbrances; and (c) you execute an absolute deed of sale in her favor free
from any liens or encumbrances not later than January 21, 1987.' (Exhs. 'k', '4', p. 223,
Record).

"On January 8, 1987 defendants sent plaintiffs a notarial notice of cancellation/rescission of

the intended sale of the subject property allegedly due to the latter's failure to comply with
the terms and conditions of the Deed of Sale with Assumption of Mortgage and the
Undertaking (Exh. '5', pp. 225-226, Record)."6

Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents

for specific performance, nullity of cancellation, writ of possession and damages. This was
docketed as Civil Case No. 15952 at the Regional Trial Court of Makati, Branch 149. The
case was tried and heard by then Judge Consuelo Ynares-Santiago (now an associate
justice of this Court), who dismissed the Complaint in a Decision dated November 14,
1990.7 Thereafter, petitioners filed a Motion for Reconsideration.8

Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge
Salvador S. A. Abad Santos was assigned to the sala she vacated. In an Order dated
May 15, 1991,9 Judge Abad Santos granted petitioner's Motion for Reconsideration and
directed the parties to proceed with the sale. He instructed petitioners to pay the balance
of P1.8 million to private respondents who, in turn, were ordered to execute a deed of
absolute sale and to surrender possession of the disputed property to petitioners.

Private respondents appealed to the CA.

Ruling of the Court of Appeal

The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-
Santiago's earlier Decision dismissing petitioners' Complaint. Upholding the validity of the
rescission made by private respondents, the CA explained its ruling in this wise:

"In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of the
consideration of this sale, the VENDEE (Velarde)' would assume to pay the mortgage
 obligation on the subject property in the amount of P 1.8 million in favor of BPI in the
name of the Vendor (Raymundo). Since the price to be paid by the Vendee Velarde
includes the downpayment of P800,000.00 and the balance of Pl.8 million, and the
balance of Pl.8 million cannot be paid in cash, Vendee Velarde, as part of the
consideration of the sale, had to assume the mortgage obligation on the subject property.
In other words, the assumption of the mortgage obligation is part of the obligation of
Velarde, as vendee, under the contract. Velarde further agreed 'to strictly and faithfully
comply with all the terms and conditions appearing in the Real Estate Mortgage signed
and executed by the VENDOR in favor of BPI x x x as if the same were originally signed
and executed by the Vendee. (p. 2, thereof, p. 12, Record). This was reiterated by
Velarde in the document entitled 'Undertaking' wherein the latter agreed to continue
paying said loan in accordance with the terms and conditions of the Deed of Real Estate
Mortgage in the name of Raymundo. Moreover, it was stipulated that in the event of
violation by Velarde of any terms and conditions of said deed of real estate mortgage, the
downpayment of P800,000.00 plus all payments made with BPI or the mortgage loan
would be forfeited and the [D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby
be Cancelled automatically and of no force and effect (pars. 2 & 3, thereof, pp 13-14,
Record).

"From these 2 documents, it is therefore clear that part of the consideration of the sale was
the assumption by Velarde of the mortgage obligation of Raymundo in the amount of Pl.8
million. This would mean that Velarde had to make payments to BPI under the [D]eed of
[R]eal [E]state [M]ortgage the name of Raymundo. The application with BPI for the
approval of the assumption of mortgage would mean that, in case of approval, payment of
the mortgage obligation will now be in the name of Velarde. And in the event said
application is disapproved, Velarde had to pay in full. This is alleged and admitted in
Paragraph 5 of the Complaint. Mariano Velarde likewise admitted this fact during the
hearing on September 15, 1997 (p. 47, t.s.n., September 15, 1987; see also pp. 16-26,
t.s.n., October 8, 1989). This being the case, the non-payment of the mortgage obligation
would result in a violation of the contract. And, upon Velarde's failure to pay the agreed
price, the[n] Raymundo may choose either of two (2) actions - (1) demand fulfillment of
the contract, or (2) demand its rescission (Article 1191, Civil Code).

"The disapproval by BPI of the application for assumption of mortgage cannot be used as an
excuse for Velarde's non-payment of the balance of the purchase price. As borne out by
the evidence, Velarde had to pay in full in case of BPI's disapproval of the application for
assumption of mortgage. What Velarde should have done was to pay the balance of P1.8
million. Instead, Velarde sent Raymundo a letter dated January 7, 1987 (Exh. 'K', '4')
which was strongly given weight by the lower court in reversing the decision rendered by
then Judge Ynares-Santiago. In said letter, Velarde registered their willingness to pay the
balance in cash but enumerated 3 new conditions which, to the mind of this Court, would
constitute a new undertaking or new agreement which is subject to the consent or
approval of Raymundo. These 3 conditions were not among those previously agreed
upon by Velarde and Raymundo. These are mere offers or, at most, an attempt to novate.
But then again, there can be no novation because there was no agreement of all the
parties to the new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).

"It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale
with Assumption of Mortgage would be deemed 'automatically cancelled and of no further
force and effect, as if the same had never been executed or entered into.' While it is true
that even if the contract expressly provided for automatic rescission upon failure to pay
the price, the vendee may still pay, he may do so only for as long as no demand for
rescission of the contract has been made upon him either judicially or by a notarial act
(Article 1592, Civil Code). In the case at bar, Raymundo sent Velarde notarial notice
dated January 8, 1987 of cancellation/rescission of the contract due to the latter's failure
 to comply with their obligation. The rescission was justified in view of Velarde's failure to
pay the price (balance) which is substantial and fundamental as to defeat the object of the
parties in making the agreement. As adverted to above, the agreement of the parties
involved a reciprocal obligation wherein the obligation of one is a resolutory condition of
the obligation of the other, the non-fulfillment of which entitles the other party to rescind
the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage
obligation by appellees Velarde would create a right to demand payment or to rescind the
contract, or to criminal prosecution (Edca Publishing & Distribution Corporation vs.
Santos, 184 SCRA 614). Upon appellee's failure, therefore, to pay the balance, the
contract was properly rescinded (Ruiz vs. IAC, 184 SCRA 720). Consequently, appellees
Velarde having violated the contract, they have lost their right to its enforcement and
hence, cannot avail of the action for specific performance (Voysaw vs. Interphil
Promotions, Inc., 148 SCRA 635)."10

Hence, this appeal. 11

The Issues

Petitioners, in their Memorandum,12 interpose the following assignment of errors:

"I.

The Court of Appeals erred in holding that the non-payment of the mortgage obligation
resulted in a breach of the contract.

"II

The Court of Appeals erred in holding that the rescission (resolution) of the contract by
private respondents was justified.

"III

The Court of Appeals erred in holding that petitioners' January 7, 1987 letter gave three 'new
conditions' constituting mere offers or an attempt to novate necessitating a new
agreement between the parties."

The Court's Ruling

The Petition is partially meritorious.

First Issue:

Breach of Contract

Petitioner aver that their nonpayment of private respondents' mortgage obligation did not
constitute a breach of contract, considering that their request to assume the obligation
had been disapproved by the mortgagee bank. Accordingly, payment of the monthly
amortizations ceased to be their obligation and, instead, it devolved upon private
respondents again.

However, petitioners did not merely stop paying the mortgage obligations; they also failed to
pay the balance of the purchase price. As admitted by both parties, their agreement
mandated that petitioners should pay the purchase price balance of P1.8 million to private
respondents in case the request to assume the mortgage would be disapproved. Thus, on
December 15, 1986, when petitioners received notice of the bank's disapproval of their
 application to assume respondents' mortgage, they should have paid the balance of the
P1.8 million loan.

Instead of doing so, petitioners sent a letter to private respondents offering to make such
payment only upon the fulfillment of certain conditions not originally agreed upon in the
contract of sale. Such conditional offer to pay cannot take the place of actual payment as
would discharge the obligation of a buyer under a contract of sale.

In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a
determinate things, and the buyer to pay therefor a price certain in money or its
equivalent.13

Private respondents had already performed their obligation through the execution of the
Deed of Sale, which effectively transferred ownership of the property to petitioner through
constructive delivery. Prior physical delivery or possession is not legally required, and the
execution of the Deed of Sale is deemed equivalent to delivery.14

Petitioners, on the other hand, did not perform their correlative obligation of paying the
contract price in the manner agreed upon. Worse, they wanted private respondents to
perform obligations beyond those stipulated in the contract before fulfilling their own
obligation to pay the full purchase price.

Second Issue

Validity of the Rescission

Petitioners likewise claim that the rescission of the contract by private respondents was not
justified, inasmuch as the former had signified their willingness to pay the balance of the
purchase price only a little over a month from the time they were notified of the
disapproval of their application for assumption of mortgage. Petitioners also aver that the
breach of the contract was not substantial as would warrant a rescission. They cite
several cases15 in which this Court declared that rescission of a contract would not be
permitted for a slight or casual breach. Finally, they argue that they have substantially
performed their obligation in good faith, considering that they have already made the
initial payment of P800,000 and three (3) monthly mortgage payments.

As pointed out earlier, the breach committed by petitioners was not so much their
nonpayment of the mortgage obligations, as their nonperformance of their reciprocal
obligation to pay the purchase price under the contract of sale. Private respondents' right
to rescind the contract finds basis in Article 1191 of the Civil Code, which explicitly
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 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 right of rescission of a party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party who violates the reciprocity between
them.16 The breach contemplated in the said provision is the obligor's failure to comply
with an existing obligation.17 When the obligor cannot comply with what is incumbent
upon it, the obligee may seek rescission and, in the absence of any just cause for the
court to determine the period of compliance, the court shall decree the rescission.18
In the present case, private respondents validly exercised their right to rescind the contract,
because of the failure of petitioners to comply with their obligation to pay the balance of
the purchase price. Indubitably, the latter violated the very essence of reciprocity in the
contract of sale, a violation that consequently gave rise to private respondent's right to
rescind the same in accordance with law.

True, petitioners expressed their willingness to pay the balance of the purchase price one
month after it became due; however, this was not equivalent to actual payment as would
constitute a faithful compliance of their reciprocal obligation. Moreover, the offer to pay
was conditioned on the performance by private respondents of additional burdens that
had not been agreed upon in the original contract. Thus, it cannot be said that the breach
committed by petitioners was merely slight or casual as would preclude the exercise of
the right to rescind.

Misplaced is petitioners' reliance on the cases19 they cited, because the factual
circumstances in those cases are not analogous to those in the present one. In Song Fo
there was, on the part of the buyer, only a delay of twenty (20) days to pay for the goods
delivered. Moreover, the buyer's offer to pay was unconditional and was accepted by the
seller.

In Zepeda, the breach involved a mere one-week delay in paying the balance of 1,000 which
was actually paid.

In Tan, the alleged breach was private respondent's delay of only a few days, which was for
the purpose of clearing the title to the property; there was no reference whatsoever to the
nonpayment of the contract price.

In the instant case, the breach committed did not merely consist of a slight delay in payment
or an irregularity; such breach would not normally defeat the intention of the parties to the
contract. Here, petitioners not only failed to pay the P1.8 million balance, but they also
imposed upon private respondents new obligations as preconditions to the performance
of their own obligation. In effect, the qualified offer to pay was a repudiation of an existing
obligation, which was legally due and demandable under the contract of sale. Hence,
private respondents were left with the legal option of seeking rescission to protect their
own interest.

Mutual Restitution

Required in Rescission

As discussed earlier, the breach committed by petitioners was the nonperformance of a

reciprocal obligation, not a violation of the terms and conditions of the mortgage contract.
Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the
contract does not apply. Instead, Civil Code provisions shall govern and regulate the
resolution of this controversy.

Considering that the rescission of the contract is based on Article 1191 of the Civil Code,
mutual restitution is required to bring back the parties to their original situation prior to the
inception of the contract. Accordingly, the initial payment of P800,000 and the
corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925
(totaling P874,150.00) advanced by petitioners should be returned by private
respondents, lest the latter unjustly enrich themselves at the expense of the former.
Rescission creates the obligation to return the object of the contract. It can be carried out
only when the one who demands rescission can return whatever he may be obliged to
restore.20 To rescind is to declare a contract void at its inception and to put an end to it
as though it never was. It is not merely to terminate it and release the parties from further
obligations to each other, but to abrogate it from the beginning and restore the parties to
their relative positions as if no contract has been made.21

Third Issue

Attempt to Novate

In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third
issue raised by petitioners. Suffice it to say that the three conditions appearing on the
January 7, 1987 letter of petitioners to private respondents were not part of the original
contract. By that time, it was already incumbent upon the former to pay the balance of the
sale price. They had no right to demand preconditions to the fulfillment of their obligation,
which had become due.

WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that
private respondents are ordered to return to petitioners the amount of P874,150, which
the latter paid as a consequence of the rescinded contract, with legal interest thereon
from January 8, 1987, the date of rescission. No pronouncement as to costs.

SO ORDERED.

7. PNB MADECOR vs. Uy (363 SCRA 128)

SECOND DIVISION

G.R. No. 129598 August 15, 2001

PNB MADECOR, petitioner,

vs.
GERARDO C. UY, respondent.

QUISUMBING,J.:

This is a petition for review on certiorari filed by petitioner PNB Management and
Development Corporation (PNB MADECOR) seeking to annul the decision of the Court of
Appeals dated February 19, 1997, and its resolution dated June 19, 1997 in CA-G.R. CV
No. 49693, affirming the order of the Regional Trial Court of Manila, Branch 38, dated
August 21, 1995 in Civil Case No. 95-72685. In said order, the RTC directed the
garnishment of the credits and receivables of Pantranco North Express, Inc. (PNEI), also
known as Philippine National Express, Inc., in the possession of PNB MADECOR, and if
these were insufficient to cover the debt of PNB MADECOR to PNEI, to levy upon the
assets of PNB MADECOR.

The facts of this case, culled from the decision of the CA,1 are as follows:

Guillermo Uy, doing business under the name G.U. Enterprises, assigned to respondent
Gerardo Uy his receivables due from Pantranco North Express Inc. (PNEI) amounting to
P4,660,558.00. The deed of assignment included sales invoices containing stipulations
regarding payment of interest and attorney's fees.
On January 23, 1995, Gerardo Uy filed with the RTC a collection suit with an application for
the issuance of a writ of preliminary attachment against PNEI. He sought to collect from
PNEI the amount of P8,397,440.00. He alleged that PNEI was guilty of fraud in
contracting the obligation sued upon, hence his prayer for a writ of preliminary
attachment.

A writ of preliminary attachment was issued on January 26, 1995, commanding the sheriff
"to attach the properties of the defendant, real or personal, and/or (of) any person
representing the defendant"2 in such amount as to cover Gerardo Uy's demand.

On January 27, 1995, the sheriff issued a notice of garnishment addressed to the Philippine
National Bank (PNB) attaching the "goods, effects, credits, monies and all other personal
properties"3 of PNEI in the possession of the bank, and requesting a reply within five
days. PNB MADECOR received a similar notice.

On March 1995, the RTC, through the application of Gerardo Uy, issued a subpoena duces
tecum for the production of certain documents in the possession of PNB and PNB
MADECOR: (1) from PNB, books of account of PNEI regarding trust account nos. T-8461-
I, 8461-II, and T-8565; and (2) from PNB MADECOR, contracts showing PNEI's
receivables from the National Real Estate Development Corporation (NAREDECO), now
PNB MADECOR, from 1981 up to the period when the documents were requested.

At the hearing in connection with the subpoena, PNB moved to be allowed to submit a
position paper on its behalf and/or on behalf of PNB MADECOR. In its position paper
dated April 3, 1995, PNB MADECOR alleged that it was the owner of the parcel of land
located in Quezon City that was leased to PNEI for use as bus terminal. Moreover, PNB
MADECOR claimed:

"2. PNEI has not been paying its rentals from October 1990 to March 24, 1994 — when it
(PNEI) vacated the property. As of the latter date, PNB MADECOR's receivables against
PNEI amounted to P8,784,227.48, representing accumulated rentals, inclusive of interest;

3. On the other hand, PNB MADECOR has payables to PNEI in the amount of
P7,884,000.00 as evidenced by a promissory note executed on October 31, 1982 by then
NAREDECO in favor of PNEI;

4. Considering that PNB MADECOR is a creditor of PNEI with respect to the P8,784,227.48
and at the same time its debtor with respect to the P7,884,000.00, PNB MADECOR and
PNEI are therefore creditors and debtors of each other; and

5. By force of the law on compensation, both obligations of PNB MADECOR and PNEI are
already considered extinguished to the concurrent amount or up to P7,884,000.00 so that
PNEI is still obligated to pay PNB MADECOR the amount of P900,227.48. x x x ."4

On the other hand, Gerardo Uy filed an omnibus motion controverting PNB MADECOR's
claim of compensation. Even if compensation were possible, according to him, PNEI
would still have sufficient funds in the hands of PNB MADECOR to fully satisfy his claim.
He explained' that:

"The allegation of PNB MADECOR that it owes PNEI only . . . (P7,884,000.00) is not
accurate. Apparently, PNB MADECOR only considered the principal amount. In the first
place, to be precise, the principal debt amounts to exactly . . . (P7,884,921.10) as clearly
indicated in the Promissory Note dated 31 October 1982 . . . In accordance with the
stipulations contained in the promissory note, notice of demand was sent by PNEI to PNB
MADECOR (then NAREDECO) through a letter dated 28 September 1984 and received
 by the latter on 1 October 1984 . . . The second paragraph of the subject promissory note
states that '[F]ailure to pay the above amount by NAREDECO after due notice has been
made by PNEI would entitle PNEI to collect an 18% [interest] per annum from date of
notice of demand'. Hence, interest should be computed and start to run from November
1984 until the present in order to come up with the outstanding debt of PNB MADECOR
to PNEI. And to be more precise, the outstanding debt of PNB MADECOR to PNEI as of
April 1995 amounts to . . . (P75,813,508.26). Hence, even if the alleged debt of PNEI to
PNB MADECOR amounting to . . . (P8,784,227.48) shall be compensated and deducted
from PNB MADECOR's debt to PNEI, there shall still be a remainder of . . .
(P67,029,380.78), largely sufficient enough to cover complainant's claim."5

Also in his omnibus motion, he prayed for an order directing that levy be made upon all
goods, credits, deposits, and other personal properties of PNEI under the control of PNB
MADECOR, to the extent of his demand.

PNB MADECOR opposed his omnibus motion, particularly the claim that its obligation to
PNEI earned an interest of 18 percent annually. It argued that PNEI's letter dated
September 28, 1984 was not a demand letter but merely a request for the implementation
of the arrangement for set-off of receivables between PNEI and PNB, as provided in
adacion en pago executed on July 28, 1983.6 Gerardo Uy again controverted PNB
MADECOR's arguments.

Meanwhile, in the main case, the RTC rendered judgment on July 26, 1995 against PNEI.
The corresponding writ of execution was issued on August 18, 1995.

As regards the issue between PNEI and PNB MADECOR, the RTC issued the assailed
order on August 21, 1995, the decretal portion of which provided:

"WHEREFORE, the Sheriff of this Court is hereby directed to garnish/levy or cause to be

garnished/levied the amount stated in the writ of attachment issued by this Court from the
credits and receivables/collectibles of PNEI from PNB MADECOR (NAREDECO) and to
levy and/or cause to levy upon the assets of the debtor PNB MADECOR should its
personal assets be insufficient to cover its debt with PNEI.

Furthermore, Mr. Roger L. Venarosa, Vice-President, Trust Department, Philippine National

Bank, and other concerned officials of said bank, is/are hereby directed to submit the
books of accounts of Pantranco North Express, Inc./Philippine National Express, Inc.
under Trust Account Nos. T-8461-I, T-8461-II, T-8565 with its position paper within five (5)
days from notice hereof.

SO ORDERED."

Petitioner appealed said order to the CA which, however, affirmed the RTC in a decision
dated February 19, 1997. Petitioner's motion for reconsideration was denied in a
resolution dated June 19, 1997.

According to the CA, there could not be any compensation between PNEI's receivables from
PNB MADECOR and the latter's obligation to the former because PNB MADECOR's
supposed debt to PNEI is the subject of attachment proceedings initiated by a third party,
herein respondent Gerardo Uy. This is a controversy that would prevent legal
compensation from taking place, per the requirements set forth in Article 1279 of the Civil
Code. Moreover, the CA stressed that it was not clear whether, at the time compensation
was supposed to have taken place, the rentals being claimed by petitioner were indeed
still unpaid. The CA pointed out that petitioner did not present evidence in this regard,
apart from a statement of account.
The CA also questioned petitioner's inaction in claiming the unpaid rentals from PNEI, when
the latter started defaulting in its payment as early as 1994. This, according to the CA,
indicates that the debt was either already settled or not yet demandable and liquidated.

The CA rejected petitioner's contention that Rule 39, Section 43 of the Revised Rules of
Court applies to the present case. Said rule sets forth the procedure to follow when a
person alleged to have property or to be indebted to a judgment obligor claims an interest
in the property or denies the debt. In such a situation, under said Rule the judgment
obligee is required to institute a separate action against such person. The CA held that
there was no need for a separate action here since petitioner had already become a
forced intervenor in the case by virtue of the notice of garnishment served upon it.

Hence, this petition. Petitioner now assigns the following alleged errors for our consideration:

THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR IN THE INTERPRETATION

OF THE APPLICABLE LAW HEREIN WHEN IT RULED THAT THE REQUISITES FOR
LEGAL COMPENSATION AS SET FORTH UNDER ARTICLES 1278 AND 1279 OF THE
CIVIL CODE DO NOT CONCUR IN THE CASE AT BAR.

II

THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR IN INTERPRETING THE

PROVISIONS OF SECTION 45, RULE 39 OF THE RULES OF COURT, NOW SECTION
43, RULE 39 OF THE REVISED RULES OF COURT, AS AMENDED ON 1 JULY 1997,
BY RULING THAT PETITIONER PNB-MADECOR, UPON BEING CITED FOR AND
SERVED WITH A NOTICE OF GARNISHMENT BECAME A FORCED INTERVENOR,
HENCE, DENYING THE RIGHT OF HEREIN PETITIONER TO VENTILATE ITS
POSITION IN A FULL-BLOWN TRIAL AS PROVIDED FOR UNDER SEC. 10, RULE 57,
WHICH REMAINS THE SAME RULE UNDER THE REVISED RULES OF COURT AS
AMENDED ON 1 JULY 1997.

III

THE [COURT OF APPEALS] COMMITTED AN ERROR IN FINDING THAT A DEMAND

WAS MADE BY PANTRANCO NORTH EXPRESS, INC. TO PNB MADECOR FOR THE
PAYMENT OF THE PROMISSORY NOTE DATED 31 OCTOBER 1982.7

After considering these assigned errors carefully insofar as they raise issues of law, we find
that the petition lacks merit. We shall now discuss the reasons for our conclusion.

Petitioner admits its indebtedness to PNEI, in the principal sum of P7,884,921.10, per a
promissory note dated October 31, 1982 executed by its precursor NAREDECO in favor
of PNEI. It also admits that the principal amount should earn an interest of 18 percent per
annum under the promissory note, in case NAREDECO fails to pay the principal amount
after notice. Petitioner adds that the receivables of PNEI were thereafter conveyed to
PNB in payment of PNEI's loan obligation to the latter, in accordance with a dacion en
pago agreement executed between PNEI and PNB.

Petitioner, however, maintains that there is nothing now that could be subject of attachment
or execution in favor of respondent since compensation had already taken place as
between its debt to PNEI and the latter's obligation to it, consistent with Articles 1278,
1279, and 1290 of the Civil Code. Petitioner assails the CA's ratiocination that
 compensation could not have taken place because the receivables in question were the
subject of attachment proceedings commenced by a third party (respondent). This
reasoning is contrary to law, according to petitioner.

Petitioner insists that even the Asset Privatization Trust (APT), which now has control over
PNEI, recognized the set-off between the subject receivables as indicated in its reply to
petitioner's demand for payment of PNEI's unpaid rentals.8 The APT stated in its letter:

"xxx xxx xxx

While we have long considered the amount of SEVEN MILLION EIGHT HUNDRED EIGHTY
FIVE THOUSAND PESOS (P7,885,000.00) which PNEI had earlier transmitted to you as
its share in an aborted project as partial payment for PNEI's unpaid rentals in favor of
PNB-Madecor, being a creditor like your goodself of PNEI, we are unable to be of
assistance to you regarding your claim for the balance thereof. We trust that you will
understand our common predicament.

xxx xxx xxx"

Petitioner argues that PNEI's letter dated September 28, 1984 did not contain a demand for
payment but only notice of the implementation of thedacion en pago agreement between
PNB and PNEI.

Petitioner contends that the CA's statement that PNEI's obligation to petitioner had either
been settled or was not yet demandable is highly speculative and conjectural. On the
contrary, petitioner asserts that its failure to institute a judicial action against PNEI proved
that the receivables of petitioner and PNEI had already been subject to legal
compensation.

Petitioner submits that Rule 39, Section 43 of the Revised Rules of Court applies to the
present case. It asserts that it stands to lose more than P7 million if not given the
opportunity to present its side in a formal proceeding such as that provided under the
cited rule. According to petitioner, it was not an original party to this case but only became
involved when it was issued a subpoenaduces tecum by the trial court.

For his part, respondent claims that the requisites for legal compensation are not present in
this case, contrary to petitioner's assertion. He argues that the better rule should be that
compensation cannot take place where one of the obligations sought to be compensated
is the subject of a suit between a third party and a party interested in the compensation,
as in this case.

Moreover, respondent points out that, while the alleged demand letter sent by PNEI to
petitioner was dated September 28, 1984, the unpaid rentals due petitioner from PNEI
accrued during the period October 1990 to March 1994, or before petitioner's obligation to
PNEI became due. This being so, respondent argues that there can be no compensation
since there was as yet no compensable debt in 1984 when PNEI demanded payment
from petitioner.

Even granting that there had been compensation, according to respondent, PNEI would still
have sufficient funds with petitioner since the PNB MADECOR's obligation to PNEI
earned interest.

Respondent echoes the observation of the CA that petitioner failed to file a suit against PNEI
at the time when it should have. This failure gave rise to the presumption that PNEI's
obligation might have already been settled, waived, or otherwise extinguished, according
 to him. He contends that petitioner's explanation that it did not sue PNEI because there
had been legal compensation is only an afterthought and contrary to logic and reason.

On petitioner's claim that it had been denied due process, respondent avers that he did not
have to file a separate action against petitioner since this would only result in multiplicity
of suits. Furthermore, he points out that the order of attachment is an interlocutory order
that may not be the subject of appeal.

Finally, respondent calls the attention of this Court to the sale by PNB of its shares in PNB
MADECOR to the "Dy Group", which in turn assigned its majority interest to the "Atlanta
Group". Respondent claims that the Dy Group set aside some P30 million for expenses to
be incurred in litigating PNB MADECOR's pending cases, and asks that his "claim over
this amount, arising from the instant case,"9 be given preference in case the PNEI
properties already garnished prove insufficient to satisfy his claim.

The first and third errors assigned by petitioner are obviously interrelated and must be
resolved together.

Worth stressing, compensation is a mode of extinguishing to the concurrent amount the

obligations of persons who in their own right and as principals arereciprocally debtors and
creditors of each other.10 Legal compensation takes place by operation of law when all
the requisites are present,11 as opposed to conventional compensation which takes
place when the parties agree to compensate their mutual obligations even in the absence
of some requisites.12

Legal compensation requires the concurrence of the following conditions:

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

(2) that both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;

(3) that the two debts be due;

(4) that they be liquidated and demandable;

(5) that over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.13

Petitioner insists that legal compensation had taken place such that no amount of money
belonging to PNEI remains in its hands, and, consequently, there is nothing that could be
garnished by respondent.

We find, however, that legal compensation could not have occurred because of the absence
of one requisite in this case: that both debts must be due and demandable.

The CA observed:

"Under the terms of the promissory note, failure on the part of NAREDECO (PNB
MADECOR) to pay their value of the instrument 'after due notice has been made by PNEI
would entitle PNEI to collect an 18% [interest] per annum from date of notice of
demand'."14

Petitioner makes a similar assertion in its petition, that

"x x x It has been stipulated that the promissory note shall earn an interest of 18% per
annum in case NAREDECO, after notice, fails to pay the amount stated therein."15

Petitioner's obligation to PNEI appears to be payable on demand, following the above

observation made by the CA and the assertion made by petitioner. Petitioner is obligated
to pay the amount stated in the promissory note upon receipt of a notice to pay from
PNEI. If petitioner fails to pay after such notice, the obligation will earn an interest of 18
percent per annum.

Respondent alleges that PNEI had already demanded payment. The alleged demand letter
reads in part:

"We wish to inform you that as of August 31, 1984 your outstanding accounts amounted to
P10,376,078.67, inclusive of interest.

In accordance with our previous arrangement, we have conveyed in favor of the Philippine
National Bank P7,884,921.10 of said receivables from you. With this conveyance, the
unpaid balance of your account will be P2,491,157.57.16

To forestall further accrual of interest, we request that you take up with PNB the
implementation of said arrangement. x x x."17

We agree with petitioner that this letter was not one demanding payment, but one that
merely informed petitioner of (1) the conveyance of a certain portion of its obligation to
PNEI per adacion en pago arrangement between PNEI and PNB, and (2) the unpaid
balance of its obligation after deducting the amount conveyed to PNB. The import of this
letter is not that PNEI was demanding payment, but that PNEI was advising petitioner to
settle the matter of implementing the earlier arrangement with PNB.

Apart from the aforecited letter, no other demand letter appears on record, nor has any of
the parties adverted to another demand letter.

Since petitioner's obligation to PNEI is payable on demand, and there being no demand
made, it follows that the obligation is not yet due. Therefore, this obligation may not be
subject to compensation for lack of a requisite under the law. Without compensation
having taken place, petitioner remains obligated to PNEI to the extent stated in the
promissory note. This obligation may undoubtedly be garnished in favor of respondent to
satisfy PNEI's judgment debt.18

As to respondent's claim that legal compensation could not have taken place due to the
existence of a controversy involving one of the mutual obligations, we find this matter no
longer controlling. Said controversy was not seasonably communicated to petitioner as
required under Article 1279 of the Civil Code.

The controversy,i.e., the action instituted by respondent against PNEI, must have been
communicated to PNB MADECOR in due time to prevent compensation from taking
place. By "in due time" should be meant the period before legal compensation was
supposed to take place, considering that legal compensation operates so long as the
requisites concur, even without any conscious intent on the part of the parties.19 A
controversy that is communicated to the parties after that time may no longer undo the
compensation that had taken place by force of law, lest the law concerning legal
compensation be for naught.
Petitioner had notice of the present controversy when it received the subpoenaduces tecum
issued by the trial court. The exact date when petitioner received the subpoena is not on
record, but petitioner was allowed to submit a position paper regarding said subpoena per
order of the trial court dated March 27, 1995.20 We assume that petitioner had notice of
the pending litigation at least no later than this date. Now, was this date before that period
when legal compensation would have occurred, assuming all other requisites to be
present?

Clearly, it is not. PNB MADECOR's obligation to PNEI was contracted in 1982 and the
alleged demand letter was sent by PNEI to petitioner on September 1984. On the other
hand, PNEI's obligation to petitioner, the payment of monthly rentals, accrued during the
period October 1990 to March 1994 and a demand to pay was sent in 1993. Assuming
the other requisites to be present, legal compensation of the mutual obligations would
have taken place on March 1994 at the latest. Obviously, this was before petitioner
received notice of the pendency of this litigation in 1995. The controversy communicated
to petitioner in 1995 could not have affected the legal compensation that would have
taken place in 1994.

As regards respondent's averment that there was as yet no compensable debt when PNEI
sent petitioner a demand letter on September 1984, since PNEI was not yet indebted to
petitioner at that time, the law does not require that the parties' obligations be incurred at
the same time. What the law requires only is that the obligations be due and demandable
at the same time.

Coming now to the second assigned error, which we reserved as the last for our discussion,
petitioner contends that it did not become a forced intervenor in the present case even
after being served with a notice of garnishment. Petitioner argues that the correct
procedure would have been for respondent to file a separate action against PNB
MADECOR, per Section 43 of Rule 39 of the Rules of Court.21 Petitioner insists it was
denied its right to ventilate its claims in a separate, full-blown trial when the courtsa quo
ruled that the abovementioned rule was inapplicable to the present case.

On this score, we had occasion to rule as early as 1921 inTayabas Land Co. v. Sharruf ,22
as follows:

". . . garnishment . . . consists in the citation of some stranger to the litigation, who is debtor
to one of the parties to the action. By this means such debtor stranger becomes a forced
intervenor; and the court, having acquired jurisdiction over his person by means of the
citation, requires him to pay his debt, not to his former creditor, but to the new creditor,
who is creditor in the main litigation. It is merely a case of involuntary novation by the
substitution of one creditor for another. Upon principle the remedy is a species of
attachment or execution for reaching any property pertaining to a judgment debtor which
may be found owing to such debtor by a third person."

Again, inPerla Compania de Seguros, Inc. v. Ramolete,23 we declared:

"Through service of the writ of garnishment, the garnishee becomes a "virtual party" to, or a
"forced intervenor" in, the case and the trial court thereby acquires jurisdiction to bind him
to compliance with all orders and processes of the trial court with a view to the complete
satisfaction of the judgment of the court."

Petitioner here became a forced intervenor by virtue of the notice of garnishment served
upon him. It could have presented evidence on its behalf. The CA, in fact, noted that
petitioner presented a statement of account purportedly showing that PNEI had not yet
 settled its obligation to petitioner.24 That petitioner failed to present any more proof of its
claim, as observed by the CA, is no longer the fault of the courts.

There is no need for the institution of a separate action under Rule 39, Section 43, contrary
to petitioner's claim. This provision contemplates a situation where the person allegedly
holding property of (or indebted to) the judgment debtor claims an adverse interest in the
property (or denies the debt). In this case, petitioner expressly admits its obligation to
PNEI.25

WHEREFORE, the petition is DENIED. The assailed decision and resolution of the Court of
Appeals are AFFIRMED. Costs against petitioner.

SO ORDERED.

8. Rodessen Supply Co. Inc. vs. Far East bank & Trust Co. (357 SCRA 618)

THIRD DIVISION

[G.R. No. 109087. May 9, 2001.]

RODZSSEN SUPPLY CO. INC., Petitioner, v. FAR EAST BANK & TRUST CO.,
Respondent.

DECISION

PANGANIBAN, J.:

When both parties to a transaction are mutually negligent in the performance of their
obligations, the fault of one cancels the negligence of the other. Thus, their rights and
obligations may be determined equitably. No one shall enrich oneself at the expense of
another.chanrob1es virtua1 1aw 1ibrary

The Case

Before us is a Petition for Review on Certiorari 1 under Rule 45 of the Rules of Court,
assailing the January 21, 1993 Decision 2 of the Court of Appeals 3 (CA) in CA-GR CV
No. 26045. The challenged Decision affirmed with modification the ruling of the Regional
Trial Court of Bacolod City in Civil Case No. 2296. The CA ruled as
follows:jgc:chanrobles.com.ph

"WHEREFORE, the decision under appeal should be, as it is hereby affirmed in all its
aspects, except for the deletion of paragraph 2 of its dispositive portion, which paragraph
shall be replaced by a new paragraph which shall read as follows:chanrob1es virtual 1aw
library

‘2. ordering the defendant to pay the plaintiff the sum equivalent to 10% of the total amount
due and collectible, as attorney’s fees; and’

"No pronouncement as to costs." 4

On the other hand, the trial court had rendered this judgment:jgc:chanrobles.com.ph
"1. Ordering the defendant to pay the plaintiff the sum of P76,000.00, representing the
principal amount being claimed in this action, plus interest thereon at the rate of 12% per
annum counted from October 1979 until fully paid;

"2. Ordering the defendant to pay the plaintiff the sum equivalent to 25% of the total amount
due and collectible; and

"3. Ordering the defendant to pay the costs of the suit." 5

The Facts

The factual and procedural antecedents of the case are summarized by the Court of Appeals
as follows:jgc:chanrobles.com.ph

"In the complaint from which the present proceedings originated, it is alleged that on January
15, 1979, defendant Rodzssen Supply, Inc. opened with plaintiff Far East Bank and Trust
Co. a 30-day domestic letter of credit, LC No. 52/0428/79-D, in the amount of
P190,000.00 in favor of Ekman and Company, Inc. (Ekman) for the purchase from the
latter of five units of hydraulic loaders, to expire on February 15, 1979; that subsequent
amendments extended the validity of said LC up to October 16, 1979; that on March 16,
1979, three units of the hydraulic loaders were delivered to defendant for which plaintiff
on March 26, 1979, paid Ekman the sum of P114,000.00, which amount defendant paid
plaintiff before the expiry date of the LC; that the shipment of the remaining two units of
hydraulic loaders valued at P76,000.00 sent by Ekman was ‘readily received by the
defendant’ before the expiry date [of] subject LC; that upon Ekman’s presentation of the
documents for the P76,000.00 ‘representing final negotiation’ on the LC before the expiry
date, and ‘after a series of negotiations’, plaintiff paid to Ekman the amount of
P76,000.00; and that upon plaintiff’s demand on defendant to pay for said amount
(P76,000.00), defendant’ refused to pay . . . without any valid reason’. Plaintiff prays for
judgment ordering defendant to pay the abovementioned P76,000.00 plus due interest
thereon, plus 25% of the amount of the award as attorney’s fees.

"In the Answer, defendant interposed, inter alia, by way of special and affirmative defenses
that plaintiff ha[d] no cause of action against defendant; that there was a breach of
contract by plaintiff who in bad faith paid Ekman, knowing that the two units of hydraulic
loaders had been delivered to defendant after the expiry date of subject LC; and that in
view of the breach of contract, defendant offered to return to plaintiff the two units of
hydraulic loaders, ‘presently still with the defendant’ but plaintiff refused to take
possession thereof.

"The trial court’s ruling that plaintiff [was] entitled to recover from defendant the amount of
P76,000.00 was based on its following findings/conclusions: (1) under the contract of sale
of the five loaders between Ekman and defendant, upon Ekman’s delivery to, and
acceptance by, defendant of the two remaining units of the five loaders, defendant
became liable to Ekman for the payment of said two units. However, as defendant did not
pay Ekman, the latter pressed plaintiff for the payment of said two loaders in the amount
of P76,000.00. In the honest belief that it was still under obligation to Ekman for said
amount, considering that Ekman had presented all the necessary documents, plaintiff
voluntarily paid the said amount to Ekman. Plaintiff’s . . . voluntary and lawful act of
payment g[a]ve rise to a quasi-contract between plaintiff and defendant; and if defendant
should escape liability for said amount, the result would be to allow defendant to enrich
itself at plaintiff’s expense . . .. SEHTA.
". . .. While defendant, indeed offered to return the two loaders to plaintiff, . . . this offer was
made 3 years after defendant’s receipt of the goods, when plaintiff pressed for payment.
By said voluntary acceptance of the two loaders, estoppel works against defendant who
should have refused delivery of, and/or immediately offered to return, the goods.

"Accordingly, judgment was rendered in favor of the plaintiff and against the defendant . . ." 6

The CA Ruling

The CA rejected petitioner’s imputation of bad faith and negligence to respondent bank for
paying for the two hydraulic loaders, which had been delivered after the expiration of the
subject letter of credit. The appellate court pointed out that petitioner received the
equipment after the letter of credit had expired. "To absolve defendant from liability for the
price of the same," the CA explained, "is to allow it to get away with its unjust enrichment
at the expense of the plaintiff."cralaw virtua1aw library

Hence, this Petition. 7

Issues

Petitioner presents the following issues for resolution:jgc:chanrobles.com.ph

"1. Whether or not it is proper for a banking institution to pay a letter of credit which has long
expired or been cancelled.

"2. Whether or not respondent courts were correct in their conclusion that there was a
consummated sale between petitioner and Ekman Co.

"3. Whether or not Respondent Court of Appeals was correct in evading the issues raised in
the appeal that under the trust receipt, petitioner was merely the depositary of private
respondent with respect to the goods covered by the trust receipt." 8

The Court’s Ruling

We affirm the Court of Appeals, but lower the interest rate to only 6 percent and delete the
award of attorney’s fees.

First Issue:chanrob1es virtual 1aw library

Efficacy of Letter of Credit

Petitioner asserts that respondent bank was negligent in paying for the two hydraulic
loaders, when it no longer had any obligation to do so in view of the expiration and
cancellation of the Letter of Credit.

Petitioner Rodzssen Supply Inc. applied for and obtained an irrevocable 30-day domestic
Letter of Credit from Far East Bank and Trust Company Inc. on January 15, 1979, in favor
of Ekman and Company Inc., in order to finance the purchase of five units of hydraulic
loaders in the amount of P190,000. Originally set to expire on February 15, 1979, the
subject Letter of Credit was amended several times to extend its validity until October 16,
1979.
The Letter of Credit expressly restricted the negotiation to respondent bank and specifically
instructed Ekman and Company Inc. to tender the following documents: (1) delivery
receipt duly acknowledged by the buyer, (2) accepted draft, and (3) duly signed
commercial invoices. Likewise, the instrument contained a provision with regard to its
expiration date. 9

For the first three hydraulic loaders that were delivered, the bank paid the amount specified
in the letter of credit. The present dispute pertains only to the last two hydraulic loaders.

Clearly, the bank paid Ekman when the former was no longer bound to do so under the
subject Letter of Credit. The records show that respondent paid the latter P76,000 for the
last two hydraulic loaders on March 14, 1980, 10 five months after the expiration of the
Letter of Credit on October 16, 1979. 11 In fact, on December 27, 1979, the bank had
informed Rodzssen of the cancellation of the commercial paper and credited P22,800 to
the account of the latter. The amount represented the marginal deposit, which petitioner
had been required to put up for the unnegotiated portion of the Letter of Credit — P76,000
for the two hydraulic loaders. 12

The subject Letter of Credit had become invalid upon the lapse of the period fixed therein. 13
Thus, respondent should not have paid Ekman; it was not obliged to do so. In the same
vein, of no moment was Ekman’s presentation, within the prescribed period, of all the
documents necessary for collection, as the Letter of Credit had already expired and had
in fact been cancelled.chanrob1es virtua1 1aw 1ibrary

Second Issue:chanrob1es virtual 1aw library

Was Petitioner Liable to Respondent?

Be that as it may, we agree with the CA that petitioner should pay respondent bank the
amount the latter expended for the equipment belatedly delivered by Ekman and
voluntarily received and kept by petitioner.

Respondent bank’s right to seek recovery from petitioner is anchored, not upon the
inefficacious Letter of Credit, but on Article 2142 of the Civil Code which reads as
follows:jgc:chanrobles.com.ph

"Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-
contract to the end that no one shall be unjustly enriched or benefited at the expense of
another."cralaw virtua1aw library

Indeed, equitable considerations behoove us to allow recovery by Respondent. True, it erred

in paying Ekman, but petitioner itself was not without fault in the transaction. It must be
noted that the latter had voluntarily received and kept the loaders since October 1979.

Petitioner claims that it accepted the late delivery of the equipment, only because it was
bound to accept it under the company’s trust receipt arrangement with respondent bank.

Granting that petitioner was bound under such arrangement to accept the late delivery of the
equipment, we note its unexplained inaction for almost four years with regard to the status
of the ownership or possession of the loaders. Bewildering was its lack of action to
validate the ownership and possession of the loaders, as well as its stolidity over the
purported failed sales transaction. Significant too is the fact that it formalized its offer to
return the two pieces of equipment only after respondent’s demand for payment, which
came more than three years after it accepted delivery.
When both parties to a transaction are mutually negligent in the performance of their
obligations, the fault of one cancels the negligence of the other and, as in this case, their
rights and obligations may be determined equitably under the law proscribing unjust
enrichment.

Payment of Interest

We, however, disagree with both the CA and the trial court’s imposition of 12 percent interest
on the sum to be paid by petitioner. In Eastern Shipping Lines v. CA, 14 the Court laid
down the following guidelines in the imposition of interest:chanrob1es virtua1 1aw 1ibrary

"x x x

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."cralaw virtua1aw library

Although the sum of money involved in this case was payable to a bank, the present factual
milieu clearly shows that it was not a loan or forbearance of money. Thus, pursuant to
established jurisprudence and Article 2009 of the Civil Code, petitioner is bound to pay
interest at 6 percent per annum, computed from April 7, 1983, the time respondent bank
demanded payment from petitioner. From the finality of the judgment until its satisfaction,
the interest shall be 12 percent per annum.

Attorney’s Fees

Considering that negligence is imputable to both parties, both should bear their respective
costs of the suit. We also delete the award of attorney’s fees in favor of respondent bank.
15

WHEREFORE, the Petition is DENIED and the assailed Decision of the Court of Appeals
AFFIRMED with the following MODIFICATIONS:chanrob1es virtual 1aw library

1. Petitioner Rodzssen Supply Co., Inc. is ORDERED to reimburse Respondent Far East
Bank and Trust Co., Inc. P76,000 plus interest thereon at the rate of 6 percent per annum
computed from April 7, 1983. After this judgment becomes final, the interest shall be 12
percent per annum.chanrob1es virtua1 1aw 1ibrary

2. The award of attorney’s fees in favor of respondent is DELETED.

3. No pronouncement as to costs.
SO ORDERED.

9. Iloilo Traders Finance. Inc. vs. Heirs of Oscar Soriano, Jr. (404 SCRA 67)

FIRST DIVISION

G.R. No. 149683. June 16, 2003

ILOILO TRADERS FINANCE INC., Petitioner, v. HEIRS OF OSCAR SORIANO JR., and
MARTA L. SORIANO, Respondents.

DECISION

VITUG, J.:

On 23 October 1979 and 29 February 1980, the spouses Oscar Soriano and Marta Soriano
executed two promissory notes, secured by real property mortgages, in favor of petitioner
Iloilo Traders Finance, Inc. (ITF). When the Sorianos defaulted on the notes, ITF, on 23
June 1981, moved for the extrajudicial foreclosure of the mortgages. Evidently, in order to
forestall the foreclosure, respondent spouses filed, on 27 August 1981, a complaint for
Declaration of a Void Contract, Injunction and Damages. On 06 January 1982, the trial
court issued a writ of preliminary injunction to suspend the public sale of the hypothecated
property. On 16 August 1983, the parties entered into an Amicable Settlement and, after
affixing their signatures thereon, submitted the agreement before the court. Instead of
approving forthwith the amicable settlement, the trial court required the parties to first give
some clarifications on a number of items. The order read in part -

Paragraph 4 of the compromise agreement dated August 16, 1983 states: That the plaintiffs
waive any claims, counterclaims, attorneys fees or damages that they may have against
herein defendants.

Plaintiffs and defendant Iloilo Traders Finance, Inc., are directed to clarify whether the words
herein defendants include defendants Bernadette Castellano and the provincial sheriff of
Iloilo.

If the plaintiffs desire to dismiss the complaint against defendants Castellano and the
provincial sheriff of Iloilo, they should state it categorically and in writing.

Furthermore, the Court wants to know from the plaintiffs and defendant Iloilo Traders
Finance, Inc., if the writ of preliminary injunction issued on January 6, 1982 should be
lifted as to all three defendants.

The clarification herein sought after by the Court shall be made in writing and signed by the
parties concerned, assisted by their respective attorneys.

This Order shall be complied with within a period of ten (10) days from notice
hereof.1cräläwvirtualibräry

The parties failed to comply with the court order. Resultantly, the trial court disapproved the
amicable settlement and set the case for pre-trial. Nothing much could be gleaned from
the records about what might have transpired next not until seven years later when the
Soriano couple filed a motion to submit anew the amicable settlement. The motion was
opposed by ITF on the ground that the amount expressed in the settlement would no
longer be accurate considering the lapse of seven years, implying in a way that it could be
amendable thereto if the computation were to be revised. The trial court denied the
 Soriano motion. Significantly, while the order of denial was made on the thesis that the
debtor spouses, without the consent of ITF, could not unilaterally resurrect the amicable
settlement, the trial court, nevertheless, made the following observations -

x x x (T)hat in relation to the disapproved Amicable Settlement, the intention of ITF to agree
and abide by the provisions thereof, as evidenced by the signatures thereto of its
President and counsels, cannot be ignored. That intention pervades to the present time
since the disapproval by the court pertains only to a technicality which in no way intruded
into the substance of the agreement reached by the parties. Such being the case, the
Amicable Settlement had novated the original agreement of that parties as embodied in
the promissory note. The rights and obligations of the parties, therefore, at this time
should be based on the provisions of the amicable settlement, these should pertain to the
principal amount as of that date which the parties pegged at P431,200.00 and the legal
rate of interest thereon.

The foregoing should however be a good issue in another forum, not in the present
case.2cräläwvirtualibräry

Taking cue from the court order, the Sorianos withdrew their complaint and, on 16 October
1991, filed a case for novation and specific performance, docketed Civil Case No. 20047,
before the Regional Trial Court, Branch 37, of Iloilo City. The case ultimately concluded
with a finding made by the trial court in favor of herein respondents. On appeal to it, the
Court of Appeals affirmed the judgment of the court a quo.

The parties have submitted that the issue focuses on whether or not the amicable settlement
entered into between the parties has novated the original obligation and also, as they
would correctly suggest in their argument, on whether the proposed terms of the amicable
settlement were carried out or have been rendered inefficacious.

The amicable settlement read -

COME NOW plaintiffs and defendant Iloilo Traders Finance, Inc., assisted by their respective
undersigned counsels and to this Honorable Court most respectfully submit the following
Amicable Settlement, thus:

1. That the total of the two (2) accounts of plaintiff to herein defendant as of June 30, 1983 is
Two Hundred Ninety Thousand Six Hundred Ninety One Pesos (P290,691.00) of which
amount P10,691.00 shall be paid by plaintiffs to herein defendant at the time of the
signing of this Amicable Settlement;

2. That to this amount of P290,691.00 shall be added P151,200.00 by way of interest for 36
months thus making a total of Four Hundred Thirty One Thousand Two Hundred Pesos
(P431,200.00);

3. That this amount of P431,200.00 shall be paid by plaintiffs to herein defendant in 36

monthly installments as follows, the first installment at P12,005.00 shall be paid on or
before August 16, 1983 and the 2nd to 36th installments at P11,977.00 shall be paid on
the 15th day of each month thereafter until fully paid;

4. That the plaintiffs waive any claims, counterclaims, attorneys fees or damages that they
may have against herein defendants;

5. That should plaintiffs fail to comply with the terms of this Amicable Settlement the
preliminary injunction issued in the case shall be immediately dissolved and the
foreclosure and public auction sale of the properties of the plaintiffs subject of the
 mortgage to defendant shall immediately take place and the corresponding writ of
execution shall issue from this Court;

6. That this Amicable Settlement is submitted as the basis for decision in this case.

WHEREFORE, it is respectfully prayed of this Honorable Court that the foregoing Amicable
Settlement be approved.3cräläwvirtualibräry

Novation may either be extinctiv or modificatory, much being dependent on the nature of the
change and the intention of the parties. Extinctive novation is never presumed; there must
be an express intention to novate;4 in cases where it is implied, the acts of the parties
must clearly demonstrate their intent to dissolve the old obligation as the moving
consideration for the emergence of the new one.5 Implied novation necessitates that the
incompatibility between the old and new obligation be total on every point such that the
old obligation is completely superseded by the new one. The test of incompatibility is
whether they can stand together, each one having an independent existence; if they
cannot and are irreconcilable, the subsequent obligation would also extinguish the first.

An extinctive novation would thus have the twin effects of, first, extinguishing an existing
obligation and, second, creating a new one in its stead. This kind of novation
presupposes a confluence of four essential requisites: (1) a previous valid obligation, (2)
an agreement of all parties concerned to a new contract, (3) the extinguishment of the old
obligation, and (4) the birth of a valid new obligation.6 Novation is merely modificatory
where the change brought about by any subsequent agreement is merely incidental to the
main obligation (e.g., a change in interest rates7 or an extension of time to pay8); in this
instance, the new agreement will not have the effect of extinguishing the first but would
merely supplement it or supplant some but not all of its provisions.

An amicable settlement or a compromise is a contract whereby the parties, by making

reciprocal concessions, avoid a litigation or put an end to one already commenced.9 It
may be judicial or extrajudicial; the absence of court approval notwithstanding,10 the
agreement can become the source of rights and obligations of the parties.

It would appear that the arrangement reached by the Soriano spouses and ITF would have
the original obligation of respondent spouses on two promissory notes for the sums of
P150,000.00 and P80,000.00, both secured by real estate mortgages, impliedly modified.
The amicable settlement contained modificatory changes. Thus, (1) it increased the
indebtedness of the Soriano spouses, merely due to accruing interest, from P290,691.00
to P431,200.00; (2) it extended the period of payment and provided for new terms of
payment; and (3) it provided for a waiver of claims, counterclaims, attorneys fees or
damages that the debtor-spouses might have against their creditor, but the settlement
neither cancelled, nor materially altered the usual clauses in, the real estate mortgages,
e.g., the foreclosure of the mortgaged property in case of default.

Verily, the parties entered into the agreement basically to put an end to Civil Case No. 14007
then pending before the Regional Trial Court.11 Concededly, the provisions of the
settlement were beneficial to the respondent couple. The compromise extended the terms
of payment and implicitly deferred the extrajudicial foreclosure of the mortgaged property.
It was well to the interest of respondent spouses to ensure its judicial approval; instead,
they went to ignore the order of the trial court and virtually failed to make any further
appearance in court. This conduct on the part of respondent spouses gave petitioner the
correct impression that the Sorianos did not intend to be bound by the compromise
settlement, and its non-materialization negated the very purpose for which it was
executed.
Given the circumstances, the provisions of Article 2041 of the Civil Code come in point -

If one of the parties fails or refuses to abide by the compromise, the other party may either
enforce the compromise or regard it as rescinded and insist upon his original demand.

As so well put in Diongzon vs. Court of Appeals,[12] a supposed new agreement is deemed
not to have taken effect where a debtor never complied with his undertaking. In such a
case, the other party is given the option to enforce the provisions of the amicable
settlement or to rescind it13 and may insist upon the original demand without the
necessity for a prior judicial declaration of rescission.14cräläwvirtualibräry

WHEREFORE, the decision of the Court of Appeals in C.A. G.R. CV No. 46910, affirming
that of the court a quo, is REVERSED and SET ASIDE, and another is entered dismissing
the complaint in Civil Case No. 20047 before the Regional Trial Court, Branch 37, of Iloilo
City. No costs.

SO ORDERED.

10. Philippine Savings Bank vs. Mañalac, Jr. (457 SCRA 203)

FIRST DIVISION

[G.R. NO. 145441. April 26, 2005]

PHILIPPINE SAVINGS BANK, Petitioners, v. SPS. RODOLFO C. MAÑALAC, JR. and

ROSITA P. MAÑALAC, Respondents.

DECISION

YNARES-SANTIAGO, J.:

This appeal by certiorari1 assails the decision of the Court of Appeals dated October 12,
2000 in CA-G.R. CV No. 502922 which affirmed with modifications the decision of the
Regional Trial Court of Pasig, Branch 1613 dated April 27, 1993 in Civil Case No. 53967
which ordered the annulment of the Certificate of Sale involving TCT Nos. N-1347, N-
1348 and N-3267 issued in favor of petitioner Philippine Savings Bank (PSBank) and
dismissing Land Registration Case No. R-3951.

The facts as culled from the records are as follows:

On October 8, 1976, respondent-spouses Rodolfo and Rosita Mañalac (Mañalac) obtained a

P1,300,000.00 loan from PSBank covered by promissory note L.C. No. 76-269. As
security for the loan, Mañalac executed a Real Estate Mortgage in favor of the bank over
8 parcels of land covered by TCT Nos. 417012, N-1348, N-1347, N-3267, N-8552, N-
6162, 469843 and 343593.

In view of Mañalac's inability to pay the loan installments as they fell due, their loan
obligation was restructured on October 13, 1977. Accordingly, Mañalac signed another
promissory note denominated as LC No. 77-232 for P1,550,000.00 payable to the order
of PSBank with interest rate of 19% annum.4 To secure the payment of the restructured
loan, Mañalac executed a Real Estate Mortgage dated October 13, 1977 in favor of
PSBank over the same aforementioned 8 real properties.

On March 5, 1979, Mañalac and spouses Igmidio and Dolores Galicia, with the prior consent
of PSBank,5 entered into a Deed of Sale with Assumption of Mortgage involving 3 of the
 mortgaged properties covered by TCT Nos. N-6162 (now N-36192), N-8552 (now TCT
No. N-36193), and 469843 (now TCT No. N-36194). The Deed of Sale with Assumption of
Mortgage contained the following stipulations:

1. The VENDEES shall assume as they hereby assume as part of the purchase price, the
amount of P550,000.00, representing the portion of the mortgaged obligation of the
VENDORS in favor of the Philippine Savings Bank, which is secured by that Real Estate
Mortgage contract mentioned in the Second Whereas Clause hereof covering among
others the above-described parcels of land under the same terms and conditions as
originally constituted.

2. The VENDORS hereby warrant valid title to, and peaceful possession of the property
herein sold subject to the encumbrance hereinbefore mentioned.

3. This instrument shall be subject to the Consent of the Philippine Savings Bank.

4. All expenses relative to this instrument including documentary stamps, registration fees,
transfer taxes and other charges shall be for the account of the VENDEES.6

Thereafter, the 3 parcels of land purchased by the Galicias, together with another property,
were in turn mortgaged by them to secure a P2,600,000.00 loan which they obtained from
PSBank. Specifically, the mortgaged properties include TCT Nos. N-36192, N-36193, N-
36194, (formerly TCT Nos. N-6162, N-8552 and 469843, respectively) and 75584.7 This
loan is evidenced by Promissory Note LC-79-36.8

On March 12, 1979, Mañalac paid PSBank P919,698.11 which corresponds to the value of
the parcels of land covered by TCT Nos. N-36192, N-36193, and N-36194, now
registered in the name of the spouses Galicia. Accordingly, PSBank executed a partial
release of the real estate mortgage covered by the aforesaid properties.9

On August 25, 1981, the spouses Galicia obtained a second loan from PSBank in the
amount of P3,250,000.00 for which they executed Promissory Note LC No. 81-108. They
also executed a Real Estate Mortgage in favor of the bank covering TCT Nos. N-36192,
N-36193, N-36194, 75584 and 87690.10

Since Mañalac defaulted again in the payment of their loan installments and despite
repeated demands still failed to pay their past due obligation which now amounted to
P1,804,241.76, PSBank filed with the Office of the Provincial Sheriff of Rizal a petition for
extrajudicial foreclosure of their 5 remaining mortgaged properties, specifically those
covered by TCT Nos. 417012, N-1347, N-1348, N-3267, and 343593.

Despite several postponements of the public auction sale, Mañalac still failed to pay their
mortgage obligation. Thus, on May 3, 1982, the foreclosure sale of the subject real
properties proceeded with PSBank as the highest bidder in the amount of
P2,185,225.76.11 On the same date, the Certificate of Sale was issued by the Acting Ex-
Oficio Provincial Sheriff for Rizal province.12

Mañalac failed to redeem the properties hence titles thereto were consolidated in the name
of PSBank and new certificates of title were issued in favor of the bank, namely, TCT No.
N-79995 in lieu of TCT No. 343593; TCT No. 79996 in lieu of TCT No. 417012; TCT No.
79997 in lieu of TCT No. N-3267; TCT No. N-79998 in lieu of TCT No. N-1347; and TCT
No. N-79999 in lieu of TCT No. N-1348.
On December 16, 1983, Mañalac wrote the Chairman of the Board of PSBank asking
information on their request for the partial release of the mortgage covered by TCT Nos.
N-36192, N-36193, N-36194, and 417012 (now TCT No. 79996). TCT Nos. 36192,
36193, and 36194 were registered in the name of the Galicias, and mortgaged to partially
secure their outstanding loan from the bank. Enclosed in the same letter is a Cashier's
Check for P1,200,000.00 with a notation which reads:

Re: Payment to effect release of TCT Nos. N-36192, 36193, and 36194 under loan account
of Spouses Igmedio and Dolores Galicia; and TCT No. 417012 under Loan Account of
Spouses Rodolfo and Rosita Mañalac.

Upon receipt of the check, PSBank's Acting Manager Lino L. Macasaet issued a typewritten
receipt with the inscription:13

Received from Sps. Rodolfo and Rosita Mañalac and Sps. Igmidio and Dolores Galicia PCIB
Check No. 002133 in the amount of One Million Two Hundred Thousand Pesos Only
(P1,200,000.00).

It is understood however, that receipt of said check is not a commitment on the part of the
Bank to release the Four (4) TCTs requested to be released on your letter dated 19
December 1983.

On December 19, 1983, the bank applied P1,000,000.00 of the P1,200,000.00 to the loan
account of the Galicias as payment for the arrearages in interest and the remaining
P200,000.00 thereof was applied to the expenses relative to the account of Mañalac.14

On May 23, 1985, the bank sold the property covered by TCT No. 79996 (previously TCT
No. 343593) to Ester Villanueva who thereafter sold it to Mañalac. On October 30, 1985,
the land covered by TCT No. 79995 was sold by the bank to Teresita Jalbuena.

Thereafter, or on October 20, 1986, Mañalac instituted an action for damages, docketed as
Civil Case No. 53967, before the Regional Trial Court of Pasig, Branch 161, against
PSBank and its officers namely Cezar Valenzuela, Alfredo Barretto and Antonio Viray,
and spouses Alejandro and Teresita Jalbuena.

The bank also filed a petition, docketed as LRC Case No. R-3951, before the Regional Trial
Court of Pasig, Branch 159, for the issuance of a writ of possession against the properties
covered by TCT Nos. N-79997, N-79998, and N-79999 (formerly TCT Nos. N-3267, N-
1347, and N-1348) and the ejectment of the respondents.

In an order dated January 2, 1989, the trial court consolidated LRC Case No. R-3951 with
Civil Case No. 53967. On April 27, 1993, a judgment was rendered the dispositive portion
of which reads:

WHEREFORE, judgment is hereby rendered ordering:

For Civil Case No. 53967

1. The annulment of the Certificate of Sale issued by the acting Ex-Oficio Provincial Sheriff
of Rizal on May 3, 1982 involving Transfer Certificate of Title Nos. N-1347-Rizal, N-1348-
Rizal and N-3267-Rizal and the Contract to Sell executed by defendant PSB in favor of
defendants spouses Alejandro Jalbuena and Teresita Jalbuena involving the real property
covered by Transfer Certificate of Title No. N-79995; and,
2. The dismissal of counterclaims for lack of merit.

For Land Registration Case No. R-3951

3. The dismissal of the petition for lack of merit.

No costs.

SO ORDERED.15

The Court of Appeals affirmed with modification the decision of the trial court, the decretal
portion of which reads:

WHEREFORE, the decision appealed from is AFFIRMED with the modification that the
defendant-appellant Philippine Savings Bank is directed to indemnify the plaintiffs-
appellants in the amount of Two Hundred Thousand Pesos (200,000.00) each as moral
damages. Costs against the defendant-appellant bank.

SO ORDERED.16

Hence the instant petition which raises the following issues:

THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY

PROBABLY NOT IN ACCORD WITH LAW AND WITH APPLICABLE DECISIONS OF
THIS HONORABLE COURT WHEN IT:

A.] HELD THAT THE GENERAL RULE WITH RESPECT TO THE ISSUANCE OF WRITS
OF POSSESSION SHOULD NOT BE APPLIED IN THIS CASE, AND WHAT SHOULD
INSTEAD BE APPLIED IS THE EXCEPTION ENUNCIATED IN VACA v. COURT OF
APPEALS, 234 SCRA 146;

b.] UPHELD THE CONSOLIDATION OF CIVIL CASE NO. 53967 WITH LRC CASE NO.
3951 WHEN PROCEDURALLY THOSE TWO PROCEEDINGS COULD SCARCELY BE
CONSOLIDATED;

c.] HELD THAT SUPPOSEDLY THERE WAS A NOVATION "OF THE PREVIOUS
MORTGAGE OF THE PROPERTIES" WHEN IN TRUTH AND IN FACT THE
MORTGAGE HAD ALREADY CEASED TO EXIST, THAT IS, THE MORTGAGE HAD
BECOME NULL AND VOID AS THE SAME HAD BEEN FORECLOSED BY
PETITIONER;

d.] AWARDED MORAL DAMAGES IN FAVOR OF RESPONDENTS.17

Petitioner claims that the Court of Appeals erred in sustaining the trial court's order
consolidating Civil Case No. 53967 with LRC Case No. R-3951, arguing that consolidation
is proper only when it involves actions, which means an ordinary suit in a court of justice
by which one party prosecutes another for the enforcement or protection of a right, or a
prevention of a wrong. Citing A.G. Development Corp. v. Court of Appeals,18 petitioner
posits that LRC Case No. R-3951, being summary in nature and not being an action
within the contemplation of the Rules of Court, should not have been consolidated with
Civil Case No. 53967.

We do not agree. In Active Wood Products Co., Inc. v. Court of Appeals,19 this Court also
deemed it proper to consolidate Civil Case No. 6518-M, which was an ordinary civil
 action, with LRC Case No. P-39-84, which was a petition for the issuance of a writ of
possession. The Court held that while a petition for a writ of possession is an ex parte
proceeding, being made on a presumed right of ownership, when such presumed right of
ownership is contested and is made the basis of another action, then the proceedings for
writ of possession would also become groundless. The entire case must be litigated and if
need be must be consolidated with a related case so as to thresh out thoroughly all
related issues.

In the same case, the Court likewise rejected the contention that under the Rules of Court
only actions can be consolidated. The Court held that the technical difference between an
action and a proceeding, which involve the same parties and subject matter, becomes
insignificant and consolidation becomes a logical conclusion in order to avoid confusion
and unnecessary expenses with the multiplicity of suits.

In the instant case, the consolidation of Civil Case No. 53967 with LRC Case No. R-3951 is
more in consonance with the rationale behind the consolidation of cases which is to
promote a more expeditious and less expensive resolution of the controversy than if they
were heard independently by separate branches of the trial court. Hence, the technical
difference between Civil Case No. 53967 and LRC Case No. R-3951 must be disregarded
in order to promote the ends of justice.

Petitioner also contends that the Court of Appeals committed reversible error in applying the
doctrine laid down in Barican v. Intermediate Appellate Court.20 It insists on the
application of the general rule that it is ministerial upon the court to issue a writ of
possession on the part of the purchaser in a foreclosure sale. It argues that the Barican
doctrine is inapplicable because the sale with assumption of mortgage in the present case
involves properties different from those which are the subject of the writ of possession
while in Barican, the assumption of mortgage refers to the same property subject of the
writ of possession. We recall that the Court of Appeals applied the Barican doctrine based
on the following factual similarities between the two cases, thus:21

"In Civil Case No. C-11232, the petitioner-spouses claim ownership of the foreclosed
property against the respondent bank and Nicanor Reyes to whom the former sold the
property by negotiated sale; the complaint alleged that the DBP knew the assumption of
mortgage between the mortgagors and the petitioner-spouses and the latter have paid to
the respondent bank certain amounts to update the loan balances of the mortgagors and
transfer and restructuring fees which payments are duly receipted; the petitioner-spouses
were already in possession of the property since September 28, 1979 and long before the
respondent bank sold the same property to respondent Nicanor Reyes on October 28,
1984; and the respondent bank never took physical possession of the property." In a
similar manner, the following facts were duly established in the case at bench: 1. The
petition for issuance of the writ of possession was only filed sometime in May 1988
although the right of redemption lapsed as early as May 7, 1983; 2. Appellant bank
neither obtained physical possession of the properties nor did they file any action for
ejectment against the plaintiffs-appellants; 3. On December 16, 1983, the plaintiffs-
appellants issued a check in favor of the appellant bank to effect the release of TCT Nos.
36192, 36193, 36194 and 417012 which was applied by appellant bank to the plaintiffs-
appellants' account and that of the Galicias and; 4. Appellant bank executed a Deed of
Absolute Sale over TCT No. 79996 (formerly TCT No. 417012) on May 23, 1985 in favor
of a certain Elsa Calusa Villanueva who thereafter sold it back to the plaintiffs-appellants.
Hence, the same ruling in the Barican case should be applied, that is, "the obligation of a
court to issue a writ of possession in favor of the purchaser in a foreclosure of mortgage
case ceases to be ministerial.
We agree with the petitioner. While indeed the two cases demonstrate palpable similarities,
the Court of Appeals overlooked essential differences that would render the Barican
doctrine inapplicable to the instant case. In Barican, the issuance of the writ of possession
was deferred because a pending action for the declaration of ownership over the
foreclosed property was made by an adverse claimant who was in possession of the
subject property. Clearly, the rights of the third parties, who are plaintiffs in the pending
civil case, would be adversely affected with the implementation of the writ.

In the instant case, the petitioner bank became the absolute owner of the properties subject
of the writ of possession, after they were foreclosed, and titles thereto were consolidated
in the name of the bank. It sufficiently established its ownership over the parcels of land
subject of the writ of possession, by presenting in evidence the Certificate of Sale,22
Affidavit of Consolidation of Ownership,23 and copies of new TCTs of the foreclosed
properties in the name of the petitioner.24 Unlike in Barican, the ownership of the
foreclosed properties are not open to question the ownership thereof being established by
competent evidence.

Moreover, as earlier pointed out by the petitioner, the parcels of land subject of the writ of
possession are different from those sold by the petitioner bank to Jalbuena and
Villanueva. Hence, unlike in the Barican case, the implementation of the writ will not affect
the rights of innocent third persons.

On the issue of novation, the Court of Appeals held that novation occurred when PSBank
applied P1,000,000.00 of the P1,200,000.00 PCIB Check No. 002133 tendered by
Mañalac to the loan account of the Galicias and the remaining P200,000.00 thereof to
Mañalac's account. It held that when the bank applied the amount of the check in
accordance with the instructions contained therein, there was novation of the previous
mortgage of the properties. It further observed that the bank was fully aware that the
issuance of the check was conditional hence, when it made the application thereof, it
agreed to be bound by the conditions imposed by Mañalac.25

Novation is the extinguishment of an obligation by the substitution or change of the

obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object or principal conditions, or, by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor. In order for novation
to take place, the concurrence of the following requisites is indispensable:

1. There must be a previous valid obligation,

2. There must be an agreement of the parties concerned to a new contract,

3. There must be the extinguishment of the old contract, and

4. There must be the validity of the new contract.26

The elements of novation are patently lacking in the instant case. Mañalac tendered a check
for P1,200,000.00 to PSBank for the release of 4 parcels of land covered by TCT Nos. N-
36192, 36193, and 36194, under the loan account of the Galicias and 417012 (now TCT
No. 79996) under the loan account of Mañalac. However, while the bank applied the
tendered amount to the accounts as specified by Mañalac, it nevertheless refused to
release the subject properties. Instead, it issued a receipt with a notation that the
acceptance of the check is not a commitment on the part of the bank to release the 4
TCTs as requested by Mañalac.
From the foregoing, it is obvious that there was no agreement to form a new contract by
novating the mortgage contracts of the Mañalacs and the Galicias. In accepting the
check, the bank only acceded to Mañalac's instruction on whose loan accounts the
proceeds shall be applied but rejected the other condition that the 4 parcels of land be
released from mortgage. Clearly, there is no mutual consent to replace the old mortgage
contract with a new obligation. 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.

Novation is never presumed, and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are too clear and
unmistakable. The extinguishment of the old obligation by the new one is a necessary
element of novation, which may be effected either expressly or impliedly. The term
"expressly" means that the contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. Upon the other hand, no specific
form is required for an implied novation, and all that is prescribed by law would be an
incompatibility between the two contracts. While there is really no hard and fast rule to
determine what might constitute to be a sufficient change that can bring about novation,
the touchstone for contrariety, however, would be an irreconcilable incompatibility
between the old and the new obligations.27

A fortiori, 3 of the 4 properties sought to be released from mortgage, namely, TCT Nos. N-
36192, N-36193, and N-36194, have already been sold by Mañalac to Galicia and are
now registered in the name of the latter who thereafter mortgaged the same as security to
a separate loan they obtained from the bank. Thus, without the consent of PSBank as the
mortgagee bank, Mañalac, not being a party to the mortgage contract between the
Galicias and the bank, cannot demand much less impose upon the bank the release of
the subject properties. Unless there is a stipulation to the contrary, the release of the
mortgaged property can only be made upon the full satisfaction of the loan obligation
upon which the mortgage attaches. Unfortunately, Mañalac has not shown that the
P1,000,000.00 was sufficient to cover not only the accrued interests but also the entire
indebtedness of the Galicias to the bank.

Neither can Mañalac be deemed substitute debtor within the contemplation of Article 1293 of
the Civil Code, which states that:

Art. 1293. Novation which consists in substituting a new debtor in the place of the original
one, may be made 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 1237.28

In order to change the person of the debtor, the old one must be expressly released from the
obligation, and the third person or new debtor must assume the former's place in the
relation. Novation is never presumed. Consequently, that which arises from a purported
change in the person of the debtor must be clear and express. It is thus incumbent on
Mañalac to show clearly and unequivocally that novation has indeed taken place.29 In
Magdalena Estates Inc. v. Rodriguez,30 we held that "the mere fact that the creditor
receives a guaranty or accepts payments from a third person who has agreed to assume
the obligation, when there is no agreement that the first debtor shall be released from
responsibility, does not constitute a novation, and the creditor can still enforce the
obligation against the original debtor."

Mañalac has not shown by competent evidence that they were expressly taking the place of
Galicia as debtor, or that the latter were being released from their solidary obligation. Nor
 was it shown that the obligation of the Galicias was being extinguished and replaced by a
new one. The existence of novation must be shown in clear and unmistakable terms.

Likewise, we hold that Mañalac cannot demand to repurchase the foreclosed piece of land
covered by TCT No. 417012 (now TCT No. 79996) from the bank. Its foreclosure and the
consolidation of ownership in favor of the bank and the resultant cancellation of mortgage
effectively cancelled the mortgage contract between Mañalac and the bank. Insofar as
TCT No. 417012 is concerned, there is no more existing mortgage to speak of. As the
absolute owner of the foreclosed property, the petitioner has the discretion to reject or
accept any offer to repurchase.

Granting arguendo that a new obligation was established with the acceptance by the bank of
the PCIB Check and its application to the loan account of Mañalac on the condition that
TCT No. 417012 would be released, this new obligation however could not supplant the
October 13, 1977 real estate mortgage executed by Mañalac, which, by all intents and
purposes, is now a defunct and non-existent contract. As mentioned earlier, novation
cannot be presumed.

We however sustain the award of moral damages. While the bank had the legal basis to
withhold the release of the mortgaged properties, nevertheless, it was not forthright and
was lacking in candor in dealing with Mañalac. In accepting the PCIB Check, the bank
knew fully well that the payment was conditioned on its commitment to release the
specified properties. At the first instance, the bank should not have accepted the check or
returned the same had it intended beforehand not to honor the request of Mañalac. In
accepting the check and applying the proceeds thereof to the loan accounts of Mañalac
and Galicia, the former were led to believe that the bank was favorably acting on their
request. In justifying the award of moral damages, the Court of Appeals correctly
observed that "there is the unjustified refusal of the appellant bank to make a definite
commitment while profiting from the proceeds of the check by applying it to the principal
and the interest of the Galicias and plaintiff-appellants."31

Moral damages are meant to compensate the claimant for any physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation and similar injuries unjustly caused. Although incapable of pecuniary
estimation, the amount must somehow be proportional to and in approximation of the
suffering inflicted. Moral damages are not punitive in nature and were never intended to
enrich the claimant at the expense of the defendant. There is no hard-and-fast rule in
determining what would be a fair and reasonable amount of moral damages, since each
case must be governed by its own peculiar facts. Trial courts are given discretion in
determining the amount, with the limitation that it "should not be palpably and
scandalously excessive." Indeed, it must be commensurate to the loss or injury
suffered.32

Respondent Rosita Mañalac has adequately established the factual basis for the award of
moral damages when she testified that she suffered mental anguish and social
humiliation as a result of the failure of the bank to release the subject properties or its
failure to return the check despite its refusal to make a definite commitment to comply
with the clearly-stated object of the payment.

Respondent Rodolfo Mañalac however is not similarly entitled to moral damages. The award
of moral damages must be anchored on a clear showing that he actually experienced
mental anguish, besmirched reputation, sleepless nights, wounded feelings or similar
injury. There was no better witness to this experience than respondent himself. Since
respondent Rodolfo Mañalac failed to testify on the witness stand, the trial court did not
have any factual basis to award moral damages to him.33 Indeed, respondent Rodolfo
 Mañalac should have taken the witness stand and should have testified on the mental
anguish, serious anxiety, wounded feelings and other emotional and mental suffering he
purportedly suffered to sustain his claim for moral damages. Mere allegations do not
suffice; they must be substantiated by clear and convincing proof.

Nevertheless, we find the award of P200,000.00 excessive and unconscionable. As we said,

moral damages are not intended to enrich the complainant at the expense of the
defendant. Rather, these are awarded only to enable the injured party to obtain "means,
diversions or amusements" that will serve to alleviate the moral suffering that resulted by
reason of the defendant's culpable action. The purpose of such damages is essentially
indemnity or reparation, not punishment or correction. In other words, the award thereof is
aimed at a restoration within the limits of the possible, of the spiritual status quo ante;
therefore, it must always reasonably approximate the extent of injury and be proportional
to the wrong committed.34 The award of P50,000.00 as moral damages is reasonable
under the circumstances.35

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated
October 12, 2000 in CA-G.R. CV No. 50292 is REVERSED and SETASIDE. The
petitioner Philippine Savings Bank is DIRECTED to indemnify respondent Rosita P.
Mañalac in the amount of P50,000.00 as moral damages. The Regional Trial Court of the
City of Pasig, Branch 161 is ORDERED to issue a writ of possession in favor of Philippine
Savings Bank. No costs.

SO ORDERED.

11. Ramos vs. Sarao (461 SCRA 103)

THIRD DIVISION

[G.R. NO. 149756 : February 11, 2005]

MYRNA RAMOS, Petitioner, v. SUSANA S. SARAO and JONAS RAMOS, Respondents.

DECISION

PANGANIBAN, J.:

Although the parties in the instant case denominated their contract as a "DEED OF SALE
UNDER PACTO DE RETRO," the "sellers" have continued to possess and to reside at
the subject house and lot up to the present. This evident factual circumstance was plainly
overlooked by the trial and the appellate courts, thereby justifying a review of this case.
This overlooked fact clearly shows that the petitioner intended merely to secure a loan,
not to sell the property. Thus, the contract should be deemed an equitable mortgage.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the August
31, 2001 Decision2 of the Court of Appeals (CA) in CA-GR CV No. 50095, which
disposed as follows:

"WHEREFORE, the instant appeal is DISMISSED for lack of merit. The decision dated
January 19, 1995 of the Regional Trial Court, Branch 145, Makati City is AFFIRMEDin
toto."3

The Facts
On February 21, 1991, Spouses Jonas Ramos and Myrna Ramos executed a contract over
their conjugal house and lot in favor of Susana S. Sarao for and in consideration of
P1,310,430.4 Entitled "DEED OF SALE UNDER PACTO DE RETRO," the contract, inter
alia, granted the Ramos spouses the option to repurchase the property within six months
from February 21, 1991, for P1,310,430 plus an interest of 4.5 percent a month.5 It was
further agreed that should the spouses fail to pay the monthly interest or to exercise the
right to repurchase within the stipulated period, the conveyance would be deemed an
absolute sale.6

On July 30, 1991, Myrna Ramos tendered to Sarao the amount of P1,633,034.20 in the form
of two manager's checks, which the latter refused to accept for being allegedly
insufficient.7 On August 8, 1991, Myrna filed a Complaint for the redemption of the
property and moral damages plus attorney's fees.8 The suit was docketed as Civil Case
No. 91-2188 and raffled to Branch 145 of the Regional Trial Court (RTC) of Makati City.
On August 13, 1991, she deposited with the RTC two checks that Sarao refused to
accept.9

On December 21, 1991, Sarao filed against the Ramos spouses a Petition "for consolidation
of ownership in pacto de retro sale" docketed as Civil Case No. 91-3434 and raffled to
Branch 61 of the RTC of Makati City.10 Civil Case Nos. 91-2188 and 91-3434 were later
consolidated and jointly tried before Branch 145 of the said Makati RTC.11

The two lower courts narrated the trial in this manner:

"x x x Myrna [Ramos] testified as follows: On February 21, 1991, she and her husband
borrowed from Sarao the amount of P1,234,000.00, payable within six (6) months, with an
interest thereon at 4.5% compounded monthly from said date until August 21, 1991, in
order for them to pay [the] mortgage on their house. For and in consideration of the said
amount, they executed a deed of sale under a [pacto de retro] in favor of Sarao over their
conjugal house and lot registered under TCT No. 151784 of the Registry of Deeds of
Makati (Exhibit A). She further claimed that Sarao will keep the torrens title until the lapse
of the 6-month period, in which case she will redeem [the] subject property and the
torrens title covering it. When asked why it was the amount of P1,310,430 instead of the
aforestated amount which appeared in the deed, she explained that upon signing of the
deed in question, the sum of P20,000.00 representing attorney's fees was added, and its
total amount was multiplied with 4.5% interest rate, so that they could pay in advance the
compounded interest. She also stated that although the market value of the subject
property as of February 1991 [was] calculated to [be] more or less P10 million, it was
offered [for] only P1,310,430.00 for the reason that they intended nothing but to redeem
the same. In May 1991, she wrote a letter to Atty. Mario Aguinaldo requesting him to give
a computation of the loan obligation, and [expressed] her intention to redeem the subject
property, but she received no reply to her letter. Instead, she, through her husband,
secured directly from Sarao a handwritten computation of their loan obligation, the total of
which amount[ed] to P1,562,712.14. Later, she sent several letters to Sarao, [furnishing]
Atty. Aguinaldo with copies, asking them for the updated computation of their loan
obligation as of July 1991, but [no reply was again received]. During the hearing of
February 17, 1992, she admitted receiving a letter dated July 23, 1991 from Atty.
Aguinaldo which show[ed] the computation of their loan obligation [totaling] to
P2,911,579.22 (Exhs. 6, 6-A). On July 30, 1991, she claimed that she offered the
redemption price in the form of two (2) manager's checks amounting to P1,633,034.20
(Exhs. H-1 & H-2) to Atty. Aguinaldo, but the latter refused to accept them because they
[were] not enough to pay the loan obligation. Having refused acceptance of the said
checks covering the redemption price, on August 13, 1991 she came to Court to consign
the checks (Exhs. L-4 and L-5). Subsequently, she proceeded to the Register of Deeds to
 cause the annotation of lis pendens on TCT No. 151784 (Exh. B-1-A). Hence, she filed
the x x x civil case against Sarao.

"On the other hand, Sarao testified as follows: On February 21, 1991, spouses Ramos
together with a certain Linda Tolentino and her husband, Nestor Tolentino approached
her and offered transaction involv[ing a] sale of property[. S]he consulted her lawyer, Atty.
Aguinaldo, and on the same date a corresponding deed of sale under pacto de retro was
executed and signed (Exh. 1) . Later on, she sent, through her lawyer, a demand letter
dated June 10, 1991 (Exh. 6) in view of Myrna's failure to pay the monthly interest of 4.5%
as agreed upon under the deed[. O]n June 14, 1991 Jonas replied to said demand letter
(Exh. 8); in the reply Jonas admitted that he no longer ha[d] the capacity to redeem the
property and to pay the interest. In view of the said reply of Jonas, [Sarao] filed the
corresponding consolidation proceedings. She [further claimed] that before filing said
action she incurred expenses including payment of real estate taxes in arrears, x x x
transfer tax and capital [gains] tax, and [expenses] for [the] consolidated proceedings, for
which these expenses were accordingly receipted (Exhs. 6, 6-1 to 6-0). She also
presented a modified computation of the expenses she had incurred in connection with
the execution of the subject deed (Exh. 9). She also testified that Myrna did not tender
payment of the correct and sufficient price for said real property within the 6-month period
as stipulated in the contract, despite her having been shown the computation of the loan
obligation, inclusive of capital gains tax, real estate tax, transfer tax and other expenses.
She admitted though that Myrna has tendered payment amounting to P1,633,034.20 in
the form of two manager's checks, but these were refused acceptance for being
insufficient. She also claimed that several letters (Exhs. 2, 4 and 5) were sent to Myrna
and her lawyer, informing them of the computation of the loan obligation inclusive of said
expenses. Finally, she denied the allegations made in the complaint that she allied herself
with Jonas, and claimed that she ha[d] no knowledge about said allegation."12

After trial, the RTC dismissed the Complaint and granted the prayer of Sarao to consolidate
the title of the property in her favor.13 Aggrieved, Myrna elevated the case to the CA.

Ruling of the Court of Appeals

The appellate court sustained the RTC's finding that the disputed contract was a bonafide
pacto de retro sale, not a mortgage to secure a loan.14 It ruled that Myrna Ramos had
failed to exercise the right of repurchase, as the consignation of the two manager's
checks was deemed invalid. She allegedly failed (1) to deposit the correct repurchase
price and (2) to comply with the required notice of consignation.15

Hence, this Petition.16

The Issues

Petitioner raises the following issues for our consideration:

"1. Whether or not the honorable appellate court erred in ruling the subject Deed of Sale
under Pacto de Retro was, and is in reality and under the law an equitable mortgage;

"2. Whether or not the honorable appellate court erred in affirming the ruling of the court a
quo that there was no valid tender of payment of the redemption price neither [sic] a valid
consignation in the instant case; andcralawlibrary

"3. Whether or not [the] honorable appellate court erred in affirming the ruling of the court a
quo denying the claim of petitioner for damages and attorney's fees."17
The Court's Ruling

The Petition is meritorious in regard to Issues 1 and 2.

First Issue:

A Pacto de Retro Sale

or an Equitable Mortgage?

Respondent Sarao avers that the herein Petition should have been dismissed outright,
because petitioner (1) failed to show proof that she had served a copy of it to the Court of
Appeals and (2) raised questions of fact that were not proper issues in a petition under
Rule 45 of the Rules of Court.18 This Court, however, disregarded the first ground;
otherwise, substantial injustice would have been inflicted on petitioner. Since the Court of
Appeals is not a party here, failure to serve it a copy of the Petition would not violate any
right of respondent. Service to the CA is indeed mentioned in the Rules, but only to inform
it of the pendency of the appeal before this Court.

As regards Item 2, there are exceptions to the general rule barring a review of questions of
fact.19 The Court reviewed the factual findings in the present case, because the CA had
manifestly overlooked certain relevant and undisputed facts which, after being
considered, justified a different conclusion.20

Pacto de Retro Sale Distinguished

from Equitable Mortgage

The pivotal issue in the instant case is whether the parties intended the contract to be a
bona fide pacto de retro sale or an equitable mortgage.

In a pacto de retro, ownership of the property sold is immediately transferred to the vendee a
retro, subject only to the repurchase by the vendor a retro within the stipulated period.21
The vendor a retro's failure to exercise the right of repurchase within the agreed time
vests upon the vendee a retro, by operation of law, absolute title to the property.22 Such
title is not impaired even if the vendee a retro fails to consolidate title under Article 1607
of the Civil Code.23

On the other hand, an equitable mortgage is a contract that - - although lacking the formality,
the form or words, or other requisites demanded by a statute - - nevertheless reveals the
intention of the parties to burden a piece or pieces of real property as security for a
debt.24 The essential requisites of such a contract are as follows: (1) the parties enter
into what appears to be a contract of sale, but (2) their intention is to secure an existing
debt by way of a mortgage.25 The nonpayment of the debt when due gives the
mortgagee the right to foreclose the mortgage, sell the property, and apply the proceeds
of the sale to the satisfaction of the loan obligation.26

This Court has consistently decreed that the nomenclature used by the contracting parties to
describe a contract does not determine its nature.27 The decisive factor is their intention -
- as shown by their conduct, words, actions and deeds - - prior to, during, and after
executing the agreement.28 This juristic principle is supported by the following provision
of law:

Article 1371. In order to judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered.29
Even if a contract is denominated as a pacto de retro, the owner of the property may still
disprove it by means of parol evidence,30 provided that the nature of the agreement is
placed in issue by the pleadings filed with the trial court.31

There is no single conclusive test to determine whether a deed absolute on its face is really
a simple loan accommodation secured by a mortgage.32 However, the law enumerates
several instances that show when a contract is presumed to be an equitable mortgage, as
follows:

Article 1602. The contract shall be presumed to be an equitable mortgage, in any of the
following cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending
the period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is
that the transaction shall secure the payment of a debt or the performance of any other
obligation.

In any of the foregoing cases, any money, fruits, or other benefit to be received by the
vendee as rent or otherwise shall be considered as interest which shall be subject to the
usury laws.33

Furthermore, a contract purporting to be a pacto de retro is construed as an equitable

mortgage when the terms of the document and the surrounding circumstances so
require.34 The law discourages the use of a pacto de retro, because this scheme is
frequently used to circumvent a contract known as a pactum commissorium. The Court
has frequently noted that a pacto de retro is used to conceal a contract of loan secured by
a mortgage.35 Such construction is consistent with the doctrine that the law favors the
least transmission of rights.36

Equitable Mortgage Presumed

to be Favored by Law

Jurisprudence has consistently declared that the presence of even just one of the
circumstances set forth in the forgoing Civil Code provision suffices to convert a contract
to an equitable mortgage.37 Article 1602 specifically states that the equitable
presumption applies to any of the cases therein enumerated.

In the present factual milieu, the vendor retained possession of the property allegedly
sold.38 Petitioner and her children continued to use it as their residence, even after Jonas
Ramos had abandoned them.39 In fact, it remained as her address for the service of
court orders and copies of Respondent Sarao's pleadings.40

The presumption of equitable mortgage imposes a burden on Sarao to present clear

evidence to rebut it. Corollary to this principle, the favored party need not introduce proof
to establish such presumption; the party challenging it must overthrow it, lest it persist.41
 To overturn that prima facie fact that operated against her, Sarao needed to adduce
substantial and credible evidence to prove that the contract was a bona fide pacto de
retro. This evidentiary burden she miserably failed to discharge.

Contrary to Sarao's bare assertions, a meticulous review of the evidence reveals that the
alleged contract was executed merely as security for a loan.

The July 23, 1991 letter of Respondent Sarao's lawyer had required petitioner to pay a
computed amount - - under the heading "House and Lot Loan"42 - - to enable the latter to
repurchase the property. In effect, respondent would resell the property to petitioner, once
the latter's loan obligation would have been paid. This explicit requirement was a clear
indication that the property was to be used as security for a loan.

The loan obligation was clear from Sarao's evidence as found by the trial court, which we
quote:

"x x x [Sarao] also testified that Myrna did not tender payment of the correct and sufficient
price for said real property within the 6-month period as stipulated in the contract, despite
her having been shown the computation of the loan obligation, inclusive of capital gains
tax, real estate tax, transfer tax and other expenses. She admitted though that Myrna has
tendered payment amounting to P1,633,034.20 in the form of two manager's checks, but
these were refused acceptance for being insufficient. She also claimed that several letters
(Exhs. 2, 4 and 5) were sent to Myrna and her lawyer, informing them of the computation
of the loan obligation inclusive of said expenses. x x x."43

Respondent herself stressed that the pacto de retro had been entered into on the very same
day that the property was to be foreclosed by a commercial bank.44 Such circumstance
proves that the spouses direly needed funds to avert a foreclosure sale. Had they
intended to sell the property just to realize some profit, as Sarao suggests,45 they would
not have retained possession of the house and continued to live there. Clearly, the
spouses had entered into the alleged pacto de retro sale to secure a loan obligation, not
to transfer ownership of the property.

Sarao contends that Jonas Ramos admitted in his June 14, 1991 letter to her lawyer that the
contract was a pacto de retro.46 That letter, however, cannot override the finding that the
pacto de retro was executed merely as security for a loan obligation. Moreover, on May
17, 1991, prior to the transmittal of the letter, petitioner had already sent a letter to
Sarao's lawyer expressing the former's desire to settle the mortgage on the property.47
Considering that she had already denominated the transaction with Sarao as a mortgage,
petitioner cannot be prejudiced by her husband's alleged admission, especially at a time
when they were already estranged.48

Inasmuch as the contract between the parties was an equitable mortgage, Respondent
Sarao's remedy was to recover the loan amount from petitioner by filing an action for the
amount due or by foreclosing the property.49

Second Issue:

Propriety of Tender of
Payment and Consignation

Tender of payment is the manifestation by debtors of their desire to comply with or to pay
their obligation.50 If the creditor refuses the tender of payment without just cause, the
debtors are discharged from the obligation by the consignation of the sum due.51
Consignation is made by depositing the proper amount to the judicial authority, before
 whom the tender of payment and the announcement of the consignation shall be
proved.52 All interested parties are to be notified of the consignation.53 Compliance with
these requisites is mandatory.54

The trial and the appellate courts held that there was no valid consignation, because
petitioner had failed to offer the correct amount and to provide ample consignation notice
to Sarao.55 This conclusion is incorrect.

Note that the principal loan was P1,310,430 plus 4.5 per cent monthly interest compounded
for six months. Expressing her desire to pay in the fifth month, petitioner averred that the
total amount due was P1,633,034.19, based on the computation of Sarao herself.56 The
amount of P2,911,579.22 that the latter demanded from her to settle the loan obligation
was plainly exorbitant, since this sum included other items not covered by the agreement.
The property had been used solely as secure ty for the P1,310,430 loan; it was therefore
improper to include in that amount payments for gasoline and miscellaneous expenses,
taxes, attorney's fees, and other alleged loans. When Sarao unjustly refused the tender of
payment in the amount of P1,633,034.20, petitioner correctly filed suit and consigned the
amount in order to be released from the latter's obligation.

The two lower courts cited Article 1257 of the Civil Code to justify their ruling that petitioner
had failed to notify Respondent Sarao of the consignation. This provision of law states
that the obligor may be released, provided the consignation is first announced to the
parties interested in the fulfillment of the obligation.

The facts show that the notice requirement was complied with. In her August 1, 1991 letter,
petitioner said that should the respondent fail to accept payment, the former would
consign the amount.57 This statement was an unequivocal announcement of
consignation. Concededly, sending to the creditor a tender of payment and notice of
consignation - - which was precisely what petitioner did - - may be done in the same
act.58

Because petitioners' consignation of the amount of P1,633,034.20 was valid, it produced the
effect of payment.59 "The consignation, however, has a retroactive effect, and the
payment is deemed to have been made at the time of the deposit of the thing in court or
when it was placed at the disposal of the judicial authority."60 "The rationale for
consignation is to avoid making the performance of an obligation more onerous to the
debtor by reason of causes not imputable to him."61

Third Issue:

Moral Damages and Attorney's Fees

Petitioner seeks moral damages in the amount of P500,000 for alleged sleepless nights and
anxiety over being homeless.62 Her bare assertions are insufficient to prove the legal
basis for granting any award under Article 2219 of the Civil Code.63 Verily, an award of
moral damages is uncalled for, considering that it was Respondent Sarao's
accommodation that settled the earlier obligation of the spouses with the commercial
bank and allowed them to retain ownership of the property.

Neither have attorney's fees been shown to be proper.64 As a general rule, in the absence
of a contractual or statutory liability therefor, sound public policy frowns on penalizing the
right to litigate.65 This policy applies especially to the present case, because there is a
need to determine whether the disputed contract was a pacto de retro sale or an
equitable mortgage.
Other Matters

In a belated Manifestation filed on October 19, 2004, Sarao declared that she was the
"owner of the one-half share of Jonas Ramos in the conjugal property," because of his
alleged failure to file a timely appeal with the CA.66 Such declaration of ownership has no
basis in law, considering that the present suit being pursued by petitioner pertains to a
mortgage covering the whole property.

Besides, it is basic that defenses and issues not raised below cannot be considered on
appeal.67

The Court, however, observes that Respondent Sarao paid real property taxes amounting to
P67,567.10 to halt the auction sale scheduled for October 8, 2004, by the City of
Muntinlupa.68 Her payment was made in good faith and benefited petitioner. Accordingly,
Sarao should be reimbursed; otherwise, petitioner would be unjustly enriched,69 under
Article 2175 of the Civil Code which provides:

Art. 2175. Any person who is constrained to pay the taxes of another shall be entitled to
reimbursement from the latter.

WHEREFORE, the Petition is partly GRANTED and the assailed Decision SET ASIDE.
Judgment is hereby rendered:

(1) DECLARING (a) the disputed contract as an equitable mortgage, (b) petitioner's loan to
Respondent Sarao to be in the amount of P1,633,034.19 as of July 30, 1991; and (c) the
mortgage on the property - - covered by TCT No. 151784 in the name of the Ramos
spouses and issued by the Register of Deeds of Makati City - -as discharged

(2) ORDERING the RTC to release to Sarao the consigned amount of P1,633,034.19

(3) COMMANDING Respondent Sarao to return to petitioner the owner's copy of TCT No.
151784 in the name of the Ramos spouses and issued by the Register of Deeds of
Makati City

(4) DIRECTING the Register of Deeds of Makati City to cancel Entry No. 24057, the
annotation appearing on TCT No. 151784

(5) ORDERING petitioner to pay Sarao in the amount of P67,567.10 as reimbursement for
real property taxes

No pronouncement as to costs.

SO ORDERED.

12. Filinvest land vs. Court of Appeals (470 SCRA 57)

SECOND DIVISION

G.R. No.138980 September 20, 2005

FILINVEST LAND, INC., Petitioners,

vs.
HON. COURT OF APPEALS, PHILIPPINE AMERICAN GENERAL INSURANCE
COMPANY, and PACIFIC EQUIPMENT CORPORATION, Respondent.
DECISION

CHICO-NAZARIO, J.:

This is a petition for review on certiorari of the Decision1 of the Court of Appeals dated 27
May 1999 affirming the dismissal by the Regional Trial Court of Makati, Branch 65,2 of the
complaint for damages filed by Filinvest Land, Inc. (Filinvest) against herein private
respondents Pacific Equipment Corporation (Pecorp) and Philippine American General
Insurance Company.

The essential facts of the case, as recounted by the trial court, are as follows:

On 26 April 1978, Filinvest Land, Inc. ("FILINVEST", for brevity), a corporation engaged in
the development and sale of residential subdivisions, awarded to defendant Pacific
Equipment Corporation ("PACIFIC", for brevity) the development of its residential
subdivisions consisting of two (2) parcels of land located at Payatas, Quezon City, the
terms and conditions of which are contained in an "Agreement". (Annex A, Complaint). To
guarantee its faithful compliance and pursuant to the agreement, defendant Pacific
posted two (2) Surety Bonds in favor of plaintiff which were issued by defendant
Philippine American General Insurance ("PHILAMGEN", for brevity). (Annexes B and C,
Complaint).

Notwithstanding three extensions granted by plaintiff to defendant Pacific, the latter failed to
finish the contracted works. (Annexes G, I and K, Complaint). On 16 October 1979,
plaintiff wrote defendant Pacific advising the latter of its intention to takeover the project
and to hold said defendant liable for all damages which it had incurred and will incur to
finish the project. (Annex "L", Complaint).

On 26 October 1979, plaintiff submitted its claim against defendant Philamgen under its
performance and guarantee bond (Annex M, Complaint) but Philamgen refused to
acknowledge its liability for the simple reason that its principal, defendant Pacific, refused
to acknowledge liability therefore. Hence, this action.

In defense, defendant Pacific claims that its failure to finish the contracted work was due to
inclement weather and the fact that several items of finished work and change order
which plaintiff refused to accept and pay for caused the disruption of work. Since the
contractual relation between plaintiff and defendant Pacific created a reciprocal obligation,
the failure of the plaintiff to pay its progressing bills estops it from demanding fulfillment of
what is incumbent upon defendant Pacific. The acquiescence by plaintiff in granting three
extensions to defendant Pacific is likewise a waiver of the former’s right to claim any
damages for the delay. Further, the unilateral and voluntary action of plaintiff in preventing
defendant Pacific from completing the work has relieved the latter from the obligation of
completing the same.

On the other hand, Philamgen contends that the various amendments made on the principal
contract and the deviations in the implementation thereof which were resorted to by
plaintiff and co-defendant Pacific without its (defendant Philamgen’s) written consent
thereto, have automatically released the latter from any or all liability within the purview
and contemplation of the coverage of the surety bonds it has issued. Upon agreement of
the parties to appoint a commissioner to assist the court in resolving the issues
confronting the parties, on 7 July 1981, an order was issued by then Presiding Judge
Segundo M. Zosa naming Architect Antonio Dimalanta as Court Commissioner from
among the nominees submitted by the parties to conduct an ocular inspection and to
determine the amount of work accomplished by the defendant Pacific and the amount of
work done by plaintiff to complete the project.
On 28 November 1984, the Court received the findings made by the Court Commissioner. In
arriving at his findings, the Commissioner used the construction documents pertaining to
the project as basis. According to him, no better basis in the work done or undone could
be made other than the contract billings and payments made by both parties as there was
no proper procedure followed in terminating the contract, lack of inventory of work
accomplished, absence of appropriate record of work progress (logbook) and inadequate
documentation and system of construction management.

Based on the billings of defendant Pacific and the payments made by plaintiff, the work
accomplished by the former amounted to ₱11,788,282.40 with the exception of the last
billing (which was not acted upon or processed by plaintiff) in the amount of ₱844,396.42.
The total amount of work left to be accomplished by plaintiff was based on the original
contract amount less value of work accomplished by defendant Pacific in the amount of
₱681,717.58 (12,470,000-11,788,282.42).

As regards the alleged repairs made by plaintiff on the construction deficiencies, the Court
Commissioner found no sufficient basis to justify the same. On the other hand, he found
the additional work done by defendant Pacific in the amount of ₱477,000.00 to be in
order.

On 01 April 1985, plaintiff filed its objections to the Commissioner’s Resolution on the
following grounds:

a) Failure of the commissioner to conduct a joint survey which according to the latter is
indispensable to arrive at an equitable and fair resolution of the issues between the
parties;

b) The cost estimates of the commissioner were based on pure conjectures and contrary to
the evidence; and,

c) The commissioner made conclusions of law which were beyond his assignment or
capabilities.

In its comment, defendant Pacific alleged that the failure to conduct joint survey was due to
plaintiff’s refusal to cooperate. In fact, it was defendant Pacific who initiated the idea of
conducting a joint survey and inventory dating back 27 November 1983. And even
assuming that a joint survey were conducted, it would have been an exercise in futility
because all physical traces of the actual conditions then obtaining at the time relevant to
the case had already been obliterated by plaintiff.

On 15 August 1990, a Motion for Judgment Based on the Commissioner’s Resolution was
filed by defendant Pacific.

On 11 October 1990, plaintiff filed its opposition thereto which was but a rehash of objections
to the commissioner’s report earlier filed by said plaintiff.3

On the basis of the commissioner’s report, the trial court dismissed Filinvest’s complaint as
well as Pecorp’s counterclaim. It held:

In resolving this case, the court observes that the appointment of a Commissioner was a
joint undertaking among the parties. The findings of facts of the Commissioner should
therefore not only be conclusive but final among the parties. The court therefore agrees
with the commissioner’s findings with respect to
1. Cost to repair deficiency or defect – ₱532,324.02

2. Unpaid balance of work done by defendant - ₱1,939,191.67

3. Additional work/change order (due to defendant) – ₱475,000.00

The unpaid balance due defendant therefore is ₱1,939,191.67. To this amount should be
added additional work performed by defendant at plaintiff’s instance in the sum of
₱475,000.00. And from this total of ₱2,414,191.67 should be deducted the sum of
₱532,324.01 which is the cost to repair the deficiency or defect in the work done by
defendant. The commissioner arrived at the figure of ₱532,324.01 by getting the average
between plaintiff’s claim of ₱758,080.37 and defendant’s allegation of ₱306,567.67. The
amount due to defendant per the commissioner’s report is therefore ₱1,881,867.66.

Although the said amount of ₱1,881,867.66 would be owing to defendant Pacific, the fact
remains that said defendant was in delay since April 25, 1979. The third extension
agreement of September 15, 1979 is very clear in this regard. The pertinent paragraphs
read:

a) You will complete all the unfinished works not later than Oct. 15, 1979. It is agreed and
understood that this date shall DEFINITELY be the LAST and FINAL extension & there
will be no further extension for any cause whatsoever.

b) We are willing to waive all penalties for delay which have accrued since April 25, 1979
provided that you are able to finish all the items of the contracted works as per revised
CPM; otherwise you shall continue to be liable to pay the penalty up to the time that all
the contracted works shall have been actually finished, in addition to other damages
which we may suffer by reason of the delays incurred.

Defendant Pacific therefore became liable for delay when it did not finish the project on the
date agreed on October 15, 1979. The court however, finds the claim of ₱3,990,000.00 in
the form of penalty by reason of delay (₱15,000.00/day from April 25, 1979 to Jan. 15,
1980) to be excessive. A forfeiture of the amount due defendant from plaintiff appears to
be a reasonable penalty for the delay in finishing the project considering the amount of
work already performed and the fact that plaintiff consented to three prior extensions.

The foregoing considered, this case is dismissed. The counterclaim is likewise dismissed.

No Costs.4

The Court of Appeals, finding no reversible error in the appealed decision, affirmed the
same.

Hence, the instant petition grounded solely on the issue of whether or not the liquidated
damages agreed upon by the parties should be reduced considering that: (a) time is of
the essence of the contract; (b) the liquidated damages was fixed by the parties to serve
not only as penalty in case Pecorp fails to fulfill its obligation on time, but also as
indemnity for actual and anticipated damages which Filinvest may suffer by reason of
such failure; and (c) the total liquidated damages sought is only 32% of the total contract
price, and the same was freely and voluntarily agreed upon by the parties.

At the outset, it should be stressed that as only the issue of liquidated damages has been
elevated to this Court, petitioner Filinvest is deemed to have acquiesced to the other
matters taken up by the courts below. Section 1, Rule 45 of the 1997 Rules of Court
states in no uncertain terms that this Court’s jurisdiction in petitions for review on certiorari
 is limited to "questions of law which must be distinctly set forth."5 By assigning only one
legal issue, Filinvest has effectively cordoned off any discussion into the factual issue
raised before the Court of Appeals.6 In effect, Filinvest has yielded to the decision of the
Court of Appeals, affirming that of the trial court, in deferring to the factual findings of the
commissioner assigned to the parties’ case. Besides, as a general rule, factual matters
cannot be raised in a petition for review on certiorari. This Court at this stage is limited to
reviewing errors of law that may have been committed by the lower courts.7 We do not
perceive here any of the exceptions to this rule; hence, we are restrained from conducting
further scrutiny of the findings of fact made by the trial court which have been affirmed by
the Court of Appeals. Verily, factual findings of the trial court, especially when affirmed by
the Court of Appeals, are binding and conclusive on the Supreme Court.8 Thus, it is
settled that:

(a) Based on Pecorp’s billings and the payments made by Filinvest, the balance of work to
be accomplished by Pecorp amounts to ₱681,717.58 representing 5.47% of the contract
work. This means to say that Pecorp, at the time of the termination of its contract,
accomplished 94.53% of the contract work;

(b) The unpaid balance of work done by Pecorp amounts to ₱1,939,191.67;

(c) The additional work/change order due Pecorp amounts to ₱475,000.00;

(d) The cost to repair deficiency or defect, which is for the account of Pecorp, is
₱532,324.02; and

(e) The total amount due Pecorp is ₱1,881,867.66.

Coming now to the main matter, Filinvest argues that the penalty in its entirety should be
respected as it was a product of mutual agreement and it represents only 32% of the
₱12,470,000.00 contract price, thus, not shocking and unconscionable under the
circumstances. Moreover, the penalty was fixed to provide for actual or anticipated
liquidated damages and not simply to ensure compliance with the terms of the contract;
hence, pursuant to Laureano v. Kilayco,9 courts should be slow in exercising the authority
conferred by Art. 1229 of the Civil Code.

We are not swayed.

There is no question that the penalty of ₱15,000.00 per day of delay was mutually agreed
upon by the parties and that the same is sanctioned by law. A penal clause is an
accessory undertaking to assume greater liability in case of breach.10 It is attached to an
obligation in order to insure performance11 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.12 Article 1226 of the Civil Code
states:

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 is no 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.

As a general rule, courts are not at liberty to ignore the freedom of the parties to agree on
such terms and conditions as they see fit as long as they are not contrary to law, morals,
 good customs, public order or public policy.13 Nevertheless, courts may equitably reduce
a stipulated penalty in the contract in two instances: (1) if the principal obligation has been
partly or irregularly complied; and (2) even if there has been no compliance if the penalty
is iniquitous or unconscionable in accordance with Article 1229 of the Civil Code which
provides:

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.

In herein case, the trial court ruled that the penalty charge for delay – pegged at ₱15,000.00
per day of delay in the aggregate amount of ₱3,990,000.00 -- was excessive and
accordingly reduced it to ₱1,881,867.66 "considering the amount of work already
performed and the fact that [Filinvest] consented to three (3) prior extensions." The Court
of Appeals affirmed the ruling but added as well that the penalty was unconscionable "as
the construction was already not far from completion." Said the Court of Appeals:

Turning now to plaintiff’s appeal, We likewise agree with the trial court that a penalty interest
of ₱15,000.00 per day of delay as liquidated damages or ₱3,990,000.00 (representing
32% penalty of the ₱12,470,000.00 contract price) is unconscionable considering that the
construction was already not far from completion. Penalty interests are in the nature of
liquidated damages and may be equitably reduced by the courts if they are iniquitous or
unconscionable (Garcia v. Court of Appeals, 167 SCRA 815, Lambert v. Fox, 26 Phil.
588). The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance,
the penalty may also be reduced by the courts if it is iniquitous or unconscionable (Art.
1229, New Civil Code). Moreover, plaintiff’s right to indemnity due to defendant’s delay
has been cancelled by its obligations to the latter consisting of unpaid works.

This Court finds no fault in the cost estimates of the court-appointed commissioner as to the
cost to repair deficiency or defect in the works which was based on the average between
plaintiff’s claim of ₱758,080.37 and defendant’s ₱306,567.67 considering the following
factors: that "plaintiff did not follow the standard practice of joint survey upon take over to
establish work already accomplished, balance of work per contract still to be done, and
estimate and inventory of repair" (Exhibit "H"). As for the cost to finish the remaining
works, plaintiff’s estimates were brushed aside by the commissioner on the reasoned
observation that "plaintiff’s cost estimate for work (to be) done by the plaintiff to complete
the project is based on a contract awarded to another contractor (JPT), the nature and
magnitude of which appears to be inconsistent with the basic contract between defendant
PECORP and plaintiff FILINVEST."14

We are hamstrung to reverse the Court of Appeals as it is rudimentary that the application of
Article 1229 is essentially addressed to the sound discretion of the court.15 As it is settled
that the project was already 94.53% complete and that Filinvest did agree to extend the
period for completion of the project, which extensions Filinvest included in computing the
amount of the penalty, the reduction thereof is clearly warranted.

Filinvest, however, hammers on the case of Laureano v. Kilayco,16 decided in 1915, which
cautions courts to distinguish between two kinds of penalty clauses in order to better
apply their authority in reducing the amount recoverable. We held therein that:

. . . [I]n any case wherein there has been a partial or irregular compliance with the provisions
in a contract for special indemnification in the event of failure to comply with its terms,
courts will rigidly apply the doctrine of strict construction against the enforcement in its
 entirety of the indemnification, where it is clear from the terms of the contract that the
amount or character of the indemnity is fixed without regard to the probable damages
which might be anticipated as a result of a breach of the terms of the contract; or, in other
words, where the indemnity provided for is essentially a mere penalty having for its
principal object the enforcement of compliance with the contract. But the courts will be
slow in exercising the jurisdiction conferred upon them in article 115417 so as to modify
the terms of an agreed upon indemnification where it appears that in fixing such
indemnification the parties had in mind a fair and reasonable compensation for actual
damages anticipated as a result of a breach of the contract, or, in other words, where the
principal purpose of the indemnification agreed upon appears to have been to provide for
the payment of actual anticipated and liquidated damages rather than the penalization of
a breach of the contract. (Emphases supplied)

Filinvest contends that the subject penalty clause falls under the second type, i.e., the
principal purpose for its inclusion was to provide for payment of actual anticipated and
liquidated damages rather than the penalization of a breach of the contract. Thus,
Filinvest argues that had Pecorp completed the project on time, it (Filinvest) could have
sold the lots sooner and earned its projected income that would have been used for its
other projects.

Unfortunately for Filinvest, the above-quoted doctrine is inapplicable to herein case. The
Supreme Court in Laureano instructed that a distinction between a penalty clause
imposed essentially as penalty in case of breach and a penalty clause imposed as
indemnity for damages should be made in cases where there has been neither partial nor
irregular compliance with the terms of the contract. In cases where there has been partial
or irregular compliance, as in this case, there will be no substantial difference between a
penalty and liquidated damages insofar as legal results are concerned.18 The distinction
is thus more apparent than real especially in the light of certain provisions of the Civil
Code of the Philippines which provides in Articles 2226 and Article 2227 thereof:

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.

Thus, we lamented in one case that "(t)here is no justification for the Civil Code to make an
apparent distinction between a penalty and liquidated damages because the settled rule
is that there is no difference between penalty and liquidated damages insofar as legal
results are concerned and that either may be recovered without the necessity of proving
actual damages and both may be reduced when proper."19

Finally, Filinvest advances the argument that while it may be true that courts may mitigate
the amount of liquidated damages agreed upon by the parties on the basis of the extent
of the work done, this contemplates a situation where the full amount of damages is
payable in case of total breach of contract. In the instant case, as the penalty clause was
agreed upon to answer for delay in the completion of the project considering that time is
of the essence, "the parties thus clearly contemplated the payment of accumulated
liquidated damages despite, and precisely because of, partial performance."20 In effect, it
is Filinvest’s position that the first part of Article 1229 on partial performance should not
apply precisely because, in all likelihood, the penalty clause would kick in in situations
where Pecorp had already begun work but could not finish it on time, thus, it is being
penalized for delay in its completion.
The above argument, albeit sound,21 is insufficient to reverse the ruling of the Court of
Appeals. It must be remembered that the Court of Appeals not only held that the penalty
should be reduced because there was partial compliance but categorically stated as well
that the penalty was unconscionable. Otherwise stated, the Court of Appeals affirmed the
reduction of the penalty not simply because there was partial compliance per se on the
part of Pecorp with what was incumbent upon it but, more fundamentally, because it
deemed the penalty unconscionable in the light of Pecorp’s 94.53% completion rate.

In Ligutan v. Court of Appeals,22 we pointed out that the question of whether a penalty is
reasonable or iniquitous can be partly subjective and partly objective as its "resolution
would depend on such factors as, but not necessarily confined to, the type, extent and
purpose of the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of the parties, and
the like, the application of which, by and large, is addressed to the sound discretion of the
court."23

In herein case, there has been substantial compliance in good faith on the part of Pecorp
which renders unconscionable the application of the full force of the penalty especially if
we consider that in 1979 the amount of ₱15,000.00 as penalty for delay per day was quite
steep indeed. Nothing in the records suggests that Pecorp’s delay in the performance of
5.47% of the contract was due to it having acted negligently or in bad faith. Finally, we
factor in the fact that Filinvest is not free of blame either as it likewise failed to do that
which was incumbent upon it, i.e., it failed to pay Pecorp for work actually performed by
the latter in the total amount of ₱1,881,867.66. Thus, all things considered, we find no
reversible error in the Court of Appeals’ exercise of discretion in the instant case.

Before we write finis to this legal contest that had spanned across two and a half decades,
we take note of Pecorp’s own grievance. From its Comment and Memorandum, Pecorp,
likewise, seeks affirmative relief from this Court by praying that not only should the instant
case be dismissed for lack of merit, but that Filinvest should likewise be made to pay
"what the Court Commissioner found was due defendant" in the "total amount of
₱2,976,663.65 plus 12% interest from 1979 until full payment thereof plus attorneys
fees."24 Pecorp, however, cannot recover that which it seeks as we had already denied,
in a Resolution dated 21 June 2000, its own petition for review of the 27 May 1999
decision of the Court of Appeals. Thus, as far as Pecorp is concerned, the ruling of the
Court of Appeals has already attained finality and can no longer be disturbed.

WHEREFORE, premises considered, the Decision of the Court of Appeals dated 27 May
1999 is AFFIRMED. No pronouncement as to costs.

SO ORDERED.

13. San Agustin vs. Court of Appeals (371 SCRA 346)

SECOND DIVISION

G. R. No. 121940 - December 4, 2001

JESUS SAN AGUSTIN, petitioner,

vs.
HON. COURT OF APPEALS and MAXIMO MENEZ, JR., Respondents.

QUISUMBING, J.:
This petition for review on certiorari seeks the reversal of the decision 1 of the Court of
Appeals dated May 19, 1995, affirming that of the Regional Trial Court in LRC Case No.
R-4659.

The relevant facts, as summarized by the CA, are as follows:

On February 11, 1974, the Government Service Insurance System (GSIS) sold to a certain
Macaria Vda. de Caiquep, a parcel of residential land with an area of 168 square meters
located in Rosario, Pasig City and denominated as Lot 13, Block 7, Pcs-5816 of the
Government Service and Insurance System Low Cost Housing Project (GSIS-LCHP). The
sale is evidenced by a Deed of Absolute Sale. 2 On February 19, 1974, the Register of
Deeds of Rizal issued in the name of Macaria Vda. de Caiquep. Transfer Certificate of
Title (TCT) No. 436465 with the following encumbrance annotated at the back of the title:

This Deed of Absolute Sale is subject to the conditions enumerated below which shall be
permanent encumbrances on the property, the violation of any of which shall entitle the
vendor to cancel x x x. this Deed of Absolute Sale and reenter the property;

The purpose of the sale be to aid the vendee in acquiring a lot for himself/themselves and
not to provide him/them with a means for speculation or profit by a future assignment of
his/their right herein acquired or the resale of the lot through rent, lease or subletting to
others of the lot and subject of this deed, and therefore, the vendee shall not sell, convey,
lease or sublease, or otherwise encumber the property in favor of any other party within
five (5) years from the dates final and absolute ownership thereof becomes vested in the
vendee, except in cases of hereditary succession or resale in favor of the vendor:

x x x (emphasis supplied).3

A day after We issuance of TCT No. 436465, or on February 20, 1974, Macaria Vda. de
Caiquep sold the subject lot to private respondent, Maximo Menez, Jr., as evidenced by a
Deed of Absolute Sale (Exhibit "D").4 This deed was notarized but was not registered
immediately upon its execution in 1974 because GSIS prohibited him from registering the
same in view of the five-year prohibition to sell during the period ending in 1979.

Sometime in 1979, for being suspected as a subversive, an Arrest, Search and Seizure
Order (ASSO) was issued against private respondent. Military men ransacked his house
in Cainta, Rizal. Upon learning that he was wanted by the military, he voluntarily
surrendered and was detained for two (2) years. When released, another order for his re-
arrest was issued so he hid in Mindanao for another four (4) years or until March 1984. In
December of 1990, he discovered that the subject TCT was missing. He consulted a
lawyer but the latter did not act immediately on the matter. Upon consulting a new
counsel, an Affidavit of Loss5 was filed with the Register of Deeds of Pasig and a certified
copy6 of TCT No. 436465 was issued. Private respondent also declared the property for
tax purposes and obtained a certification thereof from the Assessor's Office.7

Private respondent sent notices to the registered owner at her address appearing in the title
and in the Deed of Sale. And, with his counsel, he searched for the ,registered owner in
Metro Manila and Rizal and as far as Samar, Leyte, Calbayog City, Tacloban City, and in
Eastern and Northern Samar. However, their search proved futile.

On July 8, 1992 private respondent filed a petition docketed as LRC Case No. R-4659 with
the RTC, Branch 154, Pasig, Metro Manila for the issuance of owner's duplicate copy of
TCT No. 436465 to replace the lost one. To show he was the owner of the contested lot,
he showed the Deed of Absolute Sale, Exhibit "D". The petition was set for hearing and
 the court's order dated July 10, 1992 was published once in Malaya, a nationally
circulated newspaper in the Philippines.8

During the hearing on September 3, 1992, only Menez and his counsel appeared. The
Register of Deeds who was not served notice, and the Office of the Solicitor General and
the Provincial Prosecutor who were notified did not attend.

On September 18, 1992, there being no opposition, Menez presented his evidence ex-parte.
The trial court granted his petition in its decision9 dated September 30, 1992, the
dispositive portion of which reads:

WHEREFORE, the petition is hereby GRANTED and the Registry of Deeds of Pasig, Metro
Manila, is hereby directed to issue a new Owner's Duplicate Copy of Transfer Certificate
of Title No. 436465 based on the original thereon filed in his office which shall contain the
memorandum of encumbrance and an additional memorandum of the fact that it was
issued in place of the lost duplicate and which shall, in all respect, be entitled to like faith
and credit as the original duplicate, for all legal intents and purposes.

Issuance of new owner's duplicate copy shall be made only after this decision shall have
become final and executory. The said lost owner's duplicate is hereby declared null and
void.

Petitioner shall pay all legal fees in connection with the issuance of the new owner's copy.

Let copies of this Order be furnished the petitioner, the registered owner of his given address
in the title, in the deed of sale, and in the tax declaration; the Registry of Deeds of Pasig,
the Office of the Solicitor General; and the Provincial Fiscal of Pasig, Metro Manila.

SO ORDERED.10

On October 13, 1992, herein petitioner, Jesus San Agustin, received a copy of the
abovecited decision. He-claimed this was the first time he became aware of the case of
her aunt, Macaria Vda. de Caiquep who, according to him, died sometime in 1974.
Claiming that he was the present occupant of the property and the heir of Macaria, he
filed his "Motion to Reopen Reconstitution Proceedings''11 on October 27, 1992. On
December 3, 1992, RTC issued an order denying said motion.12

Petitioner filed an appeal with the Court of Appeals, which, as earlier stated, was denied in
its decision of May 19, 1995. Petitioner moved for a reconsideration, but it was denied in
a resolution dated September 11, 1995.13

Thus, the present petition, attributing the following errors to the court a quo:

A.

THE RESPONDENT COURT GRAVELY ERRED IN HOLDING THAT LRC CASE NO. R-
4659 BEING ONLY A PETITION FOR THE ISSUANCE OF A NEW OWNER'S
DUPLICATE OF TITLE, THERE IS NO NEED OF PERSONAL NOTICE TO THE
PETITIONER, THE ACTUAL POSSESSOR [WHO HAS] AND ACTUALLY BEEN
PAYING THE REAL ESTATE TAX, DESPITE PRIVATE RESPONDENT'S KNOWLEDGE
 OF ACTUAL POSSESSION OF AND INTEREST OVER THE PROPERTY COVERED BY
TCT NO. 436465.14

B.

RESPONDENT COURT GRAVELY ERRED IN HOLDING THAT THE SALE BETWEEN

THE PRIVATE RESPONDENT AND MACARIA VDA. DE CAIQUEP IS NOT NULL AND
VOID AND UNDER ARTICLE 1409 OF THE CIVIL CODE SPECIFICALLY PARAGRAPH
(7) THEREOF WHICH REFERS TO CONTRACTS EXPRESSLY PROHIBITED OR
DECLARED VOID BY LAW.15

Considering the above assignment of errors, let us resolve the corresponding issues raised
by petitioner.

The first issue involves private respondent's alleged failure to send notice to petitioner who is
the actual possessor of the disputed lot. Stated briefly, is petitioner entitled to notice? Our
finding is in the negative.

Presidential Decree No. 1529, otherwise known as the "Property Registration Decree" is
decisive. It provides:

Sec. 109. Notice and replacement of lost duplicate certificate. In case of loss or theft of an
owner's duplicate certificate of title, due notice under oath shall be sent by the owner or
by someone in his behalf to the Register of Deeds of the province or city where the land
lies as soon as the loss or theft is discovered. If a duplicate certificate is lost or destroyed,
or cannot be produced by a person applying for the entry of a new certificate to him or
for :the registration of any instrument, a sworn statement of the fact of such loss or
destruction may be filed by the registered owner or other person it interest and registered.

Upon the petition of the registered owner or other person in interest, the court may, after
notice and due hearing, direct the issuance of a new duplicate certificate, which shall
contain a memorandum of the fact that it is issued in place of the lost duplicate certificate,
but shall in all respects be entitled to like faith and credit as the original duplicate, and
shall thereafter be regarded as such for all purposes of this decree.

In Office of Court Administrator vs. Matas, A.M. No. RTJ-92-836, 247 SCRA 9, 16-17 (1995),
we held:

In the case at bar, the respective certificate of title of the properties in question on file with
the Register of Deeds are existing, and it is the owner's copy of the certificate of title that
was alleged to have been lost or destroyed. Thus, it is Section 109 of P.D. 1529 which
was approved on June 11, 1978 that becomes effective and is applicable, a reading of
which shows that it is practically the same as Section 109 of Act No. 496, governing
reconstitution of a duplicate certificate of title lost or destroyed. Consequently, it is
sufficient that the notice under Section 109 is sent to the Register of Deeds and to those
persons who are known to have, or appear to have, an interest in the property as shown
in the Memorandum of encumbrances at the back of the original or transfer certificate of
title on file in the office of the Register of Deeds. From a legal standpoint, there are no
other interested parties who should be notified, except those abovementioned since they
are the only ones who may be deemed to have a claim to the property involved. A person
dealing with registered is not charged with notice of encumbrances not annotated on the
back of the title. (Emphasis supplied.)

Here, petitioner does not appear to have an interest in the property based on the
memorandum of encumbrances annotated at the back of the title. His claim, that he is an
 heir (nephew) of the original owner of the lot covered by the disputed lot and the present
occupant thereof is not annotated in the said memorandum of encumbrances. Neither
was his claim entered on the Certificate of Titles in the name of their original/former
owners on file with the Register of Deeds at the time of the filing or pendency of LRC
Case No. R-4659. Clearly, petitioner is not entitled to notice.

Noteworthy is the fact that there was compliance by private respondent of the RTC's order of
publication of the petition in a newspaper of general circulation. This is sufficient notice of
the petition to the public at large.

Petitioner contends that as possessor or actual occupant of the lot in controversy, he is

entitled under the law to be notified. He relies on Alabang Development Corporation vs.
Valenzuela, G.R. No. L-54094, 116 SCRA 261, 277 (1982)) which held that in
reconstitution proceedings, courts must make sure that indispensable parties, i.e.. the
actual owners and possessors of the lands involved, are duly served with actual and
personal notice of the petition. As pointed out by the appellate court, his reliance on
Alabang is misplaced because the cause of action in that case is based on Republic Act i
No. 26, entitled "An Act Providing A Special Procedure for the Reconstitution of Torrens
Certificate of Title Lost or Destroyed," while the present case is based on Section 109 of
P.D. 1529 as above explained.

Under Republic Act No. 26, reconstitution is validly made only in case the original copy of
the certificate of title with the Register of Deeds is lost or destroyed. And if no notice of
the date of hearing of a reconstitution case is served on a possessor or one having
interest in the property involved, he is deprived of his day in court and the order of
reconstitution is null and void.16 The case at bar is not for reconstitution, but merely for
replacement of lost duplicate certificate.

On the second assigned error, petitioner contends that Exhibit "D" is null and void under
Article 1409 of the Civil Code, specifically paragraph (7),17 because the deed of sale was
executed within the five-year prohibitory period under Commonwealth Act No. 141, as
amended, otherwise known as "The Public Land Act."18

We find petitioner's contention less than meritorious. We agree with respondent court that
the proscription under Com. Act No. 141 on sale within the 5-year restrictive period refers
to homestead lands only. Here the lot in dispute is not a homestead land, as found by the
trial and appellate courts. Said lot is owned by GSIS, under TCT No. 10028 in its
proprietary capacity.

Moreover, as far as the violation of the 5-year restrictive condition imposed by GSIS in its
contract with petitioner's predecessor-in-interest is concerned, it is the GSIS and not
petitioner who had a cause of action against private respondent. Vide the instructive case
of Sarmiento vs. Salud:

The condition that the appellees Sarmiento spouses could not resell the property except to
the People's Homesite and Housing Corporation (PHHC for short) within the next 25
years after appellees' purchasing the lot is manifestly a condition in favor of the PHHC,
and not one in favor of the Sarmiento spouses. The condition conferred no actionable
right on appellees herein, since it operated as a restriction upon their jus disponendi of
the property they bought, and thus limited their right of ownership. It follows that on the
assumption that the mortgage to appellee Salud and the foreclosure sale violated the
condition in the Sarmiento contract, only the PHHC was entitled to invoke the condition
aforementioned, and not the Sarmientos. The validity or invalidity of the sheriff's
foreclosure sale to appellant Salud thus violative of its right of exclusive reacquisition; but
 it (PHHC) also could waive the condition and treat the sale as good, in which event, the
sale can not be assailed for breach of the condition aforestated.19

In this case, the GSIS has not filed any action for the annulment of Exhibit "D", nor for the
forfeiture of the lot in question. In our view, the contract of sale remains valid between the
parties, unless and until annulled in the proper suit filed by the rightful party, the GSIS.
For now, the said contract of sale is binding upon the heirs of Macaria Vda. de Caiquep,
including petitioner who alleges to be one of her heirs, in line with the rule that heirs are
bound by contracts entered into by their predecessors-in-interest.20

We are not unmindful of the social justice policy of R.A. 8291 otherwise known as
"Government Service Insurance Act of 1997" in granting housing assistance to the less-
privileged GSIS members and their dependents payable at an affordable payment
scheme.21 This is the same policy which the 5-year restrictive clause in the contract
seeks to implement by stating in the encumbrance itself annotated at the back of TCT No.
436465 that, "The purpose of the sale is to aid the vendee in acquiring a lot for
himself/themselves and not to provide him/them with a means for speculation or profit by
a future assignment of his/their right herein acquired or the resale of the lot through rent,
lease or subletting to others of the lot and subject of this deed, . . . within five (5) years
from the date final and absolute ownership thereof becomes vested in the vendee, except
in cases of hereditary succession or resale in favor of the vendor."22 However, absent the
proper action taken by the GSIS as the original vendor referred to, the contract between
petitioner's predecessor-in-interest and private respondent deserves to be upheld. For as
pointed out by said private respondent, it is protected by the Constitution under Section
10, Article III, of the Bill of Rights stating that, "No law impairing the obligation of contracts
shall be passed." Much as we would like to see a salutary policy triumph, that provision of
the Constitution duly calls for compliance.

More in point, however, is the fact that, following Sarmiento v. Salud,23 "Even if the
transaction between the original awardee and herein petitioner were wrongful, still, as
between themselves, the purchaser and the seller were both in pari delicto, being
participes criminis as it were." As in Sarmiento, in this case both were aware of the
existence of the stipulated condition in favor of the original seller, GSIS, yet both entered
into an agreement violating said condition and nullifying its effects. Similarly, as Acting
Chief Justice JBL Reyes concluded in Sarmiento, "Both parties being equally guilty,
neither is entitled to complain against the other. Having entered into the transaction with
open eyes, and having benefited from it, said parties should be held in estoppel to assail
and annul their own deliberate acts."

WHEREFORE, the appeal is DENIED, and the decision of the respondent court is
AFFIRMED.

SO ORDERED.

14. Cathay Pacific Airways Ltd. Vs. Vasquez (399 SCRA 207)

FIRST DIVISION

G.R. No. 150843 March 14, 2003

CATHAY PACIFIC AIRWAYS, LTD., petitioner,

vs.
SPOUSES DANIEL VAZQUEZ and MARIA LUISA MADRIGAL VAZQUEZ, respondents.

DAVIDE, JR., C.J.:

Is an involuntary upgrading of an airline passenger’s accommodation from one class to a
more superior class at no extra cost a breach of contract of carriage that would entitle the
passenger to an award of damages? This is a novel question that has to be resolved in
this case.

The facts in this case, as found by the Court of Appeals and adopted by petitioner Cathay
Pacific Airways, Ltd., (hereinafter Cathay) are as follows:

Cathay is a common carrier engaged in the business of transporting passengers and goods
by air. Among the many routes it services is the Manila-Hongkong-Manila course. As part
of its marketing strategy, Cathay accords its frequent flyers membership in its Marco Polo
Club. The members enjoy several privileges, such as priority for upgrading of booking
without any extra charge whenever an opportunity arises. Thus, a frequent flyer booked in
the Business Class has priority for upgrading to First Class if the Business Class Section
is fully booked.

Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa Madrigal Vazquez are
frequent flyers of Cathay and are Gold Card members of its Marco Polo Club. On 24
September 1996, the Vazquezes, together with their maid and two friends Pacita Cruz
and Josefina Vergel de Dios, went to Hongkong for pleasure and business.

For their return flight to Manila on 28 September 1996, they were booked on Cathay’s Flight
CX-905, with departure time at 9:20 p.m. Two hours before their time of departure, the
Vazquezes and their companions checked in their luggage at Cathay’s check-in counter
at Kai Tak Airport and were given their respective boarding passes, to wit, Business Class
boarding passes for the Vazquezes and their two friends, and Economy Class for their
maid. They then proceeded to the Business Class passenger lounge.

When boarding time was announced, the Vazquezes and their two friends went to Departure
Gate No. 28, which was designated for Business Class passengers. Dr. Vazquez
presented his boarding pass to the ground stewardess, who in turn inserted it into an
electronic machine reader or computer at the gate. The ground stewardess was assisted
by a ground attendant by the name of Clara Lai Han Chiu. When Ms. Chiu glanced at the
computer monitor, she saw a message that there was a "seat change" from Business
Class to First Class for the Vazquezes.

Ms. Chiu approached Dr. Vazquez and told him that the Vazquezes’ accommodations were
upgraded to First Class. Dr. Vazquez refused the upgrade, reasoning that it would not
look nice for them as hosts to travel in First Class and their guests, in the Business Class;
and moreover, they were going to discuss business matters during the flight. He also told
Ms. Chiu that she could have other passengers instead transferred to the First Class
Section. Taken aback by the refusal for upgrading, Ms. Chiu consulted her supervisor,
who told her to handle the situation and convince the Vazquezes to accept the upgrading.
Ms. Chiu informed the latter that the Business Class was fully booked, and that since they
were Marco Polo Club members they had the priority to be upgraded to the First Class.
Dr. Vazquez continued to refuse, so Ms. Chiu told them that if they would not avail
themselves of the privilege, they would not be allowed to take the flight. Eventually, after
talking to his two friends, Dr. Vazquez gave in. He and Mrs. Vazquez then proceeded to
the First Class Cabin.

Upon their return to Manila, the Vazquezes, in a letter of 2 October 1996 addressed to
Cathay’s Country Manager, demanded that they be indemnified in the amount of
P1million for the "humiliation and embarrassment" caused by its employees. They also
demanded "a written apology from the management of Cathay, preferably a responsible
 person with a rank of no less than the Country Manager, as well as the apology from Ms.
Chiu" within fifteen days from receipt of the letter.

In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to Cathay’s Country Manager
Argus Guy Robson, informed the Vazquezes that Cathay would investigate the incident
and get back to them within a week’s time.

On 8 November 1996, after Cathay’s failure to give them any feedback within its self-
imposed deadline, the Vazquezes instituted before the Regional Trial Court of Makati City
an action for damages against Cathay, praying for the payment to each of them the
amounts of P250,000 as temperate damages; P500,000 as moral damages; P500,000 as
exemplary or corrective damages; and P250,000 as attorney’s fees.

In their complaint, the Vazquezes alleged that when they informed Ms. Chiu that they
preferred to stay in Business Class, Ms. Chiu "obstinately, uncompromisingly and in a
loud, discourteous and harsh voice threatened" that they could not board and leave with
the flight unless they go to First Class, since the Business Class was overbooked. Ms.
Chiu’s loud and stringent shouting annoyed, embarrassed, and humiliated them because
the incident was witnessed by all the other passengers waiting for boarding. They also
claimed that they were unjustifiably delayed to board the plane, and when they were
finally permitted to get into the aircraft, the forward storage compartment was already full.
A flight stewardess instructed Dr. Vazquez to put his roll-on luggage in the overhead
storage compartment. Because he was not assisted by any of the crew in putting up his
luggage, his bilateral carpal tunnel syndrome was aggravated, causing him extreme pain
on his arm and wrist. The Vazquezes also averred that they "belong to the uppermost and
absolutely top elite of both Philippine Society and the Philippine financial community, [and
that] they were among the wealthiest persons in the Philippine[s]."

In its answer, Cathay alleged that it is a practice among commercial airlines to upgrade
passengers to the next better class of accommodation, whenever an opportunity arises,
such as when a certain section is fully booked. Priority in upgrading is given to its frequent
flyers, who are considered favored passengers like the Vazquezes. Thus, when the
Business Class Section of Flight CX-905 was fully booked, Cathay’s computer sorted out
the names of favored passengers for involuntary upgrading to First Class. When Ms. Chiu
informed the Vazquezes that they were upgraded to First Class, Dr. Vazquez refused. He
then stood at the entrance of the boarding apron, blocking the queue of passengers from
boarding the plane, which inconvenienced other passengers. He shouted that it was
impossible for him and his wife to be upgraded without his two friends who were traveling
with them. Because of Dr. Vazquez’s outburst, Ms. Chiu thought of upgrading the
traveling companions of the Vazquezes. But when she checked the computer, she
learned that the Vazquezes’ companions did not have priority for upgrading. She then
tried to book the Vazquezes again to their original seats. However, since the Business
Class Section was already fully booked, she politely informed Dr. Vazquez of such fact
and explained that the upgrading was in recognition of their status as Cathay’s valued
passengers. Finally, after talking to their guests, the Vazquezes eventually decided to
take the First Class accommodation.

Cathay also asserted that its employees at the Hong Kong airport acted in good faith in
dealing with the Vazquezes; none of them shouted, humiliated, embarrassed, or
committed any act of disrespect against them (the Vazquezes). Assuming that there was
indeed a breach of contractual obligation, Cathay acted in good faith, which negates any
basis for their claim for temperate, moral, and exemplary damages and attorney’s fees.
Hence, it prayed for the dismissal of the complaint and for payment of P100,000 for
exemplary damages and P300,000 as attorney’s fees and litigation expenses.
During the trial, Dr. Vazquez testified to support the allegations in the complaint. His
testimony was corroborated by his two friends who were with him at the time of the
incident, namely, Pacita G. Cruz and Josefina Vergel de Dios.

For its part, Cathay presented documentary evidence and the testimonies of Mr. Yuen; Ms.
Chiu; Norma Barrientos, Comptroller of its retained counsel; and Mr. Robson. Yuen and
Robson testified on Cathay’s policy of upgrading the seat accommodation of its Marco
Polo Club members when an opportunity arises. The upgrading of the Vazquezes to First
Class was done in good faith; in fact, the First Class Section is definitely much better than
the Business Class in terms of comfort, quality of food, and service from the cabin crew.
They also testified that overbooking is a widely accepted practice in the airline industry
and is in accordance with the International Air Transport Association (IATA) regulations.
Airlines overbook because a lot of passengers do not show up for their flight. With respect
to Flight CX-905, there was no overall overbooking to a degree that a passenger was
bumped off or downgraded. Yuen and Robson also stated that the demand letter of the
Vazquezes was immediately acted upon. Reports were gathered from their office in Hong
Kong and immediately forwarded to their counsel Atty. Remollo for legal advice. However,
Atty. Remollo begged off because his services were likewise retained by the Vazquezes;
nonetheless, he undertook to solve the problem in behalf of Cathay. But nothing
happened until Cathay received a copy of the complaint in this case. For her part, Ms.
Chiu denied that she shouted or used foul or impolite language against the Vazquezes.
Ms. Barrientos testified on the amount of attorney’s fees and other litigation expenses,
such as those for the taking of the depositions of Yuen and Chiu.

In its decision1 of 19 October 1998, the trial court found for the Vazquezes and decreed as
follows:

WHEREFORE, finding preponderance of evidence to sustain the instant complaint,

judgment is hereby rendered in favor of plaintiffs Vazquez spouses and against defendant
Cathay Pacific Airways, Ltd., ordering the latter to pay each plaintiff the following:

a) Nominal damages in the amount of P100,000.00 for each plaintiff;

b) Moral damages in the amount of P2,000,000.00 for each plaintiff;

c) Exemplary damages in the amount of P5,000,000.00 for each plaintiff;

d) Attorney’s fees and expenses of litigation in the amount of P1,000,000.00 for each
plaintiff; and

e) Costs of suit.

SO ORDERED.

According to the trial court, Cathay offers various classes of seats from which passengers
are allowed to choose regardless of their reasons or motives, whether it be due to
budgetary constraints or whim. The choice imposes a clear obligation on Cathay to
transport the passengers in the class chosen by them. The carrier cannot, without
exposing itself to liability, force a passenger to involuntarily change his choice. The
upgrading of the Vazquezes’ accommodation over and above their vehement objections
was due to the overbooking of the Business Class. It was a pretext to pack as many
passengers as possible into the plane to maximize Cathay’s revenues. Cathay’s
actuations in this case displayed deceit, gross negligence, and bad faith, which entitled
the Vazquezes to awards for damages.
On appeal by the petitioners, the Court of Appeals, in its decision of 24 July 2001,2 deleted
the award for exemplary damages; and it reduced the awards for moral and nominal
damages for each of the Vazquezes to P250,000 and P50,000, respectively, and the
attorney’s fees and litigation expenses to P50,000 for both of them.

The Court of Appeals ratiocinated that by upgrading the Vazquezes to First Class, Cathay
novated the contract of carriage without the former’s consent. There was a breach of
contract not because Cathay overbooked the Business Class Section of Flight CX-905 but
because the latter pushed through with the upgrading despite the objections of the
Vazquezes.

However, the Court of Appeals was not convinced that Ms. Chiu shouted at, or meant to be
discourteous to, Dr. Vazquez, although it might seemed that way to the latter, who was a
member of the elite in Philippine society and was not therefore used to being harangued
by anybody. Ms. Chiu was a Hong Kong Chinese whose fractured Chinese was difficult to
understand and whose manner of speaking might sound harsh or shrill to Filipinos
because of cultural differences. But the Court of Appeals did not find her to have acted
with deliberate malice, deceit, gross negligence, or bad faith. If at all, she was negligent in
not offering the First Class accommodations to other passengers. Neither can the flight
stewardess in the First Class Cabin be said to have been in bad faith when she failed to
assist Dr. Vazquez in lifting his baggage into the overhead storage bin. There is no proof
that he asked for help and was refused even after saying that he was suffering from
"bilateral carpal tunnel syndrome." Anent the delay of Yuen in responding to the demand
letter of the Vazquezes, the Court of Appeals found it to have been sufficiently explained.

The Vazquezes and Cathay separately filed motions for a reconsideration of the decision,
both of which were denied by the Court of Appeals.

Cathay seasonably filed with us this petition in this case. Cathay maintains that the award for
moral damages has no basis, since the Court of Appeals found that there was no
"wanton, fraudulent, reckless and oppressive" display of manners on the part of its
personnel; and that the breach of contract was not attended by fraud, malice, or bad faith.
If any damage had been suffered by the Vazquezes, it was damnum absque injuria,
which is damage without injury, damage or injury inflicted without injustice, loss or
damage without violation of a legal right, or a wrong done to a man for which the law
provides no remedy. Cathay also invokes our decision in United Airlines, Inc. v. Court of
Appeals3 where we recognized that, in accordance with the Civil Aeronautics Board’s
Economic Regulation No. 7, as amended, an overbooking that does not exceed ten
percent cannot be considered deliberate and done in bad faith. We thus deleted in that
case the awards for moral and exemplary damages, as well as attorney’s fees, for lack of
proof of overbooking exceeding ten percent or of bad faith on the part of the airline
carrier.

On the other hand, the Vazquezes assert that the Court of Appeals was correct in granting
awards for moral and nominal damages and attorney’s fees in view of the breach of
contract committed by Cathay for transferring them from the Business Class to First Class
Section without prior notice or consent and over their vigorous objection. They likewise
argue that the issuance of passenger tickets more than the seating capacity of each
section of the plane is in itself fraudulent, malicious and tainted with bad faith.

The key issues for our consideration are whether (1) by upgrading the seat accommodation
of the Vazquezes from Business Class to First Class Cathay breached its contract of
carriage with the Vazquezes; (2) the upgrading was tainted with fraud or bad faith; and (3)
the Vazquezes are entitled to damages.
We resolve the first issue in the affirmative.

A contract is a meeting of minds between two persons whereby one agrees to give
something or render some service to another for a consideration. There is no contract
unless the following requisites concur: (1) consent of the contracting parties; (2) an object
certain which is the subject of the contract; and (3) the cause of the obligation which is
established.4 Undoubtedly, a contract of carriage existed between Cathay and the
Vazquezes. They voluntarily and freely gave their consent to an agreement whose object
was the transportation of the Vazquezes from Manila to Hong Kong and back to Manila,
with seats in the Business Class Section of the aircraft, and whose cause or consideration
was the fare paid by the Vazquezes to Cathay.

The only problem is the legal effect of the upgrading of the seat accommodation of the
Vazquezes. Did it constitute a breach of contract?

Breach of contract is defined as the "failure without legal reason to comply with the terms of
a contract."5 It is also defined as the "[f]ailure, without legal excuse, to perform any
promise which forms the whole or part of the contract."6

In previous cases, the breach of contract of carriage consisted in either the bumping off of a
passenger with confirmed reservation or the downgrading of a passenger’s seat
accommodation from one class to a lower class. In this case, what happened was the
reverse. The contract between the parties was for Cathay to transport the Vazquezes to
Manila on a Business Class accommodation in Flight CX-905. After checking-in their
luggage at the Kai Tak Airport in Hong Kong, the Vazquezes were given boarding cards
indicating their seat assignments in the Business Class Section. However, during the
boarding time, when the Vazquezes presented their boarding passes, they were informed
that they had a seat change from Business Class to First Class. It turned out that the
Business Class was overbooked in that there were more passengers than the number of
seats. Thus, the seat assignments of the Vazquezes were given to waitlisted passengers,
and the Vazquezes, being members of the Marco Polo Club, were upgraded from
Business Class to First Class.

We note that in all their pleadings, the Vazquezes never denied that they were members of
Cathay’s Marco Polo Club. They knew that as members of the Club, they had priority for
upgrading of their seat accommodation at no extra cost when an opportunity arises. But,
just like other privileges, such priority could be waived. The Vazquezes should have been
consulted first whether they wanted to avail themselves of the privilege or would consent
to a change of seat accommodation before their seat assignments were given to other
passengers. Normally, one would appreciate and accept an upgrading, for it would mean
a better accommodation. But, whatever their reason was and however odd it might be,
the Vazquezes had every right to decline the upgrade and insist on the Business Class
accommodation they had booked for and which was designated in their boarding passes.
They clearly waived their priority or preference when they asked that other passengers be
given the upgrade. It should not have been imposed on them over their vehement
objection. By insisting on the upgrade, Cathay breached its contract of carriage with the
Vazquezes.

We are not, however, convinced that the upgrading or the breach of contract was attended
by fraud or bad faith. Thus, we resolve the second issue in the negative.

Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are
serious accusations that can be so conveniently and casually invoked, and that is why
they are never presumed. They amount to mere slogans or mudslinging unless
convincingly substantiated by whoever is alleging them.
Fraud has been defined to include an inducement through insidious machination. Insidious
machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit
exists where the party, with intent to deceive, conceals or omits to state material facts
and, by reason of such omission or concealment, the other party was induced to give
consent that would not otherwise have been given.7

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 a known
duty through some motive or interest or ill will that partakes of the nature of fraud.8

We find no persuasive proof of fraud or bad faith in this case. The Vazquezes were not
induced to agree to the upgrading through insidious words or deceitful machination or
through willful concealment of material facts. Upon boarding, Ms. Chiu told the Vazquezes
that their accommodations were upgraded to First Class in view of their being Gold Card
members of Cathay’s Marco Polo Club. She was honest in telling them that their seats
were already given to other passengers and the Business Class Section was fully booked.
Ms. Chiu might have failed to consider the remedy of offering the First Class seats to
other passengers. But, we find no bad faith in her failure to do so, even if that amounted
to an exercise of poor judgment.

Neither was the transfer of the Vazquezes effected for some evil or devious purpose. As
testified to by Mr. Robson, the First Class Section is better than the Business Class
Section in terms of comfort, quality of food, and service from the cabin crew; thus, the
difference in fare between the First Class and Business Class at that time was $250.9
Needless to state, an upgrading is for the better condition and, definitely, for the benefit of
the passenger.

We are not persuaded by the Vazquezes’ argument that the overbooking of the Business
Class Section constituted bad faith on the part of Cathay. Section 3 of the Economic
Regulation No. 7 of the Civil Aeronautics Board, as amended, provides:

Sec 3. Scope. – This regulation shall apply to every Philippine and foreign air carrier with
respect to its operation of flights or portions of flights originating from or terminating at, or
serving a point within the territory of the Republic of the Philippines insofar as it denies
boarding to a passenger on a flight, or portion of a flight inside or outside the Philippines,
for which he holds confirmed reserved space. Furthermore, this Regulation is designed to
cover only honest mistakes on the part of the carriers and excludes deliberate and willful
acts of non-accommodation. Provided, however, that overbooking not exceeding 10% of
the seating capacity of the aircraft shall not be considered as a deliberate and willful act of
non-accommodation.

It is clear from this section that an overbooking that does not exceed ten percent is not
considered deliberate and therefore does not amount to bad faith.10 Here, while there
was admittedly an overbooking of the Business Class, there was no evidence of
overbooking of the plane beyond ten percent, and no passenger was ever bumped off or
was refused to board the aircraft.

Now we come to the third issue on damages.

The Court of Appeals awarded each of the Vazquezes moral damages in the amount of
P250,000. Article 2220 of the Civil Code provides:

Article 2220. Willful 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.

Moral damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar
injury. Although incapable of pecuniary computation, moral damages may be recovered if
they are the proximate result of the defendant’s wrongful act or omission.11 Thus, case
law establishes the following requisites for the award of moral damages: (1) there must be
an injury clearly sustained by the claimant, whether physical, mental or psychological; (2)
there must be a culpable act or omission factually established; (3) the wrongful act or
omission of the defendant is the proximate cause of the injury sustained by the claimant;
and (4) the award for damages is predicated on any of the cases stated in Article 2219 of
the Civil Code.12

Moral damages predicated upon a breach of contract of carriage may only be recoverable in
instances where the carrier is guilty of fraud or bad faith or where the mishap resulted in
the death of a passenger.13 Where in breaching the contract of carriage the airline is not
shown to have acted fraudulently or in bad faith, liability for damages is limited to the
natural and probable consequences of the breach of the obligation which the parties had
foreseen or could have reasonably foreseen. In such a case the liability does not include
moral and exemplary damages.14

In this case, we have ruled that the breach of contract of carriage, which consisted in the
involuntary upgrading of the Vazquezes’ seat accommodation, was not attended by fraud
or bad faith. The Court of Appeals’ award of moral damages has, therefore, no leg to
stand on.

The deletion of the award for exemplary damages by the Court of Appeals is correct. It is a
requisite in the grant of exemplary damages that the act of the offender must be
accompanied by bad faith or done in wanton, fraudulent or malevolent manner.15 Such
requisite is absent in this case. Moreover, to be entitled thereto the claimant must first
establish his right to moral, temperate, or compensatory damages.16 Since the
Vazquezes are not entitled to any of these damages, the award for exemplary damages
has no legal basis. And where the awards for moral and exemplary damages are
eliminated, so must the award for attorney’s fees.17

The most that can be adjudged in favor of the Vazquezes for Cathay’s breach of contract is
an award for nominal damages under Article 2221 of the Civil Code, which reads as
follows:

Article 2221 of the Civil Code provides:

Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has
been violated or invaded by the defendant, may be vindicated or recognized, and not for
the purpose of indemnifying the plaintiff for any loss suffered by him.

Worth noting is the fact that in Cathay’s Memorandum filed with this Court, it prayed only for
the deletion of the award for moral damages. It deferred to the Court of Appeals’
discretion in awarding nominal damages; thus:

As far as the award of nominal damages is concerned, petitioner respectfully defers to the
Honorable Court of Appeals’ discretion. Aware as it is that somehow, due to the
resistance of respondents-spouses to the normally-appreciated gesture of petitioner to
upgrade their accommodations, petitioner may have disturbed the respondents-spouses’
wish to be with their companions (who traveled to Hong Kong with them) at the Business
 Class on their flight to Manila. Petitioner regrets that in its desire to provide the
respondents-spouses with additional amenities for the one and one-half (1 1/2) hour flight
to Manila, unintended tension ensued.18

Nonetheless, considering that the breach was intended to give more benefit and advantage
to the Vazquezes by upgrading their Business Class accommodation to First Class
because of their valued status as Marco Polo members, we reduce the award for nominal
damages to P5,000.

Before writing finis to this decision, we find it well-worth to quote the apt observation of the
Court of Appeals regarding the awards adjudged by the trial court:

We are not amused but alarmed at the lower court’s unbelievable alacrity, bordering on the
scandalous, to award excessive amounts as damages. In their complaint, appellees
asked for P1 million as moral damages but the lower court awarded P4 million; they
asked for P500,000.00 as exemplary damages but the lower court cavalierly awarded a
whooping P10 million; they asked for P250,000.00 as attorney’s fees but were awarded
P2 million; they did not ask for nominal damages but were awarded P200,000.00. It is as
if the lower court went on a rampage, and why it acted that way is beyond all tests of
reason. In fact the excessiveness of the total award invites the suspicion that it was the
result of "prejudice or corruption on the part of the trial court."

The presiding judge of the lower court is enjoined to hearken to the Supreme Court’s
admonition in Singson vs. CA (282 SCRA 149 [1997]), where it said:

The well-entrenched principle is that the grant of moral damages depends upon the
discretion of the court based on the circumstances of each case. This discretion is limited
by the principle that the amount awarded should not be palpably and scandalously
excessive as to indicate that it was the result of prejudice or corruption on the part of the
trial court….

and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was held:

Nonetheless, we agree with the injunction expressed by the Court of Appeals that
passengers must not prey on international airlines for damage awards, like "trophies in a
safari." After all neither the social standing nor prestige of the passenger should
determine the extent to which he would suffer because of a wrong done, since the dignity
affronted in the individual is a quality inherent in him and not conferred by these social
indicators. 19

We adopt as our own this observation of the Court of Appeals.

WHEREFORE, the instant petition is hereby partly GRANTED. The Decision of the Court of
Appeals of 24 July 2001 in CA-G.R. CV No. 63339 is hereby MODIFIED, and as modified,
the awards for moral damages and attorney’s fees are set aside and deleted, and the
award for nominal damages is reduced to P5,000.

No pronouncement on costs.

SO ORDERED.

15. Mendoza vs. Court of Appeals (359 SCRA 438)

SECOND DIVISION
[G.R. No. 116710. June 25, 2001.]

DANILO D. MENDOZA, also doing business under the name and style of ATLANTIC
EXCHANGE PHILIPPINES, Petitioner, v. COURT OF APPEALS, PHILIPPINE
NATIONAL BANK, FERNANDO MARAMAG, JR., RICARDO G. DECEPIDA and BAYANI
A. BAUTISTA, Respondents.

DECISION

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision 1 dated August 8, 1994 of the
respondent Court of Appeals (Tenth Division) in CA-G.R. CV No. 38036 reversing the
judgment 2 of the Regional Trial Court (RTC) and dismissing the complaint therein.

Petitioner Danilo D. Mendoza is engaged in the domestic and international trading of raw
materials and chemicals. He operates under the business name Atlantic Exchange
Philippines (Atlantic), a single proprietorship registered with the Department of Trade and
Industry (DTI). Sometime in 1978 he was granted by respondent Philippine National Bank
(PNB) a Five Hundred Thousand Pesos (P500,000.00) credit line and a One Million
Pesos (P1,000,000.00) Letter of Credit/Trust Receipt (LC/TR) line.

As security for the credit accommodations and for those which may thereinafter be granted,
petitioner mortgaged to respondent PNB the following: 1) three (3) parcels of land 3 with
improvements in F. Pasco Avenue, Santolan, Pasig; 2) his house and lot in Quezon City;
and 3) several pieces of machinery and equipment in his Pasig coco-chemical plant.

The real estate mortgage 4 provided the following escalation clause:chanrob1es virtual 1aw
library

(f) The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the Mortgagee in accordance
with paragraph (d) of the conditions herein stipulated shall be subject during the life of this
contract to such increase within the rates allowed by law, as the Board of Directors of the
Mortgagee may prescribe for its debtors.

Petitioner executed in favor of respondent PNB three (3) promissory notes covering the Five
Hundred Thousand Pesos (P500,000.00) credit line, one dated March 8, 1979 for Three
Hundred Ten Thousand Pesos (P310,000.00); another dated March 30, 1979 for Forty
Thousand Pesos (P40,000.00); and the last dated September 27, 1979 for One Hundred
Fifty Thousand Pesos (P150,000.00). The said 1979 promissory notes uniformly
stipulated: "with interest thereon at the rate of 12% per annum, until paid, which interest
rate the Bank may, at any time, without notice, raise within the limits allowed by law . . ." 5

Petitioner made use of his LC/TR line to purchase raw materials from foreign importers. He
signed a total of eleven (11) documents denominated as "Application and Agreement for
Commercial Letter of Credit," 6 on various dates from February 8 to September 11, 1979,
which uniformly contained the following clause: "Interest shall be at the rate of 9% per
annum from the date(s) of the draft(s) to the date(s) of arrival of payment therefor in New
York. The Bank, however, reserves the right to raise the interest charges at any time
depending on whatever policy it may follow in the future." 7
In a letter dated January 3, 1980 and signed by Branch Manager Fil S. Carreon Jr.,
respondent PNB advised petitioner Mendoza that effective December 1, 1979, the bank
raised its interest rates to 14% per annum, in line with Central Bank’s Monetary Board
Resolution No. 2126 dated November 29, 1979.

On March 9, 1981, he wrote a letter to respondent PNB requesting for the restructuring of his
past due accounts into a five-year term loan and for an additional LC/TR line of Two
Million Pesos (P2,000,000.00). 8 According to the letter, because of the shut-down of his
end-user companies and the huge amount spent for the expansion of his business,
petitioner failed to pay to respondent bank his LC/TR accounts as they became due and
demandable.

Ceferino D. Cura, Branch Manager of PNB Mandaluyong replied on behalf of the respondent
bank and required petitioner to submit the following documents before the bank would act
on his request: 1) Audited Financial Statements for 1979 and 1980; 2) Projected cash
flow (cash in-cash out) for five (5) years detailed yearly; and 3) List of additional
machinery and equipment and proof of ownership thereof. Cura also suggested that
petitioner reduce his total loan obligations to Three Million Pesos (P3,000,000.00) "to give
us more justification in recommending a plan of payment or restructuring of your accounts
to higher authorities of the Bank." 9

On September 25, 1981, petitioner sent another letter addressed to PNB Vice-President
Jose Salvador, regarding his request for restructuring of his loans. He offered respondent
PNB the following proposals: 1) the disposal of some of the mortgaged properties, more
particularly, his house and lot and a vacant lot in order to pay the overdue trust receipts;
2) capitalization and conversion of the balance into a 5-year term loan payable semi-
annually or on annual installments; 3) a new Two Million Pesos (P2,000,000.00) LC/TR
line in order to enable Atlantic Exchange Philippines to operate at full capacity; 4)
assignment of all his receivables to PNB from all domestic and export sales generated by
the LC/TR line; and 5) maintenance of the existing Five Hundred Thousand Pesos
(P500,000.00) credit line.

The petitioner testified that respondent PNB Mandaluyong Branch found his proposal
favorable and recommended the implementation of the agreement. However, Fernando
Maramag, PNB Executive Vice-President, disapproved the proposed release of the
mortgaged properties and reduced the proposed new LC/TR line to One Million Pesos
(P1,000,000.00). 10 Petitioner claimed he was forced to agree to these changes and that
he was required to submit a new formal proposal and to sign two (2) blank promissory
notes.

In a letter dated July 2, 1982, petitioner offered the following revised proposals to respondent
bank: 1) the restructuring of past due accounts including interests and penalties into a 5-
year term loan, payable semi-annually with one year grace period on the principal; 2)
payment of Four Hundred Thousand Pesos (P400,000.00) upon the approval of the
proposal; 3) reduction of penalty from 3% to 1%; 4) capitalization of the interest
component with interest rate at 16% per annum; 5) establishment of a One Million Pesos
(P1,000,000.00) LC/TR line against the mortgaged properties; 6) assignment of all his
export proceeds to respondent bank to guarantee payment of his loans.

According to petitioner, respondent PNB approved his proposal. He further claimed that he
and his wife were asked to sign two (2) blank promissory note forms. According to
petitioner, they were made to believe that the blank promissory notes were to be filled out
by respondent PNB to conform with the 5-year restructuring plan allegedly agreed upon.
The first Promissory Note, 11 No. 127/82, covered the principal while the second
Promissory Note, 12 No. 128/82, represented the accrued interest.
Petitioner testified that respondent PNB allegedly contravened their verbal agreement by 1)
affixing dates on the two (2) subject promissory notes to make them mature in two (2)
years instead of five (5) years as supposedly agreed upon; 2) inserting in the first
Promissory Note No. 127/82 an interest rate of 21% instead of 18%; 3) inserting in the
second Promissory Note No. 128/82, the amount stated therein representing the accrued
interest as One Million Five Hundred Thirty Six Thousand Four Hundred Ninety Eight
Pesos and Seventy Three Centavos (P1,536,498.73) when it should only be Seven
Hundred Sixty Thousand Three Hundred Ninety Eight Pesos and Twenty Three Centavos
(P760,398.23) and pegging the interest rate thereon at 18% instead of 12%.

The subject Promissory Notes Nos. 127/82 and 128/82 both dated December 29, 1982 in
the principal amounts of Two Million Six Hundred Fifty One Thousand One Hundred
Eighteen Pesos and Eighty Six Centavos (P2,651,118.86) and One Million Five Hundred
Thirty Six Thousand Seven Hundred Ninety Eight and Seventy Three Centavos
(P1,536,798.73) respectively and marked Exhibits "BB" and "CC" respectively, were
payable on equal semi-annual amortization and contained the following escalation
clause:chanrob1es virtual 1aw library

. . . .which interest rate the BANK may increase within the limits allowed by law at any time
depending on whatever policy it may adopt in the future; Provided, that, the interest rate
on this note shall be correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the effectivity date of the increase or
decrease in the maximum interest rate.

x x x

It appears from the record that the subject Promissory Notes Nos. 127/82 and 128/82
superseded and novated the three (3) 1979 promissory notes and the eleven (11) 1979
"Application and Agreement for Commercial Letter of Credit" which the petitioner
executed in favor of respondent PNB.

According to the petitioner, sometime in June 1983 the new PNB Mandaluyong Branch
Manager Bayani A. Bautista suggested that he sell the coco-chemical plant so that he
could keep up with the semi-annual amortizations. On three (3) occasions, Bautista even
showed up at the plant with some unidentified persons who claimed that they were
interested in buying the plant.

Petitioner testified that when he confronted the PNB management about the two (2)
Promissory Notes Nos. 127/82 and 128/82 (marked Exhibits "BB" and "CC" respectively)
which he claimed were improperly filled out, Bautista and Maramag assured him that the
five-year restructuring agreement would be implemented on the condition that he assigns
10% of his export earnings to the Bank. 13 In a letter dated August 22, 1983, petitioner
Mendoza consented to assign 10% of the net export proceeds of a Letter of Credit
covering goods amounting to One Hundred Fourteen Thousand Dollars ($114,000.00). 14
However, petitioner claimed that respondent PNB subsequently debited 14% instead of
10% from his export proceeds. 15

Pursuant to the escalation clauses of the subject two (2) promissory notes, the interest rate
on the principal amount in Promissory Note No. 127/82 was increased from 21% to 29%
on May 28, 1984, and to 32% on July 3, 1984 while the interest rate on the accrued
interest per Promissory Note No. 128/82 was increased from 18% to 29 % on May 28,
1984, and to 32% on July 3, 1984.
Petitioner failed to pay the subject two (2) Promissory Notes Nos. 127/82 and 128/82
(Exhibits" " and "CC") as they fell due. Respondent PNB extrajudicially foreclosed the real
and chattel mortgages, and the mortgaged properties were sold at public auction to
respondent PNB, as highest bidder, for a total of Three Million Seven Hundred Ninety
Eight Thousand Seven Hundred Nineteen Pesos and Fifty Centavos (P3,798,719.50).

The petitioner filed in the RTC in Pasig, Rizal a complaint for specific performance,
nullification of the extrajudicial foreclosure and damages against respondents PNB,
Fernando Maramag Jr., Ricardo C. Decepida, Vice-President for Metropolitan Branches,
and Bayani A. Bautista. He alleged that the Extrajudicial Foreclosure Sale of the
mortgaged properties was null and void since his loans were restructured to a five-year
term loan; hence, it was not yet due and demandable; that the escalation clauses in the
subject two (2) Promissory Notes Nos. 127/82 and 128/82 were null and void, that the
total amount presented by PNB as basis of the foreclosure sale did not reflect the actual
loan obligations of the plaintiff to PNB; that Bautista purposely delayed payments on his
exports and caused delays in the shipment of materials; that PNB withheld certain
personal properties not covered by the chattel mortgage; and that the foreclosure of his
mortgages was premature so that he was unable to service his foreign clients, resulting in
actual damages amounting to Two Million Four Thousand Four Hundred Sixty One Pesos
(P2,004,461.00).

On March 16, 1992, the trial court rendered judgment in favor of the petitioner and ordered
the nullification of the extrajudicial foreclosure of the real estate mortgage, the Sheriff’s
sale of the mortgaged real properties by virtue of consolidation thereof and the
cancellation of the new titles issued to PNB; that PNB vacate the subject premises in
Pasig and turn the same over to the petitioner; and also the nullification of the
extrajudicial foreclosure and sheriff’s sale of the mortgaged chattels, and that the chattels
be returned to petitioner Mendoza if they were removed from his Pasig premises or be
paid for if they were lost or rendered unserviceable.

The trial court also ordered respondent PNB to restructure to five-years petitioner’s principal
loan of Two Million Six Hundred Fifty One Thousand One Hundred Eighteen Pesos and
Eighty Six Centavos (P2,651,118.86) and the accumulated capitalized interest on the
same in the amount of Seven Hundred Sixty Thousand Three Hundred Eighty Nine Pesos
and Twenty Three Centavos (P760,389.23) as of December 1982, and that respondent
PNB should compute the additional interest from January 1983 up to October 15, 1984
only when respondent PNB took possession of the said properties, at the rate of 12% and
9% respectively.

The trial court also ordered respondent PNB to grant petitioner Mendoza an additional Two
Million Pesos (P2,000,000.00) loan in order for him to have the necessary capital to
resume operation. It also ordered respondents PNB, Bayani A. Bautista and Ricardo C.
Decepida to pay to petitioner actual damages in the amount of Two Million One Hundred
Thirteen Thousand Nine Hundred Sixty One Pesos (P2,113,961.00) and the peso
equivalent of Six Thousand Two Hundred Fifteen Dollars ($6,215.00) at the prevailing
foreign exchange rate on October 11, 1983; and exemplary damages in the amount of
Two Hundred Thousand Pesos (P200,000.00).

Respondent PNB appealed this decision of the trial court to the Court of Appeals. And the
Court of Appeals reversed the decision of the trial court and dismissed the complaint.
Hence, this petition.

It is the petitioner’s contention that the PNB management restructured his existing loan
obligations to a five-year term loan and granted him another Two Million Pesos
 (P2,000,000.00) LC/TR line; that the Promissory Notes Nos. 127/82 and 128/82
evidencing a 2-year restructuring period or with the due maturity date "December 29,
1984" were filled out fraudulently by respondent PNB, and contrary to his verbal
agreement with respondent PNB; hence, his indebtedness to respondent PNB was not
yet due and the extrajudicial foreclosure of his real estate and chattel mortgages was
premature. On the other hand, respondent PNB denies that petitioner’s loan obligations
were restructured to five (5) years and maintains that the subject two (2) Promissory
Notes Nos. 127/82 and 128/82 were filled out regularly and became due as of December
29, 1984 as shown on the face thereof.

Respondent Court of Appeals held that there is no evidence of a promise from respondent
PNB, admittedly a banking corporation, that it had accepted the proposals of the
petitioner to have a five-year restructuring of his overdue loan obligations. It found and
held, on the basis of the evidence adduced, that "appellee’s (Mendoza) communications
were mere proposals while the bank’s responses were not categorical that the appellee’s
request had been favorably accepted by the bank."cralaw virtua1aw library

Contending that respondent PNB had allegedly approved his proposed five-year
restructuring plan, petitioner presented three (3) documents executed by respondent PNB
officials. The first document is a letter dated March 16, 1981 addressed to the petitioner
and signed by Ceferino D. Cura, Branch Manager of PNB Mandaluyong, which
states:chanrob1es virtual 1aw library

. . . . In order to study intelligently the feasibility of your above request, please submit the
following documents/papers within thirty (30) days from the date thereof, viz:chanrob1es
virtual 1aw library

1. Audited Financial Statements for 1979 and 1980;

2. Projected cash flow (cash in - cash out) for five years detailed yearly; and

3. List of additional machinery and equipment and proof of ownership thereof.

We would strongly suggest, however, that you reduce your total obligations to at least P3
million (principal and interest and other charges) to give us more justification in
recommending a plan of payment or restructuring of your accounts to higher authorities of
this bank.

The second document is a letter dated May 11, 1981 addressed to Mr. S. Pe Benito, Jr.,
Managing Director of the Technological Resources Center and signed by said PNB
Branch Manager, Ceferino D. Cura. According to petitioner, this letter showed that
respondent PNB seriously considered the restructuring of his loan obligations to a five-
year term loan, to wit:chanrob1es virtual 1aw library

x x x

At the request of our client, we would like to furnish you with the following information
pertinent to his accounts with us:chanrob1es virtual 1aw library

x x x

We are currently evaluating the proposal of the client to re-structure his accounts with us into
a five-year plan.
We hope that the above information will guide you in evaluating the proposals of Mr. Danilo
Mendoza.

x x x

The third document is a letter dated July 8, 1981 addressed to petitioner and signed by PNB
Assistant Vice-President Apolonio B. Francisco.

x x x

Considering that your accounts/accommodations were granted and carried in the books of
our Mandaluyong Branch, we would suggest that your requests and proposals be directed
to Ceferino Cura, Manager of our said Branch.

We feel certain that Mr. Cura will be pleased to discuss matters of mutual interest with you.

Petitioner also presented a letter which he addressed to Mr. Jose Salvador, Vice-President
of the Metropolitan Branches of PNB, dated September 24, 1981, which
reads:chanrob1es virtual 1aw library

Re: Restructuring of our Account into a 5-year Term Loan and Request for the
Establishment of a P2.0 Million LC/TR Line

Dear Sir:chanrob1es virtual 1aw library

In compliance with our discussion last September 17, we would like to formalize our
proposal to support our above requested assistance from the Philippine National Bank.

x x x

Again we wish to express our sincere appreciation for your open-minded approach towards
the solution of this problem which we know and will be beneficial and to the best interest
of the bank and mutually advantageous to your client.

x x x

Petitioner argues that he submitted the requirements according to the instructions given to
him and that upon submission thereof, his proposed five-year restructuring plan was
deemed automatically approved by respondent PNB.

We disagree.

Nowhere in those letters is there a categorical statement that respondent PNB had approved
the petitioner’s proposed five-year restructuring plan. It is stretching the imagination to
construe them as evidence that his proposed five-year restructuring plan has been
approved by the respondent PNB which is admittedly a banking corporation. Only an
absolute and unqualified acceptance of a definite offer manifests the consent necessary
to perfect a contract. 16 If anything, those correspondences only prove that the parties
had not gone beyond the preparation stage, which is the period from the start of the
negotiations until the moment just before the agreement of the parties. 17
There is nothing in the record that even suggests that respondent PNB assented to the
alleged five-year restructure of petitioner’s overdue loan obligations to PNB. However, the
trial court ruled in favor of petitioner Mendoza, holding that since petitioner has complied
with the conditions of the alleged oral contract, the latter may not renege on its obligation
to honor the five-year restructuring period, under the rule of promissory estoppel. Citing
Ramos v. Central Bank, 18 the trial court said:chanrob1es virtual 1aw library

The broad general rule to the effect that a promise to do or not to do something in the future
does not work an estoppel must be qualified, since there are numerous cases in which an
estoppel has been predicated on promises or assurances as to future conduct. The
doctrine of ‘promissory estoppel’ is by no means new, although the name has been
adopted only in comparatively recent years. According to that doctrine, an estoppel may
arise from the making of a promise, even though without consideration, if it was intended
that the promise should be relied upon and in fact it was relied upon, and if a refusal to
enforce it would be virtually to sanction the perpetration of fraud or would result in other
injustice. In this respect, the reliance by the promisee is generally evidenced by action or
forbearance on his part, and the idea has been expressed that such action or forbearance
would reasonably have been expected by the promisor. . . .

The doctrine of promissory estoppel is an exception to the general rule that a promise of
future conduct does not constitute an estoppel. In some jurisdictions, in order to make out
a claim of promissory estoppel, a party bears the burden of establishing the following
elements: (1) a promise reasonably expected to induce action or forbearance; (2) such
promise did in fact induce such action or forbearance, and (3) the party suffered detriment
as a result. 19

It is clear from the forgoing that the doctrine of promissory estoppel presupposes the
existence of a promise on the part of one against whom estoppel is claimed. The promise
must be plain and unambiguous and sufficiently specific so that the Judiciary can
understand the obligation assumed and enforce the promise according to its terms. 20
For petitioner to claim that respondent PNB is estopped to deny the five-year restructuring
plan, he must first prove that respondent PNB had promised to approve the plan in
exchange for the submission of the proposal. As discussed earlier, no such promise was
proven, therefore, the doctrine does not apply to the case at bar. A cause of action for
promissory estoppel does not lie where an alleged oral promise was conditional, so that
reliance upon it was not reasonable. 21 It does not operate to create liability where it does
not otherwise exist. 22

Since there is no basis to rule that petitioner’s overdue loan obligations were restructured to
mature in a period of five (5) years, we see no other option but to respect the two-year
period as contained in the two (2) subject Promissory Notes Nos. 127/82 and 128/82,
marked as Exhibits "BB" and "CC" respectively which superseded and novated all prior
loan documents signed by petitioner in favor of respondent PNB. Petitioner argues, in his
memorandum, that "respondent Court of Appeals had no basis in saying that the
acceptance of the five-year restructuring is totally absent from the record." 23 On the
contrary, the subject Promissory Notes Nos. 127/82 and 128/82 are clear on their face
that they were due on December 29, 1984 or two (2) years from the date of the signing of
the said notes on December 29, 1982.

Petitioner claims that the two (2) subject Promissory Notes Nos. 127/82 and 128/82 were
signed by him in blank with the understanding that they were to be subsequently filled out
to conform with his alleged oral agreements with PNB officials, among which is that they
were to become due only after five (5) years. If petitioner were to be believed, the PNB
officials concerned committed a fraudulent act in filling out the subject two (2) promissory
 notes in question. Private transactions are presumed to be fair and regular. 24 The
burden of presenting evidence to overcome this presumption falls upon petitioner.
Considering that petitioner imputes a serious act of fraud on respondent PNB, which is a
banking corporation, this court will not be satisfied with anything but the most convincing
evidence. However, apart from petitioner’s self-serving verbal declarations, we find no
sufficient proof that the subject two (2) Promissory Notes Nos. 127/82 and 128/82 were
completed irregularly. Therefore, we rule that the presumption has not been rebutted.

Besides, it could be gleaned from the record that the petitioner is an astute businessman
who took care to reduce in writing his business proposals to the respondent bank. It is
unthinkable that the same person would commit the careless mistake of leaving his
subject two (2) promissory notes in blank in the hands of other persons. As the
respondent Court of Appeals correctly pointed

Surely, plaintiff-appellee who is a C.P.A and a Tax Consultant (p. 3 TSN, January 9, 1990)
will insist that the details of the two promissory notes he and his wife executed in 1982
should be specific to enable them to make the precise computation in the event of default
as in the case at bench. In fact, his alleged omission as a C.P.A. and a Tax Consultant to
insist that the two promissory notes be filled up on important details like the rates of
interest is inconsistent with the legal presumption of a person who takes ordinary care of
his concerns (Section 3 (c), Rule 131, Revised Rules on Evidence).

As pointed out by the Court of Appeals, Orlando Montecillo, Chief, Loans and Discounts,
PNB Mandaluyong Branch, testified that the said Promissory Notes Nos. 127/82 and
128/82 were completely filled out when Danilo Mendoza signed them (Rollo, p. 14).

In a last-ditch effort to save his five-year loan restructuring theory, petitioner contends that
respondent PNB’s action of withholding 10% from his export proceeds is proof that his
proposal had been accepted and the contract had been partially executed. He claims that
he would not have consented to the additional burden if there were no corresponding
benefit. This contention is not well taken. There is no credible proof that the 10%
assignment of his export proceeds was not part of the conditions of the two-year
restructuring deal. Considering that the resulting amount obtained from this assignment of
export proceeds was not even enough to cover the interest for the corresponding month,
25 we are hard-pressed to construe it as the required proof that respondent PNB
allegedly approved the proposed five-year restructuring of petitioner’s overdue loan
obligations.

It is interesting to note that in his Complaint, petitioner made no mention that the assignment
of his export proceeds was a condition for the alleged approval of his proposed five-year
loan restructuring plan. The Complaint merely alleged that "plaintiff in a sincere effort to
make payments on his obligations agreed to assign 10% of his export proceeds to
defendant PNB." This curious omission leads the court to believe that the alleged link
between the petitioner’s assignment of export proceeds and the alleged five-year
restructuring of his overdue loans was more contrived than real.

It appears that respondent bank increased the interest rates on the two (2) subject
Promissory Notes Nos. 127/82 and 128/82 without the prior consent of the petitioner. The
petitioner did not agree to the increase in the stipulated interest rate of 21% per annum on
Promissory Note No. 127/82 and 18% per annum on Promissory Note No. 128/82. As
held in several cases, the unilateral determination and imposition of increased interest
rates by respondent bank is violative of the principle of mutuality of contracts ordained in
Article 1308 of the Civil Code. 26 As held in one case: 27
It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of one
who contracts, his act has no more efficacy than if it had been done under duress or by a
person of unsound mind.

Similarly, contract changes must be made with the consent of the contracting parties. The
minds of all the parties must meet as to the proposed modification, especially when it
affects an important aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it can make or break a
capital venture.

It has been held that no one receiving a proposal to change a contract to which he is a party
is obliged to answer the proposal, and his silence per se cannot be construed as an
acceptance. 28 Estoppel will not lie against the petitioner regarding the increase in the
stipulated interest on the subject Promissory Notes Nos. 127/82 and 128/82 inasmuch as
he was not even informed beforehand by respondent bank of the change in the stipulated
interest rates. However, we also note that the said two (2) subject Promissory Notes Nos.
127/82 and 128/82 expressly provide for a penalty charge of 3% per annum to be
imposed on any unpaid amount when due.

Petitioner prays for the release of some of his movables 29 being withheld by respondent
PNB, alleging that they were not included among the chattels he mortgaged to
respondent bank. However, petitioner did not present any proof as to when he acquired
the subject movables and hence, we are not disposed to believe that the same were
"after-acquired" chattels not covered by the chattel and real estate mortgages.

In asserting its rights over the subject movables, respondent PNB relies on a common
provision in the two (2) subject Promissory Notes Nos. 127/82 and 128/82 which
states:chanrob1es virtual 1aw library

In the event that this note is not paid at maturity or when the same becomes due under any
of the provisions hereof, we hereby authorized the BANK at its option and without notice,
to apply to the payment of this note, any and all moneys, securities and things of value
which may be in its hands on deposit or otherwise belonging to me/us and for this
purpose. We hereby, jointly and severally, irrevocably constitute and appoint the BANK to
be our true Attorney-in-Fact with full power and authority for us in our name and behalf
and without prior notice to negotiate, sell and transfer any moneys securities and things of
value which it may hold, by public or private sale and apply the proceeds thereof to the
payment of this note.

It is clear, however, from the above-quoted provision of the said promissory notes that
respondent bank is authorized, in case of default, to sell "things of value" belonging to the
mortgagor "which may be on its hands for deposit or otherwise belonging to me/us and for
this purpose." Besides the petitioner executed not only a chattel mortgage but also a real
estate mortgage to secure his loan obligations to respondent bank.

A stipulation in the mortgage, extending its scope and effect to after-acquired property is
valid and binding where the after-acquired property is in renewal of, or in substitution for,
goods on hand when the mortgage was executed, or is purchased with the proceeds of
the sale of such goods. 30 As earlier pointed out, the petitioner did not present any proof
as to when the subject movables were acquired.

More importantly, respondent bank makes a valid argument for the retention of the subject
movables. Respondent PNB asserts that those movables were in fact "immovables by
destination" under Art. 415 (5) of the Civil Code. 31 It is an established rule that a
 mortgage constituted on an immovable includes not only the land but also the buildings,
machinery and accessories installed at the time the mortgage was constituted as well as
the buildings, machinery and accessories belonging to the mortgagor, installed after the
constitution thereof. 32

Petitioner also contends that respondent PNB’s bid prices for this foreclosed properties in
the total amount of Three Million Seven Hundred Ninety Eight Thousand Seven Hundred
Nineteen Pesos and Fifty Centavos (P3,798,719.50), were allegedly "unconscionable and
shocking to the conscience of men." He claims that the fair market appraisal of his
foreclosed plant site together with the improvements thereon located in Pasig, Metro
Manila amounted to Five Million Four Hundred Forty One Thousand Six Hundred Fifty
Pesos (P5,441,650.00) while that of his house and lot in Quezon City amounted to Seven
Hundred Twenty Two Thousand Pesos (P722,000.00) per the appraisal report dated
September 20, 1990 of Cuervo Appraisers, Inc. 33 That contention is not well taken
considering that:chanrob1es virtual 1aw library

1. The total of the principal amounts alone of petitioner’s subject Promissory Notes Nos.
127/82 and 128/82 which are both overdue amounted to Four Million One Hundred Eighty
Seven Thousand Nine Hundred Seventeen Pesos and Fifty Nine Centavos
(P4,187,917.59).

2. While the appraisal of Cuervo Appraisers, Inc. was undertaken in September 1990, the
extrajudicial foreclosure of petitioner’s real estate and chattel mortgages have been
effected way back on October 15, 1984, October 23, 1984 and December 21, 1984. 34
Common experience shows that real estate values especially in Metro Manila tend to go
upward due to developments in the locality.

3. In the public auction/foreclosure sales, respondent PNB, as mortgagee, was not obliged to
bid more than its claims or more than the amount of petitioner’s loan obligations which are
all overdue. The foreclosed real estate and chattel mortgages which petitioner earlier
executed are accessory contracts covering the collaterals or security of his loans with
respondent PNB. The principal contracts are the Promissory Notes Nos. 127/82 and
128/82 which superseded and novated the 1979 promissory notes and the 1979 eleven
(11) Applications and Agreements for Commercial Letter of Credit.

Finally, the record shows that petitioner did not even attempt to tender any redemption price
to respondent PNB, as highest bidder of the said foreclosed real estate properties, during
the one-year redemption period.

In view of all the foregoing, it is our view and we hold that the extrajudicial foreclosure of
petitioner’s real estate and chattel mortgages was not premature and that it was in fact
legal and valid.

WHEREFORE, the petition is hereby DENIED. The challenged Decision of the Court of
Appeals in CA-G.R. CV No. 38036 is AFFIRMED with modification that the increase in the
stipulated interest rates of 21% per annum and 18% per annum appearing on Promissory
Notes Nos. 127/82 and 128/82 respectively is hereby declared null and void.

SO ORDERED.

16. BPI express Card Corporation (372 SCRA 399)

SECOND DIVISION

G.R. No. 131086. December 14, 2001

BPI EXPRESS CARD CORPORATION, Petitioner, vs. EDDIE C. OLALIA, Respondent.

DECISION

QUISUMBING, J.:

This petition for review seeks to annul the decision 1 of the Court of Appeals in CAG.R. CV
No. 49618, reversing the order 2 of the Regional Trial Court, Branch 145, of Makati City
which held Eddie C. Olalia liable to BPI Express Card Corporation (BECC) in the amount
of P136, 290.97. The CA found only the amount of P13,883.27 to be due and owing to
BECC. Petitioners motion for reconsideration was denied through a resolution, 3 also
before us on review.

The factual antecedents of this case are as follows:

Petitioner operates a credit card system under the name of BPI Express Card Corporation
(BECC) through which it extends credit accommodations to its cardholders for the
purchase of goods and other services from member establishments of petitioner to be
reimbursed later on by the cardholder upon proper billing.

Respondent Eddie C. Olalia applied 4 for and was granted membership and credit
accommodation with BECC. BECC Card No. 020100-3-00-0281667 was issued in his
name with a credit limit of P5,000.

In January 1991, Olalias card expired and a renewal card was issued. BECC also issued
Card No. 020100-2-01-0281667 in the name of Cristina G. Olalia, respondents ex-wife.
This second card was an extension of Olalias credit card. BECC alleges that the
extension card was delivered and received by Olalia at the same time as the renewal
card. However, Olalia denies ever having applied for, much less receiving, the extension
card.

As evidenced by charge slips presented and identified in court, it was found that the
extension card in the name of Cristina G. Olalia was used for purchases made from
March to April 1991, particularly in the province of Iloilo and the City of Bacolod. Total
unpaid charges from the use of this card amounted to P101,844.54.

BECC sent a demand letter to Olalia, to which the latter denied liability saying that said
purchases were not made under his own credit card and that he did not apply for nor
receive the extension card in the name of his wife. He has likewise not used or allowed
anybody in his family to receive or use the extension card. Moreover, his wife, from whom
he was already divorced, left for the States in 1986 and has since resided there. In
addition, neither he nor Cristina was in Bacolod or Iloilo at the time the questioned
purchases were made. She was dropped as defendant by the trial court, in an Order
dated September 29, 1995. 5cräläwvirtualibräry

A case for collection was filed by BECC before the RTC but Olalia only admits responsibility
for the amount of P13,883.27, representing purchases made under his own credit card.
After trial on the merits, a decision was rendered as follows:

WHEREFORE, judgment is rendered ordering defendant Eddie C. Olalia to pay plaintiff the
sum of Thirteen Thousand Eight Hundred Eighty-Three Pesos and Twenty-seven
 Centavos (P13, 883.27), Philippine Currency with interest thereon at the legal rate from
June 18, 1991, until fully paid; and to pay the costs.

SO ORDERED.6cräläwvirtualibräry

From the aforesaid decision, a Motion for Reconsideration was filed, alleging that Olalia
should also be held liable for the purchases arising from the use of the extension card
since he allegedly received the same, as evidenced by his signature appearing in the
Renewal Card Acknowledgement Receipt 7 and by the express provision of paragraph 2
of the terms and conditions governing the use and issuance of a BPI Express Card,
making the cardholder and his extension jointly and severally liable for all purchases and
availments made through the use of the card.

On April 28, 1995, the Motion for Reconsideration was granted and an Order was issued,
stating:

Defendant Eddie C. Olalia has not filed any reaction paper up to the present relative to
plaintiffs MOTION FOR RECONSIDERATION dated December 20, 1994.

Finding the allegations in said motion to be meritorious, the same is hereby granted.

WHEREFORE, the dispositive portion of the decision dated November 25, 1994, is
reconsidered and accordingly amended/corrected to read as follows:

WHEREFORE, judgment is rendered ordering defendant Eddie C. Olalia to pay plaintiff the
sum of One Hundred Thirty Six Thousand Two Hundred Ninety Pesos and Ninety-seven
Centavos (P136,290.97) Philippine Currency, as of October 27, 1991.

SO ORDERED.8cräläwvirtualibräry

Olalia appealed to the Court of Appeals and was there sustained in a decision dated
November 28, 1996. The CA ruled as follows:

THE FOREGOING CONSIDERED, the contested Decision, while affirmed, is hereby

modified by limiting appellants liability only to P13,883.27, but with interest at 3% per
month in addition to penalty fee of 3% of the amount due every month, until full
payment.9cräläwvirtualibräry

BECC filed a Motion for Reconsideration but the CA denied the same through a Resolution
dated October 17, 1997.

Hence, this petition wherein BECC contends, as its lone assignment of error, 10 that the
Court of Appeals erred in limiting the liability of respondent to only P 13,883.27 exclusive
of interest and penalty fee notwithstanding receipt and availment of the extension card.

More precisely, the issues are: 1) Whether or not an extension card in the name of Cristina
G. Olalia was validly issued and in fact received by respondent Eddie C. Olalia; and 2)
Whether or not Eddie C. Olalia can be held liable for the purchases made using the
extension card.

We discuss the issues jointly.

Under stipulation No. 10 of the terms and conditions governing the issuance and use of the
BPI Express Credit Card, the following is stated:

10. EXTENSIONS/SUPPLEMENTARY CARDS Extension of the CARD issued to the

Cardholder may be given to the latters spouse or children upon payment of the necessary
fee thereof, and the submission of an application for the purpose; and the use of such
CARD, as well as the extensions, thereof, shall be governed by this Agreement, and
secured by the Surety Undertaking hereto. Any reference to the CARD issued to the
Cardholder hereafter shall also apply to extensions and/or renewals. Should a CARD be
issued to the spouse/children of a Cardholder upon the Cardholders request, the
Cardholder shall be responsible for all charges including all fees, interest and other
charges made through the CARD. In the event of separation, legal or otherwise, the
Cardholder shall continue to be responsible for all such charges to be made through the
extension CARD unless Cardholder request in writing that the privileges of such extension
Cardholder under this Agreement be terminated, provided all charges incurred shall have
been fully paid and satisfied. (Emphasis ours)11cräläwvirtualibräry

From the foregoing stipulation, it is clear that there are two requirements before an
extension/supplementary card is issued. They are: 1) payment of the necessary fee, and
2) submission of an application for the purpose. None of these requirements were shown
to have been complied with by Olalia. Both the trial and appellate courts have found that
in Olalias applications for the original as well as the renewal card, he never applied for an
extension card in the name of his wife. BECC also failed to show any receipt for any fee
given in payment for the purpose of securing an extension card.

BECC supports its allegation that Eddie C. Olalia received the extension card in the name of
his wife, by presenting the Renewal Card Acknowledgement Receipt wherein Olalia
affixed his signature. Such will not suffice to prove to this Court that the requirements for
the issuance of the extension card have been complied with, especially in the face of
respondents firm denial.

We have previously held that contracts of this nature are contracts of adhesion, so-called
because their terms are prepared by only one party while the other merely affixes his
signature signifying his adhesion thereto. 12 As such, their terms are construed strictly
against the party who drafted it. 13 In this case, it was BECC who made the foregoing
stipulation, thus, they are now tasked to show vigilance for its compliance.

BECC failed to explain why a card was issued without accomplishment of the requirements.
Moreover, BECC did not even secure the specimen signature of the purported extension
cardholder, such that it cannot now counter Eddie C. Olalias contention that the
signatures appearing on the charge slips of the questioned transactions were not that of
his former wife, Cristina G. Olalia.

We note too that respondent Eddie C. Olalia did not indicate nor declare that he had a
spouse when he applied for a credit card with BECC. In fact, at the time the extension
card was issued and allegedly received by respondent, Cristina had long left the
Philippines.

BECCs negligence absolves respondent Olalia from liability.

In sum, we agree with the Court of Appeals that respondent Olalia should not be held liable
for the purchases made under the so-called extension card irregularly issued by petitioner
and used for purchases made by an unauthorized party for whose actions the respondent
could not be legally made answerable. This being the case, respondent Olalia could only
 be held liable for P13,883.27 representing purchases made under his own credit card,
exclusive of interest and penalty thereon, if any.

WHEREFORE , the instant petition is DENIED, and the decision of the Court of Appeals is
hereby AFFIRMED.

SO ORDERED.

17. Paguyo vs. Astorga, (470 SCRA 440)

SECOND DIVISION

SPOUSES DOMINGO AND LOURDES PAGUYO,

p e t i t i o n e r s,

- versus -

PIERRE ASTORGA AND ST. ANDREW REALTY, INC.,

R e s p o n d e n t s.

G.R. No. 130982

Present:

PUNO,
Chairman,

AUSTRIA-MARTINEZ,

CALLEJO, SR.,

TINGA, and

CHICO-NAZARIO, JJ .

Promulgated:

September 16, 2005

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

DECISION

CHICO-NAZARIO, J .:

. . . Men may do foolish things, make ridiculous contracts, use miserable judgment, and lose
money by them ' indeed, all they have in the world; but not for that alone can the law
intervene and restore. There must be, in addition, a violation of the law, the commission
of what the law knows as an actionable wrong, before the courts are authorized to lay
hold of the situation and remedy it. [1]

The case at bar demonstrates a long drawn-out litigation between parties who already
entered into a valid contract that has subsisted for almost twenty (20) years but one of
 them later balks from being bound by it, alleging fraud, gross inadequacy of
consideration, mistake, and undue influence.

This is a petition for review on certiorari where petitioner Spouses Domingo and Lourdes
Paguyo seek the reversal of the Decision [2] and the Resolution, [3] dated 30 April 1997
and 12 September 1997, respectively, of the Court of Appeals in CA-G.R. CV No. 47034,
affirming in toto the Decision [4] dated 21 April 1994 of the Regional Trial Court (RTC),
Branch 142 of Makati City.

The Antecedents

The undisputed facts, per summary of the Court of Appeals, follow.

Herein petitioners, Spouses Domingo Paguyo and Lourdes Paguyo, were the owners of a
small five-storey building known as the Paguyo Building located at Makati Avenue, corner
Valdez Street, Makati City. With one (1) unit per floor, the building has an average area of
100 square meters per floor and is constructed on a land belonging to the Armas family.
[5]

This lot on which the Paguyo Building stands was the subject of Civil Case No. 5715 entitled,
Armas, et al., v. Paguyo, et al., wherein the RTC of Makati City, Branch 57, rendered a
decision on 20 January 1988 approving a Compromise Agreement made between the
Armases and the petitioners. The compromise agreement provided that in consideration
of the total sum of One Million Seven Hundred Thousand Pesos (P1,700,000.00), the
Armases committed to execute in favor of petitioners a deed of sale and/or conveyance
assigning and transferring unto said petitioners all their rights and interests over the
parcel of land containing an area of 299 square meters. [6]

In order for the petitioners to complete their title and ownership over the lot in question, there
was an urgent need to make complete payment to the Armases, which at that time stood
at P917,470.00 considering that petitioners had previously made partial payments to the
Armases.
On 29 November 1988, in order to raise the much needed amount, petitioner Lourdes
Paguyo entered into an agreement captioned as Receipt of Earnest Money with
respondent Pierre Astorga, for the sale of the former's property consisting of the lot which
was to be purchased from the Armases, together with the improvements thereon,
particularly, the existing building known as the Paguyo Building, under the following terms
and conditions as stated in the document, to wit:

RECEIVED from MR. PIERRE M. ASTORGA the sum of FIFTY THOUSAND ( P 50,000.00)
PESOS (U.C.P.B. Manager's Check No. 013085 dated November 29, 1988) as earnest
money for the sale of our property consisting of a parcel of land designated as Lot 12
located at Makati Avenue, Makati, Metro Manila, covered by and described in T.C.T. No.
154806 together with the improvements thereon particularly the existing building known
as the Paguyo Bldg. under the following terms and conditions:

1. The earnest money (Exh. 'D') shall be good for fifteen (15) days from date of this
document during which period the owner is bound to sell the property to the buyer;

2. Should the buyer decide not to buy the subject property within the earnest/option period,
the seller has the right to forfeit Fifteen Thousand ( P 15,000.00) pesos, and return the
difference to the buyer;

3. The agreed total purchase price is SEVEN MILLION ( P 7,000,000.00) PESOS

PHILIPPINE CURRENCY;

4. Within fifteen (15) days from execution of this document, the buyer shall pay Fifty (50%)
percent of the total purchase price less the aforesaid earnest money, upon payment of
which the following documents shall be executed or caused to be executed as the case
may be, namely:

a. Deed of Absolute Sale of the Paguyo Bldg., in favor of the buyer.

b. Deed of Absolute Sale to be executed by the Armases who still appear as the registered
owners of the lot in favor of the buyer.

c. Deed of Real Estate Mortgage of the same subject lot and Bldg. to secure the 50%
balance of the total purchase price to be executed by the buyer in favor of the herein
seller.
5. The Deed of Real Estate Mortgage shall contain the following provisions, namely:

a. payment of the 50% balance of the purchase price shall be payable within fifteen (15)
days from actual vacating of the Armases from the subject lot.

b. During the period commencing from the execution of the documents mentioned under
paragraph 4 (which should be done simultaneously) the buyer is entitled to one-half (1/2)
of the rental due and actually received from the tenants of the Paguyo Bldg. plus the use
of the penthouse while the seller shall retain possession and use of the basement free of
rent until the balance of the purchase price is fully paid in accordance with the herein
terms and conditions. The one-half (1/2) of the tenants' deposits shall be credited in favor
of the buyer. [7]

However, contrary to their express representation with respect to the subject lot, petitioners
failed to comply with their obligation to acquire the lot from the Armas family despite the
full financial support of respondents. Nevertheless, the parties maintained their business
relationship under the terms and conditions of the above-mentioned Receipt of Earnest
Money. [8]

On 12 December 1988, petitioners asked for and were given by respondents an additional
P50,000.00 to meet the former's urgent need for money in connection with their
construction business. Due also to the urgent necessity of obtaining money to finance
their construction business, petitioner Lourdes Paguyo, who was also the attorney-in-fact
of her husband, proposed to the respondents the separate sale of the building in question
while she continued to work on the acquisition of the lot from the Armas family, assuring
the respondents that she would succeed in doing so. [9]

Aware of the risk of buying an improvement on the lot of a third party who appeared
ambivalent on whether to dispose their property in favor of the respondents, respondents
took a big business gamble and, relying on the assurance of petitioners that they would
eventually acquire the lot and transfer the same to respondents in accordance with their
undertaking in the Receipt of Earnest Money, respondents agreed to petitioner Lourdes
Paguyo's proposal to buy the building first. Thus, on 5 January 1989, the parties executed
the four documents in question namely, the Deed of Absolute Sale of the Paguyo
Building, the Mutual Undertaking, the Deed of Real Estate Mortgage, and the Deed of
Assignment of Rights and Interest. [10] Simultaneously with the signing of the four
documents, respondents paid petitioners the additional amount of P500,000.00. [11]
Thereafter, the respondents renamed the Paguyo Building into GINZA Bldg. and
 registered the same in the name of respondent St. Andrew Realty, Inc. at the Makati
Assessor's Office after paying accrued real estate taxes in the total amount of
P169,174.95. Since 1990, respondents paid the real estate taxes on subject building as
registered owners thereof. Further, respondents obtained fire insurance and applied for
the conversion of Paguyo Building into a condominium. All of these acts of ownership
exercised by respondents over the building were with the express knowledge and consent
of the petitioners. [12]

Pursuant to their agreement contained in the aforecited documents, particularly in the Mutual
Undertaking, [13] respondent company filed an ejectment case and obtained a favorable
decision against petitioners in the Metropolitan Trial Court (MeTC) of Makati in Civil Case
No. 40050. The case reached this Court which affirmed the decision of the MeTC in favor
of respondent company. This decision had already been executed and the respondent
company is now in possession of the building. Accordingly, respondents continued to
exercise acts of full ownership, possession and use over the building. [14]

On 06 October 1989, petitioners filed a Complaint for the rescission of the Receipt of
Earnest Money [15] with the undertaking to return the sum of P 763,890.50. They also
sought the rescission of the Deed of Real Estate Mortgage, [16] the Mutual Undertaking,
the Deed of Absolute Sale of Building, [17] and the Deed of Assignment of Rights and
Interest. [18]

In their complaint, petitioners alleged that respondents Astorga and St. Andrew Realty, Inc.,
led them to believe that they would advance the P917,470.00, which was needed by
petitioners to complete payment with the Armases, with the understanding that said
amount would simply be deducted from the P7 Million total consideration due them for the
sale of the lot and the building as agreed upon in their Receipt of Earnest Money. The
same, however, did not materialize because instead of making available the check for the
said amount, respondents did not produce the amount and even ordered the 'stop
payment of the same before it could be deposited in court. [19]

Respondents, in their Answer, however, interjected that as gleaned from the Receipt of
Earnest Money, the Mutual Undertaking, the Deed of Assignment of Rights and Interest,
their original intention was to purchase the Paguyo Building and the lot on which it stands
simultaneously. Respondents interposed that at the time the decision on the compromise
agreement between petitioners and Armases was rendered, petitioners were badly in
need of money because they were financing their construction business and, with the
balance payable to the Armases, the former were in a huff to produce an amount
sufficient to cover both transactions. Thus, petitioners prevailed upon respondents to
purchase the Paguyo Building first with the lot to follow after petitioners have successfully
acquired it from the Armas family.

Respondents, likewise, stated in their Answer that sometime in July of 1989, petitioners
asked respondent corporation to execute a check in the amount of P917,470.00 [20] for
 the final execution of the Deed of Conveyance of the lot, saying that they were finally able
to negotiate the purchase of the lot owned by the Armases. To settle the transaction,
respondent corporation again complied. After investigation, however, respondents
learned that petitioners were not in the position to deliver the land, all the rights and
interest thereof having allegedly been transferred already to spouses Rodolfo and Aurora
Bacani. They were able to confirm this after obtaining a copy of a letter dated 22
September 1989 of petitioners' counsel (same counsel representing them presently) to
the Register of Deeds of Makati a month prior to the filing of the instant case. The letter
stated:

Ms. Mila Flores

Register of Deeds

Makati, Metro Manila

Dear Ms. Flores:

We represent the spouses Rodolfo and Aurora Bacani, who happen to be the assignees of
all the rights and interests that the couple Domingo and Lourdes Paguyo have over that
parcel of land located along Makati Avenue, the particulars and description of which are
indicated on TCT No. 154806 which, for reasons we perceive to be not legitimate, was
cancelled.

...

(SGD.) HECTOR B. ALMEYDA

For the Firm [21]

(Emphasis supplied.)

Respondents further explained in their Answer that because of this development, they were
constrained to order stop payment of the P917,470.00 check, which was duly
communicated to petitioners in a letter dated 14 July 1989, to wit:

I am very sorry to inform you that I have to stop payment on Philtrust Check No. 006759
because I was just reliably informed that you are no longer in a position to deliver the lot
subject of our agreement. While the financier had already advanced half million pesos
which was already placed in my account, I discouraged her from putting another million
pesos to cover my check with you. I therefore find myself with no alternative but to order
stop payment on my check to protect my rights and interests. [22]
The Ruling of the Trial Court

After trial, the RTC ruled in favor of respondents in a Decision [23] dated 21 April 1994, the
dispositive portion of which reads:

Judgment is hereby rendered dismissing the complaint for lack of cause of action, the
petition for preliminary injunction is hereby denied, judgment is rendered in favor of the
defendants and ordering the plaintiff spouses Domingo and Lourdes Paguyo to pay the
defendants Pierre Astorga and St. Andrew Realty, Inc. on their counterclaim.

1. P400,000.00 for moral damages;

2. P200,000.00 as exemplary damages;

3. P100,00.00 for attorney's fees and litigation expenses and pay the cost of suit.
[24]

The Ruling of the Court of Appeals

On appeal, the Court of Appeals promulgated its Decision [25] dated 30 April 1997 in CA-
G.R. CV No. 47034 affirming the decision of the trial court, the dispositive portion of which
reads as follows:

WHEREFORE, We find the lower court's decision in full accord with the facts and the law.
Judgment is hereby rendered affirming the assailed decision dated April 21, 1994 in toto.
[26]
Aggrieved by the ruling, petitioners elevated the matter to us via the instant petition,
contending that the Court of Appeals erred:

1. IN CONCLUDING THAT THE SUPPOSED ACTS OF OWNERSHIP AND

POSSESSION OF RESPONDENTS PRECLUDE PETITIONERS FROM SEEKING
RESCISSION AND DECLARATION OF NULLITY OF DOCUMENTS SIGNED AND
EXECUTED UNDER MISTAKEN PREMISES THAT WERE NOT ALL TRUE AND
ACCURATE;

2. IN FAILING TO FIND THAT FRAUD, MISTAKE AND UNDUE INFLUENCE

HAD BEEN EXERTED ON PETITIONER LOURDES PAGUYO TO MAKE HER A PARTY
TO THE ASSAILED DOCUMENTS;

3. IN READING THE DOCUMENTS INVOLVED WITHOUT REGARD TO THE

CONTEMPORANEOUS ACTS OF THE PARTIES PRIOR, DURING AND IMMEDIATELY
AFTER THE SIGNING PROCESS;

4. IN AFFIRMING THE DISMISSAL OF THE COMPLAINT; AND

5. IN AWARDING DAMAGES AND ATTORNEY'S FEES IN FAVOR OF THE

RESPONDENTS. [27]

The questions the Court is now tasked to answer are: (1) Did the Court of Appeals err in
upholding the trial court's decision denying petitioners' complaint for rescission? (2) Was
the award of damages and attorney's fees to respondents proper?

On the first issue, petitioners claim that the 05 January 1989 documents, particularly the
Deed of Absolute Sale of Building, Mutual Undertaking, Real Estate Mortgage, and
Assignment of Rights and Interests read together with the 29 November 1988 Receipt of
Earnest Money, were all designed, per the respondents' representations, to secure their
exposure in the total sum of P763,890.50 which constituted their outlay in the projected
purchase of the Paguyo lot and building.

Respondents dispute petitioners' line of reasoning. They say that the Deed of Absolute Sale
over the building was absolute and unconditional.
Our Ruling

Petitioners' contentions lack merit.

The right to rescind a contract involving reciprocal obligations is provided for in Article 1191
of the Civil Code. Article 1191 states: M

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.

The law speaks of the right of the "injured party" to choose between rescission or fulfillment
of the obligation, with the payment of damages in either case. [28]

Here, petitioners claim to be the injured party and consequently seek the rescission of the
Deed of Absolute Sale of the Building and the other documents in question. Petitioners
aver that they are entitled to cancel the Deed of Sale altogether in view of fraud, gross
inadequacy of price, mistake, and undue influence.

To boost their claim that the Deed of Absolute Sale was intended merely to document the
cash outlays of respondents, petitioners say that the P600,000.00 consideration as
contained in the Deed of Absolute Sale of the 5-storey Paguyo building is a far cry from
the P3 Million valuation attached to it by respondent Astorga himself and the building's fair
market value of P2,848,000.00 assessed by the Cuervo Appraisers, Inc.
We find no such inadequacy of consideration in the case at bar. For one, on top of the
P600,000.00 which petitioners received, respondents had to shoulder the accrued real
estate taxes of P169,174.95. For another, respondent Pierre Astorga explained that said
price was what St. Andrew Realty, Inc., believed as value for their money inasmuch as
the building stands on the lot owned by another and there were separate owners of the
land, who appear reluctant to sell it. For a third, said amount was arrived at considering
the depreciated value of the building and in view of the economic and political
uncertainties in the country at that time, marked by a series of coup detat, which caused
real estate prices to plummet. Respondent Astorga was explicit on this score '

ATTY. JOSE

Q: There was statement here by Mrs. Paguyo that this document entitled the deed of
absolute sale of a building marked Exhibit 9 was not expressive of the intention of the
parties meaning to say that she did not intend to sell the said building and one of the
reasons she tried to raise was the fact that the building was only sold for P500,000.00,
what can you say to that?

A: Well, the P500,000.00 amount that she would want to impress to be an inadequate
amount is what we in St. Andrew's end believed as value for money for the reason that
the building stands on the lot she does not own and there were separate owners and
apparent conflict between them even the seeming impossibility of getting the lot '

Q: By the way, before the plaintiffs decided to dispose the building or sell the building by
virtue of this deed of sale marked Exhibit '98 was your company ever interested in
acquiring the said building?

A: The building alone, no. In fact, on December 21 when we had the problem as to acquiring
the lot, we did not part with any payment to Mrs. Paguyo demonstrating that we had really
and truly intended a simultaneous buy of the building and the lot to acquire the property
simultaneously the building and as well as the lot.

Q: Now, you mentioned that you are a realtor, I will ask you the same question, which Atty.
Almeyda asked me when I was on the witness stand, as a realtor will you please tell the
court what would be your appraisal of the value of the building?

ATTY. COLOMA
- Objection, your Honor. May we know if the witness is going to express
an opinion or is he testifying now as an expert realtor?

COURT

- As an opinion but it would not bind the Court.

WITNESS

- I can explain to you.

ATTY. JOSE

- Yes, please explain.

WITNESS

A: Okay, appraisal can take many forms if its appraised value based on the construction cost
it could be different from appraising per se the building. That is now existing in that
address also appraisal will depend on where the building is and there is only one owner of
the building and the lot. As the case here is, the building in a manner of speaking stands
on thin air. That is so including depreciation and timing that we were doing in this
transaction which was 1989, my appraisal will be in the range of a Million may be.

Q: You made mentioned the word timing in 1989, why did you mention that?

A: Well, '89 was not the best real estate year. In fact, we have a boom in 1988 but prices
were already deep during this year such that it is in 1988 when it could have been another
price. But this transaction happened or entered into in 1989, there were no interested
buyers during that time, sir.

Q: Why?

A: coup de etat was one, and many other issue on hand that causes value to take deep.
Q: You mentioned that word depreciation, will you please explain to us what that
depreciation has got to do with that building?

A: In appraisal terms the building is in an economic line in every year of which a certain
value is allocated as depreciation for wear and tear for breakdowns and all that is
depreciation. This is deductible from the amount of the building (sic).

Q: Before you went into this agreement with the plaintiff Paguyo have you inspected the
building?

A: Yes, sir. Thoroughly, sir.

Q: Will you please explain to the court the size of the building and the description of the
building?

A: That building is five (5) storey it has only one (1) unit per floor, sir. There is a narrow
stairway that leads up to the penthouse. It is, I would say, in an advance deteriorating
stage, it needed some renovations here and there. [29] (Emphasis supplied.)

Moreover, Articles 1355 and 1470 of the Civil Code state:

Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not
invalidate a contract, unless there has been fraud, mistake or undue influence. (Emphasis
supplied)

Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as may
indicate a defect in the consent, or that the parties really intended a donation or some
other act or contract. (Emphasis supplied)
Petitioners herein failed to prove any of the instances mentioned in Articles 1355 and 1470
of the Civil Code, which would invalidate, or even affect, the Deed of Sale of the Building
and the related documents. Indeed, there is no requirement that the price be equal to the
exact value of the subject matter of sale. [30]

In Sps. Buenaventura v. Court of Appeals, [31] the Court was unequivocal:

Courts cannot follow one every step of his life and extricate him from bad bargains, protect
him from unwise investments, relieve him from one-sided contracts, or annul the effects of
foolish acts. Courts cannot constitute themselves guardians of persons who are not
legally incompetent. Courts operate not because one person has been defeated or
overcome by another, but because he has been defeated or overcome illegally. Men may
do foolish things, make ridiculous contracts, use miserable judgment, and lose money by
them ' indeed, all they have in the world; but not for that alone can the law intervene and
restore. There must be, in addition, a violation of the law, the commission of what the law
knows as an actionable wrong, before the courts are authorized to lay hold of the situation
and remedy it. (Emphases in the original)

What is more, petitioners would wish to convince this Court that petitioner Lourdes Paguyo
was nave enough to accept at face value the assurance of respondent Astorga that the
Deed of Sale was merely to document respondents' cash outlay.

Far from being the nave and easy to fleece lady that she wants this Court to perceive her to
be, evidence on record reveals that petitioner Lourdes Paguyo is in reality an astute
businesswoman, having insured that legal minds would be available at her disposal at the
time she entered into the transactions she now impugns. As she herself admitted in her
testimony before the trial court, during her receipt of the earnest money and during the
transactions subject of the instant case, her lawyers, one Atty. Lalin and a certain Atty.
Cario, assisted her. She testified as follows:

ATTY. JOSE

Wait, wait, your Honor. I have one question. Now, madam witness, you mentioned that you
were accompanied by a certain Atty. Molina when you executed the receipt of the earnest
money with me. Now, during the transaction of this subject matter, you will also recall that
at times you were represented in dealing with me as counsel for defendant corporation by
Atty. Lalin and Atty. Carino?
A Yes, sir. [32]

Neither does the fact that the subject contracts have been prepared by respondents ipso
facto entail that their validity and legality be strictly interpreted against them. Petitioner
Lourdes Paguyo's insinuation that she was disadvantaged will not hold. True, Article 24 of
the New Civil Code provides that '(i)n all contractual, property or other relations, when one
of the parties is at a disadvantage on account of his moral dependence, ignorance,
indigence, mental weakness, tender age or other handicap, the courts must be vigilant for
his protection. [33] Thus, the validity and/or enforceability of the impugned contracts will
have to be determined by the peculiar circumstances obtaining in each case and the
situation of the parties concerned.

Here, petitioner Lourdes Paguyo, being not only cultured but a person with great business
acumen as well, cannot claim to be the weaker or disadvantaged party in the subject
contract so as to call for a strict interpretation against respondents. More importantly, the
parties herein went through a series of negotiations before the documents were signed
and executed. [34]

Further, we find the stipulations in the subject documents plain and unambiguous. For
instance, the Deed of Sale provides in no uncertain terms-

WHEREAS, the VENDOR is the true and absolute owner, free from any lien or
encumbrance, of a concrete building presently known as the Paguyo Building,
constructed on Lot 12, Blk. 4 (described in T.C.T No. 154806-Makati) located at No. 7856
Makati Ave. corner Valdez St., Makati, Metro Manila, covered by and described in Tax
Declaration No. 93762 for the year 1984, and more particularly described as follows:

WHEREAS, the VENDOR is desirous of selling and the VENDEE is willing to buy the
aforedescribed building;

NOW THEREFORE, for and in consideration of the foregoing premises and of the sum of
SIX HUNDRED THOUSAND (P600,000.00) PESOS, Philippine currency, the receipt of
which is hereby acknowledged, the VENDOR hereby cedes, transfers, and conveys, by
way of absolute sale, unto and in favor of the VENDEE, his successors and assigns, the
aforementioned building with all the improvements therein.
The Municipal Assessor of Makati is therefore hereby authorized to register this sale in the
new Tax Declaration in the name of the VENDEE.

IN WITNESS WHEREOF, the VENDOR hereby affixed his signature by his wife and
attorney-in-fact, LOURDES S. Paguyo, this 5th day of January, 1989, in Pasay City. [35]

Inasmuch as the stipulations in the aforesaid contract and in the other contracts being
questioned leave no room for interpretation, there was no cause for applying Article 24 of
the New Civil Code.

In sum, in the case at bar, petitioners pray for rescission of the Deed of Sale of the building
and offer to repay the purchase price after their liquidity position would have improved
and after respondents would have refurbished the building, updated the real property
taxes, and turned the building into a profitable business venture. This Court, however, will
not allow itself to be an instrument to the dissolution of contract validly entered into. A
party should not, after its opportunity to enjoy the benefits of an agreement, be allowed to
later disown the arrangement when the terms thereof ultimately would prove to operate
against its hopeful expectations. [36]

On the matter of damages, the Court of Appeals affirmed the trial court's award of damages
and attorney's fees to respondents, namely P400,000 as moral damages, P200,000 as
exemplary damages, P100,000 as attorney's fees and the costs of suit.

We have held that moral damages may be recovered in cases where one willfully causes
injury to property, or in cases of breach of contract where the other party acts fraudulently
or in bad faith. [37] ' There is no hard and fast rule in the determination of what would be a
fair amount of moral damages, since each case must be governed by its own peculiar
circumstances. [38] Exemplary damages, on the other hand, are imposed by way of
example or correction for the public good, when the party to a contract acts in a wanton,
fraudulent, oppressive or malevolent manner. [39] Attorney's fees are allowed when
exemplary damages are awarded and when the party to a suit is compelled to incur
expenses to protect his interest. [40]

While it has been sufficiently proven that the respondents are entitled to damages, the actual
amounts awarded by the lower court must be reduced because damages are not
 intended for a litigant's enrichment, at the expense of the petitioners. [41] Judicial
discretion granted to the courts in the assessment of damages must always be exercised
with balanced restraint and measured objectivity. [42]

Thus, the amount of moral damages should be set at only P30,000.00, and the award of
exemplary damages at only P20,000.00. The award of attorney's fees should also be
reduced to P20,000.00 which, under the circumstances of this case, appears justified and
reasonable.

All told, we find no reason to reverse the assailed decision of respondent court. The factual
findings of the appellate court are conclusive on the parties and carry greater weight
when they coincide with the factual findings of the trial court. [43] This Court will not weigh
the evidence anew lest there is a showing that the findings of the lower court are totally
devoid of support or are clearly erroneous so as to constitute serious abuse of discretion.
In the instant case, the trial court found that the documents, which petitioners seek to
rescind, were entered into as a result of an arms-length transaction. These are factual
findings that are now conclusive upon us. [44]

WHEREFORE, the Decision and the Resolution dated 30 April 1997 and 12 September
1997, respectively, of the Court of Appeals in CA-G.R. CV No. 47034, are hereby
AFFIRMED with MODIFICATION as to the amount of damages' and attorney's fees
recoverable, as follows: (1) moral

damages is reduced to P30,000.00, (2) exemplary damages is reduced to P20,000.00, and

(3) attorney's fees is reduced to P20,000.00. Costs against petitioners.

SO ORDERED.

18. Kwok vs. Philippine Carpet Manufacturing Corporation (457 SCRA 465)

SECOND DIVISION

[G.R. NO. 149252. April 28, 2005]

DONALD KWOK, Petitioners, v. PHILIPPINE CARPET MANUFACTURING

CORPORATION, Respondents.

DECISION

CALLEJO, SR., J.:

This is a Petition for Review of the Decision1 of the Court of Appeals (CA) in CA-G.R. SP
No. 60232 dismissing Donald Kwok's Petition for Review on Certiorari and affirming the
majority Decision of the National Labor Relations Commission (NLRC), as well as its
 resolution in NLRC NCR Case No. 00-12-07454-96 dismissing the motion for
reconsideration of the said decision.

The Antecedents

In 1965, petitioner Donald Kwok and his father-in-law Patricio L. Lim, along with some other
stockholders, established a corporation, the respondent Philippine Carpet Manufacturing
Corporation (PCMC). The petitioner became its general manager, executive vice-
president and chief operations officer. Lim, on the other hand, was its president and
chairman of the board of directors. When the petitioner retired 36 years later or on
October 31, 1996, he was receiving a monthly salary of P160,000.00.2 He demanded the
cash equivalent of what he believed to be his accumulated vacation and sick leave credits
during the entire length of his service with the respondent corporation, i.e., from
November 16, 1965 to October 31, 1996, in the total amount of P7,080,546.00 plus
interest.3 However, the respondent corporation refused to accede to the petitioner's
demands, claiming that the latter was not entitled thereto.4

The petitioner filed a complaint against the respondent corporation for the payment of his
accumulated vacation and sick leave credits before the NLRC. He claimed that Lim made
a verbal promise to give him unlimited sick leave and vacation leave benefits and its cash
conversion upon his retirement or resignation without the need for any application
therefor. In addition, Lim also promised to grant him other benefits, such as golf and
country club membership; the privilege to charge the respondent corporation's account;
6% profit-sharing in the net income of the respondent corporation (while Lim got 4%); and
other corporate perquisites. According to the petitioner, all of these promises were
complied with, except for the grant of the cash equivalent of his accumulated vacation
and sick leave credits upon his retirement.5

The respondent corporation denied all these, claiming that upon the petitioner's retirement,
he received the amount of P6,902,387.19 representing all the benefits due him. Despite
this, the petitioner again demanded P7,080,546.00, which demand was without factual
and legal basis. The respondent corporation asserted that the chairman of its board of
directors and its president/vice-president had unlimited discretion in the use of their time,
and had never been required to file applications for vacation and sick leaves; as such, the
said officers were not entitled to vacation and sick leave benefits. The respondent
corporation, likewise, pointed out that even if the petitioner was entitled to the said
additional benefits, his claim had already prescribed. It further averred that it had no
policy to grant vacation and sick leave credits to the petitioner.6

In his Affidavit7 dated May 19, 1998, Lim denied making any such verbal promise to his son-
in-law on the grant of unlimited vacation and sick leave credits and the cash conversion
thereof. Lim averred that the petitioner had received vacation and sick leave benefits from
1994 to 1996. Moreover, assuming that he did make such promise to the petitioner, the
same had not been confirmed or approved via resolution of the respondent corporation's
board of directors.

It was further pointed out that as per the Memorandum dated November 6, 1981, only
regular employees and managerial and confidential employees falling under Category I
were entitled to vacation and sick leave credits. The petitioner, whose position did not fall
under Category I, was, thus, not entitled to the benefits under the said memorandum. The
respondent corporation alleged that this was admitted by the petitioner himself and
affirmed by Raoul Rodrigo, its incumbent executive vice-president and general manager.

In a Decision8 dated November 27, 1998, the Labor Arbiter ruled in favor of the petitioner.
The fallo of the decision reads:
WHEREFORE, all the foregoing premises being considered, judgment is hereby rendered
ordering the respondent company to pay complainant the sum of P7,080,546.00, plus ten
percent (10%) thereof as and for attorney's fees.

SO ORDERED.9

Undaunted, the respondent corporation appealed the decision to the NLRC, alleging that:

I. THE LABOR ARBITER ERRED IN CONCLUDING THAT KWOK WAS COVERED BY

THE NOVEMBER 6, 1981 MEMORANDUM ON VACATION AND SICK LEAVE
CREDITS.10

II. THE LABOR ARBITER ERRED IN CONCLUDING THAT IT WAS DISCRIMINATORY

NOT TO GRANT KWOK THESE BENEFITS.11

III. KWOK'S CLAIMS ARE BASELESS.12

IV. KWOK'S CLAIMS FOR BENEFITS ACCRUING FROM 1966 ARE BARRED BY
PRESCRIPTION.13

V. THERE IS NO BASIS FOR THE AWARD OF P7,080,546.00.14

The respondent corporation averred that based on the petitioner's memorandum, his
admissions and the contract of employment, the petitioner was not entitled to the cash
conversion of his sick and vacation leave credits. While the respondent corporation
conceded that the petitioner may have been entitled to unlimited sick and vacation leave
benefits during his employment, it maintained that no such promise was made by Lim to
convert the same; even assuming that such verbal promise was made, the respondent
corporation was not bound thereby since the petitioner failed to adduce the written
conformity of its board of directors. The respondent corporation insisted that the claims of
the petitioner were barred under Article 291 of the Labor Code.

For his part, the petitioner made the following averments in his memorandum:

The non-performance by PCMC of this particular promise to convert in cash all of his unused
cash (sic) and sick leave credits was precipitated by the falling out of the marriage
between Mr. Kwok and his wife, the daughter of Mr. Lim. In fact, even while Mr. Kwok was
still the Executive Vice-President and General Manager of PCMC, when the falling out of
the said marriage became apparent, the other benefits or perquisites which Mr. Kwok
used to enjoy were immediately curtailed by Mr. Lim to the prejudice of Mr. Kwok.15

On November 29, 1999, the NLRC, by majority vote, rendered judgment granting the appeal,
reversing and setting aside the decision of the Labor Arbiter.16 The NLRC ordered the
dismissal of the complaint. Commissioner Angelita A. Gacutan filed a dissenting
opinion.17

Aggrieved, the petitioner filed a Petition for Review with the CA, on the following grounds:

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH

GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT DECLARED THAT THE VERBAL PROMISE OF MR. LIM TO
PETITIONER WAS UNENFORCEABLE.
II

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH

GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT RULED THAT THE VERBAL PROMISE BY MR. LIM TO
PETITIONER WAS NOT BINDING AS IT WAS NOT APPROVED BY THE BOARD OF
DIRECTORS.

III

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH

GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT IGNORED STRONG EVIDENCE THAT PCMC CLOTHED MR.
LIM WITH AWESOME POWERS TO GRANT BENEFITS TO ITS EMPLOYEES
INCLUDING PETITIONER AND RATIFIED THE SAME BY ITS SILENCE AND WHEN IT
IGNORED TOO EXISTING JURISPRUDENCE ON THE MATTER.

IV

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH

GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT IGNORED STRONG AND CLEAR EVIDENCE THAT IN PCMC
THE GIVING OF BENEFITS TO PETITIONER, THOUGH NOT IN WRITING, WAS A
PREVALENT PRACTICE.

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH

GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT RULED THAT THE MEMORANDUM DATED APRIL 26, 1997
APPLICABLE TO MR. RAOUL RODRIGO WAS ALSO APPLICABLE TO
PETITIONER.18

On February 28, 2001, the CA rendered judgment affirming the decision of the NLRC and
dismissing the petition.19 The petitioner's motion for reconsideration thereof was denied
by the appellate court, per its Resolution20 dated July 17, 2001.

The petitioner, thus, filed the instant Petition for Review on Certiorari with this Court,
assailing the decision and resolution of the CA on the following claims:

The Hon. Court of Appeals, contrary to law, gravely erred and disregarded established
jurisprudence in ruling that petitioner has not adduced sufficient evidence to support his
claim that he was, indeed, promised the cash conversion of his unused vacation and sick
leave credits upon retirement.21

II

The Hon. Court of Appeals gravely erred in ruling that even if private respondent's (sic) Mr.
Lim did make him such promise, the same cannot be enforced.22

III
The Hon. Court of Appeals gravely erred and disregarded clear jurisprudence on the matter
when it ruled that there is no showing that private respondent, thru its board of directors
either recognized, approved or ratified the promise made by Mr. Lim to petitioner.23

As gleaned from his Memorandum, the petitioner posits that he had adduced substantial
evidence to prove that Lim, as president and chairman of the respondent corporation's
board of directors, made a verbal promise to give him the cash conversion of his
accumulated vacation and sick leave credits upon his retirement (that is, benefits at par
with the number of days to which the officer next in rank to him was entitled). According to
the petitioner, his claim is fortified by the fact that his successor, Raoul Rodrigo, has
unlimited vacation and sick leave credits. The petitioner further asserts that he would not
have accepted the positions in the respondent corporation without such benefit, especially
since his subordinates were also enjoying the same. He posits that he was entitled to the
said privilege because of his rank. He, likewise, claims that, in contrast to the evidence he
has presented, the respondent corporation failed to adduce proof of its affirmative
allegations.

The petitioner further argues that his complaint was not time-barred since he filed it on
December 5, 1996. Even if this were so, he is, nevertheless, entitled to the cash value of
his vacation and sick leave credits for three years before his retirement. Moreover, the
evidence on record shows that officers belonging to Category I had been granted the
cash conversion of their earned leave credits after the lapse of three years.

The respondent corporation, for its part, asserts that the petitioner failed to adduce
substantial evidence to the claims in his complaint. Even if Lim had made such verbal
promise to the petitioner, the same is not binding on the respondent corporation absent its
conformity through board resolution. Moreover, the petitioner is not covered by the
Memorandum dated November 6, 1981 because he had unlimited leave credits; hence, it
cannot be gainsaid that he still had unused leave credits to be converted. According to
the respondent corporation, the petitioner himself admitted that he was not included in the
Memorandum dated November 6, 1981; and even assuming that he was covered by the
said memorandum, the fact that his complaint was filed only in 1996 precludes him from
claiming the cash conversion of such leave credits for the years 1966 to 1993.

The Court's Ruling

The petition has no merit.

The threshold issue in this case is factual - whether or not the petitioner is entitled, based on
the documentary and testimonial evidence on record, to the cash value of his vacation
and sick leave credits in the total amount of P7,080,546.00. The resolution of the issue is
riveted to our resolution of whether the petitioner's mainly testimonial evidence of an
alleged verbal promise made by a corporate officer to grant him the privilege of converting
accumulated vacation and sick leave credits after retirement or separation from
employment is entitled to probative weight.

Under Rule 45 of the Rules of Court, only questions of law may be raised under a Petition for
Review on Certiorari . The Court, not being a trier of facts, is not wont to reexamine and
reevaluate the evidence of the parties, whether testimonial or documentary. Moreover,
the findings of facts of the CA on appeal from the NLRC are, more often than not, given
conclusive effect by the Court. The Court may delve into and resolve factual issues only in
exceptional circumstances, such as when the findings of facts of the Labor Arbiter, on one
hand, and those of the NLRC and the CA, on the other, are capricious and arbitrary; or
when the CA has reached an erroneous conclusion based on arbitrary findings of fact;
and when substantial justice so requires. In this case, however, the petitioner failed to
 convince the Court that the factual findings of the CA which affirmed the findings of the
NLRC on appeal, as well as its conclusions based on the said findings, are capricious and
arbitrary.

While the petitioner was unequivocal in claiming that the respondent corporation, through its
president and chairman of the board of directors, obliged itself, as a matter of policy, to
grant him the cash value of his vacation and sick leave credits upon his retirement, he
was burdened to prove his claim by substantial evidence.24 The petitioner failed to
discharge this burden.

We agree with the petitioner's contention that for a contract to be binding on the parties
thereto, it need not be in writing unless the law requires that such contract be in some
form in order that it may be valid or enforceable or that it be executed in a certain way, in
which case that requirement is absolute and independent.25 Indeed, corporate policies
need not be in writing. Contracts entered into by a corporate officer or obligations or
prestations assumed by such officer for and in behalf of such corporation are binding on
the said corporation only if such officer acted within the scope of his authority or if such
officer exceeded the limits of his authority, the corporation has ratified such contracts or
obligations.

In the present case, the petitioner relied principally on his testimony to prove that Lim made
a verbal promise to give him vacation and sick leave credits, as well as the privilege of
converting the same into cash upon retirement. The Court agrees that those who belong
to the upper corporate echelons would have more privileges. However, the Court cannot
presume the existence of such privileges or benefits. The petitioner was burdened to
prove not only the existence of such benefits but also that he is entitled to the same,
especially considering that such privileges are not inherent to the positions occupied by
the petitioner in the respondent corporation, son-in-law of its president or not.

In dismissing the petition before it, the CA disbelieved the petitioner's testimony and gave
credence and probative weight to the collective testimonies of the respondent
corporation's witnesses, who were its employees and officers, including Lim, whom the
petitioner presented as a hostile witness. We agree with the appellate court's
encompassing synthesis and analysis of the evidence on record:

Except for his bare assertions, petitioner has not adduced sufficient evidence to support his
claim that he was, indeed, promised the cash conversion of his unused vacation and sick
leaves upon retirement. Petitioner harps on what he calls the prevalent practice in PCMC
of giving him benefits, such as the use of golf and country club facilities, salary increases,
the use of the company vehicle and driver, and sharing in PCMC's annual net income,
without either a written contract or a Board resolution to back it up. Respondent PCMC
denies all these, however. According to respondent, petitioner's share in the income of
the company is actually part of the consultancy fee which PCMC pays DK Management
Services, Inc., a firm owned by petitioner's company. PCMC adds that the yearly salary
increases of corporate officers were always with the prior approval of the Board.

Nevertheless, assuming that petitioner was, indeed, given the benefits which he so claimed,
it does not necessarily follow that among those is the cash conversion of his accumulated
leaves. It is a basic rule in evidence that each party must prove his affirmative allegation.
Since the burden of proof lies with the party who asserts an affirmative allegation, the
plaintiff or complainant has to prove his affirmative allegations in the complaint and the
defendant or respondent has to prove the affirmative allegations in his affirmative
defenses and counterclaim. Petitioner, in the case at bar, has failed to discharge this
burden.26
The CA made short shift of the claim of the petitioner that per Memorandum dated
November 6, 1981, he was not entitled to the benefits of the company policy of
commutation of leave credits. Indeed, the company policy of conversion into equivalent
cash of unused vacation and sick leave credits applied only to its regular employees. The
petitioner failed to offer evidence to rebut the testimony of Nel Gopez, Chief Accountant of
the respondent, that the petitioner was not among the regular employees covered by the
policy for the simple reason that he had unlimited vacation leave benefits. As stated by
the CA, the petitioner no less corroborated the testimony of Gopez, thus:

ATTY. PIMENTEL

And, so you mention[ed] earlier that - the policy on vacation leave benefits apply for category
one employee(s) and rank-and-file employee(s)?chanroblesvirtualawlibrary

WITNESS (Mr. Nel Gopez)

Yes.

ATTY. PIMENTEL

And who are considered category one employee(s)?chanroblesvirtualawlibrary

WITNESS

Category One employees are from the rank and of Senior Vice-President and Assistant
General Manager and below, up to the level of department managers.

ATTY. PIMENTEL

How about the complainant, Mr. Kwok, does he falling (sic) to the category one?
chanroblesvirtualawlibrary

WITNESS

As far as I can remember, he is (sic) not belong to category one employee.

ATTY. PIMENTEL

Therefore, he is not entitled to the lump sum benefit?chanroblesvirtualawlibrary

WITNESS

Yes, Ma'am.

ATTY. PIMENTEL

And would you know, Mr. Witness, why he is (sic) not given the conversion of the vacation
leave benefits at the time category one employees sectors (sic) are given?
chanroblesvirtualawlibrary

WITNESS

Because he has, as far as I can remember, he has unlimited vacation leave."

This was corroborated by petitioner himself when he testified in this wise:

ATTY. PIMENTEL

Mr. Witness, you occupied the position of Executive Vice-President and General Manager.
You agree with me that this position or this office of Executive Vice-President and General
Manager are not covered by this policy.

WITNESS (Donald Kwok)

Yes, it is not covered by this policy.

ATTY. PIMENTEL

So this policy applies to persons below you and your father-in-law?

chanroblesvirtualawlibrary

WITNESS

Yes, right.

ATTY. PIMENTEL

And this policy does not apply to you?chanroblesvirtualawlibrary

WITNESS

As far as I m concerned, it does not apply for (sic) me.

In all respects, therefore, petitioner, by virtue of his position as Executive Vice-President, is

not covered by the November 6, 1981 Memorandum granting PCMC employees the
conversion of their unused vacation and sick leaves into cash.27

We have reviewed the records and found no evidence to controvert the following findings of
the CA and its ratiocinations on its resolution of the petitioner's submissions:

Second, even assuming that petitioner is included among the "regular employees" of PCMC
referred to in said memorandum, there is no evidence that he complied with the cut-off
dates for the filing of the cash conversion of vacation and sick leaves. This being so, we
find merit in respondent's argument that petitioner's money claims have already been
barred by the three-year prescriptive period under Article 291 of the Labor Code, as
amended.

Third, and this is of primordial importance, there is no proof that petitioner has filed vacation
and sick leaves with PCMC's personnel department. Without a record of petitioner's
absences, there is no way to determine the actual number of leave credits he is entitled
to. The P7,080,546.00 figure arrived at by petitioner supposedly representing the cash
equivalent of his earned sick and vacation leaves is thus totally baseless.

And, fourth, even assuming that PCMC President Patricio Lim did promise petitioner the
cash conversion of his leaves, we agree with respondent that this cannot bind the
company in the absence of any Board resolution to that effect. We must stress that the
personal act of the company president cannot bind the corporation. As explicitly stated by
the Supreme Court in People's Aircargo and Warehousing Co., Inc. v. Court of Appeals:
"The general rule is that, in the absence of authority from the board of directors, no person,
not even its officers, can validly bind a corporation. A corporation is a juridical person,
separate and distinct from its stockholders and members, 'having xxx powers, attributes
and properties expressly authorized by law or incident to its existence.'

"' the power and the responsibility to decide whether the corporation should enter into a
contract that will bind the corporation is lodged in the board, subject to the articles of
incorporation, by-laws, or relevant provisions of law."

Anent the third assigned error, petitioner maintains that the PCMC Board of Directors has
granted its President, Patricio Lim, awesome powers to grant benefits to its employees,
adding that the Board has always given its consent to the way Lim ran the affairs of the
company especially on matters relating to the benefits that its corporate officers enjoyed.

True, jurisprudence holds that the president of a corporation possesses the power to enter
into a contract for the corporation when "the conduct on the part of both the president and
corporation [shows] that he had been in the habit of acting in similar matters on behalf of
the company and that the company had authorized him so to act and had recognized,
approved and ratified his former and similar actions."

In the case at bar, however, there is no showing that PCMC had either recognized, approved
or ratified the cash conversion of petitioner's leave credits as purportedly promised to him
by Lim. On the contrary, PCMC has steadfastly maintained that "the Company, through
the Board, has long adopted the policy of granting its earlier mentioned corporate officers
unlimited leave benefits denying them the privilege of converting their unused vacation or
sick leave benefits into their cash equivalent."

As to the last assigned error, petitioner faults the NLRC for holding as applicable to
petitioner, the April 26, 1997 Memorandum issued by PCMC to Raoul Rodrigo, Donald
Kwok's successor as company executive vice-president. The said memo granted Rodrigo
unlimited sick and vacation leave credits but disallowed the cash conversion thereof.
Before he became executive vice-president, Rodrigo was senior vice-president and
enjoyed the commutation of his unused vacation and sick leaves.

We note that the April 26, 1997 memo was issued to Rodrigo when petitioner was already
retired from PCMC. While said memorandum was particularly directed to Rodrigo,
however, this does not necessarily mean that petitioner, as former executive vice-
president, was then not prohibited from converting his earned vacation and sick leaves
into cash since he was not issued a similar memo. On the contrary, the memo simply
affirms the long-standing company practice of excluding PCMC's top two positions, that of
president and executive vice-president, from the commutation of leaves. As heretofore
discussed, among the perks of those occupying these posts is the privilege of having
unlimited leaves, which is totally incompatible with the concept of converting unused leave
credits into their cash equivalents.28

We are not convinced by the petitioner's claim that Lim capriciously deprived him of his
entitlement to the cash conversion of his accumulated vacation and sick leave credits
simply because of his estrangement from his wife, who happens to be Lim's daughter.
The petitioner did not adduce any evidence to show that he appealed to the respondent
corporation's board of directors for the implementation of the said privilege which was
allegedly granted to him. Even if Lim was the president and chairman of the respondent
corporation's board of directors, the rest of the membership of the board could have
overruled him and granted to the petitioner his claim if, indeed, the latter was entitled
thereto. Indeed, even the petitioner admitted that, after his retirement, the board of
directors granted to him salary increase for two years prior to his retirement. If the claim of
 the petitioner had been approved by the board of directors, for sure, it would have
approved the same despite his falling out with the daughter of Lim.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against
the petitioner.

SO ORDERED.

19. Information Technology Foundation of the Philippines vs. Commission on Elections,

G.R. No. 15939, January 13, 2004

EN BANC

G.R. No. 159139 June 15, 2005

INFORMATION TECHNOLOGY FOUNDATION OF THE PHILIPPINES, MA. CORAZON M.

AKOL, MIGUEL UY, EDUARDO H. LOPEZ, AUGUSTO C. LAGMAN, REX C. DRILON,
MIGUEL HILADO, LEY SALCEDO, and MANUEL ALCUAZ JR., Petitioners,
vs.
COMMISSION ON ELECTIONS; COMELEC CHAIRMAN BENJAMIN ABALOS SR.;
COMELEC BIDDING and AWARD COMMITTEE CHAIRMAN EDUARDO D. MEJOS and
MEMBERS GIDEON DE GUZMAN, JOSE F. BALBUENA, LAMBERTO P. LLAMAS, and
BARTOLOME SINOCRUZ JR.; MEGA PACIFIC eSOLUTIONS, INC.; and MEGA
PACIFIC CONSORTIUM, Respondents.

RESOLUTION

PANGANIBAN, J.:

Our Decision1 in the present case voided the Contract entered into by the Commission on
Elections (Comelec) for the supply of automated counting machines (ACMs) because of
"clear violation of law and jurisprudence" and "reckless disregard of [Comelec’s] own
bidding rules and procedure." Moreover, "Comelec awarded this billion-dollar undertaking
with inexplicable haste, without adequately checking and observing mandatory financial,
technical and legal requirements. x x x. The illegal, imprudent and hasty actions of the
Commission have not only desecrated legal and jurisprudential norms, but have also cast
serious doubts upon the poll body’s ability and capacity to conduct automated elections."
As a result, the ACMs illegally procured and improvidently paid for by Comelec were not
used during the 2004 national elections.

In its present Motion, the poll body expressly admits that the Decision "has become final and
executory," and that "COMELEC and MPC-MPEI are under obligation to make mutual
restitution." Otherwise stated, this admission implies that the ACMs are to be returned to
MPC-MPEI, and that the sum of over one billion pesos illegally paid for them be refunded
to the public purse.2 In short, ownership of the ACMs never left MPC-MPEI and the
money paid for them still belongs, and must be returned, to the government.

Consequently, the ACMs, which "admittedly failed to pass legally mandated technical
requirements" cannot be used during the forthcoming elections in the Autonomous
Region for Muslim Mindanao (ARMM). Apart from formidable legal, jurisprudential,
technical and financial obstacles, the use of the machines would expose the ARMM
elections to the same electoral pitfalls and frauds pointed out in our Decision. If the ACMs
were not good enough for the 2004 national elections, why should they be good enough
now for the 2005 ARMM elections, considering that nothing has been done by Comelec to
 correct the legal, jurisprudential and technical flaws underscored in our final and
executory Decision?

The Motion

Before us is the Commission on Election’s "Most Respectful Motion for Leave to Use the
Automated Counting Machines in [the] Custody of the Commission on Elections for use
(sic) in the August 8, 2005 Elections in the Autonomous Region for Muslim Mindanao
(ARMM)," dated December 9, 2004. In its January 18, 2005 Resolution, the Court
required the parties to comment. After careful deliberation on all pleadings at hand, we
now resolve the Motion.

Background Information

At the outset, we stress that the Decision in the present case, promulgated on January 13,
2004, has long attained finality.3 In our February 17, 2004 Resolution, we denied with
finality Comelec’s Motion for Reconsideration dated January 28, 2004, as well as private
respondents’ Omnibus Motion dated January 26, 2004. The Decision was recorded in the
Book of Entries of Judgments on March 30, 2004.

Recall that our Decision declared Comelec to have acted with grave abuse of discretion
when, by way of its Resolution No. 6074, it awarded the Contract for the supply of
automated counting machines (ACMs) to private respondents. It did so, not only in clear
violation of law and jurisprudence, but also with inexplicable haste and reckless disregard
of its own bidding rules and procedures; particularly the mandatory financial, technical
and legal requirements. It further manifested such grave abuse of discretion when it
accepted the subject computer hardware and software even though, at the time of the
award, these had patently failed to pass eight critical requirements designed to safeguard
the integrity of the elections. Consequently, this Court was constrained to exercise its
constitutional duty by voiding the assailed Resolution No. 6074 awarding the Contract to
Mega Pacific Consortium, as well as the subject Contract itself executed between
Comelec and Mega Pacific eSolutions, Inc.

Comelec was further ordered to refrain from implementing any other contract or agreement it
had entered into with regard to the said project. We also declared that, as a necessary
consequence of such nullity and illegality, the purchase of the ACMs and the software,
along with all payments made for them, had no basis in law. Hence, the public funds
spent must be recovered from the payees and/or the persons who made the illegal
disbursements possible, without prejudice to possible criminal prosecutions against
them.4

Likewise, our February 17, 2004 Resolution denying reconsideration found movants to have
raised the same procedural and substantive issues already exhaustively discussed and
definitively passed upon in our Decision. In that Resolution, we emphasized (and we
reiterate here) that the Decision did not prohibit automation of the elections. Neither did
the Court say that it was opposed to such project (or the use of ACMs) as a general
proposition. We repeated our explanation that the reason for voiding the assailed
Resolution and the subject Contract was the grave abuse of discretion on the part of
Comelec; as well as its violations of law -- specifically RA 9184, RA 8436, and RA 6955
as amended by RA 7718; prevailing jurisprudence (the latest of which was Agan v.
Philippine International Air Terminals Co., Inc.5); and the bidding rules and policies of the
Commission itself.

Comelec’s Claims
Notwithstanding our Decision and Resolution, the present Motion claims, inter alia, that the
ARMM elections are slated to be held on August 8, 2005, and are mandated by RA 9333
to be automated; that the government has no available funds to finance the automation of
those elections; that considering its present fiscal difficulties, obtaining a special
appropriation for the purpose is unlikely; that, on the other hand, there are in Comelec’s
custody at present 1,991 ACMs, which were previously delivered by private respondents;
that these machines would deteriorate and become obsolete if they remain idle and
unused; that they are now being stored in the Comelec Maxilite Warehouse along UN
Avenue, at "storage expenses of ₱329,355.26 a month, or ₱3,979,460.24 annually."

The Motion further alleges that "information technology experts," who purportedly supervised
all stages of the software development for the creation of the final version to be used in
the ACMs, have unanimously confirmed that this undertaking is in line with the
internationally accepted standards (ISO/IEC 12207) for software life cycle processes,
"with its quality assurance that it would be fit for use in the elections x x x."

Comelec also points out that the process of "enhancement" of the counting and canvassing
software has to be commenced at least six (6) months prior to the August 8, 2005 ARMM
elections, in order to be ready by then. It asserts that its Motion is (a) without prejudice to
the ongoing Civil Case No. 04-346 pending before the Regional Trial Court of Makati City,
Branch 59, entitled "Mega Pacific eSolutions, Inc. v. Republic of the Philippines
(represented by the Commission on Elections)," for the collection of a purported ₱200
million balance due from Comelec under the voided Contract; and (b) with a continuing
respectful recognition of the finality and legal effects of our aforesaid Decision. At bottom,
Comelec prays that it be granted leave to use the ACMs in its custody during the said
ARMM elections.

Private Respondents’ Contentions

Commenting on the present Motion, private respondents take the position that, since the
subject ACMs have already been delivered to, paid for and used by Comelec, the
Republic of the Philippines is now their owner, without prejudice to Mega Pacific
eSolutions, Inc.’s claim for damages in the case pending before the RTC of Makati; and
that, consequently, as far as private respondents are concerned, the question of using the
subject ACMs for the ARMM elections is dependent solely on the discretion of the owner,
the Republic of the Philippines.

Petitioners’ Comment

On the other hand, petitioners contend that Comelec is asking this Court to render an
advisory opinion, in contravention of the constitutional provision6 that explicitly states that
the exercise of judicial power is confined to (1) settling actual controversies involving
rights that are legally demandable and enforceable; and (2) determining whether there
has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the
part of any branch or instrumentality of government.

Petitioners assert that there is no longer any live case or controversy to speak of -- an
existing case or controversy that is appropriate or ripe for determination, not merely
conjectural or anticipatory; and that Comelec’s allegations in its Motion do not amount to
an actual case or controversy that would require this Court to render a decision or
resolution in the legitimate exercise of its judicial power. This lack of actual controversy is
clearly seen in the relief prayed for in the Motion: the grant of a leave to use the ACMs
during the ARMM elections. Obviously, Comelec merely seeks an advisory opinion from
this Court on whether its proposal to use the ACMs during the said elections might be in
 violation of this Court’s Decision dated January 13, 2004, and Resolution dated February
17, 2004.

Assuming arguendo that the present Motion might somehow be justified by the government’s
fiscal difficulties, petitioners further argue that permitting Comelec to use the ACMs would
nevertheless allow it to do indirectly what it was not permitted by this Court to do directly.
They argue that the instant Motion is merely a subterfuge on the poll body’s part to
resurrect a lost case via a request for an advisory opinion.

The OSG’s Comment

The Office of the Solicitor General (OSG) declares in its Comment that, in compliance with
this Court’s directive for it to "take measures to protect the government and vindicate
public interest from the ill effects of the illegal disbursements of public funds made by
reason of the void [Comelec] Resolution and Contract," it filed on behalf of the Republic
on July 7, 2004, an Answer with Counterclaim in Civil Case No. 04-346. The OSG prayed
for the return of all payments made by Comelec to Mega Pacific under the void Contract,
amounting to ₱1,048,828,407.

The OSG also manifests that it received a copy of the Complaint-Affidavit dated September
15, 2004, filed with the Office of the Ombudsman by the Bantay Katarungan Foundation
and the Kilosbayan Foundation against the Comelec commissioners who had awarded
the Contract for the ACMs; and the private individuals involved, including the
incorporators and officers of Mega Pacific eSolutions, Inc. This Complaint-Affidavit was
for violation of the Anti-Plunder Law (RA 7030), the Anti-Graft and Corrupt Practices Act
(RA 3019 as amended), and the Code of Conduct and Ethical Standards for Public
Officials and Employees (RA 6713).

The complainants alleged immense kickbacks and horrendous overpricing involved in the
purchase of the 1,991 ACMs. Based on the OSG’s available records, it appears that
Comelec withdrew from Land Bank ₱1.03 billion, but actually paid Mega Pacific only
₱550.81 million. Furthermore, commercial invoices and bank applications for
documentary credits reveal that each ACM cost only ₱276,650.00, but that Comelec
agreed to pay Mega Pacific ₱430,394.17 per unit -- or a differential of ₱153,744.17 per
unit or an aggregate differential of ₱306.10 million. Moreover, Mega Pacific charged
₱83.924 million for value-added taxes (VAT) and ₱81.024 million more for customs duties
and brokerage fees, when in fact -- under the nullified Contract -- it was supposed to be
exempt from VAT, customs duties and brokerage fees. Lastly, Comelec agreed to peg the
ACM price at the exchange rate of ₱58 to $1, when the exchange rate was ₱55 to $1 at
the time of the bidding, resulting in additional losses for the government amounting to
about ₱30 million.

The OSG hews to the view that the automation of elections, if properly carried out, is a
desirable objective, but is mindful of the need for mutual restitution by the parties as a
result of the final Decision nullifying the Contract for the ACMs. Nevertheless, in apparent
response to Comelec’s clamor to use the ACMs in the ARMM elections, the OSG
manifests that it has no objection to the proposal to use the machines, provided however
that (1) Comelec should show with reasonable certainty that the hardware and software of
the ACMs can be effectively used for the intended purpose; (2) Mega Pacific should be
made to return to the Republic at least a substantial portion of the overprice they charged
for the purchase of the ACMs; and (3) the use of these machines, if authorized by this
Court, should be without prejudice to the prosecution of the related criminal cases
pending before the Office of the Ombudsman (OMB).

The OMB’s Manifestation

For its part, the Office of the Ombudsman manifested that as a result of the nullification of
the Contract, various fact-finding investigations had been conducted, and criminal and
administrative charges filed before it against the persons who appeared to be responsible
for the anomalous Contract; and that the various cases had been consolidated, and
preliminary investigation conducted in respect of the non-impeachable Comelec officials
and co-conspirators/private individuals. Furthermore, the OMB is in the process of
determining whether a verified impeachment complaint may be filed against the poll
body’s impeachable officials concerned.

A Supplemental Complaint prepared and filed by the Field Investigation Office of the
Ombudsman reveals that the ACMs were overpriced by about ₱162,000.00 per unit; that,
additionally, Mega Pacific unduly benefited by including VAT and import duties amounting
to ₱194.60 million in its bid price for the ACMs, despite Section 8 of RA 8436 exempting
such equipment from taxes and duties; that Comelec nonetheless awarded the Contract
to Mega Pacific at the same bid price of ₱1.249 billion, inclusive of VAT, import duties and
so on; and that the Commission allowed Mega Pacific to peg the ACM price using an
exchange rate of ₱58 to $1 instead of ₱53 to $1, which further inflated Mega Pacific’s
windfall.

The foregoing notwithstanding, the OMB had allegedly prepared a comment on the present
Motion, stating its position on the issue of utilizing the ACMs, but upon further reflection
decided not to file that comment. It came to the conclusion that ventilating its position on
the matter might engender certain impressions that it had already resolved factual and/or
legal issues closely intertwined with the elements of the offenses charged in the criminal
and administrative cases pending before it. "For one, utilizing illegally procured goods or
the intentional non-return thereof to the supplier may have a bearing on the determination
of evident bad faith or manifest partiality, an essential element in any prosecution under
the anti-graft law, and may, at the same time, be constitutive of misconduct penalized
under relevant disciplinary laws."

Consequently, out of prudential considerations, the OMB prayed to be excused from

commenting on the merits of the present Motion, to avoid any perception of prejudgment,
bias or partiality on its part, in connection with the criminal and administrative cases
pending before it.

The Court’s Ruling

Decision Subverted by the Motion

There are several reasons why the present Motion must be denied. First, although it
professes utmost respect for the finality of our Decision of January 13, 2004 -- an
inescapable and immutable fact from which spring equally ineludible consequences --
granting it would have the effect of illegally reversing and subverting our final Decision.
Plainly stated, our final Decision bars the grant of the present Motion.

To stress, as a direct result of our January 13, 2004 Decision, the Contract for the supply of
the subject ACMs was voided, and the machines were not used in the 2004 national
elections. Furthermore, the OSG was directed "to take measures to protect the
government and vindicate public interest from the ill-effects of the illegal disbursements of
public funds made by reason of the void Resolution." Accordingly, in Civil Case No. 04-
346, the government counsel has prayed for mutual restitution; and for the "return of all
payments, amounting to ₱1,048,828,407.00 made by Comelec to Mega Pacific under the
void Contract."
In the meantime, Comelec has done nothing -- at least, nothing has been reported in the
present Motion -- to abide by and enforce our Decision. Apparently, it has not done
anything to rectify its violations of laws, jurisprudence and its own bidding rules referred to
in our judgment. Neither has it reported any attempt to correct and observe the
"mandatory financial, technical and legal requirements" needed to computerize the
elections.

Apparently, it has simply filed the present Motion asking permission to do what it has
precisely been prohibited from doing under our final and executory Decision. If law and
jurisprudence bar it from using the subject ACMs during the last elections, why should it
even propose to use these machines in the forthcoming ARMM elections? True, these
elections are important. But they cannot be more important than the 2004 national
elections. Note that the factual premises and the laws involved in the procurement and
use of the ACMs have not changed. Indeed, Comelec has not even alleged, much less
proven, any supervening factual or legal circumstances to justify its Motion.

Basic and primordial is the rule that when a final judgment becomes executory, it thereby
becomes immutable and unalterable. In other words, such a judgment may no longer
undergo any modification, much less any reversal, even if it is meant to correct what is
perceived to be an erroneous conclusion of fact or law; and even if it is attempted by the
court rendering it or by this Court.7 Equally well-entrenched is the doctrine that what is not
permitted to be done directly may not be done indirectly either. In the instant case, it is
unarguable that the inexorable result of granting the present Motion will precisely be a
subversion of the Decision, or at least a modification that would render the latter totally
ineffective and nugatory.

To support its present Motion, Comelec appended as Annex 1 a letter dated January 22,
2004. Addressed to its chairman, the Annex was signed by four8 self-proclaimed
"information technology experts,"9 who had gratuitously contended that this Court’s
Decision was "one of the most inopportune rulings ever to come out of the hallowed halls
of that High Tribunal"; blame the Decision for supposedly forcing our people "to entrust
their votes to a manual system of counting and canvassing that have been proven to be
prone to massive fraud in the past"; and mouth legal/technical arguments that have
already been repeatedly debunked in the Decision and Resolution here. The letter also
included a long-winded, tortuous discussion of the software development life cycle.

A quick check of the case records confirmed our suspicion. The very same letter dated
January 22, 2004 had previously been appended as Annex 2 to private respondents’
"Omnibus Motion A) for reconsideration of the Decision dated 13 January 2004; b) to
admit exhibits in refutation of the findings of fact of the Court; c) to have the case set for
hearing and/or reception of evidence if deemed necessary by the Court." The only
difference is that this time around, Comelec overlooked or failed to photocopy the last
page (page 17) of the letter, bearing the signatures of the four other purported
"information technology experts."10 In other words, to support its present Motion, it
merely recycled an earlier exhibit that had already been used in seeking reconsideration
of our aforesaid Decision.

While expressing utmost reverence for the finality of the Decision, Comelec implicitly seeks,
nevertheless, to have this Court take up anew matters that have already been passed
upon and disposed of with finality.

It is a hornbook doctrine that courts are presumed to have passed upon all points that were
raised by the parties in their various pleadings, and that form part of the records of the
case. Our Resolution, disposing of respondents’ arguments on reconsideration, did not
explicitly and specifically address all of the matters raised in the said letter of January 22,
 2004. It is presumed however, that all matters within an issue raised in a case were
passed upon by the Court,11 as indeed they were in the instant case. And as we have
held elsewhere,12 courts will refuse to reopen what has been decided; they will not allow
the same parties or their privies to litigate anew a question that has been considered and
decided with finality.

Besides, the letter of January 22, 2004, laden as it is with technical jargon and impressive
concepts, does not serve to alter by even the minutest degree our finding of grave abuse
of discretion by Comelec, on account of its clear violations of law and jurisprudence and
its unjustifiable and reckless disregard of its own bidding rules and procedures.

Furthermore, the letter would obviously not contain anything that might serve to persuade us
that the situation obtaining in January 2004 has so changed in the interim as to justify the
use of the ACMs in August 2005.

The Commission seems to think that it can resurrect the dead case by waving at this Court a
letter replete with technical jargon, much like a witch doctor muttering unintelligible
incantations to revive a corpse.

In its main text, the Motion concedes that our Decision "has become final and executory,"
and that all that remains to be done is "to make mutual restitution."13 So, what is the
relevance of all these useless argumentations and pontifications in Annex 1 by the
Commission’s self-proclaimed "experts"? For its own illegal acts, imprudence and grave
abuse of discretion, why blame this Court? For Comelec to know immediately which
culprit should bear full responsibility for its miserable failure to automate our elections, it
should simply face the mirror.

Recovery of Government Funds Barred by the Motion

Second, the grant of the Motion will bar or jeopardize the recovery of government funds
improvidently paid to private respondents, funds that to date the OSG estimates to be
over one billion pesos. At the very least, granting the Motion will be antagonistic to the
directive in our Decision for the OSG to recover the "illegal disbursements of public funds
made by reason of the void Resolution and Contract."

Indeed, if the government is conned into not returning the ACMs but instead keeping and
utilizing them, there would be no need for Mega Pacific to refund the payments made by
Comelec. In fact, such recovery will no longer be possible. Consequently, all those who
stood to benefit (or have already benefited) financially from the deal would no longer be
liable for the refund. They can argue that there was nothing wrong with the voided
Resolution and Contract, nothing wrong with the public bidding, nothing wrong with the
machines and software, since the government has decided to keep and utilize them. This
argument can be stretched to abate the criminal prosecutions pending before the OMB
and the impeachment proceedings it is considering. After all, "reasonable doubt" is all that
is needed to secure acquittal in a criminal prosecution.

In brief, the poll body’s Motion not only asks for what is legally impossible to do (to reverse
and subvert a final and executory Decision of the highest court of the land), but also
prevents the Filipino people from recovering illegally disbursed public funds running into
billions of pesos. Verily, by subverting the Decision of this Court, the Motion would be
unduly favoring and granting virtual immunity from criminal prosecution to the parties
responsible for the illegal disbursement of scarce public funds.

Use of the ACMs and Software Detrimental to ARMM Elections

Third, the use of the unreliable ACMs and the nonexistent software that is supposed to run
them will expose the ARMM elections to the same electoral ills pointed out in our final and
executory Decision. Be it remembered that this Court expressly ruled that the proffered
hardware and software had undeniably failed to pass eight critical requirements designed
to safeguard the integrity of elections, especially the following three items:

"· They failed to achieve the accuracy rating criterion of 99.9995 percent set up by the
Comelec itself.

"· They were not able to detect previously downloaded results at various canvassing or
consolidation levels and to prevent these from being inputted again.

"· They were unable to print the statutorily required audit trails of the count/canvass at
different levels without any loss of data."14

The Motion has not at all demonstrated that these technical requirements have been
addressed from the time our Decision was issued up to now. In fact, Comelec is merely
asking for leave to use the machines, without mentioning any specific manner in which
the foregoing requirements have been satisfactorily met.

Equally important, we stressed in our Decision that "[n]othing was said or done about the
software -- the deficiencies as to detection and prevention of downloading and entering
previously downloaded data, as well as the capability to print an audit trail. No matter how
many times the machines were tested and retested, if nothing was done about the
programming defects and deficiencies, the same danger of massive electoral fraud
remains."15

Other than vaguely claiming that its four so-called "experts" have "unanimously confirmed
that the software development which the Comelec undertook, [was] in line with the
internationally accepted standards (ISO/IEC 12207) [for] software life cycle processes,"
the present Motion has not shown that the alleged "software development" was indeed
extant and capable of addressing the "programming defects and deficiencies" pointed out
by this Court.

At bottom, the proposed use of the ACMs would subject the ARMM elections to the same
dangers of massive electoral fraud that would have been inflicted by the projected
automation of the 2004 national elections.

Motion Inadequate and Vague

Fourth, assuming arguendo that the foregoing formidable legal, financial and technical
obstacles could be overcome or set aside, still, the Motion cannot be granted because it
is vague; it does not contain enough details to enable this Court to act appropriately.

The sham nature of the Motion is evident from the following considerations. While Comelec
asserts a pressing need for the ACMs to be used in the ARMM elections, strangely
enough, it has not bothered to determine the number of units that will be required for the
purpose, much less tried to justify such quantification. It contracted for a total of 1,991
ACMs, intended for use throughout the entire country during the 2004 elections. Are we to
believe that all 1,991 units would be utilized to count and canvass the votes cast in the
ARMM elections? Such a scenario is highly unlikely, even ridiculous.

A genuine, bona fide proposal for the utilization of the ACMs would naturally have included a
well-thought-out plan of action, indicating the number of units to be deployed, places of
utilization, number of operators and other personnel required, methods/periods of
 deployment and recovery or retrieval, assessments of costs and risks involved in
implementing the proposal, and concomitant justifications, among other things. Now,
either "The Plan" is being kept absolutely top secret, or it is completely nonexistent.

Furthermore, once the ACMs are deployed and utilized, they will no longer be in the same
condition as when they were first delivered to Comelec. In fact, it is quite probable that by
the time election day comes around, some of the machines would have been mishandled
and damaged, maybe even beyond repair. What steps has the poll body taken to make
certain that such eventualities, if not altogether preventable, can at least be minimized so
as to ensure the eventual return of the ACMs and the full recovery of the payments made
for them? A scrutiny of the 4-page Motion16 ends in futility. It is all too clear that a failure
or inability of Comelec to return the machines sans damage would most assuredly be
cited as a ground to refuse the refund of the moneys paid. Yet, if Comelec has given any
thought at all to this or any other contingency, such fact has certainly not been made
evident to us.

ARMM Elections Not Jeopardized by Nonuse of ACMs

Fifth, there is no basis for the claim that unless the subject ACMs are used, the ARMM
elections would not be held.

At the outset, if such elections are not held, the blame must be laid squarely at the doorstep
of Comelec. To stress, had it not gravely abused its discretion, the automation of the vote
counting and canvassing processes would have already become a reality over a year
ago, and the ACMs that would have been used in the 2004 national elections would now
be available for the ARMM elections.

In any event, the Commission in its Motion argues that the government, given its present
fiscal difficulties, has no available funds to finance the automation of the ARMM elections.
Without even asking under what authority it has assumed the role of Treasury
spokesman, we emphasize that there would not now be any lack of funds for election
automation had it not improvidently turned over ₱1 billion of taxpayers’ moneys to Mega
Pacific’s bank accounts.

Nevertheless, had the poll body been honestly and genuinely intent on implementing
automated counting and canvassing for the ARMM elections, it ought to have informed
Congress of the non-availability of the subject ACMs due to our Decisions and of the
need for special appropriations, instead of wasting this Court’s time on its unmeritorious
Motion. In fact, if only it had taken proper heed of our Decision of January 13, 2004, it
could have conducted an above-board public bidding for the supply of acceptable ACMs.

Certainly, this option or course of action was not foreclosed by our Decision. Moreover, there
was sufficient time within which to conduct the public bidding process. RA 9333, which set
the second Monday of August 2005 (August 8, 2005) as the date of the ARMM elections,
was enacted on September 21, 2004. Undoubtedly, Comelec was made aware of the
proposed date of the ARMM elections way before the passage of RA 9333. Thus, the poll
body had about ten (10) months at the very least (between the end of September 2004,
when RA 9333 came into force and effect, and August 8, 2005) to lobby Congress,
properly conduct a public bidding, award the appropriate contracts, deliver and test the
new machines, and make final preparations for the election.

Even assuming that a new public bidding for ACMs was not a viable option, still, Comelec
has had more than sufficient lead time -- about ten months counted from the end of
September 2004 until August 8, 2005 -- to prepare for manual counting and canvassing in
the ARMM elections. It publicly declared, sometime in late January 2004, that
 notwithstanding our Decision nullifying the Mega Pacific Contract, it would still be able to
implement such manualization for the May 10, 2004 national elections. It made this
declaration even though it had a mere three months or so to set up the mechanics. In this
present instance involving elections on a much smaller scale, it will definitely be able to
implement manual processes if it wants to.

There is therefore absolutely no basis for any apprehension that the ARMM elections would
not push through simply because the present Motion cannot pass muster. More to the
point, it would be ridiculous to regard the grant of permission to use the subject ACMs as
the conditio sine qua non for the holding of the ARMM elections.

What is most odious is the resort to the present Motion seeking the use of the subject ACMs
despite the availability of viable alternative courses of action17 that will not tend to disturb
or render this Court’s final Decision ineffectual. Thus, the present Motion is wholly
unnecessary and unwarranted. Upon it, however has Comelec pinned all its hopes,
instead of focusing on what the poll body can and ought to do under the circumstances.
The consequences of granting its lamentable Motion, we repeat, will indubitably subvert
and thwart the Decision of this Court in the instant case.

Equally reprehensible is the attempt of the Commission to pass the onus of its
mismanagement problems on to this Court. For instance, the Motion quotes the cost of
storage of the ACMs in its Maxilite Warehouse at ₱329,355.26 per month or
₱3,979,460.24 per annum. Assuming for the nonce that the machines have to be held in
storage pending the decision in the civil case (as it would simply not do to throw the
machines out into the streets), why must it assume the cost of storage? Per our Decision,
the machines are to be returned to Mega Pacific. If it refuses to accept them back, it does
not follow that Comelec must pick up the tab. Instead of further wasting the taxpayers’
money, it can simply send the bill to Mega Pacific for collection.

It would be entirely improper, bordering on unmitigated contempt of court, for the

Commission to try to pass on the problem to this Court through its Motion.

No Actual Case or Controversy

Finally, the Motion presents no actual justiciable case or controversy over which this Court
can exercise its judicial authority. It is well-established in this jurisdiction that "x x x for a
court to exercise its power of adjudication, there must be an actual case or controversy --
one which involves a conflict of legal rights, an assertion of opposite legal claims
susceptible of judicial resolution; the case must not be moot or academic or based on
extra-legal or other similar considerations not cognizable by a court of justice. x x x
[C]ourts do not sit to adjudicate mere academic questions to satisfy scholarly interest,
however intellectually challenging."18 The controversy must be justiciable -- definite and
concrete, touching on the legal relations of parties having adverse legal interests.19 In
other words, the pleadings must show an active antagonistic assertion of a legal right, on
the one hand, and a denial thereof on the other; that is, it must concern a real and not a
merely theoretical question or issue.20 There ought to be an actual and substantial
controversy admitting of specific relief through a decree conclusive in nature, as
distinguished from an opinion advising what the law would be upon a hypothetical state of
facts.21

A perusal of the present Motion will readily reveal the utter absence of a live case before us,
involving a clash of legal rights or opposing legal claims. At best, it is merely a request for
an advisory opinion, which this Court has no jurisdiction to grant.22

EPILOGUE
We close this Resolution by repeating the last two paragraphs of our final and executory
Decision:

"True, our country needs to transcend our slow, manual and archaic electoral process. But
before it can do so, it must first have a diligent and competent electoral agency that can
properly and prudently implement a well-conceived automated election system.

"At bottom, before the country can hope to have a speedy and fraud-free automated
election, it must first be able to procure the proper computerized hardware and software
legally, based on a transparent and valid system of public bidding. As in any democratic
system, the ultimate goal of automating elections must be achieved by a legal, valid and
above-board process of acquiring the necessary tools and skills therefor. Though the
Philippines needs an automated electoral process, it cannot accept just any system
shoved into its bosom through improper and illegal methods. As the saying goes, the end
never justifies the means. Penumbral contracting will not produce enlightened results."23

Comelec must follow and not skirt our Decision. Neither may it short-circuit our laws and
jurisprudence. It should return the ACMs to MPC-MPEI and recover the improvidently
disbursed funds. Instead of blaming this Court for its illegal actions and grave abuse of
discretion, the Commission should, for a change, devise a legally and technically sound
plan to computerize our elections and show our people that it is capable of managing the
transition from an archaic to a modern electoral system.

WHEREFORE, the Motion is hereby DENIED for utter lack of merit.

SO ORDERED.

20. Radiowealth Finance Company vs. Del Rosario, 335 SCRA 288

THIRD DIVISION

G.R. No. 138739 July 6, 2000

RADIOWEALTH FINANCE COMPANY, petitioner,

vs.
Spouses VICENTE and MA. SUMILANG DEL ROSARIO, respondents.

DECISION

PANGANIBAN, J.:

When a demurrer to evidence granted by a trial court is reversed on appeal, the reviewing
court cannot remand the case for further proceedings. Rather, it should render judgment
on the basis of the evidence proffered by the plaintiff. Inasmuch as defendants in the
present case admitted the due execution of the Promissory Note both in their Answer and
during the pretrial, the appellate court should have rendered judgment on the bases of
that Note and on the other pieces of evidence adduced during the trial.

The Case

Before us is a Petition for Review on Certiorari of the December 9, 1997 Decision1 and the
May 3, 1999 Resolution2 of the Court of Appeals in CA-GR CV No. 47737. The assailed
Decision disposed as follows:
"WHEREFORE, premises considered, the appealed order (dated November 4, 1994) of the
Regional Trial Court (Branch XIV) in the City of Manila in Civil Case No. 93-66507 is
hereby REVERSED and SET ASIDE. Let the records of this case be remanded to the
court a quo for further proceedings. No pronouncement as to costs."3

The assailed Resolution denied the petitioner’s Partial Motion for Reconsideration.4

The Facts

The facts of this case are undisputed. On March 2, 1991, Spouses Vicente and Maria
Sumilang del Rosario (herein respondents), jointly and severally executed, signed and
delivered in favor of Radiowealth Finance Company (herein petitioner), a Promissory
Note5 for ₱138,948. Pertinent provisions of the Promissory Note read:

"FOR VALUE RECEIVED, on or before the date listed below, I/We promise to pay jointly and
severally Radiowealth Finance Co. or order the sum of ONE HUNDRED THIRTY EIGHT
THOUSAND NINE HUNDRED FORTY EIGHT Pesos (₱138,948.00) without need of
notice or demand, in installments as follows:

₱11,579.00 payable for 12 consecutive months starting on ________ 19__ until the amount
of ₱11,579.00 is fully paid. Each installment shall be due every ____ day of each month.
A late payment penalty charge of two and a half (2.5%) percent per month shall be added
to each unpaid installment from due date thereof until fully paid.

xxx xxx xxx

It is hereby agreed that if default be made in the payment of any of the installments or late
payment charges thereon as and when the same becomes due and payable as specified
above, the total principal sum then remaining unpaid, together with the agreed late
payment charges thereon, shall at once become due and payable without need of notice
or demand.

xxx xxx xxx

If any amount due on this Note is not paid at its maturity and this Note is placed in the hands
of an attorney or collection agency for collection, I/We jointly and severally agree to pay,
in addition to the aggregate of the principal amount and interest due, a sum equivalent to
ten (10%) per cent thereof as attorney’s and/or collection fees, in case no legal action is
filed, otherwise, the sum will be equivalent to twenty-five (25%) percent of the amount due
which shall not in any case be less than FIVE HUNDRED PESOS (P500.00) plus the cost
of suit and other litigation expenses and, in addition, a further sum of ten per cent (10%)
of said amount which in no case shall be less than FIVE HUNDRED PESOS (P500.00),
as and for liquidated damages."6

Thereafter, respondents defaulted on the monthly installments. Despite repeated demands,

they failed to pay their obligations under their Promissory Note.

On June 7, 1993, petitioner filed a Complaint7 for the collection of a sum of money before
the Regional Trial Court of Manila, Branch 14.8 During the trial, Jasmer Famatico, the
credit and collection officer of petitioner, presented in evidence the respondents’ check
payments, the demand letter dated July 12, 1991, the customer’s ledger card for the
respondents, another demand letter and Metropolitan Bank dishonor slips. Famatico
admitted that he did not have personal knowledge of the transaction or the execution of
any of these pieces of documentary evidence, which had merely been endorsed to him.
On July 4, 1994, the trial court issued an Order terminating the presentation of evidence for
the petitioner.9 Thus, the latter formally offered its evidence and exhibits and rested its
case on July 5, 1994.

Respondents filed on July 29, 1994 a Demurrer to Evidence10 for alleged lack of cause of
action. On November 4, 1994, the trial court dismissed11 the complaint for failure of
petitioner to substantiate its claims, the evidence it had presented being merely hearsay.

On appeal, the Court of Appeals (CA) reversed the trial court and remanded the case for
further proceedings.

Hence, this recourse.12

Ruling of the Court of Appeals

According to the appellate court, the judicial admissions of respondents established their
indebtedness to the petitioner, on the grounds that they admitted the due execution of the
Promissory Note, and that their only defense was the absence of an agreement on when
the installment payments were to begin. Indeed, during the pretrial, they admitted the
genuineness not only of the Promissory Note, but also of the demand letter dated July 12,
1991. Even if the petitioner’s witness had no personal knowledge of these documents,
they would still be admissible "if the purpose for which [they are] produced is merely to
establish the fact that the statement or document was in fact made or to show its tenor[,]
and such fact or tenor is of independent relevance."

Besides, Articles 19 and 22 of the Civil Code require that every person must -- in the
exercise of rights and in the performance of duties -- act with justice, give all else their
due, and observe honesty and good faith. Further, the rules on evidence are to be
liberally construed in order to promote their objective and to assist the parties in obtaining
just, speedy and inexpensive determination of an action.

Issue

The petitioner raises this lone issue:

"The Honorable Court of Appeals patently erred in ordering the remand of this case to the
trial court instead of rendering judgment on the basis of petitioner’s evidence."13

For an orderly discussion, we shall divide the issue into two parts: (a) legal effect of the
Demurrer to Evidence, and (b) the date when the obligation became due and
demandable.

The Court’s Ruling

The Petition has merit. While the CA correctly reversed the trial court, it erred in remanding
the case "for further proceedings."

Consequences of a Reversal, on Appeal, of a Demurrer to Evidence

Petitioner contends that if a demurrer to evidence is reversed on appeal, the defendant

should be deemed to have waived the right to present evidence, and the appellate court
should render judgment on the basis of the evidence submitted by the plaintiff. A remand
to the trial court "for further proceedings" would be an outright defiance of Rule 33,
Section 1 of the 1997 Rules of Court.
On the other hand, respondents argue that the petitioner was not necessarily entitled to its
claim, simply on the ground that they lost their right to present evidence in support of their
defense when the Demurrer to Evidence was reversed on appeal. They stress that the CA
merely found them indebted to petitioner, but was silent on when their obligation became
due and demandable.

The old Rule 35 of the Rules of Court was reworded under Rule 33 of the 1997 Rules, but
the consequence on appeal of a demurrer to evidence was not changed. As amended,
the pertinent provision of Rule 33 reads as follows:

"SECTION 1. Demurrer to evidence.—After the plaintiff has completed the presentation of

his evidence, the defendant may move for dismissal on the ground that upon the facts
and the law the plaintiff has shown no right to relief. If his motion is denied, he shall have
the right to present evidence. If the motion is granted but on appeal the order of dismissal
is reversed he shall be deemed to have waived the right to present evidence."14

Explaining the consequence of a demurrer to evidence, the Court in Villanueva Transit v.

Javellana15 pronounced:

"The rationale behind the rule and doctrine is simple and logical. The defendant is permitted,
without waiving his right to offer evidence in the event that his motion is not granted, to
move for a dismissal (i.e., demur to the plaintiff’s evidence) on the ground that upon the
facts as thus established and the applicable law, the plaintiff has shown no right to relief.
If the trial court denies the dismissal motion, i.e., finds that plaintiff’s evidence is sufficient
for an award of judgment in the absence of contrary evidence, the case still remains
before the trial court which should then proceed to hear and receive the defendant’s
evidence so that all the facts and evidence of the contending parties may be properly
placed before it for adjudication as well as before the appellate courts, in case of appeal.
Nothing is lost. The doctrine is but in line with the established procedural precepts in the
conduct of trials that the trial court liberally receive all proffered evidence at the trial to
enable it to render its decision with all possibly relevant proofs in the record, thus assuring
that the appellate courts upon appeal have all the material before them necessary to
make a correct judgment, and avoiding the need of remanding the case for retrial or
reception of improperly excluded evidence, with the possibility thereafter of still another
appeal, with all the concomitant delays. The rule, however, imposes the condition by the
same token that if his demurrer is granted by the trial court, and the order of dismissal is
reversed on appeal, the movant losses his right to present evidence in his behalf and he
shall have been deemed to have elected to stand on the insufficiency of plaintiff’s case
and evidence. In such event, the appellate court which reverses the order of dismissal
shall proceed to render judgment on the merits on the basis of plaintiff’s evidence."
(Underscoring supplied)

In other words, defendants who present a demurrer to the plaintiff’s evidence retain the right
to present their own evidence, if the trial court disagrees with them; if the trial court
agrees with them, but on appeal, the appellate court disagrees with both of them and
reverses the dismissal order, the defendants lose the right to present their own
evidence.16 The appellate court shall, in addition, resolve the case and render judgment
on the merits, inasmuch as a demurrer aims to discourage prolonged litigations.17

In the case at bar, the trial court, acting on respondents’ demurrer to evidence, dismissed
the Complaint on the ground that the plaintiff had adduced mere hearsay evidence.
However, on appeal, the appellate court reversed the trial court because the genuineness
and the due execution of the disputed pieces of evidence had in fact been admitted by
defendants.
Applying Rule 33, Section 1 of the 1997 Rules of Court, the CA should have rendered
judgment on the basis of the evidence submitted by the petitioner. While the appellate
court correctly ruled that "the documentary evidence submitted by the [petitioner] should
have been allowed and appreciated xxx," and that "the petitioner presented quite a
number of documentary exhibits xxx enumerated in the appealed order,"18 we agree with
petitioner that the CA had sufficient evidence on record to decide the collection suit. A
remand is not only frowned upon by the Rules, it is also logically unnecessary on the
basis of the facts on record.

Due and Demandable Obligation

Petitioner claims that respondents are liable for the whole amount of their debt and the
interest thereon, after they defaulted on the monthly installments.

Respondents, on the other hand, counter that the installments were not yet due and
demandable. Petitioner had allegedly allowed them to apply their promotion services for
its financing business as payment of the Promissory Note. This was supposedly
evidenced by the blank space left for the date on which the installments should have
commenced.19 In other words, respondents theorize that the action for immediate
enforcement of their obligation is premature because its fulfillment is dependent on the
sole will of the debtor. Hence, they consider that the proper court should first fix a period
for payment, pursuant to Articles 1180 and 1197 of the Civil Code.

This contention is untenable. The act of leaving blank the due date of the first installment did
not necessarily mean that the debtors were allowed to pay as and when they could. If this
was the intention of the parties, they should have so indicated in the Promissory Note.
However, it did not reflect any such intention.

On the contrary, the Note expressly stipulated that the debt should be amortized monthly in
installments of ₱11,579 for twelve consecutive months. While the specific date on which
each installment would be due was left blank, the Note clearly provided that each
installment should be payable each month.

Furthermore, it also provided for an acceleration clause and a late payment penalty, both of
which showed the intention of the parties that the installments should be paid at a definite
date. Had they intended that the debtors could pay as and when they could, there would
have been no need for these two clauses.

Verily, the contemporaneous and subsequent acts of the parties manifest their intention and
knowledge that the monthly installments would be due and demandable each month.20 In
this case, the conclusion that the installments had already became due and demandable
is bolstered by the fact that respondents started paying installments on the Promissory
Note, even if the checks were dishonored by their drawee bank. We are convinced
neither by their avowals that the obligation had not yet matured nor by their claim that a
period for payment should be fixed by a court.

Convincingly, petitioner has established not only a cause of action against the respondents,
but also a due and demandable obligation. The obligation of the respondents had
matured and they clearly defaulted when their checks bounced. Per the acceleration
clause, the whole debt became due one month (April 2, 1991) after the date of the Note
because the check representing their first installment bounced.

As for the disputed documents submitted by the petitioner, the CA ruling in favor of their
admissibility, which was not challenged by the respondents, stands. A party who did not
appeal cannot obtain affirmative relief other than that granted in the appealed decision.21
It should be stressed that respondents do not contest the amount of the principal
obligation.1âwphi1 Their liability as expressly stated in the Promissory Note and found by
the CA is "₱13[8],948.0022 which is payable in twelve (12) installments at ₱11,579.00 a
month for twelve (12) consecutive months." As correctly found by the CA, the "ambiguity"
in the Promissory Note is clearly attributable to human error.23

Petitioner, in its Complaint, prayed for "14% interest per annum from May 6, 1993 until fully
paid." We disagree.1âwphi1 The Note already stipulated a late payment penalty of 2.5
percent monthly to be added to each unpaid installment until fully paid. Payment of
interest was not expressly stipulated in the Note. Thus, it should be deemed included in
such penalty.

In addition, the Note also provided that the debtors would be liable for attorney’s fees
equivalent to 25 percent of the amount due in case a legal action was instituted and 10
percent of the same amount as liquidated damages. Liquidated damages, however,
should no longer be imposed for being unconscionable.24 Such damages should also be
deemed included in the 2.5 percent monthly penalty. Furthermore, we hold that petitioner
is entitled to attorney’s fees, but only in a sum equal to 10 percent of the amount due
which we deem reasonable under the proven facts.25

The Court deems it improper to discuss respondents' claim for moral and other damages.
Not having appealed the CA Decision, they are not entitled to affirmative relief, as already
explained earlier.26

WHEREFORE, the Petition is GRANTED. The appealed Decision is MODIFIED in that the
remand is SET ASIDE and respondents are ordered TO PAY ₱138,948, plus 2.5 percent
penalty charge per month beginning April 2, 1991 until fully paid, and 10 percent of the
amount due as attorney’s fees. No costs.

SO ORDERED.